January/February 2010
IP Litigator
Authored by Naresh Kilaru and Mark Sommers
In Zino Davidoff S.A. v. CVS Corporation, [91 USPQ2d 1038 (2d Cir. 2009)] the Second Circuit Court of Appeals affirmed the grant of a preliminary injunction enjoining a national drugstore chain from selling gray goods that had their UPC label removed on the grounds that such removal subverted the established quality control procedures exercised by the trademark owner and that product failing to bear UPC labels constituted a material difference from the genuine goods.
Plaintiff Zino Davidoff S.A. owned the mark COOL WATER for men's and women's fragrance. To maintain the exclusivity of its brand, Davidoff limited sales of COOL WATER fragrance to luxury retailers and specifically declined to sell its COOL WATER line to national drugstore chain CVS. When CVS nonetheless procured Davidoff's COOL WATER fragrance from unauthorized sources, the product turned out to be either counterfeit or gray-market. CVS voluntarily agreed to halt all sales of counterfeit product, but refused to stop selling gray market COOL WATER product on the ground the only difference between the authorized version and the product it sold was a missing UPC (i.e., uniform production code) label. Davidoff placed a UPC on the bottom of each authorized COOL WATER fragrance bottle and packaging as part of its anti-counterfeiting and quality control programs. Davidoff subsequently moved for a preliminary injunction to enjoin CVS from selling any COOL WATER product without a UPC label. Finding that the UPC system played an important role in Davidoff's anti-counterfeiting and quality control efforts, the court held that Davidoff was likely to succeed on the merits of its trademark infringement claim and granted the motion. On appeal, the Second Circuit affirmed.
While noting that the Lanham Act generally does not impose liability for the sale of gray market goods (defined as genuine goods sold through unauthorized channels of distribution), the Second Circuit recognized the well settled principle that trademark infringement can arise where the gray market product "materially" differs from the authorized version. Here, CVS argued that Davidoff was not likely to succeed on the merits of its trademark infringement claim because the absence of a UPC label could not reasonably be considered a "material" difference that would impact consumer purchasing decisions. In CVS's view, the mere absence of a UPC label could not serve to make the sale of an otherwise genuine product actionable.
The court noted that regardless of whether the lack of a UPC is considered a material difference, tampering with the UPC system was actionable because the system played an important role in Davidoff's anti-counterfeiting and quality control efforts. Citing its prior decision in Warner-Lambert Co. v. Northside Dev. Corp., [86 F.3d 3 (2d Cir. 1996)] the Second Circuit held that a trademark owner is entitled to enjoin anyone who "subverts" its quality control procedures upon showing that: (1) the procedures are established, legitimate, substantial, and nopretextual, (2) the trademark owner abides by these procedures, and (3) sales of product that fail to conform to the established procedures would diminish the trademark's value. Agreeing that each of these requirements had been met, the Second Circuit affirmed the district court's grant of preliminary injunctive relief.
The Second Circuit found that the UPC system facilitated Davidoff's ability to identify and seize counterfeits because counterfeiters generally either omit the UPC label or use sets of fake numbers on the packaging (due to the expense associated with placing a unique production code on each unit). The UPC system thus allowed Davidoff to scan for products that either lacked a UPC or had a fake UPC to identify counterfeit goods. The court found that Davidoff regularly educated retailers, private investigators, and US Customs to use the UPC system in this manner to identify and seize counterfeit COOL WATER product.
In addition, the court found that Davidoff relied on the UPC system for its quality control efforts. The unique number in each UPC contained information about that particular unit, such as time and place of production, distribution channels, ingredients used, etc. When a quality problem arose, the UPC immediately pinpointed the place of manufacture, the batch having the defect, and other useful information that helped Davidoff remedy the problem. The court found that Davidoff had on multiple occasions relied on the UPC system to remedy quality issues such as under-filled or over-filled bottles, defective dispensers, and improper packaging.
Because the UPC system furthered Davidoff's anti-counterfeiting and quality control efforts, the court found that CVS's sale of COOL WATER product without UPCs subverted Davidoff's quality control procedures. Although CVS argued that Davidoff's use of the UPC system was just a pretext for curbing the sale of otherwise legal gray market goods, the court rejected that argument finding that the UPC system was "a bona fide control device" and that the mere fact it may provide Davidoff with additional benefits does not negate its legitimate function in protecting Davidoff's marks from counterfeiting and quality defects.
The court also justified its decision on the ground that COOL WATER products lacking a UPC label were in fact materially different. The court noted that removal of the UPC generally required tampering such as cutting the packaging, applying chemicals, or grinding away the bottom of the bottles to remove the UPC, and that such tampering produced visible differences in the packaging. Because consumers expect luxury goods such as fragrance to have appealing packaging, the court held it was "a logical inference" that consumers would regard having fragrance tampered packaging as inferior and perhaps suspicious. The court reiterated its previous holdings that the threshold for materiality is low, requiring "no more than a slight difference" which consumers would consider relevant in their purchasing decisions.
While this case turned on the importance of UPC labels in the trademark owner's anti-counterfeiting and quality control efforts (their removal "subverting" such efforts), the Second Circuit added to the scope of "material" differences when comparing gray goods to their authorized counterparts. Previous cases dealing with material differences have, for the most part, focused on differences in product quality (e.g., re-formulations or re-tooling of products to suit local tastes, preferences, or standards) or other differences i.e., such as service warranties. The rationale underlying those decisions was that such differences could lead to consumer confusion. Here, the Second Circuit acknowledged that while the absence of a UPC label may not confuse consumers, it nevertheless signaled a "tampered" product, causing consumers to view it as inferior or suspiciously, therefore being relevant to purchasing decisions.
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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