SMALL TAKES THE OFFENSE


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INTRODUCTION

1. The court may recall that Small sought a declaratory judgment with respect to the relative rights of the parties, believing at that time that neither party was entitled to a preliminary injunction. (Cpaatty Declaration ("CD"), # 2) Discovery makes it clear that is not the case, and that Small is entitled to a preliminary injunction for reasons defendants have previously obscured. (For the Court's convenience, material which has come to light subsequent to the filing of the complaint is indicated in underlined italics). To the extent that supplemental pleadings may be deemed necessary by the Court, Small moves that such supplemental pleadings be permitted at an appropriate time pursuant to Rule 15 (d), F.R.C.P.)

FACTUAL OVERVIEW

2. Pursuant to Lanham Act Sec. 7 (c), 15 U.S.C.A Sec. 1057(c), Small had a right of priority as of Sept. 9, 1996, nationwide in effect, in connection with its tax and legal services in the nature of determining choice of entity questions, including tax document preparation and the formation of corporate entities, against any other person (including the defendants) except for a person who has used the mark and whose mark has not been abandoned. (CD, #3). Defendants did not use the "Big TaxHQ" service mark until 2005, and Small asked that it be canceled. The "TaxHQ" mark, on the other hand, had been used prior to Sept. 9, 2004 as the name of a newsletter, and thus it appeared that Sec. 7(c) would not preclude its use by Big. Small asked for a declaratory judgment with respect to the relative rights of Small and defendants with respect to Small's service mark "TaxHQ" and defendants trademark"TaxHQ'.

3. What has emerged in this case is a pattern of concealment and mispresentation by the defendants/counterclaimant Big . Big secured its trademark registration for "TaxHQ" from the United States Patent and Trademark Office ("USPTO") on the basis of untrue representations. The "TaxHQ" registration is thus subject to cancellation, although the trademark is already dead anyway, since Big abandoned whatever rights it might have had to its "TaxHQ" trademark for the newsletter more than 2 years ago. Thus, Section 7(c) does in fact apply, and it precludes Big's use of "TaxHQ" for any use.

4. It was clear before discovery (and it remains clear today) that Big itself targets an entirely different market from Small. This might enable Big to use its "Big TaxHQ" service mark (first used in 2005) on the theory that there is no likelihood of confusion between the "Big TaxHQ" and Small's "TaxHQ" service mark. The court need not reach that issue, however, in light of other facts unearthed in the course of discovery. Big's marketing efforts bring to it entrepreneurs (individuals starting a business who want tax and legal services to determine choice of entity questions, including tax document preparation and the formation of corporate entities). Those entrepreneurs are not serviced by Big, or even permitted access to the commercially meaningful portions of its web site. Instead, they are referred to NewBiz Company ("NB"), a sister corporation. NB does not use any "TaxHQ" mark in any way, and its target market is exactly the target market for Small. The connection between Big and NB is hidden from Big's major law firm and accounting firm and major corporation customers, because the rates charged by NB are lower. Given these facts, there is simply no reason to permit Big to continue to use the Big TaxHQ mark based upon the dissimilarity of Big's own market (as opposed to the combined market of Big and NB) and the market of Small.

5. Big's conduct is particularly offensive in light of its conduct, including its registering (in cooperation with NB) an internet domain name virtually identical to Small, its incredible assertion to this Court that it knew nothing meaningful about Small or Cpaatty prior to June, 2007 and the intimidating tactics it has employed with respect to at least one witness.

6. Granting a preliminary injunction to prevent Big from facilitating confusion of NB's services with those of Small through the use of Big's "Big TaxHQ" mark is clearly warranted. Small has superior rights with respect to the only valid mark Big possesses (the "Big TaxHQ" mark) and certainly with respect to the abandoned mark "TaxHQ" and, as Big's infringement is likely to cause confusion, Big should be preliminary enjoined from further use of it.

