Court: Court of Appeals for the Ninth Circuit; July 11, 2017; Federal Appellate Court
The July 11, 2017 opinion at 862 F.3d 1131 has been amended to clarify that the Tea Rose-Rectanus doctrine serves as an affirmative defense distinct from the infringement claim. Omnia asserts this doctrine protects its use of Stone Creek's mark, arguing for affirmation of the district court's judgment of no liability. Judges McKeown and Callahan deny the petition for rehearing en banc, with no active judge requesting a vote on the matter, resulting in a denial of any further petitions for rehearing.
In the underlying case, Omnia Italian Design, Inc. is accused of trademark infringement for using the STONE CREEK mark owned by Stone Creek, Inc., its former business partner. Omnia acknowledges it copied and marketed goods under Stone Creek's mark, raising questions about consumer confusion due to the identical branding on similar products. The court finds a strong likelihood of confusion given the overlapping marketing channels and the fanciful nature of the mark, reversing the district court's ruling. Omnia's claim of good faith under the Tea Rose-Rectanus doctrine is rejected because its prior knowledge of Stone Creek's mark undermines this defense. Additionally, the court asserts that a 1999 amendment to trademark statutes does not alter the requirement for plaintiffs to prove willfulness to recover the defendant’s profits, necessitating a remand to evaluate whether Stone Creek can meet this standard.
Background details include that Stone Creek has utilized the STONE CREEK mark since around 1990, obtaining state trademark protection in 1992 and federal registration in 2012. The relationship between Stone Creek and Omnia began positively in 2003 but soured when Stone Creek discovered Omnia's unauthorized use of its mark in 2013, which began in 2008 as part of Omnia's efforts to attract significant retail clients like Bon-Ton Stores, Inc. Bon-Ton desired a brand that appeared "American," leading to Omnia's use of the STONE CREEK branding without permission.
Bon-Ton selected the STONE CREEK mark offered by Omnia, attracted by pre-prepared marketing materials and logos. Omnia replicated the STONE CREEK logo from old documents to create a digital version and used it extensively on various items, including warranty cards for leather furniture sold to Bon-Ton from 2008 to 2013. During this time, Stone Creek obtained federal trademark registration but remained unaware of Omnia's unauthorized use. The STONE CREEK-branded furniture was distributed to Bon-Ton galleries in several Midwestern states, with sales occurring within 200 miles of these locations. In 2013, Stone Creek began receiving inquiries about these products and discovered Omnia's use of its mark. Omnia’s Vice President admitted via email to selling STONE CREEK-branded furniture, acknowledging the confusion it caused. Stone Creek subsequently filed a lawsuit in the District of Arizona for trademark infringement and unfair competition. The district court ruled in favor of Omnia, finding no likelihood of confusion, and determined that proof of willful infringement was necessary for disgorgement of profits, which was not assessed as Omnia was not found to infringe. Stone Creek's attorneys faced sanctions for filings related to damages. The court's failure to apply the correct standard for assessing likelihood of confusion constituted legal error, leading to clearly erroneous factual findings. The legal standard for trademark infringement under the Lanham Act hinges on the potential for consumer confusion regarding the source of goods or services bearing the marks.
The district court appropriately referenced the Sleekcraft factors, which are pivotal in assessing the likelihood of confusion in trademark disputes. These factors, established in AMF Inc. v. Sleekcraft Boats, emphasize that not all factors hold equal weight and their significance can vary per case context. Key factors include the similarity of the marks, proximity of goods, strength of the mark, actual confusion evidence, common marketing channels, the defendant's intent, consumer care levels, and potential product expansion.
In this case, the court's misapplication of the Sleekcraft factors resulted in a reversal of its finding of no likelihood of confusion. The marks and goods in question were virtually identical, suggesting that likelihood of confusion was unavoidable. The district court's acknowledgment of the similarity of the marks and goods favored Stone Creek, indicating that the use of identical marks with identical goods typically leads to confusion. The evidence showed that Omnia's mark was a direct copy of Stone Creek's logo, and both companies sold the same leather furniture manufactured by Omnia.
Additionally, the strength of the protected mark was discussed, highlighting that it encompasses both market recognition (commercial strength) and inherent distinctiveness (conceptual strength). The district court failed to fully assess this, noting only the mark's strength in Arizona without considering its broader recognition. This incomplete analysis further contributed to the conclusion that the likelihood of confusion was strong in this case.
