Wednesday, May 02, 2012

The secret non-sharer

Coryn Group II, LLC v. O.C. Seacrets, Inc., 2012 WL 1282382 (D. Md.)
With further attention to the international aspects (not argued here, perhaps because the Fourth Circuit dealt with the issue in the Monte Carlo Casino case), this would make a great exam question.
Coryn II appealed the TTAB’s cancellation of its registration for SECRETS for resort hotel services.  O.C. counterclaimed and sued defendants (related entities) for state and federal trademark infringement of its SEACRETS mark, used for a Jamaican-themed entertainment complex in Ocean City, Maryland.  O.C.’s Seacrets was first used for two bars and a restaurant in 1988; it had a beachfront with palm trees and a deck.  Through 1997, O.C. bought surrounding property and added more bars, kitchens, dining areas, and a stage to the complex.  It began to turn a profit in 1990, and reported over $155 million in revenues from Jan. 1999-Dec. 2008.  In 2001, O.C. opened a nightclub on the property, and by 2004 it had a pier for private boats.
Its trademark registration for SEACRETS for restaurant and bar services issued in 1997; its application for motel services was suspended pending the outcome of the present litigation.  In 1998, O.C. bought a ten-unit motel near its complex, and the next year put up a “Seacrets Motel” sign.  From 1999-2004, O.C. allowed band members to stay at the motel in exchange for a reduced performance fee, saving $1 million, though it reported no revenue from the motel before 2005; it also bought several nearby condos and used them as motel rooms for performers.  In 2004, O.C. opened the about 18 of the 34 hotel rooms to the public, though hotel revenue accounts for no more than 2% of O.C.’s revenue.
In late 2003, two customers asked Moore, O.C.’s owner, if O.C. “was affiliated with or knew of a Secrets that was being built or was in Mexico,” and he continued to get questions 2-3 times per year, though he wasn’t aware of any customers who came to O.C. thinking they were going to Coryn’s Mexico or Jamaica operations.  Most O.C. customers come from within a 4-hour radius of Ocean City.  O.C. owns and advertises on local print, TV and radio, along with an internet radio station that broadcasts from the complex, airplane banners flown across Ocean City beaches, and some cable networks.  The Amazing Race and America's Next Top Model have filmed segments at Seacrets.  Some ads tout a “party ... at Seacrets all week long.”
By 2011, O.C. had published a franchise disclosure document and had contacted “several prospective franchisees.”  The document stated that O.C. owned SEACRETS for food, beverage, and hotel services, and that hotel services would be part of the offering.  O.C. has, however, never lost a sale to Coryn and was unable to quantify specific financial harms caused by Coryn’s use of Secrets, to which we now turn.
AMResorts, LLC manages the sales, marketing and administration of several all-inclusive, five-star resort hotels in Mexico and the Caribbean, which operate under different brands, including “Secrets,” “Dreams,” “Zoetry,” and “Sunscape,” representing about 10,000 rooms.  They target travelers from the United States, Canada, and Europe with an annual household income of over $100,000.  Coryn, which licenses the brands, reaches most of its consumers through travel agents, and also uses direct mailing to consumers of high-end products and airport advertisements, as well as its website. It advertises Secrets Resort in magazines sold in Ocean City, and in September 2011, a travel agent entered O.C. and attempted to distribute brochures advertising Apple Vacations and Secrets Resorts on the property.  
Coryn filed an ITU for SECRETS for resort hotel services in 2000 and registered, and its attorney then requested a report on similar trade names.  (One employee testified that he’d checked the Hotel Travel Index Guide, which compiles all hotel names, and searched the Yahoo! internet search engine for hotels called SECRETS, and found none, apparently prior to this.)  The attorney reported that “there were a number of registrations for SECRETS with various spellings, ... [but] none of the citations were for your services.... [W]e believe that no registered SECRET mark would present an obstacle to your use and registration.”  This letter discussed some of the similar marks, but not O.C.’s Seacrets.  He provided a list of “resort hotels” with similar marks, and O.C. was fourth on the list, but Coryn relied on the attorney’s advice that the mark was available.  The attorney chose resort hotel services rather than restaurant services based on Coryn’s description of the intended use.  Under the “unlimited luxury” proposition of the brands, restaurant and bar expenses are included in the resort price, though the restaurants and bars at Secrets resorts have names other than “Secrets.”
