Original Appalachian Artworks, Inc. v. Granada Electronics, Inc.

816 F.2d 68, 8 I.T.R.D. (BNA) 2361, 2 U.S.P.Q. 2d (BNA) 1343, 1987 U.S. App. LEXIS 5296

• Court: Court of Appeals for the Second Circuit
• Decided: April 7, 1987
• Docket: 519, Docket 86-7670
• Status: Published

Opinions

OAKES, Circuit Judge:

This appeal involves a suit by a registered trademark owner in the United States against the importer of so-called “gray goods,” here Cabbage Patch Kids dolls, bearing the owner’s trademark but manufactured abroad under a restrictive license from the trademark owner. The license restriction defined the territory in which the dolls could be sold, limiting sales essentially to Spain. The Spanish “Kids,” although duly bearing the appropriate trademark, nevertheless differ from Kids manufactured in the United States because their “adoption papers” are in Spanish. The United States District Court for the Southern District of New York, William C. Conner, Judge, found that sale of the Spanish dolls in the United States infringed the owner’s trademark and granted a permanent injunction against the importer and distributor of the dolls. Original Appalachian Artworks, Inc. v. Granada Electronics, Inc., 640 F.Supp. 928 (S.D.N.Y.1986). We affirm.

This action was brought by Original Appalachian Artworks, Inc. (OAA), the Georgia maker and licensor of the well-known Cabbage Patch Kids dolls, against Granada Electronics, Inc. (Granada), who imported and distributed Cabbage Patch Kids dolls in the United States. Granada’s dolls were made in Spain by Jesmar, S.A. (Jesmar), under a license from OAA (through a licensing agent) which permitted manufacture and distribution of the dolls in Spain, the Canary Islands, Andorra, and Ceuta Melilla. Under the license Jesmar agreed not to make, sell, or authorize any sale of the licensed products outside its licensed territory and to sell only to those purchasers who would agree not to use or resell the licensed products outside the licensed territory. The boxes containing the Jesmar dolls bear the “Cabbage Patch Kids” trademark displayed in English on all panels of the box except the bottom. Also printed in English are the words “The World Of” preceding the trademark on the rear panel of the box and the name of OAA and its United States address in small print in the copyright notice. The rest of the wording on the box, however, is in Spanish.

OAA makes hand-sewn soft-sculpture Cabbage Patch Kids dolls in Cleveland, Georgia, and markets them through what it calls “adoption centers” located primarily in specialty stores and finer department stores. Purchasers of the dolls receive “birth certificates” and “adoption papers” to be filled out by the “parent” or owner of the doll, who takes an “oath of adoption.” The adoption papers are returned to OAA, and the information is entered into the OAA computer so that on the first anniversary of the adoption the adopting parent receives a “birthday card” from OAA. Judge Conner found that this adoption process is an “important element of the mystique of the [Cabbage Patch Kids] dolls, which has substantially contributed to their enormous popularity and commercial success.” 640 F.Supp. at 930.

Through an intermediary licensing agent, OAA also licenses Coleco Industries, Inc., of Hartford, Connecticut, to manufacture, promote, and distribute Cabbage Patch Kids dolls within the United States. Unlike the OAA dolls, the Coleco dolls are smaller, with vinyl heads. They are mass-produced, packaged in boxes, and sold at a retail price less than half that of the OAA soft-sculpture dolls. Nevertheless, the Coleco dolls are also accompanied by birth certificates and adoption papers and by English-language instructions suggesting the return of completed adoption papers in a preaddressed envelope to a processing center in the United States. The instructions also permit a purchaser “legally” to change the name of the doll if desired, and the doll’s parent gets a suitable-for-framing birth certificate as well as a birthday card on the first birthday of the doll. Coleco, with tremendous sales, has invested millions of dollars in advertising the dolls during the last three years and had spent approximately $2.9 million in the first two quarters of 1986. The district court found that, indeed, the Cabbage Patch Kids trademark has become famous and associated with Coleco by virtue of its advertising expenditures and television commercials. 640 F.Supp. at 931.

