Grupo Gigante v. Dallo & Co., Inc.

KLEINFELD, Circuit Judge:

This is a trademark case. The contest is between a large Mexican grocery chain that has long used the mark, but not in the United States, and a small American chain that was the first to use the mark in the United States, but did so, long after the Mexican chain began using it, in a locality where shoppers were familiar with the Mexican mark.

Facts

Grupo Gigante S.A. de C.V. ("Grupo Gigante") operates a large chain of grocery stores in Mexico, called "Gigante," meaning "Giant" in Spanish. Grupo Gigante first called a store "Gigante" in Mexico City in 1962. In 1963, Grupo Gigante registered the "Gigante" mark as a trade name in Mexico, and has kept its registration current ever since. The chain was quite successful, and it had expanded into Baja California, Mexico by 1987. By 1991, Grupo Gigante had almost 100 stores in Mexico, including six in Baja, all using the mark "Gigante." Two of the Baja stores were in Tijuana, a city on the U.S.-Mexican border, just south of San Diego.

As of August 1991, Grupo Gigante had not opened any stores in the United States. That month, Michael Dallo began operating a grocery store in San Diego, using the name "Gigante Market." In October 1996, Dallo and one of his brothers, Chris Dallo, opened a second store in San Diego, also under the name Gigante Market. The Dallo brothers -- who include Michael, Chris, and their two other brothers, Douray and Rafid -- have since controlled the two stores through various limited liability corporations.

In 1995, which was after the opening of the Dallos' first store and before the opening of their second, Grupo Gigante began exploring the possibility of expanding into Southern California. It learned of the Dallos' Gigante Market in San Diego. Grupo Gigante decided against entering the California market at that time. It did nothing about the Dallos' store despite Grupo Gigante's knowledge that the Dallos were using "Gigante" in the store's name.

In 1998, Grupo Gigante decided that the time had come to enter the Southern California market. It arranged a meeting with Michael Dallo in June 1998 to discuss the Dallos' use of the name "Gigante." Grupo Gigante was unsuccessful at this meeting in its attempt to convince Dallo to stop using the "Gigante" mark. Also in June 1998, Grupo Gigante registered the "Gigante" mark with the state of California. The Dallos did likewise in July 1998. Neither has registered the mark federally.

About one year later, in May 1999, Grupo Gigante opened its first U.S. store. That store was followed by a second later that year, and then by a third in 2000. All three stores were in the Los Angeles area. All were called "Gigante," like Grupo Gigante's Mexican stores.

In July 1999, after learning of the opening of Grupo Gigante's first U.S. store, the Dallos sent Grupo Gigante a cease-and-desist letter, making the same demand of Grupo Gigante that Grupo Gigante had made of them earlier: stop using the name Gigante. Grupo Gigante responded several days later by filing this lawsuit. Its claim was based on numerous federal and state theories, including trademark infringement under the Lanham Act. It sought compensatory and punitive damages, a declaratory judgment that it had the superior right to the Gigante mark, and an injunction against the Dallos' use of the mark. The Dallos counterclaimed, on similar theories, asserting it had the superior right to the mark in Southern California. The Dallos sought a declaratory judgment, injunctive relief, damages, and cancellation of Grupo Gigante's California registration of the mark.

The Dallos asserted the following causes of action: (1) trademark infringement, under § 43(a) of the Lanham Act, 15 U.S.C. § 1125(a); (2) false designation of origin, misrepresentation, and unfair competition, under § 43(a) of the Lanham Act, 15 U.S.C. § 1125(a); (3) common law unfair competition; (4) trademark infringement and unfair competition under California law; (5) dilution under California law; and (6) common law misappropriation.

