Monday, February 18, 2008

It might cost Payless more to pay less

adidas America, Inc. v. Payless Shoesource, Inc., -- F. Supp. 2d --, 2007 WL 4482201 (D.Or.)

This product design trade dress infringement case resulted in several rulings of general applicability.

Surveys: Because so many different shoe designs allegedly copied by Payless were at issue, plaintiffs’ survey took only representative samples. Defendant argued that the survey results weren’t evidence of confusion as to the nontested shoes. But, the court held, “[w]here actually surveyed products and subsequently accused products share common and prominent features, a trademark infringement plaintiff need not create new likelihood of confusion surveys for each newly accused product.” In this case, each lot of accused shoes shared two or four parallel, equidistant and diagonal stripes that allegedly infringed the adidas three-stripe mark.

Willfulness: Payless argued that it acted in good faith because it followed the advice of counsel. But for advice of counsel to negate willfulness, it must be competent and it must be reasonable to rely on it. This depends on counsel’s background research; whether the opinions were written or oral; the objectivity of the opinions; whether the attorneys rendering the opinions were trademark lawyers; whether the opinions were detailed or merely conclusory; and whether material information was withheld from the attorney.

Payless obtained “risk assessments from outside counsel who specialized in trademark law. But there were questions of fact as to whether counsel actually reviewed each of the shoes at issue and whether the reviews were conducted before the lawsuit began – Payless can’t have relied in good faith on advice it didn’t have in hand.

Payless argued (in a mirror of the survey argument) that once a particular design had been approved, the approval carried over to similarly designed shoes. But the reviewed shoe lots were not “exactly the same” as the others. They were in different colors and materials, and marketed to different customers (men, women, or children). (Comment: it seems like this should also apply to the survey evidence, unless the surveys covered men, women, and children and different colors.) Some of the reviews also were conducted before the Ninth Circuit held that an earlier settlement between the parties didn’t bar adidas from suing over shoes that used straight-edged stripes, contrary to Payless’ interpretation of the settlement. After that opinion, the attorneys didn’t change their risk assessments, which is at best odd.

Further, there were genuine issues of material fact as to whether counsel’s advice was objective and based on all relevant information. Counsel made “little or no” effort to determine whether infringement or consumer confusion actually existed. They didn’t consider intent – the fact that the Payless shoes were “inspired” by the adidas shoes. They didn’t weigh the various other factors. The most “telling” feature of the opinion letters is that they were conclusory and superficial. In many cases, the opinions were a single phrase or sentence: “Low-Mod[erate]”; “Breaches Adidas Settlement. Mod. hi. Sole piece too close. Use opposing facing teeth.”; “Shoe in dispute, more you buy harder than dispute. Low to moderate risk, but will be in dispute. Change inside and outside away from parallel.”; “No [trademark] issues noted”; “Too close. Mod+ risk.... Already shipped.”; etc.

On the confusion analysis, the court found that adidas submitted “credible evidence of actual harm resulting from the alleged initial-interest and post-sale confusion.” This evidence was a declaration that Payless “directly benefits from initial interest confusion by receiving unearned consumer interest.” Consumers, the declarant continued, are likely to impute to Payless positive traits associated with adidas. Payless also gets business from consumers who want adidas prestige on the cheap. (In other words, Payless is free riding. This is perhaps dilution harm, but it’s not confusion harm; the district court nonetheless held that this was “credible evidence” of harm.)

adidas’s expert declared that the Payless knockoffs would harm adidas: “the presence of the knockoff Payless shoes in the mass market may cause adidas to appear overexposed and thereby lose its premium perception....” And consumers may attribute the inferior quality of Payless shoes to adidas; there is evidence that consumers don’t think highly of Payless shoes.

adidas also submitted consumer survey evidence indicating that 41% of prospective purchasers actually believed that the Payless four-stripe shoe was “made or authorized” by adidas.

Furthermore, adidas submitted sufficient evidence to show actual dilution under the FTDA (since its claim for damages predated the TDRA). Its expert declared that the Payless knockoffs diluted by: “(1) reducing brand equity within the footwear market; (2) negatively affecting the strength of the mark in the minds of consumers; (3) eviscerating the perception of the mark as signifying quality and a premium product; and (4) impacting consumer loyalty associated with the mark.”

