Secondary Trademark Infringement: Overview 1 comment

Secondary Trademark Infringement:

2011 – 2012 Overview

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This website is dedicated to an examination of the law of secondary liability for trademark infringement – the idea that someone other than a direct infringer can be liable for infringing another’s trademark.  Secondary liability for trademark infringement is a relatively recent development in the law, and it has evolved entirely in the courts.

The first theory of secondary liability to emerge was contributory liability. The 1982 Supreme Court case of Inwood v. Ives set forth the two-part standard for contributory infringement and is the starting point for analyzing a plaintiff’s claims. To establish contributory liability under Inwood, a plaintiff must show that the defendant either (1) “intentionally induce[d] another to infringe” his trademark or (2) “continue[d] to supply its product to one whom it knows or it ha[d] reason to know [was] engaging in trademark infringement.” Inwood Labs., Inc. v. Ives Labs., Inc., 456 U.S. 844, 854 (1982).

In the years following Inwood, cases began to arise in which a defendant contributed in some way to trademark infringement, but not by supplying any particular product to the direct infringer. Thus, courts seeking to determine whether liability was appropriate in such cases found the standard application of the Inwood test inapposite. In these situations, i.e. where the plaintiff can neither allege intentional inducement nor point to a specific “product,” a modified version of the Inwood standard has evolved in which the court considers the extent of control the defendant has over the infringing activity. Specifically, courts have held that “[d]irect control and monitoring of the instrumentality used by a third party to infringe the plaintiff’s mark permits the expansion of Inwood Lab[oratories]’ ‘supplies a product’ requirement  for contributory infringement.” Lockheed Martin Corp. v. Network Solutions, Inc., 194 F.3d 980, 984 (9th Cir. 1999).

A second theory for secondary infringement recognized by the courts is vicarious liability. The Supreme Court has not articulated a standard for finding vicarious liability for trademark infringement, as it has done regarding contributory liability in the case of Inwood. Rather, vicarious liability has evolved in the federal courts under two main approaches: One is the application of agency principles to parties involved in trademark infringement.  The second approach is derived from joint tortfeasor liability doctrine and incorporates elements of agency law as well. The ways in which vicarious liability can arise under these two standards are discussed in this treatise.

Of all the contexts in which secondary liability has been raised, whether contributory or vicarious, the Internet has by far generated the most interest and attention. The advent of Internet commerce has created new problems for the law to address. On the Internet, buying and selling take place among a seemingly infinite number of parties in a matter of moments, making it difficult both to police and remediate infringement.  These issues came to light in Tiffany v. eBay, where the court observed that “more than six million new listings are posted on eBay daily, and at any given time, some 100 million listings appear on the website.” Tiffany v. eBay, 576 F.Supp.2d 463, 475 (S.D.N.Y. 2008), affirmed in part and remanded in part, 600 F.3d 93 (2d Cir. 2010). For application of secondary liability doctrine in a variety of specific Internet contexts, see the treatise outline.

Since the initial release of this treatise in September 2009, courts have addressed a number of novel issues:

  • Affiliate Marketing — Should online retailers be liable for their affiliates’ trademark infringement?   Two courts have declined to extend contributory liability to online merchants for the infringing activities of their affiliates. The attenuated relationship between the two parties did not support a claim of either contributory or vicarious liability in 1-800 Contacts v. Lens.com and Sellify v. Amazon.
  • Is the licensing of IP rights in cartoon characters used to make counterfeit jewelry a “service” or a “product”?  The plaintiff in Nomination Di Antonio E Paolo Gensini S.N.C. v. H.E.R. Accessories, Ltd. argued unsuccessfully that the defendant licensors supplied a “product,” albeit an intangible one. The court disagreed, and saw the defendants as providers of a “service,” triggering a “direct control and monitoring” analysis. Indeed, the licensing of IP rights has been contemplated as a service, as for example in Fare Deals, which the court referenced. But Nomination seems distinguishable, because the right to use those characters became manifest as an integral component of the infringing product – the counterfeit jewelry depicting those characters and bearing the plaintiff’s mark – whereas in Fare Deals it did not.
  • Damage Awards – Can the  secondary infringer face higher damages than the direct infringer?  This was the outcome in Roger Cleveland Golf Co.  v. Price (sic),  where the jury was afforded broad discretion in awarding statutory damages. A new section on remedies explains that the law regards contributory infringers and direct infringers as joint-tortfeasors, and how a secondary infringer may be equally responsible for damages, notwithstanding his indirect role in the underlying infringement.

More cases have been brought as contributory liability claims than as claims for vicarious infringement, though the law is certainly still evolving in this area. The key factor in determining the viability of a contributory liability claim is the defendant’s knowledge. Sometimes the knowledge requirement is readily met with direct evidence such as correspondence revealing a relationship between the direct and indirect infringers. At other times, however, plaintiffs are hard-pressed to meet the knowledge requirement under Inwood. Even where it has been met, it is often because the plaintiffs put the defendants on notice of the infringing activity, in which case the defendants may have taken remedial action, to which courts have been very sympathetic. In Tiffany v. eBay, for example, the court was satisfied that, notwithstanding the volume of complaints by Tiffany, eBay had taken “appropriate steps” through its notice-and-takedown system, the VeRO Program, to avoid liability.

The organization of this treatise reflects the development of the two secondary liability doctrines. First, contributory liability doctrine is discussed, beginning with the two-part test articulated by the Supreme Court in Inwood and then its application and expansion in various contexts. Vicarious liability for trademark infringement is discussed in the third section of this treatise, which also covers both the standards followed by the courts for finding such liability and the contexts in which it has been found to apply.