Cpaatty's (and thus Small's) Initial use of "TaxHQ"

7. Cpaatty was admitted to the Washington State Bar Association in 1982, is a licensed certified public accountant and has practiced the two professions in Seattle since that time, with an emphasis on tax, corporate and securities law. In the course of that practice, Cpaatty observed that entrepreneurs were poorly informed about choice of entity questions. Additionally, they were often foregoing the basic limited liability shield provided by incorporating or were turning to untrained persons who held themselves out as qualified to provide tax and incorporation services, because of the charges for such services by attorneys. Attorneys charges were high because of either (1) inexperience with tax, incorporation and related questions and the perceived necessity of applying a normal hourly rate to the process of becoming educated about it, or (2) the traditional (and understandable) lawyer approach that every aspect of legal service must be customized to fit the clients needs, and that each choice must be discussed with the client. To the single entrepreneur, or the typical "rna and pa" start-up, issues such as how much notice should be given for a directors or stockholders meeting, when billing at a normal hourly rate, simply add cost without adding value. Given the poor odds facing the start-up in the first place, entrepreneurs should not have to forego professional tax services or putting a basic liability shield in place or entrust those processes to untrained hands.

8. Cpaatty streamlined the traditional customized approach he'd learned from a competent mentor and adapted over the years. He was able to provide quality service at a price entrepreneurs could afford and at the same time be able to recognize potential pitfalls (e.g. the sale of securities) which untrained persons could not comprehend. Cpaatty first employed "TaxHQ" mark as a service mark for his services in 1999. The mark was at all times used in interstate commerce. Prior to registration, the symbol "SM" appeared in conjunction with the mark, to make clear Cpaatty's claims of intellectual property rights with respect to the service mark.

9. An application for the registration of Cpaatty's "TaxHQ" service mark was filed with the USPTO on September 9, 2004. The USPTO registered the service mark in Cpaatty's name on October 7, 2005, as U.S. Trademark Registration No. 1,000,000. This application was the first application filed by either of the parties and the first registration granted to either of the parties. Cpaatty learned of Big in late October, 2004 and gave Big notice of Cpaatty's use of "TaxHQ" mark as a service mark on November 1, 2004.

10. In apparent recognition of its problems with respect to Cpaatty's "TaxHQ" service mark, Big filed an application for registration of what it called "Big TaxHQ" (Big's "TaxHQ") in March, 2005, attempting to distinguish the "Big TaxHQ" service mark from Cpaatty's "TaxHQ" service mark by adding the identifier "Big", adding design features, and keeping its claims well clear of the claims Cpaatty had made when he filed his senior application. This filing occurred within a month after Big first used "Big TaxHQ" (2005). This use occurred on Big's new web site, where the words "Big TaxHQ" appear on every page of the site. As previously stated, all of this activity occurred subsequent to Big's receipt of notice of Cpaatty's nationwide rights with respect to the "TaxHQ" service mark.

11. The services of Small (the licensee and now the assignee of Cpaatty) have been accessible throughout the United States and the world.

Small's Discovery of Infringement

12. Cpaatty and Small (Cpaatty's licensee and now assignee) became aware of Big, its newsletter and its web site plans when Cpaatty talked to Big Official, a key employee of Big for twenty-seven minutes on November 1, 2004. Cpaatty initiated the contact and informed Official, in detail, of Cpaatty's use of the "TaxHQ" service mark. Cpaatty considered what Official told him about Big's use of "TaxHQ" as the name of a newsletter, and thereafter monitored Big's web site and its activities with the USPTO. This careful examination led Cpaatty to believe that there was no competition between Big and Cpaatty, since Cpaatty targeted entrepreneurs as opposed to Big's target market of major accounting and law firms and major corporations. Big's advertising and its web site appeared to confirm that fact. Big's claims with the USPTO were different from Cpaattys, and did not appear to pose a competitive threat or be likely to confuse either the accounting and law firm/major corporation market on the one hand or the entrepreneur market on the other. Given this, Small and Cpaatty did not contest the Big trademark applications.

