Fashion Apparel Law Blog

"Google AdWords -- Be Careful What You Bid For"

Sheppard Mullin — Thu, 04 Feb 2010 08:57:26 -0500

Since the proliferation of the internet and online advertising, trademark owners have sought to prevent the unauthorized use of their marks as keywords for online advertising on search engines. In the Second Circuit before 2009, trademark owners had difficulty protecting their marks where the competitor's link simply shows up as "Sponsored Link" on the landing page, and no other use of the mark has been made, because of the decision in 1-800 Contacts, Inc. v. WhenU.com, Inc., 414 F.3d 400 (2d Cir. 2005), which held that no Lanham Act "use", and, thus, no actionable Lanham Act claim, exists for the use of a trademark in a keyword or metatag, where (a) the defendant does not place the trademark on any product, good or service, (b) it is not used in any way that would indicate source of origin, and (c) where defendant's use of plaintiff's trademark is strictly internal and not communicated to the public, as the use does not indicate the source or origin of the product.

Recently, however, the U.S. District Court for the Eastern District of New York in FragranceNet.com, Inc. v. Les Parfums, Inc. (Case No. 09-CV-2626) (the "FragranceNet.com Case"), citing the Second Circuit decision in RescueCom Corp. v. Google, Inc., 562 F.3d 123 (2d Cir. 2009), signaled a change split in the circuits. The district court also significantly held that the issue of genericness of a registered trademark is not susceptible to determination on a motion to dismiss under Federal Rule 12(b)(6). This finding is significant ,especially in the context of dot.com domain names that also function as trademarks.

The Facts of the FragranceNet.com Case

In the FragranceNet.com case, the plaintiff, FragranceNet.com, brought action against the defendants (collectively, "Les Parfums") alleging that Les Parfums' use of its registered trademarks as keywords for Google AdWords constitutes trademark infringement, trademark dilution, passing off, and unfair competition. Les Parfums brought a motion to dismiss on the basis that the registered trademarks at issue, "fragrancenet" and "fragrancenet.com", are generic terms, and thus are not protectable under trademark laws.

The Court did not rule on the issue of whether the trademarks were actually generic, but held that it was improper to do so on a motion to dismiss. FragranceNet.com had alleged plausible claims with respect to its registered trademarks. The Court added that registered trademarks, even in the context of dot.com domain names, are presumed not to be generic and the party alleging that the mark is generic must overcome this presumption. The district court held that because Les Parfums failed to present any evidence to overcome the presumption and since no discovery been taken, the motion was denied. Issues of fact remained as to whether FragranceNet.com's trademarks were generic and such an inquiry is fact-intensive and not susceptible to a Rule 12(b)(6) dismissal prior to commencement of discovery.

The FragranceNet.com v. FragranceX.com Case

The FragranceNet.com Case is not the first time FragranceNet.com has pursued claims against its competitors for use of its trademarked terms as keywords for sponsored links. In FragranceNet.com, Inc. v. FragranceX.com, Inc., 493 F. Supp. 2d 545 (E.D.N.Y. June 12, 2007)("FragranceX"), FragranceNet.com brought an action against FragranceX.com for using its trademark as a keyword to prompt FragranceX.com's appearance as a sponsored link in Google's search engine, and for including the trademark as a metatag on its website. The Court denied FragranceNet.com's motion to amend its complaint for futility, since it could not survive a motion to dismiss based upon the Second Circuit precedent in 1-800 Contacts, Inc. v, WhenU.com, Inc., which held that no "use" had been made under the Lanham Act. The Court reasoned, where the use of a trademark is solely internal and not communicated to consumers in any way, there can be no likelihood of confusion.

At the time, the plaintiff in FragranceX conceded that "though most courts in other circuits allow a trademark infringement claim based on such use, district courts in this Circuit have not allowed these types of trademark infringement claims to go forward." Id. at 547. The Court cited three other Second Circuit cases that had held that the act of purchasing a trademark as a keyword for a "Sponsored Link" is not a "use" as defined by the Lanham Act. See, e.g.,Merck & Co., Inc. v. Mediplan Health Consulting, Inc., 425 F. Supp. 2d 402 (S.D.N.Y. Mar. 30, 2006); Rescuecom Corp. v. Google Inc., 456 F. Supp. 2d 393, 403 (N.D.N.Y. Sept. 28, 2006); Site Pro-1, Inc. v. Better Metal, LLC, 506 F. Supp. 2d 123 (E.D.N.Y. May 9, 2007).

At the time, the Court distinguished the case from other situations where a motion to dismiss would be denied in the Second Circuit, such as where a search of plaintiff's trademark results in plaintiff's trademark appearing next to defendant's name in the search results, and the plaintiff's trademark is being displayed in a way that could indicate an association with the defendant. Hamzik v. Zale Corp./ Delaware, No. 06-CV-1300 (TJM), 2007 US Dist. LEXIS 28981 (N.D.N.Y. Apr. 19, 2007). The Second Circuit held that this type of listing of the search results next to the plaintiff's trademark constituted a "use" under the Lanham Act.

The Split Among the Circuits Is Resolved in Rescue.com

The issue of using trademarked terms in connection with a search engine ad campaign was clarified this past summer when RescueCom Corp. v. Google, Inc., 562 F.3d 123 (2d Cir. 2009) was decided and held that the prior WhenU.com decision was limited to its facts. The Second Circuit noted that the alleged use of a competitor's name as a keyword in connection with an advertising program of an internet search engine constituted a "use" under the Lanham Act. Rescue.com Corp., 414 F.3d at 130 ("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."). As a result, in this case, the district court, citing Rescuecom Corp., held that the motion based on what constituted "use" that had been successful in the prior case was no longer viable in the Second Circuit.

Conclusion

The issue of whether or not a trademark, even a domain name trademark, is generic raises issues of fact. As a result, no motion for dismissal pursuant to Rule 12(b)(6) should be brought unless and until discovery has been undertaken and completed on the issue of whether or not the trademark is generic or not. In addition, because Rescue.com resolved the prior split in the Circuit Courts within the United States, trademark infringement actions against the unauthorized use of keywords are now fair game in the Second Circuit.

Celebrity Endorsement and Licensing The View from the US

Sheppard Mullin — Wed, 03 Feb 2010 16:22:10 -0500

Partner, Bob Darwell will be speaking at Fashion Week in Milan on March 2nd, 2010.

Legal Issues in the Fashion, Apparel, and Design Industry: Creating and Protecting Your Intellectual Property

Sheppard Mullin — Wed, 03 Feb 2010 16:19:12 -0500

Partner, Ted Max spoke at the Volunteer Lawyers for the Arts on Feb 2, 2010.

Testing Requirements Under Consumer Product Safety Improvement Act Stayed For Additional Year to February 10, 2011

Sheppard Mullin — Wed, 23 Dec 2009 11:57:12 -0500

On Friday, December 18, 2009, the Consumer Product Safety Commission ("CPSC") issued a notice announcing a revision to the terms of the stay of enforcement of the stringent certification and testing requirements under the Consumer Product Safety Improvement Act ("CPSIA"). With regard to testing and certifying children’s products for compliance with phthalate levels, the stay is continued while the CPSC works toward finalizing the accreditation requirements for testing labs. Once standards for a particular category of product are published in the Federal Register, the responsible parties will have 90 days to achieve compliance with the testing and certification requirements. For children’s products subject to lead testing requirements, the stay has been extended for an additional year, to February 10, 2011.[1]

Additionally, the CPSC has adopted an interim enforcement policy permitting component part testing. Under this policy, domestic manufacturers and importers may still obtain testing certification for complete, finished products, but they now have the additional option of collecting certifications from the manufacturers of component parts. For example, most fasteners such as zippers, snaps and buttons are not, themselves, children’s products and thus not subject to the testing and certification requirements. However, once they are integrated in to a children’s product, the requirements apply to the entire item. Under the new policy, manufacturers and importers may obtain certification from suppliers of component parts, obviating the need to have the entire finished product tested and certified.