The district court disposed of the case in a published decision on cross motions for summary judgment. The court recognized that under the "territoriality principle," use of a mark in another country generally does not serve to give the user trademark rights in the United States. Thus, the territoriality principle suggests that the Dallos' use of the mark, which was the first in the United States, would entitle them to claim the mark. But it held that because Grupo Gigante had already made Gigante a well-known mark in Southern California by the time the Dallos began using it, an exception to the territoriality principle applied. As the district court interpreted what is known as the "famous-mark" or "well-known mark" exception to the territoriality principle, Grupo Gigante's earlier use in Mexico was sufficient to give it the superior claim to the mark in Southern California. The court held, therefore, that Grupo Gigante was entitled to a declaratory judgment that it had a valid, protectable interest in the Gigante name. Nevertheless, the court held that laches barred Grupo Gigante from enjoining the Dallos from using the mark at their two existing stores. The Dallos appeal the holding that Grupo Gigante has a protectable right to use the mark in Southern California. Grupo Gigante appeals the laches holding. We agree in large part with the district court's excellent opinion, but some necessary qualifications to it require a remand.

Analysis
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A fundamental principle of trademark law is first in time equals first in right. But things get more complicated when to time we add considerations of place, as when one user is first in time in one place while another is first in time in a different place. The complexity swells when the two places are two different countries, as in the case at bar.

Under the principle of first in time equals first in right, priority ordinarily comes with earlier use of a mark in commerce. It is "not enough to have invented the mark first or even to have registered it first." If the first-in-time principle were all that mattered, this case would end there. It is undisputed that Grupo Gigante used the mark in commerce for decades before the Dallos did. But the facts of this case implicate another well-established principle of trademark law, the "territoriality principle." The territoriality principle, as stated in a treatise, says that "priority of trademark rights in the United States depends solely upon priority of use in the United States, not on priority of use anywhere in the world." Earlier use in another country usually just does not count. Although we have not had occasion to address this principle, it has been described by our sister circuits as "basic to trademark law," in large part because "trademark rights exist in each country solely according to that country's statutory scheme." While Grupo Gigante used the mark for decades before the Dallos used it, Grupo Gigante's use was in Mexico, not in the United States. Within the San Diego area, on the northern side of the border, the Dallos were the first users of the "Gigante" mark. Thus, according to the territoriality principle, the Dallos' rights to use the mark would trump Grupo Gigante's.

Grupo Gigante does not contest the existence of the territoriality principle. But like the first-in-time, first-in-right principle, it is not absolute. The exception, as Grupo Gigante presents it, is that when foreign use of a mark achieves a certain level of fame for that mark within the United States, the territoriality principle no longer serves to deny priority to the earlier foreign user. The Dallos concede that there is such an exception, but dispute what it takes for a mark to qualify for it. Grupo Gigante would interpret the exception broadly, while the Dallos would interpret it narrowly.

. . .

There is no circuit-court authority -- from this or any other circuit -- applying a famous-mark exception to the territoriality principle. At least one circuit judge has, in a dissent, called into question whether there actually is any meaningful famous-mark exception. We hold, however, that there is a famous mark exception to the territoriality principle. While the territoriality principle is a long-standing and important doctrine within trademark law, it cannot be absolute. An absolute territoriality rule without a famous-mark exception would promote consumer confusion and fraud. Commerce crosses borders. In this nation of immigrants, so do people. Trademark is, at its core, about protecting against consumer confusion and "palming off." There can be no justification for using trademark law to fool immigrants into thinking that they are buying from the store they liked back home.

It might not matter if someone visiting Fairbanks, Alaska from Wellington, New Zealand saw a cute hair-salon name -- "Hair Today, Gone Tomorrow," "Mane Place," "Hair on Earth," "Mary's Hair'em," or "Shear Heaven" -- and decided to use the name on her own salon back home in New Zealand. The ladies in New Zealand would not likely think they were going to a branch of a Fairbanks hair salon. But if someone opened a high-end salon with a red door in Wellington and called it Elizabeth Arden's, women might very well go there because they thought they were going to an affiliate of the Elizabeth Arden chain, even if there had not been any other Elizabeth Ardens in New Zealand prior to the salon's opening. If it was not an affiliate, just a local store with no connection, customers would be fooled. The real Elizabeth Arden chain might lose business if word spread that the Wellington salon was nothing special.