The mark was published for opposition in 2001, and Coryn began to use Secrets in advertising, opening the first Secrets Resort in January 2002.  The unopposed mark was registered in 2003.
Secrets Resorts have been recognized in various publications/guides for high quality. 
In 2004, O.C. petitioned the TTAB for cancellation of the Secrets mark, and the TTAB ordered its cancellation in 2008 because O.C. was the senior user and had shown likely confusion.  By that point, Coryn was operating one Secrets resort but had begun construction on two others, and by the end of 2011, seven were open to the public, including two in Jamaica, and another is planned for 2012. 
Several other hotels use SEACREST, SECRET, or SECRETS, and O.C. has not challenged their uses. Though they advertise online, other forms of advertisement have not reached Ocean City, and they use SECRET or SECRETS with other words, such as SECRET HARBOUR or SECRETS INN.
After Coryn appealed and O.C. counterclaimed, the court held a jury trial.  Along with the evidence above, AMResort’s president conceded that: (1) SEACRETS and SECRETS are used for “vacation destinations,” (2) for “a fun ... island experience” (3) that includes “restaurant and bar services,” and involves (4) sand, sun, ocean, palm trees, “music and dancing and events,” while O.C.’s prinicpal acknowledged that SECRETS offers more luxurious options than SEACRETS.  “There was also evidence that some restaurants, such as Planet Hollywood, expand into the hotel industry.”  O.C. presented a survey from a market researcher.  In the test cell, people saw photos of a luxury beach resorts called Secrets alongside photos of several other luxury resorts with different names, 29.8% shown a photo of Seacrets Hotel thought that it was affiliated or connected with Secrets, and 67.6% said they did so because of the similarity of the name.  The equal-sized control group saw the same pictures, with Sunscape in place of Secrets.  Other survey participants heard a Seacrets radio ad after seeing the resort images, and 33.9% of those thought Seacrets was affiliated with Secrets, 89.5% of those because of the names.  In the control group, 6.9% and 5.7% associated Sunscape with Seacrets, respectively.  Coryn introduced a competing survey that found little to no consumer association between the two, and critiqued O.C.’s expert’s choice of participants, stimuli, questions asked, and the control group.
The jury returned a verdict for O.C., awarding $1 in compensatory damages for infringement.  Finding the infringement willful, the jury awarded $265,035 in punitive damages.  The court then affirmed the TTAB cancellation.
Coryn moved for judgment as a matter of law or a new trial.  The court found that a reasonable jury could have concluded that there was likely confusion, since there was evidence that could be found to favor O.C. on most of the factors.  On intent, since this was a reverse confusion case, the relevant consideration was whether the junior user adopted its mark knowing of or recklessly disregarding the senior user’s mark regardless of intent to trade on the senior user’s goodwill and reputation.  “Willfulness in a reverse confusion case can be as little as knowing or reckless disregard of the senior user's rights when the junior user first uses the mark,” though continued use of a mark after receiving notice is generally irrelevant unless it was done without a good faith belief that the use was not infringing.  The evidence here could have supported an inference that, when it opened the first Secrets, Coryn knew of or recklessly disregarded O.C.’s rights.  (It is probably tough to convey to a jury how crowded the field of good marks for hotels already is; not every suggestive mark is good for a resort, and it’s easy to say in hindsight that this out of the entire list of similar marks was the one Coryn should have worried about.) 
The fact that Coryn’s ITU application didn’t mention restaurant and bar services, which were the subject of O.C.’s registration, wouldn’t support a finding of intent to confuse or knowing disregard, because it was undisputed that Coryn wasn’t aware of the Seacrets mark until after it filed the ITU.  But Coryn’s failure to perform a TM search before filing permitted an inference of the requisite intent, though reliance on counsel’s advice cut the other way.
On actual confusion, evidence of a small number of instances of actual confusion can be dismissed as de minimis when the field of potential customers is large.  But given the survey along with the evidence that 2-3 customers per year asked about affiliation, the jury could have concluded that this factor favored O.C.
