Lucky Brands Dungarees Inc. v. Marcel Fashions Group Inc.

DEFENSE PRECLUSION AND THE SCOPE OF RES JUDICATA​

Lucky argues that the Second Circuit’s concept of defense preclusion fundamentally misconstrues one of the foundational principles of civil procedure: res judicata. Brief for Petitioner, Lucky Brands Dungarees, Inc. at 22. According to Lucky, the doctrine of res judicata is made up of only two types of preclusion: claim preclusion and issue preclusion. Id. at 22–23. Lucky contends that defense preclusion fits into neither of those two categories, and thus is a novel invention without basis in civil procedure jurisprudence. Id. at 25, 31. Lucky believes that the Second Circuit’s application of defense preclusion is inconsistent with claim preclusion because the claims against Lucky in the present case (the “Current Action”) are different from the claims Lucky faced in the prior case (the “2005 Action”). Id. at 24–26. Lucky explains that claim preclusion does not bar distinct claims from being made in subsequent actions, but only bars the same claim from being made, and notes that the lower courts in this case recognized that Marcel’s claims in the 2005 Action could not be the same as Marcel’s claims in the Current Action because the alleged trademark violations in the Current Action took place after the 2005 Action concluded. Id. at 25–26. Given this difference in timing, argues Lucky, for claim preclusion purposes, the two actions should be treated as arising out of separate transactions—and thus constituting separate claims—even if the underlying violation, an alleged infringement on Marcel’s trademark, is the same. See id. at 26. Lucky asserts that when the same plaintiff in separate actions asserts two claims that arose from separate transactions, the defendant can raise defenses in the second action that it opted not to raise in the first action. Id.

Lucky also acknowledges that courts have recognized a different kind of defense preclusion in the past, where a losing defendant attempts to use an unraised, available defense from a prior action to subsequently, acting as the plaintiff, attack the result of that action in a later action. Id. at 28. In the present case, Lucky points out that it is not acting as the plaintiff and that the defense it asserts in the Current Action would not impact the relief Marcel received in the 2005 Action, nor does it seek to attack the 2005 result. Id. Moreover, Lucky emphasizes that Marcel is not using the Current Action to enforce the 2005 Action because in the Current Action, Marcel attempts to collect additional damages that it could not have obtained at the time of the conclusion of the 2005 Action. Id. at 29–30.

Lucky further asserts that since claim preclusion cannot apply between the 2005 Action and the Current Action, “defense preclusion” as defined by the Second Circuit is an attempt to create a new and improper version of issue preclusion. Id. at 31. Lucky notes that issue preclusion is supposed to apply only to issues that have been conclusively and definitively decided in a final judgment and points out that the court in the 2005 Action recognized that it had not conclusively decided the settlement agreement issue, which Lucky seeks to raise as a defense in the Current Action. Id. at 32–33.

Marcel counters that the core values of res judicata are not fixed, and that defense preclusion is in harmony with the historic and modern use of claim preclusion and issue preclusion. Brief for Respondent, Marcel Fashion Group, Inc. at 24–26. Marcel claims that there are two categories of defense preclusion that differ only in form and not in substance. Id. at 26. According to Marcel, Lucky in fact recognizes one type of defense preclusion in its argument, the type typically used on collateral attack by a former defendant. Id. at 30. The type applicable in this case, Marcel asserts, occurs where a defendant in a subsequent action attempts to employ defenses that were available against a plaintiff in an original action between the same parties. Id. In order to apply defense preclusion, Marcel continues, (1) the parties in the two actions must be the same, (2) the defense must have been available in the original action, (3) the prior action must have concluded in a valid and final judgment, and (4) there must be a “common set of operative facts” between the two actions to the extent that a decision in favor of the defendant in the second action would harm the interests and relief the plaintiff received in the first action. Id. at 27, 31.

