Roger Cleveland Golf Company, Inc. v. Prince involved the online sale of counterfeit golf clubs by Christopher Prince, the operator of the “copycatclubs.com” Web site. Prince, by the way, got off with a mere $28,250 damage award for direct infringement. Bright Builders was not initially a defendant in the litigation. In the course of discovery, however, Cleveland Golf learned that Prince had started his online business after signing up with Bright Builders, which provided Web hosting, search engine optimization and related services to aspiring online retailers. Cleveland Golf then amended its complaint to add Bright Builders as a defendant on the theory that it was secondarily liable for Prince’s infringement.

In 2010, Bright Builders had moved for summary judgment dismissing the complaint. Its filing was met with scorn by the court, which criticized its brevity (one and one-half pages), its lack of citations to authority, and other failures to comply with court rules.  The motion papers argued very simply that Bright Builders did not know that Prince was selling counterfeit golf clubs, and that it “simply cannot be true” that merely by hosting Prince’s site, Bright Builders could be found liable for Prince’s infringement.

The court rejected Bright Builders’s motion on the merits, finding that the following allegations could support a finding of knowledge sufficient to establish contributory liability:

• Prince paid Bright Builders $10,000 for a package of services that included coaching and mentoring services aimed at teaching Prince how to build his online business.
• The coaching and mentoring services included one-on-one discussions with an advisor who encouraged Prince’s efforts.
• Bright Builders created and developed Prince’s Web sites, which it knew or should have known were meant to sell counterfeit golf equipment, based upon the chosen domain name of “copycatclubs.com” and the inclusion of the following statement in the text on the site: “your one stop shop for the best COPIED and ORIGINAL golf equipment on the Internet.”

Roger Cleveland Golf Company, Inc. v. Prince (D. S.C. Dec. 3, 2010).  The court also concluded that Bright Builders’s motion was so deficient that the defendant should show cause why attorney fees should not be assessed against it for a bad faith attempt to increase the plaintiff’s litigation costs.

Prof. Eric Goldman’s December 2010 blog on the summary judgment ruling analyzes the facts alleged by the plaintiff relative to the asserted claims in more detail.

This is not the first time that liability for contributory trademark infringement has been assessed against an “Internet intermediary.” In Gucci America, Inc. v. Frontline Processing Corp. 2010 U.S. Dist. LEXIS 62654 (S.D.N.Y. June 23, 2010) (see prior blog post), the court refused to dismiss secondary trademark infringement claims against companies that provided credit card processing services to online retailers found to have been engaging in the sale of counterfeit goods.

Gucci v. Frontline followed on the lawsuit against the retailers, who admitted the sales of counterfeit goods and consented to the entry of judgment in a separate action. The court in Gucci v. Frontline found that a jury might find that the necessary knowledge to impose contributory liability on the payment processors in the fact, among other things, that they processed credit card “chargebacks” resulting from customer complaints concerning the receipt of counterfeit merchandise, and, therefore, they should have known the nature of the goods being sold on the site. The court also cited the allegation that the processing firms charged higher fees to sites, such as the one found to have been infringing, that sold “replica” merchandise and were consequently considered to be “high risk” merchants.

See also Louis Vuitton Malletier, S.A. v. Akanoc Solutions, Inc., 2010 U.S. Dist. LEXIS 34021 (N.D. Cal. March 19, 2010). The court upheld upholding a multimillion dollar verdict for contributory trademark infringement against a Web hosting company that provided services to retailers of counterfeit goods.

Central to the court’s ruling was the conclusion that Gucci had alleged sufficient facts from which it could be found that each of the defendants knew or should have known that counterfeit merchandise was being sold on the Web site, an essential finding for establishing contributory infringement.

Durango Merchant Services is a business that assists merchants in setting up credit card merchant accounts. Durango assisted the Web site operator in arranging such accounts with the two card processing services, Frontline Processing Corp. and Woodforest National Bank. In reviewing the allegations concerning the defendants’ knowledge of counterfeiting on the Web site, court noted allegations in Gucci’s complaint, which, if proved, could establish that the firms either knew, or deliberately shielded themselves from knowledge, concerning the nature of the items sold on the site. Among other things, Gucci alleged that:

• Durango advertised itself as specializing in "high risk merchant accounts," including sellers of "replica products," a term synonymous (according to Gucci) with counterfeit products. Durango was aware that the Web site operator had experienced difficulty in obtaining card processing services from other firms because it was selling "replica" items.
• Frontline charged higher fees for processing services for such high risk merchants.
• Durango’s salesman suggested that a notice be put on the Web site stating that it sold replica items, in order to avoid credit card chargebacks from customers dissatisfied with the merchandise they ordered. The salesman’s action was attributed to Frontline because the salesman was listed on the application for services as the Web site operator’s agent, and because Frontline reviewed and approved the placement of the notice.
• Both Frontline and Woodforest processed chargebacks from dissatisfied customers, in the course of which they obtained documentation concerning the disputed transactions, including item descriptions, the relatively small price of items and quality complaints that should have alerted them to the fact that the products sold were counterfeit.
• Woodforest’s employee reviewed the Web site and made a sample purchase of an item prior to agreeing to provide card processing services.

