ABSTRACT

On appeal from the Southern District of New York’s grant of a PI against defendant’s sale of gray-market COOL WATER perfumes with plaintiff’s unique production codes obscured or removed, the Second Circuit affirmed, finding the codes served two legitimate purposes under the Lanham Act. First, the codes allowed plaintiff to easily detect counterfeit products that had either no code or a fake code. Second, plaintiff used the codes to identify and recall, in a targeted fashion, potentially defective products.

CASE SUMMARY

FACTS

Plaintiff Zino Davidoff SA (“Davidoff”) markets multiple COOL WATER fragrances and holds valid, uncontestable registrations for its marks. Affixed to each bottle and package is a unique production code (“UPC,” not to be confused with Universal Product Code) that contains information about each unit’s time and place of production, ingredients, distributor, and intended customer. Davidoff only sells its products to luxury retailers and does not sell to defendant CVS Corp. (“CVS”), the largest drugstore chain in the United States.

For many years, however, CVS has purchased Davidoff’s products outside of their normal distribution channels. After a 2005 cease-and-desist letter regarding CVS’s alleged sale of counterfeit Davidoff products, Davidoff sued CVS for trademark infringement. The Southern District of New York granted a TRO and authorized Davidoff to inspect all of its branded, undistributed products in CVS’s inventory. That review uncovered 16,600 units with the UPC removed either by cutting away the UPC from the box or label, wiping the UPC off with chemicals, or grinding the UPC off. After CVS agreed to stop selling counterfeits, but not gray-market products with the UPC removed, Davidoff moved for a PI, which the district court granted.

ANALYSIS

The Second Circuit rejected CVS’s argument that the gray-market “goods are sold in their original packaging with the Davidoff trademarks clearly visible and unaltered,” such that “the removal of the codes does not negate their genuineness or constitute infringement.” The pertinent question for the court was not whether the products were genuine, but whether their sale without the UPCs interfered with Davidoff’s trademark rights. Congress had considered but ultimately did not pass amendments to the Lanham Act specifically prohibiting the removal of UPCs, but the court found this was not dispositive, since that failure “tells nothing about whether the preexisting law already covered the point.”

The Second Circuit acknowledged the general proposition that the unauthorized sale of gray-market goods may not cause confusion or dilution, but recognized the exceptions that gray-market goods will be considered nongenuine if they do not conform to the mark owner’s quality-control standards, or if they materially differ from authorized products. In the Second Circuit, an injunction is available against the removal of quality-control measures if (1) the measure is established, legitimate, substantial, and nonpretextual; (2) the mark owner abides by the measure or procedure; and (3) sales of nonconfirming products will diminish the value of the mark. Davidoff argued that the UPCs fulfilled important quality-control functions by allowing for the easy detection of counterfeits and for the targeted identification and removal of defective products. The court analyzed each of Davidoff’s UPC justifications.

First, as to the detection of counterfeits, the court noted that applying a UPC is an expensive process that counterfeiters routinely skip altogether or circumvent by repeating a few fake codes. The evidence revealed that Davidoff regularly trains retailers, investigators, and other personnel, as well as U.S. Customs, to use the UPCs to identify and seize counterfeit products. Since the UPC was a legitimate quality-control method which Davidoff employed, and since counterfeits “are invariably non-conforming and inferior” products that diminish a mark’s value, use of the UPC to detect counterfeits warranted a PI under the Second Circuit’s test. The court rejected CVS’s argument that the UPC did not itself prove the authenticity of the product, since “the removal of the codes exposes Davidoff to an increased risk that any given unit sold at retail will be counterfeit.”

Second, CVS argued that the UPCs were not a legitimate quality-control measure for identifying and removing defective products, but instead were merely a pretext for finding gray-market goods, since Davidoff’s customers are not aware of the UPCs and Davidoff had never enacted a large recall. The court rejected both arguments, stating that whether “consumers understand the codes is irrelevant to the codes’ performance of their function,” and relying on evidence showing that Davidoff had in several instances relied on the UPC system for small, targeted quality-control issues. The court found that “[w]hat matters is whether Davidoff’s codes are a bona fide control device upon which Davidoff actually relies. If the codes served only to help Davidoff exert control over the distribution and sales network, different questions would arise.”

Discounting CVS’s argument that Davidoff had not proven that the gray-market products were inferior, the court found that such proof was not necessary and that, in any event, tampering with the package to remove the UPC could diminish the product’s value: “Mutilated packaging makes the item less appealing to such a [romantic gift] purchaser, who runs the risk that the gift will be viewed by the recipient as a sketchy, cheap purchase from an illicit source or of the sort given by Tony Soprano to Carmela.” Thus, CVS’s altered products not only ran afoul of Davidoff’s legitimate quality-control mechanisms but also were “materially different” from authorized products with the UPC attached, given the low threshold of only “a slight difference which consumers would likely deem relevant when considering a purchase of the product,” providing another basis to affirm the PI.

CONCLUSION

This decision highlights that quality-control measures may effectively block the unauthorized sale of gray-market goods. The court repeatedly emphasized the dual purposes of the UPC system, and was persuaded by evidence that Davidoff trained personnel in the UPC’s use to detect counterfeits and used the UPC to detect and recall defective products. Here, Davidoff was able to prevent CVS’s unauthorized sale of over 16,000 units.