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Lahoti v. Vericheck

April 9, 2010

DAVID LAHOTI, PLAINTIFF / COUNTERCLAIM DEFENDANT,
v.
VERICHECK, INC., DEFENDANT / COUNTERCLAIM PLAINTIFF.



The opinion of the court was delivered by: James L. Robart United States District Judge

AMENDED FINDINGS OF FACT AND CONCLUSIONS OF LAW

I. INTRODUCTION

This matter returns to the court on remand from the United States Court of Appeals for the Ninth Circuit following its decision in Lahoti v. VeriCheck, Inc., 586 F.3d 1190 (9th Cir. 2009). Prior to the appeal, the court conducted a bench trial in this matter that began on November 6, 2007. At trial, Plaintiff/Counterclaim Defendant David Lahoti was represented by John Du Wors and Derek Linke of Newman & Newman, Attorneys at Law, LLP. Defendant/Counterclaim Plaintiff Vericheck, Inc. ("Vericheck") was represented by Shannon Jost of Stokes Lawrence, P.S. Upon the conclusion of the trial, the court took the case under advisement and subsequently made its original Findings of Fact and Conclusions of Law (Dkt. # 81).

Following entry of judgment, Mr. Lahoti appealed to the Ninth Circuit. On November 16, 2009, the Ninth Circuit issued its opinion in Lahoti, wherein the Ninth Circuit affirmed in part and vacated in part this court's decision and remanded the case to this court for further proceedings. The court has now considered the Ninth Circuit's opinion in Lahoti and reviewed the post-appeal briefing submitted by the parties. The court has also considered the evidence and exhibits admitted at trial, the findings and conclusions reached in the court's order on summary judgment ("SJ Order") (Dkt. # 52), and counsels' arguments.

Therefore, being fully advised, the court makes its Amended Findings of Fact and Conclusions of Law.

II. FINDINGS OF FACT

Background

1. Vericheck, a Georgia corporation, is a national provider of electronic payment transaction processing services, and has been using the VERICHECK mark (or, "the mark") in connection with its business since at least 1992. In 2003, Vericheck attempted to register the mark with the United States Patent and Trademark Office ("PTO") but was unable to do so because an Arizona company successfully registered VERICHECK as a word mark in 1975. (2d Hannah Decl. (Dkt. # 26) ¶ 8, Exs. 7, 8.)

2. According to Vericheck's Chief Executive Officer ("CEO") Jerry Hannah, who purchased the company in 1995, Vericheck has maintained a World Wide Web presence at since 1999 and began offering its services online about a year later. (Id. ¶ 2.) The company also registered the domain names , , , and , many of which redirect visitors to . Vericheck now conducts its business primarily over the Internet and through its resellers and independent sales offices ("ISOs"), who rely on the Internet, including Vericheck's websites, as a primary mode of communication with Vericheck. On August 31, 2001, the company successfully registered a service mark with the State of Georgia, described as "a depiction of a check mark over the word 'vericheck.'" (2d Jost Decl. (Dkt. # 28) ¶ 3, Ex. B.)
3. Mr. Lahoti is an adjudicated cybersquatter who has registered thousands of domain names and prospectively registers domain names of services he "might offer" based on his "ideas for new ventures." (Lahoti Decl. (Dkt. # 31) ¶¶ 7-8; Jost Decl. (Dkt. # 16), Ex. B (E-Stamp Corp. v. Lahoti, Case No. 2:99-CV-9287-GAF-MAN (C.D. Cal. Jun. 12, 2000)); Supp. Jost Decl. (Dkt. # 23), Ex. K; SJ Order at 12 n.9.) After having tracked ("Domain Name") for five years, Mr. Lahoti, a self-described "Internet entrepreneur," registered the Domain Name in March 2003. (Lahoti Decl. ¶¶ 3, 11.) The Domain Name incorporates the VERICHECK mark. Mr. Lahoti uses in connection with a directory website providing links to companies that compete with Vericheck. (See Ex. A-10.)
4. Prior to Mr. Lahoti purchasing the Domain Name, it was owned by a Canadian company. For several years, Mr. Hannah and other Vericheck representatives attempted to secure rights to from the Canadian company. Once Mr. Lahoti purchased the Domain Name, he expressed a willingness to sell the Domain Name to Vericheck at prices that ranged from $48,000 to $100,000. (SJ Order at 3-4.)
5. In June 2006, Vericheck filed a complaint with the National Arbitration Forum ("NAF") pursuant to the Uniform Domain-Name Dispute-Resolution Policy seeking an order transferring to Vericheck. Mr. Lahoti responded and objected. In August 2006, the arbitrator issued a decision ordering transfer of the Domain Name to Vericheck.

