Monday, April 20, 2015

Territoriality is no bar to keeping up with the Kardashians in Kroma dispute

Kroma Makeup EU, Ltd. v. Boldface Licensing Branding, Inc., No. 6:14–cv–1551, 2015 WL 1708757 (M.D. Fla. Apr. 15, 2015)
A foreign licensee of a US trademark sued US citizens for alleged infringement abroad, and sued its licensor for refusing to share in the proceeds of a settlement in a separate lawsuit about the infringement.  The court here found that it had subject matter jurisdiction and that the foreign licensee could state a Lanham Act claim. Plus, the licensee could proceed against its licensor under a breach of contract theory.
Defendant Tillett owns a registration for Kroma for makeup, used for a premium, all-natural makeup brand. “Kroma products sell from between $19 and $100 and have been featured at high-profile fashion events throughout the United States and the world, including the Oscars and the Emmys.”
According to the complaint, Plaintiff Kroma EU had an exclusive license from Tillett to import and sell Kroma products in the EU, with a guarantee from Tillett that it owned the Kroma mark.  This was a thriving business by late 2012, with Kroma EU negotiating to place Kroma products in a number of upscale British and European retail stores.
Enter Khroma, a new makeup line backed by defendants Kim Kardashian, Kourtney Kardashian, and Khloe Kardashian and defendant Boldface. The new line was released in the US and Europe in late 2012, priced between $6 and $20.  It was of inferior quality compared to Kroma, and Kroma suffered severe consumer confusion.  Boldface sued Tillett for a declaration of noninfringement.  Tillett counterclaimed, and in 2013, the district court preliminarily enjoined Khroma.  Tillett and the other defendants eventually settled.  Prior to the settlement, Tillett allegedly promised to seek damages on Kroma EU’s behalf and sought information from Kroma EU regarding its claimed damages.  However, after winning the motion for a preliminary injunction, Tillett allegedly abandoned Kroma EU’s interests, and the ultimate settlement didn’t include a release of Kroma EU’s claims.
Thus, Kroma EU sued everybody, alleging trademark claims against Boldface and the Kardashian defendants, and promissory estoppel against Tillett. Boldface defaulted.
The Kardashian defendants suggested that Kroma EU lacked standing to bring vicarious trademark infringement claims because Tillett was the registrant and owner of Kroma in the US, and because Kroma EU couldn’t enforce either a registered or unregistered foreign mark.
Although a licensee doesn’t own the mark it licenses, §43(a) doesn’t require a “registrant,” but speaks of “any person who believes that he or she is or is likely to be damaged.” Thus, ownership is irrelevant, and “courts frequently find non-owners—such as manufacturers, competitors, distributors, and others—to have standing under § 43(a).”  Lexmark required “statutory standing”—what the court here characterized as “more of a refinement to what federal courts have called ‘prudential standing’ over the years.” (Of course Justice Scalia insisted that he wasn’t engaged in a “standing” inquiry at all, but this court, like many others, isn’t interested in changing the label.)
A plaintiff must demonstrate a cognizable “commercial interest in reputation or sales” to fall within § 43(a)’s zone of interest, and show that its injuries were proximately caused by the defendant’s wrongful conduct. Kroma EU was not trying to enforce a foreign trademark in a US court, but rather a domestic trademark.  (That skips over territoriality completely.  Kroma EU doesn’t have any rights to sell Kroma in the US, according to the description of the license.  The mark may have originated in the US, but when used in the EU it’s an EU mark.)  Kroma sufficiently satisfied the zone of interests tests because of its commercial interest in selling Kroma. “Kroma EU is exactly the type of commercial actor who § 43(a) of the Lanham Act envisions protecting.”  And Kroma EU alleged proximate cause: consumer confusion that cost it significant business and revenue.
Nor did res judicata bar Kroma EU’s claims, since Kroma EU was never a party to the prior litigation.
But did the Lanham Act reach the Kardashians’ conduct abroad? Steele v. Bulova Watch Co., 344 U.S. 280 (1952), held that the Lanham Act regulates not only domestic conduct, but also foreign conduct of U.S. citizens where the conduct involves U.S. commerce and does not otherwise interfere with the rights of foreign nationals in their own countries. Relevant factors: (1) whether the defendant is a U.S. citizen, (2) whether the foreign conduct had a substantial effect on U.S. commerce, and (3) whether adjudicating the claim would interfere with another nation’s sovereignty.