On consumer sophistication, though the jury heard evidence that Coryn’s clientele was more limited than the general public because of the expense of a resort stay, it could have concluded that O.C.’s customers—the ones at risk in this reverse confusion case—were the general public.  And in any event, sophistication can be outweighed by other factors.
Thus, there was legally sufficient evidence for the jury to decide that most, if not all, of the factors favored O.C., and judgment as a matter of law or a new trial were denied.
Coryn next contends that no compensatory damages award was justified.  The Fourth Circuit uses six nonexclusive factors for plaintiff’s damages/defendant’s profits awards: “(1) whether the defendant had the intent to confuse or deceive, (2) whether sales have been diverted, (3) the adequacy of other remedies, (4) any unreasonable delay by the plaintiff in asserting his rights, (5) the public interest in making the misconduct unprofitable, and (6) whether it is a case of palming off.”
On intent, the jury could have interpreted the evidence as showing that Coryn’s continued use after notice was in bad faith, or that Coryn thought that O.C.’s mark was too weak to conflict, and it could likewise have concluded that Coryn recklessly adopted the mark because it failed to search first, “justifying some damages.”  There was no evidence of diverted sales, but the jury could have concluded that O.C. lost some “market presence” because of Secrets, weighing slightly in favor of an award.  There was no evidence about whether other remedies, such as an injunction, would adequately protect O.C., so this factor weighed against a damages award.  As to delay, the jury could have accepted O.C.’s testimony that it learned about Secrets in late 2003 and first asserted its rights in January 2004, not an unreasonable delay.  The public interest weighs a plaintiff’s right to compensation against a defendant’s right not to be assessed a penalty, along with the public interest in encouraging innovation and good faith investment in marks that become more successful than a senior user’s mark.  “The jury could have concluded that the public interest would be served by awarding nominal damages for Coryn's failure to check for similar marks and choose a mark not already in use for similar services.”  This wasn’t a palming off case, so that didn’t weigh in favor of damages, but balancing the factors a reasonable jury could have concluded that a nominal damages award was appropriate.
Coryn then challenged the punitive damages award both in substance and amount.  “In Maryland, punitive damages are appropriate when the plaintiff shows, by clear and convincing evidence that the defendant acted ‘maliciously, wantonly or fraudulently.’”   The issue here was wantonness—extreme recklessness and utter disregard for others’ rights.  The court held that the jury reasonably could have concluded that Coryn recklessly disregarded O.C.’s rights by failing to check federally registered marks before filing, which could justify an award of some punitive damages.  The court did not explain the line between recklessness and extreme recklessness—performing the search only after filing the ITU and relying on advice of counsel certainly doesn’t seem to be extreme to me—nor did it explain what evidence met the clear and convincing standard.
Turning to the due process challenge, punitive damages must be reasonable, considering (1) the degree of reprehensibility of the defendant's conduct; (2) the difference between the actual or potential harm suffered (compensatory damages) and the punitive award; and (3) the difference between the punitive award and civil penalties in comparable cases.  The first factor is the most important, though that one factor favors the plaintiff doesn’t justify a substantial punitive award, and even if most or all factors favor the defendant, some award may be justified.  The first factor considers physical harm; indifference to health or safety; the plaintiff’s financial vulnerability; any pattern of conduct; and intentional malice.  None of these were present here (the only arguable one was financial vulnerability, but O.C. was enough of a financial success during the relevant period that this didn’t favor it).
The disparity between the harm actually or potentially caused and the punitive award also favored Coryn.  Ordinarily, a single-digit ratio is appropriate, but that isn’t necessarily true when a jury awards nominal damges  or a small amount of compensatory damages.  Potential harm—risks that failed to materialize—can justify a higher ratio, but that’s not the same thing as expected future harm from lost profits; the jury was instructed to consider the value of the mark in its compensatory award, so prospective lost profits were actual damages and were already part of the compensatory award.  Thus, the over 265,000:1 ratio, without any aggravating factors from the first prong of the test, weighed heavily against the amount of the award.  The Fourth Circuit has mostly approved punitive awards in nominal damages cases involving ratios of 125,000:1 or less.  The “similar civil penalties” factor was neutral.
