IP Law Daily Seized goods were Michael Kors counterfeits, but infringement liability an issue for trial
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Friday, October 28, 2016

Seized goods were Michael Kors counterfeits, but infringement liability an issue for trial

By Mark Engstrom, J.D.

Fashion company Michael Kors LLC was entitled to a summary judgment finding that 20,000 items that were seized from the facilities of defendant Hernandez International, d/b/a Alex Trading, were counterfeit goods, the federal district court in Houston has ruled. Nevertheless, questions of material fact precluded a summary judgment finding of vicarious liability on various trademark claims, or a similar finding of direct liability on the theory that the knowledge and conduct of the defendants’ employees could be imputed to Alex Trading. Finally, the court refused to sanction Kors for the spoliation of evidence, declined a continuance to the defendants for additional discovery on the spoliation issue, and denied the defendants’ "no-evidence" motion for summary judgment. Kors’s motion for summary judgment was granted in part and denied in part (Michael Kors LLC v. Hernandez International Inc., October 27, 2016, Atlas, N.).

Lawsuit. Michael Kors LLC sued Hernandez International and Alex International, which operated under the name "Alex Trading," and their owner, Leticia Cordero, for: (1) trademark infringement, trade dress infringement, trademark dilution, false designation, and false designation of origin, all under the Lanham Act; (2) injury to its business reputation or trademarks under the Texas Business and Commerce Code; and (3) common law trademark infringement and unfair competition.

Kors owned a variety of federally registered marks, including MICHAEL KORS, MK MICHAEL KORS, and MICHAEL MICHAEL KORS (collectively, the "Kors Marks"). The court noted that the marks were used exclusively by Kors and its licensees, and were valid, subsisting, and enforceable. Nine of the marks were incontestable.

Seizure of fashion goods. In 2013, a private investigator for Kors—Investigation Services Company (ISC)—accompanied officers of the Houston Police Department (HPD) on a raid of two Alex Trading facilities. The raid resulted in the seizure of more than 20,000 items of counterfeit fashion merchandise.

The HPD deemed the seized items evidence for a potential criminal case, but lacked sufficient storage capacity and thus asked ISC to store some of the evidence. After three employees of Alex Trading pleaded guilty to trademark counterfeiting, the seized evidence was destroyed pursuant to a court order. The defendants argued that confirmation of the counterfeit character of the seized items was therefore impossible.

Liability of defendants. The defendants disputed liability on two grounds. First, they argued that a genuine dispute of material fact was present regarding the counterfeit character of the seized goods. Second, they argued that Alex Trading was not liable for the actions of its employees (the direct infringers), even if the seized items were indeed counterfeits.

Character of seized goods. According to the court, Kors had submitted extensive evidence to show that the seized fashion goods were counterfeit. Although the defendants argued that the evidence was spoliated, making it impossible to confirm that the goods were not authentic, Kors had relied on other evidence such as the defendants’ deposition testimony and interrogatory responses, which allowed no other conclusion.

In addition, the evidence showed that the HPD had recovered from the defendants’ facilities more than 17,000 loose "Michael Kors" labels, an embossing machine, and a "MICHAEL KORS" stamp. According to counsel for the plaintiff, Kors has never distributed to third parties any stamps or stand-alone labels that bore the Kors Marks. Moreover, other than its own manufacturers, Kors had never permitted any third party to make stamps or stand-alone labels that bore the Kors marks.

For all of those reasons, the court concluded that the defendants had not raised a genuine issue of material fact regarding the counterfeit character of the seized goods.

Vicarious liability. The court noted that the Supreme Court had never proffered a test for vicarious liability in the trademark context, and the Fifth Circuit had neither accepted nor rejected the doctrine.

The court was guided by the Restatement (Second) of Agency, which provided that: (1) a master was subject to liability for the torts that servants committed while acting in the scope of their employment and (2) a master was also subject to liability if the servants’ acts were committed outside of the scope of their employment but they "purported to act or to speak on behalf of the principal and there was reliance upon apparent authority, or [the principal] was aided in accomplishing the tort by the existence of the agency relation."

Because a genuine question of material fact was present regarding the authorized duties of Alex Trading employees, and whether those duties extended to selling counterfeit goods, summary judgment was not warranted on the theory of vicarious liability.

