IP Law Daily Proposed ‘Krusty Krab’ restaurant would infringe Viacom’s trademark
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Wednesday, May 23, 2018

Proposed ‘Krusty Krab’ restaurant would infringe Viacom’s trademark

By Peter Reap, J.D., LL.M.

By creating a connection in the consumer’s mind between IJR’s restaurant-in-development that was named "Krusty Krab" and The Krusty Krab from Viacom’s popular children’s television show "SpongeBob SquarePants," there was an impermissible likelihood of confusion as to source, affiliation, or sponsorship, the U.S. Court of Appeals in New Orleans has ruled. The digits of confusion—particularly the strength of Viacom’s mark, the identical spelling and pronunciation of the marks, both marks’ identification of restaurants, and evidence of actual confusion—dictated that IJR’s use of the mark infringed on Viacom’s trademark. Thus, a decision by the federal district court in Houston was affirmed (Viacom International, Inc. v. IJR Capital Investments, LLC, May 22, 2018, Owen, P.).

In 1999, Viacom launched the animated television series "SpongeBob SquarePants" on its Nickelodeon network. The show revolves around SpongeBob SquarePants, a sea sponge that wears square shorts, lives in an underwater pineapple, and works at the fictional The Krusty Krab restaurant. Viacom also licenses The Krusty Krab to third parties for a variety of products.

In 2014, IJR’s owner, Javier Ramos, decided to open seafood restaurants in California and Texas. Ramos asserted that he was describing the crusted glaze applied to cooked seafood when his friend Ivan Murillo suggested naming the restaurant Crusted Crab, which quickly became The Krusty Krab. Both Murillo and Ramos denied having considered SpongeBob during this conversation. Because Ramos’s trademark search did not find an actual restaurant that used the mark, IJR filed a trademark application with the USPTO for THE KRUSTY KRAB. Viacom had not previously registered The Krusty Krab mark. The USPTO approved IJR’s mark and published the application for opposition. Viacom did not oppose at this time, and the USPTO issued a notice of allowance for the mark authorizing issuance once IJR filed a statement of use.

In November 2015, Viacom sent a cease-and-desist letter that demanded the withdrawal of IJR’s trademark application and alleged infringement of The Krusty Krab mark. IJR promptly responded, declining to cease use and asserting that Viacom did not actually use The Krusty Krab as a trademark and that there was no likelihood of consumer confusion. However, IJR postponed opening any restaurants. Viacom then filed suit in January 2016. The district court granted, in part, Viacom’s summary judgment motion on its common law trademark infringement and Lanham Act unfair competition claims. The district court held that: Viacom established ownership of the mark through sales and licensing; Viacom demonstrated that The Krusty Krab has acquired distinctiveness; and every likelihood-of-confusion factor indicated IJR’s proposed use would probably cause confusion. IJR appealed.

Although Viacom had never registered The Krusty Krab mark, the Supreme Court has held that the Lanham Act protects qualifying unregistered marks, the Fifth Circuit noted. Viacom’s mark was legally protectable if it established ownership by demonstrating that it used The Krusty Krab as a source identifier. Often, the Fifth Circuit has bypassed the use inquiry and conducted only a distinctiveness analysis. However, the two issues are separate questions, and because the use-as-a-source-indicator requirement is at issue in this case Viacom was required to establish both use and distinctiveness, the court said.

Use. Viacom’s mark clearly appeared on goods in the market, such as The Krusty Krab playsets and aquarium ornaments. The question in this case, however, was whether Viacom used The Krusty Krab to indicate origin because the purpose of trademark law is to prevent competitors from copying a source-identifying mark. As an initial matter, the court first determined that specific elements from within a television show—as opposed to the title of the show itself—were entitled to trademark protection. The underlying purposes of trademark are to protect goodwill and to protect consumers against confusion and monopoly, and to protect the investment of producers in their trade names to which goodwill may have accrued. Extending trademark protection to elements of television shows that serve as source identifiers can serve those purposes.

When an element plays a central role in a franchise, trademark protection is ordinarily granted. For example, the Southern District of New York held that the Daily Planet, the employer of Clark Kent in "Superman," was a common law trademark because "[t]he totality of evidence demonstrates that the Daily Planet has over the years become inextricably woven into the fabric of the Superman story." DC Comics, Inc. v. Powers, 465 F. Supp. 843, 847 (S.D.N.Y. 1978). The Krusty Krab was analogous to protected marks like the Daily Planet, the court determined. The mark was integral to "SpongeBob SquarePants," as it appeared in over 80% of episodes, playing a prominent role. The Krusty Krab’s central role in the multi-billion dollar SpongeBob franchise is strong evidence that it is recognized in itself as an indication of origin for Viacom’s licensed goods and television services. The Krusty Krab’s key role in "SpongeBob SquarePants" coupled with the consistent use of the mark on licensed products established ownership of the mark because of its immediate recognition as an identifier of the source for goods and services, the court decided.

Distinctiveness. While Viacom established ownership of the mark through its use as a source identifier, Viacom also had to prove that The Krusty Krab mark was distinctive in order to establish that it was legally protectable. Even if a mark is not inherently distinctive, it can acquire distinctiveness if it has developed secondary meaning. To determine whether a mark has acquired secondary meaning, courts considered the following seven factors: (1) length and manner of use of the mark or trade dress, (2) volume of sales, (3) amount and manner of advertising, (4) nature of use of the mark or trade dress in newspapers and magazines, (5) consumer-survey evidence, (6) direct consumer testimony, and (7) the defendant's intent in copying the mark.