The district court erred by failing to recognize the inherent distinctiveness of Stone Creek’s mark, which is classified as a high-strength, fanciful or arbitrary mark, contrary to suggestive or descriptive marks. This oversight impacts the evaluation of the trademark's strength, which is essential for determining the extent of trademark protection. Additionally, despite the district court's dismissal of Stone Creek's evidence of actual confusion, such instances are significant and relevant to the likelihood of confusion analysis. Actual confusion can occur even when consumers do not mistake the source of a purchased product, as evidenced by customers misdirecting inquiries about Bon-Ton furniture to Stone Creek. These instances illustrate genuine confusion related to purchasing decisions and brand perceptions, necessitating consideration alongside other confusion evidence.
Furthermore, the district court erroneously assumed that geographic separation negates the potential for overlapping marketing channels. Stone Creek effectively utilizes its website to market its furniture beyond Arizona, indicating a convergence of marketing efforts with Bon-Ton, which sells similar products. Both retailers cater to the same customer demographic with identical items, reinforcing the likelihood of confusion between the two brands.
Stone Creek conducts most of its business in the Phoenix area but maintains overlapping marketing channels with Omnia. The district court found that Stone Creek has used its trademark on its website since 2000 and has optimized its site for search engines. During the period of alleged infringement, Stone Creek advertised in a nationwide magazine with a Midwest readership and generated over $200 million in sales, including 610,384 in the Midwest. Despite these Midwest sales being a small fraction of total sales, they demonstrate Stone Creek’s presence in that market. The court noted that the physical distance between Stone Creek's Arizona showrooms and Bon-Ton's Midwest locations does not negate the potential for customer overlap, as both were actively marketing the STONE CREEK mark in the Midwest at the same time.
The likelihood of confusion is supported by the simultaneous advertising and sales activities, indicating that Stone Creek retains the right to enforce its trademark despite geographic separation. Regarding Omnia's intent in adopting the STONE CREEK mark, the court noted that the choice was made with knowledge of Stone Creek’s prior use, suggesting a presumption of intent to deceive. The court criticized Omnia’s assertion that the mark was chosen for its "American" sound, emphasizing that numerous alternative names were available. Additionally, Omnia's replication of Stone Creek's branding and use of the mark on similar products further indicates intentional appropriation. Omnia's president's speculative comments regarding Stone Creek's business do not establish a good faith belief that there would be no conflict between the marks.
The president of Omnia acknowledged that Stone Creek sold furniture in Phoenix but did not investigate the specifics of its sales or customer locations before adopting the STONE CREEK mark. Omnia failed to overcome the presumption of likelihood of confusion, with its deceptive intent being a significant factor. The degree of consumer care suggests that confusion is less likely due to the expensive nature of furniture, as consumers are expected to engage in thorough research. However, this factor is less impactful when the marks and goods are identical, as even discerning consumers may not recognize differences. The district court's finding that Stone Creek lacked plans for expansion was deemed legally insignificant due to established overlap in goods and marketing channels. The court reversed the district's ruling on no likelihood of confusion, citing strong evidence of a conceptually robust mark used on identical goods.
The analysis of likelihood of confusion continues with the Tea Rose-Rectanus doctrine, which Omnia argues protects its use of the STONE CREEK mark. The district court rejected this defense, and the appellate court affirmed this decision. The doctrine, rooted in common law, allows for trademark rights in areas where a mark is recognized, even if a later user enters a geographically remote market. Omnia's potential common-law rights in the Midwest remain valid despite Stone Creek's federal trademark registration, as the Lanham Act acknowledges defenses that existed before registration.
Established common-law rights are exempt from the protections offered to registered trademarks, creating a situation where a senior user's rights are diminished in areas where others have prior common-law claims. This principle is highlighted in the case of Johnny Blastoff, Inc. v. L.A. Rams Football Co., where the geographic scope of a trademark can have significant gaps due to common-law rights. The case of Omnia, which began using its mark in 2008 before Stone Creek's registration in 2012, illustrates the potential application of the Tea Rose-Rectanus doctrine, allowing Omnia to claim good faith use in a geographically distinct area.
