Header graphic for print

Fashion Law Blog

An Interactive Discussion on the Business of Fashion

Copyright and Fashion Design Confusion: Let’s Move to Tennessee [1]

Posted in Fashion Intellectual Property, The Business of Fashion

In Varsity Brands Inc. v. Star Athletica LLC[2] the court brings a new spin to on the bank shot to create in the United States a protectable zone of intellectual property rights for fashion designers.  Varsity is just another recent example of the fashion industry floundering for protection of design rights; it is also novel as an example of judicial activism in an area ripe, over ripe, for Congressional Legislation.

In a recent exploration[3] of the Adidas v Skechers “Stan Smith” case, the twisted shoe horning of trademark law to fashion design was discussed wherein it was shown that the true solution to addressing design knock off and copying is legislative action; the author suggested tracking the European Union (“EU”) Directive 98/71/EC of the European Parliament and of the Council of 13 October 1998 citing the failure of a United States solution. The Innovative Design Protection Act of 2012 (the “IDPA”) ( S.3523-112th Congress (2011-2012) introduced by Sen. Charles Schumer failed to pass Congress even though it was at best a compromise which would ineluctably have limited benefit to the fashion industry and its creative designers. Thus a gaping legislative hole continues to exist.

This intellectual property hole is due to the strict statutory limitation for the grant of copyright protection to apparel. The Copyright statute, 17 U.S.C. § 101 does not permit useful, functional articles be subject to copyright protection; clothing is both functional and useful and therefore the ability to decompile the aesthetic from the utilitarian has been considered a practical non-starter for protection of fashion designs, or for others the holy grail.

In Varsity the court jumped over decades of precedent manifested by at least twelve (12[4]) different tests to determine if a pictorial or graphic design can be identified separately from the utilitarian aspects of the article, in the instant case a cheerleader’s uniform. The Court decided to meld into a grand uniform “hybrid approach”[5] to determine if  “an artistic design is conceptually separable from the utilitarian aspects of the article.”  The Varsity court reversed a lower court’s conventional decision finding the designs on the cheerleader’s uniform, such as chevrons, were not inseparable and therefore there can be no copyright protection for the designs which are a part of the cheerleader’s uniform. If one pauses for a moment the holding belies credulity: one company now has the copyright on chevrons for cheerleader uniforms?[6]

Cutting through the “hybrid” analysis Varsity comes full circle to a very simplistic analysis: the designs on the cheerleaders uniforms are more like fabric designs than clothing designs and are therefore subject to copyright protection. Of course fabric designs are subject to protection but precedent holds “that clothing, in addition to covering the body, serves a ‘decorative function,’ so that decorative elements of clothing are generally ‘intrinsic’ to the overall function, rather than separable from it.”[7]  In other words clothing design is intrinsically useful by its function. Any other interpretation is a bald circumvention of the Copyright Law as written. However the Varsity  court blithely rejected  precedent since such precedent would make nearly “all artwork unprotectable.”

If the Varsity holds fashion designers concerned about design protection may well be served by moving their corporate headquarters to the Sixth Circuit of the United States Court of Appeals. A better result would be for Congress to do it’s a job an adopt appropriate legislation to remedy the problem of misappropriation of original designs.

[1] Or Kentucky, Michigan and Ohio all within the Sixth Circuit

[2] Westlaw citation 2015 WL 4934282; 115 USPQ 2nd 1773

[3] See Rube Goldberg Trademark Infringement: Adidas AG v Skechers USA Inc. — A lesson on why we need to learn from the EU by Leonard N. Budow

[4] See Westlaw citation 2015 WL 4934282, 15-16

[5] Hybrid melding the second and fourth circuit opinions.

[6] Note the Varsity court did not rule on the originality issue which would seemingly address this issue

[7] See Jovani Fashion, Ltd. v. Fiesta Fashions , Docket No. 12-598-cv, 2012 WL 4856412

The International Trade Commission and Section 337: An Underused Trademark Enforcement Mechanism

Posted in Fashion Intellectual Property, The Business of Fashion

The Tariff Act of 1930[1] (“Act”) provides that infringement of patent and registered trademark rights[2] to be unfair practices in the importation of goods into the United States.  The Act is  implemented by the United States  International Trade Commission (“Commission”) which is an agency of the United States government that serves a bi-partisan function to advise the President, Office of the United States Trade Representative, and Congress on matters related to international trade. In addition, it also has a judicial function which is too often overlooked by apparel companies seeking to enforce its rights against importers of goods which infringe their intellectual property rights. Globalization of the fashion industry means that it is more likely than not a domestic United States enterprise will directly or indirectly be involved in the international sale of goods. Thus, the Commission may seem to be an obvious avenue of recourse to strike at the heart of many infringement claims; the production of goods entering the United States which infringe on a company’s intellectual property rights. So why the dearth of actions before the Commission by fashion companies?

There are several reasons why an apparel company and counsel may feel the Commission is not a viable forum to seek relief. First, tactical.  The nature of an infringement may be best appreciated or understood by a jury as opposed to an Administrative Law Judge (“ALJ”). The   ALJ is designated by the six (6) Commissioners who are nominated by the President, confirmed by the Senate and serve for nine (9) years. Proceedings before the Commission[3] are more administrative[4] than judicial so depending upon the nature of the trademark or even upon the location of the plaintiff, an apparel company may feel it has tactical advantage before a jury in a “home” jurisdiction as opposed to before  a “sterile” ALJ.

The next disincentive for selecting the Commission for relief is actually the nature of the relief desired.  The Commission cannot grant monetary damages[5] or targeted relief.  If the goal is to secure monetary damages that relief is not available before the Commission.  The nature of relief is in the form of a General Exclusion Order (“GEO”) or a Limited Exclusion Order (“LEO”).  The GEO generally bans importation of the infringing goods even an importer is not a party to the proceeding before the Commission and the LEO is targeted to the actual named infringer. However, there is no calibration of the relief.  While goods may be banned from further import into the United States the Commission cannot order destruction, re-call or other flexible relief.[6]

Then there is the rocket docket.  Counsel may see the expedited processing of the administrative tribunal to be a negative. The ramp up function in itself will be time consuming. Prior to filing with the Commission it is critical that all ducks be lined in  a straight row; that will be an advantage to plaintiff and will place defendant in an accelerated defensive position. Depending on the nature of the defendant’s internal operations, and its intellectual property and  litigation counsel, the commencement of the process in itself might lead to an expedited settlement. But the plaintiff might not be able to take advantage of the tactical move if it too suffers from the defendant’s internal limitations.

