Injunction vacated in ‘nominative-use’ trade name case

A high-end manufacturer of luxury goods was not entitled to a preliminary injunction restricting the use of its trademarked name by an off-price retail chain, the 1st U.S. Circuit Court of Appeals has decided.

The manufacturer, Swarovski North America Ltd., sought the injunction after the retailer, Building #19, planned an ad announcing the resale of Swarovski crystal figurines that Building #19 had acquired in a salvage sale.

A U.S. District Court judge had issued a partial injunction, determining that the name “Swarovski” at the top of the ad could be in a font no larger than that used in a disclaimer at the bottom of the ad disassociating Swarovski from Building #19 and from the sale.

But the 1st Circuit reversed, finding that in a “nominative use” case like the one at issue — in which the defendant was using the plaintiff’s mark to refer to the plaintiff’s product as opposed to trying to associate a different product with the plaintiff — a trial judge must still make specific findings on customer confusion.

“Without at this time endorsing any particular approach to the fair use doctrine, it is enough to observe that whether [nominative fair use] factors serve as the plaintiff’s case-in-chief … or as an affirmative defense … a trademark defendant has no burden to prove anything until the plaintiff has first met its responsibility to show infringement by demonstrating that the defendant’s use of its mark is likely to confuse customers,” the court wrote in a per curiam opinion.

The 23-page decision is Swarovski Aktiengesellschaft, et al. v. Building #19, Inc.

‘Nominative-use’

The case represents the first time the 1st Circuit “has expressly acknowledged and adopted the ‘nominative fair use’ doctrine in the trademark context,” said Building #19’s lawyer, Michael C. Gilleran of Adler, Pollock & Sheehan in Boston.

Additionally, Gilleran said, the decision “serves notice” on brand owners that they cannot rely on trademark laws to protect them when their genuine goods are being resold after a casualty loss. In Swarovski, Building #19 purchased the Swarovski products from an insurer’s salvage sale after a storm damaged the warehouse in which a prior owner had been storing them.

“Brand owners must themselves police use of their names and marks on resale,” he said. “They should do so by making sure they have de-labeling and maybe even destruction clauses in their insurance contracts, so they are contractually protected and do not have to hope for protection under the trademark laws.”

Robert K. Taylor of Partridge, Snow & Hahn in Providence, R.I., represented Swarovski. He agreed that the decision is a sign that the 1st Circuit would be likely to accept a nominative fair use analysis in a trademark case.

At the same time, Taylor doubted that the ruling creates any significant precedential ramifications.

“The 1st Circuit judge just felt that the District Court judge hadn’t been clear enough in explaining her findings,” he said.

R. David Hosp, an intellectual property lawyer at Goodwin Procter in Boston, said the type of dispute in the case is fairly common. While the 1st Circuit declined to determine whether nominative fair use is an affirmative defense or a substitute for a likelihood-of-confusion analysis, the decision is still noteworthy for “reinforcing the notion” that nominative use of another company’s mark is permissible so long as it meets certain criteria, he added.

“So what attorneys need to know in advising clients is that, as a general matter, if a client is referring to genuine goods of another company, it can do so as long as it’s truthful, doesn’t use more of the trademark than necessary to identify the other product or manufacturer, and is done in a way that doesn’t suggest affiliation with the [holder of the mark].”

Salvage sale

In December 2011, defendant Building #19, a chain of off-price retail stores, acquired a number of Swarovski crystal figurines from an insurer’s salvage sale.

The figurines, which had a total retail value of $500,000, were apparently undamaged and came with a Swarovski certificate of authenticity. The terms of the sale placed no restrictions on Building #19’s ability to use the Swarovski name or product label, though Swarovski itself never authorized Building #19’s use of its trademark or name.

That month, Building #19 conducted two one-day-only sales of the Swarovski merchandise, promoting the events through a newspaper ad headlined with the word “Swarovski” in extra large, capitalized, bold lettering. The name “Building #19” appeared at the bottom of the ads, also in large, distinctive lettering.

On Dec. 7, 2011, Swarovski sent Building #19 a cease-and-desist letter objecting to the ads and, a week later, brought a trademark infringement suit in U.S. District Court in Rhode Island.