To successfully invoke this doctrine, a junior user must demonstrate good faith use. The determination of good faith is crucial and has led to differing interpretations among circuits. Some circuits assert that knowledge of a senior user’s prior use negates good faith, while others view knowledge as a factor to consider, focusing on the junior user’s intent to benefit from the senior user's reputation. The prevailing view posits that good faith is forfeited if the junior user is aware of the senior user’s prior use.
Historical cases, such as Tea Rose and Rectanus, support this interpretation, where the Supreme Court ruled that the junior users, unaware of the senior users’ marks, acted in good faith. The Court emphasized that the absence of awareness was central to establishing good faith, asserting that recognizing the senior user’s claim would unfairly deprive the junior user of their established goodwill. In summary, knowledge of prior use by a senior user undermines claims of good faith for junior users under the Tea Rose-Rectanus doctrine.
The legal principles surrounding trademark use emphasize the importance of knowledge and good faith in determining the rights of junior users. The Rectanus case establishes protection for an 'innocent' junior user who adopts a mark without knowledge of prior use by another party. The court's focus on good faith is reinforced by the Richter case, where good faith was linked to the belief in originality. Justice Brennan, in K Mart Corp. v. Cartier, noted that the Tea Rose-Rectanus doctrine requires the absence of knowledge regarding prior use for a junior user to maintain their claim. Both the Seventh and Eighth Circuits, along with the Trademark Trial and Appeal Board (TTAB), support this interpretation, defining a good faith junior user as someone unaware of another's use of the mark. The TTAB specifies that knowledge of another's use negates good faith. While some courts have referenced the concept of 'design inimical' from the Tea Rose case, this does not overshadow the central focus on knowledge. The repeated connection between good faith and knowledge in various cases illustrates the policy intent to protect those who unknowingly adopt a mark while investing in their business.
A junior user, like Omnia, who is aware of a senior user's trademark, cannot claim their choice of mark was coincidental or independent. Omnia's knowledge indicates bad faith in its actions, potentially hindering the senior user from entering a new market. This understanding aligns with the Lanham Act, which requires that junior users adopt their marks without knowledge of prior use by registrants (15 U.S.C. 1115(b)(5)). The Act provides nationwide rights upon federal registration, effectively shifting liability to later users who should be aware of federally registered marks. Consequently, the Tea Rose-Rectanus defense does not protect Omnia in its infringement of Stone Creek's mark, as the district court determined Omnia was a non-innocent user with no common law rights in the Midwest.
Regarding remedies under the Lanham Act, a court may award the defendant’s profits, the plaintiff's damages, and costs (15 U.S.C. 1117(a)). Stone Creek sought a ruling that willfulness is not necessary for profit disgorgement, but the court denied this motion and sanctioned Stone Creek. The court confirmed that willfulness remains a requisite for awarding profits, despite a 1999 amendment to the remedies provision. The historical context of the remedies provision is crucial for understanding the implications of this amendment, which has not altered the requirement for willfulness in disgorgement cases.
The phrase "subject to the principles of equity" in relation to awarding a defendant’s profits has generated significant debate among circuit courts. The Ninth Circuit requires a showing of willfulness for such awards, stating that they are not automatic and must consider equitable factors, as established in Lindy Pen Co. v. Bic Pen Corp. The Third Circuit also mandates proof of willfulness before allowing recovery of an infringer's profits, a view supported by other circuits. Conversely, some circuits treat willfulness as just one factor in the broader context of determining profit awards. This divergence became more pronounced following a 1996 amendment to the Lanham Act that introduced a federal cause of action for trademark dilution, necessitating clarification in the remedies provision. The 1999 amendment explicitly linked willful violations under the dilution statute to recoverable damages, yet retained the "subject to the principles of equity" clause, leading to ongoing disputes regarding the role of willfulness in profit recovery. The Federal Circuit has emphasized that the 1999 amendment does not alter the precedent requiring willfulness for profit recovery in infringement cases.