The rocket docket also has a very practical negative side for all parties: accelerated legal fees and costs. Those costs and expenses will include expensive surveys, census analysis as well as other experts. Depending on the solvency of the plaintiff as well as its cash flow, it might be imprudent to start an action that will have an immediate impact on its expenses. In a judicial proceeding, although the relief may be delayed, one can practically budget for a slower, protracted, as opposed to a fleeting, war.

Another disincentive or threshold bar to an action before the Commission is jurisdictional.  As noted above while apparel companies may be involved in the importation of goods, there are times when establishing that the targeted goods have been imported. If you cannot establish importation the Commission will not have jurisdiction.

Also one must establish harm to a domestic industry.[7] This means the plaintiff in a  trademark infringement case must show at least one of the following three: a material investment in plant and equipment; a significant investment of labor or capital; or a substantial investment in research and development or licensing.[8] If the plaintiff cannot show both domestic industry impact as well as importation of goods the Commission will not have jurisdiction.

Notwithstanding the apparent limitations or hurdles presented by a Section 337 action, an apparel company must view such an action as being just another weapon to enforce its intellectual property rights.[9] For example to combat grey market goods[10] as opposed to outright infringement, recourse to the Commission may be a viable option. The plaintiff in a Section 337 grey market case would have to show the goods are materially different, such as differing warranties which is almost a given on foreign versus domestic sale of goods. The relief, since it is based on the in rem jurisdiction against the goods, could be a broad GEO implemented in the time frame of a rocket docket.

Although the availability of a GEO or LEO and not monetary damage is identified as negative for a Section 337 proceeding, note that damages are also available in a Federal District Court proceeding; the remedies and actions are not mutually exclusive although it is likely that the Federal District Court case will be stayed pending the proceeding before the Commission.

For luxury brands or any brand concerned about dilution, as well as infringement of its trademark, the rocket docket is a positive not a negative.  A trademark owner may see the import of infringing goods as adversely affecting its good will and the value of its brand. The greater the dissemination of the products, the length of time permeating the domestic market, the greater the impact on brand value.  Thus the expedited time frame afforded by the Commission can be a great tactical advantage.

Practically speaking sometimes the effective target of an action may not be subject to the in personam jurisdiction of the United States courts. A manufacturer which may not have contacts for long arm jurisdiction will not be adversely affected by an action brought in Federal District court. However the jurisdiction of the Commission is in rem thus it is against the goods. So while a manufacturer may not appear before the Commission a GEO will bar the importation of the offending goods.

The Section 337 proceeding while common for patent actions is still a relatively rare bird for trademark. However it can be effective tactical weapon if wisely deployed in the appropriate circumstances.  Precipitous preclusion or implementation are both to be avoided; however, either through over sight or ignorance, to date  Section 337 enforcement actions have not been deemed a conventional part of enforcement mechanisms for a fashion and that is a strategic error.

[1] 19 U.S.C. §1337

[2] See 19 U.S.C. §1337(a)(1)(B)-(E). Misappropriation of trade secrets, palming off, misleading or false advertising and general violations of antitrust laws are also subject to the bailiwick of the Commission

[3] The rules of the Commission are set forth in 19 CFR Part 210

[4] But to be clear the investigations conducted by the ALJ are subject to procedural that are similar to the Federal Rules of Civil Procedure. The hearing is conducted in accordance with 5 U.S.C. 551 et seq. which does provide for notice, cross examination, the right to object, motion practice etc.

[5] Under the Lanham Act one can recover the infringer’s profits in addition to actual damages.

[6] E.g. Levi Strauss & Co v Sunrise International  Trading, Inc.  51 F 3d 982  (11th Cir 1995)

[7] See Sections 337(a)(2) and (3) of the Act.

[8] See 19 U.S.C. §1337(a)(1)(B).

[9] In  the  Matter  of  Certain  Handbags,  Luggage, Accessories,  and  Packing  Thereof Investigation  No. 337- TA-754  Publication 4387  USITC March 2013

[10] See Grey Market Trademark Infringement Actions at the U.S. International Trade Commission: The Benefits of the Forum and Analysis of Relevant Cases,” 8 John Marshall Review of Intellectual Property Law 271 (2009).

Rube Goldberg Trademark Infringement: Adidas AG v Skechers USA Inc. — A lesson on why we need to learn from the EU

Posted in Fashion Intellectual Property, The Business of Fashion

Trademarks and design rights are a woeful but combustible combination. Another day and another trademark infringement suit is commenced to circumvent the lack of effective design protection rights in the United States.  On September 14, 2015, Adidas America Inc., sued Skechers USA Inc. in the Federal District Court in Oregon alleging in a 35 page complaint that Skechers infringed the Adidas trademarks known as Stan Smith Trade Dress and Three Stripe Mark.[1]

There are both commercial and legislative reasons why Adidas apparently decided to continue to pursue enforcement of trade dress and design claims which should not be under the purview of the Lanham Act and trademark laws in the United States.[2] Commercially, one can speculate that the announcement in May 2015[3] that Skechers apparently became the number 2 player in the sports footwear market with prior number 2 Adidas “sinking” to number 3 did not sit well internally with Adidas.  Skechers leapt into second place with approximately 5% of the marketplace and Adidas sank to third with 4.6% of the United States share.[4]  Failure in the competitive marketplace must lead to post mortems; was the failure due to misfiring of the  marketplace position with cutting edge designs or fabrics, or was it due to various forms of unfair competition? From the perspective of the design team and middle managers, the latter response obviates any need to explain commercial marketplace failures.

However, the real failure lies with the present intellectual property regime surrounding fashion designs in the United States.  The European Model shows a way forward.  The European Union (“EU”) in its Directive 98/71/EC of the European Parliament and of the Council of 13 October 1998 (“Directive”) on the legal protection of designs required each member nation to:

  1. (P)rotect designs by registration, and shall confer exclusive rights upon their holders in accordance with the provisions of this Directive.
  2. A design shall be protected by a design right to the extent that it is new and has individual character.
  3. A design applied to or incorporated in a product which constitutes a component part of a complex product shall only be considered to be new and to have individual character:

(a) if the component part, once it has been incorporated into the complex product, remains visible during normal use of the latter, and

(b) to the extent that those visible features of the component part fulfil in themselves the requirements as to novelty and individual character.(Emphasis Added)

Simply put, a design is subject to protection if the design is novel, meaning that  it is new, has not been made available prior to publication and it must resonate with an informed consumer who would find it unique from other designs.  This makes business sense and ameliorates issues regarding knocking offs[5] let alone exact copying.   Registered designs are protected for the first term for five years and thereafter subject to extension for up to twenty five years.  Unregistered designs are protected for three years from publication. In addition to the EU protection, the Member States can create and enforce their own intellectual property protection structures[6].

