Monday, August 20, 2012

False use of (R) justifies Lanham Act injunction without evidence of materiality

Perfect Pearl Co., Inc. v. Majestic Pearl & Stone, Inc., 2012 WL 3526611 (S.D.N.Y.)

Perfect sued Majestic for unfair competition and false advertising under the Lanham Act, alleging infringement of the marks Majestic and Majestic Pearl.  Majestic counterclaimed.  The court found that Perfect was the first to use the marks in the field of pearl jewelry and had the exclusive right to use the marks for pearl jewelry, though not for other products such as pearl beads and loose pearls (the vast majority of Majestic’s business).

Perfect makes pearl jewelry, while Majestic is a wholesale retailer of pearl beads as well as pearl jewelry.  Historically they were both business-to-business operations, but Perfect has begun to sell directly to consumers through QVC. 

Perfect used “Majestic Pearl Company” as a business name since 1965, when it began to sell a line of pearl jewelry under the name “Majestic,” and employees used “Majestic Pearl” to identify themselves since at least 1986.  Though some of its jewelry is sold as private label jewelry by retailers, a number of retailers sell it with the Majestic marks present on the tags.  The line generated over $1 million/year from 1988-2010, though some of that was the private label sales.  The court summarized Perfect’s use of the marks before Majestic’s entry into the market as “limited to (1) selling pearl jewelry; (2) to national clothing and accessories retailers; (3) including tags bearing the MAJESTIC marks; and (4) from a showroom in New York City.”

Majestic began selling jewelry in the US in 1996 (it began in Hong Kong in 1980).  It primarily sells pearl beads to bead shops, jewelry manufacturers, and designers, though about 5% of its business is in pearl jewelry.  It spent over $2.3 million on advertising in connection with the marks since 1996, a lot of it at trade shows.  Majestic obtained a registration for MAJESTIC in connection with the sale of pearls in 2001.  Its promotional materials had ® next to “majestic” during that time, and when the registration lapsed in 2008, the company continued to use those materials.  When, as a result of the present litigation, Majestic learned in October 2009 that its registration had lapsed, it stopped using the ®.  Majestic filed new applications for the Majestic marks, which have been published; Perfect has opposed; the proceedings were suspended pending the outcome of this suit.

There were numerous instances of actual confusion since 2009, caused by Perfect’s marketing on QVC.  “Perfect at some point ceased displaying its jewelry on QVC for a period of time, and that a number of Perfect's customers set out to find the retailer of the jewelry they had previously seen on QVC, and came upon Majestic, not Perfect. Believing Majestic to be the company responsible for the line of ‘majestic pearl’ jewelry shown on QVC, these customers reached out to Majestic to ask how to order Perfect's products.”  In addition, a party to the Filene’s Basement bankruptcy attempted to purchase Majestic Pearl Co.’s claim, and contacted Majestic, though it was Perfect that had the potential claim.

The court found that Perfect, as the senior user of a suggestive and inherently distinctive mark, was “necessarily” entitled to “exclusive” use of the marks.  Then (note the contradiction here, not at all unique to this court) the court evaluated whether there was likely confusion, and found that there was, but only in the sale of pearl jewelry, not loose pearls or pearl beads.  Majestic could continue to use its trade name and use the marks on loose pearls or pearl beads.

The court noted that the suggestive/descriptive line could be a difficult one, and found it reasonably close here. A suggestive mark “requires imagination, thought or perception to reach a conclusion as to the nature of the goods,” while a descriptive mark “conveys something about the qualities, ingredients or characteristics of a product.”  Majestic argued that the term was a laudatory mark describing the pearls, like “original” or “famous.”  The Second Circuit case law wasn’t entirely consistent, occasionally finding self-laudatory terms suggestive (e.g., “plus,” “100%,” “first”).  Being laudatory wasn’t necessarily enough for descriptiveness.

“The defining feature of a descriptive mark is that it gives the consumer an immediate idea of the contents of the product.”  (Note that this is unduly compressed, which may affect the analysis.  It should be: a term is descriptive when it gives the consumer an immediate idea about the product when the consumer knows the product.  Compare Apple for computers (arbitrary) with Apple for lipstick (descriptive).  Some laudatory terms may not require that extra step—“best” is going to be descriptive for pretty much everything—but you still need to know the product to conduct a full descriptiveness analysis.  For example, the court cited POWER CHECK as descriptive for batteries that allow users to check the remaining power.  But POWER CHECK for, say, a line of sports apparel wouldn’t be descriptive.)

Regardless, the court ruled that “MAJESTIC does not convey the qualities of the subject pearls with the immediacy normally associated with a purely descriptive mark,” but instead required consumers to consult their imaginations to determine what the pearls are like.  At most, the customer could infer that the pearls were viewed as having high quality, or that the wearer would convey a regal or high-quality impression while wearing them.  This still required imagination to grasp the nature of the product.

The Second Circuit also considers the effect on competitors.  “MAJESTIC is not so elemental or necessary to describe products in this area that it must be left unprotected.”  Query: what about ad copy that says, “These pearls are truly majestic”?  Is a descriptive fair use impossible?  That seems misguided.

