Schwinn Bicycle Co. v. Ross Bicycles, Inc.

• Decision Date: 24 March 1989
• Docket Number: No. 88-1575,88-1575
• Citation: 870 F.2d 1176,10 USPQ2d 1001
• Parties: , 10 U.S.P.Q.2d 1001 SCHWINN BICYCLE COMPANY, Plaintiff-Appellee, v. ROSS BICYCLES, INC., Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1176

870 F.2d 1176

57 USLW 2552, 10 U.S.P.Q.2d 1001

SCHWINN BICYCLE COMPANY, Plaintiff-Appellee, v. ROSS BICYCLES, INC., Defendant-Appellant.

No. 88-1575.

United States Court of Appeals Seventh Circuit.

Argued Sept. 15, 1988.

Decided Feb. 27, 1989.

Rehearing and Rehearing In Banc Denied March 24, 1989.

Bernard J. Cantor, Cullen Sloman Cantor Grauer Scott & Rutherford, P.C., Detroit, Mich., for defendant-appellant.

Donald G. Mulack, Keck Mahin & Cate, Chicago, Ill., for plaintiff-appellee.

Before COFFEY, FLAUM and EASTERBROOK, Circuit Judges.

COFFEY, Circuit Judge.

Plaintiff-appellee Schwinn Bicycle Company brought suit against defendant-appellant Ross Bicycles, Inc., alleging that Ross had taken orders for a prototype of an exercise bicycle that unfairly copied the trade dress of an exercise bicycle produced by Schwinn in violation of Sec. 43(a) of the Lanham Act, 15 U.S.C. Sec. 1125(a). ¹ Schwinn moved for a preliminary injunction requesting that Ross be prohibited from selling its exercise bicycle, and the district judge designated a magistrate to conduct a hearing and issue proposed findings of fact as well as a recommendation for disposition of the motion pursuant to 28 U.S.C. Sec. 636. After a nine-day hearing the magistrate recommended denial of the preliminary injunction motion. The district judge, after conducting a de novo review of the record, disagreed with the magistrate's recommendation and granted Schwinn's preliminary injunction motion. ² Ross appeals the district court's order granting the preliminary injunction. We vacate and remand.

I. FACTS

Schwinn Bicycle Company ("Schwinn"), an Illinois corporation, is a bicycle manufacturer whose name and reputation are widely known in the industry. Ross Bicycles, Inc. ("Ross") likewise is a well-established bicycle manufacturer.

In 1977 Lindsay Hooper (an engineer for Repco, an Australian company) approached the executive vice president of Schwinn with a prototype for a new exercise bicycle. ³ This prototype was unique because, in addition to exercising the rider's legs like other conventional exercise bicycles, it also enables the rider to exercise his/her upper body by moving the long handle arms back and forth with his/her arms and shoulders. The prototype had air vanes (resembling the blades on an ordinary free-standing fan) mounted on a front bicycle wheel to provide resistance to the pedals and handle arms as the wheel turned which, consequently, required the rider to expend energy ("exercise"). Thus, the resistance was generated by "air displacement." ⁴ See Schwinn Bicycle Co. v. Ross Bicycles, Inc., 678 F.Supp. 1336, 1339 (N.D.Ill.1988). Hooper had obtained Australian and United States patents on the "linkage" mechanism connecting the foot pedals to the handle arms which allowed the handle arms to spin the pedals and, in turn, drive the front fan wheel. Hooper, before approaching Schwinn, assigned the patents to Repco (an Australian company). In effect, Hooper's patented linkage mechanism allowed the front fan wheel to be driven by the handle bars alone only if the rider took his feet off the pedals.

Ultimately, Schwinn obtained the exclusive right to use the linkage mechanism patent and, thereafter, modified the design of Hooper's exercise bicycle prototype making it more attractive, adding a protective cage around the large (27-inch) front wheel (the "fan"), and adding a locking device to keep the wheel and pedals from inadvertently moving when not being ridden by an exerciser. Schwinn has successfully marketed its version of the air displacement exercise bicycle since late 1978 under the trade name "Air-Dyne" and has spent well over $4 million in advertising the product between 1980 and 1986. ⁵ The district court trial judge determined that "[u]ntil recently, ... there were more than 100 exercise bicycles on the market" and further that "no other manufacturer sold an exercise bicycle that looks or performs like the Air-Dyne." 678 F.Supp. at 1339. The district court was silent concerning the reason for this lack of competition, but the magistrate reported that "a major reason for the lack of competition [with the Air-Dyne] was the Hooper patent."