We note that OAA did cause its trademark to be recorded with the United States Customs Service, the regulations of which require the listing “of each foreign person or business entity authorized or licensed to use the trademark and a statement as to the use authorized.” 19 C.F.R. § 133.2(c) (1986). Jesmar was listed on the application for recordation by OAA and pursuant thereto the Customs Service sent its agents a letter authorizing Cabbage Patch Kids dolls made by Jesmar to pass through Customs. Parenthetically it should be noted that this court recently held that these regulations were not contrary to statute and that the Customs Service as a matter of “enforcement discretion” and by virtue of inherent “administrative difficulties” may authorize the admission of so-called gray market goods. Olympus Corp. v. United States, 792 F.2d 315, 320 (2d Cir.1986), petition for cert. filed, 55 U.S.L.W. 3372 (U.S. Nov. 6, 1986) (No. 86-757); accord Vivitar Corp. v. United States, 761 F.2d 1552, 1569-70 (Fed. Cir.1985), cert. denied, — U.S. -, 106 S.Ct. 791, 88 L.Ed.2d 769 (1986). But see Coalition to Preserve the Integrity of American Trademarks v. United States, 790 F.2d 903, 916-17 (D.C.Cir.1986) (customs regulations allowing importation of gray goods inconsistent with statute governing entry of trademarked goods), cert. granted, — U.S. -, 107 S.Ct. 642, 93 L.Ed.2d 699 (1986). It is important to point out, however, that although we held in Olympus that Customs could permit entry of gray market goods, we also indicated that this does not limit the reach of protection of section 526 of the Tariff Act of 1922, as reenacted in 1930 and codified at 19 U.S.C. § 1526 (1982). As we stated, “The markholder still has rights under the statute: he may pursue private remedies against the importer under section 526(c), notwithstanding Customs’ failure to exclude the goods.” Olympus Corp., 792 F.2d at 320. This is precisely such a case, that is, one in which the markholder is pursuing its private remedies against the importer. Cf. Osawa & Co. v. B & H Photo, 589 F.Supp. 1163 (S.D.N.Y.1984) (granting preliminary injunction in private infringement action against the importation of goods genuinely marked abroad), cited with approval and disapproval in Olympus Corp., 792 F.2d at 319.

DISCUSSION

As Judge Conner noted below, 640 F.Supp. at 932, OAA's registration of the Cabbage Patch Kids trademark is prima facie evidence of its validity and of OAA’s exclusive right to use the trademark, the validity of which has not been challenged here. As he also noted, section 32 of the Lanham Trademark Act of 1946, 15 U.S.C. § 1114(l)(a) (1982), prohibits the unauthorized sale of goods bearing a registered trademark where there is a likelihood of confusion, mistake, or deception of purchasers. See, e.g., Syntex Laboratories, Inc. v. Norwich Pharmacal Co., 437 F.2d 566, 568 (2d Cir.1971); S.Rep. No. 1333, 79th Cong., 2d Sess. 1, reprinted in 1946 U.S.Code Cong.Serv. Applying this standard, the district court found that Jesmar’s Cabbage Patch Kids dolls with their Spanish-language birth certificates, adoption papers, and instructions are materially different from the Coleco dolls with English-language papers. The court also concluded, on the basis of numerous letters from parents and child doll owners or “parents,” that the sale in the United States of the Spanish-language dolls with the prominent English-language trademark causes the public to confuse or mistake the Spanish dolls for the Coleco dolls that they expect to be for sale. Together, these findings led the district court to hold Granada’s sale of Jesmar dolls in the United States actionable under 15 U.S.C. § 1114(l)(a). 640 F.Supp. at 933 (citing Bell & Howell Mamiya Co. v. Masel Supply Co., 719 F.2d 42 (2d Cir.1983)).

Granada’s principal argument is that the central purpose of a trademark is to identify the owner of the trademark as the source of the goods. Accordingly, the argument runs, the role of trademark laws is to prevent an infringer from passing off its goods as being those of another. There would thus be no infringement here because Jesmar’s Cabbage Patch Kids dolls bear a genuine trademark that accurately portrays OAA as the originator, or in this case licensor, of the product. To back this line of reasoning, Granada cites three cases in this circuit as standing for the proposition that the unauthorized sale of authorized goods does not give rise to a claim for trademark infringement. Unfortunately for Granada, however, we do not find that these cases support its interpretation of the Lanham Act.