6. Mr. Lahoti filed the instant action for declaratory relief challenging NAF's decision pursuant to 15 U.S.C. § 1114(2)(D)(v), which allows a registrant whose domain name has been suspended, disabled, or transferred to file a civil action to establish that his or her use of the domain name is lawful. Mr. Lahoti seeks a declaratory judgment that his use of the Domain Name does not contravene the Anti-Cybersquatting Consumer Protection Act ("ACPA"), 15 U.S.C. § 1125(d), or any other provision of the Lanham Act, 15 U.S.C. § 1051 et seq. In its answer, Vericheck pleads the following counterclaims: violation of the ACPA; Lanham Act false designation of origin, 15 U.S.C. § 1125(a); common law trademark infringement and trade name infringement; common law unfair competition and misappropriation; and a violation of Washington's Consumer Protection Act ("CPA"), RCW § 19.86.020. Vericheck seeks transfer of the Domain Name, statutory damages, and attorneys' fees.

7. The parties filed cross-motions for summary judgment. On August 30, 2007, the court denied Mr. Lahoti's motion and granted in part and denied in part Vericheck's motion. The court found the following: Mr. Lahoti registered and used in bad faith (SJ Order at 12-14); Mr. Lahoti is not entitled to take refuge in the "safe harbor" provision of Lanham Act § 43(d), 15 U.S.C. § 1125(d)(1)(B)(ii) (SJ Order at 14); the Domain Name and the VERICHECK mark are identical or confusingly similar (id. at 6, 17); Vericheck's use of the mark predates Mr. Lahoti's registration of the Domain Name (id. at 7 n.5); Mr. Lahoti's use of the Domain Name for a directory website and his offers to sell the Domain Name constitute "commercial use" (id. at 15); and both parties use the Internet as a marketing channel (id. at 17).

8. With respect to liability, the court found that there were issues of fact with regards to: (1) the distinctiveness of the VERICHECK mark; and (2) the likelihood of consumer confusion caused by Mr. Lahoti's use of the mark. The first issue affects all five of Vericheck's counterclaims. The second issue affects all claims except for the ACPA counterclaim.

9. At the bench trial, Vericheck called two witnesses to testify: Vericheck CEO Mr. Hannah and Mr. Lahoti. Mr. Lahoti called a single witness, Tom Nort, to testify telephonically in rebuttal to Mr. Hannah's deposition testimony of November 5, 2007. Mr. Nort sold the VERICHECK mark and business to Mr. Hannah.

10. Because the court had already determined that Mr. Lahoti used the VERICHECK mark in bad faith, on the second day of the trial the parties agreed that the court could determine statutory damages and attorneys' fees on the existing record without need for trial testimony.

11. On December 3, 2007, the court issued its Findings of Fact and Conclusions of Law (Dkt. # 81). The court determined that the VERICHECK mark is distinctive and strong; that Mr. Lahoti, by his registration, use, and attempted sale of the domain name, had violated Lanham Act § 43(a) and (d), 15 U.S.C. § 1052 et seq.; and that Mr. Lahoti's acts constituted common law trademark infringement and trade name infringement, common law unfair competition and misappropriation, and a violation of the CPA. The court awarded Vericheck $100,000 in statutory damages under 15 U.S.C. § 1117(d). In subsequent orders, the court awarded Vericheck its attorneys' fees and costs.