In 1986 Jerry Ross, President and Chief Executive Officer of Ross Bicycles, Inc., designed and developed a linkage mechanism that avoided the Hooper patent. It is uncontested that Ross actually purchased a Schwinn Air-Dyne to aid him in designing an exercycle around the patent. ⁶ After Ross came up with a linkage mechanism design that did not infringe on Schwinn's patent, it constructed a prototype of its version of an air displacement exercise bicycle and displayed its early prototypes at trade shows in late 1986 and early 1987. According to the district court, Ross intentionally copied the Air-Dyne's "basic shape, silhouette, and primary features," 678 F.Supp. at 1342, and stated that "[a]lthough some engineering improvements were made by Ross, the basic design--apart from the gear [the linkage mechanism]--was taken from Schwinn." Id. at 1343 n. 10.

Nonetheless, there are differences between Ross' final prototype (the "Futura") and Schwinn's Air-Dyne. For example, Ross' linkage mechanism design allows the rider to hold his feet stationary on the pedals while exercising only his upper body without the pedals rotating ("free-wheeling"). Schwinn's linkage does not allow free-wheeling; thus, the pedals must rotate to turn the wheel because Schwinn's linkage mechanism connects the handle arms and the pedals. There are foot rests on the Air-Dyne type for the rider to place his feet while exercising his upper body.

Ross' and Schwinn's separately patented linkage mechanism designs require that their respective locations and housings (guards) be different: The Schwinn Air-Dyne's connecting mechanism is between the pedals and the handle arms, but the Ross Futura's connecting mechanism is in a relatively large enclosure on the front fan-type wheel. The meters that register, calculate and display the amount of time, distance and energy expended by the rider (ergonometers) are of different shapes and sizes. Moreover, the Futura features an electronic ergonometer while the Schwinn's ergonometer is mechanical. There are also differences in the chain covers and, in addition, the locking devices for the "fans" are of different colors. The Futura's handle arms are somewhat longer than the Air-Dyne's; the Futura has toe straps on the pedals; the small wheels located at the front of the exercise bicycles for transporting the entire machine from one location to another are of different size and material; and while the Air-Dyne has black markings on its base, the Futura does not. The handle arms of the two exercise bicycles are of different diameters; the space between the handle arms varies between the Air-Dyne and the Futura; and the seat used on the Air-Dyne is not only larger than on the Futura but also has a different contour. Finally, the Schwinn exercise bicycle displays either "Air-Dyne" or "Schwinn" in ten places while the Ross exercise bicycle displays the name "Futura" and "Ross" or their logo in thirteen places. The 27-inch fan wheels on both exercise bikes is located on the front in the same relation to the rider's body as on a bicycle, and the district court stated:

"[t]he Air-Dyne and the Ross bike are basically identical in shape, the arms of the two machines are shaped nearly the same, the wheel and enclosing cage are of the same size and configuration, and the rear and bases of the two bikes are nearly identical. While Ross uses the color creme where Schwinn has used chrome, and chrome where Schwinn uses white, the overall white, and chrome effect of the two exercisers is also similar."

678 F.Supp. at 1339.

The district court agreed with the magistrate's report that the style and appearance of the two machines was very similar and stated that the appearance of the two machines is "strikingly similar." Nonetheless, the district judge did not agree with the magistrate's recommendation that the preliminary injunction be denied and instead granted the same. The district judge specifically determined that Schwinn established that the appearance (i.e., "the overall configuration" or overall design) of the Air-Dyne had acquired secondary meaning; that Schwinn was likely to prove consumer confusion between the Air-Dyne and the Futura at trial; and, finally, that Ross failed to establish it was likely to prevail at trial on its defense that the overall design of the Air-Dyne was functional and thus not protected under federal trade law. Based on these findings, the district court judge granted a preliminary injunction against Ross prohibiting it from marketing its Futura design.

Ross specifically contends on appeal that the district court erred only in determining (1) Schwinn was likely to prove consumer confusion; and (2) Ross failed to establish it was likely to prevail on its "functionality" defense.

II. THE PRELIMINARY INJUNCTION AND OUR STANDARD OF REVIEW

This is an interlocutory appeal from the district court's grant of a preliminary injunction. Schwinn moved for a temporary restraining order and a preliminary injunction prohibiting the sale of Ross' exercise bicycle. ⁷ The district court denied the temporary restraining order and designated a magistrate to hear evidence and make a report and recommendation on the motion for preliminary injunction pursuant to 28 U.S.C. Sec. 636(b)(1)(B). After a nine-day hearing, the magistrate recommended denial of the preliminary injunction motion because Schwinn was not likely to establish some likelihood of consumer confusion at trial, and because Ross was likely to prevail on the issue of functionality. The respective parties objected to the magistrate's report, on separate grounds, ⁸ pursuant to Rule 72(b), Fed.R.Civ.P.; the district judge made a de novo determination based on the record of the magistrate's hearing pursuant to 28 U.S.C....