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I. Introduction 2 comments

I. Introduction

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The Lanham Act does not anywhere provide for secondary liability for trademark infringement. Rather, the language of the Act is directed solely at the direct infringers. Am. Tel. & Tel. Co. v. Winback and Conserve Program, Inc., 42 F.3d 1421, 1429 (3d Cir. 1994) (noting same). Specifically, §43(a) of the Lanham Act provides in pertinent part that:

[a]ny person who, on or in connection with any goods or services … uses in commerce any work, term name, symbol or device … or any false designation of origin, false or misleading representation of fact which … is likely to deceive as to the affiliation, connection or association of such person with another person, or as to origin, sponsorship or approval of his or her goods, services, or commercial activities by another person … shall be liable in a civil action by any person who believes that he or she is or is likely to be damaged by such act.

15 U.S.C. § 1125(a).

The anti-counterfeiting provisions in §32(1) of the Act are similarly silent as to secondary liability. That section provides:

(1) Any person who shall, without the consent of the registrant—

(a) use in commerce any reproduction, counterfeit, copy, or colorable imitation of a registered mark in connection with the sale, offering for sale, distribution, or advertising of any goods or services on or in connection with which such use is likely to cause confusion, or to cause mistake, or to deceive; or

(b) reproduce, counterfeit, copy, or colorably imitate a registered mark and apply such reproduction, counterfeit, copy, or colorable imitation to labels, signs, prints, packages, wrappers, receptacles or advertisements intended to be used in commerce upon or in connection with the sale, offering for sale, distribution, or advertising of goods or services on or in connection with which such use is likely to cause confusion, or to cause mistake, or to deceive,

shall be liable in a civil action by the registrant for the remedies hereinafter provided. Under subsection (b) hereof, the registrant shall not be entitled to recover profits or damages unless the acts have been committed with knowledge that such imitation is intended to be used to cause confusion, or to cause mistake, or to deceive.

15 U.S.C. § 1114(1). As noted by the court in Am. Tel. & Tel. Co., supra, by referring to “any person” who infringes on a plaintiff’s rights, the Act is silent as to the existence and scope of secondary liability. See Am. Tel. & Tel. Co., supra (referring specifically to vicarious liability).

Consequently, the notion that a party who does not himself infringe another’s trademark may nevertheless be indirectly liable for such infringement, under a theory of either contributory or vicarious liability, has evolved in the courts. See generally John T. Cross, “Contributory Infringement and Related Theories of Secondary Liability for Trademark Infringement,” 80 Iowa Law Rev. 101, 109-129 (1994). And see Tiffany v. eBay, 600 F.3d 93, 103-104 (2d Cir. 2010) (“[c]ontributory trademark infringement is a judicially created doctrine that derives from the common law of torts” ) , affirming in part and remanding in part, 576 F.Supp.2d 463, 502 (S.D.N.Y. 2008) cert denied, 131 S.Ct. 647 (2010)cert denied, 131 S.Ct. 647 (2010).  Courts considering the scope of liability for trademark infringement under the Lanham Act have recognized that the Act is derived from the common law tort of unfair competition and concluded that it is therefore appropriate to analogize to common law tort principles. See Am. Tel. & Tel. Co., supra at 1433 (“The Act federalizes a common law tort.”), citing Hard Rock Café Licensing Corp. v. Concession Services Inc., 955 F.2d 1143, 1148 (7th Cir. 1992) (trademark infringement is a “species of tort” and “we have turned to the common law to guide our inquiry into the appropriate boundaries of liability”); David Berg and Co. v. Gatto Int’l Trading Co., Inc., 884 F.2d 306, 311(7th Cir. 1989)(“unfair competition and  trademark infringement are tortious”).

The first theory of secondary liability to emerge in the courts was contributory liability. Contributory liability doctrine developed initially in the Supreme Court, which, prior to the enactment of the Lanham Act, relied on common law doctrines to determine the scope of liability. See William R. Warner & Co. v. Eli Lilly & Co., 265 U.S. 526 (1924), discussed in AT & T, supra at 1432. Later on, after the Act was passed, the Supreme Court re-established the validity of contributory infringement theory in the case of Inwood Labs., Inc. v. Ives Labs., Inc., 456 U.S. 844, 854 (1982), which set out a two-part test for contributory infringement discussed herein.

Thereafter, courts determined that secondary liability based on agency principles is also often appropriate. See Am. Tel. & Tel. Co., supra at 1433; see also David Berg and Co. v. Gatto Int’l Trading Co., Inc., 884 F.2d 306, 311 (7th Cir. 1989)(incorporating similar tests based on joint tortfeasor liability). In fact, the rationale for applying agency principles to the Lanham Act rested in part on the law that already established contributory liability for trademark infringement.  The contributory liability cases demonstrated to the court in Am. Tel. & Tel. Co. that “in certain instances, secondary, indirect liability is a legitimate basis for liability under the federal unfair competition statute.” Am. Tel. & Tel. Co., supra at 1433.

The organization of this treatise  reflects the development of the two secondary liability doctrines. First, contributory liability doctrine is discussed, beginning with the two-part test articulated by the Supreme Court in Inwood and then its application in various contexts. Vicarious liability for trademark infringement is discussed in the third section of this treatise, which also covers both the standards followed by the courts for finding such liability and the contexts in which it has been found to apply.

