The recent trademark case, Dropbox, Inc. v. Thru Inc., found tech giant Dropbox defending itself against a competitor’s claim of trademark infringement. Its outcome serves as a useful warning for businesses big and small against complacency and “gotcha” tactics in trademark enforcement.

In this 2015 case in the U.S. District Court for the Northern District of California, Dropbox’s request for dismissal of its rival’s challenge to its registered trademark was granted. The facts were undisputed: the challenger, Thru Inc., failed to object to Dropbox’s use of the mark “DROPBOX” until almost six years after Dropbox applied for registration of the mark with the U.S. Patent and Trademark Office (USPTO).

Besides general complacency, evidence also was introduced that showed Thru Inc. delayed action against the alleged infringement by Dropbox until Dropbox’s planned initial public offering (IPO). Why? For the apparently cynical reason to create more leverage for a higher potential settlement or sales price.

Laches is an established legal doctrine that limits such undue delays in trademark enforcement. That age-old principle can be just as relevant to small- and medium-sized businesses as it is to $10 billion organizations like Dropbox.

Trademark Enforcement

As a general rule, trademark owners must enforce their rights themselves. The USPTO is not an enforcement agency. Owners must diligently monitor federal and state trademark publications in addition to the marketplace.

When potential competitors start to use an infringing mark and/or attempt to register it on an official register, trademark owners must invest the time, energy, and resources to defend their trademark. This enforcement can often involve unpalatable conflict and attorneys’ fees. However, as explained below, a trademark owner’s failure to enforce its rights promptly can lead to those rights losing all practical value.

The Doctrine of Laches

While it is widely known that trademark owners must enforce their own rights, it is less well-established and often unclear to owners when they must enforce their rights against allegedly infringing – or junior – users of a similar trademark.

When it comes to potential action, here are some of the questions to ask:

• Does an owner need to send cease and desist letters to anyone and everyone with marks even remotely close to its mark as soon as it catches wind of such marks’ existence?
• Can the owner wait to see if the new business with a similar name or similarly-named product grows to a point where it is a real threat?
• How long of a wait is too long of a wait?

The answers lie in courts’ application of the doctrine of laches, which spans many areas of law. As it turns out, the Lanham Act – the 1946 act governing federal trademark law – does not include a statute of limitations. That’s why the doctrine of laches has had an unusually large role in the area of trademark law. It is an equity defense that has developed in trademark common law that is meant to keep parties from “sleeping on their rights.” A laches defense claims that the plaintiff has delayed bringing an action for such a long period of time that the defendant party has been prejudiced. This prejudice usually arises from the defendant party’s investment of resources into growing the value of its trademark over time.

After a party discovers a trademark it deems to be infringing on a trademark it owns, there is a period of time during which it can take action. Exactly how long has been a matter for a bevy of litigation over the past decades. But this much is clear: if the trademark owner waits too long, the scales of equity start to tip toward that “junior user.”

When deciding laches cases, courts frequently will look to the limitations period for the most analogous statute in the state in which the infringement and subsequent request for injunction occurs. For Wisconsin, this statute of limitation is three years, which courts have derived from the Wisconsin Deceptive Trade Practices Act. If a trademark owner waits more than three years from the date it first knew of (or should have known of) the existence of an allegedly infringing mark, Wisconsin courts will presume that the defendant has been prejudiced by the delay. The onus is then shifted back onto the plaintiff to prove that the defendant has not been so prejudiced.

Dropbox, Inc. v. Thru Inc.

The new case out of the United States District Court for the Northern District of California clearly illustrates the negative effects that can occur when a business waits an extended period of time to enforce alleged infringement against another trademark user and has illegitimate reasons for doing so.

In Dropbox, Inc. v. Thru Inc., Dropbox, Inc. brought an action for declaratory relief to establish its right to use the term DROPBOX as a trademark. Thru Inc. brought counterclaims for trademark infringement under the Lanham Act.

Dropbox was founded in 2006 and launched its product in 2008. Business boomed, growing to a user base of more than 500 million customers and a valuation of $10 billion. In 2009, Dropbox applied to the USPTO for registration of the DROPBOX trademark. Its application was published in 2011. After several issues and settlements with other parties, it finally gained trademark registration for DROPBOX in February 2014.

