Beauty Time, Inc. Beauty Makers, Inc. & R. Richard Riso v. Vu Skin Systems, Inc. Bjv Dpm Skin Systems, Inc. & Marion M. Vujevich

Citations: 118 F.3d 140; 43 U.S.P.Q. 2d (BNA) 1225; 1997 U.S. App. LEXIS 16289; 1997 WL 366018Docket: 96-3572

Court: Court of Appeals for the Third Circuit; July 3, 1997; Federal Appellate Court

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The case involves Beauty Time, Inc. and Beauty Makers, Inc. (appellants) appealing a dismissal by the United States District Court for the Western District of Pennsylvania regarding a trademark dispute with VU Skin Systems, Inc. and DPM Skin Systems, Inc. (appellees). The appeal raises issues related to the constructive notice provisions of the Lanham Act, the application of Pennsylvania's statute of limitations, and state tolling principles. The district court dismissed the action for fraudulent re-registration of the trademark as time-barred and dismissed other claims due to lack of standing, failure to state a claim, and pendant jurisdiction. 

Marion J. Vujevich initially registered the "DPM" trademark in 1983, using it exclusively until 1987. In that year, he allegedly orally assigned the trademark to a new corporation, Beauty Time, Inc., formed with R. Richard Riso, who became the sole shareholder. Beauty Time claimed exclusive use of the DPM mark from 1987 to 1991. Vujevich, however, filed a renewal application in 1989 asserting sole ownership and use of the trademark, which was renewed as "incontestable" in July 1989 without acknowledging Beauty Time's alleged rights. 

In 1991, Vujevich began marketing products under the DPM trademark without Beauty Time's consent, leading to a conflict as he claimed ownership and accused Beauty Time of infringement, causing retailers to cease purchasing from Beauty Time. The appellate court affirmed part of the district court's decision while vacating another part, indicating ongoing legal complexities surrounding trademark rights and ownership.

In July 1995, Riso discovered that Vujevich re-registered a trademark in 1989 with Vujevich as the sole owner. Subsequently, the plaintiffs initiated a lawsuit against the defendants, seeking cancellation of the trademark, declaratory and injunctive relief, and monetary damages, presenting an amended complaint with eleven counts: four federal claims (trademark infringement, false advertising, false designation in interstate commerce, and fraud under the Lanham Act) and seven state claims (violation of the anti-dilution statute, common law trademark infringement, fraudulent misrepresentation, breach of contract, tortious interference with contract, unjust enrichment, and misappropriation). The district court dismissed the amended complaint under Federal Rule of Civil Procedure 12(b)(6), ruling Count XI as time-barred, Counts I-V for lack of standing, and the remaining counts for lack of pendant jurisdiction. The plaintiffs appealed the dismissal.

The appeal first challenged the dismissal of the fraud claim under the Lanham Act as time-barred. The court's application of the statute of limitations is reviewed de novo. Since the Lanham Act lacks an express statute of limitations, federal courts generally refer to analogous state statutes. In this case, Pennsylvania's two-year statute of limitations for fraud applies. The statute begins to run when the right to sue arises, which, in this instance, was in 1989 when Vujevich re-registered the trademark. Consequently, the statute would have expired in 1991 unless exceptions apply.

Pennsylvania law recognizes a tolling exception that delays the statute of limitations until the plaintiff discovers or should have discovered the injury and its cause. Courts apply a 'knew or should have known' standard for determining tolling due to either the discovery rule or fraudulent concealment. The principle established by the U.S. Supreme Court indicates that the statute does not begin to run until the fraud is discovered if the injured party remains unaware without negligence on their part.

Plaintiffs must demonstrate reasonable diligence in identifying the cause of their injuries, as established in Urland, 822 F.2d at 1273-74. Reasonable diligence is defined as the level of care expected from a person of ordinary prudence, with the obligation to investigate triggered by some reason to inquire. Plaintiffs claimed they had no reason to verify the trademark registration with the PTO until they learned of its re-registration in 1989, prompting the question of when they should have become aware of issues regarding the DPM trademark.

The dissent incorrectly asserts that Pennsylvania has a distinct tolling rule for fraud cases, which would complicate tolling the statute of limitations in instances of fraud. This interpretation misrepresents the discovery and fraudulent concealment rules in Pennsylvania's statutes of limitations. Historically, Pennsylvania's statute mandated that suits for personal injuries be filed within two years, regardless of the victim's knowledge of the injury, without provisions for tolling based on fraud.

