Fun-Damental Too, Ltd. v. Gemmy Industries Corp. Kay-Bee Toy & Hobby Shops, Incorporated

Citations: 111 F.3d 993; 42 U.S.P.Q. 2d (BNA) 1348; 1997 U.S. App. LEXIS 6288Docket: 490

Court: Court of Appeals for the Second Circuit; April 3, 1997; Federal Appellate Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

An appeal in a trade dress infringement case involves Plaintiff Fun-Damental Too, Ltd. suing Defendants Gemmy Industries Corp. and Kay-Bee Toy Hobby Shops, Inc. under the Lanham Act and New York law, claiming that Gemmy copied the packaging of its novelty item, the "Toilet Bank," for a similar product, the "Currency Can." Key legal issues include the evaluation of inherent distinctiveness of packaging and the implications of the junior user mimicking the senior user's trade dress, posing challenges in determining likelihood of confusion. The United States District Court for the Southern District of New York, under Judge Mukasey, granted a preliminary injunction against Kay-Bee and Gemmy, prohibiting them from manufacturing or distributing the Currency Can in its current or similar packaging. Fun-Damental, a Pennsylvania limited partnership, specializes in novelty toys that often feature sound mechanisms, marketed primarily through large retailers and small shops. The Toilet Bank, developed in 1992 and completed in 1994, mimics a toilet and produces a flushing sound, having sold over 860,000 units at prices ranging from $15 to $20 each.

In May 1995, defendant Kay-Bee, a prominent toy retailer, showed interest in purchasing the Toilet Bank but opted against it due to its high cost compared to other impulse items. In September 1995, Fun-Damental's sales manager observed a similar toilet-shaped bank in Kay-Bee's office but was denied the opportunity to examine it. In October, Fun-Damental requested a sample of this product for potential infringement, but no sample was provided. It was later revealed that Gemmy, a novelty manufacturer, had approached Kay-Bee and offered toilet-shaped coin banks similar to Fun-Damental's product. Kay-Bee purchased Gemmy's Currency Cans at a lower wholesale price, allowing them to retail the product at $9.99. 

Gemmy's vice-president had instructed their Chinese manufacturer to design a product similar to Fun-Damental's Toilet Bank after learning about it in May 1995, using dimensions nearly identical to effectively compete. 

Fun-Damental's Toilet Bank is packaged in a royal blue triangular box, with the product visible and accessible for consumers to test the flushing sound. The design includes specific branding elements, such as the name "TOILET BANK" in yellow letters, instructional images, and promotional phrases highlighting the flushing feature.

Gemmy's Currency Can is similarly packaged in a box that mirrors the configuration and dimensions of Fun-Damental's packaging, utilizing two color schemes—one with a yellow background and another with a deeper blue—both featuring a starburst with promotional text about the flushing sound and similar instructional arrows pointing to the handle. Both products include a gray coin-like sticker on a plastic cover over the toilet bowl opening, emphasizing the competitive similarities in their designs.

Fun-Damental filed a complaint against Gemmy and Kay-Bee on February 13, 1996, alleging trade dress infringement under § 43(a) of the Lanham Act, injury to business reputation under New York law, and unfair competition. The plaintiff sought a preliminary injunction and impoundment of goods. The district court granted the preliminary injunction on March 18, 1996, requiring Kay-Bee to remove Currency Can units from retail shelves and mandating Gemmy to acquire and store all units of the Currency Can in the allegedly infringing packaging. The defendants appealed the injunction.

Defendants argued that the district court erred in determining the packaging of Toilet Bank was inherently distinctive, that Fun-Damental's trade dress was nonfunctional and protected under the Lanham Act, and that reliance on evidence of product copying to establish likely confusion was inappropriate. They also contested the court's extraterritorial jurisdiction regarding Gemmy's overseas purchases. 

To obtain a preliminary injunction, a plaintiff must demonstrate irreparable harm and either a likelihood of success on the merits or sufficiently serious questions regarding the claim. The issuance of the injunction is reviewed for abuse of discretion, which occurs if the court applies an incorrect legal standard, relies on clearly erroneous facts, or issues an injunction with substantive errors. The defendants acknowledged that irreparable harm would follow if the plaintiff showed a likelihood of success on its Lanham Act claim, noting that a high probability of confusion presumes irreparable harm. The focus then shifts to assessing Fun-Damental's likelihood of success in its trade dress infringement claim.

The Lanham Act aims to protect trademarks, benefiting consumers by allowing them to distinguish between products and encouraging producers to maintain quality by protecting their goodwill from being misappropriated by competitors.

Section 43(a) of the Lanham Act grants a private cause of action against individuals who use any word, term, or symbol in commerce that is likely to cause confusion regarding the origin or approval of goods. This protection extends to unregistered trademarks, including trade dress, which refers to the overall design and appearance of a product. To prove trade dress infringement, a plaintiff must show that their trade dress is either inherently distinctive or has acquired distinctiveness through secondary meaning, and that it is nonfunctional. Furthermore, the plaintiff must demonstrate a likelihood of confusion between their trade dress and that of the defendant.

