Gucci America, Inc. v. Daffy's Inc.

• Decision Date: 31 December 2003
• Docket Number: No. 02-4046.,02-4046.
• Citation: 354 F.3d 228
• Court: U.S. Court of Appeals — Third Circuit
• Parties: GUCCI AMERICA, INC. Appellant v. DAFFY'S, INC.; John Does 1-10.

354 F.3d 228

GUCCI AMERICA, INC. Appellant v. DAFFY'S, INC.; John Does 1-10.

No. 02-4046.

United States Court of Appeals, Third Circuit.

Argued July 14, 2003.

Filed December 31, 2003.

Milton Springut (Argued), Kalow & Springut, New York, NY, for Appellant.

Stephen R. Buckingham (Argued), David L. Harris, Michelle R. Nance, Lowenstein Sandler, Roseland, for Appellee.

Before: McKEE, BARRY, Circuit Judges, and ROSENN, Senior Circuit Judge.

OPINION OF THE COURT

McKEE, Circuit Judge.

Gucci America, Inc. appeals the district court's decision to deny Gucci's request for an order compelling defendant Daffy's, Inc. to recall counterfeit "Jackie-O" handbags. Gucci also appeals the district court's denial of Gucci's request for an accounting of profits and other injunctive relief. For the reasons that follow, we will affirm.

I. FACTUAL BACKGROUND

Daffy's is a chain of retail clothing stores specializing in selling popular brands of goods and apparel at discount prices. In late May 2000, Daffy's acquired three sizes of a handbag that appeared to be a particular Gucci model known as the "Jackie-O". Daffy's purchased 594 of these handbags from its supplier, Sara's Collection, Inc., for prices ranging from $238 to $250 depending on size. Sara's Collection, Inc. was recognized as a reputable supplier, and Daffy's had previously purchased products from it.

The events leading to the purchase began when a representative of Sara's approached Daffy's regarding some Gucci handbags that were being diverted to the United States from a merchant in the Far East. Although Daffy's representatives were confident that the bags were genuine Daffy's nevertheless attempted to authenticate the bags by taking them to a Gucci outlet store in Secaucus, New Jersey before offering them for resale. There, a Daffy's employee presented one of the bags to the Gucci clerk and informed the clerk that she had received the bag as a gift and was not certain of its authenticity. The employee asked the clerk to examine the bag and confirm that it was genuine. The clerk did so, and informed the Daffy's employee that the bag was authentic. That conclusion was based on certain indicia of authenticity including the quality of fabric and leather, the storage bag the handbag came in, and the Gucci label and appropriate codes on the bag. The clerk also compared the bag with another Gucci bag in the store.

Daffy's also sent one of the bags it had purchased that was damaged to the Gucci repair center in New York for repair. Gucci repaired the bag and returned it without comment or further inquiry. Based upon its experience with its reputable supplier, the corroboration of the Gucci clerk, and the unquestioned repair and return of one of the bags from Gucci's own service center, Daffy's concluded that the bags it had purchased from Sara's were genuine Gucci bags. That conclusion was incorrect. The bags were actually counterfeit, although they were of exceptional quality, expensive, and virtually indistinguishable from genuine Gucci bags.

Daffy's proceeded to sell a total of 588 of these bags for $298.99, $339.99 and $398.99 depending on size. The sales continued through the summer of 2000. Daffy's remained unaware of any problem until counsel for Gucci sent Daffy's a letter dated September 5, 2000, demanding that Daffy's immediately cease selling the bags and that Daffy's disclose its supplier to Gucci. Daffy's responded by informing Gucci that the bags had been obtained from a legitimate parallel importer outside of Gucci's authorized chain of distribution and it believed the bags were genuine Gucci bags. Nevertheless, despite its belief that the bags were genuine and that it had done nothing improper, Daffy's immediately withdrew the handbags from its stores and has since adopted a policy of not buying any Gucci merchandise in order to avoid the possibility of purchasing counterfeit Gucci goods.

II. PROCEDURAL HISTORY

Despite the steps Daffy's took after being informed of the counterfeit nature of the Gucci bags it was selling, Gucci sued seeking an Order to Show Cause why Daffy's should not be preliminarily enjoined from infringing Gucci's trademark through the sale of counterfeit "Jackie-O" handbags.¹ The requested relief was denied, and the court also denied Gucci's motion for expedited discovery directed at Daffy's supplier. In the court's view, Gucci had not demonstrated a sufficient likelihood of success on the merits to justify the equitable relief it requested. In an effort to avoid unfair prejudice to any party, the district court severed the factual issue of the authenticity of the Daffy's handbag and proceeded to a bench trial on the merits of that issue. See Gucci America, Inc. v. Daffy's, Inc., No. 00-4463, 2000 WL 1720738 (D.N.J. Nov.14, 2000) (denying preliminary injunction and severing authenticity issue for trial).

