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INTENT OF PARTY IN DETERMINING INFRINGEMENT CLAIMS – ADIDAS AMERICA INC. V. PAYLESS SHOESOURCE INC.

Introduction

Adidas America Inc. v. Payless Shoesource Inc. is a leading judicial precedent for analyzing how a court determines an infringement claim. This case is primarily known for the award of damages worth a whopping $305 million by a Jury trial, and its subsequent reduction in a retrial. However, the author believes that this judgment has more to it than just a simple reduction of damages, as it also sheds light on the elements and ambiguities of an infringement claim.

In the present paper, the author has analyzed the instant case to provide an understanding of how the liability of the defendant was assumed in the first place, i.e., by construing the evidence on record and bringing to light elements like intent, the likelihood of confusion, actionable harm, and ascertainment of dilution of a registered trademark in a trademark violation.

Background and Facts of the Dispute

Adidas America Inc. (hereinafter “Adidas”) is a manufacturer and seller of athletic and casual footwear. Since 1952, Adidas has exclusively been placing a ‘Three Stripe Mark’ on is products. The mark displays three parallel and equidistant serrated stripes of contrasting colour shades on each side of the footwear that run diagonally from the mid sole towards the shoelace. In 1969, Adidas introduced the Superstar Trade Dress, which includes three parallel stripes, a flat sole, rubber shell toe, and a coloured portion at the back of the brand's footwear. In 1994, Adidas registered the trademarks and its slight variations with the U.S, Patent and Trademark Office[1].

Payless Shoesource Inc. (hereinafter “Payless”) is a leading company that retails in discounted athletic and casual footwear. Payless markets and sells shoes bearing parallel stripes. The brand primarily sells shoes with two and four straight-edged parallel stripes that run from the mid-sole to the shoelace. It also sells shoes with a shell toe, flat sole, and a coloured section at the shoe's backside.

In 1994, Adidas and Payless signed a Settlement Agreement (hereinafter “Agreement”) that stipulated that Payless shall not indulge in the sale of shoes bearing the Three-Stripe Mark, or shoes with two or four double serrated stripes of contrasting shades running from the midsole section towards the shoelaces. The need for an Agreement arose because Adidas first introduced the Three-Stripe Mark and had spent millions on promoting it since 1952. The proceeds from the sale of footwear globally bearing the trademark have generated billions of dollars annually, especially hundreds of millions within the United States of America. On the other hand, Payless is a major retail outlet of casual footwear that does not sell Adidas’ shoes. However, since they share the same customer base and advertise their products through the same media channels, an Agreement was needed to protect the infringement of the trademarks.

In 2001, Adidas filed a class action suit against Payless and claimed that the latter had violated the Agreement. Adidas claimed that the design of Payless’ shoes with two and four straight-edged stripes was identical to Three-Stripe Mark and Superstar Trade Dress. The District Court in this concern ruled that the Agreement precluded Adidas’ claims and that an infringement claim was barred for a shoe that did not exist before the Agreement was executed.

In 2006, Adidas filed another complaint of trademark infringement, federal dilution, unfair competition, unfair and deceptive trade practices, injury to business and reputation against Payless and sought injunction relief, recovery of profits, enhancement of damages, recovery of attorney’s fee and cost, as well as dilution damages. In this ruling, the Ninth Circuit reversed the prior dismissal of the District Court in the Jury Trial. Consequently, Payless proceeded with a motion in the District Court to reconsider the Jury’s verdict on the matter.

Issues and Arguments Raised

The entire dispute between the parties relied on Adidas’ allegation that Payless had been indulging in trademark infringement since 2001 and was violating the Agreement concluded in 1994. To substantiate its claim, several issues were presented before the Ninth Circuit.

