Zino Davidoff Sa v. Cvs Corp.

• Decision Date: 19 June 2009
• Docket Number: Docket No. 07-2872-cv.
• Citation: 571 F.3d 238
• Parties: ZINO DAVIDOFF SA, Plaintiff-Appellee, v. CVS CORPORATION, Defendant-Appellant.
• Court: U.S. Court of Appeals — Second Circuit

571 F.3d 238

ZINO DAVIDOFF SA, Plaintiff-Appellee, v. CVS CORPORATION, Defendant-Appellant.

Docket No. 07-2872-cv.

United States Court of Appeals, Second Circuit.

Argued: October 15, 2008.

Decided: June 19, 2009.

Amended: June 30, 2009.

Lis Pearson (Christopher Lick, on the brief; Adam H. Charnes and W. Andrew Pequignot, of counsel), Kilpatrick Stockton LLP, New York, NY, for Plaintiff-Appellee.

Megan Muoi (Nicholas Fortuna, on the brief), Allyn & Fortuna LLP, New York, NY, for Defendant-Appellant.

Before: LEVAL, KATZMANN, and LIVINGSTON, Circuit Judges.

LEVAL, Circuit Judge:

Defendant CVS Corporation, a retail drugstore chain, appeals from the order of the United States District Court for the Southern District of New York (Karas, J.), granting to plaintiff Zino Davidoff SA ("Davidoff"), a Swiss corporation, a preliminary injunction which enjoined CVS from dealing in any way in trademarked goods of the plaintiff with Davidoff's unique production code ("UPC") removed.¹ The district court found that the plaintiff was likely to succeed on the merits of its trademark infringement claim because the UPC acts as a quality control mechanism which enables Davidoff to protect the reputation of its trademarks by identifying counterfeits and by protecting against defects. We agree and affirm the district court's order.

BACKGROUND

Davidoff has been a well-regarded brand for high-end luxury goods for personal consumption since 1911. In 1988, Davidoff launched DAVIDOFF COOL WATER, a cologne for men, followed by a COOL WATER fragrance for women in 1997. Davidoff holds valid uncontested trademarks for all of the COOL WATER products at issue in this case. The COOL WATER fragrances are manufactured and marketed by Coty Inc. ("Coty") and its subsidiaries, under license from Davidoff.

Davidoff and Coty together have developed a comprehensive quality assurance and anti-counterfeiting program. Part of this program involves the placement of a unique production code on the bottom of each COOL WATER fragrance bottle and on the bottom of its corresponding package. As its name suggests, the UPC is a multi-digit code unique to each unit. Embedded within the code is a variety of information about that particular unit, such as the time and place of production, the production line, ingredients used, etc.

Davidoff's use of the UPC plays an important role in fighting counterfeits. Because of the high expense involved in placing a unique number on each unit, counterfeiters will generally either omit such a number from their packaging or repeatedly use sets of fake numbers on a series of counterfeit units. The UPC system therefore facilitates the spotting of counterfeit units by allowing investigators to make a determination based on the absence of a UPC on the packaging or the use of a repeating and, thus, fake UPC number. Also, the identification of a fake UPC number allows investigators to search for other fakes merely by identifying products bearing the same fake number. Furthermore, Davidoff's own investigators are not the only recipients of these benefits. Davidoff regularly instructs its retailers and officers of U.S. Customs and Border Protection ("Customs") in the use of the UPC system and relays information regarding fake UPC numbers known to be used by counterfeiters. Armed with this knowledge, Customs and retailers are more easily able to check newly-received COOL WATER shipments and set aside suspected counterfeits.

Use of the UPC system also assists Davidoff's ability to protect its brand against quality slippage in genuine authorized products. When a quality problem surfaces, the UPC identifies the place of manufacture the batch which produced the defect, and other identifying information. This information helps Davidoff both to recall already distributed product that may share the defect and to prevent further recurrence of the defect. The ability derived from the use of the UPC helps Davidoff assure that its marks will not appear on defective product and thus preserve and protect the value of its trademarks.

In an effort to maintain the prestige of its brand, Davidoff limits sales of COOL WATER products to luxury retailers and has declined to sell to CVS. Though not an authorized retailer, CVS is nonetheless able to secure stock of COOL WATER from outside of Davidoff's normal distribution channels. Davidoff products are among CVS's top-selling fragrances. Some of the COOL WATER fragrances sold by CVS have been found to be counterfeit. In addition, some of the COOL WATER stock purchased by CVS that is not counterfeit consists of gray-market goods, meaning "goods that are manufactured [under authorization from the trademark owner], are legally purchased [outside the United States] from authorized distributors, and are then imported by persons other than the trademark holder and without the markholder's permission." Olympus Corp. v. United States, 792 F.2d 315, 317 (2d Cir.1986).