In the United States no such regime exits. The most recent attempt at protecting fashion design  was introduced by Senator Charles Schumer by The Innovative Design Protection Act of 2012 (the “IDPA”). ( S.3523-112th Congress (2011-2012). Although woefully short of the Directive[7], it would have ameliorated the worst offenses.

That leaves designers with recourse to Rube Goldberg complaints which conflate intellectual property crafted and intended to connote source of goods to design protection.  Today a designer must look to trademark, patent[8] and copyright protection which effectively is not structured or intended to protect fashion designs.

Copyright protection protects original works of authorship fixed in any tangible medium of expression[9] and should be the obvious default for apparel design protection. But fashion designs are not protected by copyright law.  The reason is that clothing is considered by definition to be functional so it is a useful article and useful articles are not subject to copyright protection.[10]  While it is possible to secure copyright protection if one can show the design can be identified from and apart from the apparel, it is a functional high bar.

Trademark law seeks to apprise a consumer of the source of the goods. This means a unique, distinctive trade name or logo so there is no confusion as to the creator of the goods.  Trade dress protection goes to the overlook and feel of packaging that serves to identify source. The key in both of these frameworks is to identify who or what produced the goods. Style as to how that is done is not the concern. So long as a consumer, without confusion, can identify the source of goods based upon the trade name, logo or trade dress which has acquired secondary meaning[11], trademark protection is available. But a fashion design is not indicative of source otherwise every garment would be a trademark.

The paucity of United States fashion design protection encourages counsel to grasp at whatever arrows may be in the quiver of United States intellectual property rights to protect a perceived or actual misappropriation of an original design. So what to make of the Adidas case against Skechers? Adidas effectively is arguing that Skechers produced a “Stan Smith Kock Off,” a design copy,  and therefore infringed the Mark. Therein lies the Rube Goldberg quality of this case; Adidas complains of a design copy and brings a case based on source confusion.

First recall that trademark must connote source of goods.  Applying that concept to the Adidas case, one is factually befuddled when viewing the Stan Smith Knock Off and the Stan Smith Trade Dress Shoe. The Stan Smith Trade Dress Shoe replaces the Adidas three stripe mark with angled perforations which does not resemble a stripe. Looking at that design, it will take creative surveys and evidence to establish the secondary meaning by which the Stan Smith Trade Dress Shoe is associated with Adidas; to be clear if the Stan Smith Trade Dress Shoe had the Adidas Three Stripe Mark[12] the argument might be different. But that is not the case. So if the Stan Smith Trade Dress Shoe does not denote Adidas, it will take a leap of faith to find confusion with the Skechers shoe.

But most telling is the Complaint denomination of the Skechers shoe as the Stan Smith Knock Off.  Without belaboring it, knocking off has been seen as the creative engine of the fashion industry. A knockoff is not counterfeit wherein one affixes a trademark to confuse the actual source of goods.  In the Adidas Skechers case there is a close resemblance; but merely knocking off, as labeled in the Complaint, is not a violation of trademark law.

While this will be an interesting case to follow the real response from the legal and fashion community to address the paucity of existing fashion design protection in the United States and to converge with the regime existent in the EU.

[1] The Complaint also alleges infringement of the Supernova trademark which unlike the Stan Smith and Three Strip is not trade dress but a true trademark.

[2] The purpose herein is to address only the Federal trademark and Trade Dress Infringement and Trademark Dilution claims, not the related State and Common Law claims

[3] See Skechers Overtakes Adidas; Becomes No 2 in U.S. Footwear Zacks Equity Research Published May 20, 2015 here.

[4] Nike was and remains the Number 1 brand in the United States.

[5] See discussion below regarding the “Stan Smith Knock Off”

[6] For example see the French Intellectual Property Code  Artc. L 112.2. See Red Soles Aren’t Made for Walking: A Comparative Study of European Fashion Laws, 5 Landslide 6, available here.

[7] The IDPA only protected against intentional, deliberate copies that are “substantially identical.” This language is a potential bonanza for the Intellectual Property  litigation bar.

[8] 35 U.S.C.A. § 171 Design Patents are theoretically available but due to the extended time necessary to secure the same, cost and the burden of proving that the design is novel or nonobvious, they are rarely deemed a useful vehicle.

[9] 17 USCA §102

[10] 17 U.S.C. § 101

[11] For background on trade dress and secondary meaning see 1 McCarthy on Trademarks and Unfair Competition §8:5 (4th ed.); TarfFix Devices, Inc. v. Marketing Displays, Inc. 532 US 23, 58 USPQ2d 1001 (2001)

[12] The three stripes have acquired secondary meaning and are ineluctably associated with Adidas

Trademark Infringement in the Fashion World: Aesthetic Functionality and Other Defenses

Posted in Fashion Intellectual Property, The Business of Fashion

It is a truism that a fashion company is nothing more than its brand, it is an identity affixed to clothing so the purchaser may adopt by osmosis the brand’s genre.[1] The brand, the trademark, encapsulates all of the good will and secondary meaning associated with apparel and accessories.  Essentially the same garment produced and labeled from parallel, divergent sources will be perceived and priced accordingly. Moreover, the art of valuation goes beyond a multiple of EBITDA in the present or projected; it captures, or should capture, the intangible value represented by the trademark.

Since the trademark or brand is so core to a fashion company it is no wonder that prosecution of trademark claims[2] is replete to the extent of its own parody.[3]  To effectively protect and enforce a company’s true, bona fide and essential commercial rights without the speciousness of broad fire prosecutions incurring unnecessary legal costs and diversion of business efforts, it is important to have a familiarity with likely defenses to claims of confusion[4] and therefore infringement.

Aesthetic Functionality is a key defense for a fashion brand against a trademark infringement claim due to design.  There exist two types of functionality: utilitarian and aesthetic.