The most cited case for the famous-mark exception is Vaudable v. Montmartre, Inc., a 1959 trial court decision from New York. A New York restaurant had opened under the name "Maxim's," the same name as the well-known Parisian restaurant in operation since 1893, and still in operation today. The New York Maxim's used similar typography for its sign, as well as other features likely to evoke the Paris Maxim's -- particularly among what the court called "the class of people residing in the cosmopolitan city of New York who dine out" (by which it apparently meant the sort of people who spend for dinner what some people spend for a month's rent). The court enjoined the New York use, even though the Paris restaurant did not operate in New York, or in the United States, because the Maxim's mark was "famous."

While Vaudable stands for the principle that even those who use marks in other countries can sometimes -- when their marks are famous enough -- gain exclusive rights to the marks in this country, the case itself tells us little about just how famous or well-known the foreign mark must be. The opinion states in rather conclusory terms that the Paris Maxim's "is, of course, well known in this country," and that "there is no doubt as to its unique and eminent position as a restaurant of international fame and prestige." This language suggests that Maxim's had achieved quite a high degree of fame here, and certainly enough to qualify for the exception to the territoriality principle, but it suggests nothing about just how much fame was necessary. It does not suggest where the line is between "Shear Heaven" and Maxim's.

The Patent and Trademark Office's Trademark Trial and Appeal Board, whose expertise we respect and whose decisions create expectations, has recognized the validity of the famous-mark exception. But as with Vaudable, none of these cases helps us to establish a clear threshold for just how famous a mark must be to qualify for the exception.

Grupo Gigante urges us to adopt the approach the district court took. The district court held that the correct inquiry was to determine whether the mark had attained secondary meaning in the San Diego area. Secondary meaning refers to a mark's actual ability to trigger in consumers' minds a link between a product or service and the source of that product or service. That is, a mark has secondary meaning "when, in the minds of the public, the primary significance of a mark is to identify the source of the product rather than the product itself." Determining whether a mark has secondary meaning requires taking into account at least seven considerations, which the district court did in this case.

Applying its interpretation of the famous-mark exception, the district court concluded that Grupo Gigante's use of the mark had achieved secondary meaning in the San Diego area by the time the Dallos opened their first store, and thus the court held that Grupo Gigante's use was eligible for the exception to the territoriality principle. Grupo Gigante asserts that we, too, should adopt secondary meaning as the definition of the exception. We decline to go quite this far, however, because following the district court's lead would effectively cause the exception to eclipse the territoriality rule entirely.

Secondary meaning has two functions. First, it serves to determine whether certain marks are distinctive enough to warrant protection. . . . Second, and most relevant to this case, secondary meaning defines the geographic area in which a user has priority, regardless of who uses the mark first. Under what has become known as the Tea Rose-Rectanus doctrine, priority of use in one geographic area within the United States does not necessarily suffice to establish priority in another area. …The practical effect is that one user may have priority in one area, while another user has priority over the very same mark in a different area... Secondary meaning comes into play in determining just how far each user's priority extends. Courts ask whether the first, geographically limited use of the mark is well-known enough that it has gained secondary meaning not just within the area where it has been used, but also within the remote area, which is usually the area where a subsequent user is claiming the right to use the mark.

Assume, for example, that Grupo Gigante had been using the mark in Arizona as well as in various parts of Mexico, . . .we would analyze, under the Tea Rose-Rectanus doctrine, whether Grupo Gigante's use of the mark had achieved secondary meaning in San Diego. This is how the district court analyzed the actual dispute, as a result of having defined the exception to the territoriality principle in terms of secondary meaning. In other words, the district court treated Grupo Gigante's use of the mark exactly as it would have had Grupo Gigante used the mark not only in Mexico, but also in another part of the United States. Under the district court's interpretation of the exception to the territoriality principle, the fact that Grupo Gigante's earlier use of the mark was entirely outside of the United States becomes irrelevant.