The most significant issue in the instant matter was whether the alleged infringement was a good faith interpretation of the Agreement or whether the defendant had an intent to infringe in the instant case. Adidas contended that Payless’ shared marks similar to the petitioner company’s registered trademarks-, and this was an infringement prohibited as per the Agreement. Payless, however, argued that the marks used were straight-edged stripes and not serrated stripes and two and four stripes, and not three. The defendant claimed that since the Three-Stripe Mark wasn’t utilized, the Agreement wasn’t violated and it had used the marks on its shoes out of a good faith interpretation of the Agreement, assuming there was no prohibition on sale and designing of straight-edged stripes and had no intent to infringe Adidas’ trademark. Lastly, due to a lack of evidence of any intent to infringe or deceive a prudent customer about the product's source, Payless claimed it could not be held liable.

The second issue deliberated upon was whether there was any dilution of the registered trademark’s image by the alleged infringement. For this purpose, we must understand that the dilution of a trademark refers to using a trademark for a commercial purpose, and such a mark is sufficiently similar to a famous mark. Such usage results in the blurring of the trademark and tarnishes its value distinctively, causing harm or impairment to the public perception of the famous trademark through such association.

Adidas contended that due to existing similarities between the design of the two brands and actions of the alleged infringer, there is a likelihood of initial interest and post-sale confusion by Payless’s actions, leading to evidence of actual confusion for the purchaser. The doctrine of initial interest stipulates any merchant who causes an initial confusion to divert a potential customer’s attention from its competitor’s products and wrongfully profits on the goodwill their competitor accrues will be deemed liable. The doctrine allows the court to find an infringement of any initial caused to the customer about its provenance, even before it is actually purchased, and even if the confusion no longer exists at the point of sale.

Adidas argued that Payless's infringement and the likelihood of confusion caused due to actionable similarity between their products affected the value of the petitioner's registered trademarks, resulting in dilution. Further, the petitioner claimed that the defendant company’s shoes are of inferior quality and submitted direct evidence of a survey that depicted a likelihood of confusion among customers regarding the quality of the footwear due to the two and four stripe marks on the shoes and all of this had led to a negative perception of the brand’s footwear. The defendant, however, contended that there is no significant popularity attached to Adidas’ trademark, and so, there is no dilution present. Payless also argued that to impose liability, Adidas must prove that such commercial use of the Three-Striped mark was after the trademark became renowned.

Decision

Deciding on the first issue, the Ninth Circuit held that Payless’ shoes come off as strikingly similar to Adidas’ products. It decided the issue using the confusion theory, i.e., looking into the relatedness of the disputing parties' goods, the nature of similarity existing, the defendant's intent, and evidence of any actual confusion caused. It was seen that an infringement claim could not be decided upon a mathematical premise, i.e., three stripes do not equal four, rather, the alleged infringement's total effect is taken into consideration. It was seen that there existed an actionable similarity between the marks of the two parts, and such substantial similarity raised relevant questions on the intent of the defendant company. Considering the evidence on record, it was that there existed sufficient direct and circumstantial evidence showing that Payless’ had copied Adidas’ registered trademark. It was in entirety held that good faith interpretation did not stand, there was no ‘unwilling intention to infringe’ in the present dispute, and the likelihood of confusion caused by the defendant party raised essential questions on its credibility and intent.

Dismissing the defendant’s claims in the second issue, the Ninth Circuit observed that Adidas’ trademark was established in the 1970s and is famous since then, so any conflicting statements regarding its popularity are insignificant. It looked into the Federal Trademark Dilution Act (hereinafter “FTDA”) and Trademark Dilution Revision Act 2006 (hereinafter “TDRA”) to evaluate whether Payless’s actions resulted in the dilution of Adidas’ trademark. As per FTDA, an owner is entitled to injunction relief if there is a commercial use by another entity that distinctly dilutes the owner’s trademark's reputation. However, as per TDRA, the injunction relief can be granted even if there is a likelihood of such dilution due to the infringer’s mark being identical or nearly identical to the protected trademark. It was held that genuine confusion regarding the product's material source was created, leading to a likelihood of confusion. This was further proved by providing a customer survey that served as substantial evidence of the likelihood of confusion caused and led for a ruling that there existed an essential similarity between the products. Determining the dilution claims, the Ninth Circuit relied on the rule that if a registered trademark is used by another to grab initial customer attention, despite no actual sale being done, any resulted confusion may still constitute an infringement. It was held that the marks used by Payless’ and the product quality concerns of the product negatively impact the customer’s perception of Adidas’ shoes, which is seen as a source of quality footwear, and thereby highlights the initial interest of the defendant and was held to be a dilution of Adidas’ trademark.

