Poor Quality is No Defense to Trademark Infringement

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On May 31, 2013, the U.S. District Court in the Northern District of Indiana ruled in favor of Plaintiffs Coach, Inc. and Coach Services, Inc. ("Coach") and against Defendants The Treasure Box, Heather Hiatt and Michael Hiatt on claims of trademark infringement and counterfeiting.

BACKGROUND

Coach is a three-billion-dollar-a-year business and owns a number of trademarks ("Coach Marks") for its goods, including handbags, wallets, travel cases, briefcases, planners, etc.  Coach has spent over $100 million advertising, promoting and marketing its goods bearing the Coach Marks, which it sells to consumers, retailers and international distributors.

The Treasure Box, a small boutique located in Elkhart, Indiana, sold knock-off Coach handbags, key chains and wallets.  The Hiatts were co-owners of the now-defunct shop. Heather Hiatt handled the purchasing and display of the merchandise, and Michael Hiatt paid the bills and handled the bookkeeping. Heather purchased knock-off Coach merchandise from the Internet and another local Indiana store, specifically: five or six purses, three key chains and a few wallets. Critically, Heather knew that these items were knock-offs.

The Treasure Box sold these goods at a price point significantly lower than authentic Coach goods, because, as Heather explained, she did not want her customers to think they were purchasing authentic Coach goods.  When customers asked, Heather told them the goods were not genuine – and those customers did not purchase the goods. On the other hand, the customers who bought the goods were never told they were not genuine.

TRADEMARK INFRINGEMENT AND COUNTERFEITING CLAIMS

In December 2011, Coach sued The Treasure Box for various trademark offenses. In January 2012, Coach amended its complaint to name both Heather and Michael Hiatt as defendants. The amended complaint included federal and state claims for trademark and trade dress infringement, copyright infringement, unfair competition, forgery and counterfeiting. Subsequently, Coach moved for partial summary judgment on the federal trademark and counterfeiting claims.

Trademark Infringement Claim

In order to prevail on a claim of trademark infringement, the Plaintiffs needed to show (1) the Coach Marks were protectable, and (2) the Defendants use of the marks was "likely to cause confusion among customers." As there was no dispute that the Coach Marks were protectable -- indeed, the Defendants admitted that the products were knock-offs of Coach goods -- the only issue was whether the Defendants’ use of the Coach Marks was likely to cause confusion.

Although it was clear from the facts of the case that the Defendants were interested in capitalizing on the Coach name and the demand for Coach goods, in an abundance of caution, the court proceeded with the seven-factor infringement test before arriving at the decision that there was a likelihood of consumer confusion. The court found in favor of the Plaintiffs with regard to four of the factors: (1) the marks were similar; (2) the goods were similar such that the public might attribute them to a single source; (3) the area and manner of use were similar; and (4) the Coach Marks were very strong. The court found in favor of the Defendants with regard to actual confusion, as there was no evidence to support actual confusion, and determined that the factor relating to the degree and care exercised by consumer did not favor either party.

Finally, the court considered whether the Defendants intended to "palm off" the goods they sold as those of the Plaintiffs. Here, the Defendants argued that the quality of the knock-off goods was so poor (Heather Hiatt described the goods as "junk") and the price so low, that no consumer could possibly believe the goods were authentic. Moreover, the Defendants claimed they did not want anyone to believe the goods were authentic, so they priced the goods accordingly, never told customers that the goods were authentic and, in fact, if asked, told customers that the goods were knock-offs. Further, the Defendants argued that they were not "affirmatively trying to hide the ball on consumers and make them think that the [goods] were authentic Coach [goods]" and did not intend to “palm off” or infringe the Coach Marks.

The court disagreed, stating it was clear the Defendants were trying to profit from consumers’ goodwill toward Coach by selling "phony" Coach handbags. Even if they wanted their customers to recognize that the bags were not authentic, they intended their customers to associate the goods with authentic Coach bags and for The Treasure Box to benefit from this connection. Indeed, Heather sought out counterfeit Coach goods to sell in her store!

Counterfeiting Claim

To establish counterfeiting, the Plaintiffs needed to establish four additional elements beyond infringement: (1) the mark must be “counterfeit,” (2) the mark must be registered; (3) the Defendants must not have been authorized to use the mark; and (4) the Defendants must have acted with knowledge and intent.

Here, the Plaintiffs established (1) the infringing marks were “substantially indistinguishable” from the registered Coach Marks; (2) the Coach Marks were properly registered trademarks; (3) neither The Treasure Box nor the Hiatts were authorized to use the marks; and (4) The Treasure Box and Heather Hiatt acted with knowledge and intent. Selling the goods at a price below market value did not negate these facts.

CONCLUSION

Accordingly, the court found Defendants’ arguments that poor quality, low prices and lack of claims of authenticity proved lack of intent were not persuasive, finding in favor of the Plaintiffs with regard to infringement and counterfeiting, as well as Heather Hiatt’s individual liability.