Upholding a preliminary injunction entered against a national drugstore chain, the U.S. Court of Appeals for the Second Circuit recognized that a trademark owner may maintain an action for trademark infringement when a defendant sells an otherwise genuine product that has been tampered with so that its anti-counterfeiting device has been removed. Zino Davidoff SA v. CVS Corporation, Case No. 07-2872 (2d Cir., June 30, 2009) (Leval, J).

Plaintiff Zino Davidoff SA (Davidoff) distributes men’s and women’s fragrance products under the marks COOL WATER and DAVIDOFF COOL WATER through luxury retailers. Defendant CVS is a national drugstore chain. Although Davidoff had declined to distribute its COOL WATER products through CVS (so that CVS is not an authorized retailer), CVS sells COOL WATER products, obtaining them outside of Davidoff’s normal distribution channels. After discovering that CVS was selling so-called counterfeit COOL WATER products, Davidoff sent CVS cease and desist letters and provided CVS with information on how to identify counterfeits based on the product’s unique-product-code (UPC). In response, CVS assured Davidoff that it would conduct an inventory review and remove all counterfeit products and would source only from authorized distributors. After Davidoff learned that CVS was continuing to sell counterfeit COOL WATER products, Davidoff brought an action for trademark infringement, trademark dilution and unfair competition under the Lanham Act.

In the course of a court-ordered inspection into CVS’s inventory, Davidoff learned that in the 16,600 remaining products in CVS’s inventory, the UPC codes on the packages and labels affixed to the bottles had been removed and, in many instances, the packaging had been opened. Thereafter, Davidoff amended its complaint to include claims for relief based upon CVS’s sale of COOL WATER products with the UPC codes removed. CVS then agreed to voluntarily stop selling counterfeit COOL WATER products but not the products with the UPC codes removed. Davidoff moved for a preliminary injunction barring CVS from selling COOL WATER products with the UPC codes removed. The district court granted Davidoff’s motion, finding that removal of the UPC codes impaired Davidoff’s trademark rights and constituted trademark infringement by interfering with Davidoff’s rights as a trademark owner to identify counterfeit products and exercise quality control. CVS appealed.

The Second Circuit affirmed the district court’s grant of a preliminary injunction against CVS on two grounds. First, the Court found that the injunction was justified on the ground that removal of the UPC codes from Davidoff’s COOL WATER products unlawfully interfered with Davidoff’s ability to control the quality of its trademarked products. In its analysis, the Court employed the test from its 1996 decision Warner-Lambert Co. v. Northside Development Corp., which held that, “a trademark holder is entitled to an injunction against one who would subvert its quality control measures upon a showing that (i) the asserted quality control procedures are established, legitimate, substantial, and nonpretextual, (ii) it abides by these procedures, and (iii) sales of products that fail to conform to these procedures will diminish the value of the mark.” Employing the Warner-Lambert test, the Court agreed with the district court that Davidoff had satisfied each of these requirements. First, Davidoff demonstrated adequately that the affixation of the UPC codes was a legitimate procedure for identifying counterfeit products. Second, Davidoff showed that it regularly trains retailers, private investigators and customs officials on how to use the UPC system to identify counterfeits. Finally, Davidoff demonstrated that its marks would be harmed by an increase in sales of counterfeit products, which would occur in the absence of the quality-control procedures.

The Court further found that Davidoff was likely to succeed on its trademark infringement claim based because the COOL WATER products with the UPC codes removed were materially different from Davidoff’s genuine products. While the Court recognized that the unauthorized sale of genuine goods does not generally constitute trademark infringement because such sales may not cause confusion or dilution, the court noted that goods are not genuine if they do not conform to the trademark holder’s quality-control standards or if they differ materially from the product authorized for sale. In finding that CVS’s COOL WATER PRODUCTS with UPC codes removed were materially different, the Court noted that the evidence showed that the UPC removal required tampering in the form of cutting of packaging, application of chemicals to remove the labeling and grinding of bottles. “It is a logical inference that consumers may regard a product whose packaging has been tampered as inferior and perhaps suspicious,” the Court stated, and therefore, “trademarked goods whose luxury packaging is damaged are materially different from those that are intact.” Thus, the Second Circuit concluded that Davidoff was likely to succeed on its trademark infringement claim “not only on the basis of CVS’s interference with Davidoff’s quality control, but because CVS is selling under Davidoff’s [COOL WATER marks] goods that are materially different from Davidoff’s genuine trademarked product.”