B. The Elements of Contributory Liability under Inwood: 3. The Requirement of Actual or Constructive Knowledge: (c) Willful Blindness — (iv) No Affirmative Duty
The knowledge and willful blindness considerations discussed supra have been expressly distinguished by the courts from an affirmative duty to “seek out and prevent” or “take precautions against” trademark violations by another party, which is not required by the doctrine of contributory liability. See Hard Rock Café Licensing Corp. v. Concession Services, Inc. 955 F.2d 1143, 1149 (7th Cir. 1992); Monsanto Co. v. Campuzano, 206 F.Supp.2d 1271, 1275 (S.D. Fla. 2002); MDT Corp. v. New York Stock Exchange, 858 F.Supp.1028, 1034 (C.D. Cal. 1994). And see, Tiffany v. eBay, 576 F.Supp.2d 463, 515 (S.D.N.Y. 2008)(citing Hard Rock Café),affirmed in part and remanded in part, 600 F.3d 93 (2d Cir. 2010), cert denied, 131 S.Ct. 647 (2010); SB Designs v. Reebok Int’l. Ltd. 338 F.Supp.2d 904, 912 (N.D. Ill. 2004)(same); Ford Motor Co. v. GreatDomains.com Inc. 177 F.Supp.2d 635, 646 (E.D. Mich. 2001)(same). In Hard Rock Cafe, which is discussed in more detail infra, the court distinguished “willful blindness” from negligence.
Hard Rock Café involved a dispute between the owner of the HARD ROCK trademark and CSI, the owner and operator of a flea market, one of whose vendors had sold counterfeit Hard Rock Café t-shirts. Hard Rock alleged that CSI bore contributory liability for the counterfeit sales, and the district court agreed, finding CSI to be willfully blind. Hard Rock Café, supra at 1149. On review, the Seventh Circuit acknowledged that “willful blindness is equivalent to actual knowledge, for purposes of the Lanham Act,” but found that the district court had defined willful blindness incorrectly. Specifically, the court’s review of the district court’s memorandum opinion revealed its focus on the defendant’s failure to take “reasonable steps to detect or prevent the sale of Hard Rock Café counterfeit T-shirts on its premise[s]” Hard Rock Café, supra at 1148. This finding, the Seventh Circuit objected, suggested “mere negligence,” as opposed to willful blindness. Id.
The Seventh Circuit ruled that the district court had applied the incorrect standard to the issue of the defendant’s knowledge. Hard Rock, supra at 1149. It reiterated that “to be willfully blind, a person must suspect wrongdoing and deliberately fail to investigate.” Id. While the “reason to know” part of the standard for contributory liability required CSI “to understand what a reasonably prudent person would understand,” it did not impose any duty to seek out and prevent violations. The court concluded that the district court, having focused on such a duty, had found CSI to be negligent, not willfully blind, and therefore remanded for further findings on the question of willful blindness. Id.
In this vein, it has been held that a “supplier’s duty does not go so far as to require him to refuse to sell to dealers who merely might pass off its goods.” Monsanto Co. v. Campuzano, 206 F.Supp.2d 1271, 1276 (S.D. Fla. 2002), citing Inwood, supra at 861 (White, J., concurring). Further, “the mere sale of a genuine trademarked product without the trademark owner’s consent does not violate the Lanham Act[.]” Id. at 1274, citing Matrix Essentials, Inc. v. Emporium Drug Mart, Inc., 988 F.2d 587, 593 (5th Cir. 1993); NEC Electronics v. CAL Circuit Abco, 810 F.2d 1506, 1509 (9th Cir. 1987). In this regard, it has been found that circumstantial evidence regarding a distributor’s activities that amounted to mere speculation was insufficient to raise a fact question as to that party’s knowledge or willful blindness. Monsanto, supra at 1279.
In Monsanto, the defendant, Campuzano, owned a company, F. Garcia, which purchased and sold institutionally packaged Equal sweetener to another company, Trio International. Monsanto, 206 F.Supp.2d 1271, 1273-1274. It was undisputed that Trio International engaged in a scheme to repackage the Equal product that had been packaged for the institutional food service market and sell it for distribution on the retail market. Id. at 1274. The scheme involved the creation of counterfeit Equal retail boxes that infringed the plaintiffs’ trademarks and copyrights. Monsanto, the manufacturer of the artificial sweetener, and Merisant Company, the owner of the trademarks, sued Campuzano and his company, alleging inter alia, contributory trademark infringement liability for his customer’s counterfeit scheme. The defendants moved for summary judgment against Merisant to dismiss the claim, which the court granted, on the ground that the evidence was insufficient to raise a question of fact regarding whether Campuzano knew of or was willfully blind to the counterfeiting operation. Id. at 1279.
