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.