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A. Contributory Liability Doctrine: Inwood., II. Contributory Trademark Infringement Comments Open

II. Contributory Trademark Infringement: A. Contributory Liability Doctrine: The Inwood Standard

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The notion that a party who does not himself infringe another’s trademark may nevertheless be indirectly liable for such infringement is not expressly provided for in the Lanham Act, but rather has emerged from case law over the years.  See generally John T. Cross, “Contributory Infringement and Related Theories of Secondary Liability for Trademark Infringement,” 80 Iowa Law Rev. 101, 109-129 (1994), for an extensive treatment of the legal source of contributory infringement. See also Georgia Pacific Consumer Products, LP v Von Drehle Corp., 2010 WL  3155646 (4th Cir.)(analyzing plaintiff’s claim “under the judicially created doctrine of contributory trademark infringement, derived from the common law of torts”); Tiffany v. eBay, 600 F.3d 93, 103-104 (2d Cir. 2010) (“[c]ontributory trademark infringement is a judicially created doctrine that derives from the common law of torts”), affirming in part and remanding in part, 576 F.Supp.2d 463, 502 (S.D.N.Y. 2008), cert denied, 131 S.Ct. 647 (2010); Procter & Gamble Co. v. Haugen, 317 F.3d 1121, 1128-1129 (10th Cir. 2003) (discussing same);  Polo Ralph Lauren Corp. v. Chinatown Gift Shop, 855  F.Supp. 648 (S.D.N.Y. 1994), plaintiff’s motion for summary judgment denied, 1996 WL 67700 (S.D.N.Y. 1996) (contributory liability has emerged from judicial decisions).(Unpublished opinion).

The standard for analyzing contributory liability claims was set forth by the Supreme Court in the case of Inwood Laboratories Inc. v. Ives Laboratories, Inc., 456 U.S. 844, 853-854 (1982). Although the Court had already recognized contributory trademark infringement years earlier in William R. Warner & Co. v. Eli Lilly & Co., 265 U.S. 526 (1924), Cross, supra, has explained that Warner predated Erie R.R. v. Tompkins, 304 U.S. 64 (1938) which “cast into doubt the validity of all existing federal common-law rules.” Inwood is consequently “important primarily because it reaffirms the existence of the cause of action.” See Cross, supra at 101 and 101 n.3, and cases cited therein. And see Transdermal Products, Inc. v. Performance Contract Packaging, Inc., 943 F.Supp. 551 (E.D. Pa 1996) (Inwood “merely confirmed the continued vitality of contributory infringement under federal statutory law”), citing AT & T Co. v. Winback and Conserve Program, Inc., 42 F.3d 1421, 1432 (3d Cir. 1994). Modern courts therefore begin their analyses of contributory liability claims with the standard set forth in Inwood.  See e.g.  National Federation of the Blind, Inc. v. Loompanics Enterprises, Inc. 936 F.Supp. 1232, 1244 (D. Md. 1996)(noting same).  See also, Tiffany v. eBay, 576 F.Supp.2d 460, 502-503 (rejecting plaintiff’s argument that it apply a “reasonable anticipation” standard for contributory infringement as an alternative to the standard set forth in Inwood), affirmed in part and remanded in part, 600 F.3d 93, 110 n.15 (2d Cir. 2010), cert denied, 131 S.Ct. 647 (2010); MetroPCS Wireless, Inc. v. Virgin Mobile USA, L.P., 2009 WL 3075205, *17 (N.D.Tex.)(citing Inwood for the proposition that “the standard is not whether defendant “could reasonably anticipate” possible infringement”).

Inwood involved a trademark violation claim brought by a prescription drug manufacturer, Ives Laboratories (“Ives”), against a number of generic drug manufacturers, including Inwood Laboratories (“Inwood”). Ives manufactured the patented drug cyclandelate, and sold it to wholesalers, retail pharmacists and hospitals in colored capsules under the registered trademark CYCLOSPASMOL. Inwood, supra at 844, 846-7. After the company’s patent expired, several generic drug manufacturers began marketing the drug, intentionally copying the appearance of the CYCLOSPASMOL capsules. Id. at 847.

Seeking injunctive relief and damages, Ives brought an action in federal district court against those companies. Id. at 849. It alleged that some pharmacists had dispensed generic drugs mislabeled as CYCLOSPASMOL. Id. Although Ives did not allege that the defendants themselves applied the Ives trademark to the capsules they sold, it contended that by virtue of their use of “look-alike capsules” and catalog entries comparing prices and revealing the colors of generic capsules, those companies contributed to the pharmacies’ infringing activities. Id. at 850. The district court denied Ives’s request for injunctive relief, and the Second Circuit affirmed, remanding the case back with trial guidelines as to finding secondary liability. Specifically, the Second Circuit court instructed that the companies would be liable if “they suggested, even by implication, that retailers fill bottles with [the generic drug] and label the bottle with Ives’ trademark or if the [generic drug companies] continued to sell [the drug] to retailers whom they knew or had reason to know were engaging in infringing practices.” Id. at 851-852 (citation omitted).

Applying those guidelines at trial on remand, the district court again entered judgment in favor of the generic drug companies. It found that the generic drug companies had not suggested, even by implication, that pharmacists should dispense generic drugs incorrectly identified as CYCLOSPASMOL. Id. at 852. And see MDT Corp. v. New York Stock Exchange, Inc. 858 F. Supp. 1028, 1033-1034 (C.D. Cal. 1994)(applying the same standard). It also found that the companies did not “continue to provide drugs to retailers whom they knew or should have known were engaging in trademark infringement.” Id. at 852, n.12. It specifically found further that actual instances of mislabeling by pharmacists occurred too infrequently to justify the inference that the generic companies’ catalogs and use of imitative colors had “impliedly invited” druggists to mislabel, and to the extent that such mislabeling had occurred, it had not been deliberate. Id. at 852 -853.

On appeal once again, the Second Circuit reversed the district court’s judgment, rejecting its findings and holding that it failed to give sufficient weight to evidence presented by the defendants. Id. at 855-857. Without expressly stating the district court’s findings were clearly erroneous, the Court of Appeals then reviewed the evidence itself, and concluded that the evidence did establish a Lanham Act violation.  Id. at 854, 857. The defendants subsequently petitioned the Supreme Court for a writ of certiorari, which granted the petition and found that the Second Circuit had clearly erred in setting aside the lower court’s findings of fact and substituting that court’s review of the evidence with its own. Id. at 857-858.