Beginning in 2004 – two years before Dropbox was established – Thru had used a feature called “DropBox” in its file management software program. It failed to take any action to enforce its trademark rights in the term DROPBOX until December 2011, five years after Dropbox’s birth. That’s why Thru finally reached out to Dropbox and asserted priority over the mark. But, despite alerting Dropbox to its claims, Thru inexplicably did not file any action in the Northern District of California until April 2015.

Stating that “one who seeks the help of a court of equity must not sleep on its rights,” the court ruled for Dropbox, finding that “(1) [Thru]’s delay in filing suit was unreasonable, and (2) [Dropbox] would suffer prejudice caused by the delay if the suit were to continue.”

Evidence showed that Thru’s officers were aware of Dropbox’s use of the DROPBOX trademark as early as June 2009. Even if Thru’s officers had been able to remain unaware of the existence of Dropbox – a direct competitor in its field – the court would have almost certainly attributed inquiry notice to them. That is, notice that a “man of ordinary intelligence” would have reasonably inquired about this “other” Dropbox, which, after all, already claimed 1 million customers and had been widely covered in the media. By 2009, Dropbox was no secret to just about anyone with a computer.

The first prong of the laches inquiry – that a senior user’s delay in filing suit was unreasonable – can be proven without any nefarious reasons behind the delay. But when there are such questionable reasons, the unreasonableness of the delay becomes even clearer. Such was the case here.

Thru claimed that its delay was reasonable because it had reached out to Dropbox to assert its claims several years earlier. However, the record also showed that Thru’s delay was “a deliberate attempt to maximize the value of its claims by leveraging an anticipated IPO from Dropbox.” There were even emails presented that showed Thru executives called the potential suit a “lottery ticket” and planned to “file suit [on the day of Dropbox’s IPO] and make as much noise as we can about it.” Another email stated that, “Slow walking this to [Dropbox’s pre-IPO] S1 filing is all that is important.”

The only question remaining was whether Dropbox was prejudiced by this delay, the second prong in a laches inquiry. The court found it had been. The court found that Thru’s delay prejudiced Dropbox because, if the court ruled that Thru owned superior rights to the DROPBOX trademark, Dropbox would have to spend “massively” more in 2015 than if Thru had brought the action when it should have, as many as nine years earlier. During that time, Dropbox strategically continued to spend millions of dollars in marketing and brand recognition while Thru twiddled its thumbs and failed to bring the necessary action.

Do’s and Don’ts for Businesses

Most businesses invest a lot of time, energy, and money in creating and developing goodwill in their trademarks. Being able to defend rights in these valuable trademarks is an important tool in the continued success of any business.

As the Dropbox case shows, if a trademark owner does not actively defend its rights, it may lose them. In most successful laches defense cases, trademark owners are barred from collecting triple damages from trademark infringers, something they’d otherwise be allowed by right. Additionally, in extreme cases, the infringer may not be enjoined from using the conflicting mark at all.

In order to avoid losing the ability to enforce its rights in trademarks it owns, a business should:

• Monitor third-party use of trademarks it owns and close iterations of them.
• Carefully analyze whether it is likely to confuse consumers when a potentially-infringing use of a same or similar trademark is discovered.
• Decide whether and how to contact infringing users.
• Will a relatively friendly request to clarify its use or slightly alter the junior mark be effective?
• Or will a strongly-worded cease and desist letter be necessary?
• Be ready to follow through.
• If cease and desist communications fail to convince an infringing party to stop its infringing use of a trademark, businesses need to be prepared to sue.
• Failure to follow through on a threat gives the infringing party a potentially potent arrow in its doctrine of laches quiver if a business decides to file an infringement action at a later date.

The Takeaway

The overarching takeaway from the Dropbox case is this: Know your rights in your business’s trademarks and enforce them. If you sit on your hands, the rights may not be yours for long.

Or, to paraphrase the laches doctrine – when it comes to trademark infringement, if you snooze, you lose.

This article was originally published on the State Bar of Wisconsin’s Business Law Blog. Visit the State Bar sections or the Business Law Section web pages to learn more about the benefits of section membership.