Circuit City Stores, Inc. v. Carmax, Inc. Philip Artz Harold Artz

Citations: 165 F.3d 1047; 49 U.S.P.Q. 2d (BNA) 1507; 1999 U.S. App. LEXIS 797; 1999 WL 22649Docket: 97-4104

Court: Court of Appeals for the Sixth Circuit; January 22, 1999; Federal Appellate Court

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Circuit City Stores, Inc. filed a lawsuit against CarMax, Inc. and its founders, Philip and Harold Artz, alleging trademark infringement and unfair competition under the Lanham Act and Ohio law. The claims arose from the defendants' use of the "CarMax" service mark, which Circuit City had registered. The defendants contended that they were the senior users of the mark and counterclaimed for fraudulent registration of the trademark. The District Court ruled in favor of Circuit City, granting injunctive relief.

On appeal, the defendants challenged the District Court's rejection of their senior use defense, arguing that the findings regarding their prior use of the mark were clearly erroneous and that the Court improperly required proof of secondary meaning for common law ownership rights. They also contended that the legal standard for injunctive relief was incorrectly applied and that certain evidence relevant to their fraud counterclaim was admitted inappropriately. However, the appellate court upheld the District Court's conclusion, determining that the defendants had not demonstrated sufficient use of the "CarMax" mark to claim superior intellectual property rights over Circuit City. 

The background details indicated that the Artz family incorporated CarMax in 1990 after previously operating a new car dealership under the name "Artz Auto Group." The CarMax name was derived from the names of the Artzes' grandchildren, and the business aimed to expand into used car sales alongside a rental car operation.

Plaintiffs, including Circuit City Stores, Inc. and its affiliates, collectively known as "Circuit City," developed the "CarMax" service mark for used car superstores in 1991. Circuit City filed an "intent to use" application for federal registration of the CarMax mark on June 22, 1993, and opened its first store in Virginia in September 1993, securing federal registration by December 12, 1995. The defendants have utilized the CarMax mark since Circuit City's application date. On September 11, 1996, Circuit City filed a lawsuit against the defendants for trademark infringement and unfair competition under the Lanham Act, as well as state law claims. The defendants countered, asserting they were the senior users of the CarMax mark since June 1991 and alleging Circuit City's fraudulent registration. The District Court had jurisdiction under 28 U.S.C. 1338(a), (b) and conducted a bench trial in June 1997. During the trial, the defendants presented evidence of their CarMax mark usage, particularly through radio advertisements. Philip Artz testified about these advertisements, including a specific script promoting CarMax in Willoughby, which he prepared in the early 1990s, aligning with their marketing strategies at that time.

Philip Artz testified that during the relevant period, the Artz Auto Group aired approximately 300 radio advertisements monthly, with 15-25% attributed to CarMax. He lacked documentary evidence of advertising arrangements, stating he operated on a "trade basis," exchanging cars for airtime. Tom Embrescia, owner of WDOK FM and WRMR AM, confirmed a 1991 agreement with Artz to exchange $100,000 in advertising for two cars, replicating this deal in 1992 and 1993. He estimated the defendants received 20-40 commercials monthly on WDOK and 40-70 on WRMR, with about 25% for CarMax. Embrescia recalled discussions about the CarMax name during negotiations but produced no documentation, claiming records were discarded.

Gaye Ramstrom, national sales manager for WMMS, estimated CarMax ads aired 12-20 times monthly but acknowledged her estimates were guesses. She recalled hearing CarMax ads while driving in the early 1990s, yet also provided no documentary evidence. 

In contrast, the defendants presented documentary evidence of the CarMax mark used in transactions, including sales and financing documents. Four industry witnesses attested to the recognition of the Willoughby operation as "CarMax" within the automobile dealership community. Additionally, the Cleveland Automobile Dealer's Association listed the defendants as "CarMax, Inc." in its 1992 and 1993 membership directory and as "CarMax-Lake" in vehicle registration reports since December 1990.

Defendants repeatedly failed to use the CarMax name in their business operations, relying instead on the Budget name. There was no listing for CarMax in the phone book, and employees answered phones as "Budget" or "AutoCredit" until mid-1996. The defendants claimed their licensing agreement with Budget restricted the use of the CarMax name in phone communications. Business cards for their Willoughby operation also featured the Budget name, and they did not use CarMax in any advertisements, believing Budget was a stronger brand. Signage for the Willoughby operation displayed "Budget" until 1996. No consumer testimony linked the Willoughby operation to CarMax, although a consumer complaint referred to it as "Budget Car Sales." 