As before, while enforcement of the testing and certification requirements is currently stayed, all products must still comply with applicable limits governing lead and phthalate content. Details on the particular strictures of the CPSIA can be found here.

[1] The stay will expire as scheduled for four categories of products: bicycle helmets, bunk beds, infant rattles and dive sticks.

A & F Wages a Fierce Fragrance Fight: The Battle Over Dollars & Scents

Sheppard Mullin — Thu, 17 Dec 2009 13:37:14 -0500

Abercrombie & Fitch has taken quick action to protect its signature fragrance "Fierce" against pop diva, Beyonce Knowles' proposed naming of her forthcoming perfume by Coty, Inc. after her alter ego, "Sasha Fierce". According to the complaint for trademark infringement filed by A & F on September 19, 2009, A & F has held a registered trademark for the mark "Fierce" for fragrances since May 2003, and "Fierce" is the scent wafting from all A & F stores as it is dispersed either though a scent machine or by constant spraying of the cologne by A & F employees. The goal being that every A & F garment is infused by the citrus scent.

In the United States, scent does not garner intellectual property protection and creators are forced to rely on trademark or tradedress to protect their perfumes and colognes. Hence, companies spend much of their marketing money on the name and image of their perfumes while the actual smell is secondary. According to A & F's complaint, consumers might be confused into thinking that Beyonce's anticipated "Sasha Fierce" perfume is associated with their "Fierce" cologne. If this occurs, there is a possibility that Beyonce would unfairly benefit from the reputation A & F has built for their scent through misguided association. According to A & F's complaint, sales of "Fierce", which have exceeded $190 million since the cologne debuted in 2002 and is projected to exceed $64 million in sales in 2009, could be hindered by consumer confusion.

The announcement of Beyonce's perfume, projected to launch in early 2010, did not specify a name, and Coty spokespersons have alleged that the terms "Sasha Fierce" and "Fierce" will not be used as names for the Beyonce fragrance. However, according to A & F's complaint, in connection with Beyonce's 2008 album entitled, "I am . . . Sasha Fierce", she filed and applied for an intent-to-use trademark for "Sasha Fierce" in connection with her launch of her fragrance. The complaint also alleged that Beyonce disputed A & F's request that she cease and desist from any use of "Sasha Fierce" in connection with fragrance due to the likelihood of confusion. The complaint further noted that shortly before announcing her Coty deal, Beyonce alleged "rights to compete" with A & F in response to A & F's Notice of Opposition against her application to register the mark "Sasha Fierce" for fragrance.

Despite how unlikely it is that Beyonce's perfume bottle would feature the nude chiseled men's torso that appears on the rectangular A & F "Fierce" bottles, or that the smell which personifies her as a women, would resemble the scent of the "Fierce" male cologne, currently, a trademarked name in fragrance packs a more powerful punch in the legal arena than the aroma spritzed from the atomizer. Therefore, it is important for those interested in debuting a new fragrance to have a lawyer involved in the pre-development stage to obtain clearance for the trademark sought prior to any announcement or launch of the scent. A lawyer will be able to evaluate whether a desired trademark may be obtained and to prevent litigation and the associated costs later on.

Retailers Get More Clarity On Key Privacy Issues In Song-Beverly Cases - Zip Code O.K., Reverse Lookup O.K., E-MAIL Address Not Preempted

Sheppard Mullin — Thu, 29 Oct 2009 17:43:07 -0500

By Craig Cardon and Elizabeth Berman

The California Court of Appeal has recently published two new decisions involving data privacy class actions. Both involve claims under the Song-Beverly Credit Card Act. The most recent, Jessica Pineda v. Williams-Sonoma Stores, Inc., 2009 DJDAR 15191, affirmed the judgment against the plaintiff on the grounds that it is not a violation of Song-Beverly to request a zip code during a credit card transaction, even if the zip code is matched with a name to acquire that individual's address, and that the same conduct is not a serious invasion of privacy where the home address information is publicly available and plaintiff has taken no special steps to protect it. Approximately one month earlier, the same panel held in Susan Powers v. Pottery Barn Inc., (2009) 177 Cal.App.4^th 1039, that the federal CAN-SPAM Act does not preempt a Song-Beverly claim based on a request for an email address, and sent the case back to the trial court for further proceedings.

In Jessica Pineda v. Williams-Sonoma Stores, Inc., the plaintiff had alleged that Williams-Sonoma violated Song-Beverly by requesting her zip code during a credit card transaction and then used that zip code in conjunction with her name to look up her address. Song-Beverly prohibits the requesting of an address, among other things, during a credit card transaction. She also alleged that this same conduct constituted an invasion of her right to privacy under the California Constitution. The trial court sustained Williams-Sonoma's demurrer to the class complaint. Shortly after the trial court's dismissal, the Court of Appeal issued its opinion in Party City v. Superior Court, (2008) 169 Cal.App.4^th 497, holding that a zip code is not Personal Identification Information as the term is defined under Song-Beverly. Pineda appealed, arguing that Party City was distinguishable because she specifically alleged that her zip code was used to obtain her home address, and that Party City did not involve an invasion of privacy claim. The Court of Appeal affirmed the trial court's dismissal of Pineda's claim. It found that regardless of whether a zip code is used to look up a home address, the zip code is not Personal Identification Information and is not covered by Song-Beverly. As to the invasion of privacy claim, the Court of Appeal held that the alleged invasion – the looking up of a home address – was not sufficiently serious to constitute an invasion of the California Constitution's right to privacy. The Court further explained that even if the address was sold after it was obtained, the invasion would not be sufficiently serious where the address was publicly available and where the plaintiff had not taken specific steps to keep it private.

In Powers v. Pottery Barn Inc., (2009) 177 Cal. App. 4^th 1039, the trial court dismissed the only claim brought by plaintiff Powers, a Song-Beverly claim based upon a request for her email address, on the basis that it was preempted by the federal CAN-SPAM Act. Pottery Barn argued on demurrer, and the trial court agreed, that if Song-Beverly regulated the collection of email, then it is preempted by CAN-SPAM. Powers appealed and the Court of Appeal reversed the judgment against her, on the basis that Song-Beverly did not expressly regulate the sending of commercial email. The Court of Appeal distinguished this case from Facebook Inc. v. ConnectU, LLC, (2007) 489 F.Supp. 2d 1087, by asserting that the statute at issue in Facebook expressly regulated the collection of email for the purpose of sending unwanted commercial messages, whereas Song-Beverly does not expressly reference email. The Court of Appeal declined to affirm on the alternative grounds that an email address is not Personal Identification Information under Song-Beverly because the factual record regarding how email operates and how email addresses are used had not been sufficiently developed to make such a determination. Accordingly, the case now returns to the trial court where the factual record will be developed and a determination then made as to whether email addresses are covered by Song Beverly.

Both Williams-Sonoma and Pottery Barn were represented by Craig Cardon and Elizabeth Berman of Sheppard Mullin.

The Bankruptcy Files: Haute Couture Edition

Sheppard Mullin — Fri, 16 Oct 2009 12:37:20 -0500

To read this article on bankruptcies in the fashion industry published by American Lawyer, please click here, or visit the AmLaw Daily website.

The Hottest Trend: Refinancing

Sheppard Mullin — Thu, 24 Sep 2009 15:15:45 -0500

For the fashion industry, one of the must-have, but hard to come by, items this season is a favorable refinancing deal. The recent volatility in the fashion market has reflected not just the ever-changing tastes of the cognoscenti, but also the rapidly shifting economic landscape confronting designers and retailers. The fashion industry has suffered acutely in the global financial crisis as consumers curb their spending, particularly in the luxury goods market. In fact, analysts have estimated that 12% of fashion companies will not survive the recession.

