Cybersquatting Judgment Results in Nondischargeable Debt

Posted by NCBRC - July 29, 2014

A million-dollar-plus district court judgment against the debtor for intentional trademark infringement and cybersquatting resulted in a nondischargeable debt in bankruptcy under section 523(a)(6). Nguyen v. Biondo (In re Biondo) No. 13-1612 (Bankr. S.D. Fla. June 13, 2014).

The action in district court arose out of a business relationship between the debtor and Nguyen, the owner of a salon franchise that sold alcohol and operated under the name “Tipsy.” Initially, the debtor was a half owner of one of the salons. When the debtor’s relationship with Nguyen deteriorated, he purchased the salon in its entirety with the proviso in the contract that he was entitled to use the “Tipsy” name for only one year while he transitioned to a new name. At the end of one year, however, the debtor continued to use the Tipsy name, even attempting to register it as a trademark himself. These actions resulted in a finding of trademark infringement and cybersquatting in violation of the Lanham Act. The district court granted summary judgment in Nguyen’s favor and awarded fees and costs based on its finding that the debtor’s “infringement of the Tipsy mark was malicious and fraudulent and deliberate and willful.” In addition, the debtor’s continued use of the Tipsy trademark after the district court had issued an injunction, resulted in sanctions. Though the district court also found that the debtor’s actions constituted a breach of contract, Nguyen did not seek to except that damage award from the debtor’s bankruptcy discharge.

The case came before the bankruptcy court on Nguyen’s motion for summary judgment in an adversary proceeding. As an initial matter, the court rejected the debtor’s attempt to relitigate the facts of the underlying infringement case finding that collateral estoppel applied. Citing Tampa Bay Water v. HDR Eng’g, Inc., 731 F.3d 1171, 1180 (11th Cir. 2013) and CSX Transp., Inc. v. Bhd. of Maint. of Way Emps., 327 F.3d 1309, 1316 (11th Cir. 2003). Thus, the issue was whether the district court’s findings established the two elements of nondischargeability: 1) the existence of a debt owed by the debtor to the complainant, 2) caused by willful and malicious injury. Under section 523(a)(6), “an act is willful .  .  . if it is undertaken with the intent to cause injury, or if it is an intentional act and injury is certain or substantially certain to result.” The court noted that intentional infringement of a trademark is necessarily “willful” within the meaning of section 523(a)(6). It further found that the findings of the district court demonstrated that the debtor’s conduct was malicious. Cybersquatting, on the other hand, includes an element of “bad faith intent” in its prima facie case and therefore satisfies both the “willful” and “malicious” components of section 523(a)(6). Both intentional infringement and cybersquatting necessarily result in injury. The court concluded that “where a debtor has been held liable for intentional infringement of intellectual property without just cause, or cybersquatting, the resulting debt arises from a willful and malicious injury within the meaning of section 523(a)(6).” The court also found that fees and costs arising out of litigation of a nondischargeable debt are likewise nondischargeable and that, based on the intentional nature of the debtor’s conduct, the sanctions award based on violation of the district court’s injunction were also excepted from discharge.

The only issue that the bankruptcy court could not determine based on the record, was to what extent the fees and costs awarded by the district court related to Nguyen’s claim for breach of contract. Because the debt arising out of that claim was not dischargeable, the fees relating to its litigation were not dischargeable either. The court, therefore, granted Nguyen’s motion for summary judgment in part and denied it in part to determine appropriate allocation of fees and costs.

Biondo Bankr SD Fla opinion


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