The problem with this is that treating international use differently is what the territoriality principle does. This interpretation of the exception would effectively eliminate the territoriality principle by eliminating any effect of international borders on protectability. We would end up treating foreign uses of the mark just as we treat domestic uses under the Tea Rose-Rectanus doctrine, asking in both cases whether the use elsewhere resulted in secondary meaning in the local market.

We would go too far if we did away with the territoriality principle altogether by expanding the famous-mark exception this much. The territoriality principle has a long history in the common law, and at least two circuits have described it as "basic to trademark law." That status reflects the lack of a uniform trademark regime across international borders. What one must do to acquire trademark rights in one country will not always be the same as what one must do in another. And once acquired, trademark rights gained in other countries are governed by each country's own set of laws. Furthermore, we are arguably required by the Paris Convention, of which the United States is a signatory, to preserve the territoriality principle in some form. Thus, we reject Grupo Gigante's argument that we should define the well-known mark exception as merely an inquiry into whether the mark has achieved secondary meaning in the area where the foreign user wishes to assert protection.

To determine whether the famous-mark exception to the territoriality rule applies, the district court must determine whether the mark satisfies the secondary meaning test. The district court determined that it did in this case, and we agree with its persuasive analysis. But secondary meaning is not enough.

In addition, where the mark has not before been used in the American market, the court must be satisfied, by a preponderance of the evidence, that a substantial percentage of consumers in the relevant American market is familiar with the foreign mark. The relevant American market is the geographic area where the defendant uses the alleged infringing mark. In making this determination, the court should consider such factors as the intentional copying of the mark by the defendant, and whether customers of the American firm are likely to think they are patronizing the same firm that uses the mark in another country. While these factors are not necessarily determinative, they are particularly relevant because they bear heavily on the risks of consumer confusion and fraud, which are the reasons for having a famous-mark exception.

Because the district court did not have the benefit of this additional test, we vacate and remand so that it may be applied. We intimate no judgment on whether further motion practice and some additions to what the district court has already written in its published opinion will suffice, or whether trial will be needed to apply this new test. Nor do we intimate what the result should be. The concurring opinion is incorrect in its suggestion that the case necessarily must go to trial because distinctiveness of a mark is a question of fact and defendants have contested the reliability of plaintiffs' survey evidence. That conclusion flies in the face of the 1986 triumvirate of summary judgment cases. Regardless of whether questions are factual, there is nothing to try unless there is a genuine issue of material fact. One survey that is impeachable, but still good enough to get to a jury, weighed against no survey evidence at all on the other side, along with all the other evidence in the record, does not necessarily add up to a genuine issue of fact.

Paris Convention claims

The district court properly held that Grupo Gigante's claim for "use of a well-known mark" under Article 6bis of the Paris Convention is duplicative of its claim that, because the Gigante mark is well-known, that mark is entitled to protection under the Lanham Act. The district court also properly rejected Grupo Gigante's claim for unfair competition under Article 10bis of the Paris Convention.

There has been some understandable confusion among the district courts with respect to whether the Paris Convention, implemented in § 44 of the Lanham Act, creates substantive law or a right of action applicable to international trademark disputes. ... That confusion results from the interplay between Article 10bis and § 44 of the Lanham Act. As discussed above, Article 10 bis requires member countries "to assure to nationals of [other member countries] effective protection against unfair competition." Section 44 of the Lanham Act implements Article 10bis by extending Lanham Act protection to foreign nationals to the extent necessary to satisfy the United States' treaty obligations:

Any person whose country of origin is a party to any convention or treaty relating to trademarks, trade or commercial names, or the repression of unfair competition, to which the United States is also a party, or extends reciprocal rights to nationals of the United States by law, shall be entitled to the benefits of this section under the conditions expressed herein to the extent necessary to give effect to any provision of such convention, treaty or reciprocal law, in addition to the rights to which any owner of a mark is otherwise entitled by this chapter.

