El Greco Leather Products Co., Inc. v. Shoe World, Inc.

• Decision Date: 03 December 1986
• Docket Number: D,No. 1036,1036
• Citation: 1 U.S.P.Q.2d 1016,806 F.2d 392
• Parties: , 55 USLW 2356, 1 U.S.P.Q.2d 1016 EL GRECO LEATHER PRODUCTS COMPANY, INC. d/b/a Candie's International, Plaintiff-Appellant, Cross-Appellee, v. SHOE WORLD, INC., d/b/a Gussini, Defendant-Appellee, Cross-Appellant. ockets 86-7032, 86-7038.
• Court: U.S. Court of Appeals — Second Circuit

Page 392

806 F.2d 392

8 ITRD 1609, 55 USLW 2356, 1 U.S.P.Q.2d 1016

EL GRECO LEATHER PRODUCTS COMPANY, INC. d/b/a Candie's International, Plaintiff-Appellant, Cross-Appellee, v. SHOE WORLD, INC., d/b/a Gussini, Defendant-Appellee, Cross-Appellant.

No. 1036, Dockets 86-7032, 86-7038.

United States Court of Appeals Second Circuit.

Argued March 31, 1986.

Decided Dec. 3, 1986.

J. Joseph Bainton, New York City (Reboul, MacMurray, Hewitt, Maynard & Krostol, of counsel), for plaintiff-appellant, cross-appellee.

Edward V. Filardi, New York City (Brumbaugh, Graves, Donohue & Raymond, of counsel), for defendant-appellee, cross-appellant.

Before KEARSE, PRATT, and ALTIMARI, Circuit Judges.

GEORGE C. PRATT, Circuit Judge:

This appeal presents an issue under Sec. 32 of the Lanham Act, 15 U.S.C. Sec. 1114, specifically, whether goods manufactured by agreement with the holder of a trademark, but distributed without authorization of the holder, may be considered "genuine" for purposes of trademark protection. Because we conclude that such goods cannot be considered genuine, we reverse.

BACKGROUND

On March 17, 1983, Solemio, a Brazilian shoe factory, contracted with El Greco Leather Products Company, Inc. to manufacture 25,000 pairs of shoes bearing El Greco's trademark, CANDIE'S. Solemio was to ship the shoes no later than June 15, 1983, in seven lots, A through G, each consisting of approximately 3600 pairs. Upon each shipment, El Greco was to pay Solemio $7.10 per pair, through a letter of credit. El Greco's agent in Brazil, Sapatus Assessoria e Lancomentos Ltd. ("Sapatus"), was to inspect the shoes before shipment in order to assure that they met El Greco's specifications and quality standards. Payment under the letter of credit could not be made without a certificate of inspection signed by Sapatus on behalf of El Greco, declaring that the merchandise had been "approved for shipment in accordance with buyer's delivery and quality specifications."

It soon became apparent that El Greco was not satisfied with Solemio's performance. Whether due to inferior quality or production delays, El Greco eventually cancelled its order for the last two lots, F and G, and transferred those orders to another factory. The official reason given by El Greco was production delays which had made it impossible for Solemio to deliver by the June 15th deadline; but it is unclear whether these delays were, in turn, caused by quality-control problems or simply an inability to produce the required output by the required date. In either case, no certificate of inspection was ever issued for the shoes Solemio manufactured for lots F and G.

Despite the cancellation, the shoes that were to be shipped as lots F and G were apparently manufactured by Solemio. The district court found that they had in fact been completed, at least in substantial part, at the time El Greco cancelled its order, and that El Greco did not specifically instruct Solemio on how to dispose of the shoes.

Solemio then sold the shoes, through an intermediary, to defendant Shoe World, Inc. All told, Shoe World purchased just over 7000 pairs bearing the CANDIE'S trademark at $4.00 per pair, F.O.B. Brazil, or $3.10 less than the original price paid by El Greco. Shoe World resold the CANDIE'S shoes for $13.88 per pair, the uniform price it charged for all shoes sold in its retail stores.

In October 1983 El Greco, which was selling its "current" style of CANDIE'S shoes for $35.00, learned that Shoe World was selling the same shoes for $13.88. Knowing that El Greco had never sold the shoes to Shoe World, on October 27, 1983, Charles Cole, president of El Greco, telephoned Paul Gussin, the president of Shoe World, inquiring as to where Shoe World had obtained the shoes and demanding that Shoe World discontinue selling them. Shoe World continued to sell the shoes.

Shortly thereafter, El Greco brought this suit, alleging trademark infringement in violation of the Lanham Act, 15 U.S.C. Secs. 1114, 1125(a) and 1126(g), unfair competition, violation of New York Gen.Bus.L. Secs. 368-b, 368-d and 279-n, and violation of the Genuine Goods Exclusion Act, 19 U.S.C. Sec. 1526.