In reaching its conclusion, the Supreme Court re-affirmed the basic principle that

“liability for trademark infringement can extend beyond those who actually mislabel goods with the mark of another.”  Id. at 853. Thus, “[e]ven if a manufacturer does not directly control others in the chain of distribution, it can be held responsible for their infringing activities under certain circumstances.” Id. at 853-854.

Furthermore, the Court established a two-part test for evaluating contributory liability claims. Specifically,

if a manufacturer or distributor intentionally induces another to infringe a trademark, or if it continues to supply its product to one whom it knows or has reason to know is engaging in trademark infringement, the manufacturer or distributor is contributorially responsible for any harm done as a result of the deceit.

Id. at 854.

The two-part test articulated by the Supreme Court in Inwood has been consistently followed and expounded upon by subsequent courts. See, e.g. Perfect 10, Inc. v. Visa Int’l Service Ass’n, 494 F.3d 788, 807 (9th Cir. 2007); Lockheed Martin Corp. v. Network Solutions, Inc. 194 F.3d 980, 983 (9th Cir. 1999); Polymer Technology Corp. v. Mimran, 975 F.2d 58, 64 (2d Cir. 1992); David Berg and Co. v. Gatto Int’l Trading Co., Inc., 884 F.2d 306, 311  (7th Cir. 1989); Sealy, Inc. v. Easy Living, Inc., 743 F.2d 1378, 1381-1382 (9th Cir. 1984); Tiffany v. eBay, 576 F.Supp.2d 463, 502 (S.D.N.Y. 2008), affirmed in part and remanded in part, 600 F.3d 93, 106 (2d Cir. 2010), cert denied, 131 S.Ct. 647 (2010); Monotype Imaging, Inc. v. Bitstream Inc., 376 F.Supp.2d 877 , 2005 WL 1653604, *8 (N.D. Ill. 2005); Monsanto Co. v. Campuzano, 206 F.Supp.2d 1271, 1274 (S.D. Fla. 2002); Fare Deals, Ltd. v. World Choice Travel .com, Inc. 180 F.Supp.2d 678, 687 (D. Md. 2001); Medic Alert Foundation United States, Inc. v. Corel Corp. 43 F.Supp.2d  933, 940 (N.D. Ill. 1999);  National Basketball Association v. Sports Team Analysis and Tracking Systems, Inc., 939 F.Supp. 1071, 1108 (S.D.N.Y. 1996); MDT Corp. v. New York Stock Exchange, 858 F.Supp. 1028, 1033 (C.D. Cal. 1994).

For cases reciting the Inwood two-prong test but dismissing the contributory liability claim for failure to plead sufficient facts to support it,  see Too Marker Products, Inc. v. Shinhan Art Materials, Inc., 2010 WL 786041 *6 (D. Or.); and Guantanamera Cigar Co. v. Corporacion Habanos, S.A., 672 F.Supp.2d 106, 113 (D.D.C. 2009). And see, Coach Inc, v. Asia Pacific Trading Co., Inc., 676 F.Supp.2d 914, 927-928 (C.D.Cal. 2009) (C.D.Cal.)(granting defendants’ motion for summary judgment of no contributory liability where plaintiffs failed to show that the alleged direct and indirect infringers “worked in conjunction with one another” while engaging in conduct that violated plaintiff’s trademark rights).

More recently, the contributory liability doctrine articulated in Inwood has been expanded beyond the manufacturer-distributor context, to apply in situations where a party has not necessarily supplied a product, but may have provided a service or the like. See Tiffany v. eBay, 600 F.3d 93, 106 (2d Cir. 2010)(assuming without deciding that Inwood applied to the online auction site eBay), affirming in part and remanding in part, 576 F.Supp.2d 463, 502, 507 (S.D.N.Y. 2008), cert denied, 131 S.Ct. 647 (2010). See also Lockheed Martin Corp. v. Network Solutions, Inc., 194 F.3d 980, 984 (9th Cir. 1999)(Inwood standard could be applied to the Internet if there were evidence of monitoring and control); Fonovisa, Inc. v. Cherry Auction, Inc. 76 F.3d 259, 264-265 (9th Cir. 1994)(applying the Inwood standard to swap meet owners, holding that “Inwood …laid down no limiting principle that would require defendant to be a manufacturer or distributor.”); Hard Rock Café Licensing Corp. v. Concession Services Inc., 955 F.2d 1143, 1149 (7th Cir. 1992)(finding that Inwood test extends to landlords and licensors).

The remainder of this section will discuss the elements of a contributory liability claim pursuant to Inwood. It will then explore the expansion of the “product” requirement as it has been applied by the courts outside the manufacturer-distributor context contemplated in Inwood. As will be seen, this expansion has had particular implications for trademark infringement over the Internet. The application of contributory liability doctrine to Internet activity, as well as in many other contexts, will be discussed in detail below.

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1. Intentional Inducement, B. The Elements of Contributory Liability Under Inwood, II. Contributory Trademark Infringement Comments Open

