Registration is a diamond's best friend

Diamonds Direct USA, Inc. v. BFJ Holdings, Inc., --- F. Supp. 2d ---, 2012 WL 4574140 (E.D. Va.)

An old-school priority case!  This one might go nicely in a casebook update.  Plaintiff Diamonds Direct has used its mark in North Carolina since 1996.  In January 2012, BFJ, d/b/a Capri Jewelers, registered “Diamonds Direct” with the Virginia State Corporation Commission after it learned that Diamonds Direct intended to open a store in Capri's home market, Richmond, Virginia.  It did so to protect its position in the Richmond market because of its prior use of similar marks.  The parties brought cross claims for an injunction.  Capri won.

Diamonds Direct started in Charlotte, and expanded to Raleigh and Birmingham, Alabama in 2008.  By 2011, it was considering expansion to a new market, and ultimately decided to open in Richmond.  (There’s another company using “Diamonds Direct” in Raleigh, in business since 1993, and another in St. Petersburg, Florida, since 1984.  However, the parties agreed that Diamonds Direct had a common-law mark in North Carolina.)  Diamonds Direct applied for federal registration in 2001, but abandoned the effort.  It’s filed state applications in North Carolina, Alabama, and Texas, though the Texas one was rejected, in part because Diamonds Direct has not yet begun to sell products in Texas. 

Starting in 1999, Diamond Direct’s customer database showed a number of customers with Virginia addresses.  About 700 of DD’s 69,000 customers have given a Virginia address.  There was no evidence about specific purchases in or from Virginia, or evidence of Virginia consumer association.

DD has had its mark used in nationally/Virginia-circulated magazines.  Most of the relevant ads were prepared by jewelry manufacturers who supply their lines of jewelry to Diamonds Direct and, in some cases, to Capri—they were “tag” advertisements that direct readers to jewelry stores that carry its line.  This costs DD a “meager” portion of its multi-million-dollar ad budget.  In the tag ads, DD, was always associated with the Charlotte, Raleigh, and Birmingham markets. The tag ads didn’t describe the Diamonds Direct model for acquiring diamonds directly from suppliers in Israel, at the core of its local advertising efforts. The evidence didn’t show what if any sales to Virginia residents resulted from tag ads.  Several of those ads directed Virginia consumers to Capri and other retailers throughout Virginia. There was only one a direct, non-tag ad in the record prominently promoting DD, and it specifically identified DD locations in Birmingham, Charlotte, and Raleigh—not Virginia.

Meanwhile, back in Richmond, Capri had been selling jewelry since 1983.  Over the past ten years, it advertised variations of “direct” such as “Buy Direct, Save Direct,” “Annual Direct Diamond Sale,” and “Virginia's Largest Direct Diamond Event.” When Capri learned that DD was going to open a store in Richmond, Capri filed to register “Diamonds Direct” in Virginia.  Its claimed date of first use was Jan. 14, 2012.  Capri immediately began to use “Diamonds Direct” in ads throughout the Richmond area, resulting in at least one instance of confusion with a DD customer.

The court found that Capri was likely to show that it was the owner in Virginia, and thus entitled to a preliminary injunction.  The court first found that “Diamonds Direct” was at least suggestive—which seems quite wrong to me, and an example of how unargued issues (since neither party had much incentive to argue descriptiveness and indeed didn’t present evidence directly bearing on secondary meaning) are likely to go awry.  The court said, “Here, a consumer must imagine whether ‘Diamonds Direct’ refers to jewelry shipped directly to the purchaser, obtained directly from overseas suppliers, or obtained directly from the designer,” meaning that consumers had to think creatively to figure out how the words were associated.  Sigh.

Virginia registration creates a rebuttable presumption of ownership in Virginia, which may be rebutted by showing common law prior use rights.  This requires actual use.  United Drug Co. v. Theodore Rectanus Co., 248 U.S. 90 (1918).  At common law, the scope of rights is limited to the locality of use and to the area of probable expansion, though the common law is not entirely in play because, the court ruled, Capri had state statutory rights and thus the United Drug rules for when a remote secondary user might beat out a local user with priority don’t fully apply.  Advertising alone is insufficient to establish use; they must penetrate the consumer market and be shown to have an effect.

DD couldn’t defeat the presumption of ownership resulting from the state registration.  And it couldn’t show that its ads and few Virginia customers were enough to show use of its mark.  “Above all, there is simply no evidence that Diamonds Direct has sold any product in Virginia that bears its mark.”  Also, the ads weren’t shown to have any effect in Virginia.  Given the way the tag ads were configured, “even if a Virginia resident read the fine print, he would not perceive Diamonds Direct as a source of jewelry in his market…. Because most of the advertisements direct Virginians to Virginia-based retailers, indicating only that Diamonds Direct is in North Carolina and Alabama, it cannot be said that Diamonds Direct was ‘deliberately’ targeting the Virginia market with these ads.”

DD also argued that Richmond was within its natural zone of expansion.  This requires consideration of (1) previous business activity; (2) previous expansion or lack thereof; (3) dominance of contiguous areas; (4) presently-planned expansion; and (5) possible market penetration by means of products brought from other areas.  Looking at these factors, DD didn’t make its case.  Among other things, its closest established market was in Raleigh, not a region contiguous with Richmond even though the states share a border. 

The court went on to find that confusion was likely, and that an injunction was justified.  The equities favored Capri: DD suggested that Capri’s registration was made in bad faith to exclude DD, but Capri had been using variations on the “direct diamond” theme for at least 10 years.  Capri worried about likely confusion when it discovered DD’s plans, and made a “tactical, legal business decision to register the mark with the Virginia State Corporation Commission to protect its long established market share. Given its existing advertising scheme and the fact that Diamonds Direct had not yet established a presence in Richmond, registration of the mark could hardly constitute bad faith.”  An injunction would merely protect the status quo.