Grupo Gigante uses the phrase "in addition to the rights to which any owner of a mark is otherwise entitled to by this chapter" to argue that § 44 of the Lanham Act implements certain additional substantive rights created by international treaties. Although that may be true as a general matter, Article 10bis itself does not create additional substantive rights. Rather, "the Paris Convention ensures that 'foreign nationals should be given the same treatment in each of the member countries as that country makes available to its own citizens' as to trademark and related rights." . . .

As we held in Kemart Corp. v. Printing Arts Research Laboratories, Inc., "the Paris Convention was not intended to define the substantive law in the area of 'unfair competition' of the signatory countries." More recently, we concluded that the interaction between § 44 of the Lanham Act and Article 10bis of the Paris Convention simply results in equal treatment of foreign and domestic parties in trademark disputes:

A foreign national is entitled to the same "effective protection against unfair competition" to which an American is entitled, Paris Convention, art. 10bis, and in turn, the American gets the same right that the foreign national gets . . . . But [a party] has no claim to a nonexistent federal cause of action for unfair competition. As said, the Paris Convention provides for national treatment, and does not define the substantive law of unfair competition.

Mattel, 296 F.3d at 908.

Because the Paris Convention creates neither a federal cause of action nor additional substantive rights, the district court properly dismissed Grupo Gigante's Paris Convention claims.

Priority based on California law

Grupo Gigante next argues that, even if it failed to establish that the Gigante mark is famous and well-known, it has established priority under California law because California does not recognize the territoriality principle and, consequently, use anywhere in the world suffices to establish priority in California. Grupo Gigante draws support for this argument principally from Derringer v. Plate. Derringer held that, under common law trademark principles, "the person who has first adopted and used a trademark, whether within or beyond the limits of this State, shall be considered its original owner, with full right of property, and entitled to the same protection by suits at law as in the case of other personal property." In arguing that Derringer contemplated use in other countries as a means to establish priority in California, Grupo Gigante points out that the California Supreme Court rejected the contention that "all the merchants and manufacturers . . . in every country that maintains commercial relations with California, if they desired to be considered in this State, the owners of their marks" must comply with state filing requirements.

As a general matter, trademark claims under California law are "substantially congruent" with federal claims and thus lend themselves to the same analysis. Even looking exclusively to California case law, no case supports Grupo Gigante's contention that California disregards the territoriality principle. Derringer involved a dispute between a California defendant and a plaintiff doing business in Philadelphia. Thus, any comment in Derringer with respect to foreign parties was dictum. Further, Derringer discusses foreign parties in the limited context of compliance with California's statutory filing procedures. There is no justification in Derringer or later cases for reading that limited discussion as a flat rejection of the territoriality principle.

The later cases that Grupo Gigante offers as proof of Derringer's continued vitality are similarly limited to disputes between domestic parties. For example, Stork Restaurant v. Sahati, involved a suit between two establishments named the "Stork club," one in New York and one in San Francisco. Both parties in Golden Door v. Odisho, conducted business in California. At most, these cases establish that California recognizes the Tea Rose-Rectanus doctrine. They provide no support for the conclusion that use anywhere in the world suffices to establish priority in California. Thus, Grupo Gigante's state law claims must fail.

Laches

Additionally, Grupo Gigante argues that the district court erred in holding that its four-year delay in bringing suit bars their claim for injunctive relief.
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B. Application of the E-Systems factors

In E-Systems Inc. v. Monitek, Inc., we set out six factors for determining whether laches bars a claim for either damages or injunctive relief in an action for trademark infringement:

1. strength and value of trademark rights asserted;
2. plaintiff's diligence in enforcing mark;
3. harm to senior user if relief denied;
4. good faith ignorance by junior user;
5. competition between senior and junior users; and
6. extent of harm suffered by junior user because of senior user's delay.

1. Strength and value of the trademark rights asserted

The district court properly concluded that Gigante is either a descriptive or a suggestive mark when used to identify a large grocery store with a wide selection of general merchandise. Descriptive or suggestive marks are relatively weak.