B. The Elements of Contributory Liability under Inwood: 1. The Requirement of Intentional Inducement

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Although the majority of contributory liability cases have proceeded under the second prong of the Inwood standard – supplying a product – a few courts have addressed circumstances in which inducement formed the basis for liability. See Gucci America, Inc. v. Frontline Processing Corp., 2010 WL 2541367 (S.D.N.Y.); Transdermal Products, Inc. v. Performance Contract Packaging, Inc. 943 F.Supp. 551 (E.D. Pa. 1996), discussed infra. See also Bauer Lamp Co.,  Inc. v. Shaffer, 941 F.2d 1165, 1171 (11th Cir. 1991)(defendant sales representatives who asked lamp manufacturer to produce infringing lamps held liable for contributory trade dress infringement; fact that defendants did not themselves manufacture the infringing lamps did not matter for purposes of contributory liability). But  see Sellify v. Amazon, 2010 WL 4455830 *4 (S.D.N.Y.) (defendant online sales company’s practice barring advertisers who infringe from linking to its website militated against finding inducement); Monotype Imaging, Inc. v. Bitstream Inc., 376 F.Supp.2d 877, 2005 WL 1653604, *8 (N.D. Ill. 2005)(rejecting contributory liability claim where plaintiff failed to show any relationship between the defendant and the direct infringer and therefore could not prove intentional inducement of that infringement); Information Exchange Systems, Inc., v. First Bank Nat’l. Ass’n., 994 F.2d 478 (8th Cir. 1993)(dismissing claims of inducement to infringe where plaintiff failed to cite to any evidence in the record). See further, Georgia Pacific Consumer Products, LP, v. Von Drehle Corp., 2010 WL 3155646 (4th Cir.)(where defendant sold to distributors its inferior paper towel product designed specifically for use in plaintiff’s branded dispenser, court found record sufficient for a reasonable jury to find that defendant both induced infringement and continued to supply its product to distributors knowing that infringement was taking place, thereby satisfying Inwood under either of its two prongs), discussed in Section II. B.3 (a); Google Inc. v. American Blind & Wallpaper Factory Inc., 2005 WL 832398 (N.D. Cal 2005)(defendant alleged search engine company had induced its competitors to purchase its marks as “keywords”), discussed in detail inf Section II.D.2 (c).

A company that served as a “middleman” by setting up credit card processing for an online retailer of counterfeit handbags was subject to a contributory liability claim based on inducement in Gucci America, Inc. v. Frontline Processing Corp., 2010 WL 2541367 at *12 (S.D.N.Y). In reaching its decision, the court applied the standard used by the Ninth Circuit in Perfect 10, Inc. v. Visa Int’l Service Ass’n, 494 F.3d 788, 800-801, where that court considered inducement in a contributory copyright infringement context. The company’s profile on it website, coupled with its business practices as set forth in the pleadings, were sufficient support for the plaintiff’s inducement theory. Gucci, supra at*12.

Gucci v. Frontline arose out of successful trademark infringement litigation brought by Gucci, the well-known manufacturer of luxury goods, against an online merchant operator of a website called “TheBagAddiction.com,” in which the owners admitted to liability for selling counterfeit Gucci products. Gucci , supra at *1. Thereafter, Gucci turned to the three companies that had helped the merchant obtain credit card services, alleging, inter alia, both vicarious and contributory liability for trademark infringement. Id. One of the three defendants, Durango Merchant Services (“Durango”) acted as a middleman, while the other two, Frontline Processing Corporation (“Frontline”) and Woodforest National Bank (“Woodforest”), provided credit card processing services to the merchant. Id.

In rejecting the defendants’ motion to dismiss, the court allowed the contributory liability claims to go forward as to all three defendants, but on different legal theories in accordance with their roles. As to Frontline and Woodforest, the court found the pleadings sufficient to allege contributory trademark infringement, based on their knowledge and control over the infringing activity on the website. This aspect of the case is discussed below in Section II. D. 3. As to the middleman, Durango, the court found the pleadings sufficient to allege contributory infringement based on an inducement theory.

In doing so, the Gucci v. Frontline court relied on the Ninth Circuit’s language when that court analyzed the contributory copyright infringement claims in Perfect 10, derived from the Supreme Court decision in Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd., 545 U.S. 913 (2005). Namely, the court inquired into whether Gucci had alleged that Durango “communicated an inducing message to [its] …users[.]”Gucci, supra at *12. It looked further into whether Durango had allegedly created “advertisement[s] or solicitation[s] that broadcast[] a message designed to stimulate others to commit violations.” Id., citing Perfect 10, 494 F.3d at 801. Finally, the court considered whether Gucci’s allegations suggested Durango had taken “affirmative steps to foster infringement,” and “promoted their payment system as a means to infringe.”[sic] Id., citing Perfect 10, 494 F.3d at 800-801.

Durango’s internet marketing profile as well as its activities on behalf of the direct infringer prompted the court to find Gucci’s allegations of inducement sufficient. It likened Durango to companies that offer loans to customers with bad credit, noting that its “website reache[d] out to “high risk merchant accounts,” including those who sell “replica products.”  Id. at *12. More specifically, Gucci had pointed to discussions in which one of Durango’s representatives acknowledged the merchant was having trouble obtaining credit card services because it sold “replica[s,]” a euphemism, according to Gucci, for counterfeits. Citing the Ninth Circuit, the Gucci court concluded that Durango “communicated an inducing message to [its] users,” and that “Gucci [had] pled sufficient facts to infer that Durango crafted “advertisement[s] or solicitation[s] that broadcast[] a message designed to stimulate others to commit violations.” Id. at *12, citing Perfec10, 494 F.3d at 801. Finally, the court found that Durango had helped the online merchant set up a system to avoid “chargebacks” by requiring customers to acknowledge in writing that they were purchasing “replicas.”  This practice, the court concluded, indicated “affirmative steps taken to foster infringement” or “that Defendants promoted their payment system as a means to infringe.” [sic] Id., citing Perfect 10, 494 F.3d at 800-801.

Note that by contrast, the two other defendant companies in Gucci were not subject to a claim of inducement. Gucci, supra at *12. The court found that “[t]hough both companies allegedly advertised for high risk merchants, they did not bring [the direct infringer] to the table the way Durango allegedly did.” Id. The fact that they charged higher fees for processing high risk merchants and that Frontline was aware of customers’ written acknowledgement of purchasing “replicas” did not constitute “affirmative steps necessary to foster infringement.” Gucci, supra at *12. See also 1-800 Contacts v. Lens.com, where the court found the evidence insufficient to sustain a claim of contributory liability against an online contact lens retailer based on the theory that it had induced its affiliate to generate infringing advertisements. 755 F.Supp.2d 1151, 1185 (D. Utah 2010). The plaintiff “[a]t most … presented evidence that the defendant did not institute negative keywords [i.e. keywords designated not to trigger its link when searched] and that it knew of some of the keywords that a few affiliates were using in their advertising …”  Id. But the mere use of a trademark as a keyword, the court held, did not trigger trademark liability, so none of the foregoing evidence demonstrated that the defendant intentionally induced its affiliates to infringe on the plaintiff’s trademark. Id. at 1185.