In Smith v. Blachley, the Pennsylvania Supreme Court examined whether to allow an exception to the statute of limitations for fraud, concluding that tolling applies only if the wrongdoer actively concealed their fraud. This established a limited recognition of equitable tolling in fraud cases. Later, in Ayers v. Morgan, the court introduced the "discovery rule," allowing tolling based on the delayed discovery of an injury, as seen in a medical malpractice case involving a retained surgical sponge.

The trial court ruled in favor of the defendant based on a two-year statute of limitations, referencing the precedent set in Blachley (1901). However, the Supreme Court of Pennsylvania reversed this decision, establishing that the discovery rule applies beyond personal injury cases. The court noted that in contract actions, if fraud is present and the plaintiff has not neglected their rights, they may file suit even after the statute of limitations has expired. This was illustrated in Ayers, where the court allowed a claim against a surgeon after the two-year period due to concealment of a foreign substance in the patient's intestines, which was discovered nine years later.

The defendant's argument against concealment was dismissed, as the court found that the mere presence of a foreign object constituted sufficient concealment. The court's reasoning was not limited to personal injury but also included references to tolling statutes in contract cases involving fraud and criminal cases where the defendant fled. In Lewey v. H.C. Frick Coke Co., the court reversed a judgment based on a six-year statute of limitations, stating that it would be unjust to allow a defendant who committed fraud to benefit from the statute while the plaintiff remained ignorant of the loss.

In Pocono Int'l Raceway, Inc. v. Pocono Produce, Inc., the Supreme Court reaffirmed the discovery rule's applicability to property actions, allowing a suit for damage caused by negligence even after the statute of limitations had expired. While the court ultimately reversed the superior court's decision, it emphasized that the discovery rule is invoked when the injured party, despite exercising due diligence, cannot ascertain their injury or its cause within the limitation period.

The Pennsylvania statute of limitations and its tolling principles are elucidated through the case of Gee v. CBS, Inc., where Judge Edward Becker identifies key inquiries regarding fraud in contract disputes. If the events are inherently based in fraud or deceit, the statute of limitations is tolled until the fraud is discovered or should have been discovered through due diligence. This principle is rooted in the understanding that fraud is often self-concealing; as long as the plaintiff relies on misleading representations, the fraud remains concealed without the need for further actions to hide it.

Judge Becker differentiates between inherent fraud and independent acts of fraudulent concealment. The former tolls the statute until discovery, while the latter applies regardless of whether the underlying events are inherently fraudulent. The court has adopted Gee's reasoning, emphasizing that if a claim is rooted in fraud, the statute is tolled until the fraud is revealed. Conversely, the dissent misinterprets Pennsylvania's tolling principles, suggesting that the statute is not tolled unless there is active concealment by the wrongdoer. This interpretation is incorrect, as it could unjustly bar recovery in cases of undiscovered fraud, such as financial misconduct by a bank officer, contradicting the principles of justice in Pennsylvania law.

Turtzo is not applicable here as it was decided prior to the establishment of the "discovery rule" in Ayers. Turtzo illustrates the due diligence requirement of the discovery rule, indicating that a plaintiff who could have reasonably discovered the fraudulent filing of a nominating petition cannot claim that fraud invalidates the proceedings if they acted promptly after learning of the fraud. In the present case, there is no evidence showing when the plaintiffs could have discovered the alleged fraud, necessitating a remand.

The dissent's reliance on cases suggesting that the statute of limitations for fraud actions is only tolled if the fraud is actively concealed is misplaced. Turtzo dealt with a specific election code provision and did not address the general statute of limitations for tort claims. Similarly, In re Estate of Doerr and In re Thorne's Estate pertained to particular probate and fiduciaries provisions and predated the discovery rule. 

Furthermore, Northampton County Area Community College v. Dow Chemical is cited by the dissent but is also inapplicable. In that case, the college argued that their fraud claim was tolled until they discovered the fraud. The court referenced Turtzo but ultimately decided that the college could not have reasonably relied on the fraudulent misrepresentation, thus negating their claim regardless of the statute of limitations. This case does not undermine the established precedent that fraud will toll the statute of limitations until it could reasonably have been discovered.