In Romag Fasteners, Inc. v. Fossil, Inc., the court addressed the legal standard for awarding a defendant's profits in trademark infringement cases, particularly focusing on the requirement of willfulness. The court noted that while other circuits have either maintained or altered the willfulness standard post-1999 amendment to the remedies provision, it concluded that the Ninth Circuit's precedent remains unchanged: willfulness is still a prerequisite for recovering a defendant's profits. The court emphasized that the 1999 amendment was meant solely to correct a drafting error in the 1996 version of the remedies provision, specifically to clarify that willful violations of the dilution statute could lead to damages. The legislative history demonstrated that Congress aimed to amend the statute without altering the existing framework that requires establishing willfulness for profit recovery. The court reinforced its previous holding in Lindy Pen, asserting that the unchanged wording in the statute maintains the willfulness requirement, despite the introduction of new language regarding willful violations. It cautioned against misinterpreting the amendment as negating established legal principles, underscoring that changes in related provisions should not undermine existing judicial interpretations. The court also noted that there was no indication that Congress intended to resolve the existing circuit split on the willfulness standard.
The Supreme Court case Customs Enf’t establishes that congressional ratification cannot be assumed without clear judicial consensus. The district court correctly determined that Stone Creek must demonstrate intentional or willful infringement to obtain disgorgement of Omnia's profits. It denied summary judgment due to factual disputes regarding Omnia's infringement, thus not addressing willfulness at this stage. Relevant factual findings about Omnia's intent in using the STONE CREEK mark could influence the willfulness determination, which the court remands back for the district court's evaluation.
Regarding sanctions, the district court sanctioned Stone Creek's attorneys under 28 U.S.C. § 1927 for unreasonably multiplying proceedings. The first sanctions order was found to violate the legal standard, while the second was deemed appropriate. The sanctions stemmed from a summary judgment motion on willfulness, which the court considered inappropriate since it could not rule on willfulness without first deciding on infringement. The district court deemed Stone Creek's arguments frivolous, asserting that prior case law precluded the argument that willfulness was unnecessary for disgorgement after the 1999 amendment. However, this interpretation was incorrect, as the cited case did not adequately analyze the amendment's impact on the willfulness requirement, and the question remained unresolved in the Ninth Circuit. Although the court disagreed with Stone Creek's position, the unsettled legal landscape provided a legitimate basis for Stone Creek to seek clarification on the issue of willfulness and its relevance to the trial.
An unresolved legal issue supports Stone Creek's argument regarding the 1999 amendment eliminating the willfulness requirement. The sanctions order related to willfulness is reversed; however, the second sanctions order is upheld as it is backed by legal grounds and the record. Stone Creek was sanctioned for not withdrawing its actual damages claim, which it intended to replace with a claim for Omnia’s profits, despite lacking evidence to support the actual damages claim. Stone Creek’s expert admitted difficulty in proving actual damages and did not conduct a damages analysis. Consequently, Omnia incurred unnecessary costs in defending against this claim, prompting the district court to conclude that Stone Creek's actions unnecessarily multiplied proceedings and warranted awarding attorneys’ fees to Omnia.
The court reversed the finding of no likelihood of confusion and rejected the Tea Rose-Rectanus defense, holding Omnia liable for infringing the STONE CREEK mark. Willfulness is affirmed as a necessary condition for disgorgement of profits, with a remand for assessing Omnia's intent. The district court's sanctions order regarding Stone Creek's summary judgment on willfulness is reversed, but the sanctions related to the actual damages claim are upheld. The ruling is affirmed in part, reversed in part, and remanded, with costs on appeal awarded to Stone Creek. The Midwest states relevant to the case are Illinois, Michigan, Ohio, Pennsylvania, and Wisconsin. The district court previously rejected Omnia’s Tea Rose-Rectanus defense due to a lack of good faith, supported by survey evidence of limited Stone Creek brand awareness in the Midwest.
Stone Creek has demonstrated a likelihood of confusion, rendering unnecessary the examination of challenges related to the admission of Omnia's expert and surveys. The presumption of Stone Creek's rights remains applicable despite its lack of federal trademark registration at the time Omnia adopted its mark. Omnia's interpretation of Stone Creek's rights may serve to counter the presumption but does not diminish the justification for its application. The founders of Omnia, who initiated their business in New York, intentionally created a foreign-sounding name, believing it would enhance market appeal, akin to the consumer perception that Häagen-Dazs ice cream originates from Scandinavia. Additionally, the 1999 legislation aimed at combating cybersquatting indicates that Congress did not intend to overhaul existing remedies for trademark violations. The cybersquatting statute (15 U.S.C. § 1125(d)) shows that while it added violations to the remedies provision, it differentiates between the requirements for "bad faith intent" in cybersquatting cases and "willful intent" only for monetary relief in dilution cases (15 U.S.C. § 1125(c)).
