November/December 2010 Issue
Civil Cases
Famous Horse Inc. v. 5th Avenue Photo Inc.,
2010 WL 4117673 (2d Cir. Oct. 21, 2010)
ABSTRACT
Defendants sold counterfeit third-party jeans to plaintiff. After plaintiff discovered that the jeans were counterfeit and stopped purchasing them from defendants, defendants told other potential customers that plaintiff was a satisfied customer. The Court of Appeals for the Second Circuit reversed the district court’s dismissal of plaintiff’s false-endorsement and unfair-competition claims. As to false endorsement, the appeals court held that to survive a motion to dismiss, plaintiff only needed to show that consumers believed that plaintiff sponsored or otherwise approved of the defendants’ use of plaintiff’s mark, as opposed to source confusion. The Second Circuit also held that plaintiff sufficiently pleaded its false-endorsement claim under Section 43(a) by alleging defendants’ unauthorized use of plaintiff’s mark to claim that plaintiff was a satisfied customer of defendants’ services. As to unfair competition, the Second Circuit held that plaintiff need not necessarily be in competition with defendants to have standing, instead applying a more flexible “reasonable interest” test.
CASE SUMMARY
FACTS
Plaintiff Famous Horse Inc. d/b/a V.I.M. (“V.I.M.”) operated a chain of clothing stores in New York selling brand-name jeans and sneakers at discount prices. Defendants offered to supply several clothing stores, including V.I.M., with Rocawear brand jeans at a discounted price. After purchasing jeans from defendants, V.I.M. discovered that the jeans were counterfeit and stopped selling them. Defendants, however, continued selling allegedly counterfeit Rocawear products to other stores and told potential purchasers that V.I.M. was a satisfied customer of defendants.
V.I.M. sued for trademark infringement, false endorsement, and unfair competition under Sections 32 and 43(a) of the Lanham Act. The district court subsequently dismissed the complaint on defendants’ motion under Rule 12(b)(6) and concluded that V.I.M. failed to allege any facts establishing consumer confusion as to the source of its products.
ANALYSIS
On appeal, the Second Circuit held that “consumer confusion, triggering the Lanham Act . . . need not be solely as to the origin of the product.” Analyzing V.I.M.’s false-endorsement claim under Section
43(a), the court emphasized that the statute prohibits the use in commerce of any designation that is likely to cause confusion or to deceive “as to the affiliation, connection, or association of such person with another person, or as to the origin, sponsorship or approval of his or her goods, services, or commercial activities by another person.” Relying on this statutory language, the court held that a consumer need not believe that the owner of the mark actually produced the item and placed it on the market; rather, consumers’ belief that the mark’s owner sponsored or otherwise approved of the use of the mark also satisfies the statute. The court concluded that V.I.M. sufficiently pleaded its false-endorsement claim because it alleged that defendants used the V.I.M. mark to falsely portray to other clothing stores that V.I.M. was a satisfied customer of Rocawear jeans.
Similarly, regarding the false-endorsement claim under Section 32 of the Lanham Act, the court concluded that by stating that V.I.M. was a satisfied customer of defendants, defendants attached the V.I.M. mark to claims about the services they provided. Thus, V.I.M. satisfied the “use in commerce” requirement and sufficiently pleaded its false-endorsement claim under Section 32 as well.
Turning to V.I.M.’s unfair-competition claims, V.I.M. alleged that defendants competed unfairly by selling counterfeit Rocawear jeans. Defendants argued that V.I.M. could not bring an unfair-competition claim based on misuse of the Rocawear mark because it did not own that mark. V.I.M., in response, argued that it was injured in two ways: (1) it lost sales of genuine Rocawear jeans to defendants when customers purchased the allegedly counterfeit jeans from defendants or other retailers supplied by defendants; and (2) V.I.M.’s reputation as a discount seller of brand-name products was damaged because customers would believe that V.I.M. was selling genuine Rocawear jeans at an inflated price as a result of defendants’ sales of cheap counterfeit jeans.
The court explained that Section 43(a) has been “universally interpreted . . . to protect the interests of a purely commercial class” and did not confer standing upon consumers bringing unfair-competition claims. The court also noted that in one case, Telecom International America, Inc. v. AT & T Corp.,
280 F.3d 175 (2d Cir. 2001), the Second Circuit applied the “categorical test” requiring that a plaintiff must be a competitor of the defendant to bring an unfair-competition action under the Lanham Act.
The court, however, retreated from this categorical approach and stated that Second Circuit cases, with the exception of Telecom, had not treated competition as a sine qua non of standing. Instead, the Second Circuit held that it has traditionally utilized the “reasonable interest” test for determining standing in unfair-competition cases, under which a plaintiff must show “(1) a reasonable interest to be protected against the alleged false advertising and (2) a reasonable basis for believing that the interest is likely to be damaged by the alleged false advertising.”
The court concluded that V.I.M. had standing under both the categorical test requiring competition and the “reasonable interest” test.
With regard to the more rigid competition test, the court held that V.I.M. and the defendants were “in essence competitors.” The court explained that, while V.I.M. sold at retail and defendants at wholesale, the Rocawear jeans sold by both parties were in direct competition in the marketplace and defendants supplied the allegedly counterfeit jeans to retailers in direct competition with V.I.M.
Analogizing to PPX Enterprises, Inc. v. Audiofidelity, Inc., 746 F.2d 120 (2d Cir. 1984), the court concluded that V.I.M. also had standing under the “reasonable interest” test. In PPX, the owners of royalty interests in Jimi Hendrix’s recordings sued the defendant for allegedly falsely advertising certain recordings as featuring Jimi Hendrix when Hendrix actually appeared only as a background performer. The court here explained that, like the plaintiffs in PPX who claimed the defendants undermined their business by making false representations about the genuineness of the Hendrix recordings, V.I.M. sufficiently alleged “lost sales and a unique harm to the specific reputation of V.I.M. stores” as a discount seller of genuine brand-name clothes. The appeals court thus reversed the district court’s dismissal of the unfair-competition claim. The appeals court noted, however, that, while plausible, the unfair-competition claim may be difficult to prove at trial as it will be hard for V.I.M. to show actual losses resulting from the defendants’ conduct.
The dissent argued that V.I.M. did not satisfy the “reasonable interest” test and, thus, lacked standing to bring an unfair-competition claim. The dissent stated that the owner of the Rocawear label was “significantly more proximate than [V.I.M.] to the injurious conduct alleged,” and that V.I.M.’s claim was “highly speculative with respect to reputation and potentially still quite speculative in the context of the claim for lost sales.”CONCLUSION
This decision is instructive on whether a plaintiff and a defendant need to be in direct competition to confer standing in an unfair-competition claim under Section 43(a). The court’s revival of the unfair-competition claim in this case indicates that the Second Circuit does not adhere to a rigid competition test and, instead, determines standing under a more flexible “reasonable interest” approach. However, the Second Circuit declined to squarely determine which test prevailed, finding standing here under either test.
*Anna Balichina is a Trademark Law Clerk with Finnegan.