Very simply trademark protection cannot be granted for an item or product which is utilitarian that is inherently useful.  Utilitarian functionality has three fundamental considerations:

(i) Whether the feature or aspect is essential for the product use;

(ii) Does the feature impact cost and quality; and

(iii) If the grant of a trademark would place newcomers or competitors at a commercial, in contradistinction to a reputational, disadvantage.  [5]

If one is subject to claim of trademark infringement based upon a trademark which is functionally utilitarian, as determined by the factors set forth above, then such claim will fall.  However, the more interesting defense for the fashion company accused of infringement is aesthetic functionality. To conceptualize this issue of aesthetic functionality it is best to ask whether the purported trademark identifies a source (a bona fide trademark) or the product (an invalid trademark). If the trademark places a competitor at a non-reputational commercial disadvantage then that trademark should not stand.[6]

The Christian Louboutin S.A. v. Yves Saint Laurent America, Inc., 778 F. Supp. 2d 445, 447-48 (S.D.N.Y. 2011), often mischaracterized, is simply a dispute as to aesthetic functionality.  The district court held against Christian Louboutin because its red outer sole served an aesthetic function which was vital for competition in the fashion industry.  To claim exclusive use of the color red for outer soles would place competitors at a commercial, not reputational, disadvantage.  So the Court reasoned Christian Louboutin was not entitled to trademark its outer red sole.

The Circuit Court reversed due to what it viewed as a misapplication of Qualitex v. Jacobson Products, 514 U.S. 159 (1995). The Court ruled that in Christian Louboutin S.A. v. Yves Saint Laurent America, Inc the red outer sole with a contrasting upper did serve to identify the source so the issue was reputational.  While there was no aesthetic functionality defense to the Christian Louboutin red sole trademark, the court concluded that no confusion was likely to arise since Yves St Laurent used a monochromatic look and had no contrasting upper. In sum, Christian Louboutin had a valid trademark, was not aesthetically functional and the red sole did have secondary meaning, but factually there was no confusion, so no harm to Christian Louboutin.

The take away is that aesthetic functionality is laser like, fact specific. Is the design functional, i.e. is it essential for the function or affect costs and quality? If it is, then it is not a valid trademark. If the design is not functional then it still must show whether there would be an adverse effect upon competition.  The purpose of the aesthetic functionality review is to ensure the integrity of the marketplace, avoiding the adverse impact of a trademark registration.

Aside from aesthetic functionality there are various other trademark infringement defenses perhaps not so relevant in fashion specific cases but nonetheless a staple in infringement cases. One can look to the Trademark Dilution Revision Act of 2006 (“Act”) which encapsulated certain defenses theretofore recognized by the courts.[7]

The Act also adopted a fair use defense, meaning use of a trademark other than for designation of source for one’s own goods and services. There are two prongs to the fair use defense: classic and nominative. The statutory provision states that fair use is  “the use of the name, term, or device charged to be an infringement is a use, otherwise than as a mark . . . or of a term or device which is descriptive of and used fairly and in good faith only to describe the goods or services of such party, or their geographic origin.”[8] Classic fair use occurs when a junior user uses the existing trademark of another (1) as description of the junior user’s goods (2) in good faith and (3) other than as a trademark.

Nominative Fair Use occurs when one refers to another brand for advertising, parody, commentary or news reporting.[9]     In Playboy Enterprises, Inc. v. Welles, 279 F.3d 796 (9th Cir. 2002) the concept of nominative use was extended to identification of oneself when Ms. Welles used the trademark “Playmate of the Year” to identify her role in that capacity.

Other defenses against confusion claims include invalidity of the trademark.  The most common claim for invalidity is prior use. In the United States use ordinarily trumps registration. So if a claim is made by a registrant of a trademark but it can be shown that another party made prior use of the trademark before the registrant, then the registrants claim will fail.[10]  Some other standard defenses to trademark infringement include fraud on the trademark office[11], laches[12] and unclean hands[13].

There exists panoply of defenses to trademark infringement which expand as the claims for trademark effloresce. Before acquiescing to a random cease and desist, measure the trademark against the above defenses and push back.

[1] See Fashion Brands by Mark Tungate (2012), Introduction, “You don’t buy clothes, you buy an identity”

[2] The provenance of trademark claims for confusion can be found in 15 U.S.C. § 1114 which states the holder of a registered trademark can file a trademark infringement claim against any person who, without the registered trademark holder’s consent,…(4) where such use is likely to cause confusion, or to cause mistake, or to deceive.

[3] See Under Armour is suing pretty much every company using the name ‘Armor’,  The Washington Post, August 19, 2015.

[4] Lack of confusion is the ultimate defense and is fact driven. Courts look to a variety of factors, namely, similarity of the overall impression as well as the goods and services, whether the trademark is strong, arbitrary or fanciful, or weak generic or descriptive (See Two Pesos, Inc. v. Taco Cabana, Inc., 505 U.S. 763, 768 (1992), the existence of actual confusion, the intent of the junior party in using the mark, channels of distribution in the marketplace, sophistication or degree of care to be exercised by a consumer and possible bleed or expansion of product lines.

[5] See Qualitex v. Jacobson Products, 514 U.S. 159 (1995)

[6] See Tarfix Devices Inc. v Mktg Displays 532 US 23 (2001)

[7] See  15 U.S.C. § 1125(c)(3) which states: (3) EXCLUSIONS—The following shall not be actionable as dilution by blurring or dilution by tarnishment under this subsection: (A) Any fair use, including a nominative or descriptive fair use, or facilitation of such fair use, of a famous mark by another person other than as a designation of source for the person’s own goods or services, including use in connection with— (i) advertising or promotion that permits consumers to compare goods or services; or (ii) identifying and parodying, criticizing, or commenting upon the famous mark owner or the goods or services of the famous mark owner. (B) All forms of news reporting and news commentary. (C) Any noncommercial use of a mark

[8] See 15 U.S.C. § 1115(b)(4)

[9] See New Kids on the Block v. News America Publishing, Inc., 971 F.2d 302 (9th Cir. 1992).

[10] See Bauer Bros. LLC v Nike Inc. 2012 WL 1900047 (SD Cal. May 24, 2012)

[11] See Bauer Bros. LLC v Nike Inc.

[12] Precision instruments  Mfg v Auto Maint Mach Co 324 US 806 (1945)

[13] Chattanoga Mfg Inc. v Nike Inc. 301 F3rd 789 (7th Cir. 2002)

The Law that Dare Not Speak Its Name in the USA: the CISG

Posted in The Business of Fashion

Fashion is global; an often used truism which means the law applicable to a transaction involving a fashion house and a supplier, or even affiliated companies, may involve overlap with multiple countries.  The United Nations Convention on Contracts for the International Sale of Goods (“CISG”) is a project of the United Nations Commission on International Trade Law designed to address this issue.  It is an attempt to create a uniform set of procedural and substantive rules for the international sale of goods.  One may say it is a revised Article 2 of Uniform Commercial Code for the international community.

The applicability[1] of the CISG should obviate the concerns regarding local, jurisdictional law. So a purchaser located in California in negotiating his purchase order with a seller in China does not have to be concerned about the vagaries of Chinese law nor does the Chinese seller need be concerned about the anomalies in California law. Defaulting to the CISG permits the parties to move apace without recourse to the impediments created by different law and experiences.

