For more than a century, courts have grappled with whether to extend the protections of trademark laws to colors. In 1995, however, the Supreme Court recognized that both the “language . . . and the basic underlying principles” of the Trademark Act of 1946, 15 U.S.C. §§ 1051-1127 (Lanham Act), “would seem to include color within the universe of things that can qualify as a trademark.” Qualitex Co. v. Jacobson Prods. Co., 514 U.S. 159, 162 (1995) (“We cannot find in the basic objectives of trademark law any obvious theoretical objection to the use of color alone as a trademark, where that color has attained ‘secondary meaning’ and therefore identifies and distinguishes a particular brand (and thus indicates its ‘source’).”).
Holding that “color alone, at least sometimes, can meet the basic legal requirements for use as a trademark,” id. at 166, the Qualitex court acknowledged, however, that in some circumstances, “to permit one, or a few, producers to use colors as trademarks will ‘deplete’ the supply of usable colors to the point where a competitor’s inability to find a suitable color will put that competitor at a significant disadvantage. Id. at 168. In such circumstances, the competitor’s use of a color mark may be subject to a defense of “aesthetic” functionality:
When a color serves as a mark, normally alternative colors will likely be available for similar use by others. . . . Moreover, if that is not so – if a “color depletion” or “color scarcity” problem does arise – the trademark doctrine of “functionality” normally would seem available to prevent the anticompetitive consequences . . . .”
Id. (citations omitted). The Qualitex court anticipated that such “aesthetic” functionality concerns would cause courts evaluating the validity of color marks to “examine whether the use [of a color or range of colors] as a mark would permit one competitor (or a group) to interfere with legitimate competition through actual or potential exclusive use of an important product ingredient [i.e., all usable colors],” and that such examination would, “ordinarily, . . . prevent the anticompetitive consequences of . . . ‘color depletion.’” Id. at 170.
The Second Circuit recently analyzed that aesthetic functionality defense to a single-color trademark in Christian Louboutin S.A. v. Yves Saint Laurent America Holding, Inc., 2012 WL 3832285 (2d Cir. 2012). At issue was a dispute between two European fashion houses over the right to color the “outsole” of women’s shoes red. In 2008, the plaintiff, French shoe designer Christian Louboutin, registered a mark consisting of “a lacquered red sole on footwear” (the “Red Sole Mark”). Since Louboutin began designing shoes in the early 1990s, he had featured red outsoles to contrast with the colors of other parts of the shoes. The district court concluded that, through Louboutin’s marketing efforts, the “flash of a red sole” had become “instantly” recognizable as “Louboutin’s handiwork.” Id. at *2 (citing district court).
In 2011, the fashion company founded by the late Yves Saint Laurent (“YSL”) designed a line of “monochrome” ladies shoes of various colors, including red shoes that “featured the same color on the entire shoe, so that the red version is all red, including a red insole, heel, upper, and outsole.” Id. After YSL rejected Louboutin’s demand that it remove its monochrome red shoes from the market, Louboutin sued and sought a preliminary injunction. YSL opposed in part on the ground that the Red Sole Mark was invalid as aesthetically functional.
Relying on Qualitex, the district court concluded that a “color is protectable as a trademark only if it ‘acts as a symbol that distinguishes a firm’s goods and identifies their source, without serving any other significant function.’” Id. at *3 (quoting district court). Noting the supposedly “unique characteristics and needs – the creativity, aesthetics, taste, and seasonal change – that define production of articles of fashion,” the district court held that single-color marks are inherently “functional” in the fashion industry, and on that basis denied Louboutin’s requested injunction. Id.
On review, the Second Circuit recognized the Qualitex court’s concerns about the potential anti-competitive consequences of single-color marks and discussed at length the “aesthetic functionality” defense to a trademark infringement claim. In addition to the traditional “functionality” defense, which asks whether a product feature like color is “‘functional’ in a utilitarian sense,” id. at *8, aesthetic functionality goes a step further in considering whether a design feature has a “significant effect on competition.” Id. After analyzing various formulations of the aesthetic functionality tests that it and other circuit courts have applied, the Second Circuit held that “a mark is aesthetically functional, and therefore ineligible for protection under the Lanham Act, where protection of the mark significantly undermines competitors’ ability to compete in the relevant market.” Id. at *10.
Having decided on the standard for evaluating aesthetic functionality, the Second Circuit turned to the district court’s “per se rule of functionality for color marks in the fashion industry.” Id. The court profits opinions, and after conducting an eight-day evidentiary hearing, the judge excluded the expert’s testimony because it was speculative and lacked any reliable basis.
The Court of Appeal reversed, ruling that any challenges to the expert’s reasoning were for the jury to resolve, but Quinn Emanuel successfully petitioned the California Supreme Court, which grants review in less than 1.5% of civil, to review case. Arguing in the California Supreme Court only two days after being before the U.S. Supreme Court, Kathleen Sullivan, the head of the firm’s appellate group, persuaded the California Supreme Court to overturn the Court of Appeal and rule for USC in a unanimous 7-0 decision.
In addition to protecting USC against $1.18 billion in lost profits, the California Supreme Court’s decision in Sargon Enterprises v. USC establishes that California trial courts have a duty to exclude speculative and unreliable expert testimony. Using language similar to Daubert, the Court held that trial judges have a “gatekeeping” responsibility, which requires them to exclude expert testimony that is based on invalid or unreliable reasoning. This now clearly established responsibility will enable businesses litigating in California courts to exclude speculative and unreliable expert testimony. Also, by bringing California practice more in line with federal practice, the Sargon decision removes a significant incentive for forum-shopping in complex business cases.
The Sargon decision also establishes another principle that may have a wide ranging impact on business litigation. It is well settled that new businesses seeking lost profits bear a heavy burden because they have no track record of profitability. Small businesses such as Sargon frequently claim that they would have grown into much larger companies absent some tort or breach of contact but that they should not be subject to the standard for new businesses because they already were earning some small profit. The Sargon decision makes clear that claims that a small business would grow into a much larger entity are subject to the same burden of proof. This ruling will change the dynamic in cases in which start-ups and other small companies seek large lost profit awards based on growth that they alleged that they would achieve. Moreover, because of California’s leading role in the high-tech industry involving so many start-ups, this aspect of the Sargon decision is likely to influence decisions in other jurisdictions.