IP Law Daily $21M summary judgment award to Tiffany for Costco’s infringement of ‘Tiffany’ mark vacated
Monday, August 17, 2020

$21M summary judgment award to Tiffany for Costco’s infringement of ‘Tiffany’ mark vacated

By Cheryl Beise, J.D.

Costco raised triable issues of fact as to its liability for infringement and counterfeiting and whether its use of "Tiffany" to describe a ring style was fair use.

The federal district court in Manhattan erred in concluding as a matter of law that Costco’s use of the word "Tiffany" to describe diamond engagement rings amounted to willful trademark infringement and counterfeiting, warranting compensatory and punitive damages exceeding $21 million, the U.S. Court of Appeals in New York City has ruled. The district court had a duty on summary judgment to credit evidence presented by Costco regarding its liability for trademark infringement and counterfeiting and, relatedly, its entitlement to present its fair use defense to a jury. As to liability, Costco raised triable issues of fact as to three likelihood of confusion factors—whether Costco’s customers were actually confused, whether Costco adopted Tiffany’s mark in bad faith, and whether the relevant population of consumers was sufficiently sophisticated to avoid confusion. A jury also reasonably could find that Costco used the term "Tiffany" descriptively on its point-of-sale signs, based on Costco’s evidence that "Tiffany" has a descriptive meaning independent of Tiffany’s brand. The district court’s judgment was vacated and the case remanded for trial (Tiffany and Company v. Costco Wholesale Corp., August 17, 2020, Livingston, D.).

Tiffany and Company holds 97 trademark registrations related to the company name, including several for the use of the word "Tiffany." In the late nineteenth century, Charles Lewis Tiffany designed an engagement ring incorporating a particular style of six-prong diamond setting. Since that time, numerous advertisements, dictionaries, trade publications, and other documents have referred to diamond settings reminiscent of that style as "Tiffany settings." Costco operates a chain of membership-only warehouse stores, which offer engagement rings with a variety of setting styles, which during the relevant time period included a bezel setting, cathedral setting, channel setting, and a "Tiffany" setting. Costco used the word "Tiffany" on in-store signage, but did not affix it directly the rings, which bore the true manufacturer’s mark on the inside. In December 2012, Tiffany contacted Costco to warn that its use of "Tiffany" on its in-store signage constituted infringement and counterfeiting. Within one week, Costco removed all uses of the word "Tiffany" from the signs in its jewelry display cases and ceased using the name.

Litigation history. On February 14, 2013, Tiffany filed suit against Costco, asserting claims for trademark infringement, dilution, counterfeiting, unfair competition, false and deceptive business practices, and false advertising in violation of the Lanham Act and New York law. In response, Costco argued that its use of the word "Tiffany" to describe certain ring setting styles was not infringement, but "fair use" under the Lanham Act. Costco also filed a counterclaim seeking to modify or partially cancel any federal trademark registrations that might prevent retailers from using the word "Tiffany" to indicate a type of ring setting.

On September 8, 2015, the district court granted Tiffany’s summary judgment motion in its entirety, concluding that Costco had failed to raise a genuine issue of material fact as to any of the factors relevant to the infringement analysis, that Costco’s fair use defense failed as a matter of law, and that Costco’s infringement constituted counterfeiting as a matter of law. Following its determination of Costco’s liability, the district court held a jury trial on the issue of damages. The jury awarded Tiffany $3.7 million in an accounting of Costco’s profits, an additional $1.8 million on the grounds that the profits award was inadequate compensation, and $8.25 million in punitive damages. Treating the jury’s profits award as advisory, the district court awarded Tiffany trebled profits in the amount of $11.1 million, along with the additional $8.25 million in punitive damages awarded by the jury. The court entered its final judgment and damages award, which ran to $21,010,438.35 including prejudgment interest. The district court denied Costco’s post-trial motions, and Costco appealed.

Trademark infringement. On appeal, Costco argued that the district court erred because it failed to consider Costco’s evidence, which has raised a question of material fact as to its liability for trademark infringement and counterfeiting. The Second Circuit agreed. The appeals court clarified that while a district court’s factual findings on the issue of likelihood of confusion is entitled to "considerable deference," the court has "never purported to expand a district court’s license to make factual findings at summary judgment beyond those very limited circumstances in which ‘the uncontroverted evidence and the reasonable inferences to be drawn in the nonmoving party’s favor’ support only a single conclusion."

The court accordingly examined the district court’s factual findings and its ultimate balancing of the Polaroid likelihood of confusion factors de novo. The Second Circuit found that Costco had raised triable issues of fact as to three factors—whether Costco’s customers were actually confused, whether Costco adopted Tiffany’s mark in bad faith, and whether the relevant population of consumers was sufficiently sophisticated to avoid confusion.

On the issue of actual confusion, the district court found that Tiffany had established actual customer confusion as a matter of law, based two categories of evidence proffered by Tiffany—the deposition testimony of six Costco customers claiming they were confused by Costco’s point-of-sale signs and a consumer confusion survey and report created by Tiffany’s expert. The district court determined that Costco failed to rebut this evidence, but the appellate court disagreed. Costco had argued that six purchasers out of the 3,349 customers who bought Tiffany-set rings at Costco during the relevant period was only de minimis evidence of confusion and insufficient to definitively establish likelihood of confusion. Costco also offered a report from its own expert, who raised significant questions about the methodology used in Tiffany’s survey. Resolving all factual issues in favor of Costco, a reasonable jury could find that Tiffany failed to prove actual confusion.