 

Transdermal Products, Inc. v. Performance Contract Packaging, Inc. presented an unusual factual paradigm, in that the direct infringer defendant sought to join another distributor as a contributory infringer, alleging it had induced infringement in its capacity as the defendant’s customer. 943 F.Supp. 551 (E.D. Pa. 1996). The plaintiff, Transdermal Products, was the manufacturer of transdermal patches, a skin patch containing a drug that delivers the drug into a patient when placed onto the skin. It began marketing the patch with the mark, LEPATCH, and contracted with the defendant, Performance Contract Packaging, Inc. (“PCP”), to package and ship LEPATCH to its customers. Among these customers was Laboratorio Maver, S.A. (“Maver”), a Chilean distributor. Transdermal alleged that PCP had begun manufacturing and distributing its own version of LEPATCH to Maver. It sued PCP, but not Maver, alleging, inter alia, trademark infringement under both the Lanham Act and state law. Transdermal Products, 943 F.Supp. 551, 554. Thereafter PCP sought to join Maver as a third-party defendant. At issue therefore was whether Maver could he held contributorily liable for the infringement and thereby be joined as a party under Rule 14 of the Federal Rules of Civil Procedure. See id.

The Transdermal Products court held that it could, applying Inwood to the somewhat atypical facts of this case. It noted at the outset that this case differed from the “vast majority of contributory infringement cases” insofar as the defendants in this case had alleged that Maver, the distributor, encouraged PCP, in its capacity as manufacturer, to violate Transdermal’s trademark. Transdermal Products, supra at 553. Nevertheless, the court discerned that the express language of Inwood subjects “manufacturers or distributors” to liability. Id. at 553.  It noted that Maver distributed the allegedly infringing patches in Central and South America. Id. Furthermore, the defendants had claimed that Maver had “selected the mark in question and represented that it owned and had the authority to use the mark.” Id. at 552, 553.

Citing the first prong of Inwood, the court found that Maver could trigger contributory liability if it had “intentionally induce[d] … another to infringe a trademark.” Transdermal Products, supra at 553. The court further found that if “Maver selected the “LePatch” mark and encouraged PCP to copy the mark, knowing, as a Transdermal customer that it was Transdermal’s mark, a fair reading of [Inwood] would seem to impose liability on Maver.” Id. at 553-554.

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2. Supplying a Product, B. The Elements of Contributory Liability Under Inwood, II. Contributory Trademark Infringement Comments Open

B. The Elements of Contributory Liability under Inwood: 2. The Requirement of Supplying a Product

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Where a contributory liability claim is predicated on the second prong of Inwood, i.e. that the defendant supplied a product to a third party with actual or constructive knowledge that the product was being used to infringe the plantiff’s marks, the plaintiff obviously must allege that a product has been supplied or the claim will fail. Consequently, this fact tends to be undisputed (and therefore not subject to much discussion) in contributory liability cases. See, e.g.  Monsanto Co. v. Campuzano, 206 F.Supp.2d 1271, 1274 (S.D. Fla. 2002)(fact that defendants engaged in a scheme to repackage plaintiff’s product in counterfeit retail boxes and sell it to the retail market, thereby infringing plaintiff’s trademarks, was undisputed). See also SB Designs v. Reebok Int’l, Ltd., 338 F.Supp.2d 904, 912 (N.D. Ill. 2004) (rejecting contributory liability claim where plaintiff failed to provide any evidence that defendant had supplied allegedly infringing product).

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(a) In General, 3. Knowledge, B. The Elements of Contributory Liability Under Inwood, II. Contributory Trademark Infringement Comments Open

B. The Elements of Contributory Liability under Inwood: 3. The Requirement of Actual or Constructive Knowledge: (a) In General — Part 1

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Under the Inwood standard, the plaintiff must prove that the defendant continued to supply a product “to one whom it knows or has reason to know is engaging in trademark infringement.” Inwood, 456 U.S. at 854. The extent of a defendant’s knowledge of the wrongful activities of the direct infringer is the focus of courts deciding contributory trademark infringement cases. See David Berg and Co. v. Gatto Int’l Trading Co., Inc., 884 F.2d 306, 311 (7th Cir. 1989)(“[t]he determination of contributory infringement depends upon a defendant’s intent and its knowledge of the wrongful activities of its distributors,” citing Sealy, Inc. v. Easy Living, Inc., 743 F.2d 1378, 1382 (9th Cir. 1984)). See also Sony Computer Entertainment America, Inc. v. Gamemasters, 87 F.Supp. 2d 976 (N.D.Cal. 1999)(“gravamen of a contributory infringement action is the defendant’s knowledge”); Power Test Petroleum Distributors, Inc. v. Manhattan & Queens Fuel Corp., 556 F.Supp. 392, 394 (E.D.N.Y. 1982)(“a determination of liability for contributory infringement turns on the factual issue of knowledge”).  And see GMA Accessories, Inc. v. BOP, LLC, 2011 WL 446196 *5 (S.D.N.Y)(sustaining contributory liability complaint on motion for summary judgment where dispute of material fact existed regarding plaintiff’s allegation that defendant had actual knowledge based on service of a complaint on a company sharing the same address and company officers );  Louis Vuitton Malletier, S.A. v. Akanoc Solutions, 591 F.Supp.2d 1098, 1111 (N.D.Cal. 2008)(sustaining contributory liability claim where defendant ISPs internal emails showed the company knew about infringing websites using its services, creating a genuine issue of material fact regarding its actual or constructive knowledge), defendants’ motion for JMOL denied, 2010 WL 5598337 *10 (N.D. Cal.).