The Superior Court of Pennsylvania has observed that the differences between the discovery rule and fraudulent concealment in fraud cases have diminished. In the case of Bickell v. Stein, it was noted that while the doctrine of fraudulent concealment traditionally required proof that the defendant actively prevented the plaintiff from discovering the fraud through independent deceptive acts, this requirement has been relaxed. The practical distinction between fraudulent concealment and the discovery rule is now much less significant. The cases of Smith v. Blachley and Turtzo v. Boyer support the notion that if fraud is apparent or easily discoverable, the application of the discovery rule is consistent with the statute of limitations. Under Pennsylvania law, a plaintiff must bring a fraud claim within two years of discovering or being reasonably expected to discover the fraud through due diligence, with mere inquiry notices being sufficient to start the limitations period.

The district court ruled that the plaintiffs were barred from pursuing their action based on the constructive notice provision of the Lanham Act, which states that trademark registration provides constructive notice of ownership claims. The court found that the plaintiffs were on constructive notice of any fraud related to the re-registration of the DPM mark as of its re-registration date in 1989. However, the plaintiffs contended that state law does not recognize this constructive notice as adequate to trigger the statute of limitations. The Lanham Act mandates that trademark holders submit a usage affidavit between the fifth and sixth years of registration to maintain their trademark. Vujevich registered the DPM mark on April 19, 1983, and was required to submit the usage affidavit by April 18, 1989. He submitted allegedly fraudulent affidavits on February 27, 1989, which allowed him to retain the registration of the mark, thus establishing him as the sole owner and user of DPM, with certain conditions allowing for the mark to become incontestable under the Act.

The constructive notice provision under Section 1072 of the Lanham Act does not apply to affidavits submitted under Sections 1058 and 1065 for trademark registration and incontestability. No case law indicates that confirming a trademark's continued use fulfills the constructive notice requirement. The language in Section 1072 refers specifically to registration on the principal register, which does not extend to affidavits submitted years later. Therefore, the filing of user affidavits by Vujevich does not constitute constructive notice to trigger the statute of limitations under Pennsylvania law.

However, the plaintiffs' claim may still be time-barred if they had actual notice of Vujevich's alleged improper use of the DPM trademark as early as 1991, when the complaint states that Vujevich began marketing products under the name VU Skin Systems without authorization. The plaintiffs now argue they did not become aware of this until 1994. If they were aware in 1991, they should have pursued legal action within two years of that discovery, which would render the claim time-barred. If their awareness came in 1994, their 1995 suit would fall within the applicable statute of limitations. The district court did not establish when the plaintiffs first learned of the trademark's improper use, necessitating a remand for further proceedings on this issue.

Additionally, the plaintiffs contest the dismissal of Counts IV, V, and VI for lack of standing. The district court determined that the plaintiffs failed to demonstrate an effective assignment of the trademark and did not establish first rights, essential for ownership claims. The plaintiffs argue they possess common-law rights to the trademark despite any alleged deficiencies in the oral assignment, asserting that these rights confer standing to pursue their state law claims.

The plaintiffs failed to demonstrate that the trademark was acquired through the sale of a business or associated goodwill, rendering the attempted oral assignment invalid as an assignment in gross. Consequently, they lack ownership rights under Pennsylvania law, and the mark is neither registered nor valid at common law, as established in precedent cases. Under Pennsylvania common law, trademarks cannot be transferred in gross, which means the plaintiffs have no standing to pursue claims for infringement or dilution, leading to the dismissal of Counts IV and V of their amended complaint by the district court. Count VI, however, was dismissed for lack of original jurisdiction but will be reinstated for further proceedings. The district court's dismissal of Count XI, concerning a fraud claim under the Lanham Act, was vacated and remanded for further action. In dissent, Judge Alito agreed on the applicable two-year statute of limitations for the fraud claim but disagreed with the majority's application of the discovery rule for tolling, stating that the plaintiffs did not argue that additional acts of concealment occurred, thus rendering their fraud claim time-barred. Costs were taxed against the appellees.

The Pennsylvania Supreme Court has established that the statute of limitations for fraud claims is only tolled if the fraud has been actively concealed by the wrongdoer. Merely having fraud or concealment in the original transaction does not extend the time to file suit. For the statute to be tolled, there must be an independent act of fraud or concealment that misleads or prevents the injured party from discovering their cause of action. This principle has been a part of Pennsylvania law since 1901 and has been reaffirmed in subsequent cases. 