Yet after months of economic stagnation, there may be signs of improvement: this summer, a number of companies in the fashion industry successfully refinanced their debts, reflecting an improving climate among credit markets and offering some struggling firms a desperately needed lifeline. But even as some companies successfully refinance their debts, a number of others have been unable to reach refinancing deals and have filed for bankruptcy protection.

Refinancing is In…

Some analysts have suggested that firms’ ability to reach favorable refinancing terms depends on the strength of the company’s brand and the prominence of its position within the industry. For example, one high-end department store, widely regarded as an industry leader, successfully refinanced its credit facility, on very favorable terms and with a potential for added borrowing, in July. A number of other retailers and clothing manufacturers have also refinanced in recent months.

In early August, Charming Shoppes, Inc., better known for its brands Lane Bryant, Fashion Bug, Catherines Plus Sizes and Petite Sophisticates Outlet, announced that it had replaced a $375 million credit facility due in July 2010 with a three-year secured revolving $225 million credit facility. In this case, the reduced revolving credit facility is a better match for Charming Shoppes, which has simplified its business in the last year by shutting down several catalogs, Figure magazine, and shoetrader.com.

Quiksilver Inc., the youth-oriented apparel company with a focus on surf culture, which includes the Quiksilver, Roxy, and DC brands, announced in August that it had entered into an agreement with its European banking partners to consolidate its European debt obligations into a new four-year committed facility totaling €268 million. In addition, one of Quiksilver’s European bankers agreed to extend the maturity of a €50 million term loan due to mature in July 2010 until July 2013.

Kellwood Co., the owner of the Phat Farm, Baby Phat, Sag Harbor, and XOXO brands, successfully avoided bankruptcy in July when it reached an agreement with its lenders to allow the firm to defer payment on $140 million in bonds. The lenders agreed to exchange the bonds, which were originally due in July, with new notes that mature in 2014.

…Unless Refinancing is Out

Not all have succeeded in their efforts to refinance their debt obligations with lenders. Internationally renowned firms such as Escada and Christian Lacroix have resorted to insolvency protection, and Barneys New York, the famed luxury retailer, is currently teetering on the brink of bankruptcy…again.

In August, Escada AG, the German luxury fashion group, initiated insolvency proceedings in Munich after a failed debt exchange with its bondholders. Escada needed 80% of its bondholders to agree to a swap for new securities, but only 46% of the bondholders did so. Because Escada could not implement its restructuring program with its lenders, it could not finance its operation. A day after Escada AG filed in Germany, the company’s US subsidiary, Escada (USA) Inc., filed for chapter 11 bankruptcy protection. Escada (USA) attributed its chapter 11 filing to its failure to restructure its indebtedness out of court, as well as a two-year sales decline and softened demand for luxury goods amidst the global recession. Escada AG intends to restructure through an insolvency plan under German laws, or else a structured sale process of its assets. Investors have already expressed interest in purchasing Escada’s brand, licensing rights, inventory, and store network.

Christian Lacroix SNC, the iconic French fashion label, filed for insolvency protection in Paris in May. According to executives, Christian Lacroix filed for protection after talks with potential financial partners and investors collapsed due to conditions in the financial markets. Under French law, the company will have six months to restructure and find a buyer. Christian Lacroix’s owner, who had been looking for a buyer for a year prior to the filing, will continue to finance the firm's operations until a buyer is found.

Barneys New York is currently embroiled in its own financial struggles. Barneys’ owner, Istithmar PJSC of Dubai, is considering a debt restructuring or a bankruptcy filing to address the firm’s recent decline in sales and its debt load. Due to the $942 million price tag that Istithmar paid for the company in 2007, Barneys is now shouldering $660 million in loans maturing through 2016. Istithmar recently infused $25 million into the retailer to maintain normal business operations. As Barneys considers its next step, and as the industry watches, other parties are indicating their interest in acquiring the company.

Looking Ahead

As the fashion industry reels from the effects of the global economic downturn, companies are discovering that there are no guarantees when it comes to refinancing. Some industry leaders have been able to secure favorable credit facilities on the strength of their reputation and past performance. At the same time, other luminous names, such as Barneys, struggle to find solid ground in this time of crisis. It is difficult to distinguish patterns or indicators that suggest whether a firm will be successful in its efforts to refinance. Numerous factors enter the equation – a company’s existing credit facility, its debt load, the strength of the brand, the bondholders’ commitment and flexibility – and the end result is anything but predictable. Although the recent refinancing arrangements should be welcomed as a sign that the credit markets are slowly thawing, the steady drumbeat of fashion insolvencies demonstrates that the industry has not yet regained its footing.

Court Challenge to Maine's New Marketing Law Fails

Sheppard Mullin — Tue, 15 Sep 2009 14:51:54 -0500

On September 9, 2009, a federal judge in Maine agreed with retailers, marketers, and media companies that the recently enacted Maine law "An Act To Prevent Predatory Marketing Practices Against Minors" is likely unconstitutional. Nonetheless, the judge dismissed the challenge to the Act on the ground that the state Attorney General does not intend to enforce it.

The Act, which became effective on September 12, 2009, broadly prohibits the collection, receipt, and use of personal information and health-related information from minors under 18 for marketing purposes without first obtaining verifiable parental consent. The Act also prohibits "predatory marketing" which is broadly defined as the use of any personal information or health-related information regarding a minor for the purpose of marketing a product or service to that minor or promoting any course of action for the minor relating to a product.

The overly broad requirements and limitations of the Act were reportedly not the intent of the Maine legislature. The original version of the bill was focused on protecting children's health information, requiring parental consent before the collection and use of certain health-related information of minors. The bill, however, was amended at the last minute to include a new and expansive definition of personal information, which as a practical matter prohibits direct marketing of products and services to Maine residents under the age of 18.

Personal information means "individually identifiable information, including: (1) an individual's first name, or first initial, and last name; (2) a home or other physical address; (3) a social security number; (4) a driver's license number or state identification card number; and (5) information concerning a minor that is collected in combination with an identifier described in this subsection." Health-related information is defined as "any information about an individual or a member of the individual's family relating to health, nutrition, drug or medication use, physical or bodily condition, mental health, medical history, medical insurance coverage or claims or other similar data."

Similar to the federal Children's Online Privacy Protection Act (COPPA), the Act defines verifiable parental consent as "any reasonable effort, taking into consideration available technology, including a request for authorization for future collection, use and disclosure described in the notice, to ensure that a parent of a minor receives notice of the collection of personal information, use and disclosure practices and authorizes the collection, use and disclosure, as applicable, of personal information and the subsequent use of that information before that information is collected from that minor."

The Act provides for (1) relief as an unfair trade practice (enforced by both the state Attorney General and private rights of action specified in the Maine Unfair Trade Practices Act), (2) a private right of action for injunctive relief and/or damages, including attorneys' fees (monetary damages may be trebled for willful violations), and (3) a civil violation with monetary fines of not less than $10,000 and not more than $20,000 for a first violation, and not less than $20,000 for each subsequent violation.

Facing a September 12, 2009 effective date, retailers, marketers, and media companies filed an unsuccessful lawsuit seeking to enjoin the enforcement of the Act on the grounds that the law violates the First Amendment and the Commerce Clause of the Constitution and is preempted by COPPA. State lawmakers are expected to revise the Act next year. In the meantime, although the order dismissing the challenge to the Act indicates the state Attorney General does not intend to enforce the Act, the order does not prevent possible private causes of action under the Act.

Retail Red Flag - Not Quite Yet

Sheppard Mullin — Wed, 29 Jul 2009 18:48:15 -0500

On July 29, 2009, the Federal Trade Commission announced it will delay enforcement of the new "Red Flags Rule" from August 1, 2009 to October 1, 2009, to give creditors and financial institutions more time to develop and implement written identity theft prevention programs.

