IP Update - June 2010 - Part 2

Profession:McDermott Will & Emery
 
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Trademarks

Small Trademark Licensee Scores a Touchdown Against the NFL Keith M. Stolte

In one of his last opinions, Justice John Paul Stevens, together with all eight of his Supreme Court brethren, handed a novelty clothing manufacturer a touchdown in its antitrust lawsuit against Reebok International, the National Football League (NFL) and the NFL's 32 member teams. The unanimous Court held that the NFL and its teams could be subject to Sherman Act liability for conduct relating to their exclusive trademark licensing agreements for sports merchandise. American Needle, Inc. v. National Football League, Case No. 08-661 (Supr. Ct., May 24, 2010) (Stevens, Justice).

Between 1963 and 2000 the NFL granted, on behalf of its member teams, non-exclusive trademark licenses to a number of vendors including American Needle permitting them to manufacture and sell apparel bearing the insignias of the member teams. In December 2000, the teams voted to authorize the NFL to do away with its series of non-exclusive licenses and grant exclusive licenses for use of their intellectual property on sports merchandise. Accordingly, the NFL declined to renew American Needle's license and instead granted Reebok an exclusive, 10-year license to manufacture and sell trademarked headwear for all 32 teams.

American Needle filed suit against Reebok, the NFL and the owners of the 32 teams, alleging that the defendants violated the Sherman Act by illegally restraining trade and attempting to monopolize the market for NFL trademarked merchandise. Following a short discovery period the district court entered summary judgment in favor of the NFL and held that the Sherman Act did not reach parent-subsidiary relationships such that the court found existed between the NFL and its member teams. The Court of Appeals for the Seventh Circuit affirmed, concluding that the NFL teams shared a common economic interest in licensing their intellectual property.

Hoping for an even broader decision insulating it from future antitrust actions, the NFL took the unusual step of joining American Needle in seeking certiorari. Other sports leagues (i.e., the NBA and the NHL) filed amicus briefs in support of the NFL's position. The narrow issue the Supreme Court agreed to decide was whether the licensing activity of the NFL and its 32 team members must be viewed as that of a single enterprise for purposes of Section 1 of the Sherman Act would and thus be immune from antitrust liability.

The Supreme Court answered that question in the negative, noting, "[t]he NFL teams do not possess either the unitary decisionmaking quality or the single aggregation of economic power characteristics of independent action. Each of the teams is a substantial, independently owned, and independently managed business."

The Court also determined that the teams directly compete in the market for intellectual property. "To a firm making hats, the [New Orleans] Saints and the [Indianapolis] Colts are two potentially competing suppliers of valuable trademarks. When each NFL team licenses its intellectual property, it is not pursuing the common interests of the whole league, but is instead pursuing interests of each corporation itself." The Court concluded that decisions by the NFL member teams to collectively license their separately-owned trademarks to a single vendor are decisions that "deprive the marketplace of independent centers of decisionmaking." The Court held that such conduct may constitute concerted action for which liability under Section 1 of the Sherman Act may attach. Accordingly, the Court reversed and remanded the case to the district court for a determination of liability under the "rule of reason."

Post-Purchase Confusion Trumps First Sale Doctrine Rita Weeks

Finding against a company that created new products that incorporated another company's genuine and lawfully purchased trademarked product, the U.S. Court of Appeals for the Ninth Circuit found that the "first sale" doctrine is not a defense if such new products create a likelihood of confusion among persons observing such products after purchase. Au-Tomotive Gold, Inc. v. Volkswagen of America, Inc., Case No. 08-16005 (9th Cir., May 6, 2010) (Fletcher, J.)

Au-Tomotive Gold (Auto Gold) manufactured and sold various automobile accessories for specific car brands, including Volkswagen. Volkswagen automobiles bear decorative badges on the hoods or trunks, consisting of the letters VW inside a circle. Among Auto Gold's products are "marquee" license plates, which are plain license plates onto which Auto Gold mounted genuine "VW" badges. Auto Gold purchased the replacement badges from an authorized Volkswagen supplier.