Thus, due process did not allow such a high award.  The court awarded a new trial unless Coryn accepted remittitur to $50,000, which “far exceeds the general 9:1 ratio limit and is 40% of the Fourth Circuit's largest approved ratio. Exceeding $50,000 is inappropriate here because there were no aggravating factors justifying a maximum award.”
O.C. then contended that it was entitled to disgorgement of Coryn’s profits.  The Lanham Act provides that if “the court shall find that the amount of recovery based on profits is either inadequate or excessive, the court may in its discretion enter judgment for such sum as the court shall find to be just,” but the award must “constitute compensation and not a penalty.” 15 U.S.C. § 1117(a).  Considered in the light most favorable to Coryn (since O.C. was the moving party), the jury’s finding of willful infringement didn’t mandate enhancing the compensatory award.  There was no evidence that Coryn intended to trade on O.C.'s goodwill, or that it acted in bad faith or fraudulently.  Moreover, an injunction would adequately protect O.C.’s interests, and the public interest didn’t support the imposition of a penalty, which disgorgement would be given that O.C. didn’t show that it lost any sales or significant market presence as a result of Secrets.  “Though the public interest would be served by awarding some damages for Coryn's failure to check for similar marks and choose a mark not already in use for similar services, increasing the damages award might hinder innovation.”  Thus, the nominal compensatory award was appropriate.
More significantly for Coryn, the court did grant a permanent nationwide injunction, starting in 2013.  O.C. presented “some evidence that, by overwhelming the market with the SECRETS brand, Coryn may have usurped some control over O.C.'s goodwill.”  This constituted enough irreparable injury to weigh slightly toward granting an injunction.  Money damages are often inadequate in cases of damage to reputation and goodwill; lost control over reputation is not easily quantifiable.  Plus, Coryn continued to develop its mark and advertise even after the TTAB ruling, making future infringement likely without an injunction.  The balance of hardships justified giving Coryn time to discontinue use to avoid unnecessary impairment of its business, in which it had made a significant nonfraudulent investment.  Coryn shouldn’t be required to terminate any of its contracts with resort owners, tour operators/travel agents, or publishers.  Cancellation “would be costly, anti-competitive, and in some cases impossible because the ads appear with many other sellers, and some advertisers might be unwilling to recall or reprint the materials.
As a result, the injunction barred Coryn from entering or renewing any agreements to use the Secrets mark in the US.  (The court said no limit on geographic scope was appropriate because O.C.’s registration gave it nationwide rights—ignoring the Dawn Donut issue.)  Moreover, Coryn could’t use or cause the mark to be used as a mark in commerce in the US after December 31, 2012, “by itself or with the words resort, hotel, spa, restaurant, or bar, in connection with resorts, hotels, spas, restaurants, or bars, or other services or goods within the hospitality field in a manner that is likely to cause confusion or mistake with respect to the SEACRETS mark.”  (Query how much leeway this allows Coryn to use “formerly Secrets.”)  The long transition period wouldn’t cause O.C. unnecessary harm given that it was able to grow for the past ten years notwithstanding Coryn’s use.  Coryn was not required to recall or destroy infringing material, which could be used during the transition and also possibly internationally.
After the period ends, Coryn will also not be allowed to register, host, or maintain a domain name in the US that included “Secrets,” by itself or with the words …, etc.  O.C. asked for an injunction barring the use of Secrets anywhere in the world, if consumers in the United States will be able to access the website.  The court, however, found “no authority for enjoining third parties, such as hotel owners, from registering or hosting a domain name outside the United States based on an infringement claim (rather than an anticybersquatting claim under 15 U.S.C. § 1125(d)). Accordingly, the Court will limit the injunction to the United States.”
O.C.’s motion for attorneys’ fees was also denied.  This was not an exceptional case.  Despite the jury’s finding of willful infringement, Coryn originally selected its mark without any intent to trade on O.C.’s goodwill, and it had multiple bases for challenging the scope and enforceability of O.C.’s mark.

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