246 CORPORATION, DOING BUSINESS UNDER THE NAME AND STYLE OF ROLEX MUSIC LOUNGE, PETITIONER, VS. HON. REYNALDO B. DAWAY, IN HIS CAPACITY AS PRESIDING JUDGE OF BRANCH 90 OF THE RE…

246 Corporation versus Daway

The Case

This is a petition for review on certiorari brought by 246 Corporation, which does business under the name and style of Rolex Music Lounge, against Judge Reynaldo B. Daway in his capacity as Presiding Judge of Branch 90 of the Regional Trial Court of Quezon City, and against Montres Rolex S.A. and Rolex Centre Phil., Limited, the owners of the Rolex mark and the Crown Device. The respondents sued the petitioner for trademark infringement and damages, and the petitioner now asks the Supreme Court to reverse the Court of Appeals, which had refused to disturb the trial court's orders. The case matters because it is the bridge between the old Trademark Law, under which unrelated goods could never be confused, and Section 123.1(f) of the Intellectual Property Code, which now protects well-known marks even against use on entirely unrelated goods or services.

Procedural History

Montres Rolex S.A. and Rolex Centre Phil., Limited filed a complaint for trademark infringement and damages with a prayer for a restraining order or writ of preliminary injunction before the Regional Trial Court of Quezon City, Branch 90, presided over by Judge Daway. The petitioner answered and raised special affirmative defenses, then moved for a preliminary hearing on those affirmative defenses. On motion of the petitioner, the trial court issued a subpoena requiring the respondents' counsel, Atty. Alonzo Ancheta, to appear at the preliminary hearing. The respondents opposed the motion and moved to quash the subpoena. In an order dated October 27, 2000, the trial court quashed the subpoena and denied the petitioner's motion for preliminary hearing on affirmative defenses with motion to dismiss. The trial court denied reconsideration on March 16, 2001.

The petitioner then filed a petition for certiorari with the Court of Appeals, arguing that the trial court gravely abused its discretion. The Court of Appeals dismissed the petition on November 28, 2002, and denied reconsideration on February 13, 2003. The petitioner elevated the matter to the Supreme Court by petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure.

Facts

Montres Rolex S.A. and Rolex Centre Phil., Limited are the owners or proprietors of the Rolex mark and the Crown Device. Sometime in July 1996, 246 Corporation adopted and, from then on, used without authority the mark Rolex in its business name, Rolex Music Lounge, and in its newspaper advertisements, which read Rolex Music Lounge, KTV, Disco and Party Club.

On November 26, 1998, the respondents filed suit for trademark infringement and damages. The petitioner defended on the ground that no confusion could arise, because its entertainment business is totally unrelated to the watches, clocks, bracelets and parts thereof that the respondents deal in. It also attacked the complaint as improperly verified and certified against forum shopping, because Atty. Ancheta, the respondents' counsel of record who signed the verification and certification, was not authorized to represent the respondents.

The petitioner sought a preliminary hearing on its affirmative defenses and caused a subpoena to be issued against Atty. Ancheta. The trial court quashed the subpoena and denied the motion for preliminary hearing with motion to dismiss, and the appellate court declined to interfere. Hence this petition.

Issues

• Whether or not the trial court denied not only the petitioner's motion for preliminary hearing on its affirmative defenses but also its motion to dismiss.
• Whether or not, if the answer is in the affirmative, the trial court gravely abused its discretion in denying those motions.
• Whether or not the trial court gravely abused its discretion in quashing the subpoena issued against Atty. Ancheta.

Applicable Provisions

Section 5 of Rule 16 of the old Rules of Civil Procedure, as quoted in the decision, provides:

SEC. 5. Pleading grounds as affirmative defenses. -- Any of the grounds for dismissal provided for in this Rule, except improper venue, may be pleaded as an affirmative defense, and a preliminary hearing may be had thereon as if a motion to dismiss had been filed.

The word may in this provision is the textual anchor of the Court's holding that a preliminary hearing on affirmative defenses is discretionary, not a matter of right.

Section 6 of Rule 16 of the 1997 Rules of Civil Procedure provides:

SEC. 6. Pleading grounds as affirmative defenses.-- If no motion to dismiss has been filed, any of the grounds for dismissal provided for in this Rule may be pleaded as an affirmative defense in the answer and, in the discretion of the court, a preliminary hearing may be had thereon as if a motion to dismiss had been filed.

This is the governing rule at the time of the case, and it expressly lodges the grant of a preliminary hearing in the sound discretion of the court.

Section 123.1(f) of the Intellectual Property Code, Republic Act Number 8293, which took effect on January 1, 1998, provides:

Sec. 123. Registrability. - 123.1. A mark cannot be registered if it: (f) Is identical with, or confusingly similar to, or constitutes a translation of a mark considered well-known in accordance with the preceding paragraph, which is registered in the Philippines with respect to goods or services which are not similar to those with respect to which registration is applied for: Provided, That use of the mark in relation to those goods or services would indicate a connection between those goods or services, and the owner of the registered mark: Provided, further, That the interest of the owner of the registered mark are likely to be damaged by such use.