Grupo Gigante argues that the Gigante trademark is stronger than a typical descriptive or suggestive mark because its uncontroverted expert survey established that the mark has acquired secondary meaning. As explained above, the probative value of that evidence is highly questionable. Nonetheless, even granting that the mark has achieved some appreciable level of secondary meaning, the district court's conclusion that the Gigante mark is "moderately strong" took that acquired meaning into account.

2. The plaintiff's diligence in enforcing the mark

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Grupo Gigante offers three explanations for its four-year delay in bringing suit. First, Grupo Gigante explains that it originally tried to contact the Dallos through a mutual vendor, Fleming Foods, in 1997, but that Fleming was reluctant to set up the meeting before seeking approval from its legal department. Grupo Gigante's attempt to assign responsibility for the delay to Fleming is unpersuasive. "Companies expecting judicial enforcement of their marks must conduct an effective policing effort." At the very least, that effort must involve actually contacting the alleged infringer about its use of a trademark.

Second, Grupo Gigante points out that the Dallos' first Gigante Market operated at a loss between 1995 and 1998. That argument is equally unavailing. To be sure, a plaintiff may be "justified in delaying a protest or the commencement of litigation until the viability of the defendant's infringing business is evident." The other side of that coin, however, is that the plaintiff "cannot simply wait without explanation to see how successful the defendant's business will be and then ask for an injunction to take away good will developed by defendant in the interim."

Here, although the Dallos operated their first Gigante Market at a loss for three years, they opened a second Gigante Market a year after Grupo Gigante first learned of the alleged infringement. Further, it is unclear from the record whether Grupo Gigante learned that the Dallos' first Gigante Market was operating in the red until discovery commenced in this case. Even if Grupo Gigante had the benefit of that knowledge before this litigation started, that knowledge alone does not excuse its delay in view of the fact that the Dallos opened an additional store under the same name.

Finally, Grupo Gigante argues that the dispute did not "crystalize" until it opened their first U.S. grocery store in May 1999. Because only then did the "likelihood of confusion loom large," Grupo Gigante contends, it had no obligation to bring suit before moving into the Dallos' market. That argument rings hollow in the light of Grupo Gigante's argument that its mark already was well known in San Diego County in 1991. Grupo Gigante cannot logically argue that it had established a protectable interest in the Gigante mark in the Dallos' trading area in 1991, but was not obliged to protect that interest until 1999.

By the same token, Grupo Gigante's "progressive encroachment" argument is unpersuasive. As we have noted, laches cannot bar injunctive relief when an infringing user progressively encroaches on the owner's mark over time. … A defendant can encroach on a plaintiff's mark by expanding its business into different regions or into different markets. Id. The doctrine allows a plaintiff to delay when a defendant engages in de minimis infringement at first, but then gradually encroaches on the plaintiff's market. . . .

Here, however, Grupo Gigante is encroaching on the Dallos' market. The Dallos' use of the Gigante mark has not changed since 1996: they operate two grocery stores in San Diego. The district court's implicit rejection of Grupo Gigante's "progressive encroachment" argument, and its conclusion that Grupo Gigante "has not been diligent in enforcing [its] mark," were proper.

3. Harm to senior user if relief denied

Noting that "the parties have co-existed on both sides of the United States-Mexico border for almost ten years," the district court concluded that there was "no threat of great harm to the plaintiffs if the status quo were to be maintained." The district court warned, however, that if the Dallos changed the nature or extent of their operations under the Gigante name, some form of injunctive relief may be appropriate later.

. . .

Here, the district court qualified its conclusion that the harm to Grupo Gigante did not bar a laches defense by noting that, should the Dallos expand their use of the Gigante mark, the court would revisit the issue. In so doing, the district court struck a sensible balance between the potential harm to Grupo Gigante, the interest in protecting the public from confusingly similar marks, and the Dallos' interest in maintaining the nine years of good-will associated with its trademark.

