No mark, no false designation of origin is still the rule in NY

Innovation Ventures, LLC v. Ultimate One Distributing Corp., 2016 WL 1317524, No. 12-CV-5354 (E.D.N.Y. Mar. 31, 2016)

 

The Fourth Circuit’s Belmora decision did more than create protection for foreign marks in the US; it created a conflict with a number of other doctrines about who can sue for trademark infringement.  Here, the district court follows Second Circuit precedent—but this case clearly should come out the other way under Belmora, given the harm the plaintiff concededly suffered.

 

Innovation sued lots of businesses allegedly involved in making, selling, and distributing counterfeit 5-hour ENERGY.  Quality King is a New York-based wholesaler of health, beauty, and grocery products, and FDI is a Florida-based wholesaler of grocery products. Quality King bought approximately 878,688 bottles of what FDI sold as 5-hour ENERGY, for a total price of over $1,000,000. FDI didn’t dispute that all of these bottles were counterfeit. Quality King resold approximately 270,864 bottles to downstream retail customers. (Quality King 56.1 ¶ 13.) The 607,824 counterfeit bottles that Quality King did not resell were quarantined and transferred to the custody of Living Essentials; Quality King paid FDI $799,266.80 for the counterfeit bottles that were unsold and quarantined.

 

Quality King’s standard purchase order included representations by FDI that “any and all merchandise that is the subject of this purchase order (1) was obtained by Supplier [FDI] without fraud, misrepresentation or violation of any statute, regulation, or administrative court order, (2) can lawfully be distributed in the United States in its present form and packaging, and (3) is not the subject of any legal or contractual restriction on its resale by Supplier [FDI] to [Quality King].”  Also, FDI warranted and represented that FDI’s products were genuine and not counterfeit, and FDI agreed to indemnify Quality King for costs, expenses, losses, and attorneys’ fees for any lawsuits arising out of FDI’s breach of the Vendor Agreement.

 

The court found that Quality King was entitled to summary judment on its breach of contract/warranty claims in the amount of $799,266.80, with factual disputes precluding determination of any additional damages at this time. However, common law indemnification for the Lanham Act claims against Quality King was unavailable, because indemnification “is neither provided for under the Lanham Act’s extensive remedial provisions nor has federal common law been implied to allow such remedies.” Moreover, “a party who has itself participated to some degree in the wrongdoing cannot receive the benefit of the [common law indemnity] doctrine.” “Common law indemnification is warranted where a defendant’s role in causing the plaintiff’s injury is solely passive, and thus its liability is purely vicarious.” Here, Quality King resold hundreds of thousands of the counterfeit bottles, thus participating in some degree in the wrongdoing.

 

Quality King also sued under §43(a)(1)(A) and (B).  The court rejected the false desgination of origin claim because Quality King didn’t own or have a property interest in any relevant trademark rights. “[I]t is well settled that the standards for false designation of origin claims under Section 43(a) of the Lanham Act (15 U.S.C. § 1125) are the same as for trademark infringement claims under Section 32 (15 U.S.C. § 1114).”  Cf. Greenwich Taxi, Inc. v. Uber Tech., Inc., 123 F. Supp. 3d 327, 338 (D. Conn. 2015) (dismissing federal false designation of origin claim where plaintiffs failed to allege their “associat[ion] with any recognizable marks or associat[ion] with valid marks entitled to protection”); Zino Davidoff SA v. Selective Distrib. Int’l, Inc., No. 07-cv-10326, 2013 WL 1234816, at *7 (S.D.N.Y. Mar. 27, 2013) (“simply purchasing a product for resale does not give rise to an interest in that product’s trademark sufficient to state a claim for unfair competition”); Silverstar Enters., Inc. v. Aday, 537 F. Supp. 236, 241 (S.D.N.Y. 1982) (dismissing Lanham Act trademark infringement claim where plaintiff sought to enforce its own contractual rights rather than registrant’s trademark rights). Quality King argued that it didn’t need to own the mark at issue to win a false designation claim, but Second Circuit precedent disagreed with it.

 

False advertising: Lexmark requires “an injury to commercial interest in sales or business reputation proximately caused by the defendant’s misrepresentations.”  Quality King argued that two customers, Steerforth and CVS, ceased purchasing products from Quality King “[a]s a result of [Quality King’s] sale of alleged counterfeit 5-hour ENERGY,” satisfying its burden.  The FDI defendants disputed the losses; the record indicated a material factual dispute about causation.  Moreover, Quality King didn’t show proximate cause—that its injury was proximately caused by FDI’s misrepresentations, “rather than Quality King’s independent decision to resell counterfeit 5-hour ENERGY to CVS and Steerforth. As the Supreme Court cautioned in Lexmark, ‘a business misled by a supplier into purchasing an inferior product is, like consumers generally, not under the [Lanham] Act’s aegis.’”  [I think the Lexmark Court pretty clearly meant that a business that is the ultimate consumer of the product is, like consumers generally, not within the Lanham Act’s zone of interests.  A reseller is a different matter, as the non-competitor relationship between the parties in Lexmark itself indicates; also, I don’t understand how Quality King’s decision to resell to CVS was “independent” of FDI’s misrepresentations.]

 

Regardless, even assuming standing, Quality King couldn’t show that FDI made statements in “commercial advertising or promotion.” While Quality King argued that the packaging and labeling on the counterfeit products was “commercial advertising and promotion,” there was no evidence that the FDI defendants created or labeled those bottles, or that FDI engaged in a widespread, organized campaign to mislead the public regarding 5-hour ENERGY. On the record before the court, FDI’s participation was limited to purchasing counterfeit 5-hour ENERGY from two wholesalers and reselling that product to another wholesaler.

 

The state-law unfair competition claim failed because the standards were the same as for the Lanham Act.