Firm Successfully Defends Motion to Dismiss Counterclaim for Declaratory Judgment of Invalidity and Unenforceability of Trademark

August 09, 2021

The Firm represents Defendants in I&I Hair Corporation v. Beauty Plus Trading Co., Inc., et al., 3:20-cv-02179-M (N.D.Tx.), in which Plaintiff filed claims against Defendants for trademark infringement and other related claims. In response, Defendants filed a Counterclaim for Declaratory Judgment of Invalidity and Unenforceability of the trademark at issue, EZBRAID, based on allegations that Plaintiff imported and sold goods bearing the EZBRAID mark, manufactured through forced labor. Plaintiff filed a motion to dismiss the Counterclaim arguing that there is no legal basis for the Counterclaim. Plaintiff’s motion was denied.

The Counterclaim alleges that on May 1, 2020, the U.S. Customs and Border Protection announced that it would be detaining all imported merchandise made wholly or in part with hair products manufactured by Hetian Haolin Hair Accessories Company Limited (“Haolin”), based on information that reasonably indicated the use of forced labor.  Defendants allege that on July 22, 2020, the U.S. Department of Commerce (“DOC”) added Haolin to the Entity List of the Export Administration Regulations which placed restrictions on Haolin’s exports to the United States.  Specifically, the DOC stated that: 

"[Haolin has] been implicated in human rights violations and abuses in the implementation of China’s campaign of repression, mass arbitrary detention, forced labor and high-technology surveillance against Uyghurs, Kazakhs, and other members of Muslim minority groups in the Xinjiang Uyghur Autonomous Region (XUAR)… [It has been] determined that [Haolin] is engaging in activities contrary to the foreign policy interests of the United States through the practice of forced labor involving members of Muslim minority groups in the XUAR."

Defendants allege that over 50% of Haolin’s exports to the United States were imported by Plaintiff, including goods bearing the trademark at issue.  Defendants also allege that Haolin’s detained imported goods, including goods imported by Plaintiff, are imports prohibited by 19 U.S.C. § 1307, which provides that:

"All goods, wares, articles, and merchandise mined, produced, or manufactured wholly or in part in any foreign country by convict labor or/and forced labor or/and indentured labor under penal sanctions shall not be entitled to entry at any of the ports of the United States, and the importation thereof is hereby prohibited, and the Secretary of the Treasury is authorized and directed to prescribe such regulations as may be necessary for the enforcement of this provision. “Forced labor”, as herein used, shall mean all work or service which is exacted from any person under the menace of any penalty for its nonperformance and for which the worker does not offer himself voluntarily. For purposes of this section, the term “forced labor or/and indentured labor” includes forced or indentured child labor."

In opposition to Plaintiff’s motion to dismiss, Defendants argued that the unlawful use doctrine applies to Plaintiff’s alleged acts.  The unlawful use doctrine is a policy of the United States Patent and Trademark Office’s Trademark and Trial and Appeal Board that holds that “use of a mark in commerce only creates trademark rights when the use is lawful.” CreAgri, Inc. v. USANA Health Services, Inc., 474 F.3d 626, 630 (9th Cir. 2007). Similar to the doctrine of unclean hands, the policy is based on the view that the government does not want to extend the benefits of trademark protection to a seller based upon actions the seller took in violation of that government’s own laws. Id.

In denying Plaintiff’s motion to dismiss, the Court ruled that Defendants have plausibly alleged Plaintiff’s unlawful use of the trademark at issue to support the Counterclaim.  In its decision, the Court found that: (i) Defendants have alleged that Plaintiff imported over twelve shipments from Haolin over one year, and that the imported goods were part of Plaintiff’s $11 million revenue during that time; (ii) viewed in the light most favorable to Defendants, such facts point toward a significant violation with regard to the number of unlawful goods; (iii) there is a sufficient “nexus” alleged between Plaintiff’s imported goods and the use of the trademark; and (iv) Defendants have sufficiently alleged a nexus between allegedly illegal imports and a mark used to promote those imports.

Therefore, the Court concluded that Defendants have sufficiently stated a counterclaim of unlawful use upon which relief can be granted.