The Federalist Society

States May Be Immune From Certain Lanham Act Claims

Intellectual Property Practice Group Newsletter - Volume 1, Issue 2, Spring 1997

July 1, 1997

Thomas E. Graham

A decision issued December 13, 1996, by the United States District Court for the District of New Jersey casts doubt on Congress's ability to permit private parties to pursue certain claims against a state or its instrumentalities in federal court under the federal trademark statute. See College Savings Bank v. Florida Prepaid Postsecondary Education Expense Board, Nos. CIV. 95-4516 (GEB), CIV. 94-5610 (GEB), 1996 WL 728173 (D.N.J. Dec. 13, 1996). Relying on the United States Supreme Court's 1996 decision in Seminole Tribe of Florida v. Florida, 116 S. Ct. 1114 (1996), the district court held that the Eleventh Amendment to the United States Constitution prohibits Congress from taking away a state's immunity from suit for certain false advertising claims under the Lanham Act. In contrast, the court also held that Congress effectively abrogated the states' Eleventh Amendment immunity from suits brought under the Patent Act. The decision raises questions about the degree to which the rights embodied in the Lanham Act can be considered constitutionally protected "property" and the extent to which states may violate the Lanham Act without fear of being sued in federal court.

Plaintiff, College Savings Bank of Princeton, New Jersey ("CSB"), brought suit against Florida Prepaid Postsecondary Expense Board ("Florida Prepaid"), an instrumentality of the State of Florida. CSB alleged that since 1987 it had marketed a deposit contract, called the "CollegeSurer CD," that was administered according to a patented method designed to provide funds for future, though presently uncertain, college expenses. CSB claimed that Florida Prepaid's sale of such a plan willfully infringed CSB's patent. CSB also alleged that Florida Prepaid had engaged in false advertising in violation of Section 43(a) of the Lanham Act, by misrepresenting its product, thus hampering CSB's efforts to sell its own investment contracts.

The alleged misrepresentations were that the State of Florida guaranteed beneficiaries the full amount necessary to cover education expenses at a participating postsecondary institution; that tax liability under the program would be deferred until the student was enrolled at college; that the program's investments were backed by the full faith and credit of the United States; and that Florida Prepaid failed to disclose that CSB had asserted a patent infringement claim against it. Significantly, however, CSB did not allege that Florida Prepaid had made any false statements concerning CSB's CollegeSurer CD.

CSB relied on Section 43(a)(2) of the Lanham Act as the jurisdictional basis for suit. This section, included in the Trademark Remedy Clarification Act of 1992 ("the TRCA"), Pub. L. No. 102-542, 106 Stat. 3567 (codified as amended at 15 U.S.C.A. §§ 1114(1), 1121, 1125(a)(2) (West Supp. 1996)), explicitly provides for suits against states and their instrumentalities, officers and employees under Section 43(a) to the same extent as nongovernmental entities. The Patent Act was similarly amended in 1992. See Patent and Plant Variety Protection Remedy Clarification Act of 1992, Pub. L. 102-560, 106 Stat. 4230 (codified as amended 35 U.S.C.A. § 296(a) (West Supp. 1996)). Congress's express purpose in passing the TRCA was to abrogate state sovereign immunity and, consistent with existing Eleventh Amendment decisions in similar contexts, Congress rested its authority to do so on its Article I Commerce Clause powers and its powers to enforce the substantive provisions of the Fourteenth Amendment. See S. Rep. No. 280, 102d Cong., 2d Sess. 8 (1992), reprinted in 1992 U.S.C.C.A.N. 3087, 3088, 3094.

However, on March 27, 1996, the Supreme Court significantly altered the Eleventh Amendment landscape with its landmark decision in Seminole Tribe. In that case, the Court held that, although Congress had clearly expressed its intent to abrogate the states' Eleventh Amendment immunity in passing the statute in question, no Article I power granted Congress the constitutional authority to do so. In reaching its result, the Seminole Tribe Court explicitly overruled precedent that had permitted Congress to abrogate a state's Eleventh Amendment immunity pursuant to the Interstate Commerce Clause. 116 S. Ct. at 1128 (overruling Pennsylvania v. Union Gas Co., 491 U.S. 1 (1989)). The Court held that "Article I cannot be used to circumvent the constitutional limitations placed upon federal jurisdiction." Thus, after Seminole Tribe, Congress may only abrogate Eleventh Amendment immunity pursuant to the powers granted by Section 5 of the Fourteenth Amendment. See Fitzpatrick v. Bitzer, 427 U.S. 445 (1976).

Seeking to avail itself of this shift in Eleventh Amendment jurisprudence, Florida Prepaid moved to dismiss CSB's claims, arguing lack of subject matter jurisdiction. Florida Prepaid's argument in favor of dismissal was two-fold: first, the statute on which CSB based jurisdiction was unconstitutional because Congress could not base its abrogation of immunity on the Commerce Clause after Seminole Tribe; and second, the amendment to the Lanham Act was not "appropriate legislation" because it was not directed at remedying the type of conduct expressly prohibited by the Fourteenth Amendment's substantive provisions.

After holding that Florida Prepaid was indeed an "arm of the state" and therefore entitled to Eleventh Amendment immunity and that Florida Prepaid had not waived its claim to immunity, the district court addressed whether Congress had validly abrogated Florida Prepaid's sovereign immunity to CSB's claims. Adhering to the Supreme Court's analysis in Seminole Tribe, the court engaged in a two-part inquiry, asking first "whether Congress ha[d] 'unequivocally expresse[d] its intent to abrogate the immunity' . . . ; and second, whether Congress has acted 'pursuant to a valid exercise of power.'"