However United States practitioners have been slow to adopt the CISG or to advise their clients to adapt their contracts to incorporate the CISG as applicable law.  This is at best nettlesome and to a degree a significant impediment to the expansion of trade.  A buyer in the United States of finished apparel from China should be able to arrange a negotiated contract, without an extensive negotiation or concern as to which law will apply.  But the dismal adaptation of the CISG by lawyers in the United States has been a barrier to the smooth adaption of a process facilitator effective in other jurisdictions.[2]

So why is it that the American bar has not jumped on the CISG bandwagon? There are five principal factors: ignorance, parol evidence, intent concerns, statute of frauds and perfect tender.

(1) Ignorance. When we speak of ignorance that relates to the actual status of the CISG in United States jurisdictions.  Many practitioners may still not realize that the CISG is United States law, not alien or foreign law. It was ratified as treaty by the Senate in 1986 and became law on January 1, 1988. This means that the CISG is American law as a self-executing treaty. For the avoidance of dout such a treaty is also the substantive law of the separate states.

Unless one affirmatively opts out of the CISG or  if one merely designates the choice of law as being any particular state, such as New York or California, in fact the CISG most likely will apply.[3]  For a party to opt out the language in the Contract should first state that “The parties agree that United Nations Convention on Contracts for the International Sale of Goods shall not apply to this contract and the transactions described herein; the laws of the State of ____ (or country of ________) shall apply.” Unless the ritualistic formulation precedes the desired applicable law, the CISG may apply.

Most importantly, there are also cases in which two US domiciled corporations may enter into an agreement which can subject to the CISG. An example is when the principal business situs of contracting entities are in differing countries which are signatories to the CISG.  Therefore and inadvertently one may be subject to the CISG based upon an illusion created by the domicile of the parties to the contract.

(2) Parol Evidence.  Aside from just plain ignorance there are some substantive objections. US Courts applying the UCC will bar evidence that contradicts the specific terms of contract. The parol evidence rule[4] presumes that a written contract encapsulates the parties’ complete agreement. Therefore, under the UCC, oral evidence cannot be used to contradict the terms of a written contract.

However, such customary parol evidence rules do not apply when interpreting contracts governed by CISG[5] and this causes some practitioners concern. Under the standard American parol evidence rule, in general, a writing intended by the parties to be the apotheosis of their concurrence as to the terms of their transactions cannot be varied by evidence of earlier agreements or negotiations.  So a contracting party cannot introduce evidence of negotiations that preceded the signing of the agreement. By contrast, under the CISG, when determining a party’s intent, the CISG requires a courts and arbitrators to consider all relevant facts and circumstances which would include the negotiations preceding the contract execution, the course of conduct or on going practices of the parties, and any post contract actions of the parties.  This ability to traverse the four corners of a contract likely gives many American practitioners agita, that the unambiguous words of the contract might be varied by the parties’ pre- or post-signing conduct.  However, such a rule could be useful if the course of negotiations were illuminative of the parties’ intent, perhaps more so than a form contact, and when a client wishes to modify the terms of the agreement based on pre-signing negotiations. This is a judgment call dependent on the nature of one’s client and the types of goods in question.

(3) The Parties’ Intent. Related to the parol evidence rule is the treatment of parties’ subjective intent[6] by the CISG[7] which also gives leeway to modify the apparent terms of a contract.   If evidence exists which may be admissible due to the obviation of the parol evidence rule discussed above, if the parties intent is inconsistent with the written terms of the contract, such evidence of intent would be admissible to in effect re-write the contract[8]. If one is concerned about a transaction accurately reflecting the intents of the parties, this rule makes sense and is desirable; if one views a contract as a battle of forms[9] with the last draft prevailing, evidence of intent is anathema.

(4) Statute of Frauds  Following these gaping holes in the finality of a contract is the lack of a statute of frauds.  Recall under the UCC, a contract for the sale for goods over $500 must be in writing to be enforceable in the US court.  The CISG does not.[10]  This fits in with the CISG approach which fundamentally is a search for the truth, not the formalities of a lawyerly drafted document which might be too smart by half.[11]

(5) Perfect Tender Rule.  The next issue of distress to some practitioners is the upending of the perfect tender rule.[12] Simply put a buyer has the right to insist upon perfect and fully compliant performance under the UCC. However the CISG[13] states (1) The buyer may declare the contract avoided if the failure by the seller to perform any of his obligations under the contract or this Convention amounts to a fundamental breach of contract[14] (Emphasis Added).

Notwithstanding all of the foregoing an adept practitioner would nonetheless still accommodate and implement the CISG for the purpose of facilitating a client’s business processes.  Using Article 6 of the CISG the practitioner may selectively opt out of the applicability of any article of the CISG[15]; in other words it is the acme of freedom of contract.  Using the CISG as a malleable product subject to subtle or crude adaptation can give a client the upper hand in a negotiation process. It behooves any US practitioner engaged in multi-national contracts to speak the name of the CISG to clients when drafting or amending a contract for the sale of goods.

[1] To be clear the applicability itself of the CISG is dependent not on multiple nationality of parties to a contract but of the residency of those multiple parties in a contracting state to the CISG. The convention on international sale of goods disregards nationality in favor of place of business.  So we have a US company or French company with a foreign subsidiary conducting business in a non-convention contracting nation the convention will not apply. So that’s an important consideration to take into account if you’ve got an American company and its subsidiary is located within a non-contracting party  nation state then in that event the CISG will not apply.

[2] To determine if a counterparty is resident, which is the key term not nationality, in a signatory to the CISG please see http://www.cisg.law.pace.edu/cisg/countries/cntries.html

[3] See  Easom Automation Systems, Inc. v. Thyssenkrupp Fabco, Corp., 2007 U.S. Dist. LEXIS 72461 (E.D. Mich. 2007)

[4] See UCC 2-202

[5] See CSIG Article 8(3)– In determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties. (Emphasis Added)

[6] See MCC Marble Ceramic Center, Inc. v. Ceramica Nuova D’Agostina, S.p.A., 144 F. 3rd 1384 (United States, 11th Cir. 1998) which is the seminal case dealing with both intent and the parol evidence rule under the CISG.

[7] See 8(1): For the purposes of this Convention statements made by and other conduct of a party are to be interpreted according to his intent where the other party knew or could not have been unaware what that intent was.