12. Mr. Lahoti appealed to the Ninth Circuit. On November 16, 2009, the Ninth Circuit issued an opinion affirming in part and vacating in part, and remanded the matter to this court for consideration in light of the principles articulated in Lahoti v. VeriCheck, Inc., 586 F.3d 1190 (9th Cir. 2009).

Vericheck's Business, Its Services, and Consumer Confusion

13. In 1992, Mr. Nort started Vericheck in Georgia. Vericheck was a verification company for check processing that appeared to employ a unique system for tracking account information.

14. Mr. Hannah met Tom Nort in 1992 or 1993. In 1995, Mr. Hannah purchased Vericheck from Mr. Nort. The assets included in the sale were the company's computer programs, computers, processing equipment, and the name Vericheck, Inc. Mr. Hannah continued to do business as Vericheck and has always used the name Vericheck to brand the company's services. Mr. Nort thereafter changed the name of his business so that he could offer services that he had not sold to Mr. Hannah as part of the sale of the Vericheck business. (See Ex. A-21.)

15. Mr. Nort was called to testify telephonically as a rebuttal witness to challenge Mr. Hannah's deposition testimony that Vericheck had been doing business under the Vericheck name since 1991 or 1992. Mr. Nort instead corroborated Mr. Hannah's testimony, testifying that Vericheck began offering services in 1991 or 1992 and, when pressed, said that he would have to settle on "around 1992." Mr. Nort further testified that salesmen used the VERICHECK mark to solicit business in Atlanta, Georgia and the surrounding area, as well as in Gainesville, Georgia.

16. Mr. Hannah registered Vericheck, Inc. with the State of Georgia on September 7, 1999. (Exs. 4, 5.) He testified credibly that his delay in registering the company was due to the death of one parent and the debilitating illness of his other parent around the same time that he began operating Vericheck. Vericheck owns a State of Georgia trademark registration, No. S-19547, for the mark VERICHECK & Design, issued August 31, 2001. (Ex. A-3.)

17. Vericheck provides a broad array of financial and merchant solutions, including check and other financial verification services; check guarantee services; check collection and prosecution of delinquent payments; verification of account information, balance, and positive or bad/fraudulent account transaction history; monitoring and reporting of check transaction history; payment processing services (credit card, debit card, echecks, electronic benefit transfer ("EBT"), wireless payments, stored value or purchasing cards, and personal or merchant check); and related transactional and technical support services. (See, e.g., Exs. A-4, A-9, 4, 5, 15.) The vast majority of Vericheck's business involves automated check handling ("ACH"), which includes prearranged payment debits ("PPD"); commercial cash debits ("CCD"); accounts receivable conversion ("ARC"); telephone transactions; back office conversion ("BOC"); point-of-purchase transactions ("POP"); returned check collection ("RCK"); and consolidated returns ("RCC"). Of these ACH transactions, ARC, BOC, POP, RCK, and RCC depend upon the existence of a physical check.

18. There are approximately 1,500 merchants conducting electronic transactions through Vericheck. Its customers include large private corporations such as the home security company ADT, as well as county and city governments, law firms, and professional organizations. Mr. Hannah testified that Vericheck's sales volume in 1995 was "minuscule," but the company now is involved with approximately $300 million in transactions per year, which translates to approximately 300,000 transactions. According to Mr. Hannah, in 2001-2002, Vericheck's business "really took off" and the "trajectory was straight up"; this increase in business was related to Vericheck's partnership with USA ePay. Presently, Vericheck grosses approximately $60,000 per month.