The only material fact at issue in Monsanto was whether the defendants knew or should have known about their customer’s counterfeiting scheme. Monsanto, supra at 1274. However, Merisant failed to bring any direct evidence of the defendants’ knowledge or willful blindness, the court found. Id. at 1274. Rather, it posited a number of circumstantial facts, viz.: that (1) the defendants sold “massive” quantities of the Equal product to the direct infringers; (2) the defendants were the only suppliers for the direct infringers, who were their largest account; (3) the defendants never asked the direct infringers about the nature of their business; (4) Campuzano made undisclosed pay-offs to his supplier of the Equal product that he sold to the direct infringers; (5) Campuzano was aware of another unrelated, illegal repackaging scheme that took place in another state; (6) Campuzano advised his trucking company not to disclose the identity and location of the direct infringer; and various other allegations, including the fact that the defendant and the direct infringer knew each other personally. Id. at 1274-1275. None of the foregoing facts, the court found, even taken together, raised enough circumstantial evidence of knowledge or willful blindness on the part of the defendant. Id. at 1275.
Relying on the Seventh Circuit in Hard Rock Café, supra, the court stated that “the doctrine of contributory liability does not impose an affirmative duty on a manufacturer or distributor to seek out and prevent violations or take precautions against the sale of counterfeit product.” Monsanto, supra at 1275. Rather, to be “willfully blind” for purposes of the Lanham Act, “a person must suspect wrongdoing and deliberately fail to investigate.” There was nothing in the record, taken in the light most favorable to Merisant, that would permit a reasonable trier of fact to find that the defendants should have suspected wrongdoing yet deliberately failed to investigate. Id.
Notably, the court found that the allegations regarding the “massive” quantities of Equal product sold by the defendants to the direct infringers constituted sheer speculation on the part of Merisant. Id. at 1276-1277. Compare Monsanto, supra, with Rolex Watch USA, Inc. v. Meece, 158 F.3d 816 (5th Cir. 1998), supra, where the fact that the defendant evidently had not sold large quantities of non-genuine watch parts to jewelers weighed against a finding of contributory liability,. Nor did the pay-offs or “brokerage fees” paid by the defendant to his supplier constitute evidence that Campuzano knew of the repackaging scheme. Id. at 1277. The facts that the defendant was the only supplier of Equal to the direct infringers, and that the direct infringers were its largest account, were similarly insufficient to raise a fact issue. Id. at 1277-1278.
Furthermore, evidence that the defendant knew that “at some time unknown individuals engaged in an unrelated repackaging scheme in another state” was not evidence that the defendant knew or should have known that its customers were involved in a similar scheme. Otherwise, the court impliedly reasoned, “[e]veryone who ever sold or purchased Equal product [who] may have been aware of the [other] scheme” would be subject to contributory liability. Monsanto, supra at 1278. Regarding Campuzano’s instruction to his trucking company not to disclose the location to which the Equal was being delivered, the court found that this was known to be a practice “intended to protect middleman like Mr. Campuzano from being cut out.” Id. at 1278. The court similarly rejected all other evidence put forth by Merisant as “speculation” and thus concluded that there was insufficient evidence to let the contributory infringement claims go forward. Id. at 1278-1279.
It has similarly been held that the contributory infringement doctrine established by Inwood “does not extend so far as to require non-infringing users to police the mark for a trade name owner.” MDT Corp. v. New York Stock Exchange, 858 F.Supp. 1028, 1034 (C.D. Cal. 1994). See also Tiffany v. eBay, 576 F.Supp.2d 463, 515 (S.D.N.Y. 2008)(without specific knowledge or reason to know, plaintiff was under “no affirmative duty to ferret out potential infringement”), affirmed in part and remanded in part, 600 F.3d 93 (2d Cir. 2010), cert denied, 131 S.Ct. 647 (2010), discussed below.
MDT Corp. involved a dispute between the senior owner of the trademark MDT, MDT Corporation, and the New York Stock Exchange (“NYSE”), over the latter’s use of the trademark as a trade symbol for another company, Medtronic. MDT Corp. sued the NYSE for contributory trademark infringement regarding the use of the trade symbol, and the junior user, Medtronic, intervened. MDT Corp. moved for summary judgment enjoining further use of the trading symbol and for dismissal of Medtronic’s complaint. The court found that MDT Corp. had failed to state a claim of contributory infringement. MDT Corp., supra at 1033-1034.
At the outset, the court noted a number of undisputed facts underlying its conclusions. Namely, it observed that although MDT Corp. was the senior user of the MDT mark in the medical products field, Medtronic was the senior user of the MDT mark with in the context of the publicly traded securities market. MDT Corp., supra at 1032, 1034. It was further undisputed that Medtronic and the NYSE used the MDT trading symbol only to identify Medtronics securities. Id. Even more to the point, MDT Corp. conceded that in so doing, the NYSE and Medtronic had not directly infringed its trade name. Id. In fact, the only theory of liability advanced by MDT Corp. was contributory infringement, based on the parties’ failure to police potentially infringing third party use of the MDT trading symbol. Id. Moreover, the court found that MDT Corp. waited at least 12 years to challenge the NYSE and Medronic’s use of the MDT trading symbol.