As part of the Commission's implementation of the Fair and Accurate Credit Transactions (FACT) Act of 2003, many fashion and apparel retailers with private label credit cards will need to comply with the Red Flags Rule. The Rule requires "creditors" -- which FTC guidance has defined broadly to include "retailers that offer financing or help consumers get financing from others, say, by processing credit applications" -- to establish a program to prevent identity theft in their practices. The program must highlight "Red Flags" -- that is, indicators of a possible risk of identity theft.

The Red Flags Rule was scheduled to go into effect on August 1, 2009. Retailers, and other industries surprised to learn they may fall within the definition of "creditor," have expressed concern about enforcement of the Rule. In the press release announcing the extension, FTC Chairman Jon Leibowitz is quoted as saying “Given the ongoing debate about whether Congress wrote this provision too broadly, delaying enforcement of the Red Flags Rule will allow industries and associations to share guidance with their members, provide low-risk entities an opportunity to use the template in developing their programs, and give Congress time to consider the issue further."

Removal of UPC Codes Constitutes Trademark Infringement

Sheppard Mullin — Wed, 22 Jul 2009 09:43:38 -0500

On June 19, 2009, in Zino Davidoff SA v. CVS Corp., the Second Circuit enjoined CVS, a national retail chain, from removing unique production codes ("UPC") from Davidoff product packaging for its "Cool Water" fragrances on the grounds of trademark infringement.[1] Davidoff, a high end luxury brand, imprints a unique UPC on every product for quality control purposes and to protect against diversion and counterfeiting. The code contains basic information about each product unit, including "where and when it was produced, ingredients used, and distribution path."[2] The UPC code ordinarily is used to track goods that are sold to and by unlicensed distributors. The Davidoff UPC also allows Davidoff to spot defects easily and swiftly recall or remove products from the market when such defects are noted. The UPC is used to protect the reputation of the brand and its trademarks.

Davidoff licenses its Cool Water trademark to Coty Inc. for the manufacture and distribution of Cool Water fragrances. In an effort to maintain the prestige of its brand, Davidoff restricts distribution of Cool Water products to luxury retailer and has declined to sell CVS. When Davidoff found out that CVS was selling its Cool Water perfume and cologne without the UPC codes, it sent CVS a cease and desist letter in 2005. Without the UPC code, there was no way of knowing whether the goods were genuine or counterfeit. CVS assured Davidoff they would stop selling the counterfeits but, only a year later in 2006, Davidoff discovered that CVS had continued to sell the counterfeit products and brought an action against CVS for trademark infringement.

Davidoff was permitted by the District Court as part of discovery to inspect CVS's inventory. Davidoff found 16,600 items with the UPC removed. Either the part of the box containing the code was cut, chemicals were used to wear it down, or the bottom of the bottles were ground to wear the UPC code away.[3] Davidoff sought a preliminary injunction to enjoin CVS from selling these items. CVS voluntarily agreed to stop selling counterfeit goods, but argued that, since there was no question as to the genuineness of the goods with the UPC removed, CVS should be allowed to sell its inventory.

In Original Appalachian Artworks v. Granada Electronics, Inc., the Second Circuit held that, where a distributor was selling the Plaintiff's genuine products which had been diverted, such goods infringed the Plaintiff's trademark where the products were materially different and likely cause consumer confusion as to the source.[4] Trademark owners may restrict distribution and licenses territorially because different types of licensed products may be sold in different places with ingredients or at prices relative to the local economies. In addition, global distribution strategies may vary. There is a high risk that goods will be diverted and that opportunists will purchase goods in one market at the lowest price and sell them in a different market at a higher price, thereby making a large profit. In Original Appalachian Artworks, the trademark owner was able to demonstrate that the products manufactured and intended for distribution in Spain were materially different from the goods intended for distribution in the United States, where the language on the packaging and product was in Spanish.

The Second Circuit in Zino Davidoff SA, took a different approach, relying not so much on the differences between the products sold in CVS and genuine Davidoff goods, but rather on the removal of the UPCs to find that there was trademark infringement. The Second Circuit ruled that the removal of the UPC alone constitutes trademark infringement, even if the goods bear the trademark and are genuine. The Court relied on the test in Warner-Lambert Co v. Northside Dev. Corp., 86 F.3d 3 (2nd Cir. 1996), which held that a trademark holder was entitled "to an injunction against one who would subvert its quality control measures upon a showing that (i) the asserted quality control procedures are established, legitimate, substantial, and nonpretextual, (ii) it abides by these procedures, and (iii) sales of products that fail to conform to these procedures will diminish the value of the mark."[5] The Court concluded that the UPC was a legitimate quality control measure upon which Davidoff could rely to prevent counterfeit products from damaging its brand's good will and reputation. As a result, Davidoff was entitled to enjoin CVS from selling goods from which the UPC had been removed.

The Second Circuit found additional compelling reasons to rule for Davidoff, noting that the removal of the UPC exposes Davidoff to a greater risks of harm to its good will and reputation as the result of counterfeiting. As part of its broad protection, Davidoff routinely trains its retailers about the use of the UPC, ensuring that if there is a counterfeit product with no code, or a product with a fake code, the retailers will remove the product before it reaches the consumer. The Court also noted that the act of removing the code requires tampering with and alteration of the packaging. Not only is the removal of the code an impediment to monitoring and preventing counterfeit products but removal of the UPC diminishes the value of the genuine product and tarnishes the trademark.

The Court applied the Warner Lambert precedent by holding that the interference with the quality control measure by itself would suffice as grounds for the issuance of an injunction.[6] In stating that a claim does not hinge on the fact that the Cool Water goods sold were defective, the Court held that the trademark holder need only prove a risk of injury to the mark in order to find irreparable harm. It is likely that, as a result of this decision, removal or interference with UPCs and other quality control measures will be increasingly held to be the basis for trademark infringement actions under similar factual circumstances. Not only does the UPC protect the product from tampering and help to track counterfeits, but the use of a UPC may give trademark holders greater ability to protect their trademark from diversion and counterfeiting. The concurring opinion in Original Appalachian Artworks may have been prescient, as Judge Cardamone asserted that, since the Lanham Act imposes an affirmative duty for the trademark owner to protect his mark, "[i]t would be anomalous . . . to burden the trademark owner with this 'affirmative' duty and then . . . deny him a federal forum in which to control his licensees."[7] With the new precedent set by Zino Davidoff SA, trademark owners can use UPC codes as another way to protect and enforce their valuable trademarks.

[1] Zino Davidoff SA v. CVS Corp., No. 07-2872 (2nd Cir. 2009).

[2] Id. at *12.

[3] Id. at *6.

[4] Original Appalachian Artworks, Inc. v. Granada Electronics, Inc., 816 F.2d 68 (2nd Cir. 1987).

[5] Id. at *10.

[6] Id. at *9.

[7] Original Appalachian Artworks, 816 F.2d at 75 (citation omitted).

U.S. Diamond Retailers Can Help Ensure Conflict Diamonds Are Not a Girl's Best Friend

Sheppard Mullin — Fri, 17 Jul 2009 16:13:31 -0500

Not all diamonds are a girl’s best friend. Conflict diamonds, for instance, are considered more of a rebel’s best friend. Also known as “blood diamonds,” conflict diamonds are linked to rebel forces and factions opposed to legitimate governments, and are used to fund military opposition to those governments. The international diamond community, including the U.S., has expressed zero tolerance towards such diamonds and has sought to regulate the rough diamond trade to assure consumers that their purchases are not used to finance overseas wars and rebel movements. Further, U.S. diamond retailers can assist these efforts by keeping informed of the various diamond distribution laws and by effectively implementing self-regulating retail policies that will help curtail illegal trade.