Additionally, the franchise agreement between AAG, Inc. (Artz Auto Group) and Budget was disclosed during pre-trial discovery, along with a letter from Philip Artz requesting the replacement of "AAG, Inc." with "CarMax." Artz later admitted that the letter was not an original document and was created in early 1997, revealing this only the day before trial. No evidence was provided to prove Budget received the original letter.

The defendants also raised a fraud counterclaim against Circuit City, alleging that it obtained federal registration of the CarMax mark fraudulently. They pointed to a verified statement made by Circuit City officer Mark O'Neil in 1993, asserting no other entity had superior rights to the CarMax mark.

Defendants claim O'Neil's statement regarding the CarMax mark was fraudulent, asserting that Circuit City knew of their CarMax operation. O'Neil testified he was aware of the defendants' business under the CarMax name at the time he made his statement, but Circuit City believed in good faith that the defendants' use would not cause confusion with its own. O'Neil considered the defendants’ CarMax operation a rental service, unlikely to confuse consumers with Circuit City's used car business. He learned of the defendants' use through a trademark search and consulted with counsel, who did not advise against proceeding with the registration application. The defendants contended they could not inquire into O'Neil’s communications with counsel due to Circuit City's attorney-client privilege invocation, leading them to move to strike O'Neil's testimony, though the court did not rule on this motion.

Testimony revealed that Circuit City did not currently operate CarMax stores in Ohio but intended to open locations there by 1999. However, no evidence of real estate purchases or hiring efforts was presented to support this claim, although Circuit City did engage a local broker for site identification and conducted a market analysis.

On August 20, 1997, Judge Dowd issued a Judgment Entry and Permanent Injunction against the defendants, dismissing their affirmative defense of common law ownership for failing to prove actual use of the CarMax mark and secondary meaning. The court also rejected the defendants’ fraud claim, affirming Circuit City's good faith belief in its superior rights to the mark. 

The District Court found no reversible error in its findings regarding the defendants' claim to the CarMax mark. Although the court incorrectly required the defendants to prove secondary meaning, this error was deemed harmless, as the evidence did not demonstrate sufficient actual use of the mark to establish a common law ownership claim. Furthermore, the court's dismissal of the CarMax radio advertisement evidence was not clearly erroneous, and the remaining evidence was inadequate to support the defendants' claim of senior rights to the mark.

No mistake was found in the District Court's conclusion that there was insufficient "independent and convincing evidence" regarding the frequency of defendants' radio ads for CarMax. Defendants argued that their witnesses testified to a monthly rate of forty-five to seventy-five CarMax ads, claiming these reached hundreds of thousands of listeners across eighteen counties in Northeast Ohio. However, the primary evidence came from the oral testimony of Philip Artz, a party to the lawsuit, whose credibility was questionable. Artz estimated over 300 spots per month, attributing forty-five to seventy-five to CarMax, but provided no documentary support for these claims. The presiding judge, Dowd, noted the lack of supporting documents and found Artz's testimony unconvincing, especially given his admission to having fabricated an earlier letter.

Although Artz's testimony was somewhat corroborated by other witnesses, like Tom Embrescia and Gaye Ramstrom, their accounts also lacked documentary evidence and relied on memory. Judge Dowd highlighted the speculative nature of their estimates, with Embrescia's claims deemed as mere guesswork and Ramstrom admitting to guessing the frequency of ads. The court emphasized its responsibility to assess witness credibility and concluded that the absence of documentary evidence undermined the defendants’ claims, rendering their case unpersuasive. The court was not obligated to accept witness testimony solely because it was uncontradicted.

The District Court determined that the defendants' entitlement to the CarMax mark depended on their ability to demonstrate that the mark had acquired "secondary meaning," which signifies public association of the mark with a single source. This requirement was based on the belief that CarMax, being derived from personal names, necessitated proof of secondary meaning for trademark protection. However, the excerpt argues against this view, citing precedents that a composite mark of personal names does not automatically qualify as a personal name in trademark law. The court highlighted that no evidence was presented to show that the public associates the CarMax mark with the names of the defendant’s children. Instead, the CarMax mark better fits the definition of a "suggestive" mark, which implies characteristics of the goods or services and requires consumer interpretation. To establish common law rights in a suggestive mark, only "actual use" is necessary, not secondary meaning. However, the evidence indicated that the defendants did not sufficiently use the CarMax mark to claim rights to it. The text emphasizes that rights to service marks and trade names are protected similarly to trademarks and that establishing a common law right requires deliberate and continuous use of the mark, rather than sporadic or casual usage.