[8] See TeeVee Tunes, Inc. et al v. Gerhard Schubert GmbH  http://cisgw3.law.pace.edu/cases/060823u1.html which held “the CISG, unlike American contract law, includes no Parol Evidence rule

[9] See UCC 2-207.

[10] See CISG 11– A contract of sale need not be concluded in or evidenced by writing and is not subject to any other requirement as to form. It may be proved by any means, including witnesses.

[11] See also Articles  9  “any usage to which they have agreed and by any practices which they have established between themselves” and  11: “contract of sale need not be concluded in or evidenced by writing.

[12] See UCC 2-601

[13] See CISG Art.49 (1)

[14] Clearly for a seller the CISG provides greater protection.

[15] Art. 6 states: The parties may exclude the application of this Convention or, subject to article 12, derogate from or vary the effect of any of its provisions.

A Colgate Map to “Circumventing” Retail Price Restraints

Posted in The Business of Fashion

The confusion over the Leegin case is legion.  Leegin[1] is a 2007 Supreme Court Case which was supposed to unloose price restraints.  This was and remains of critical concern to the fashion community.   Classically a design house may have multiple channels of distribution in addition to its own vertically integrated stores. There may be franchise or license relationships; shop in shop agreements under joint ventures; sales to specialty boutiques; as well as department stores.  In each, aside from the vertically integrated model, a designer is rightfully concerned about the pricing of its goods by third parties.

Before Leegin, setting or stipulating a minimum re-sale price was per se illegal.  Going back to a 1911 case, Dr. Miles Medical Co. v. John D. Park and Sons, 220 U.S. 373 (1911), vertical price agreements between a manufacturer and distributor or as commonly known Resale Price Maintenance Agreements or RPM,  were deemed unreasonable as being the equivalent of horizontal price restraints which were the basis of cartel formation. So, since 1911 it was a presumptive,  per se,  violation of Section 1 of the Sherman Act to establish RPM agreements.[2]   However Leegin made headlines because the Supreme Court shifted ground and declared that going forward vertical price restraints would no longer be per se illegal but would be subject to a rule of reason analysis. So it was anticipated that there would be an efflorescence of RPM in franchise and distribution agreements. That has not occurred and the question is why, if indeed Leegin opened the door to RPM?

The primary misconception arising from Leegin  is that  subjecting an agreement between a manufacturer and distributor to the rule of reason will ineluctably result in a finding for the manufacturer. That pre-supposes that under a rule of reason analysis RPMs could never be deemed an unreasonable restraint of trade.   But there is always the possibility, again even under Leegin, that one could find material adverse restraints of trade in an RPM.  RPMs could result in manufacturer and retailer cartels; the former by assisting manufactures in identifying price-cutting manufacturers who benefit from the lower prices they offer and the latter by retailers conspiring to fix prices and then securing RPMs to enforce the same. Most obviously, dominant manufacturers or retailers could use RPM to enforce the status quo and avoid changes in distribution models and forestalling the entry of competitive retailers. Even if it is safe to say that after Leegin the prevailing analysis is that at least on the federal level, subjecting an RPM to the rule of reason would result in a finding that it was not an unreasonable restraint of trade and therefore enforceable, there remains the threat of a finding of unreasonable restraint of trade.

Further upon this supposed Leegin clarity was cast the shadow of state anti-trust laws which were too often overlooked. Certain states have declared RPM to be per se illegal, such as New York, Illinois, Michigan, Maryland, and California. This created a chequerboard hodgepodge of different standards and rules.

Confusion is the main theme of the day.   New York under its anti-trust law, the Donnelly Act still tries to enforce bans on vertical restraints. However, in Tempur Pedic[3] the state lost and Tempur Pedic was not deemed in violation of the law. The court found that section 369-of the Donnelly Act did not prohibit minimum retail price maintenance agreements. However this should give little comfort: if any presumption would apply that should be the State will look for an opportunity to enforce the Donnelly Act against RPM.

Further in contradistinction to New York, in People v. Bioelements, Inc.[4], the California Attorney General obtained a consent decree against Biolelements for its attempt to maintain RPM agreements.  Maryland actually adopted a statute[5] after Leegin which makes RPM (as to minimum as opposed to maximum pricing)  per se illegal.

So for now the prudent designer would avoid RPM so as not to unnecessarily divert resources to litigation with an aggressive state’s attorney general.

If we stopped at this juncture the designer would have no ability to protect its  brand image and full service retailers from free riding on the internet. However the Colgate doctrine gives some guidance as to what can be done.  In United States v. Colgate & Co. 250 U.S. 300 (1919) a unilateral declaration, in contradistinction to any downstream agreements with retailers, that Colgate would not conduct business with those selling below manufacturer’s suggested retail price was not deemed a restraint of trade since there was no “agreement.” Colgate acted unilaterally.  The Colgate doctrine is good law and opens one door to the designer.

A designer can also adopt a minimum advertised price (or MAP) policy which like Colgate is a unilateral deceleration, with no downstream agreements, prohibiting advertising a sales price below manufacturer’s suggested retail price.  The theory is if you cannot advertise a price it does a retailer little good to discount since it will not be able to drive business to its store(s) based upon the discounted price. Moreover in the public domain there is no dilution of brand image.

A cautious yet salutary approach would be to adopt a Colgate policy in combination with a MAP. This was the strategy adopted by Tempur Pedic.  The company combined a Colgate declaration with a MAP policy.[6]  This is a reasonable course of action to take when dealing with the possibilities opened by Leegin and  the conflicting  realities of the checquerboard maze of state law.   Finally, as an ever evolving area of the law any such Colgate-MAP policy should be frequently revisited to ensure any necessary adaptations are made on a timely basis.

[1] Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007)

[2] To be clear the vertical restraint concept before Leegin encompassed both minimum and  maximum  pricing since Albrecht v. Herald Co., 390 U.S. 145 (1968).  The concept was that unrestricted maximum pricing would channel sales to large distributors thereby evolving into a minimum pricing scheme. This was overruled in 1997 See State Oil v. Khan, 522 U.S. 3 (1997)

[3] See People v. Tempur-Pedic International, Inc., 400837/10 (N.Y. Sup. Ct. N.Y. County filed Mar. 29, 2010)

[4] People v. Bioelements Inc., File No. 10011659 (Cal. Super. Ct. Riverside County, filed Dec. 30, 2010)

[5] See Md. Code Ann., Com. Law. § 11-204(A)(1) (2009)

[6] A good MAP policy would specify that the  polices only apply to advertising, it is unilateral and should be in plain English.