However, the Oregon state law dilution claims were preempted by federal patent law. The rarely invoked Sears/Compco/Bonito Boats line of cases holds that states cannot bar the simple copying of an unpatented article. The federal patent bargain – exclusive rights in return for disclosure – depends on the existence of free competition in unpatented designs. So state dilution laws are preempted when they bar the copying of a potentially patentable but unpatented product design without any consumer confusion requirement. Applying state dilution protection to adidas shoe designs would allow adidas a perpetual monopoly on an unpatented product design.

Comment: Though I think this is the right result, it’s interesting that the court didn’t consider the relevance of the existence of federal dilution law in assessing whether dilution law really does conflict with the patent scheme – the Supreme Court has taken the Lanham Act into account in evaluating other preemption arguments.

The court then rejected an aesthetic functionality defense. The Ninth Circuit disfavors aesthetic functionality. If it survives, it’s limited to product features that don’t serve any source-identifying function. Since adidas is attempting to protect its distinctive trademark, the doctrine is inapplicable. (Comment: this is the same reasoning that the Supreme Court rejected in KP Permanent, another case from the Ninth Circuit. If aesthetic functionality is a legitimate defense – which it may not be – it can’t simply be a defense that applies when there’s no confusion, because then it’s not a defense at all, and it’s certainly not a functionality defense, since functionality trumps confusion.)

On plain old functionality, there was an interesting wrinkle: some elements of the adidas trade dress were “intended to be functional in 1969” when they were introduced. But subsequent developments in shoe science revealed that they weren’t functional, and in any event, functionality can change over time to nonfunctionality and then be a protected indicator of source. By modern standards, the flat heel on the adidas design decreases performance, and the stripes and colored heel patch increase the manufacturing cost. There’s no evidence that the combination of features, taken as a whole, serves a utilitarian purpose.


Anonymous said...

adidas wins and wins BIG in lawsuit against Payless. adidas has won a $300 million lawsuit against Payless, whom adidas took to court in Portland for producing their own products that knock off our most iconic shoes like the Superstar, Campus and Country. "adidas is pleased the jury agreed with our position that Payless' conduct was unlawful and cannot be tolerated," said Paul Ehrlich, General Counsel for adidas North America. "We have been building the adidas brand for over sixty years and this verdict supports the value our society places on protecting innovation and quality brands. This decision will enable consumers to continue to count on the premium quality, iconic styles and innovation that they have come to expect from adidas. The jury verdict also underscores the importance of protecting consumers from unfair and deceptive practices, including the sale of knock-off products."

Anonymous said...

Payless rocks! Adidas is stupid and so is anyone who would mistake a payless shoe for an adidas shoe...OMG who cares if it has three stripes! What's next? A lawsuit againt a fast food joint for not labling coffee hot? Oh Wait...

Unknown said...

I think you can survey any issue and find 40% of people confused. See if they can determine if K-Swiss' five stripes patent doesn't infringe on Adidas' three stripes.

Anonymous said...

actually, adidas has an agreement with K-Swiss; use of 5 stripes is "approved" by adidas. adidas does not have its 3 stripes trademarked in all of its markets worldwide. It differs country to country.

Anonymous said...

I think this is just all retarded! Basically you are giving more power and money to a company that has been out the longest. Doesn't adidas already have that much money because of their success over their 60 years of being in the business? How is any other company and business going to thrive if they get sued? How are lower incomed families with kids able to buy shoes when an average name brand shoes cost more than $50 a pair? I say leave Payless alone because there are a vast majority of people who love to shop there (mainly mothers). Love it or hate it, Payless just needs to address their policy, designers, and their company objective in order to fight this. If adidas wants money because Payless took their stripes, then they might as well sue every other company with 2-4 strips. C'mon that's just rediculous. Ever company "borrows" ideas whether it be designs or marketing ways to get more consumers. Unless someone came to adidas with a complaint saying they want their shoe for $29.99 CAD because they saw that price at Payless, then fine, that person is wierd and highly confused. But if no one "suffered" from this then WHO REALLY CARES! If you want name brand shoes that are expensive and would probably last you longer, go to your name brand stores, if you want a quick, cheaper shoe for yourself or for the whole family, then PAYLESS is the store for you.

Kelley Freedman said...

Adidas is ridiculous. This is just like Louis Vouitton suing that girl who made statement shirts featuring a bag that had a similar design to a LV bag.

So what if things appear as knock offs? If they are obviously branded something else and different in at least some way that it's distinguishable, who cares if a shoe has 3 stripes? Wow... This is how far capitalism goes... Stamping out the "competition" when the competition is only trying to make things more affordable to people who can't buy Adidas shoes!