13. Small analyzed the situation in the same way when it received Big's cease and desist letter in early July, 2007, and it filed this suit seeking a declaratory judgment for precisely that reason. During the course of discovery, however, Small discovered that the truth is radically different from the scenario Big has constructed for the public and this court. Cpaatty remembered a call from X. Big Employee, who had solicited business from Small earlier in the year, coincidentally telling Cpaatty at the time that he had previously worked for Big and recognized Small's "TaxHQ" service mark as the one he heard about when he worked for Big. Cpaatty had, fortuitously, recorded his conversation with Official of November 1, 2004, so that he could analyze it to determine the relative rights of the parties. Small contacted Mr. Employee in hopes that Mr. Employee could provide third party confirmation of what Cpaatty knew to be true with respect to Big's full knowledge (on November 1, 2004.) of Small's use. Upon questioning, Mr. Employee confirmed that he had been told, before Big established its web site in early 2005, that Big was aware of another user in the northwest, but that it wasn't going to be a problem. Upon further questioning of Mr. Employee, Cpaatty learned that while Big did not in fact serve the entrepreneur market directly it did so indirectly, through NewBiz. When this information was confirmed by another former employee of Big, Cpaatty sought direct confirmation of that fact through discovery directed to Big. To summarize, Big's witness with the most direct knowledge (A. Nother Person) confirms Mr. Employee's testimony in his affidavit and in his deposition that Big does not service the entrepreneur market directly, but instead refers entrepreneurs to NewBiz.

14. The bottom line is that Big is infringing Small's "TaxHQ" service mark by shepherding entrepreneurs who come to it (by reason of its "Big TaxHQ" mark or otherwise) to NewBiz. As will be discussed later, a strong inference of confusion is engendered where marks are nearly identical and where competition exists. This infringement has occurred with full knowledge of Small's rights, given constructively on September 9, 2004, under the Lanham Act, and actually on November 1, 2004. In this litigation, Big has relied upon Big's use of "TaxHQ" as the name of its newsletter to insulate it from the nationwide priority given Small's "TaxHQ" service mark, effective as of the filing on Sept. 9, 2004 (Lanham Act, Section 7), and from Cpaatty's use of the service mark prior to that date. This defense has been destroyed by discovery. Big's filing for "TaxHQ" with the USPTO is based upon untrue representations. The original application, filed November 26, 2004 was filed on behalf of a corporation which did not exist. When the USPTO indicated that the original application was unacceptable without a better identification of the goods for which trademark protection was sought, Big filed a sworn amendment on November 19, 2005, identifying the goods as a newsletter named "TaxHQ". The problem is that there was no such TahHQ newsletter then, and no such TaxHQ newsletter exists now. In fact, the use of the name "TaxHQ" with respect to the Big newsletter was abandoned over 2 years ago. Big provided this untrue statement, incidentally, over six months after the abandonment of the "TaxHQ" newsletter.

Small's Need for Immediate Relief

15. Big continues to use its junior "Big TaxHQ" mark to shepherd entrepreneurs to NewBiz. Small is concerned over the loss of revenue caused by this infringement. It is also concerned that entrepreneurs are being not only confused but deceived, and that this confusion (and more importantly, this deception) will destroy the goodwill associated with Small's "TaxHQ" service mark. Entrepreneurs who seek Small's mark but are confused by Big's use of "Big TaxHQ and end up with NewBiz may expect the services of an experienced, competent certified public accountant and lawyer. With NB, entrepreneurs will not get such services. Permitting Big to continue to divert entrepreneurs degrades the quality of the service associated with Small's "TaxHQ" service mark.