The first factor—length and manner of use—supported Viacom, the court held. Over 80% of the episodes aired from 1999 through today have included The Krusty Krab, and it is a central element of the SpongeBob universe. As for volume of sales, Viacom had earned millions on licensed products that displayed The Krusty Krab mark, and two feature films which prominently featured The Krusty Krab grossed a combined $470 million. The Fifth Circuit has considered the sale of items grossing $30,500 to be low volume, but has affirmed a finding of secondary meaning on review of a summary judgment when sales totaled $93 million.

As for the third factor, though the effectiveness of the advertising as to The Krusty Krab mark, specifically, was not directly proven, its depiction in advertisements was such that the public would recognize the mark as more than an artistic backdrop. With respect to the nature and use of the mark in media—factor four—The Krusty Krab was often referenced by the press. This evidence supported Viacom’s assertion that its word mark had acquired secondary meaning.

There was no direct consumer testimony nor any consideration of IJR’s intent in the distinctiveness inquiry. Therefore, there was no evidence pertaining to factors five and six. The evidence regarding IJR’s intent in copying the mark was discussed in more detail below. That evidence was inconclusive, the court determined.

In sum, the record clearly showed that The Krusty Krab was a focal point in the "SpongeBob SquarePants" television series and films, The Krusty Krab was continually been depicted in the advertising and promotion of the franchise over the past eighteen years, and it was used in the sale of products. The factors led inescapably to the conclusion that in the minds of consumers, The Krusty Krab identified the source of products, which was Viacom, the creator of the "SpongeBob SquarePants" fictional universe and its inhabitants. Viacom’s mark had acquired distinctiveness through secondary meaning as a matter of law, the court held.

Likelihood of confusion. Viacom must also had to prove that IJR’s use of The Krusty Krab created a likelihood of confusion as to source, affiliation, or sponsorship. It met that burden, the court ruled.

To assess whether use of a mark creates a likelihood of confusion as to affiliation, sponsorship, or source, the court considered the so-called "digits of confusion." The digits form a flexible and nonexhaustive list" that includes seven factors.

The first digit, the type of mark, refers to the strength of the mark. The more distinctive a mark, the stronger the mark. In evaluating the strength of The Krusty Krab mark, the focus was on Viacom’s mark. Viacom’s mark was strong because it had acquired distinctiveness through secondary meaning. Therefore the first digit weighed in favor of a likelihood of confusion.

The second digit is the similarity of the marks. IJR’s mark was verbatim the same and there was no genuine issue of material fact with respect to this digit of confusion. Logos for the two marks may differ, but the words themselves were indistinguishable and would likely confuse consumers as to the source, affiliation or sponsorship of IJR’s The Krusty Krab restaurant, according to the court. The third digit in the likelihood of confusion analysis is the similarity of the products or services. Viacom’s The Krusty Krab had a distinct theme as a fictional hamburger restaurant, whereas IJR has not fully developed a theme for its planned seafood restaurant. While there was little evidence of thematic overlap between the restaurants, IJR nevertheless planned to open a restaurant, and given the success of SpongeBob, that indicated a likelihood of confusion.

The fourth digit is the identity of retail outlets and purchasers. IJR planned to open restaurants in California and Texas, and it intended to target "the general public," particularly "families, singles, and students . . . as well as the area’s work force." At this general level of abstraction, Viacom also targeted the general public, including residents of California and Texas. However, there were substantial differences in the retail outlets and the predominant purchasers that mitigated the possibility of confusion, the court reasoned. The retail outlets had little overlap, as Viacom presumably targeted television viewers, toy stores, and online retailers, whereas IJR’s services will only be available in brick-and-mortar restaurants. There was some overlap in purchasers, but the core consumers of each mark are dissimilar. The extent of the overlap between purchasers could not be gauged adequately on the record before the court.

The fifth digit of confusion is the identity of advertising media. Absent any existing advertising by IJR, it was difficult to assess the similarity between the campaigns, the court said. While there was substantial overlap in the abstract, without specific advertising content, digit five did not weigh in favor of a likelihood of confusion.

The sixth digit is the defendant’s intent. The district court acknowledged that it was "not clear" whether Ramos intended to derive benefits from Viacom’s reputation. Nonetheless, it held that IJR acted in bad faith because Murillo associated the phrase The Krusty Krab with "SpongeBob SquarePants" and Ramos was aware of Viacom’s use of the mark before he submitted his trademark application. Murillo’s word association, without more, did not establish bad faith at summary judgment, the appellate court explained. While a jury may disbelieve IJR, at the summary judgment stage there was a genuine issue of material fact as to whether IJR intended to derive benefits from Viacom’s The Krusty Krab. The district court erred in inferring bad intent, as evidence of IJR’s malevolence was circumstantial. Accordingly, this digit did not support a finding of a likelihood of confusion, the Fifth Circuit opined.

The seventh digit is evidence of actual confusion. Viacom commissioned Dr. Blair to take a consumer survey and it found that 30% of respondents indicated that a restaurant named The Krusty Krab was "operated by, affiliated or connected with, or approved or sponsored by Viacom" and that 35% of respondents associated such a restaurant with Viacom. There was also anecdotal evidence of confusion: Ivan Murillo admitted that The Krusty Krab called to mind "SpongeBob SquarePants," and an IJR investor mentioned SpongeBob "out of the blue" while discussing the restaurant. Blair’s survey had probative value, and, in view of the anecdotal evidence of actual confusion, this digit weighed in favor of a likelihood of confusion, the appellate court concluded.

This case is No. 17-20334.

Attorneys: Stephen Paul Meleen (Pirkey Barber, PLLC) for Viacom International, Inc. Karen Bryant Tripp (Office of Karen B. Tripp) for IJR Capital Investments, LLC.

Companies: Viacom International, Inc.; IJR Capital Investments, LLC

MainStory: TopStory Trademark LouisianaNews MississippiNews TexasNews

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