Hunt for Red October: first sale protects competing candy sales

Krasnyi Oktyabr, Inc. v. Trilini Imports, 578 F. Supp. 2d 455 (S.D.N.Y. 2008)

Plaintiff, aka Red October, says it has an exclusive license from a Russian manufacturer to import Russian candies into the US for sale to the Russian ethnic market. Defendants nonetheless began importing the same candies, claiming to have obtained them from third parties. Plaintiff sued under the Lanham Act and state law unfair competition claims.

Plaintiff has an exclusive license from the unrelated Russian entity that produces the candy, which I am calling Red October Moscow, allowing plaintiff to use Red October trademarks (in Cyrillic, but we’ll call them Red October marks) in the US. Plaintiff obtained US trademark registrations for the word mark and for the logo, but then assigned them, including all potential infringement claims, to Red October Moscow.

Plaintiff alleged that, though defendants’ candy originated from Red October Moscow factories, its own candy has been selected for export and has been subjected to higher quality control standards. It relied on a 2001 declaration from the director of exports at Red October Moscow, submitted in a different case. It also alleged that its own contract with Red October Moscow obliges it to follow strict quality control standards for transport and storage that don’t apply to defendants, meaning defendants might sell expired or stale candy. However, the court noted that plaintiff didn’t explain what the quality control standards require. Defendants argued that there was no difference between domestic and export candy, and that their candy quality control standards conformed to industry norms and was the same quality as plaintiff’s.

Defendants challenged plaintiff’s standing to bring claims for infringement of registered marks, given that Red October Moscow was the real party in interest. The court accepted this, holding that plaintiff could be the legal representative of Red October Moscow, but would have to show that Red October Moscow had suffered damages, whereas plaintiff’s only evidence of damages went to its own losses. Indeed, defendants apparently paid more for the candies than plaintiff would have paid for the same amounts (making one wonder how exactly defendants undercut plaintiff). Nor could plaintiff show why Red October Moscow couldn’t have protected its own rights and joined the litigation. The court’s concern here was tied into the idea that Red October Moscow had been protected against discovery by not participating, and that plaintiff might really need to sue Red October Moscow for breach of the exclusivity portions of the license agreement.

Plaintiff was, however, allowed to assert its own claims under Section 43, because the allegedly false designation of origin at issue was likely to cause plaintiff to lose sales.

Given all the sturm und drang over standing for Section 32, the differences between a Section 32 and Section 43 case are fairly minor; plaintiff needed to show a valid mark rather than being afforded a presumption of validity, but the defendants didn’t dispute validity.

So now we’re at the core of the case: unauthorized resale of genuine products isn’t infringing because it isn’t confusing. Differences in quality control can be sufficient to make goods not genuine; quality control is one of a trademark owner’s most valuable rights. However, plaintiff failed to meet its burden to show that quality control standards differed as between its products and defendants’, either by showing actual differences or material differences in quality control at the factory. The evidence of quality control differences in candy intended for export was both old and too general.

As a result, the state-law claims, including a state-law dilution claim, collapsed as well.

Defendants counterclaimed for cancellation of the Red October marks based on fraud on the PTO, as well as some other things. Defendants argued that plaintiff falsely represented that it had the exclusive right to use the Red October marks in commerce in the US. But defendants lacked standing; they have no commercial interest in the marks and no basis for thinking they’re harmed by the registration. Nor were they able to show that plaintiff knew its statement to the PTO was false; indeed, the license agreement with Red October Moscow supports the truth of plaintiff’s statement. Defendants’ argument for cancellation on grounds of use of the mark to violate antitrust law also failed, since there was no defined product market. The Russian premium candy market is not a defined market; even if it were, there was no evidence plaintiff dominated it.