Costco Appeal of $19M Tiffany Win Could Shift Trademark Law

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By Kyle Jahner

Costco Wholesale Corp. hopes to escape a $19.3 million judgment that it willfully deceived customers into believing they were buying Tiffany rings. Win or lose, it could create new case law on the definition of counterfeiting and calculation of trademark infringement damages.

The case presents a rare chance for a federal appeals court to parse the law’s broad, nebulous definition of counterfeiting—a more severe form of trademark infringement. Since most counterfeiting cases involve fly-by-night bad actors rather than established businesses like Costco, appeals are rare and case law is limited, lawyers told Bloomberg Law.

The warehouse giant’s appeal also could set new boundaries on how courts compute profit losses in trademark infringement cases. Tiffany & Co. convinced a lower court to reject Costco’s claimed profit margins on its ring sales and include a share of membership dues based on industry profit margins.

Tiffany sued in 2013 over Costco’s ring sales, saying that by using “Tiffany” alone on signs in display cases, Costco confused customers into thinking the rings originated from Tiffany. Costco argued the signs simply referred to a Tiffany setting, a generic term in the industry.

The U.S. District Court for the Southern District of New York sided with the luxury jeweler, calculated profit losses, and then tripled the figure under counterfeiting law to arrive at $11.1 million in profits. It also added a $8.25 million punitive damages award. The fact that Costco asked vendors to copy Tiffany designs and put the rings next to signs identifying actual brands of other luxury goods demonstrated bad faith, the court held.

Costco’s appeal to the U.S. Court of Appeals for the Second Circuit, filed in September 2017, awaits the district court’s ruling on Costco’s post-judgment motion asking the court to alter its decision. Briefing on that motion concluded in October 2017.

The appeals court could “expose some issues just lurking in Lanham Act laws, as well as some unresolved issues in Second Circuit case law,” Christine Haight Farley, an intellectual property law professor and trademark specialist at American University, told Bloomberg Law.

“The newsworthiness of the case comes from not just the shocking award, but what this exposes about the way you can get profits awarded,” she added. “Costco got no sympathy from the judge or the jury.”

Defining Counterfeit

Tiffany’s evidence convinced judge and jury that Costco’s signs intentionally and effectively sowed consumer confusion, the benchmark for trademark infringement. But the finding of counterfeiting—a more extreme infringement involving a product “substantially indistinguishable” from another—smoothed the path to triple damages.

Neither Costco’s rings themselves nor their packaging carried any Tiffany trademarks, prompting some lawyers and legal academics to question the counterfeiting ruling in a 2015 summary judgment that preceded the damages trial.

U.S. District Judge Laura Taylor Swain ruled Costco’s signs—at times near similar signs labeling bona fide luxury-branded items like Rolex watches—and specific requests for replication of Tiffany designs indicated a bad faith intent to deceive customers. She said the Lanham Act, which governs trademark law, does not require a product to bear a trademark to establish counterfeiting.

Her post-trial August 2017 final judgment also said Costco’s billions in profits and court findings of bad faith undercut Costco’s argument for extenuating circumstances, which the law requires to avoid trebling profits lost to counterfeiting.

The Second Circuit could take “a more nuanced approach” than Swain’s application of the Lanham Act’s trebling clause for counterfeiting, Jonathan Moskin, a trademark attorney at Foley & Lardner in New York, told Bloomberg Law.

“Just because she fairly rejected that evidence isn’t fully exculpatory; it doesn’t mean there’s not extenuating circumstances,” Moskin said. “There’s so little appellate law. This may well be an opportunity for the Second Circuit to provide a more refined analysis.”

Costco’s tactics “made it difficult to raise the [trademark infringement] issue cleanly,” Mark McKenna, University of Notre Dame trademark law professor, told Bloomberg Law. It would be “hard to describe” the rings as counterfeit, he said. And there “seems to be a watering down of the meaning of counterfeit” in both criminal and civil courts, according to McKenna, who published a research paper in April about an expanding counterfeit definition in criminal courts.

“I don’t see what’s gained by that. Straightforward infringement [rather than counterfeiting] would have been adequate, it seems,” he said.

‘Treasure Hunt’ Damages

A Second Circuit ruling also could alter the methods for determining profits in complicated trademark infringement cases, and for when punitive damages are allowed.

Costco asserted a 10.31 percent profit margin on its rings, which Tiffany labeled “ludicrously low.” Costco conceded a broader ring industry margin of 50-100 percent, and Swain used 50 percent to calculate $3.7 million in profits—lower than the jury’s $5.5 million advisory verdict—before trebling it to $11.1 million.

“If I had to roll the dice on it, I would probably expect some pushback on the damages amount” if the Second Circuit rules on the case, said Edward M. Weisz, an intellectual property lawyer for Cozen O’Connor in New York. An affirmation “would make Second Circuit [infringement] defendants a little more uncomfortable,” he said.

Costco said no new evidence justified Swain reversing her 2015 summary judgment finding that Tiffany failed to link membership fees to ring sales and couldn’t count dues as lost profits. But after the damages trial she said Costco’s “treasure hunt” marketing concept attracts bargain-hunters with razor-thin margins, and the rings therefore helped drive membership revenue.

Costco says Tiffany is barred from a punitive award because it sought an accounting of profits and not actual damages. Swain said that while circuit courts have split on the question, nothing in the Lanham Act prohibits counting profit loss as actual damages. New circuit court decisions could affect plaintiff strategy depending on when the strategy leaves a punitive award within reach.

Trademark attorney Jeffrey Van Hoosear of Knobbe, Martens, Olsen & Bear LLP agreed that Costco’s tactics, like avoiding online ads, appeared evasive, given Tiffany’s online vigilance. But the size of the award surprised him, and he questioned the directness of its link to damage suffered by Tiffany.

“How do you prove that someone who bought a ring at Costco would have gone into an upscale mall at Tiffany to buy the ring?” the Irvine, California, lawyer said of the profit calculation.

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