By Robert C. Scheinfeld and Parker H. Bagley

What is the "industry standard" when conducting a trademark search? When your client wishes to adopt a trademark for a new product line, is it enough to conduct a "knock-out" search of names and symbols in the relevant federal database before giving your client the go-ahead to use the mark? If you conduct less than a full search, can your client be found to have willfully infringed, and thereby be subject to monetary remedies?

According to a recent Second Circuit decision, these issues have not yet been clearly defined. But International Star Class Yacht Racing v. Tommy Hilfiger U.S.A.1 (Hilfiger II) reiterates the Second Circuit's view that a trademark search which is less than thorough could later become evidence of bad faith trademark infringement by your client, and subject her to a disgorgement of profits, liability for compensatory damages and possibly payment of the plaintiff's attorney's fees.

In reversing and remanding for the second time in the same case, the Second Circuit also ruled that the awarding of profits from the defendant's sales in a case of willful infringement is at the discretion of the district court. The ruling follows recent Second Circuit decisions giving more latitude to the lower court to decide whether willful infringers should be required to disgorge all profits.

In Hilfiger, the plaintiff sued the defendant clothing manufacturer Tommy Hilfiger for using the "STAR CLASS" mark on its 1994 Nantucket Line sportswear collection. While the plaintiff never registered the mark for federal trademark protection, the non-profit yachting organization used "STAR CLASS" in connection with boat racing regattas and promotional materials. Over the ISCYRA's more than seventy year history, the name had become a common law mark in the yachting context.

While designing its nautical-themed collection, Hilfiger requested that its lawyers conduct a search to clear the mark for use as decoration on its clothing. The company did not discuss specifically how it planned to use the mark and its lawyers only conducted a limited "knock-out" search in a federal database. The search focused particularly on trademarks in class 25, the clothing classification, and did not reveal any registrations or pending applications for the mark. In an advisory letter, Hilfiger's counsel advised: "At this point, we would not necessarily rule out your use and registration of this mark, subject to our usual disclaimers regarding the need to first obtain and review a full trademark search."2

Hilfiger I

The district court originally enjoined Hilfiger's use of the mark, finding that Hilfiger did not use "STAR CLASS" in bad faith. No damages or profits were awarded. On appeal, in Hilfiger I the Second Circuit vacated the lower court's finding of good faith, ruling that Hilfiger's failure to conduct a full search must be considered when assessing the company's bad faith and that a defendant could not rely on its own "willful ignorance" to avoid a finding of bad faith.3 On remand, the district court again found that Hilfiger had not acted in bad faith, bolstering its argument by citing a 1992 antitrust case, Corsearch, Inc. v. Thomson & Thomson, stating that it is common practice for firms to file federal trademark applications after conducting only a limited federal database search.4 The district court appeared to ignore the Second Circuit's earlier reversal in Hilfiger I, and to maintain its view that no bad faith had been shown.

Once again, on appeal, the Second Circuit vacated the lower court's determination on bad faith. The court found Corsearch irrelevant and possibly outdated, stating that the district court should not have used a six-year old antitrust decision to gauge current industry practice for trademark searches. Further, the Federal Rules of Evidence prevent the district court from taking judicial notice of the facts and testimony from Corsearch, the Second Circuit held.

The Second Circuit's rulings both in Hilfiger I and Hilfiger II point clearly to the court's changing view of a trademark user's duty to conduct trademark clearance searches. As more trademark databases become available for use when conducting searches, companies must take greater care in requesting thorough searches that are above and beyond the minimal "knock-out" search. Otherwise, the client may risk a bad faith judgment in a case of trademark infringement.

Hilfiger is distinct from earlier cases that stated that trademark users do not bear the burden of conducting full searches prior to use. For example, in Hasbro, Inc. v. Lanard Toys, Ltd.5, the Second Circuit affirmed a district court determination that Lanard had acted in good faith when it focused only on federally registered trademarks while conducting a trademark search before launching its "GUNG-HO!" toy line. An earlier Federal Circuit case, Rosso and Mastracco Inc. v. Giant Food Inc.6, also noted that the Lanham Act does not require "one seeking federal registration of a mark to investigate and report all other possible users of an identical or confusingly similar mark."7 Clearly, the trend is away from Lanard and Rosso, and toward the imposition of a greater duty on trademark users to fully search and investigate prior to adoption of a new trademark.

Damages

In Hilfiger II, the Second Circuit also addressed both parties' contentions that the lower court erred in its consideration of damages. The yachting organization argued that the district court erred in only considering Hilfiger's profits earned after receipt of the cease-and-desist letter, instead of taking into account all of Hilfiger's profits. Hilfiger took issue with the district court's failure to deduct its costs.

The Second Circuit looked to its earlier decision in George Basch Co. v. Blue Coral, Inc.8, which held that the district court has some discretion in the determination of damages, as long as the plaintiff can prove actual consumer confusion or intentional deception on the part of the defendant.

In the absence of actual confusion, the George Basch court held that: "...a plaintiff must prove that an infringer acted with willful deception before the infringer's profits are recoverable by way of an accounting."9 Deferring to this standard, the Hilfiger II court did not make a final determination regarding damages. Instead, the court said that the question of the possibly intentional nature of Hilfiger's conduct should again be considered by the district court on remand. Thus, the question of whether Hilfiger's failure to conduct a full search and its subsequent adoption of plaintiff's mark constitutes "willful deception", is directly tried to the issue of whether it must disgorge its profits.

Interestingly, even though the district court, on remand from Hilfiger I, had found no evidence of bad faith which would trigger an award of profits or damages, it anticipated a second reversal by the Second Circuit on that point, and therefore made a damages determination--finding that Hilfiger had made $818,419.85 in infringing sales, after receiving plaintiff's cease and desist letter10. This determination appears to recognize the possibility that Hilfiger acted in bad faith after receiving actual notice of its infringement, while maintaining that the original failure to conduct a search did not constitute bad faith.

While ruling that the district court had considerable latitude in setting a profits figure, the Second Circuit reminded the district court that the award of profits must adequately "serve the goal of deterrence"11. It also found that sufficient evidence of Hilfiger's costs was in the record, and that those costs should be deducted from gross revenues to arrive at an appropriate award of profits.

Endnotes

1. 46 U.S.P.Q.2d 1942 (2d Cir. May 29, 1998).

2. Id. at 1944.

3. 80 F.3d 749, 754 (2d Cir. 1996).

4. 792 F. Supp. 305, 307 (S.D.N.Y. 1992).

5. 858 F.2d 70, 78 (2d Cir. 1988).

6. 720 F.2d 1263 (Fed. Cir. 1983).

7. Id. at 1266, quoting The Money Store v. Harriscorp. Finance, Inc., 689 F.2d 666, 670 (7th Cir. 1982).

8. 968 F.2d 1532, 1537 (2d Cir. 1992).

9. Id. at 1540.

10. 46 U.S.P.Q. at 1944

11. Id. at 1947

For further information please contact Mitch Lukin.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.