The case Allard Enterprises, Inc. v. Advanced Programming Resources, 146 F.3d 350 (6th Cir. 1998), serves as a pivotal reference for the defendants, emphasizing that common law ownership of a service mark can be established without extensive use or widespread recognition. The court found that the defendants had prior ownership rights despite the plaintiff's registration, as they had employed the mark in various contexts, including faxes and oral solicitations, prior to the plaintiff's registration. While the defendants' use was not high-volume, it was deemed consistent and continuous, qualifying for protection due to sufficient public association with their services.

The court maintained that ownership rights arise from deliberate and continuous use rather than sporadic usage. Although based on limited documentary evidence, the court acknowledged good evidence of public recognition of the mark, which is generally relevant for proving actual use, even in cases not requiring secondary meaning. Public recognition supports the association of a mark with a service or product, thereby aiding trademark law in reducing confusion.

However, significant differences exist between Allard and the current case: the defendants in Allard had no evidence of material non-use of the mark, while the current defendants exhibited repeated failure to use the CarMax mark in essential commercial settings, such as advertising and customer information. Additionally, unlike in Allard, there is no evidence of public awareness linking the disputed mark to the defendants’ business.

The District Court's decision to allow Mark O'Neil's testimony regarding his prior consultations with counsel was upheld, as the defendants failed to demonstrate that attorney-client privilege precluded them from exploring O'Neil's communications during trial. The defendants did not request the production of letters between O'Neil and his counsel, which undermined their argument for preclusion based on privilege. 

Regarding injunctive relief, the District Court correctly awarded it to Circuit City after determining the defendants were liable for trademark infringement and unfair competition. The defendants contended that the District Court erred by presuming Circuit City's imminent entry into their Northeast Ohio market; however, the law does not require such a finding for injunctive relief in cases of infringement. Established legal precedent indicates that a finding of liability alone is sufficient to justify injunctive relief, as the likelihood of confusion or harm typically accompanies such violations. The Court adopted the eight-point test for infringement liability under the Lanham Act, clarifying that likelihood of entry is only one of several factors and is not decisive. Ultimately, the District Court's judgment and award of injunctive relief were affirmed.

Judge Nathaniel R. Jones concurs with the panel's opinion while elaborating on its implications regarding trademark law, specifically addressing the "Dawn Donut Rule" from *Dawn Donut v. Hart's Food Stores*. This rule posits that no likelihood of confusion exists—and thus no injunction can be issued—when parties operate in separate geographical markets and the senior trademark user has no plans to enter the infringer's market. Although this rule has been accepted in many circuits, the Sixth Circuit employs an eight-point test to evaluate the likelihood of confusion, where the potential for market entry is just one of several factors considered. This eight-point test was established in *Frisch's Restaurants v. Elby's Big Boy*, where the court ruled in favor of the plaintiff despite geographical separation, concluding that consumer confusion warranted protection under the Lanham Act. The case emphasized that even without direct competition in the same market, a senior trademark holder could suffer harm due to consumer misperceptions. Consequently, Jones argues that if a plaintiff can demonstrate a likelihood of confusion based on the other factors, it would be inconsistent to deny an injunction solely because the parties are in different geographical regions.

The Dawn Donut Rule, established in 1959, may need re-evaluation due to societal changes and technological advancements that have altered marketing dynamics. The increasing mobility of society and the impact of the Internet suggest that the rule could be outdated. The defendants in the case argue they hold senior rights to the CarMax mark as both a trade name and a service mark; however, the distinction they make is irrelevant for legal purposes. The court will apply the same legal standard to the defendants' various claims regarding the CarMax mark. Circuit City's assertion that the defendants must demonstrate secondary meaning for the CarMax trade name is incorrect, as legal precedents do not differentiate between trade names and trademarks in terms of requiring proof of secondary meaning for suggestive marks. This is supported by the precedent set in Champions Golf Club, Inc. v. The Champions Golf Club, Inc.