Regulating “Rough” Diamonds From “Mine to Factory”: KPCS & CDTA

In 2000, a joint initiative was formed among the international diamond industry, governments, and NGOs to control and monitor the rough diamond trade, and specifically, to exclude conflict diamonds. The United Nations General Assembly adopted this initiative, known as the Kimberley Process Certification System (“KPCS”), which expects participating countries (“Participants”) to “prohibit the importation of rough diamonds from, and the exportation of rough diamonds to, non-Participants and to require that shipments of rough diamonds from or to a Participant be controlled through the KPCS.”

Further, the KPCS expects each Participant to be responsible for implementing its scheme domestically. In compliance, President Bush signed the Clean Diamond Trade Act (“CDTA”) in 2003, and the Office of Foreign Assets Control (U.S. Dept. of Treasury) promulgated regulations implementing the CDTA [Title 31 of the Code of Federal Regulations (CFR) §592.101-592.801]. These regulations seek to effectively monitor U.S. trade of rough diamonds, and to improve the system for collecting and sharing U.S. data on such diamonds. For instance, all shipments of rough diamonds imported to, or exported from, the U.S. must be accompanied by an original Kimberley Process Certificate and be sealed in a tamper-resistant container [31 CFR §592.301(a)(1)-(2)]. Next, the final recipient of the shipment is responsible for confirming the receipt of a rough diamond import shipment with the foreign exporting authority [31 CFR §592.301(a)(3)]. Additionally, the U.S. exporter must submit shipment information through an automated export system that validates the Kimberley Process certificate [31 CFR §592.301(a)(4)].

To increase efficacy, a number of U.S. agencies have had a hand in implementing the CDTA. In fact, the State Department and the Treasury Department co-chair an inter-agency group, the Kimberley Process Implementation Coordination Committee, to coordinate U.S. government regulation of rough diamonds and to oversee operational issues. Additionally, the State Department reviews the standards and practices of the USKPA (the entity that issues Kimberley Process certificates) and reports to Congress the results of its review annually. Also, to improve the collection of statistical data, an amendment was added to the CDTA in 2008 that requires formal entry documents for importation of all rough diamonds regardless of value [Note 4 to 31 CFR §592.301]. Finally, those who are found in violation of CDTA’s requirements face criminal penalties up to $50,000 per count for corporations and individuals and/or ten years’ imprisonment for individuals [31 CFR §592.601(a)(2)]. Civil penalties of up to $10,000 per violation may also be imposed [31 CFR §592.601(a)(1)].

Regulating “Polished” Diamonds From “Factory to Finger”: The System of Warranties

While impressive, international and domestic diamond trade laws do not directly affect U.S. diamond retailers because they concern rough (as opposed to cut and polished) stones. Therefore, to support the implementation of KPCS and CDTA downstream, a voluntary system of warranties has been carried out by U.S. diamond retailers who sell cut or polished diamonds, and jewelry containing such diamonds. Specifically, this self-regulating system upholds the seller of each diamond transaction to include a written guaranty on the invoice assuring the buyer that the diamonds have been purchased through authorized channels and are conflict free. Additionally, each retailer is responsible for maintaining records of warranty invoices for internal audit.

However, because there is no government oversight over this process, warranty statements are largely unsubstantiated. Subsequently, for proper implementation, retailers may want to take extra steps to ensure the legitimacy of their polished diamonds. For instance, a retailer may want to demand proof of a KPCS certificate for each order. Further, a retailer may hire an independent third-party to conduct an audit of its diamond supply. Additionally, because the warranty system is voluntary, the retail industry may find it beneficial to enact monitoring or verification mechanisms to ensure that all companies are adhering to the system.

One final safeguard ensuring the legitimacy of the diamond trade is the USA Patriot Act, where U.S. diamond dealers who buy or sell more than $50,000 worth of goods which derive more than 50% of their value from “jewels, precious metals, or precious stones” must have anti-money laundering measures in place [31 CFR §103.140]. These measures include: assessing the company’s risk to money laundering; developing and implementing an anti-money laundering program; designating a compliance officer for the program; providing education and training for program personnel; and testing and monitoring the program periodically [31 CFR §103.140 (b)-(c)]. Diamond retailers falling under this statute should therefore report suspicious activity that may potentially involve rebel financing.

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Overall, the U.S. has adopted substantial measures in curtailing the trade of conflict diamonds. However, because it falls short of full oversight, success also depends on diamond retailers not directly regulated by the KPCS or CDTA. All parties – not only government entities -- must ask questions, identify partners and monitor transactions, and demand assurance that diamonds come from a legitimate source. Only through a collective effort can the U.S. guarantee that all diamonds are truly a girl's best friend.

Artists Shout "I'm with the Brand" as Fashion Labels Take on Role of Record Label

Sheppard Mullin — Fri, 17 Jul 2009 16:06:52 -0500

From Sgt. Pepper's psychedelic costumes to Run DMC's love of Adidas and Kanye West's shutter shades, fashion and music have visibly influenced one another for decades. The global recession has only strengthened this bond by leading fashion brands to take on roles once exclusively reserved for major record labels. As a result, labels and artists have begun to view fashion brands as a lucrative and logical business partner while brands' increasing ability to work with musicians has allowed them new and unique means of attracting customers, increasing consumer goodwill, and maintaining their distinctiveness.

Major Endorsements at Knock-Off Prices!

As record sales continue their precipitous decline and record stores close down, artists are left with very few brick and mortar venues through which they can distribute physical CDs. As a result, major artists have become increasingly amenable to co-endorsement deals and alliances. In the past few months alone, big-name acts like Lily Allen, Wil.I.am, N.E.R.D., Kris Allen, and Miley Cyrus signed potentially lucrative deals with major fashion brands and retailers. In one such deal, Latin pop star Paulina Rubio entered a partnership with Wal-Mart to promote her new album. In exchange for a few in-store appearances and a performance at the annual stockholder's meeting, Wal-Mart agreed to show exclusive concert footage of Rubio and to display her CDs in close proximity to her new perfume line—in the store's beauty department.

A few years ago, stores like Wal-Mart (the second-largest music retailer in the country) would be unlikely to place CD racks anywhere but their music department, while co-promotions were either out of the question for major acts or solely controlled by the labels. Now, as cross-promotions and partnerships become increasingly common, retailers and artists are forced to consider new strategic partnerships. While Rubio's in-store ads should boost perfume sales, they are really a calculated promotional campaign for her CD. Additionally, Rubio's endorsement of Wal-Mart will help the brand connect with Rubio's primarily Latin-American fanbase and her in-store performances should prove invaluable. Not only does her presence attract a huge number of shoppers, it provides the in-store audience with a brand-affinity that would not otherwise have been possible. At the same time, by displaying Rubio's concert video and CDs in its beauty department, Wal-Mart introduces her music to shoppers who may not otherwise have heard it and encourages the purchase of both fragrance and CD—especially if the retailer discounts combo purchases.

If planned correctly, strategic partnerships with established acts are also an extremely valuable way for high-fashion brands to remain sexy, young, and culturally relevant. In the 1990s, hip-hop artists helped make Ralph Lauren ubiquitous in both country clubs and high school hallways. Now, when Jay-Z shouts-out Burberry, Marc Jacobs, and Vera Wang, he reinforces the allure of the brands among a youthful audience that might have overlooked such high-fashion designers. Gucci's recent endorsement deal with Rihanna helped the 80-year old brand connect with the singer's young female fans. Meanwhile, Kanye West has agreed to design an exclusive shoe for Louis Vuitton and taken to calling himself "the Louis Vuitton Don" in recent singles. These alliances work to reinforce the brand's luxury cachet and ensure their relevance.

Exclusivity, Distinctiveness, and Lesser-Known Bands

Some of the most interesting synergies between fashion and music have come from retailers working with unsigned or lesser-known bands because, unlike major artists, lesser-known musicians have exhibited a willingness to focus on audience access and public exposure rather than compensation. Thus, undiscovered or lesser-known musicians present fashion brands with a huge upside and low costs. For example, Claire's—an accessories retailer which targets girls and young women—recently began a promotional campaign with teen pop singer Alex Roots.