The Ninth Circuit concluded that the Three-Striped Mark and Superstar Trade Dress have a valid registration and are distinct, and this is incontestable. Payless’ actions, however, caused a likelihood of confusion among the already existing somewhat similar customer base. Further, significant questions of Payless’s intent arose due to the evidence on record. Hence, Payless actions were seen as a violation of the Agreement and was held liable for trademark infringement in the instant case. It was also viewed that the defendant’s actions had negatively affected Adidas, and dilution had occurred. Therefore, the Jury awarded Adidas actual damages of approximately $30.6 million, lost profits of approximately $137 million, and punitive damages of approximately $137 million.

The District Court, in this case, ruled that the post-trial motions of the defendant were not a matter of law; however, it accepted the remittitur for the punitive damages awarded by the Jury. It held that the punitive damages were overstated and were reduced to $15 million, despite the defendant's conduct. It was also felt that the loss of profits was overstated and more punitive than compensatory. Hence, loss of profit was reduced to $19.7 million from $137million. Overall, even during reconsideration of the verdict the District followed the pattern of Jury and did not deviate from it.

Analysis

Trademark infringement occurs when a party’s mark is similar or identical to another party's trademark and establishes a likelihood of confusion in the customers about the source and origin of the product. The verdict in the instant matter is a landmark one concerning infringement of the trademark. In the dispute, Adidas attempted to protect its distinctive trademark- Three-Striped Trademark and Superstar Trade Dress. The Ninth Circuit herein deviated from the general rule that to constitute misconduct requires a deliberate intent to deceive a party. The judgment relied on the premise that the elements of a trademark infringement claim do not include the intent or the actual confusion. For determining the liability of an infringer, the total effect of infringement is seen, and proof of intent to confuse customers is not needed. By relying on the facts and evidence on record defendant's liability was ascertained.

Overall a new rule that determination infringement can be by evaluating the nature of the infringement, and its effect was established. It was seen that a party’s stance of an unwilling infringement might fail if the effect of the infringement and consequent injury or dilution to the trademark owner is present. Hence, liability can be cast if there is likelihood of confusion and any dilution caused. In this case, using this view, liability was cast on the defendant.

The significance of this judgment is seen even today- it shows that to secure a monetary and injunction relief, the plaintiff should show how a likelihood of confusion was caused, and how it confused the customer. To show a coherent theory of how actionable harm is likely to occur may be the most challenging part of the case. It is now set that to determine intent; the court looks into the consisting doctrinal features, ambiguities, and proof of active inducement. But, if at all, the accused relies on a good faith infringement, non-intentional infringement, the excuse may fail if the belief is faulty, or there exist ambiguities in such a claim.

Conclusion

The landmark case illustrates the essentiality of looking into the existing facts or be a fact-finder to evaluate if there is a wilful infringement or malafide intent of an alleged trademark infringer. By striking a balance between the wilful violation, and pieces of evidence ascertaining the intent; the judgment sets into motion a remarkable evidentiary standard. The author believes that the judgment has significantly provided a path for courts to go about an infringement claim where a defendant may claim innocence based on a non-intentional infringement. It makes it possible to ascertain genuine violations by acting as a fact-finder, and not let erroneous excuses pose a barrier in determining justice in an infringement claim, and securing the interest of a legitimate owner.



Title Image source: Quartz


This article has been written by Priya Ganotra. Priya is a fourth year law student at Maharashtra National Law University, Nagpur.


[1] ¶3, Adidas America., Inc. v. Payless ShoeSource, Inc., No. CV 01-1655-KI, 2008 WL 4279812 (D. Ore. Sept. 12, 2008).