The court ruled that in addition to establishing the defendants’ knowledge of the infringement, Gucci also had to show that the defendants either “(1) intentionally induced the website to infringe through the sale of counterfeit goods or (2) knowingly supplied services to websites and had sufficient control over infringing activity to merit liability.

The court concluded that while Durango’s liability could not predicated on control over the Web site’s activity, the fact that the company held itself out to “high risk merchant accounts” that sold “replica items” could establish the company’s attempt to induce “less savory businesses, like those who sell counterfeit ‘replicas’ of luxury goods.” Durango’s salesman’s suggestion that customers be required to check a box acknowledging that they were purchasing “replicas” suggested an “affirmative step taken to foster infringement” or that the payment system was promoted as a means to infringe.

But sufficient control over infringing activity had been established with respect to the processing firms, the court found, because the credit card processing services provided by them were "a necessary element for the transaction of counterfeit goods online, and were essential to sales" on the Web site. The firms “knowingly provided a "financial bridge between buyers and sellers" which enabled them to consummate transactions in infringing goods. The "ability to literally shut down the web site" is not necessary to establish control, the court found, only the ability to control and monitor the instrumentality used to infringe the plaintiff’s mark:

Based on Gucci’s claims, the instrumentality in this case is the combination of the website and the credit card network, since both are allegedly necessary elements for the infringing act – the sale and distribution of the counterfeit good. *** Gucci’s allegations indicate that they are concerned primarily with the sale of tangible counterfeit goods to customers around the country, which allegedly could not be accomplished without Woodforest and Frontline’s ability to process the credit card-based purchases. In the words of the Supreme Court, these defendants "furnish[ed] the means of consummating" the trademark infringement.

A point of interest in the opinion is Judge Baer’s citation of both the majority and dissenting opinions in Perfect 10, Inc. v. Visa International Service Association, 494 F.3d 788 (9th Cir. 2007). The majority in Perfect 10 v. Visa concluded that credit card companies could not be held secondarily liable for copyright and trademark infringement occurring on Web sites that hosted unauthorized copies of copyright photographs, finding, among other things, that the infringement could have occurred without the use of the companies’ payment processing services, therefore, the companies made no “material contribution” to the infringement.

Judge Baer distinguished Perfect 10 v. Visa on the ground that the infringement claimed in that case was the unauthorized display and copying of the photographs, which could have continued even if the firms withdrew their services, while in Gucci v. Frontline the claimed infringement arose from the sales that were made via the firms processing services. Judge Baer also cited Judge Kozinski’s dissenting opinion in Perfect 10 v. Visa, in which wrote he would have held the credit card companies secondarily liable on the ground (among others) that they were the “financial bridge” between the buyers and sellers of pirated works.

In an opinion written by Judge Leval (with Judges Calabresi and Wesley), the court rejected the district court’s reliance on the court’s previous ruling in 1-800 Contacts, Inc. v. WhenU.com, Inc., 414 F.3d 400 (2d Cir. 2005) as dispositive. In that case, the court ruled that the use of trademark terms in a software program that generated "pop-up" advertisements on a user’s computer did not constitute a "use in commerce" because, among other things, the program distributor did not sell trademark terms to advertising clients nor even disclose to them which keywords (trademark terms or otherwise) it used to generate the pop-up advertisements.

The court in Rescuecom pointed out that in contrast, Google, via its AdWords program and Keyword Suggestion Tool, "is recommending and selling to its advertisers" the Rescuecom trademark. The court also noted that in contrast to the facts in the 1-800-Contacts case, Google "displays, offers and sells Rescuecom’s mark to Google’s advertising customers when selling its advertising services," and "encourages the purchase of Rescuecom’s mark through its Keyword Suggestion Tool."