Although some financial consideration was reportedly exchanged, the deal's primary focus was exposure for Roots in exchange for her endorsement of Claire's products. Claire's publicizes her music via in-store radio in 400 U.K. stores and includes with every purchase a postcard directing customers to a Claire's micro site featuring Alex Roots' music. Finally, Claire's plans to release a line of Alex Roots sunglasses to coincide with the release of her next single.

Since its inception, the micro site (which includes links to Roots' own promotional site) has reported over 35,000 hits each month—a tremendous source of exposure for Roots and a great way to strengthen affinity for and awareness of the Claire's brand. Further, Roots is a huge online-traffic driver. Since Claire's website is one of the best means of downloading, viewing, or listening to Roots' music, fans and their friends may find themselves inadvertently buying a shirt or some earrings while they listen to a favorite new song. In addition, among some consumers and Roots' fans Claire's is likely to become inextricably linked with the artist—a phenomenon some industry experts have taken to calling "ownership." Since Roots' fanbase coincides neatly with Claire's target-customer, "ownership" translates into increased brand exposure and improved credibility with consumers. Meanwhile, Claire's endorsements, advertisements, and promotional materials have essentially replaced the role of traditional record label.

The allure of "ownership" also works in musicians' favor by providing incentives to actively promote artists in all possible venues. For example, in a recent alliance with the Thomas Pink shirt company, musician Gary Go agreed to appear in Pink advertisements, to provide Pink customers with an exclusive download, and to provide his music for in-store radio. In exchange, Pink agreed to display Go's video online and promote his music. Now, due to the promotion's success in UK stores, Pink plans to unroll it internationally. In so doing, the company will provide Go (who released his first CD in May) with international promotions and advertising well beyond anything he could have reasonably expected from a cash-strapped record label.

The Best is Yet to Come:

As CD sales continue to fall, fashion brands are becoming increasingly entwined in areas which were once the exclusive domain of major labels. In the brave new world of music, fashion brands provide artists with a promotions, exposure, and audience access that might not otherwise be possible. In exchange, artists provide fashion brands and retailers with inexpensive endorsements, a means of distinguishing or reinvigorating their brand, and a direct connection to consumers through music. Music and fashion have always gone hand-in-hand, now a difficult market environment has brought the two even closer together and forced both parties to seek out new and creative partnerships.

What Is the Jurisdictional Pre-Requisite for Copyright Litigation?: Do Denim v. Fried Denim

Sheppard Mullin — Tue, 14 Jul 2009 15:37:14 -0500

On June 17, 2009, Judge Laura Taylor Swain of the Southern District of New York dismissed the copyright claims of jeans maker Do Denim against rival manufacturer Fried Denim Inc., holding that the mere filing of the copyright applications, fees and deposits did not satisfy the jurisdictional requirement that a copyright be registered before a lawsuit is initiated. Do Denim v. Fried Denim, No. 08Civ.10947, 2009 U.S. Dist. LEXIS 51512, at *7 (S.D.N.Y. June 17, 2009). This decision highlights the importance of copyright registration, as a jurisdictional prerequisite for plaintiffs hoping to protect their designs.

In 2005, Plaintiff Do Denim created two back pocket designs for its jeans -- the "Wings Design" and the "Dragon Design." Defendant Fried Denim allegedly copied these unique designs in the production and sale of its own jeans. Among other things, Plaintiff claimed that the Defendant's copying and use of the "Wings" and "Dragon" designs constituted copyright infringement.

The Copyright Act provides that "no civil action for infringement of the copyright in any United States work shall be instituted until pre-registration or registration of the copyright claim has been made in accordance with this title." 17 U.S.C. § 411(a) (emphasis added). Although Plaintiff had delivered the deposits, applications and fees required for copyright registration in both of its designs, the Copyright Office had yet to respond. Defendant Fried Denim argued that because of this lack of response, registration had not "been made" and therefore the Court lacked subject matter jurisdiction. Plaintiff replied that its delivery and filing of the applications, fees and deposits was in fact sufficient to constitute "registration" being "made," thereby conferring upon the Court the requisite subject matter jurisdiction.

This issue has been a divisive one in recent years. As Judge Laura Taylor Swain notes in her opinion that although the Second Circuit has yet to address the question of when a registration has "been made" for the purpose of copyright litigation, it is the subject of a current circuit split between the Tenth Circuit and the Eighth Circuit. The Tenth Circuit concluded in La Resolana Architects, PA v. Clay Realtors Angel Fire, 416 F.3d 1195 (10th Cir. 2005) that "only upon registration or refusal to register is a copyright holder entitled to sue for copyright infringement. The Eighth Circuit held in Action Tapes, Inc. v. Mattson, 462 F.3d 1010,1013 (8th Cir. 2006) that the copyright owner may sue for infringement once the owner has delivered the deposits, application, and fee required for registration. Judge Swain ultimately sided with the Tenth Circuit in her opinion, thereby dismissing Do Denim's copyright claims.

It is interesting to note that although the Second Circuit has not examined this area before, the Southern District of New York has. In City Merchandise v. Kings Overseas, No. 99 CV 10456, 2001 U.S.Dist. LEXIS 3176, at *4 (S.D.N.Y. March 22, 2001), Judge Richard Conway Casey stated that "it is well settled that the court lacks subject matter jurisdiction unless the claimant has a registration or its registration has been refused." This holding, coupled with Judge Swain's recent opinion in Do Denim, clearly demonstrates where the Southern District of New York stands on the registration issue.

These decisions emphasize the importance of securing copyright registration before attempting to protect a copyright, especially in the Southern District of New York. Additionally, potential defendants in copyright matters should be mindful at the outset to ask the potential plaintiff for a valid copyright registration. As Do Denim v. Fried Denim demonstrates, this simple step may stop a premature copyright litigation dead in its tracks.

If You Gave a Fashion Show and No One Came...

Sheppard Mullin — Mon, 06 Jul 2009 19:20:57 -0500

Some fashionistas are trying to revive L.A. fashion week, while others say runway shows are pass? Several dozen members of Los Angeles’s fashion elite gathered recently on the rooftop of the hip Hotel Erwin on Venice Beach. Their issue of concern: the cancellation of the city’s fashion week in March.

Click here to read article.

ICANN's gTLD Expansion Plan: Fashion Your Own Custom Domain

Sheppard Mullin — Mon, 18 May 2009 08:52:04 -0500

In June 2006, the Internet Corporation for Assigned Names and Numbers (ICANN) approved a plan that will allow private parties to create custom online domains. These domain names may be anywhere from 3 to 63 characters long and in nearly any alphabet, such as Arabic or Chinese. The Internet currently operates using 12 generic top-level domains (gTLDs) to direct traffic. The more common gTLDs include .com, .org, and .gov, of which "dotcom" is by far the most popular. The draft plan was released for an open comment period from October 24-December 15, 2008. There was a strong public reaction during the comment period, much of it negative. In response, an amended plan was released on February 18, 2009, with a comment period through April 13, 2009.

The revision addresses many of the perceived problems of the original plan and includes changes to the application fee structure and dispute resolution process. However, one critical issue -- trademark protection -- was not addressed. Recognizing that trademark rights will be substantially impacted, ICANN announced the formation of an Implementation Recommendation Team (IRT) dedicated to devising solutions to the intellectual property issues created by the gTLD expansion plan. The IRT’s preliminary report has been posted for a thirty (30) day comment period, closing May 24, 2009.