For example, in DEP Corp. v. Interstate Cigar Co., 622 F.2d 621 (2d Cir.1980), this court upheld the dismissal of a Lanham Act claim by a United States distributor of an English soap against a gray goods importer because the distributor had no property interest in the trademark. In dicta the court noted that it would be “anomalous” if the sale of genuine goods could support an infringement action. Id. at 622 n. 1. But the court also noted that A. Bourjois & Co. v. Katzel, 260 U.S. 689, 43 S.Ct. 244, 67 L.Ed. 464 (1923), appeared to the contrary and, in the end, concluded that it need not reach the issue in the case because the plaintiff had no standing to assert trademark infringement.

Granada also cites El Greco Leather Products Co. v. Shoe World Inc., 599 F.Supp. 1380 (E.D.N.Y.1984), which found that the trademark owner’s rights were not infringed by the unauthorized sale in the United States of trademarked shoes even though the shoes had not been accepted or approved for sale by the owner. But this decision was recently reversed in this court on appeal, El Greco Leather Products Co. v. Shoe World Inc., 806 F.2d 392 (2d Cir.1986), on the ground that while the shoes had been manufactured by agreement with the trademark owner, they were not “genuine” for purposes of trademark infringement because the shoes were sold without being inspected by the owner to insure quality. The unauthorized disposition of the shoes without inspection deprived the owner of the right to control the product and could mislead consumers into believing that the trademark owner had approved the shoes for sale. Thus, in El Greco we concluded that the owner was entitled to relief under section 1114 of the Lanham Act against the seller of goods that bore the owner’s mark but had not been inspected, accepted, or authorized for sale in the United States.

The third case cited by Granada, Sasson Jeans, Inc. v. Sasson Jeans, L.A., Inc., 632 F.Supp. 1525 (S.D.N.Y.1986), which involved unauthorized sales in the United States of surplus blue jeans manufactured overseas under license, is similarly unsupportive. In Sasson Jeans, the court recognized that the heart of the Lanham Act claim was potential confusion by the consumer as to the origin or source of the goods. 632 F.Supp. at 1527 (citing Standard & Poor’s Corp. v. Commodity Exchange, Inc., 683 F.2d 704, 708 (2d Cir. 1982)). The court ruled that there was no trademark infringement because the jeans were “genuine,” that is, their production was authorized by contract, they were labeled with the trademark with the intent that they be sold in the United States, and they were sufficiently similar that they could not give rise to the confusion section 1114 was intended to prevent. See Sasson Jeans, 632 F.Supp. at 1528-29; see also Monte Carlo Shirt, Inc. v. Daewoo International (America) Corp., 707 F.2d 1054, 1058 (9th Cir.1983) (surplus shirts were “the genuine product, planned and sponsored by Monte Carlo and produced for it on contract for future sale”); Diamond Supply Co. v. Prudential Paper Products Co., 589 F.Supp. 470, 475 (S.D.N.Y.1984) (paper products were produced under contract and “identical or qualitatively equivalent”); Ballet Makers, Inc. v. United States Shoe Corp., 633 F.Supp. 1328, 1334-35 (S.D.N.Y.1986) (subsequent licensee’s use of trademark does not infringe prior licensee’s rights when goods are “genuine” and owner approved both goods for U.S. distribution).