Although any one of the foregoing factors would have been dispositive in reaching its decision, the court specifically noted that MDT appeared to have interpreted Inwood to “impose an affirmative duty on innocent third party users of a mark to police the mark for its owner.” Id. at 1034. The court found no such duty exists. Id. Even if it did, the court reasoned further, MDT Corp., having delayed almost 12 years, had acquiesced in the parties’ use of its trade name, and its claim failed under the theory of laches. More fundamentally, it would seem, is the fact that MDT Corp. conceded there was no direct infringement of its trade name, and therefore no predicate claim upon which indirect liability could be based. For a discussion of cases in which contributory infringement claims are dismissed on this basis see discussion infra.
Note further that a licensor of a mark does not ordinarily have a duty to prevent a licensee’s misuse of another party’s mark. Fare Deals, Ltd. v. World Choice Travel.com, Inc., 180 F.Supp.2d 678, 689 (D. Md. 2001), citing Mini Maid Servs. Co. v. Maid Brigade Sys., Inc. 967 F.2d 1516, 1520 (11th Cir. 1992)(“[To hold otherwise] would impose responsibility upon a [licensor] not for failing to maintain the integrity of its own trademark, but for failing to prevent another entity’s violation of the law.”). Franchisor liability is discussed in further detail at infra.
Without specific knowledge or reason to know of infringing activity, there was no affirmative duty on the part of the defendant “to ferret out potential infringement,” the court held in Tiffany v. eBay. 576 F.Supp.2d 463, 515 (S.D.N.Y. 2008), affirmed in part and remanded in part, 600 F.3d 93 (2d Cir. 2010), cert denied, 131 S.Ct. 647 (2010). In Tiffany, Tiffany, the luxury jeweler, sued eBay, the online marketplace, asserting contributory liability for trademark infringement arising out of the sale of counterfeit Tiffany silver jewelry on its website. Tiffany, supra at 469. Tiffany alleged that hundreds of thousands of counterfeit silver jewelry items had been offered for sale on eBay’s website, and that eBay “facilitated and allowed these items to be sold” there. Id. It was undisputed that eBay was generally aware of infringing activity on its website and in fact had put in place a number of anti-fraud measures in response. Tiffany, supra at 514, and see infra for a detailed discussion of these measures.
Tiffany argued nevertheless that the anti-fraud measures taken by eBay were inadequate and that eBay’s failure to do more to prevent the sale of counterfeit goods on its website constituted willful blindness. Tiffany, 576 F.Supp.2d 463, 515 (S.D.N.Y. 2008). At trial, Tiffany brought expert testimony to demonstrate a number of measures eBay could have taken to do so. Tiffany, supra at 491-493, 514. For example, eBay should have conducted its own internal investigation of activity on its website to prevent further infringing activity, Tiffany asserted. Tiffany, supra at 514. Indeed, the court acknowledged that there were a number of steps eBay could have taken but did not, such as keeping track of the number of sellers suspended for expected infringement, or researching and evaluating the number of “Tiffany” listings removed from its website. Id at 514-515.
Notwithstanding the availability of these measures, the court was unpersuaded. eBay’s failure to take these steps was “immaterial” to the question of willful blindness, it held, “because without specific knowledge or reason to know, eBay [was] under no affirmative duty” to proactively seek out infringement on its website. Id. Willful blindness, the court continued ““requires more than mere negligence or mistake” and does not lie unless the defendant knew of a high probability of illegal conduct and purposefully contrived to avoid learning of it, for example, by failing to inquire further out of fear of the result of the inquiry.” Tiffany supra at 515, citing Nike, Inc. v. Varitety Wholesalers, Inc., 274 F.Supp.2d 1352, 1369-70 (S.D.Ga.2003). The court therefore rejected the willful blindness claim, because Tiffany failed to prove that eBay had anything more than generalized knowledge of infringement on its website. Tiffany, supra at 515.
To hold otherwise, the court reasoned, would mean an expansion of the Inwood “reason to know” standard into an “affirmative duty to take precautions against potential counterfeiters, even when eBay had no specific knowledge of the individual counterfeiters.” Tiffany, supra at 515. Citing Hard Rock Café, supra at 1149, the court reiterated that “[t]he law explicitly precludes such an expansion of the “reason to know standard.” Tiffany, supra at 515 and see cases cited therein.
The district court’s requirement of specific knowledge of infringement was upheld on appeal to the Second Circuit. Tiffany v. eBay, 600 F.3d 93, 106 -109 (2d Cir. 2010), affirming in part and remanding in part, 576 F.Supp.2d 463 (S.D.N.Y. 2008), cert denied, 131 S.Ct. 647 (2010). The Second Circuit’s decision is discussed in detail in Sections II.B.3. (a) and II.B. 3. (c)