The court had little difficulty holding that Congress intended that states would be subject to Lanham Act claims, and it reached the same conclusion with regard to the 1992 amendments to the Patent Act. The second question, however, proved more troublesome. Noting that "after Seminole Tribe, the only remaining authority for Congressional abrogation of the States' immunity is [Section 5] of the Fourteenth Amendment," the court found the ultimate issue to be "whether the interests sought to be protected by the 'false advertising prong' of the Lanham Act are 'property' for purposes of the Fourteenth Amendment." The court answered this question in the negative, holding that "[a]n interest in being free from alleged false advertising simply does not qualify as a property right for purposes of the Due Process Clause of the Fourteenth Amendment, or indeed for any other purpose." The court reached a contrary conclusion, however, regarding CSB's patent infringement claim, holding that "a patent is 'property' for purposes of the Fourteenth Amendment, and Congress can, under that Amendment, abrogate Eleventh Amendment immunity for claims under the Patent Act." Thus, the court held the attempt to subject states to suit under Section 43(a) of the Lanham Act unconstitutional, concluding that "Congress has no power, under the Fourteenth Amendment or any other provision of the Constitution, to strip the states of their Eleventh Amendment immunity and subject them to suits in federal court for false advertising."

The breadth of the court's constitutional ruling remains open to question. The court carefully limited its result to false advertising claims and distinguished such cases from claims of trademark infringement. Moreover, the court seemed further to restrict its holding to false advertising cases in which the defendant "is alleged to have made misleading statements about its own program, not to have misappropriated some element of plaintiff's product." Therefore, the result in College Savings Bank appears to govern only that portion of Section 43(a) making it unlawful to "misrepresent[] the nature, characteristics, qualities, or geographic origin of [one's own] . . . goods, services, or commercial activities."

This decision raises questions about the degree to which the rights embodied in the Lanham Act can be considered constitutionally protected "property." Historically, trademarks and other communicative symbols used in connection with the sale of goods and services have been viewed as a form of "property." See, e.g., Hamilton-Brown Shoe Co. v. Wolf Bros. & Co., 240 U.S. 251, 259 (1916) ("The right to use a trademark is recognized as a kind of property, of which the owner is entitled to the exclusive enjoyment to the extent that it has been actually used."). As such, the policy of the law has been to protect them as "valuable business assets," Jacob Siegel Co. v. FTC, 327 U.S. 608, 612 (1946), that can be bought, sold, assigned and licensed. However, "[a]nalogies to other forms of 'property,' from real estate to patents and copyrights, falter on the basic definition of the scope of trademark 'property,'" because, unlike these other forms, "any 'property' in trademarks is created and defined by the mental state of customers." 1 J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition § 2:14 at 2-30 (4th ed. 1996).

The "property" aspects of trademarks and other communicative business symbols are thus unique and appear to depend on the purposes underlying legal protection for such symbols. These purposes are two-fold. First, trademarks and their analogues are designed to protect consumers from confusion about the source of goods and services. See, e.g., Kentucky Fried Chicken Corp. v. Diversified Packaging Corp., 549 F.2d 368, 388-89 (5th Cir. 1977) (holding that there are no "property" aspects to trademarks absent likelihood of consumer confusion). Second, these symbols signify the good will of the business with which they are associated. See, e.g., McCarthy, supra, § 2:15. Therefore, the trademark-type rights that the law recognizes as "property" are "the right of the public to be free of confusion and the synonymous right of a trademark owner to control his product's reputation." James Burrough Ltd. v. Sign of Beefeater, Inc., 540 F.2d 266, 274 (7th Cir. 1976), appeal after remand, 572 F.2d 574 (7th Cir. 1978). In contrast, the "property" aspects of patents and copyrights are designed to "[protect] producers as an incentive to product innovation." Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 157 (1989).

The result in College Savings Bank implies that, in order to be considered "property" for purposes of the Fourteenth Amendment and Congressional abrogation of state sovereign immunity pursuant thereto, claims under Section 43(a) of the Lanham Act must implicate both the public's right to be free from confusion and the plaintiff's right to control its product's reputation. For example, although Florida Prepaid's allegedly false representations about certain aspects of its own product could breach the public's right not to be confused, those representations did not appear to damage the reputation or good will of CSB. As such, the court deemed that no constitutionally recognized "property" rights were implicated in the suit.

In contrast, claims under Section 43(a)'s infringement prong and claims under its false advertising prong that involve misrepresentations about the plaintiff's product implicate both potential consumer confusion and the reputation and good will of the plaintiff's goods or services. Theoretically, courts should therefore be more likely to find that such claims involve Fourteenth Amendment property rights and thus to uphold the TRCA as a valid abrogation of Eleventh Amendment immunity.

Some danger exists, however, that courts will rely on College Savings Bank as authority to deny property status to all of the rights granted by Section 43(a) or, even more broadly, to hold that none of the provisions of the Lanham Act implicate constitutionally protected property interests. The effect of such a broad holding would be that states could not, under any circumstances, be subject to Lanham Act claims brought in federal court. Such a result could leave states free, if states chose, to violate federal law by misleading consumers and impugning the reputation of a private business's goods or services without fear of having to answer for such conduct in a federal forum.

*Thomas E. Graham is a partner in the Winston-Salem office of Kilpatrick Stockton LLP.


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