4. Good faith ignorance by junior user

As the district court noted, the record contains no evidence that the Dallos acted in bad faith or had knowledge of Grupo Gigante's Mexican stores before opening their first Gigante Market in 1991. Although the Dallos had heard of Grupo Gigante's stores by the time they opened their second Gigante Market in 1996, they had already been operating under that name for five years by that time. Grupo Gigante contends that because the Dallos sought out a "Spanish sounding" name to attract customers in a predominantly Hispanic neighborhood, "any claim by appellants that their adoption of the 'Gigante' mark was made in good faith, is dubious at best." Seeking to attract customers does not constitute bad faith and Grupo Gigante offers little else to support its claim of bad faith. In the light of the absence of any relevant evidence to support that claim, the district court properly concluded that the Dallos acted in good faith.

5. Competition between senior and junior users

The district court concluded that no evidence suggests that the Dallos' stores compete with Grupo Gigante's Los Angeles stores. Id. Although noting that the Dallos might compete for customers with Grupo Gigante's Tijuana stores, the district court observed that the stores had "managed to co-exist" for over ten years. Id. However peaceful that co-existence may have been, the fact remains that the stores do compete. They both sell groceries to a very broad customer base in close proximity to one another. Thus, this factor weighs in Grupo Gigante's favor, particularly in view of its status as the non-moving party opposing the Dallos' motion for summary judgment.

6. Harm suffered by the defendant because of the plaintiff's delay

Had Grupo Gigante brought suit upon learning of the Dallos' allegedly infringing use, the Dallos would have had to change the name of one store that had been open for four years. Instead, the Dallos opened a second store a year after Grupo Gigante learned of its use of the Gigante name and, by the time Grupo Gigante filed suit in response to the Dallos' cease-and-desist letter, the Dallos had been operating under the Gigante name for more than eight years. Grupo Gigante argues that the Dallos are unable to show that they were harmed by Grupo Gigante's delay because the Dallos have failed to present their own evidence of secondary meaning and because they operate other grocery stores under different names.

We have held that prejudice to the defendant is an essential element of any laches defense. However, a defendant can make the required showing of prejudice by proving that it has continued to build a valuable business around its trademark during the time that the plaintiff delayed the exercise of its legal rights. By opening a second Gigante Market after Grupo Gigante learned of the Dallos' alleged infringement, and by operating both stores for an additional four years after that use was discovered, the Dallos were prejudiced by Grupo Gigante's delay. The district court did not abuse its discretion by deciding this factor in the Dallos' favor.

One factor, competition between the parties, weighs heavily in Grupo Gigante's favor. The district court's conclusion to the contrary does not justify disturbing the grant of summary judgment in favor of the Dallos. On balance, the E-Systems factors weigh in the Dallos' favor. The grant of summary judgment must be upheld.

The Dallos' Cancellation-of-Registration Claim

Under California Business & Profession Code § 14281, the Secretary of State must cancel a trademark or service mark registration upon a determination that the registration was fraudulently obtained. Grupo Gigante's registrations state that the Gigante trademark and service mark were "first used" in California "as early as 1/14/98," although Grupo Gigante did not open its first Gigante store in California until 1999. The district court concluded that those statements were not false and that, even if the statements were false, the Dallos failed to produce evidence showing an intent to deceive. The district court thus denied the Dallos' motion for summary judgment on their cancellation claim.

. . .

There are no cases construing the California statute that governs state trademark and service mark cancellation. Analogous federal cases suggest that a misstated date of first use is not fraudulent so long as the first use of the mark has preceded the date of the application. Here, before the June 1998 filing date, Grupo Gigante had engaged in extensive promotion of its mark and limited distribution of products under the Gigante name. Nothing in the record shows that Grupo Gigante improperly recorded the date of first use of the Gigante mark with an intent to deceive. With no evidence of fraud and evidence of significant activity in California that preceded the filing date of Grupo Gigante's trademark and service mark registrations, the district court properly denied the Dallos' motion for summary judgment on this issue.

VACATED AND REMANDED