A cause of action for fraud is considered complete once the transaction ends, with the statute of limitations beginning to run immediately, unless there is active concealment preventing discovery. The court has recognized two competing views regarding the timing of the statute of limitations in cases of fraud: one holds that the statute runs only upon discovery, while the other maintains that it begins to run when the fraud is complete, unless additional concealment occurs. The Pennsylvania Supreme Court aligns with the latter view, asserting that the rights of the parties become fixed upon the completion of the fraud. The statute of limitations reflects legislative intent that plaintiffs should initiate lawsuits within a specified period after the fraud occurs, acknowledging that some concealment is inherent in fraud but also recognizing that the right of action is complete once the fraud is consummated.

The legislature designed the statute of limitations considering typical lag times, making it inappropriate for courts to implement a tolling rule for these delays unless caused by subsequent concealment. The majority argues against applying a stricter tolling rule for fraud claims compared to other tort claims, deeming it inconsistent and illogical. However, the dissent contests this view, asserting that Pennsylvania's legal framework does not mandate such a tolling rule and that its choice is rational. Fraud claims necessitate different treatment due to their inherent concealment, unlike many other tort actions. Illustrative cases include Ayers v. Morgan, where the court allowed a lawsuit for a surgical error discovered years later due to the defendant's concealment, and Lewey v. H.C. Frick Coke Co., which involved undiscoverable trespass. These examples highlight that while many torts are immediately apparent, fraud is distinct due to its concealment, requiring a different approach to the statute of limitations.

In Pennsylvania, the statute of limitations for fraud claims requires a showing of independent acts of concealment by the defendant to toll the two-year limit, differing from personal injury cases where mere concealment may suffice. This interpretation stems from the Pennsylvania Supreme Court's reasoning and precedent, specifically the case of Smith v. Blachley, which has not been overruled. The current majority opinion introduces ambiguity, suggesting that the statute is tolled by the wrongful conduct itself without requiring further acts of concealment. However, the dissent argues that without evidence of independent concealment, plaintiffs cannot benefit from tolling, thereby affirming that the plaintiffs’ Lanham Act fraud claim is barred due to the expiration of the statute of limitations. The dissent emphasizes that any misleading actions occurred during the transaction, not as independent acts to conceal the fraud afterward.

A new section establishes a two-year statute of limitations for actions seeking damages based on negligent, intentional, or tortious conduct, including fraud and trespass, unless a different limitation applies under the subchapter. This contrasts with the previous six-year statute for fraud claims prior to 1982. The analysis heavily references *Lewey v. H.C. Frick Coke Co.*, which introduced the "discovery rule," though *Blachley* does not mention it. There is acknowledgment of ambiguity in Pennsylvania's tolling rules, but the established rule from *Gee* remains intact. The district court must determine when plaintiffs became aware of the alleged unauthorized use of the DPM trademark to assess if the statute of limitations applies to their fraud claim. The plaintiffs did not contest the dismissal of certain counts on appeal. The discussion critiques the majority's reliance on *Lewey* and the interpretation of the discovery rule, noting it primarily applies to equitable claims. It highlights that the principle from *Holmberg v. Armbrecht* is equity-based and may not pertain to the plaintiffs' Lanham Act fraud claim. The excerpt also points out that the doctrine of fraudulent concealment is narrower than the discovery rule, requiring evidence of independent acts of concealment. Cases cited in support of the majority's conclusion are considered ambiguous regarding their applicability.

The statute of limitations was tolled due to "inherent fraud" stemming from the defendant's misleading certifications regarding required benefit fund contributions. This fraudulent concealment is distinct from the underlying issue of failing to make the contributions. The court referenced Pocono Int'l Raceway, Inc. v. Pocono Produce, Inc., highlighting that while the case discussed the discovery rule, it ultimately found the plaintiff's claim time-barred due to a lack of reasonable diligence in uncovering the injury. The author agrees with the majority's decision to affirm the dismissal of the plaintiffs' state law dilution and infringement claims. Additionally, since the plaintiffs did not appeal the dismissal of their federal claims, the district court's choice not to exercise supplemental jurisdiction over the remaining state law claims was also affirmed.