The court rejected the argument advanced by Google and its amici (a group of law professors including Prof. Eric Goldman) and accepted by a number of district court in the Second Circuit, that the inclusion of a trademark in an internal computer directory cannot constitute trademark use:

First, regardless of whether Google’s use of Rescuecom’s mark in its internal search algorithm could constitute an actionable trademark use, Google’s recommendation and sale of Rescuecom’s mark to its advertising customers are not internal uses. Furthermore, 1-800 did not imply that use of a trademark in a software program’s internal directory precludes a finding of trademark use. Rather, influenced by the fact that the defendant was not using the plaintiff’s trademark at all, much less using it as the basis of a commercial transaction, the court asserted that the particular use before it did not constitute a use in commerce. See 1-800, 414 F.3d at 409-12. We did not imply in 1-800 that an alleged infringer’s use of a trademark in an internal software program insulates the alleged infringer from a charge of infringement, no matter how likely the use is to cause confusion in the marketplace. If we were to adopt Google and its amici’s argument, the operators of search engines would be free to use trademarks in ways designed to deceive and cause consumer confusion.   This is surely neither within the intention nor the letter of the Lanham Act.

The court also rejected the analogy advanced by Google and the amici that Google’s use of the Rescuecom’s trademark is the same as the use of product placement by retail vendors, where, for example, a generic product is placed next to a trademark product:

From the fact that proper, non-deceptive product placement does not result in liability under the Lanham Act, it does not follow that the label “product placement” is a magic shield against liability, so that even a deceptive plan of product placement designed to confuse consumers would similarly escape liability. It is not by reason of absence of a use of a mark in commerce that benign product placement escapes liability; it escapes liability because it is a benign practice which does not cause a likelihood of consumer confusion. In contrast, if a retail seller were to be paid by an off-brand purveyor to arrange product display and delivery in such a way that customers seeking to purchase a famous brand would receive the off-brand, believing they had gotten the brand they were seeking, we see no reason to believe the practice would escape liability merely because it could claim the mantle of “product placement.” The practices attributed to Google by the Complaint, which at this stage we must accept as true, are significantly different from benign product placement that does not violate the Act.

The court emphasized that it took no position on whether Rescuecom could prove that Google’s use of its trademark in the AdWords program causes likelihood of confusion or mistake, but it is going to get the opportunity to do so. The case was remanded for further proceedings.

Finally, there is an Appendix to the ruling that opines further "On the Meaning of ‘Use in Commerce’ in Sections 23 and 43 of the Lanham Act," which discusses at length what the court considers to be ambiguity with respect to the statutory language in these provisions. The Appendix also includes a notation that the judges who sat on the panel in 1-800-Contacts case "read this Appendix and have authorized us to state that they agree with it." However, there is also a notation that the discussion "is therefore dictum and not a binding opinion of the court. It would be helpful for Congress to study and clear up this ambiguity."

What’s a "duck tour," you ask?

Unfortunately for the plaintiff tour operator that prevailed on the issue in the trial court, for the answer to that question the appellate court looked to the tour operator’s Web site, which contained a discussion of the derivation of the term. The appellate court found that the plaintiff tour operator’s own generic use of the term on its Web site was "strong evidence against its claim that the term is primarily associated with its company rather than the services it provides."

The court went on to comment:

On its website, the company notes that "[c]ontrary to local belief, the unique idea of a [d]uck [t]our did not originate in Boston. Duck operations have been in existence in the Midwest for decades, and in fact, continue to thrive. What we did, however, is take a unique product and improve and enhance it, while at the same time bringing it to a major metropolitan city." See Boston Duck Tours, http://www.bostonducktours.com/ company_history_main.html (last visited March 31, 2008). Although Boston Duck is quick to point out the introductory clause to its website statement, which asserts that the local population believes Boston Duck is the only provider of "duck tours," this speculative statement about what the Boston population believes is largely irrelevant for purposes of our analysis. The two sentences, and the website more generally, are published by Boston Duck to inform consumers in the Boston area and around the world about the company’s history and services. Accordingly, the site instructs these customers that the phrase "duck tours" is the common phrase used to describe amphibious sightseeing tours rather than Boston Duck’s product alone.

The appellate court also pointed to articles proffered by the plaintiff tour operator to establish its fame and recognition, which used the term generically. The court also concluded that the trial court erred in focusing on the separate terms "duck" and "tour," rather than the entire phrase, in assessing genericism.

Although the appellate court agreed with the district court’s analysis on numerous other points, the panel agreed with the defendant tour operator that the erroneous finding with respect to genericism was fatal to the result in the case, thus the preliminary injunction should not have issued. The court remanded for further proceedings.