Regarding evidence of purchaser sophistication, a jury reasonably could conclude that consumers of diamond engagement rings would know that "Tiffany" describes a style of setting not unique to rings manufactured by Tiffany. Such consumers may be capable of recognizing that Costco’s rings were not manufactured by Tiffany—based, for example, on their price, place of purchase, packaging, or paperwork, the court suggested. The Second Circuit has previously held that purchasers of diamond engagement rings educate themselves so as to become discerning consumers. The court additionally noted that Tiffany did not prove that actual purchasers would not recognize the word "Tiffany" as denoting a commonly used setting style.

On the issue of Costco’s bad faith, the court observed that while a jury reasonably could find that Costco’s interest in emulating Tiffany’s designs evidenced an intent to mislead buyers as to the origins of its own jewelry, it could also reasonably conclude that Costco intended to borrow "certain successful features [from Tiffany’s] product" without implying that Tiffany actually produced or endorsed the jewelry at issue.

In light of the evidence presented by Costco and resolving all factual inferences in its favor, the Second Circuit reversed the district court’s conclusion that no reasonable jury could find that Costco’s signs were not confusing.

Counterfeiting. Under the Lanham Act, a "counterfeit" is "a spurious mark which is identical with, or substantially indistinguishable from, a registered mark." Because it was inappropriate to hold Costco liable for trademark infringement at the summary judgment stage, and because counterfeiting is "merely an aggravated form of infringement," the appeals court also vacated the district court’s judgment as to counterfeiting.

Fair use defense. To succeed on the affirmative defense of descriptive fair use, a defendant must establish that it used the allegedly infringing term (1) other than as a mark, (2) in a descriptive sense, and (3) in good faith. The district court erred in concluding that no question of material fact existed on the question of Costco’s fair use.

According to the Second Circuit, a jury reasonably could find that Costco used the term "Tiffany" descriptively, based on Costco’s evidence that (1) "Tiffany" has a descriptive meaning independent of Tiffany’s brand and (2) Costco intended to and did invoke that meaning when it created its point-of-sale signs. Costco had identified over a century’s worth of documents suggesting that "Tiffany"—both alone and in conjunction with words like "ring," "setting," "style," or "mounting"—is widely understood to refer to a particular type of pronged diamond setting.

Contrary to Tiffany’s assertion, the Second Circuit emphasized that there is nothing inherently absurd about a single word’s being both a source identifier and a descriptive term within the same product class. The public’s right to use descriptive words or images in good faith in their ordinary descriptive sense must prevail over the exclusivity claims of the trademark owner, the court said. "Costco’s evidence was sufficient for a jury to find the word ‘Tiffany,’ when used in conjunction with a particular six-pronged stone setting, had acquired a descriptive meaning in the jewelry trade that did not suggest an association with the jeweler Tiffany & Co., and that Costco used the word descriptively in that sense and in good faith under the particular circumstances of this case," the court said. A reasonable jury could also reject Costco’s evidence and find that customers would not recognize Costco’s use of the word "Tiffany" as descriptive. The decision is one for the jury and not the court, the Second Circuit said.

Practitioner response. IP litigator and Finnegan partner Naresh Kilaru told IP Law Daily that he believes the Second Circuit’s de novo review of the evidence and its conclusions were correct. In particular, the court was right to emphasize that the likelihood of confusion must be determined in the context of marketplace realities.

The district court erred in this case by entirely discounting Costco’s evidence of descriptive use, according to Kilaru. Costco presented evidence that "Tiffany" has been used descriptively for over a century. A jury should have the chance to weigh all the evidence. Kilaru noted that after Costco sent a letter to customers that had purchased the "Tiffany" ring to clarify that the ring was not manufactured by Tiffany, only 1.6 percent returned the ring. In theory, that evidence could indicate a low rate of confusion.

Kilaru also was skeptical of the district court’s finding of bad faith on Costco’s part. There really was no evidence that Costco intended to trade off of Tiffany’s goodwill and the information on Costco’s in-store signage was provided by Costco’s suppliers, he said.

The Second Circuit didn’t break any ground today, according to Kilaru, but the case serves as a cautionary tale for those who want to make descriptive use of another’s mark. For example, Costco easily could have dispelled confusion by describing the style of the rings at issue as "Tiffany-style setting" rather than simply as "Tiffany."

While "Tiffany" is a well-known luxury brand and the company does an excellent job of policing use of its marks, retrial of the case before a jury is not without some degree of risk, even to the famous jeweler, Kilaru said.

The case is Nos. 17-2798-cv, 19-338, 19-404.

Attorneys: Jeffrey A. Mitchell (Browne George Ross LLP) for Tiffany and Company and Tiffany [NJ] LLC. David H. Bernstein (Debevoise & Plimpton LLP) for Costco Wholesale Corp. Naresh Kilaru (Finnegan, Henderson, Farabow, Garrett & Dunner, LLP).

Companies: Tiffany and Company; Tiffany [NJ] LLC; Costco Wholesale Corp.

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