On two occasions, in 1998 and 2005, Davidoff discovered that counterfeit COOL WATER products were being sold at CVS. On both occasions, Davidoff sent cease-and-desist letters to CVS and provided information to CVS on how to identify counterfeits based on the product's UPC. CVS assured Davidoff that it would conduct an inventory review, remove all counterfeit products, and source only from authorized distributors. Despite these assurances, Davidoff discovered in 2006 that CVS was continuing to sell counterfeit COOL WATER fragrances. Davidoff then brought this action against CVS alleging, inter alia, trademark infringement, unfair competition, and trademark dilution in violation of Sections 32(1) and 43(a) and (c) of the Lanham Act, 15 U.S.C. §§ 1114(1), 1125(a) and 1125(c).² Davidoff's original complaint sought relief only as to CVS's marketing of counterfeit Davidoff products. On December 22, 2006, the district court granted a temporary restraining order and authorized Davidoff to inspect all undistributed products in CVS's inventory bearing the Davidoff mark.

During the course of this inspection, Davidoff discovered that, in the case of 16,600 items in CVS's inventory, the UPCs on the packages and labels affixed to the bottle had been removed.³ The codes had been removed through a variety of techniques, including cutting the portion of the box or label exhibiting the UPC, using chemicals to wipe away the UPC on the label, and grinding away the bottom of the bottles to remove the UPC. It was apparent in many instances that the packaging had been opened.

On February 7, 2007, Davidoff amended its complaint to include also claims for relief based upon CVS's sale of Davidoff products with the UPC removed. On March 2, 2007, CVS voluntarily agreed to halt the sale of counterfeit Davidoff products, but not the products with the codes removed. Davidoff then moved for a preliminary injunction forbidding the sale of all its trademarked goods with code removed. The court granted Davidoff's motion. Zino Davidoff SA v. CVS Corp., No. 06-cv-15332, 2007 WL 1933932 (S.D.N.Y. July 2, 2007). The court reasoned that removal of the codes from Davidoff's trademarked product impaired Davidoff's marks by interfering with the trademark owner's ability to identify counterfeit goods and to control the quality of its legitimate products by identifying and recalling defective products. The court thus concluded that Davidoff was likely to succeed on the merits of its trademark infringement claims on the theory that CVS's sale of Davidoff's trademarked products with the codes removed constituted trademark infringement. CVS brought this appeal.

DISCUSSION

We review a district court's grant of a preliminary injunction for abuse of discretion. Almontaser v. N.Y. City Dep't of Educ., 519 F.3d 505, 508 (2d Cir. 2008).

In cases involving claims of trademark infringement and dilution, as in other types of cases, a party seeking a preliminary injunction must demonstrate (1) the likelihood of irreparable injury in the absence of such an injunction, and (2) either (a) likelihood of success on the merits or (b) sufficiently serious questions going to the merits to make them a fair ground for litigation plus a balance of hardships tipping decidedly toward the party requesting the preliminary relief.

Fed. Express Corp. v. Fed. Espresso, Inc., 201 F.3d 168, 173 (2d Cir.2000). CVS argues that Davidoff failed to establish a likelihood of success on the merits and would not suffer irreparable harm in the absence of an injunction. We disagree and affirm the district court's grant of a preliminary injunction.

I. Trademark Infringement

CVS contends that the district court erred in ruling that Davidoff is likely to succeed on the merits of its trademark infringement claims. CVS asserts that the goods with the codes removed are gray-market goods — i.e., genuine Davidoff goods sold by Davidoff through authorized channels in other countries and subsequently imported by others into the United States. Because these goods are sold in their original packaging with the Davidoff trademarks clearly visible and unaltered, CVS contends that the removal of the codes does not negate their genuineness or constitute infringement. CVS's argument misses the point. The fact that the goods in question may be gray-market goods does not furnish CVS with a valid defense. The question before us is not whether, or under what circumstances, the sale of gray-market goods infringes their trademark. The district court did not justify its grant of a preliminary injunction by the proposition that the goods authorized by Davidoff for sale in another country are not genuine when sold in the United States. The injunction was justified rather on the basis that the removal of Davidoff's codes interfered unlawfully with Davidoff's trademark rights regardless of whether the goods were originally authorized by Davidoff for sale in the United States or elsewhere.

CVS argues that neither the plain text nor the...