DECISION BELOW

After a trial in January 1984 the district court on December 21, 1984, dismissed El Greco's complaint for a permanent injunction barring Shoe World from using the CANDIE'S mark on any goods sold by it. El Greco Leather Products Co. v. Shoe World, Inc., 599 F.Supp. 1380 (E.D.N.Y.1984). On the Lanham Act claims, the court held that the shoes in question were genuine within the meaning of the statute, and that their sale, even though unauthorized by El Greco, could not constitute a violation of Sec. 1114 and Sec. 1125(a). The court further found Sec. 1126(g) unavailable to El Greco, a domestic corporation, because the section protects only "the trade or commercial names of any foreign national whose country of origin is party to any convention or treaty relating to trademarks". 599 F.Supp. at 1391.

The court went on to hold that no case of unfair competition had been made out, basing this holding on the conclusion that since the shoes were genuine CANDIE'S shoes, there was no "likelihood of confusion" of the buying public. From this conclusion the court reasoned that there was also no trademark infringement under New York law, nor violation of New York General Business Law Sec. 279-n.

Finally, the court rejected El Greco's claim under Sec. 526 of the Tariff Act of 1930, the Genuine Goods Exclusion Act, 19 U.S.C. Sec. 1526. The court concluded that Sec. 526 applied to situations in which a trademark is held by one party in the United States and another party elsewhere; that there was no holder of the CANDIE'S trademark other than El Greco; that the statute was designed to prevent importation of products of a second holder which could validly be sold under the trademark elsewhere, but not in the United States; and that since the shoes at issue here were

manufactured not by or for some second holder of the CANDIE'S trademark but rather for El Greco itself, no claim was established under Sec. 526. This appeal followed.

DISCUSSION

The heart of this case is whether the shoes at issue were "genuine" for purposes of the Lanham Act. We conclude that the district court erred as a matter of law when it held that the CANDIE'S shoes being sold without El Greco's permission or even knowledge were "genuine" CANDIE'S shoes.

A. The Genuineness of the Shoes Sold by Shoe World.

In order to make out a claim for trademark infringement, a holder must show, inter alia, that the alleged infringement is "likely to cause confusion, or to cause mistake, or to deceive." 15 U.S.C. Sec. 1114(1)(a). Shoe World strenuously urges that the sale of "genuine" goods cannot give rise to the necessary likelihood of confusion, citing Monte Carlo Shirt, Inc. v. Daewoo International (America) Corp., 707 F.2d 1054 (9th Cir.1983), and DEP Corp. v. Interstate Cigar Co., 622 F.2d 621, 622 n. 1 (2d Cir.1980). Even if this is so, however, the goods sold by Shoe World cannot be considered genuine.

One of the most valuable and important protections afforded by the Lanham Act is the right to control the quality of the goods manufactured and sold under the holder's trademark. Menendez v. Faber, 345 F.Supp. 527 (S.D.N.Y.1972), aff'd in relevant part and modified, 485 F.2d 1355 (2d Cir.1973), modification rev'd sub nom. Alfred Dunhill, Inc. v. Republic of Cuba, 425 U.S. 682, 96 S.Ct. 1854, 48 L.Ed.2d 301 (1976). For this purpose the actual quality of the goods is irrelevant; it is the control of quality that a trademark holder is entitled to maintain. Professional Golfers Association of America v. Bankers Life & Casualty Co., 514 F.2d 665, 670-71 (5th Cir.1975).

The holder of a trademark is entitled to require, as El Greco did here, that no merchandise be distributed without its first being inspected by the holder or its agent to insure quality. Here, not only did El Greco not waive the right to such inspection, it required the inspection certificate as a condition for Solemio to draw upon the letter of credit.

The original order placed by El Greco specifically restricted distribution of the shoes with the CANDIE'S mark. As the district court noted, "No shoes are approved or accepted unless and until a principal of Sapatus [El Greco's agent in Brazil] signs an Inspection Certificate certifying that the lot of shoes to which it relates fully complies with [El Greco's] standards and specifications." 599 F.Supp. at 1384. It is undisputed that no such certificates of inspection were ever signed or issued with respect to lots F and G.

The certificates of inspection required in this case were an integral part of appellant's effort at quality control. Earlier inspections by Sapatus of the shoes that eventually comprised lots A-E resulted in some shoes being rejected, and in changes in the procedures being followed in production. 599 F.Supp. at 1385. While we accept as not clearly erroneous the conclusion of the district court that poor quality was not the reason lots F and G were cancelled, the inspection step was nevertheless an integral part of El Greco's procedure for determining whether to accept shoes and allow them to be sold under its trademark.

The district court concluded the shoes were "genuine" because they had been manufactured pursuant to an order by El Greco, the undisputed holder of the CANDIE'S trademark, and because El Greco did not specifically instruct Solemio on how to dispose of the shoes once it cancelled the order.

This is an unjustifiably narrow view of the protection afforded trademark holders by the Lanham Act. The mere act of ordering a product to be labeled with a trademark does not deprive its holder of the right to control the product and the trademark. It is true that El Greco did not, at the time it cancelled the last two lots of its order, give instructions on how to dispose of the shoes that had already been...