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January 23, 2002


The opinion of the court was delivered by: Denny Chin, United States District Judge:


In 1997, Lawrence Storey registered the Internet domain name "" with Network Solutions, Inc. ("NSI"), an Internet domain name registration company. Shortly thereafter, Cello Holdings, L.L.C. and Cello Music & Film Systems, Inc. (together, "Cello") sued Storey in this Court asserting rights to the "" name and seeking an injunction requiring Storey to transfer the NSI registration of "" to Cello. On the eve of trial, however, Cello advised the Court that the case had been settled. As a consequence, the Court issued an order discontinuing the case "with prejudice," subject to reinstatement within 30 days.

Neither side requested reinstatement. Hence, the dismissal with prejudice became final. Nonetheless, just days later, Cello filed an arbitration proceeding against Storey for the same relief it had sought in the discontinued action. Storey argued in the arbitration proceeding that the dismissal with prejudice of the prior lawsuit barred Cello's claims. The panel rejected Storey's res judicata argument, ruled in favor of Cello on the merits, and ordered Storey to transfer the registration of the domain name "" to Cello.

The parties thereafter brought separate lawsuits. Cello sued Storey in state court in Virginia for an order confirming the arbitration award. Storey brought this action, arguing that Cello was barred from relitigating its claims with respect to "" because the prior action was dismissed "with prejudice." Before this Court are the parties' cross-motions for summary judgment pursuant to Fed.R.Civ.P. 56 and Storey's motion for sanctions pursuant to Fed.R.Civ.P. 11.

Cello's motion is denied and Storey's motions are granted. The discontinuance "with prejudice" operated as an adjudication on the merits in Storey's favor and Cello was therefore barred from asserting future claims against Storey based upon the same causes of action that were or could have been asserted in the first case. By discontinuing its claims "with prejudice" on the eve of trial, Cello could not then turn around, as it did, to assert the same claims in an arbitration proceeding. Moreover, in its answer and other submissions in this case, Cello made a number of representations and arguments that have no reasonable basis in law or fact. Accordingly, sanctions will be imposed.


A. The Facts

The underlying facts are set forth in detail in the Court's memorandum decision in the first action. See Cello Holdings, L.L.C. v. Lawrence-Dahl Cos., 89 F. Supp.2d 464 (S.D.N.Y. 2000). The facts relevant to the issues presently before the Court are not in dispute and are as follows:

1. Background

2. The First Action

On October 16, 1997, Cello commenced an action in this Court against Storey (the "First Action") under the Federal Trademark Dilution Act (the "FTDA"), 15 U.S.C. § 1125(c), and § 360-1 of the New York General Business Law. N.Y. Gen. Bus. L. § 360-1 (McKinney Supp. 1999). Cello contended that Storey was diluting its trademark "Cello" by registering and trying to sell the domain name "" Cello contended that Storey was a "cybersquatter" who had no "productive use" in mind for the domain name when he registered it. Rather, Cello contended that Storey registered the name solely for the purpose of "blackmail[ing]" someone into buying it. Storey, on the other hand, contended that Cello failed to demonstrate that the "Cello" mark was distinctive or famous, and argued that "cello" was a common noun used in the names of dozens of businesses. Storey, a California resident, also contended that the Court lacked personal jurisdiction over him.

After discovery, the parties filed cross-motions for summary judgment. While the motions were pending, the Anticybersquatting Consumer Protection Act (the "ACPA") was signed into law. Pub. L. No. 106-113, 113 Stat. 1501 (1999) (codified at 15 U.S.C. § 1125(d)). The Court denied the parties' cross-motions and granted Cello leave to amend its complaint to add a cause of action under the ACPA. See Cello Holdings, L.L.C. v. Lawrence-Dahl Cos., 89 F. Supp.2d 464 (S.D.N.Y. 2000).

In August 2000, shortly before the First Action was scheduled to be tried, Cello's counsel advised the Court that the case had been "settled." In fact, as the Court has now learned, the First Action had not actually "settled," but instead Cello had merely decided to discontinue its claims. The parties did not enter into a settlement agreement. Because the Court was advised that the case had been "settled," the Court issued a 30-day order on August 15, 2000, discontinuing the First Action "with prejudice" but subject to reinstatement within 30 days. The trial was canceled. Neither side requested reinstatement and the dismissal "with prejudice" therefore became final on or about September 14, 2000.

3. Storey's Letter

On September 25, 2000, Storey's counsel sent a letter to "Cello Limited" (the "September 25th Letter") stating that Storey had successfully concluded trademark litigation in which Storey's "ownership interest" in "" had been "challenged" by Cello. The September 25th Letter further stated that Storey was offering the domain name for sale. (Def. Mem. at Ex. 1).

4. The Arbitration proceedings

The eResolution complaint form contained a space for a description of "any other legal proceedings that have been commenced or terminated in connection with or relating to the contested domain name(s)." In this section, Cello wrote:

This issue began with a Complaint filed 16 Oct. 1997 in the United States District Court for the Southern District of New York, 97 Civ. 7677. The case has dragged on for almost three years without resolution and with significant expense. Cello Holdings LLC voluntarily dismissed the case last month so as to avail itself of this dispute resolution policy which was not available at the time of the 1997 filing, thereby saving significant time and expense over the continued litigation.

(Id. at Ex. 3, p. 7) (emphasis added).*fn3 Cello's complaint made no mention of the September 25th Letter and did not allege that Storey had engaged in any wrongful conduct following the dismissal of the First Action.

Storey submitted a response on the form provided by eResolution. His principal argument was that the arbitration proceedings were barred by the discontinuance with prejudice of the First Action. Storey wrote:

On October 16, 1997, Cello Holdings, LLC and Cello Music and Film Systems, Inc. filed an identical complaint against Lawrence-Dahl Companies and Lawrence Storey in the United States District for the Southern District of New York in an action entitled Cello Holdings, L.L.C. v. Lawrence Dahl Companies. . . . The action was discontinued with prejudice by Order dated August 15, 2000, which, as noted above, acts as an adjudication on the merits of complainant's claims.

(Id. at Ex. 5, pp. 3-4). Storey also wrote:

Complainant's claim to the "" domain name is in any event wholly lacking in merit and should be rejected even were this tribunal empowered to reconsider this issue — which it is not.

(Id., Ex. 5, pp. 7-8) (emphasis added). Storey did address the merits, but he did so merely as an alternative argument to his res judicata defense, and he did so merely by summarizing his arguments in the First Action and this Court's ruling on the summary judgment motions and attaching copies of the court papers.

On December 21, 2000, the eResolution panel issued a decision in favor of Cello. Noting that Storey had "responded to the Complaint and ha[d] freely participated in this arbitration" and that "voluminous material" had been submitted by the parties, the panel found for Cello. (Def. Mem. at Ex. 4, pp. 3, 10). In response to Storey's assertion that the arbitration was precluded by the dismissal of the First Action, the panel held that Storey's assertions "are at variance with this Tribunal's reading of the evidence he submitted and are expressly rejected. Furthermore, as Respondent has made no attempt to enjoin the actions of eResolution or this Tribunal, a claim that jurisdiction is absent or that Respondent has not consented to participate in this proceedings is likewise unpersuasive." (Id. at Ex. 4, p. 7). The panel then ordered that Storey transfer the registration of "" to Cello. (Def. Mem. at Ex. 4, p. 11).

5. The Instant Action

Storey filed the instant action on January 10, 2001. The complaint seeks a declaratory judgment that Storey's ownership and use of the domain name "" is not unlawful.

The complaint seeks relief principally on the basis of the res judicata effect of the dismissal of the First Action, and it also seeks ...

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