Two main factors have influenced the courts’ determination of knowledge in this area: one is the extent to which the defendant was involved with the underlying direct infringement; the second is the likelihood and strength of the direct infringement claim. See Lockheed Martin Corp. v. Network Solutions, Inc. 985 F.Supp.949, 964-965 (C.D. Cal. 1997)(“Contributory infringement doctrine has always treated uncertainty of infringement as relevant to the question of an alleged contributory infringer’s knowledge[]”), aff’d, 194 F.3d 980 (9th Cir. 1999), and cases cited therein. See also Tiffany v. eBay, 576 F.Supp.2d 463, 508 (S.D.N.Y. 2008)(noting that “courts have been reluctant to extend contributory trademark liability to defendants where there is some uncertainty as to the extent or the nature of the infringement”), affirmed in part and remanded in part, 600 F.3d 93 (2d Cir. 2010), cert denied, 131 S.Ct. 647 (2010); RGS Labs Int’l, Inc.v. The Sherwin-Williams Co., 2010 WL 317778, *3 (S.D.Fla.)(“a contributory infringement claim requires, at a minimum, both an allegation of a direct infringement by a third party and an allegation of an intentional or knowing contribution to that infringement by the defendant”), citing Optimum Techs. Inc, v. Henkel Consumer Adhesives, Inc. 496 F.3d 1231.1245 (11th Cir. 2007). The requirement to demonstrate direct trademark infringement is discussed in further detail, in Section II.B.5.

Thus, where the record was “grossly lacking” in evidence of either actual or constructive knowledge on the part of the defendants, the court, for purposes of granting a preliminary injunction, could not find a likelihood of prevailing on a contributory infringement claim as a matter of law. Sony Computer Entertainment America, Inc. v. Gamemasters, 87 F.Supp. 2d 976 (N.D.Cal. 1999).  Moreover, the questionable nature of the underlying direct infringement claim in this case significantly undermined the plaintiff’s argument for contributory liability based on knowledge. See id. at 986.

Sony Computer arose out of the sale of allegedly counterfeit video game accessories by a retail store, “GameMasters” and its owners. Sony Computer Entertainment America Inc. (“Sony”), the manufacturer of the PlayStation video game for which the accessories were designed, sued GameMasters, alleging both direct and indirect trademark and copyright infringement, including trademark counterfeiting. Sony sought a preliminary injunction in connection with both the direct and indirect liability claims. Id. at 977.

Among the accessories sold by the defendants in Sony Computer was the video “Game Enhancer.” As described by the court, the Game Enhancer was an external device that served at least two functions. One was to simply modify an existing video game according to the user’s wishes, e.g., to make it more or less challenging. The second function of the Game Enhancer was to permit players to play games sold in Japan or Europe and intended by Sony for use exclusively in those territories, i.e. “grey market” games. See Sony Computer, supra at 981.

Sony contended that the Game Enhancer also allowed users to play counterfeit copies of original PlayStation software. See id. at 982. By selling the Game Enhancer, Sony argued, the defendants contributed to others’ trademark and copyright infringement. Id. The defendants simply rejected the assertion that the Game Enhancer could be used to play counterfeit games. Id. The court noted that there was nothing in the instructions accompanying the Game Enhancer to support such a use. Id. Nor had Sony brought any evidence to suggest that the particular Game Enhancers sold by the defendant enabled users to play counterfeit games. See id.

The court denied the preliminary injunction, both because of the weakness of the direct infringement claim and the lack of evidence suggesting that the defendants had any knowledge or constructive knowledge of it. Sony Computer, supra at 986-987. Citing Inwood, the court stated that Sony was required to prove that GameMasters supplied a product to third parties with actual or constructive knowledge that its product was being used to infringe. Id. at 986. The court noted, however, that the “scant evidence and allegations” by Sony only suggest that the defendant supplied a product that “consumers could have used to engage in trademark infringement.” Id. Moreover, the court held, “[a] consumer’s choice to play the non-territorial game [by way of the Game Enhancer] cannot be the infringing activity,” because those games were authentic, Sony authorized games. Id., (citation omitted). Finally, the court noted that the record was “grossly lacking” in evidence of actual or constructive knowledge of infringement on the part of the defendants. Id. at 987. See also, David Berg and Co. v. Gatto Int’l Trading Co., Inc., 884 F.2d 306, 311 (7th Cir. 1989)(affirming district court’s rejection of contributory infringement claim where plaintiff had presented no evidence that defendant had knowledge or any reason to know of any infringing sales); Cf. Power Test Petroleum Distributors, Inc. v. Manhattan & Queens Fuel Corp., 556 F.Supp. 392 (E.D.N.Y. 1982) (denying defendant’s motion to dismiss where factual question remained as to defendant’s awareness of potential infringement by subsequent parties in the chain of distribution).

By contrast, where the underlying infringement was patently obvious both from the design of the products and accompanying misleading advertising, the court readily found knowledge and intent. See Sealy, Inc. v. Easy Living, Inc., 743 F.2d 1378, 1381-1382 (9th Cir. 1984).  Sealy was a trademark dispute that arose out of the sale of sets of Sealy mattresses together with non-Sealy foundations by Danco, a bedding products company. The plaintiff, Sealy Incorporated, (“Sealy”) was an association of bedding manufacturers which owned and licensed the SEALY trademark.  Sealy, supra at 1380. Also involved in the dispute was Ohio-Sealy, a bedding manufacturer and Sealy licensee. Ohio-Sealy owned a subsidiary, Pacifica, which was not a Sealy licensee.