In the current case, the district court ruled that Fun-Damental's trade dress is inherently distinctive and that there is a significant likelihood of confusion with the defendant's product. It also concluded that, while certain features of the trade dress may have functional aspects, the overall trade dress is nonfunctional. The assessment of distinctiveness follows a spectrum: trade dress can be classified as generic, descriptive, suggestive, or arbitrary/fanciful. Only suggestive and arbitrary/fanciful trade dress is inherently distinctive, while descriptive trade dress may gain protection if it acquires secondary meaning. The Supreme Court has noted that inherently distinctive trade dress serves to identify a product's source, even if it is not widely recognized by consumers. Generally, trade dress is often arbitrary or fanciful, thus meeting the distinctiveness requirement for protection under § 43(a).

Trade dress protection is limited, particularly when a product's shape adheres to established industry norms, rendering it generic and unprotected. For instance, black, rectangular compacts in cosmetics or green cans for lime soda are considered generic under trade dress law. To qualify for protection under the Lanham Act, a trade dress must be distinctive enough to link to a single source. In this context, the defendants argue for a stricter distinctiveness standard than the trial court applied, suggesting an alternative test from Seabrook Foods that examines whether a package design is common or unique within its industry. However, the court opts to retain the Abercrombie distinctiveness spectrum, noting its applicability to packaging and its consistency with the Lanham Act’s goal of identifying product sources. Unlike product configuration cases, where distinguishing features are harder to classify, packaging offers more creative possibilities. The Abercrombie test aligns with consumer behavior, as they often rely more on packaging than on the product design itself to identify sources. Thus, while product design may require a more stringent standard, Abercrombie is suitable for evaluating trade dress in packaging to prevent overreaching protection that could encroach on patent rights.

Defendants argue that the Toilet Bank's trade dress lacks inherent distinctiveness, claiming that the elements are generic. The classification of distinctiveness follows the Abercrombie spectrum and is a factual question assessed under the clearly erroneous standard. Evaluating the trade dress requires examining its overall impression. While many features of the Toilet Bank's design, such as its triangular box shape and common labeling, are prevalent in the toy industry, the combination of elements can still yield inherent distinctiveness, a finding supported by the district court and not deemed clearly erroneous.

Gemmy contends that the trial court erroneously considered the similarities between its product and that of Fun-Damental when determining distinctiveness. However, it was deemed appropriate to examine the product and its packaging together, as trade dress encompasses the overall presentation, including color, design, and container. This approach is essential for analyzing open-style packaging, as it takes into account consumer perception.

Gemmy and Kay-Bee also assert a functionality defense, arguing that specific features of Fun-Damental's packaging are functional and thus not protected under the Lanham Act. They maintain that treating a collection of functional features as a protected trade dress is erroneous. A critical aspect of trade dress cases is functionality; if a trade dress is functional, it cannot receive protection under the Lanham Act to prevent unfair competition. Protecting functional features could grant a monopoly to one producer, disadvantaging competitors.

Whether a trade dress is functional is determined as a factual question, subject to a "clearly erroneous" standard on appeal. Functionality assessment involves evaluating the usefulness of similar features in competing products, the similarity of non-useful ornamental aspects, and the availability of alternative designs. A feature may serve a useful purpose while also being source-identifying, but defendants must demonstrate that the features are critical for effective competition in the market. 

In the case of the Toilet Bank's open-style packaging, while it serves multiple useful functions—such as product display, shipping protection, and consumer accessibility—the defendants did not prove that this design is essential for competition in the novelty toy market. The district court identified at least two alternative packaging designs that met consumer needs and allowed for cost-effective shipping. Consequently, Gemmy failed to establish that it would suffer a significant competitive disadvantage without using the contested packaging, leading to the determination that the packaging features are nonfunctional.

Regarding the likelihood of confusion between Fun-Damental's Toilet Bank and Gemmy's Currency Can, the court used the eight Polaroid factors to assess confusion risk. These factors include the strength of the trade dress, similarity between the products, market proximity, potential bridging by the prior owner, evidence of actual confusion, the defendant's bad faith, product quality, and consumer sophistication. Each factor was reviewed under a "clearly erroneous" standard, but the overall likelihood of confusion assessment is a legal question reviewed de novo. The court found no errors in its findings related to these factors.

Strength of the trade dress is assessed based on its classification on the Abercrombie spectrum and its ability to identify goods from a particular source. The district court correctly determined that the Toilet Bank's trade dress is strong due to the overall packaging effect. The district court also found significant similarity between the plaintiff's and Gemmy's trade dress, noting identical box shapes and construction, as well as comparable packaging details such as ties, clear plastic bubbles, and color schemes. Although there are minor differences in tile patterns and colors, the similarities in overall appearance support the conclusion of substantial similarity. 