16. Small has learned, through discovery, that Big and NB are attacking Small on a second front. Specifically, Mr. Official of Big (the corporate officer Cpaatty talked to for 27 minutes on Nov. 1, 2004) and John Doe of NB, between them, decided to reserve the domain name "abouttax.net" and to import Big's infringing web site to that domain name. Small's main web site, of course, is "abouttax.com". Now entrepreneurs who seek Small's web site using "abouttax" may be diverted to Big (and then to NB), just as those who search for Small's "TaxHQ" service mark are diverted. Big will presumably argue that this action was simply a reprisal to Small's mirror site "TaxHQ.net". Such an argument rings hollow: even if one were to believe the now discredited prior use claim of Big, Small had reason to use "TaxHQ.net", i.e. it owns the first registered "TaxHQ" service mark. Big has no conceivable claim on "abouttax.net" .Time will tell whether Small has a separate infringement claim with respect to Big's use of "abouttax.net" , in addition to the infringement claim it has with respect to Big's use of "Big TaxHQ". If Big seriously believed that its now abandoned trademark claim with respect to"TaxHQ" was justified because"TaxHQ" was the name of its newsletter, it should understand the infringing nature of its use of "abouttax" where "abouttax.com", is the domain name of Small's web site.

Argument

17. A party is entitled to a preliminary injunction in a trademark case if "he demonstrates either (1) a combination of probable success on the merits and the possibility of irreparable injury or (2) the existence of serious questions going to the merits and that the balance of hardships tips sharply in his favor." Brookfield Communications, Inc. v. West Coast Entertainment Corp., 174 F.3d 1036, 1046 (9th Cir. 1999); accord Rent-A-Center, Inc. v. Canyon Television & Appliance Rental, Inc., 944 F. 2d 597, 602 (9th Cir. 1991). All of the factors set forth in those alternative standards favor granting Small a preliminary injunction.

Small is likely to Succeed on the Merits

18. To establish an infringement or unfair competition claim under the Lanham Act, Small must establish that the defendants are using a mark that is confusingly similar to a valid, protectable mark owned by Small. See Brookfield, 174 F.3d at 1046; AMF Inc. v. Sleekcraft Boats, 599 F.2d 341,348 (9th Cir. 1979). The facts shown in Small's supporting declaration demonstrate that Small satisfies that standard.

19. The "TaxHQ" Service Mark is a Protectable Mark and Small Owns the Service Mark Because It Made Use of It in Interstate Commerce Well Before the Defendants Did, and Because of Section 7 (c) of the Lanham Act.

20. To succeed on a claim for infringement or unfair competition, a party must first demonstrate that its mark is protectable in the sense that it is not merely descriptive of the party's services or a generic term, but instead is inherently distinctive or possesses secondary meaning. E.g., Official Airline Guides. Inc. v. Goss, 6 F.3d 1385, 1390-91 (9th Cir. 1993) (making distinction). The "TaxHQ" service mark satisfies that standard because it is inherently distinctive, being properly classified either as an arbitrary designation or as being merely suggestive of the services to which it is associated. The use of the term "Tax" within the mark suggests, at most, an association with tax matters, but the mark is not "descriptive" of tax services because it "requires the consumer to exercise the imagination in order to draw a conclusion as to the nature of the goods and services." Union Nat'I Bank of Texas, Laredo v. Union Nat'I Bank of Texas, Austin, 909 F.2d 839, 845 (5th Cir. 1990). As such, even if the "TaxHQ" service mark is treated as a suggestive mark rather than an arbitrary mark, it is still inherently distinctive and is considered "protectable without proof of secondary meaning." accord Sleekcraft Boats, 599 F.2d at 349.

21. A party seeking relief also must demonstrate that it owns the mark. Small satisfies that requirement and has nationwide priority pursuant to Lanham Act Section 7 (c ) (Although Big used "TaxHQ" as the name of a newsletter prior to Small's use of "TaxHQ" mark as a service mark, it has abandoned that use.) Moreover, Big never thought enough of its own rights to act upon them until Nov. 26, 2004, and it was then so cavalier about its claim that it applied in the name of a corporation which did not exist, and thereafter specified non-existent goods as the subject of its application.

22. One is forced to the conclusion, since Big abandoned use of "TaxHQ" as the name of its newsletter shortly after it first applied for registration and eight months before the false representation to the USPTO which enabled its registration to issue, that the "TaxHQ" registration was never anything more than a stalking horse.