Louis Vuitton and Damier: Inherent versus Acquired Distinctiveness in the European Union

Posted in Fashion Intellectual Property, The Business of Fashion

When a Louis Vuitton (“LV”) trademark, duly registered in the European Union, is subject to a declaration of invalidity and therefore cancelled, it is a worthwhile exercise to determine what went wrong; a legal post mortem. This is not a question of schadenfreude for a respected brand and design but a question of what went legally awry and how to avoid any mistakes identified by the European General Court (“EGC”).

A Community Trademark is a unitary trademark for the EU as constituted at the time of trademark application and for subsequent accession countries. On September 18, 1996, LV filed an application to register as a Community Trademark its famous, but as we shall see not distinctive, checkerboard design. At the time of the LV application, there were 15 constituent units of the EU and today there are 28. The application was granted by the Office of Internal Harmonization (“OIHM”) on August 27, 1998. Eleven years later on September 28, 2009, Nanu-Nana of Germany intervened to have the application declared invalid, in effect to have the OIHM overruled, and to cancel the trademark registration.

The EGC on April 21, 2015, affirmed the decision of the OIHM’s First Board of Appeal to grant the declaration of invalidity. While the decision itself may not have surprised (or disappointed) many observers, the breadth of the decision was stunning. Simply put, the EGC gave no succor to LV’s claims that the checkerboard as used by LV in connection with leather goods was either (a) inherently distinctive or (b) had acquired distinctiveness through use.

The findings on inherent distinctiveness, was conventional. The EGC focused on identification of origin or source and asked fundamentally a simple question: does the brown and beige checkerboard, with the weft and warp structures, have inherent distinctiveness? While the court appears to have placed a greater burden of proof on three dimensional marks as opposed to marks based on a graphic or word element, it did so for good reason. The average consumer is most likely to associate a product source with a word or logo as opposed to a shape or design. Particular designers may have a look and feel, the consumer will always have a reservation of doubt as to who or what is the actual producer of a particular product unless it is blatantly spelled out via words or unique graphics.

It is possible to perceive that underlying this analysis — as evidenced by the broad language of the findings — was a distrust of using trademark law to protect a design. The EGC was borderline insulting to the LV trademark. The design was deemed to be “basic and commonplace”; there was no “notable variation” in relation to conventional checkerboards; and probably most damming the design was no different from other checkerboard designs due to its great “simplicity.”

The EGC unequivocally held, although as a composite trademark of several possible distinctive elements, when viewed in its totality, it was not distinctive; if it’s not distinctive it cannot stand as an identifier of source. While the EGC did appear to protest too much, clearly it felt comfortable enough that LV did not carry its burden of proof that as of the date of its application the checkerboard was not distinctive enough to differentiate LV sourced goods from others.

The second claim presented a more prosaic issue: from the time of the application to the date intervenor Nanu-Nana appeared, did LV acquire the requisite distinctiveness by mere use? The door was wide open for the EGC to find for LV. Article 52(2) of EU Regulation No. 207/2009 specifically states that even if registration was erroneously granted by the OIHM for a trademark lacking inherent distinctiveness, would not be subject to invalidation, cancellation, if it had acquired distinctiveness through use. As noted above the time period of use was eleven years. It is safe to say, via a neutral term, that the checkerboard in tan and brown with weft and warp structures was and is an iconic design; but for the EGC even 11 years of continued, open, notorious and EU wide use was insufficient to sustain acquired distinctiveness .

Evidence of such use may include the amount of market share, the intensity, breadth and long standing use, the amounts invested in promoting the trademark, surveys showing the proportion of relevant persons identifying the trademark as being from a particular source, statements from chambers of commerce and opinion polls. LV submitted 8 exhibits worth of evidence as well as a survey. The exhibits showed what one would expect namely extensive, continued and consistent use.

The post mortem shows the EGC laser like focus on the issue of acquired distinctive use. LV appears to have erred in connection with the above mentioned evidence by claiming that it reflected “increased” inherent distinctiveness as opposed to “acquired distinctiveness.” Clearly not the cleanest of arguments and yet the same would not ordinarily cause a court to turn its back from such clear evidence of acquired distinctiveness.

The court also argued that of the 15 member nations of the EU at the time of application there was inadequate proof of acquired distinctiveness in Denmark, Portugal, Finland and Sweden. Since the Community trademark is a unitary mark the acquired distinctiveness argument must carry in the jurisdictions of the EU existent as of the time of the original application. The court held there was inadequate evidence to support the claim in Denmark, Portugal, Finland and Sweden.

The EGC also took LV to task over the quality of its survey stating it was faulty since it covered consumers of luxury goods and not the “average consumer” in the EU. This is on its face a stretch. The average consumer to have relevance must be the typical consumer in the particular channel of distribution.
While often times reading opinions in much like reading tea leave for future guidance, it is clear that the EGC did not merely hold against LV, it created significant hurdles to using trademarks to protect a design. The checkerboard is iconic but should a design be elevated to a source identifier no matter how iconic? While many have focused on what appears to be the technical flaws in LV’s position as identified by the court, the strategic message is simply that designs have significant and material hurdles to be afforded trademark status and the various attempts to elevate design to trademark are facing pushback.

Co-tenancy Clauses in a Lease for a New Mall Construction

Posted in The Business of Fashion

In the fashion world, we are constantly being approached by landlords and brokers anxious to bring our brands into the mix of their stores in a Mall. A Mall is a unique situation whereby the marketing of your brand is sublimated to the greater whole of the Mall; if the Mall is a success your store supposedly will also be a success. But this sublimation leads to a fundamental conundrum; when does the marketing for the Mall in toto, inclusive of brands that may be not on the same level as your own, detrimentally affect the good will of your brand? If the answer is that the marketing and demographics of the Mall are oriented towards a customer not willing or able to patronize your brand, except on an aspirational level, entry into the Mall will be a negative; both in terms of return on CapEx as well as dilution of the Brand.

This seems obvious enough as far it goes. You or your agent walk the Mall, review the occupancy, request representations as to sales per square foot and voila, we know if it’s a fit. However, what do you do if you are approached for a space in a new Mall construction? Obviously the developer and its agents will try to prove that your brand is not only a good fit but on the flip side they will use your brand to entice others into the Mall. One could say a virtuous cycle…unless the cycle is broken by misrepresentations of potential tenancies.

To ensure that your brand will be a good fit and not the anchor in the marketing process a Co-tenancy clause is an insurance policy to keep the cycle virtuous. While each Co-tenancy should be calibrated to the particular project there are the proverbial seven (7) deadly sins—when someone is not shall we say fully forthcoming– to consider.