Gucci's head of quality control testified extensively at the ensuing trial. Based upon that testimony, the court concluded that the bags Daffy's sold as genuine Gucci product were, in fact, counterfeit bags not manufactured by Gucci. However, as the district court made clear in its fourth written opinion in this case, "the Daffy's handbag was an extremely high-quality product, capable of fooling even a very discriminating examiner. It should be apparent... that the quality of the counterfeit and the difficulty in distinguishing it from a true Gucci has colored every step of this litigation." Gucci America v. Daffy's Inc., No. 00-4463 slip. op. at 2 (D.N.J. Nov. 16, 2001) ("Gucci IV").

The district court then moved to the remedy phase of the trial. Gucci first requested an order compelling Daffy's to contact those consumers who had purchased the counterfeit bags and offer them a refund. As detailed below, this requested recall was denied, and Daffy's and Gucci then filed cross-motions for partial summary judgment. We are concerned here with Gucci's cross-motion for partial summary judgment. Gucci sought an injunction preventing Daffy's from using the Gucci trademark, a finding that Daffy's willfully infringed that trademark through the sale of the counterfeit Gucci bags, and an award of profits based upon that allegedly willful infringement. Daffy's insisted that Gucci was not entitled to profits because there had been no willful infringement, and Daffy's also argued that Gucci was not entitled to an injunction because it could not establish the necessary harm.

The district court explained its denial of the requested recall in its November 14, 2001 Memorandum Opinion. Gucci IV at 2. The court stated that it had considered whether:

(1) the defendant acted in a willful or otherwise egregious manner

(2) the risk of confusion to the public and injury to the trademark is greater than the cost and burden of recall to the alleged infringer and

(3) there is substantial risk of danger to the public resulting from the defendant's infringing activity.

Id. at 4. After concluding that Daffy's had not acted willfully, and recognizing that Gucci failed to establish a genuine issue of fact as to whether Daffy's acted intentionally or with willful blindness in selling counterfeit handbags, the court undertook the balancing encompassed by the second prong of its inquiry. Id at 5-8. In doing so, the court first considered the low risk of public confusion due to the high quality and price of the bags and low risk of injury to the Gucci trademark. Id. at 8-9 The court then weighed the benefits Gucci might derive from a recall against the negative impact a recall could have on Daffy's goodwill, as well as the difficulties of obtaining the necessary consumer information for a recall. Id. at 10-11. The court concluded that the balance tipped in favor of Daffy's and therefore denied Gucci's motion for a recall. Id. at 12.

The district court agreed that Daffy's had infringed Gucci's trademark, Gucci America v. Daffy's Inc., No. 00-4463 slip. op. at 3-4 (D.N.J. Sept. 3, 2002) ("Gucci V"), but denied Gucci's request for an award of Daffy's profits based on the absence of the willfulness required under SecuraComm Consulting Inc. v. Securacom Inc., 166 F.3d 182 (3d Cir.1999). Id. at 10-12. The court also rejected Gucci's request for a permanent injunction because Gucci could not demonstrate irreparable injury. Id. at 13. In doing so, the court noted Daffy's attempts to minimize damage to Gucci by voluntarily withdrawing the offending merchandise from Daffy's shelves,² and the court concluded that Daffy's was therefore highly unlikely to infringe Gucci's trademark again. Id. at 14. Thus, in the court's view, balancing hardships weighed in favor of Daffy's and against granting Gucci's requested relief. Id. at 15. This appeal followed.

III. DISCUSSION

Congress has explained that:

The intent of [the Lanham] Act is to regulate commerce within the control of Congress by making actionable the deceptive and misleading use of marks in such commerce; to protect registered marks used in such commerce from interference by State, or territorial legislation; to protect persons engaged in such commerce against unfair competition; to prevent fraud and deception in such commerce by the use of reproductions, copies, counterfeits, or colorable imitations of registered marks; and to provide rights and remedies stipulated by treaties and conventions respecting trademarks, trade names, and unfair competition entered into between the United States and foreign nations.

15 U.S.C. § 1127 (2003). The Senate Report on the Lanham Act reinforces the congressional intent behind the legislation noting that Congress enacted it to:

protect the public so that it may be confident that, in purchasing a product bearing a particular trade-mark which it favorably knows, it will get the product which it asks for and wants to get. Secondly, where the owner of a trade-mark has spent energy, time and money in presenting to the public the product, he is protected in his investment...