Tax Service’s Registered Trademark’s Suggestiveness Presented Jury Question

In Engineered Tax Services, Inc. v. Scarpello Consulting, Inc., 2020 WL 2478863 (11th Cir. May 14, 2020), the Eleventh Circuit reversed and remanded the district court’s grant of summary judgment for Scarpello Consulting in a trademark dispute over the distinctiveness of the service mark “Engineered Tax Services,” citing previous rulings on substantive trademark law and its  application when a defendant seeks summary judgment of invalidity. The decision elaborated on how to apply the imagination and third-party use tests for determining whether a given mark is suggestive rather than descriptive. The court concluded that under both tests a reasonable jury could find that the mark is suggestive (and therefore protectable as a trademark as inherently descriptive) because (1) it takes some imagination to grasp the dual meaning of “Engineered Tax Services,” and (2) the moving defendant failed to prove that competitors needed the mark to describe their own services. The opinion also reaffirms the court’s ruling in a prior case that, because a registered trademark is presumed valid, a defendant seeking summary judgment of invalidity is required to prove invalidity by a preponderance of the evidence, without any burden shifting back to the plaintiff mark owner.

The dispute below

Engineered Tax Services (ETS) and Scarpello Consulting (Scarpello) both provide specialized federal income tax services that involve engineering expertise, including cost segregation and Section 179D and Section 45L energy studies.  ETS had previously considered purchasing or engaging Scarpello as a subcontractor, but negotiations broke down in early 2014.  Soon after, Scarpello began a Google AdWords marketing campaign using “engineered tax services” among its keywords. As a result, when a user Googled “engineered tax services,” Scarpello’s website was the first returned result.

In October 2015, ETS filed an application to register the mark “Engineered Tax Services” with the United States Patent and Trademark Office (USPTO), which registered the mark in June 2016.  ETS subsequently sued Scarpello for infringement of the “Engineered Tax Services” mark under the Lanham Act, along with several other claims.  Scarpello responded, in part, that the mark lacked distinctiveness—and therefore is not protectable as a trademark.  Because both cost segregation and the energy studies are generally performed with the involvement of licensed engineers, Scarpello asserted that “Engineered Tax Services” is not suggestive but merely either descriptive or generic.  The district court agreed and granted Scarpello’s motion for summary judgment, holding that no reasonable jury could have found that the mark was either inherently distinctive or had acquired a distinctive secondary meaning.  ETS appealed.

The appellate decision

The decision pointed out that for a successful trademark infringement claim, a plaintiff must show both that he has a valid trademark and that the defendant used an identical or similar mark likely to confuse consumers. A valid trademark must be inherently distinctive or acquire distinctiveness over time.  Because the district court granted summary judgment to the defendant on the ground that “Engineered Tax Services” was an invalid service mark due to a lack of distinctiveness, the court addressed only the validity issue and whether “Engineered Tax Services” is inherently distinctive.

Judge Kevin Newsom’s opinion for the court clarified the tests for determining whether a mark is suggestive rather than descriptive after providing a brief background on trademark law, citing the court’s prior decision in Royal Palm Properties, LLC v. Pink Palm Properties, LLC, 950 F.3d 776 (11th Cir. 2020).  Federal law recognizes four categories of trademarks:  (1) fanciful or arbitrary; (2) suggestive; (3) descriptive; and (4) generic.  In order of strength, fanciful, arbitrary, suggestive, and descriptive marks can acquire trademark protection.  Only fanciful, arbitrary or suggestive marks can be inherently distinctive, however.  After noting that Scarpello bears the burden of proving lack of inherent distinctiveness as both the summary judgment movant and the party challenging the mark’s validity, the court reversed the district court, concluding that a reasonable jury could find that “Engineered Tax Services” is inherently distinctive.

First, the Eleventh Circuit noted that as a result of the USPTO’s registration of the mark, the mark is presumed to be inherently distinctive, and thus at least suggestive.  Therefore, unlike the typical plaintiff seeking to avoid a defensive motion for summary judgment, ETS did not have the burden of producing any affirmative evidence that “Engineered Tax Services” is inherently distinctive.  Instead, as the movant with the burden of proof of invalidity, Scarpello must “present evidence so decisive that ‘no reasonable jury could find’ for ETS.”  This it failed to do.

The Eleventh Circuit applied two tests, the “imagination” test and the “third-party use” test, to determine whether the mark was suggestive or descriptive.  The Eleventh Circuit concluded that a reasonable jury could find that potential customers would need to make at least some imaginative leap to grasp that “Engineered Tax Services” has a dual meaning; the court reasoned that this leap is sufficient to render the mark suggestive.  The Eleventh Circuit also concluded that a reasonable jury could find that there is insufficient evidence that ETS’s competitors actually “need” to use the mark to describe their own services.

The Eleventh Circuit concluded that because “Engineered Tax Services” has a clever double meaning, referring to tax services that are both skillful and scientific and performed by engineers, a reasonable jury could decide that grasping both meanings requires imagination and thus conclude that ETS’s mark was suggestive.  Under the imagination test, a mark is merely descriptive if customers who observe the term can readily perceive the nature of the plaintiff’s services without having to exercise their imagination.  The district court, applying the imagination test and using dictionary definitions, concluded that because use of licensed engineers is well-accepted in cost segregation and tax energy studies, the mark was merely descriptive.  The Eleventh Circuit held that the district court failed to properly apply the imagination test both because (1) it focused too narrowly on the individual meanings of individual words without considering the effect of combining the words, and (2) it only considered one definition of the word “engineered” to the exclusion of other relevant meanings.

Moreover, although Scarpello presented some evidence that indicated that competitors have made some limited use of the mark or aspects of the mark, it did not demonstrate that competitors needed the mark to describe their services.  Under the third-party use test, a court should consider whether competitors would be likely to need the terms used in the trademark in describing their products; if a competitor needs the mark to describe its own product, the mark is not distinctive.  The Eleventh Circuit concluded that Scarpello failed to provide compelling evidence of third-party use.  Most competitors used somewhat similar terms to “engineered tax services” but not the term itself, such as “engineered cost segregation,” “engineering tax services,” and “engineered tax programs.”

Because a jury could reasonably find that Scarpello had failed to prove that the mark at issue was merely descriptive as opposed to suggestive, the Eleventh Circuit reversed the district court’s order for summary judgment and remanded the case for further proceedings.

Posted by Ann Fort and Haley Hurowitz.

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