19. Vericheck promotes its name and services through trade shows, banking shows, and electronic transactions exhibitions in Las Vegas and San Jose; merchant's forums in Eureka, California, southern Tampa, Florida, and Atlanta, Georgia; and vendor groups sponsored by regional and national banks. Mr. Hannah personally attends two to three trade shows per year, distributing material and business cards, all of which prominently display the VERICHECK mark. It costs approximately $5,000 to register for a trade show and additional expenses are incurred for setting up a booth. Vericheck also offers incentives to promote its services, for example, waived application fees for vendors, and asks that its ISOs and resellers participate in promoting these incentives.

20. Mr. Hannah testified that approximately 90% of Vericheck's business is conducted through the Internet. This includes Vericheck's secure network and merchant transactions. Vericheck, its resellers, and ISOs also direct merchants to the website posted at Vericheck's to fill out applications, service agreements, and for further information. Vericheck, its resellers, and ISOs use VERICHECK as a trademark regularly. (See, e.g., Exs. A-4 (using the mark on the website posted at ), A-9 (using the mark on the website posted at ).)
21. Mr. Hannah testified that he personally receives two or three calls per day from Vericheck resellers who say that customers are confused when they visit the website posted at and cannot find the Vericheck merchant application. According to Mr. Hannah, these resellers ask what the company is doing to increase Vericheck's presence on the Internet and to eliminate the confusion when merchants attempt to locate the Vericheck application online and visit Mr. Lahoti's website posted at instead of the website posted at Vericheck's .

The VERICHECK Mark and Distinctiveness

22. An Arizona company successfully registered VERICHECK as a word mark in 1975. (Exs. 7, 8.) These registrations were not renewed by the trademark owner and have expired. (Exs. 9-10.) There is no evidence in the record that the Arizona company ever used the VERICHECK mark.

23. Mr. Hannah testified credibly that the Arizona company has never and does not presently offer services similar to those of Vericheck. According to Mr. Hannah, the Arizona company is primarily a civil collections firm. Mr. Hannah has spoken with the Arizona company's principal and Vericheck presently has a referral agreement with that company: once checks are processed through the RCK process, Vericheck will refer the "hard collections" to the Arizona company. Mr. Hannah believes that the Arizona company does business under a name other than "Vericheck."

24. In July 2007, Vericheck applied for registration of the VERICHECK mark. (Ex. 30.) The PTO recently completed its initial examination of Vericheck's application for registration of the VERICHECK mark, and has approved Vericheck's application for publication for opposition. (Ex. A-22.) Mr. Lahoti has opposed Vericheck's application.

25. At trial, Mr. Lahoti testified inconsistently and evasively about his research into the domain name. In his answers to interrogatories, Mr. Lahoti stated that he began researching domain names with the "VERI-" prefix in 1998, discovering that was, at that time, registered to a Canadian company; searched the PTO's online database, finding that an Arizona company had registered the VERICHECK mark; and then conducted an Internet search, determining that "the Arizona entity was no longer using the alleged mark VERICHECK," and that "a number of other third parties were using terms identical or similar to VERICHECK in connection with their goods or services." (Ex. A-23, at 9.) Mr. Lahoti testified: (1) he could not verify that his answers to interrogatories were accurate; (2) he may not have verified or reviewed the answers to interrogatories before they were served on opposing counsel; (3) he was unaware of any duty to ensure that his answers were accurate; and (4) his attorney told him that any inaccuracies could be sorted out at trial.

26. Mr. Lahoti testified that he did an Internet search for "Vericheck" and that the Arizona company did not appear in any of the results. He further stated that he did not take specific notice of Vericheck's presence on the Internet because he was "overwhelmed" by the number of companies doing business on the Internet as "Vericheck."

27. Mr. Lahoti has earned $724 in revenue from owning . He received this revenue from Oversee.net, which pays Mr. Lahoti based upon the number of times a visitor to clicks through links on the page. He testified that he did not know how much he earned per click, and could not recall the number of times that visitors clicked through the links. He said that he did not scrutinize the statistics provided by Oversee.net closely enough to hazard a guess as to how his revenue was earned.