This provision is the heart of the case, because it modifies the old rule that unrelated goods can never give rise to confusion, and it supplies the requisites that the trial court must still determine on the merits.

Ruling

On the first issue, the Court held that what the trial court denied in its October 27, 2000 order was not only the motion for preliminary hearing but the motion to dismiss as well. The dispositive portion of that order neither qualified the denial nor held the motion to dismiss in abeyance, and the trial court ruled on the merits of the motion to dismiss against the respondents' comment and opposition, which had squarely traversed the affirmative defenses. The Court added that it presumes all matters within an issue raised in a case were passed upon by the court, and that in the absence of evidence to the contrary the presumption is that the court discharged its task properly.

On the second issue, the Court held that no grave abuse of discretion attended the denial. A preliminary hearing on affirmative defenses is not mandatory even when prayed for; it rests largely on the sound discretion of the trial court. The use of the word may shows that the hearing is not a matter of right demandable from the court, for may is an auxiliary verb indicating liberty, opportunity, permission and possibility. The Court also stressed that whether trademark infringement exists is a question of fact best determined by the trial court.

The Court then turned to the substantive trademark question. Under the old Trademark Law, where the goods for which identical marks are used are unrelated, there can be no likelihood of confusion and therefore no infringement by the junior user of the registered mark on entirely different goods. That ruling, however, has been modified to some extent by Section 123.1(f) of the Intellectual Property Code. A junior user of a well-known mark on goods or services that are not similar, and therefore unrelated, to those specified in the certificate of registration of the well-known mark is precluded from using the same mark on the entirely unrelated goods or services, subject to three requisites: first, the mark is well-known internationally and in the Philippines; second, the use of the well-known mark on the entirely unrelated goods or services would indicate a connection between such unrelated goods or services and those specified in the certificate of registration, which refers to the likelihood of confusion of origin or business or some business connection or relationship between the registrant and the user of the mark; and third, the interests of the owner of the well-known mark are likely to be damaged, as where the registrant would be precluded from expanding its business to those unrelated goods or services, or where the inferior quality of the user's goods or services would damage the registrant.

The Court found Section 123.1(f) clearly in point, because the Music Lounge of the petitioner is entirely unrelated to the respondents' business involving watches, clocks, bracelets and the like. Yet the Court could not resolve the merits, because the requisites for the application of Section 123.1(f) constitute the kernel issue at bar and require facts that must be resolved at the trial court. Their existence or absence should be addressed in a full-blown hearing and not on a mere preliminary hearing, with ample opportunity given to the respondents to prove their claim and to the petitioner to debunk it. The same is true of the question whether Atty. Ancheta was properly authorized to sign the verification and certification against forum shopping, which could be properly resolved during the trial together with the substantive issues.

On the third issue, the Court held that since the trial court correctly denied the motion for preliminary hearing with motion to dismiss, there was no reason to compel Atty. Ancheta to testify, and no abuse of discretion was committed in quashing the subpoena. Grave abuse of discretion implies a capricious and whimsical exercise of judgment equivalent to lack of jurisdiction, or the exercise of power in an arbitrary or despotic manner by reason of passion or personal hostility, so patent and gross as to amount to an evasion of positive duty or a virtual refusal to perform the duty enjoined or to act at all in contemplation of law. None of these was committed by the trial court, and the Court of Appeals correctly dismissed the petition.

Doctrine

A preliminary hearing on affirmative defenses is not a matter of right; under Section 5 of Rule 16 of the old Rules and Section 6 of Rule 16 of the 1997 Rules, it lies in the sound discretion of the trial court, as the permissive word may indicates. When the trial court denies a motion for preliminary hearing with motion to dismiss, and its order neither qualifies the denial nor holds the motion to dismiss in abeyance, the denial reaches the motion to dismiss itself, and the presumption of regularity attaches to that ruling.

Under the old Trademark Law, no infringement arises from the use of an identical mark on unrelated goods, because there is no likelihood of confusion. That rule is modified by Section 123.1(f) of the Intellectual Property Code: a junior user of a well-known mark may be precluded from using that mark even on entirely unrelated goods or services, provided that the mark is well-known internationally and in the Philippines, that the use would indicate a connection between the unrelated goods or services and those covered by the registration, and that the interests of the owner of the well-known mark are likely to be damaged. These requisites are questions of fact that must be established in a full-blown trial, not on a preliminary hearing.

Disposition

The petition was denied, and the decision and resolution of the Court of Appeals, which had dismissed the petition for certiorari, were affirmed; the respondents therefore prevailed at this stage, and the case was left for trial on the merits.

Remember This

Memorize this line: a preliminary hearing on affirmative defenses is discretionary, not demandable, and Section 123.1(f) of the Intellectual Property Code now lets a well-known mark reach even unrelated goods or services. Examiners use this case to test the old Trademark Law rule against the Intellectual Property Code, the requisites of protection for well-known marks, and the discretionary nature of a preliminary hearing on affirmative defenses.