Building #19 agreed to voluntarily refrain from further advertising the sale of the Swarovski crystal in its possession and the situation appeared settled.

However, on April 5, 2012, the defendant provided Swarovski with a copy of a proposed ad it planned to run to promote a Mother’s Day sale of its remaining crystal and invited Swarovski to suggest further steps it could take to avoid consumer confusion. The ad was similar to the previous one, except it also had a disclaimer at the bottom in a small, non-bold font stating that the defendant was not an authorized Swarovski dealer, that Swarovski had no connection with Building #19 or the sale, and that Swarovski’s limited warranty was unavailable to Building #19 customers.

In response, Swarovski moved for a preliminary injunction to forbid Building #19 from using its trademark or name at all.

On May 1, 2012, U.S. District Court Judge Mary M. Lisi issued an oral decision rather than a written one, given the time sensitivity of the matter. Lisi granted a partial injunction barring Building #19 from putting the name Swarovski at the top of the ad in font larger than what was used in the disclaimer.

Building #19 appealed, arguing that Lisi failed to include necessary findings that customers were likely to be confused by its use of the Swarovski mark or that Swarovski would suffer irreparable harm as a result of what the defendant characterized as nominal fair use.

Necessity of further findings

On appeal, the 1st Circuit noted that the potential for confusion was not one of source since the product really was Swarovski crystal, but rather one of “endorsement or affiliation.”

In other words, the fear of a manufacturer is that a customer might mistakenly believe that it is associated with the sale or that it has partnered with a lower-end retailer in a way that might detract from its luxury status.

The court also pointed out that because such confusion is different than the typical trademark case, other circuits, such as the 9th and 3rd, have developed a specific “nominative fair use” analysis to identify unlawful infringement.

Though the mechanics of the analysis differ between those two circuits, the court said, they both look at whether a plaintiff’s product is identifiable without use of the mark, whether the defendant has used more of the mark than necessary, and whether the defendant accurately portrayed the relationship between itself and the plaintiff.

“In the 1st Circuit, we have recognized the ‘underlying principle’ of nominative fair use, but … have never endorsed any particular version of the doctrine,” the court said, adding that given the uncertainty in the law, Lisi did an “admirable” job trying to evaluate the likelihood of Swarovski’s success on the merits of its infringement claim.

Still, the court said, “greater clarity” was needed on the likelihood of customer confusion in the case.

“[Lisi] merely decided that Building #19 used ‘more of the mark than necessary’ to effectively communicate its message,” the 1st Circuit said. “But as we have explained, a trademark holder has no right to police ‘unnecessary’ use of its mark. Whether necessary or not, a defendant’s use of a mark must be confusing in the relevant statutory sense for a plaintiff to raise a viable infringement claim.”

And while the 1st Circuit opted not to endorse any particular approach of the nominative fair use doctrine, it stated that a defendant still had no burden to establish nominative fair use at all before the plaintiff satisfied its burden of showing that the defendant’s use of its mark would likely result in customer confusion.

“The district court erred by granting Swarovski’s request for a preliminary injunction without first [making such a finding],” the court said.

The 1st Circuit also observed that Lisi had not made a formal finding that Building #19’s use of Swarovski’s mark was likely to cause irreparable harm.

Swarovski argued that such a finding was unnecessary, since the 1st Circuit has long held that a trademark plaintiff seeking a preliminary injunction — and demonstrates likely confusion — is entitled to a presumption of irreparable harm.

The court, however, noted that the U.S. Supreme Court’s 2006 decision in eBay Inc. v. MercExchange, L.L.C. calls such a presumption into question — at least in patent cases.

And while the 1st Circuit said there is no reason why eBay should not also apply to trademark cases, it did not need to decide that issue in Swarovski.

“Whether or not the presumption of irreparable harm remains viable in this context, it is difficult to see how irreparable harm could be established without a finding of confusion, and so the district court’s decision did not include adequate findings to support its grant of the injunction against Building #19,” the court stated.

Accordingly, the 1st Circuit reversed the injunction and remanded the case back to the District Court for more specific findings on the merits of Swarovski’s claims.