23. In any event, abandonment settles any conceivable issue: Small owns the mark. It was unquestionably the senior service mark user before discovering the false registration and abandonment. Afterwards, it is clearly the first user for any purpose and its rights are established under Lanham Act Section 7 (c). As such, it has the right to enjoin others, including the defendants, from making use of that mark if it is likely to result in consumer confusion See, e.g., Brookfield, 174 F.3d at 1047 ("The first to use a mark is deemed the senior user and has the right to enjoin 'junior' users from using the confusingly similar marks in the same industry and market or within the senior user's natural zone of expansion."; Tally-Ho, Inc. v. Coast Community College Dist., 889 F.2d 1018, 1023 (11th Cir. 1989) ("The first to use a mark on a product or service in a particular geographic market, the senior user, acquires rights in the mark in that market") Defendants were aware of Small's senior rights in the service mark "TaxHQ" from September 9, 2004 forward. Their infringing use demands injunctive relief.

24. The Defendants Use of the "Big TaxHQ" Mark, as Well as Its Use of the Word "TaxHQ", in both Its Advertising and Its Web Sites is Likely to Cause Confusion.

25. In determining whether a likelihood of confusion exists, the Ninth Circuit relies on the Sleekcraft test, which considers: (1) the similarity of the parties' marks; (2) the relatedness or proximity of the two companies' products or services; (3) the marketing channels used by the parties; (4) the strength of the asserted mark; (5) the infringing party's intent in selecting its mark; (6) the degree of care likely to be exercised by purchasers in selecting goods or services; (7) evidence of actual confusion; and (8) the likelihood of expansion in product or service lines. See Sleekcraft Boats, 599 F.2d at 348-49.

The Key Sleekcraft Factors-Similarity of Small's and the Defendants' Marks:

26. The defendants' mark, "Big TaxHQ" is virtually identical to Small's "TaxHQ" service mark. The only difference is the addition of the word "Big". This minor difference is really incidental, and does not alter the fact that the marks look and sound alike and are confusingly similar. See Official Airline Guides, Inc., 6 F.3d at 1392 (a court must assess the similarity of the marks in terms of their sight, sound, and meaning, with similarities weighed more heavily than the differences); Sleekcraft Boats, 599 F.2d at 351 (same).

The Relatedness and Proximity of the Two Companies' Services:

27. There also can be no doubt that while Small and Big are not competitors, Small and NB (Big's sister corporation) are competitors seeking to sell tax and formation services to entrepreneurs. That fact is abundantly clear upon examination of Small' s web site, and the very reason for the existence of NB is to provide tax and formation services for entrepreneurs. The similarity of those services, coupled with the virtual identity of the marks, compels a finding that there is a high likelihood of confusion. See Brookfield, 174 F.3d at 1056 (where there is a virtual identity of marks, "if they were used with identical products or services [a] likelihood of confusion would follow as a matter of course."); Lindy Pen Co. v, Bic Pen Corp., 796 F.2d 254,256-57 (9th Cir. 1986) (where those two factors weighed in favor of a finding of a likelihood of confusion, reversing a district court's contrary finding even though all the other factors weighed against it).

28. The Remaining Sleekcraft Factors Either Indicate a High Likelihood of Confusion or Are at Least Not Contrary to Such a Finding.

The Marketing Channels Used by the Parties:

29. Small has previously expressed its reservations with the concept that this factor is satisfied solely because both of the parties use the Internet. This is so because everyone uses the Internet.This was before Small learned that NB was Big's secret proxy in the tax and entity formation for entreprenuers market. In any event, this factor is at the least not contrary to a finding of a likelihood of confusion between Small and NB.

The Strength of Small's Mark:

30. Big argued vigorously, in its own application for preliminary injunction, that the strength of the mark factor favors a finding of confusion. It nevertheless concluded that any perceived weakness in the marks in question would not outweigh the key factors it considered the most important. Small agrees that the similarity of the marks and the similarity of the services offered by NB and by Small are more important factors than the strength of the mark.