After receiving a cease and desist demand from Volkswagen, Auto Gold filed suit seeking a declaratory judgment that it did not infringe or dilute the VW trademarks. Volkswagen counterclaimed for federal trademark infringement, counterfeiting, false designation of origin and dilution under the Lanham Act and related state law claims. Both parties moved for summary judgment. The district court granted summary judgment to Auto Gold on all claims, finding that the VW trademarks were "functional" and not entitled to trademark protection. Volkswagen appealed.

The Ninth Circuit reversed, finding that Auto Gold's use of Volkswagen's marks was "neither aesthetic nor independent of source identification," but that consumers purchased Auto Gold's products directly because of the products' identification with the VW brand. The Ninth Circuit, in remanding the case, also determined that Auto Gold's production and sale of automobile accessories bearing the VW trademarks, including the marquee license plates, created a sufficient likelihood of confusion to constitute trademark infringement.

On remand, the district court granted summary judgment to Volkswagen and awarded a permanent injunction against Auto Gold. This time Auto Gold appealed with respect to the issue of infringement by the marquee license plates, arguing that its sale of the license plates was protected by the "first sale doctrine.

Generally, the first sale doctrine protects the resale of trademarked products when consumers will not be confused as to the source or sponsorship of the products. The Ninth Circuit explained that the first sale doctrine comports with the principle that in the absence of consumer confusion, "the right of a producer to control distribution of its trademarked product does not extend beyond the first sale of the product." Auto Gold argued that because it had lawfully purchased the VW badges before incorporating them into its marquee license plate products, its use of the VW marks was protected by the first sale doctrine.

The Ninth Circuit rejected this argument, explaining that it did not base its finding of a likelihood of confusion on pre-purchase confusion among purchasers of the marquee license plates. Instead, the Ninth Circuit determined that post-purchase confusion was likely among non-purchasers who observed the marquee plates used on automobiles. The Ninth Circuit explained that post-purchase confusion creates a free-rider problem. Although Auto Gold had paid for the trademarked products, i.e., the VW badges, its purchase covered the trademarked badges only, not the use of the trademark. As such, the court explained, "[I]f a producer profits from a trademark because of post-consumer confusion about the product's origin, the producer is, to that degree, a free-rider." This conclusion was supported by the fact that "customers buy marquee license plates principally to demonstrate to the general public an association with Volkswagen."

Practice Note: So long as the likelihood of consumer confusion is eliminated when incorporating another's trademarked product into a new product, such as through the use of prominent disclaimers, the first sale doctrine will ordinarily protect the sales of such products. Au-Tomotive Gold illustrates that the first sale doctrine will not apply, however, if the association between the trademarked product and the new product is not made clear to consumers at all stages of the purchasing process. To strengthen one's first sale defense, disclaimers and other messages to consumers should be used prominently to negate the existence of a likelihood of confusion both pre-purchase and post-purchase, even with respect to potential confusion among persons who observe a product after another has bought it.

One More Round with "Victor's Little Secret" Paul Devinsky

In a trademark dilution case that was the subject of an earlier U.S. Supreme Court ruling and a new federal dilution law, the U.S. Court of Appeals for the Sixth Circuit has enjoined a "sex toy" shop from using the name "Victor's Little Secret." V-Secret Catalogue, Inc. v. Victor Moseley, Case No. 08-5793 (6th Cir., May 19, 2010) (Merritt, J.) (Moore, J., dissenting).

In 1998, the proprietors of the Victoria's Secret brand became aware of a sex shop owned by Moseley, then called Victor's Secret. Victoria Secret sued for trademark dilution. After the district court enjoined Moseley's use of the store name, the case made it all the way to the U.S. Supreme Court. (See IP Update, Vol. 9, No. 10 .) The Supreme Court reversed the district court and ruled that actual harm, rather than a mere likelihood of harm, must be shown by a trademark holder in order to prevail in a dilution case.

Congress, in response to the burden the Supreme Court...

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