28. Vericheck's use of the VERICHECK mark predates nearly all of the alleged uses cited by Mr. Lahoti. Several of the purported third-party uses either are unsupported, irrelevant, or support the distinctiveness of the VERICHECK mark as used by Vericheck to describe its services.

29. Most of the alleged uses upon which Mr. Lahoti relies are in unrelated services. For example, "VeriCheck Information Services" offers background investigation services (Exs. 20, 21); "Vericheck, Inc." offers pre-employment background services (Exs. 22, 23); VeriCheck provides "Professional Pre-employment Verification Service" (Ex. 24); and "VERI-CHECK" offers an ultraviolet counterfeit money detector (Moeller Decl. (Dkt. # 32) Ex. 25).

30. Mr. Lahoti argued in his trial brief that another company, GLA, Inc., had an earlier use of a "vericheck" designation. However there is no evidence of record showing any use whatsoever by GLA, Inc. of the mark, and the slim documentation provided by Mr. Lahoti (Ex. 17) indicates that GLA registered the trade name VERICHECK in Hawaii in 1997, at least five years after Vericheck adopted the mark.

31. Mr. Lahoti also cites VeriChek, Inc., a Texas company (Ex. 13); however, the earliest alleged use of the mark by that company is 1995, at least three years after Defendant adopted the VERICHECK mark.

32. Mr. Lahoti references three third-party uses that allegedly commenced before Vericheck first adopted the VERICHECK mark in 1992: Credit Associates of Maui; Veri-Cheque of Canada (Ex. 18); and Vericheck Services, Inc. of Arizona (Exs. 7-10). There is no evidence indicating whether or the extent to which Credit Associates of Maui or Veri-Cheque of Canada actually used and promoted any mark in connection with their services. The sole evidence presented by Mr. Lahoti concerning Veri-Cheque of Canada's alleged use of a mark are a page printed from an Internet archive from 1998, six years after Defendant adopted its VERICHECK mark, and a page printed from VeriCheque's current website in June 2007, fifteen years after Defendant adopted its VERICHECK mark. Moreover, Veri-Cheque is a Canadian company, and aside from a statement on the website that it operates in "North America" there is no evidence of actual goods or services provided in the United States.

33. The court finds that the evidence introduced at trial about the Arizona company supports Vericheck's contention that the mark is distinctive. The Arizona company does not use the mark in connection with services that compete with Vericheck. Mr. Lahoti's own investigation showed that the company did not use the VERICHECK mark, at least on the Internet, and he has not produced evidence to contradict his own investigation. Furthermore, that the PTO allowed the Arizona company to register the now expired VERICHECK mark without requiring proof of secondary meaning affords a rebuttable presumption that the mark is inherently distinctive for "check verification services." (Ex. 7 (capitalization removed)); see Abercrombie & Fitch Co. v. Hunting World, Inc., 537 F.2d 4, 11 (2d Cir. 1976).

34. The VERICHECK mark has no common English meaning, and appears in no dictionary. The VERICHECK mark does not immediately convey information about the nature of Vericheck's goods and services, either in whole or in part. If the term VERICHECK is understood by the average consumer to suggest Vericheck's services, either in whole or in part, such understanding requires imagination or a mental leap by the consumer, in order to become apparent. The court therefore finds the VERICHECK mark to be inherently distinctive.

35. Vericheck has also presented substantial proof of the VERICHECK mark's strength in the marketplace in the form of Vericheck's extensive and longstanding use and promotion of the mark as well as the company's expanding territory, client list, and sales figures.

III. CONCLUSIONS OF LAW

1. Vericheck has presented facts that establish the distinctiveness of the VERICHECK mark and the likelihood of consumer confusion caused by Mr. Lahoti's use of the mark. Given that the mark is strong and protectable, Vericheck is entitled to judgment on its five counterclaims: (1) violation of the ACPA; (2) Lanham Act false designation of origin; (3) common law trademark infringement and trade name infringement; (4) common law ...


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