May/June 2013
IP Litigator
Authored by Mark Sommers and Naresh Kilaru
On January 4, 2013, the U.S. Court of Appeals for the Second Circuit upheld a district court decision granting summary judgment in favor of Italian fashion house Fendi against an importer selling counterfeit Fendi bags to discount retailers. The decision underscores that once a party has been put on notice that it may be trading in counterfeit goods, its failure to conduct a reasonable investigation can become the basis for a finding of willful infringement.
In 2001, Fendi sent a cease-and-desist letter to Ashley Reed Trading advising Ashley Reed that it was selling counterfeit Fendi-branded merchandise. Although there were some in-person meetings between Fendi and Ashley Reed in 2001 after the letter was sent, it does not appear that Fendi contacted Ashley Reed again until the initiation of the lawsuit in late 2005. Among the defenses asserted by Ashley Reed was laches.
To establish that the bags sold by Ashley Reed were counterfeit, Fendi obtained 20 bags sold by Ashley Reed in 2005 and 2006 and had them examined by Fendi's head of manufacturing during the time period in question. The head of manufacturing gave detailed testimony regarding the reasons each bag was a counterfeit (e.g., different grade of leather, different lining, different zipper pulls, etc.). To rebut this testimony, Ashley Reed offered testimony that the products may have been genuine, gray market goods or "seconds" that Fendi intended to be sold as overstock.
The district court held that such speculative testimony was not sufficient to create a genuine issue for purposes of defeating summary judgment, noting in particular Ashley Reed's admission during oral argument that it was "not sure exactly" where the bags came from. The district court also found no genuine issue that Ashley Reed's infringement was willful. With respect to Ashley Reed's laches defense, the court found that Ashley Reed failed to prove the defense given that Fendi had filed suit within the six-year limitations period for fraud (the most closely analogous state statute) and Ashley Reed had clearly been on notice of Fendi's objections since 2001. With respect to damages, the district court awarded Ashley Reed's gross revenues from selling Fendi-branded products during 2005 and 2006.
On appeal, Ashley Reed asserted that even if Fendi had established liability for the years 2005 and 2006 (the years for which Fendi had direct evidence of counterfeit sales), there were genuine issues regarding whether liability existed before 2005. The Second Circuit rejected this argument. Although Fendi did not produce any direct evidence of pre- 2005 counterfeit sales, the court held there was sufficient circumstantial evidence (e.g., forged invoices, Ashley Reed's failure to keep adequate financial records, etc.) to support the district court's finding of liability for the entire 2001 to 2006 time period. The Second Circuit also rejected Ashley Reed's laches defense, holding that Fendi was entitled to investigate before filing suit and that it brought suit promptly after discovering counterfeit bags that it could prove were sold by Ashley Reed.
The Second Circuit also affirmed the finding of willful infringement. To prove willfulness, Fendi was required to establish either that Ashley Reed was actually aware of the infringing activity, or that Ashley Reed was aware it might be selling infringing goods but was willfully blind to such activity. Here, the court found Ashley Reed was willfully blind based on evidence that it failed to adequately inquire about the authenticity and original sources of the goods it purchased, even after having been on notice since 2001 that it might be infringing Fendi's trademarks and after having been accused previously of counterfeiting by other fashion companies. For instance, there was evidence that Ashley Reed accepted "sanitized" invoices from its suppliers that did not disclose the original sources. The court also found it persuasive that after being sued by Fendi, Ashley Reed immediately returned all Fendi-branded handbags and accessories in its inventory to their sources, rather than allow them to be inspected. Based on the evidence, the Second Circuit agreed a reasonable jury could not find that Ashley Reed acted innocently or in good faith. Although Ashley Reed tried to demonstrate good faith by claiming it purchased bags from Fendi stores and used them to conduct side-by-side comparisons to ensure its bags were genuine, the court found this testimony was not credible because Ashley Reed was not able to produce any documentation to support this claim.
With respect to damages, the Second Circuit held that the award of Ashley Reed's gross revenues was proper because Ashley Reed had failed to present any specific evidence of its costs. It remanded the case for the district court to consider whether the damages should be increased, given that the district court had awarded gross revenues only for 2005 and 2006 and the finding of liability was for the 2001–2006 time period.
The Second Circuit's decision teaches that once a plaintiff shows products to be counterfeit, defendants unable to put forward credible evidence regarding the products' source likely face an uphill battle in avoiding summary judgment. Moreover, defendants who are on notice they may be trading in counterfeit goods but fail to conduct a reasonable investigation may summarily be held liable for willful infringement.
Reprinted with permission from the IP Litigator, published by Aspen Law and Business. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.
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