Defendants cited Bristol-Myers Squibb, arguing that prominent trade names prevent confusion, but the names in this case are less recognized, leading to the conclusion that consumers are more likely to remember the packaging than the names. The products are nearly identical and compete in the same market, reinforcing the likelihood of confusion. Evidence of actual confusion was presented through testimony from Fun-Damental’s national sales manager, who noted customer complaints about perceived pricing discrepancies. Defendants contested this evidence as inadmissible hearsay, claiming it should not support a finding of actual confusion.

Hearsay issues were deemed not applicable, as the testimony was used to demonstrate the declarant's confusion rather than to prove the truth of Fun-Damental's pricing. Federal Rule of Evidence 803(3) permits such statements to reveal the declarant's state of mind, supporting the district court's consideration of the evidence. The trial court found the sales manager's testimony credible, indicating that while the evidence of actual confusion was not overwhelming, it was adequate for a preliminary injunction.

The district court determined that Gemmy acted in bad faith by intentionally copying Fun-Damental's Toilet Bank and its packaging. Defendants argued this conclusion improperly focused solely on the product rather than the trade dress. Nonetheless, the combination of identical product and copied packaging suggested an intent to confuse consumers. Evidence indicated that Gemmy's packaging pattern was identical to Fun-Damental's, deviating from Gemmy’s previous designs. Additionally, a misleading pricing strategy created the illusion of a discount on Gemmy's product, further supporting the finding of bad faith.

Regarding product quality, the court found that Gemmy's Currency Can was inferior to Fun-Damental's Toilet Bank, noting specific defects such as lower quality seams and a less authentic flushing sound, which could harm Fun-Damental's reputation. Lastly, the court assessed consumer sophistication, concluding that the target buyers of novelty items like toilet-shaped coin banks typically lack the ability to distinguish between Gemmy's and Fun-Damental's products, favoring the latter in the analysis.

De novo review of the likelihood of confusion indicates that the court assesses the overall impression created by the trade dress of the "Currency Can" and "Toilet Bank" rather than a side-by-side comparison. It affirms the district court's conclusion that the two trade dresses create a similar general impression likely to confuse consumers. Defendants argue that the district court overemphasized the "bad faith" factor; however, the absence of good faith alone does not establish a Lanham Act violation unless there’s no confusing similarity. Intentional copying of trade dress does not automatically imply an intent to deceive consumers, as defendants may have legitimate reasons for their actions. In the absence of additional evidence of intent to confuse, bad faith should not be presumed solely from copying. Nonetheless, in this case, there is supporting evidence of bad faith beyond mere copying, such as the use of a "false markdown" to mislead consumers about the product's source. This evidence supports the likelihood of confusion finding. Fun-Damental successfully raised serious questions regarding its likelihood of confusion claim, particularly considering the novelty nature of the product, which can lead consumers to overlook its origin and be influenced by price.

The trade dress of the two coin banks is strikingly similar, leading to a comparable impression among consumers, despite the products not being sold in close proximity. The defendants' subtle distinctions fail to clarify to consumers that the products come from different sources, particularly in the narrow market for toilet-shaped banks. The price difference, with the Currency Can being marked down, contributes to consumer confusion, as buyers may assume it is simply a temporary price reduction rather than a different product. Testimonies indicate that some retailers experienced confusion. The district court concluded, considering various Polaroid factors including the defendants' bad faith, that a likelihood of confusion exists, justifying an injunction that does not excessively burden Gemmy, the junior market entrant. Gemmy may alter its packaging for the Currency Can to mitigate confusion without completely eliminating similarities to Fun-Damental's design.

On appeal, Gemmy and Kay-Bee raised concerns about the extraterritorial nature of the injunction related to Currency Can units in China, arguing it improperly extends the Lanham Act. Generally, issues not presented in the lower court are not addressed on appeal, though exceptions apply for subject matter jurisdiction or evident injustices. While federal question jurisdiction exists for the trade dress violation under federal trademark law, the defendants contest the extraterritorial reach of the Lanham Act. Federal courts have previously applied the Act to overseas activities when necessary to protect U.S. commerce, such as in cases where sales abroad harm American trademark holders.

The Lanham Act's extraterritorial application is limited, as established in Vanity Fair Mills v. T. Eaton Co. and further clarified by the Bulova test, which requires courts to assess: 1) whether the defendant's conduct substantially affects U.S. commerce, 2) if the defendant is a U.S. citizen, and 3) if there's no conflict with foreign trademark rights. In this case, the defendants argued that the district court failed to apply these Bulova factors before issuing an extraterritorial injunction against Gemmy. However, the court found that the injunction, which requires Gemmy to acquire products warehoused in China for resale in the U.S., sufficiently impacts U.S. commerce. The injunction only regulated specific conduct of Gemmy, a U.S. corporation, without preventing production or alternative sales methods by either Gemmy or the Chinese factory. Furthermore, no conflicts with foreign trademark rights were demonstrated. Ultimately, the district court's issuance of the preliminary injunction was affirmed, establishing that Fun-Damental is likely to succeed on its claim regarding trade dress distinctiveness and the likelihood of consumer confusion between the Toilet Bank and the Currency Can.