First, the list. You will want to make sure that the Landlord lists as potential co-tenants the main brands that seduced you to enter into the Lease negotiations in the first instance. Since this is a moving target, there may be a list of ten (10) from which the Landlord has to secure say five (5) to (7) signed leases before you are obligated to commence operations.

Second, from the list there may be your anchors; the Brand(s) that must sign leases otherwise you would not proceed. Usually it is one (1) or two (2) and may include a major anchor. But the reasoning is obvious: you do not want your Brand to be the linchpin leveraged for success. Since your Brand positioning is sublimated to the Mall it must be insulated by having core co-tenancies in sync with your own.

Third, timing. When do you have to start spending money on construction, immediately in anticipation of the projected Grand Opening Date or only after the landlord has signed a minimum number of the co-tenancies? Clearly you want breakpoint so your CapEx is not wasted. But this can be ameliorated by…

Fourth, a tenant improvement allowance, the TI. TIs are common enough but are more aggressively promoted in new mall projects. Depending on the size of the store and importance of the Brand full build out costs inclusive of hard and soft costs are negotiable. If the landlord is bearing the cost then timing is ameliorated except you will have to float the costs pending proof of completion.

Fifth, quality of the purported leases. This is the tricky part, how does one ensure that the signed co-tenancy leases are “real” leases. Are they short term pop ups, licenses or leases with favorable kick out provisions? In effect you want to make sure that even if for the Grand Opening Date the co-tenancy requirements are technically met, they reflect true commitment commensurate with your own lease term; if not the value of the co-tenancy clause is totally vitiated. So to hedge, you would require that the co-tenancy leases meet certain standards; as a simple example they must be for terms of no less than five (5) years without a kick out provision. An early kick out provision on favorable terms to the co-tenant is merely an option not the commitment commensurate to insulate your risk.

Sixth, location. The mere fact that the co-tenancy requirements are met does not mean you have immediate value if the brands are located on a different levels, or areas of the Mall. If your brand is in the North 2nd floor of a Mall and your co-tenants are in the South 1st floor the traffic for your co-tenants are unlikely to accrue to your benefit.

Seventh, what happens if the co-tenancy is not met even colorably by opening day. Termination? Probably not. The remedy should be to go to percentage rent only until the co-tenancy is met with a drop dead date of between 12 to 18 months. If the co-tenancy is not met by the drop dead date then tenant usually has the right to terminate.

New projects can be exciting and economically incentivized since the developer is highly motivated to secure tenancies. But the devil is in creating the traction and making sure you are not alone in the vanguard of the developer’s project. A carefully crafted and modulated co-tenancy clause while not a panacea to an inductive analysis of the merits of the particular project, can be a safety net to ensure the economic viability of your shop.

Flash Post: Fashion Entrepreneur Karen Tai of OnePointSix featured on Forbes.com

Posted in Fashionable Friday, The Business of Fashion

Recently, Fox Rothschild client Karen Tai (CEO; OnePointSix) was featured in Forbes’ Designer Spotlight!

Ms. Tai, who launched OnePointSix about a year ago, has reimagined an entire ready-to-wear collection of stylish and sophisticated office-appropriate dresses, blazers, skirts, pants, and coats.

Her garments focus on proper fit, figure-flattering cuts, high quality materials, and subtle, yet sophisticated details, like double top-stitching, color panels, discreet pockets, and more.

Congratulations Karen on your current and future successes!

Gray Market Goods: The Ninth Circuit Court of Appeals’ Recent Opinion In Favor of Costco

Posted in Fashion Intellectual Property, The Business of Fashion

Dana S. Katz writes:

Gray market goods are typically defined as authentic items sold by an unauthorized retailer.  This often means that the goods are imported and sold outside the normal distribution channels, without the brand owner’s consent.  As a consumer, you may have seen gray market products (high-end or luxury items offered at steep discounts) in your local bulk retailer or discount warehouse shopping stores.

In Omega S.A. v. Costco Wholesale Corp., Case Nos. 11-57137, 12-56342 (9th Cir. Jan. 20, 2015), the Ninth Circuit Court of Appeals recently decided a dispute arising from Costco’s unauthorized sale of Omega watches to its members in California.  Omega manufactures luxury watches in Switzerland and distributes them around the world through its network of authorized distributors and dealers.  In 2003, Omega copyrighted its “Omega Globe Design” and began selling its Seamaster watches bearing this copyrighted symbol.  That same year, Costco and Omega discussed the possibility of Costco carrying Omega watches but the parties never came to any agreement, and Costco was not authorized to sell Omega watches.

Regardless, in 2004, Costco purchased 117 Seamaster watches bearing the Omega Globe symbol on the gray market.  On its second round of appeal, the Ninth Circuit upheld the lower court’s decision in favor of Costco.  Here, Costco obtained the watches as follows:  Omega sold the watches to one of its authorized distributors abroad.  Unidentified parties then bought the watches and sold them to a company in New York.  Costco acquired the 117 Seamaster watches from this New York company and proceeded to sell 43 watches to its members.

The Ninth Circuit’s decision was based primarily on the first sale doctrine under a recent United States Supreme Court decision, Kirstaeng v. John Wiley & Sons, Inc., 133 S.Ct. 1351 (2013).  Under the first sale doctrine “once a copyright owner consents to the sale of particular copies of work, that same copyright owner cannot later claim infringement for distribution of those copies.

In Kirstaeng, the Supreme Court determined that the first sale doctrine applies to copyrighted work made abroad in a lawful manner.  Based on Kirstaeng, the Ninth Circuit explained, “Omega’s right to control importation and distribution of its copyrighted Omega Globe expired after that authorized first sale, and Costco’s subsequent sale of the watches did not constitute copyright infringement.”  Omega at 7 (citing Kirstaeng, 133 S.Ct. at 1366).  The Court conclusively ruled, “copyright holders cannot use their rights to fix resale prices in the downstream market.” Omega at 7.

Although Omega authorized the initial sale of its watches, it never approved the importation of the watches into the U.S. or Costco’s ultimate sale of the watches to its customers, and yet, the Ninth Circuit found in Costco’s favor under the first sale doctrine because the first sale was authorized by Omega.  The Ninth Circuit’s decision could have much wider implications to the import of gray market goods into the U.S.; however, the saga continues. On February 9, 2015, Omega filed a Petition for Panel Rehearing and Rehearing En Banc and only time will tell whether Omega will obtain any relief from the Ninth Circuit’s ruling.

The Ninth Circuit’s opinion can be found here.

Dana S. Katz is an associate in Fox Rothschild’s Philadelphia office. Follow her on Twitter for interesting legal news and updates @danasichelkatz