Finally, the court noted that Majestic’s earlier registration wasn’t based on §2(f) acquired distinctiveness.  PTO findings are given a substantial degree of deference, at least when the evidence is in equipoise.  However, the court didn’t find that Majestic was bound by its earlier implicit position that the mark was inherently distinctive. “The position a party takes as to distinctiveness when seeking to register its mark with the PTO may have a sound strategic basis” (citing McCarthy’s encouragement to applicants to seek registration based on inherent distinction).  “In light of this, the Court is not persuaded that it needs to bind Majestic to the position it implicitly took in front of the PTO more than a decade ago.”

The parties agreed that confusion was likely in the market for pearl jewelry, but the court undertook its own analysis as well.  As a suggestive mark, Majestic was “moderately strong”: “inherently distinctive and entitled to some protection, [but] otherwise weak.”  This somewhat favored Majestic.  Everything else fell out as you’d expect given the summary above.  On product relatedness:

These are different types of products sold through different channels—Perfect sells jewelry to retail stores largely by having store representatives visit its showroom in New York and by cold-calling potential customers; Majestic, by contrast primarily sells its goods at trade shows. Thus, insofar as Majestic's pearl beads and loose pearls business is concerned, this factor favors Majestic, as it appears that its pearl bead and loose pearl products generally do not compete directly with Perfect’s pearl jewelry.

By contrast, “[h]aving two companies selling pearl jewelry in a national market using effectively the same or highly similar marks presents a high potential for confusion.”  Individual consumers weren’t sophisticated, but retail store buyers were.  Retailers, wholesalers, and designers were likely to differentiate between the two, especially if as the record suggested Majestic’s pearls were genuine and Perfect’s simulated.

The opinion seems to conclude that both parties have a right to operate in the non-individual consumer market (despite the one instance of debt buyer confusion, which didn’t represent consumers of any stripe), but the parties may be free to litigate that at a full merits trial if they choose.  Majestic was enjoined from using Majestic on its line of pearl jewelry.

Perfect also alleged false advertising based on use of the ® after the registration lapsed.  In the Second Circuit, literal falsity may be enjoined without reference to an ad’s impact on the buying public, which the court read to make a separate showing of materiality unnecessary.  Majestic used the ® on promotional materials including shopping bags, tape measures, and calculators at trade shows all across the country.  The court found that this constituted advertising: a way of promoting Majestic’s product to existing and potential customers.

Perfect proved literal falsity, but didn’t present evidence that the misuse of ® “played a substantial role in the decision of Majestic's customers to purchase Majestic's product.”  Still, that didn’t bar an injunction.  Thus, the court granted summary judgment to Perfect, and entered an injunction barring Majestic from misusing the ® symbol in connection with the MAJESTIC marks on any product.

Majestic’s trademark dilution claim was moot, and useless because it wasn’t famous.

The state law trademark infringement claims were resolved in the same way.  As for NY unfair competition, that requires a showing of bad faith by the infringing party, but neither party established bad faith.  And the state law false advertising claim under N.Y.G.B.L. § 350 based on use of ® failed because the gravamen of the state law is harm to consumers, not harm to business interests.  There was no evidence of harm to the public interest from Majestic’s inadvertent error.  Also, courts have found that trademark cases are outside the scope of the NY consumer protection statute, because the public harm from trademark infringement is too insubstantial.  As for Majestic’s N.Y.G.B.L. § 349 claim for deceptive business practices, that requires materially misleading practices causing harm to Majestic.  But (even ignoring the result on infringement) there was no evidence that the marks were used in a materially misleading way or that Majestic was harmed by Perfect’s use.  And courts have also found that trademark claims aren’t actionable under § 349 without specific and substantial injury to the public interest over and above the ordinary harms of infringement.

Majestic also brought a state law claim for dilution.  Perfect’s seniority precluded this claim.

Majestic further raised a laches defense.  Laches requires plaintiff’s knowledge of defendant’s use, inexcusable delay, and prejudice to the defendant.  Perfect first became aware of Majestics use around October 2009, after the instances of actual confusion, and Perfect sued in May 2010, after a “lengthy” exchange with Majestic’s counsel at the time.  The relevant statute of limitations for borrowing purposes is six years.  Perfect sued well within that period.  Thus, prejudice couldn’t be presumed.  Majestic couldn’t show any, and Majestic was on notice of a possible lawsuit as soon as Perfect reached out.

Majestic argued that Perfect had constructive notice by virtue of Majestic’s 2000 registration.  But knowledge is imputed to a party of another's use of the marks only where “the facts already known to him were such as to put upon a man of ordinary intelligence the duty of inquiry.”  (Hmm, I wonder whether that’s a correct statement of the law in the ordinary case.  Registration provides constructive notice, and a junior user can’t avoid that by claiming that an ordinary business in its position wouldn’t have searched the register and had actual notice; that’s part of the point of registration.  But perhaps senior users are in a different position.)  Majestic failed to explain what facts known to Perfect would have created a duty to inquire as to Majestic’s use.

Also, it was purely speculative to argue that Perfect knew as of December 2007, when it looked for a website name and searched a database of potential domain names for different iterations of “Majestic [and] some other adjective.”  That didn’t mean that Perfect must have found out about Majestic’s website,

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