Direct liability. Kors argued that Alex Trading was directly liable for the infringing acts of the arrested employees. Although vicarious liability asked whether a corporation could be held liable for its employee’s actions, knowledge imputation asked whether the employee’s mental state could be attributed to the corporation for the purpose of direct liability. Because the acts of a corporation’s vice-principals were generally considered to be the acts of the corporation itself, and thus were imputed to the corporation, the liability of a corporation for the acts of its vice-principals was direct rather than vicarious, the court explained.

In this case, Kors argued that the acts of the arrested employees should be imputed to Alex Trading because the arrested employees were vice-principals of the defendant companies. However, a finding of imputed knowledge required a factual determination regarding an individual’s position in the corporate hierarchy, and for that reason, the court found that a factual issue was present on the question of whether the arrested (and convicted) employees were "vice-principals" whose conduct and knowledge could be imputed to Alex Trading. Summary judgment of direct liability was therefore denied.

Collateral estoppel. The court decided that collateral estoppel could not be used on summary judgment to preclude the defendants’ denial of the counterfeit character of the seized goods—based on the admissions of those employees who had pleaded guilty to trademark counterfeiting—to establish the liability of Alex Trading. Significantly, a dispute of material fact was raised on the issue of privity between Alex Trading and its former employees.

Kors argued that privity was present because: (1) the employees had been arrested for trademark counterfeiting in the course of their employment and (2) corporate defendants could act only through their employees. However, the defendants argued that the arrested employees were running an unauthorized counterfeiting operation that was unknown to Cordero.

In the court’s view, the record evidence raised a genuine issue of material fact as to privity, precluding the application of collateral estoppel on summary judgment.

Spoliation sanctions. The defendants argued that Kors was liable for evidence spoliation because ISC investigators had destroyed the goods that were seized from Alex Trading. The defendants asked the court to severely sanction Kors with the dismissal of its claims, the striking of any pleadings that relied on spoliated evidence, or an adverse-inference jury instruction.

Kors, however, provided evidence to show that it had no legal or physical control over the stored items. According to uncontroverted evidence that was submitted by ISC, all of the seized items constituted state evidence that was controlled by the HPD. No evidence was proffered to show that Kors had access to or control over the items. In addition, the evidence did not indicate that Kors had breached a duty to preserve the evidence at issue, or that Kors had acted in bad faith regarding the destruction of that evidence. For all of those reasons, the court denied the defendants’ request for sanctions against Kors.

Defendants’ motion for summary judgment. The court denied summary judgment to the defendants on all of Kors’ claims. The defendants argued that Kors could not produce any evidence to support its trademark claims given the destruction of the seized goods, but the argument was unavailing because "ample evidence" created an issue of fact on the question of whether Alex Trading had manufactured and sold the allegedly counterfeit items.

Leticia Cordero had testified, for example, that the handbags that she purchased for Alex Trading did not display or otherwise include the plaintiff’s labels. In addition, the record evidence included photographs and inventories of the allegedly counterfeit products that the HPD had seized from Alex Trading.

Continuance. The defendants asked for a continuance to conduct additional discovery for the purpose of obtaining documents to support the alleged spoliation, and to depose opposing counsel, all of the ISC investigators, and the HPD officers who had participated in the raids on Alex Trading. The defendants failed, however, to establish their entitlement to a continuance, and the request was denied.

Request for injunction. Kors was not entitled to a permanent injunction that barred Alex Trading from using the Kors Marks. The evidence supported findings of ownership, use in commerce, and a likelihood of confusion between the accused marks and the Kors Marks, but Kors did not show, as a matter of law, that Alex Trading was liable for the acts that caused confusion: the manufacture or sale of items that bore the counterfeit marks. A permanent injunction was therefore unwarranted on summary judgment.

The case is No. 4:15-cv-0844.

Attorneys: Cindy Chan (Blakely Law Group) for Michael Kors, LLC. Willie Ben Daw III (Daw & Ray LLP) for Hernandez International Inc., d/b/a Alex Trading; Alex International Inc., d/b/a Alex Trading; and Leticia Cordero.

Companies: Michael Kors, LLC; Hernandez International Inc., d/b/a Alex Trading; Alex International Inc., d/b/a Alex Trading

MainStory: TopStory Trademark TexasNews

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