The implications for trademark owners under the existing plan are myriad, both pro and con. On the positive side, many current problems with internet overcrowding could potentially be alleviated through creation and use of new, industry-specific TLDs. A persistent problem for trademark owners in cyberspace is the conflict between similar but equally valid marks. Until now, the coveted dotcom domain has gone in a first-come, first-served fashion; where the first to arrive has a valid right to use the mark, those arriving late to the party have been forced to settle for some variation of their own mark. The opportunity for members of an industry such as the fashion industry to band together and create a new domain just to serve their own people is an interesting prospect. Someone could create ".fashion" or ".designs" and then sell space in that domain only to qualified members of the industry. Assuming the public embraces the new Internet, holders of non-competing but similar marks could each use their mark in their domain name without conflict.

Unfortunately, the plan also gives rise to significant potential pitfalls for mark holders. Trademark owners are already required to be ever vigilant in defending their marks against infringement, cybersquatting, and other types of online encroachment. Under this regime, the burden of policing not only remains on the mark holder, but will increase exponentially. With every new gTLD comes proliferation of new infringing and/or confusing domains. While ICANN's rules do prohibit infringement, they will not screen proposed domains for infringing use or verify ownership of marks. Mark owners will have to monitor applications and assert timely objections to potentially infringing new domains. Incidentally, each filing carries a fee of $1,000 - $5,000, which may deter enforcement of rights. Furthermore, organizations that can afford it might be compelled to purchase TLDs that they don't particularly need or want, as a preemptive move against competitors and would-be cybersquatters. This would require substantial expenditures of both time and money, and the minimal restrictions on new domain names make guarding against all potential infringements impossible.

The preliminary report of the IRT proposes solutions to some of these dangers, most of which will be channeled through the creation and operation of an IP Clearinghouse. For a fee, mark holders can have their information added to a central database, subject to initial and annual validation of the right asserted. The IP Clearinghouse will then make that information available to new applicants, registry administrators, and ICANN itself, ideally reducing the overall costs and burdens associated with creation and maintenance of new domains. Other proposed functions of the IP Clearinghouse include: a watch service (which would alert mark owners of potentially infringing applications), a Uniform Rapid Suspension System (for infringing or otherwise malicious domains), and a Globally Protected Marks List (which would automatically block applications for qualified marks). Another significant proposal relates to the shifting of costs and fees for unsuccessful applications. This would allow a legitimate mark holder to (theoretically) recoup any expenses incurred in challenging potentially infringing applications. Incorporation of the IRT proposals in to the expansion plan will significantly minimize many of the risks discussed above.

On the whole, the expansion plan appears to be a lucrative opportunity for ICANN, but a largely unnecessary distraction for businesses. However, the fact remains that the current internet model gets more outdated every day and, at some point, changes will have to be made. Operating under the new regime will most certainly require trademark holders to analyze whether offensive and defensive registration will be necessary, though until ICANN definitively responds to the ultimate concerns of mark owners, development of specific strategies will have to wait. At this point trademark owners should simply monitor developments in this area and time will tell what comes next. Details of plan revisions and comment procedure can be found at www.icann.org.

Ding-Dong!! Multi-level Marketing Plans Calling!!

Sheppard Mullin — Mon, 18 May 2009 08:45:11 -0500

Multi-level marketing plans ("MLMs"), also known as "network" or "matrix" marketing plans, can be an effective way for the "little guy" or the "entrepreneur" to achieve financial success in the cosmetics or apparel industry.[1] By promoting individual autonomy and embracing the concept that the independent sales person is the main driver of success, it's no surprise that MLMs are attracting considerable talent. In fact, the Direct Selling Association, a trade group that includes the leading multi-level marketing firms, reports that the industry employed more than 15 million U.S. salespeople in 2007, and had an estimated $30 billion in U.S. direct sales. Further, the clothing, cosmetics, and personal care segment represented almost a third of all domestic sales, the highest of any major product group.

However, success comes with a price, and in this case—an image problem. Specifically, the MLM industry has been widely criticized that its business models are nothing more than an illusory pyramid or ponzi scheme. But this accusation is only skin-deep. While it's fair to say that some companies are a sham, the truth is that an MLM plan, if properly set up, is a completely legal business model that can offer substantial benefits to its members. Therefore, potential participants must check beneath the surface of any MLM plan to determine whether the rewards promised can actually be attained.

Courts have offered a few tips in distinguishing between a legal MLM plan and an illegal pyramid scheme. In the classic case of Amway Corp., Inc., the court noted that Amway was a legitimate MLM because it was a substantial manufacturing company that distributed "actual" products [93 F.T.C. 618 (1979)]. Further, Amway implemented several policies (now known as the “Amway safeguards”) that “avoided the abuses of pyramid schemes” [Id. at 700]. These safeguards include:

1. No Headhunting Fee

First, Amway did not have “headhunting fees” or commissions on mandatory inventory purchases by the recruits [Id. at 717]. Rather, the only investment needed was a sales kit for $15.60 that could be refunded if the recruit decided to leave the Amway plan [Id.]. Additionally, no profit was made on the sale of the kit [Id.]. In other words, a sponsoring distributor received nothing for the mere act of recruiting a new distributor. Only when products are sold did the sponsoring distributor begin to earn commission.

2. Product Sales a Precondition to Receiving a Performance Bonus

Second, Amway commissions were earned only when distributors resold at least 70% percent of the products they purchased each month [Id. at 646]. The “70% Rule” prevented the accumulation of inventory and encouraged distributors to get their products out to consumers [Id. at 716].

3. Buying-Back Policy

Third, Amway bought back unused marketable products from a distributor whose inventory did not move or who wished to leave the business [Id. at 646]. This deterred unlawful inventory loading, where a sponsoring distributor is inhibited from pushing unrealistically large amounts of inventory onto her new recruits for the sake of increasing her performance bonus [Id. at 716].

4. Requirement that Products are Sold to Customers

Fourth, Amway required ongoing sales to retail customers. For instance, Amway’s “Ten-Customer Rule" provided that distributors do not receive a performance bonus unless they prove a sale to each of ten different retail customers during each month [Id. at 646]. Such a rule made retail selling an essential part of being a distributor.

Where the Amway case described characteristics of a legitimate MLM plan, a number of suits brought by the FTC against clothing and cosmetics distributors have provided guidance as to what constitutes an illegal pyramid scheme [See Ger-Ro-Mar, Inc., 84 F.T.C. 95 (1974) (cosmetics); Holiday Magic, Inc., 84 F.T.C. 748 (1974) (cosmetics and toiletries); Koscot Interplanetary, Inc., 86 F.T.C. 1106 (1975) (brassiere, lingerie, and swimwear)]. In a typical pyramid scheme, revenue primarily comes from recruitment alone. The new recruits are usually required to invest money to participate in the plan; such investment goes towards a “money pool” that becomes the primary source of income for those higher in the pyramid. Unlike a legitimate multi-level marketing plan, an illegal pyramid scheme has no substantial product to sell and therefore does not derive revenue from such sales. Rather, capital acquisition is based on recruiting efforts that are unrelated to the sale of the product to ultimate users. In other words, for the company to sustain itself, members will have to continually recruit others to increase the money pool—if they do not, the pyramid collapses. Companies involved in a pyramid scheme are usually more focused on recruiting than selling, require substantial fees upfront, do not allow for returnable inventory, and pay scant attention to consumer sales.

In the end, the MLM industry is like any other industry. Some businesses are golden apples, while others are simply rotten apples. Therefore, before investing in an MLM plan, one must check its details and see if there are safeguards in place that impede the development of a pyramid scheme, where participants purchase a right to earn profits by simply recruiting other distributors, who themselves are interested in recruitment fees rather than the sale of products. For additional help with identifying pyramid schemes, please visit: www.ftc.gov/edu/consumer/invest/inv12.shtm

[1] Multi-level marketing plans typically offer distributors a commission for both sale of the plan's goods or services and sales by others that they have recruited to join as distributors. For example, every time Distributor A recruits a new Distributor B (usually a friend, family member, or neighbor), Distributor A will receive a commission from all sales made by Distributor B. Further, if Distributor B recruits a Distributor C, Distributor A may continue to receive commission through both levels of recruits (e.g., Distributor A’s “downline”). In other words, Distributor A earns a commission on both his independent sales efforts as well as the leveraged sales efforts of his downline.