The Defendants Intent in Selecting and Using Their Service Mark:

31. Small can categorically state that Big was aware of Cpaatty's prior use of the "TaxHQ" service mark when it started using the infringing mark "Big TaxHQ" in 2005. Small can also categorically state that Big was fully aware of Small' s prior use of its"TaxHQ" servicemark on abouttax.com prior to Big's registration of the domain name "abouttax.net" in July, 2007, and the subsequent manuever by key employees of Big (Mr. Official) and NB, to put the entire "Big TaxHQ" WebSite on the domain name "abouttax.net".

The Degree of Care Likely to be Exercised by Purchasers in Selecting Services:

32. Big covered this ground in its own application for preliminary injunction. It noted that many of the Internet users who visit the web sites of Small and Big are likely to be sophisticated, and this is certainly true with respect to the target market of Big: accounting and law firms and major corporations. Big went on to note that a significant number of users seeking to form a business for the first time might lack that sophistication. These users, of course, are the entrepreneurs sought by both Small and NB. Small hopes that these users can distinguish between the tax and legal services offered by Small and the paralegal services offered by NB, but fears that some may not be able to do so. Since, as Big itself noted, the likelihood of confusion is measured against the likely standard of care exercised by the "least sophisticated consumer", this factor favors a finding that confusion is likely between Small and NB.

Evidence of Actual Confusion:

33. Small has not yet encountered evidence of substantial actual confusion, but it has only recently discovered the practice of Big of using its "Big TaxHQ" service mark to shepherd entrepreneurs to NB. Moreover, the attempt of Big and NB to capture entrepreneurs seeking Small's "abouttax" web site and to divert them to the Big web site ("abouttax.net"), created in July, 2007) is so recent that such evidence has not had the opportunity to become manifest at this point.

Likelihood of Expansion in Service Lines:

34. The likelihood of expansion of product lines is relatively unimportant where, as here, two companies (Small and NB) already compete to a significant extent, inviting public confusion. See Brookfield, 174 F.3d at 1060.

ALL THE OTHER FACTORS FAVOR GRANTING A PRELIMINARY INJUNCTION

35. Small Will Suffer Irreparable Injury Unless the Defendant's Infringing Uses Are Enjoined and Such an Injunction Is in the Public Interest.

A. Once a party demonstrates a likelihood of confusion, it is ordinarily presumed that it will suffer irreparable harm unless injunctive relief is granted. See, e.g., Metro Pub. Ltd v. San Jose Mercury News, 987 F.2d 637, 640 (9th Cir. 1993). That presumption is buttressed by the fact that Small has invested substantial time and money in developing and advertising services under its "TaxHQ" service mark. Allowing defendants to continue infringing that mark, not only on its own original web site but on the predatory web site "abouttax.net", deprives Small of the commercial benefit it is entitled to derive from its investment. That loss increases each day that defendants infringement is allowed to continue. Issuing a preliminary injunction will serve the public interest because it would avoid the inevitable confusion by entrepreneurs that will otherwise result. See, Tally-Ho, Inc., 889 F.2d at 1029.

B. The Balance of Hardships Favors Small. The balance of hardships tips in Small's favor. In contrast to the substantial injury that Small is suffering from defendants infringement, both through its principal web site and because of the "abouttax.net" web site, it seems clear that little investment was made in Big's web site prior to the filing of Small's application for registration of its service mark "TaxHQ" on Sept. 9, 2004. As a matter of fact, Big had not even obtained the domain name registration for the web site at the time, and did not do so until the middle of the following month. Moreover, within two weeks after the domain name registration was effected, Cpaatty advised Official (in the course of their 27 minute telephone call) of Cpaatty's use of the service mark in considerable detail. Given constructive knowledge under the Lanham Act, and actual knowledge on November 1, 2004, any hardship that defendant may encounter from discontinuing its use of its infringing mark "Big TaxHQ" on its main web site and on its "abouttax. net" web site is self-inflicted and should carry no weight in determining whether a preliminary injunction should issue.

Conclusion

36. Small's application for preliminary injunction should be granted and the Court should enter an order consistent with the proposed order accompanying Small's application.

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