Marcel argues that if Lucky had brought its current defense as a claim instead—seeking a declaration that Marcel cannot enforce its trademark against Lucky—preclusion would clearly apply because Lucky would effectively be asking the court to relitigate the 2005 Action and reverse the decision in Marcel’s favor. Id. Marcel asserts that allowing Lucky to effectively relitigate the 2005 Action, merely because Lucky was not the party that initiated the Current Action, contradicts principles of res judicata and should be prohibited by defense preclusion just as it would if Lucky had been the plaintiff in the Current Action. Id. at 31–32, 35. Marcel indicates that claim preclusion does not bar the Current Action against Lucky because this action deals with Lucky’s later-in-time infringement on the same trademark that was violated in the 2005 Action, but Marcel argues that because the 2005 Action and the Current Action implicate a “common set of operative facts,” defense preclusion must still apply. Id. at 31. Marcel goes on to explain that claims are based on the same operative facts where they concern the same or “connected transactions” which are based on the same facts and seek the same relief. Id. at 37–38. Marcel contends that just because the 2005 Action and the Current Action arose out of different transactions does not mean that those transactions were not connected as to their facts, evidence, and legal rights for preclusion purposes. Id. at 42. Therefore, Marcel concludes, although Marcel’s claims and Lucky’s defense arose out of the same set of operative facts, because Marcel’s claims involve conduct that occurred after the 2005 Action, their claims are not precluded, but Lucky’s defense, which could have been raised during the 2005 Action, is. Id.

Finally, Marcel challenges Lucky’s position that because there is no claim preclusion, res judicata dictates that only issue preclusion may apply. See id. at 40–41. Instead, Marcel contends that even if claim preclusion does not apply, defense preclusion still can because defense preclusion relies on the element of res judicata that emphasizes that before preclusion applies, a party must have an actual opportunity to have raised an argument in a previous suit, and Marcel believes Lucky had that opportunity. See id. at 41. Marcel argues that for res judicata and defense preclusion purposes, what matters most is that a second action not challenge the correctness of the first action if the defendant could have raised that challenge during the first action. Id. at 32.

CONFLICT WITH THE FEDERAL RULES OF CIVIL PROCEDURE

Lucky contends that defense preclusion conflicts directly with the Federal Rules of Civil Procedure because defense preclusion gives all defenses the same effect as compulsory counterclaims, which are forfeited if not raised in an original proceeding. Brief for Petitioner at 34–35. At the heart of this conflict, emphasizes Lucky, is the difference between defenses and counterclaims: a defense is a response to another party’s claim and is not adjudicated separately from that claim, while a counterclaim is an affirmative argument for relief that could be adjudicated separately. Id. at 34. Lucky maintains that the Second Circuit effectively ignored the distinction between defenses and counterclaims, treating any defense that a defendant could possibly assert like a compulsory counterclaim under Federal Rule 13(a), and thus barred if not asserted at the first opportunity. Id. at 35–36. According to Lucky, the blurred concept of defense preclusion conflicts directly with the text of the Federal Rules of Civil Procedure, which distinguishes between defenses and counterclaims under Federal Rule 8(c). Id. at 36. Lucky argues that the defense it wishes to employ in the Current Action is a defense, and not a counterclaim, since it could not create any affirmative relief for Lucky if successful. Id. Finally, Lucky notes that even if a court were to treat its defense as a counterclaim, it would not be a compulsory counterclaim, but a permissive one, because the 2005 Action and the Current Action are based upon different facts; thus, Lucky contends that applying defense preclusion here would give its defense even greater preclusive effect than if Lucky had asserted its defense in the form of a counterclaim. Id. at 37.

Marcel counters that Rule 13(a) acts as an efficient means for courts to implement res judicata and that the Federal Rules of Civil Procedure do not restrict courts from applying other elements of res judicata in conjunction with the Federal Rules. Brief for Respondent at 49. Marcel highlights that in the past, many courts have consistently supplemented Rule 13(a) with other preclusion rules when res judicata policies permit it. Id. Marcel argues that the purposes of defense preclusion and compulsory counterclaims are identical: both prevent a situation where the result of a second decision somehow weakens or defeats the first decision concerning the same cause of action. Id. at 50. Marcel contends that labeling something a defense or a counterclaim, or permissive or compulsory, for the purposes of the Federal Rules of Civil Procedure makes no difference since both defense preclusion and compulsory counterclaims ensure that a defendant cannot relitigate the same claim twice or weaken the finality and result of the first decision. Id. at 50–51. Marcel asserts that such a defense, regardless of how it is labeled, must be barred. Id. at 51.