EU Cosmetics Regulation Receives Welcome Facelift

Sheppard Mullin — Mon, 18 May 2009 08:40:41 -0500

Last month, the European Parliament approved new rules that will increase cosmetic safety and simplify regulatory procedures in the European Union. The legislation, which resulted from a compromise negotiation between Parliament and Council representatives, will take the form of a single regulation that applies to all member states simultaneously, and will replace the patchwork of 27 sets of national rules and 55 amendments that comprise the EU Cosmetic Directive of 1976.

The new text will increase manufacturer responsibility and strengthen market surveillance, while establishing clear guidelines that will cut administrative costs and unnecessary litigation. Noteworthy changes include:

Notification, Assessment, and Labeling of Nanomaterials. For the first time, Parliament introduced laws regulating cosmetics containing nanomaterials, which the new text defines as “an insoluble or bio-resistant and intentionally manufactured material with one or more external dimensions, or an internal structure, on the scale from 1 to 100 nm.” Nanomaterials, which may be thousands of times finer than a human hair, and estimated to be in about 5% of cosmetic products, are now subject to compulsory notification, safety assessment, and labeling measures. For instance, a manufacturer must inform the European Commission (the "Commission") six months prior to launching a product containing nanomaterials. If there is a safety concern, the Commission will consult the Scientific Committee on Consumer Safety for an opinion. Additionally, all nanomaterials in the cosmetic must be mentioned on the list of ingredients on the packaging, with the names of such ingredients followed by the word “nano” in brackets.

Strict Treatment of CMR Substances. The regulation essentially forbids the use of substances in cosmetics that are carcinogenic, mutagenic, or toxic for reproduction ("CMR"), which may only be used in exceptional cases under strict conditions. A new clause also addresses substances with endocrine-disrupting properties, which will be regulated when European or internationally agreed upon criteria for identifying such substances are available, or five years after the regulation is in force. However, the rules still allow for the continued use of ethanol, which is widely used in perfumes.

Common Criteria for Product Claims. The regulation provides that labeling and advertising of cosmetics may only mention the real effect of a product. The Commission is asked to draw up an action plan and adopt a list of common criteria for claims which may be used in connection with cosmetics.

Strengthening In-Market Control. The regulation creates a single, central notification system overseeing cosmetics that will replace various national procedures. Additionally, new provisions increase market surveillance cooperation between authorities, reinforces a tracing system that ensures identification of a product through the supply chain, monitors undesirable side effects induced by a product, and sets up minimum requirements for the manufacturer in assessing product safety.

Once approved by the Council, the regulation will enter into force 20 days after publication in the EU Official Journal, and will apply 42 months later (2012), except for certain parts on nanomaterials and CMR substances that will apply from an earlier stage. Existing provisions concerning animal testing on cosmetics from now until 2013 will remain intact.

Generally, the new amendments have been favorably received. With these changes, Parliament has expressed its aim to "remove legal uncertainties and inconsistencies, while increasing the safety of cosmetics." Additionally, these improvements may influence other countries such as the U.S., whose cosmetics regulations are less clear and less stringent, to take notice and toughen up.

Fashion & Apparel Confab-ulous

Sheppard Mullin — Wed, 13 May 2009 11:38:21 -0500

Please join us for our upcoming

Fashion & Apparel Confab-ulous
Networking Event

When: June 9, 2009, 5:30 p.m. - 7:30 p.m.

Where: Sheppard, Mullin, Richter & Hampton LLP
30 Rockefeller Plaza, Suite 2400, New York, NY 10012

Our Confabs are informal networking events where you can "meet and greet" your peers in the industry followed by a short "hot topic" presentation by various industry experts.

5:30 – 6:30 Networking, Networking, Networking – Hors d’oeuvres and drinks

6:30 – 7:00 The Design Piracy Prohibition Act: Change Fashion Needs Copyright and Fashion Design at the Crossroads in 2009

In April, designers Jason Wu, Narciso Rodriguez, Maria Cornejo and Thakoon Panichgul –- all of whom have been worn by First Lady Michelle Obama –- traveled to Washington for one day to lobby Congress for support of the bill. On April 30, 2009, the "Design Piracy Prohibition Act" was officially reintroduced in U.S. House of Representatives. This bill, if enacted, would amend Chapter 13 of the U.S. Copyright Act and grant fashion designs a three-year term of protection, based on registration with the U.S. Copyright Office. Currently, fashion design does not receive explicit protection under U.S. copyright law and protection of certain types of apparel designs can only be found through trademark and patent law. This confab will discuss the proposed bill and its impact on the fashion industry both positive and negative.

Questions? Contact Amy Romaker at aromaker@sheppardmullin.com or 858.720.7403

To RSVP please click here.

Trends May Come and Go, But Personal Name Trademarks Are Here to Stay

Sheppard Mullin — Tue, 17 Mar 2009 15:02:13 -0500

From Coco Chanel to Zac Posen, many fashion designers' personal names (and personalities) have become synonymous with the fashion houses they represent. Anything associated with a famous designer's name often becomes more coveted due to the reputation, history, and recognition that the designer carefully built around it over time. As a result, designers' personal name trademarks often become their most valuable assets. The Joseph Abboud case illustrates some of the issues associated with selling, assigning, or licensing all of a designer's names and trademarks to someone else, and designers should take note of its implications.

The Joseph Abboud Case

In 1987, designer Joseph Abboud launched his first menswear line and registered his personal name trademark, "Joseph Abboud," with the U.S. Patent and Trademark office. In 1988, Abboud and GFT International Corp. entered into a joint venture to create JA Apparel Corp., a company that would manufacture, market, and sell apparel under the Joseph Abboud brand name. In 2000, Joseph Abboud sold all of his rights and interests in his "Joseph Abboud" names and trademarks to JA Apparel for $65 million, and Abboud also agreed to a non-compete agreement that was to last until July 2007.

However, in 2007, a dispute arose between JA Apparel and Joseph Abboud because Abboud started a new menswear line prior to July 2007 called "jaz," using his name to promote the new line with ads that described jaz as "a new composition by designer Joseph Abboud." JA Apparel sued Joseph Abboud for, among other things, trademark infringement, arguing that Mr. Abboud could not continue to use his personal name to promote or sell fashion goods, since he had sold "all of [his] right, title and interest in . . . [t]he names, trademarks, trade names, service marks, logos, insignias and designations . . . ." to JA Apparel in 2000.

In JA Apparel Corp. v. Joseph Abboud, No. 07 Civ. 7787 (THK), 2008 WL 2329533 (S.D.N.Y. June 5, 2008), the Court held that Joseph Abboud could no longer use his name for commercial purposes since he sold JA Apparel the exclusive right to use the "Joseph Abboud" name in connection with commercial goods and services. The Court reasoned that Abboud lost his right to use his name commercially since in the parties' agreement, he sold all of his rights and interests in his trademarks and "names" to JA Apparel, as well as his rights to use and apply for trademark registrations for new trademarks or designations containing the words "Joseph Abboud," or anything similar to or derivative of his name. Therefore, Mr. Abboud's use of his name constituted trademark infringement. The Court permanently enjoined Mr. Abboud from using his personal name in association with any commercial goods, products, or services, with a narrow exception for personal and public appearances unrelated to the promotion or sale of goods and services.

Designers should be well aware of the harsh outcome of the Abboud case before attempting to assign, license, or sell away all of their trademarks and names. No matter how lucrative the offer, the resulting inability to use one's personal name in connection with the promotion or sale of goods can be extremely limiting for a designer, as the Abboud case illustrates.