Because all the alleged conduct occurred outside the US, the Kardashians argued that there was no substantial effect on US commerce, and also they contended that allowing Kroma EU to proceed would interfere with the sovereignty of the United Kingdom and the European Union, as Kroma EU’s trademark interests are based under the laws of each entity and all of the alleged infringement occurred within these entities’ respective territorial boundaries.
U.S. citizens should not be allowed to “evade the thrust of the laws of the United States in a privileged sanctuary beyond our borders.”  Some courts call this the paramount factor. 
Moreover, Kroma EU alleged conduct with a substantial effect on US commerce.  If foreign conduct creates confusion among American consumers, there can be little doubt of a substantial effect on US commerce. This usually occurs when there’s intentional importation of infringing goods into the US, or when infringing goods seep into the US via third parties. In addition, the Eleventh Circuit also holds that the Lanham Act also protects non-American consumers from confusion created by American infringers. Babbit Electronics, Inc. v. Dynascan Corp., 38 F.3d 1161 (11th Cir.1994) (per curiam) (affirming extraterritorial application of the Lanham Act where a U.S. corporation purchased infringing products to sell exclusively to consumers in South America). Nonetheless, “global consumer confusion is insufficient by itself to sustain a finding of a substantial effect; there must be other connections to U.S. commerce.” Another connection can be found through a defendant’s significant commercial activity within the US to advance its infringing conduct abroad.
Kroma EU “more than adequately” alleged global consumer confusion, including failed negotiations with a high end retailer that stated that it didn’t want to be associated with the Kardashians or to be perceived as selling discount or inferior-quality products, along with other confused customers.  The court also inferred that Kroma EU suffered confusion in the US too.  (Except that it didn’t have any rights in the US!) “Because of Khroma’s pervasive Internet presence around the world, the Court can reasonably infer that some American consumers intending to purchase Kroma products were confused into purchasing deeply discounted European Khroma products through the European websites and that … these infringing makeup products seeped back into the United States.”  (But, had Kroma EU tried to sell back into the US, it would likely have violated its licensing agreement.) 
Plus, Kroma EU alleged significant commercial conduct by the Kardashians within the US to further their infringing activities in Europe. They engaged Boldface to make the Khroma line and exerted control over all aspects of the brand from within the US, chose the Khroma name, marketed the brand through their personal celebrity, etc. Given the policies underlying the Lanham Act—protecting consumers and securing the rewards of trademark—it was appropriate to find a substantial effect on US commerce. Given the defendants’ awareness of the Kroma mark, “U.S. trademark law has a considerable interest in protecting U.S. trademarks regardless of where an American infringer’s conduct occurs.”
Nor would enforcing Kroma EU’s interest interfere with the sovereignty of another nation, which generally occurs “where the parties are engaged in parallel litigation within the foreign nation or where the foreign nation takes action against the interest which the plaintiff seeks to assert in the United States court.” There’s no parallel litigation or foreign action against the marks here. Because Kroma EU is the licensee of a US mark, the US had the greatest interest in enforcing the mark.
As to the promisory estoppel claim, Kroma EU would need to show: (1) the plaintiff relied to its detriment on a promise made by the defendant, (2) the defendant should have reasonably expected the plaintiff to rely on the promise, and (3) injustice can be avoided only by enforcing the promise. However, promissory estoppel is unavailable where a written contract governs the parties’ relations. 
All exclusive trademark licensing contracts provide as a matter of law that the licensor is “under an implied good faith obligation not to do anything that would impair or destroy the value of [the] exclusive licensee’s rights.” The Eleventh Circuit has specifically held that a licensor must share its proceeds from the settlement of a trademark infringement action with its exclusive licensee where the exclusive licensee can show its damages. Thus, contract law could adequately fashion an appropriate remedy, making promissory estoppel unavailable.
But the plaintiff’s label for its claim was not dispositive. Kroma EU’s factual allegations clearly set forth a claim for breach of contract against Tillett.

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