Danco acquired its genuine Sealy mattresses from an Ohio-Sealy subsidiary, and sold them together with non-Sealy foundations made by Pacifica. The unlabeled Pacifica foundations were covered in fabric or “ticking” that was identical to the Sealy mattress ticking. The mattress and foundation combination thus gave the impression of being a matched Sealy set.  Sealy supra at 1381.  Furthermore, at Danco’s suggestion, the items were advertised by some retailers as a “Sealy Back-Saver and matching foundation.” Sealy supra at 1381. Sealy brought a trademark infringement action in district court against both Danco and Pacifica, seeking, inter alia, an injunction against the sale of the Sealy-Pacifica bed sets. Id.  The court granted the injunction and the defendants appealed.

The Ninth Circuit affirmed, finding substantial evidence to support the district court’s findings that the defendants “foresaw and intended that the Pacifica foundations would be passed off as Sealy products.” Sealy, supra at 1382. It pointed specifically to the matching ticking on the Pacifica foundations and to the advertisements offering the product as a “matching foundation,” for the Sealy mattress. Id. It found further that remedial measures taken by the defendants during the course of litigation did not overcome the misleading impression conveyed by the identical ticking on the Pacifica foundation. Id. The effect of such measures is discussed in further detail infra.

Similarly, where the defendant “candidly admit[ted]” that it specifically designed its paper towel product for use in the plaintiff’s branded dispenser, the court found that the plaintiff had pleaded facts alleging contributory trademark infringement sufficient to survive a motion to dismiss on summary judgment. Georgia Pacific Consumer Products, LP, v. Von Drehle Corp., 2010 WL 3155646, *7 -*8. (4th Cir.). In Georgia Pacific, the court determined that a reasonable jury could find that the defendant both induced infringement and continued to supply its product to distributors knowing that infringement was taking place, thereby satisfying Inwood under either of its two tests. Id. at *7.

The plaintiff in that case, Georgia Pacific, (“G-P”), was the manufacturer of paper products and dispensers for both the home and institutional use. It invented the first electronic, hands-free dispenser, the “enMotion,” a paper towel dispenser that enabled the customer to dry his hands with paper towel without having to touch the dispenser. Georgia Pacific, supra at *2. G-P also designed a related product, the enMotion paper toweling, a special, high-quality, non-standard-sized paper towel for use in its enMotion dispensers. Id. at *1.

To ensure that the enMotion dispenser would be used exclusively with the enMotion paper towels, G-P restricted the terms by which it sold the toweling and leased the dispensers. It sold the enMotion paper toweling to janitorial supply distributors, who in turn sold it to their respective end-user customers. Id. at *1.  It only leased its dispensers, however, to those distributors, who in turn, were permitted to sublease them to their respective end-user customers. Id. at *1. Both the leases and subleases provided that only the enMotion toweling was to be used in the enMotion dispensers, the inside of which bore stickers reiterating that requirement and the face of which bore Georgia-Pacific’s registered trademarks. Id.

Notwithstanding these efforts, one of G-P’s competitors, the Von Drehle Corporation, (“VD”), began marketing and selling to distributors a cheaper paper toweling specifically manufactured and designed by VD for use in the enMotion dispensers. Georgia Pacific, supra at *1. G-P thereafter sent VD a cease and desist letter, “informing it that its conduct constituted trademark infringement and tortious interference” with contract. Id. at *4. VD responded, rejecting G-P’s claims and insisting that “its conduct regarding its … [paper toweling was] legitimate competition.” Id.

G-P consequently sued VD, alleging inter alia unfair competition under the Lanham Act and state common law, tortious interference with contract, and contributory trademark infringement. Georgia Pacific, supra at *1. VD counterclaimed for violation of the state Unfair and Deceptive Trade Practices Act. Id. The district court granted summary judgment in favor of VD with respect to all of G-P’s claims and summary judgment in favor of G-P with respect to VD’s counterclaim, and both parties appealed. Id.

On de novo review, the Fourth Circuit found entirely in G-P’s favor, vacating and remanding the district court’s grant of summary judgment dismissing G-P’s claims, and affirming its grant of summary judgment in favor of G-P with respect to VD’s counterclaim. Georgia Pacific, supra at *1. Noting that all of G-P’s claims turned on whether G-P adduced evidence sufficient for a reasonable jury to find VD liable for contributory trademark infringement, the court began its inquiry there, applying the Inwood standard. Id. at *6.

The court noted at the outset that it would assume for the purposes of deciding the contributory liability claim that the “stuffing of [the enMotion] dispensers with VD’s [toweling] by end-user customers constitute[d] trademark infringement under the Lanham Act,” and indeed further on did find sufficient evidence in the record to sustain a claim of direct infringement by the end-user customers. Id. at *7, *13. It then readily found the record sufficient to demonstrate to a reasonable jury that “VD directly induced such infringement and continued to supply its product to distributors knowing such infringement was taking place.” Id. at *7.

Specifically, the court noted that “VD candidly admit[ted] that it developed its … toweling for the specific purpose of end-users stuffing enMotion dispensers, which dispensers were the only ones on the market  at the time to accept” the non-standard-ized toweling. Georgia Pacific, supra at *7 -*8. It found further that VD’s sales staff directly marketed its toweling as a cheaper alternative to G-P’s, making “in-person sales calls on distributors and end-user customers.” Id. at *8. Finally it noted that “leaving no doubt as to VD’s intentions,” VD’s president had testified, well after receiving the cease and desist letter from G-P, that it intended for “every roll” of its toweling to be used in G-P’s dispensers. Id.  These findings on the record were sufficient to satisfy the test for contributory trademark infringement under both prongs Inwood. See Id. at *7 -*8. For a discussion of the significance of defendants’ responses to cease and desist letters in the context of willful blindness, see Section II. B. 3 (c).

Continue reading B. The Elements of Contributory Liability under Inwood: 3. The Requirement of Actual or Constructive Knowledge: (a) In General — Part 1 →

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