But as OAA notes and the district court concluded, the present case is distinguishable from the above eases because Jesmar’s dolls were not intended to be sold in the United States and, most importantly, were materially different from the Coleco Cabbage Patch Kids dolls sold in the United States. There is a very real difference in the product itself — the foreign language adoption papers and birth certificate, coupled with the United States fulfillment houses’ inability or unwillingness to process Jesmar’s adoption papers or mail adoption certificates and birthday cards to Jesmar doll owners, and the concomitant inability of consumers to “adopt” the dolls. It is this difference that creates the confusion over the source of the product and results in a loss of OAA’s and Coleco’s good will. Thus, even though the goods do bear OAA’s trademark and were manufactured under license with OAA, they are not “genuine” goods because they differ from the Coleco dolls and were not authorized for sale in the United States. This case is therefore closer to Osawa & Co. v. B & H Photo, 589 F.Supp. 1163, 1171-74 (S.D.N.Y.1984), in which Judge Leval rejected the principle that a trademark lawfully affixed in one country carried the mark lawfully wherever it went and found that gray good Mamiya cameras imported into the United States in violation of a Customs Service exclusion order infringed upon the American distributor’s trademark. See also Ballet Makers, 633 F.Supp. at 1334 (distinguishing Osawa and A. Bourjois & Co. v. Katzel, 260 U.S. 689, 43 S.Ct. 244, 67 L.Ed. 464 (1923) from eases in which the trademark owner had authorized the goods for U.S. distribution). As in Osawa, OAA’s domestic good will is being damaged by consumer confusion caused by the importation of the Jesmar dolls.

Admittedly, this case is different from Osawa because it is OAA that owns and controls the trademark on Jesmar Cabbage Patch Kids dolls. Citing Parfums Stern, Inc. v. United States Customs Service, 575 F.Supp. 416, 419-20 (S.D.Fla.1983), Granada argues accordingly that there can be no infringement here because OAA cannot be damaged by sales of its own goods. Although this argument has some force in cases where the imported goods are identical to the domestic goods and are intended for sale in the United States, as in Sasson Jeans or Monte Carlo Shirt, for example, in a case such as this where the goods are confusingly different, the argument ignores the fact that section 1114 was intended to prevent any consumer confusion over similar goods. In light of this statutory purpose, the fact that a single entity owns the trademark worldwide is not dispositive.

Bell & Howell: Mamiya Co. v. Mosel Supply Co., 719 F.2d 42, 45-46 (2d Cir.1983), another gray goods case, is also distinguishable from the present case because it ruled only that a preliminary injunction should be denied when there was an inadequate showing of irreparable injury due to confusion and less drastic interim remedies could be adopted. Here there is a more than adequate showing of confusion over the source of the Cabbage Patch Kids dolls and sufficient evidence of damage to OAA’s good will to support the permanent injunction. Cf. Premier Dental Products Co. v. Darby Dental Supply Co., 794 F.2d 850, 859 (3d Cir.1986) (finding irreparable damage to good will even though gray good was identical to goods sold by trademark owner), cert. denied, — U.S. -, 107 S.Ct. 436, 93 L.Ed.2d 385 (1986).

Granada argues further that OAA consented to the importation of Jesmar dolls. This contention is meritless. Although OAA’s filing of the names of its licensed producers pursuant to Customs regulations, 19 C.F.R. § 133.2 (1986), did allow the goods to pass through Customs, this does not extinguish OAA’s rights to claim infringement or seek exclusion, as we have said, in a private suit in federal court. See Olympus Corp. v. United States, 792 F.2d at 320; Vivitar Corp. v. United States, 761 F.2d at 1570. The recordation of the trademark and its concomitant application listing Jesmar as a licensee simply operates to ease Customs’ administrative chores, not as authorization to import.

Granada also argues that the court erred in dismissing its antitrust counterclaims. Although Granada recognizes that under Continental T. V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 97 S.Ct. 2549, 53 L.Ed.2d 568 (1977), territorial restrictions on product resale do not amount to a per se violation of the Sherman Act, see Olympus Corp., 792 F.2d at 319-20, it nonetheless makes the vague allegation that the “wide disparity in price” here and abroad and the shortage of Coleco’s Cabbage Patch Kids dolls in the United States are suggestive of an antitrust violation. The district court, however, correctly dismissed this counterclaim on the ground that Granada had alleged no antitrust injury that would give it standing to challenge OAA’s acts. Indeed, the court found, and we agree, that gray goods importers such as Granada would have benefited from any anticompetitive conduct. Cf. W. Goebel Porzellanfabrik v. Action Industries, Inc., 589 F.Supp. 763, 766 (S.D.N.Y.1984) (antitrust counterclaim to gray good copyright infringement suit dismissed because importer would have benefited from high domestic prices). Finally, any claim by Granada that the infringement suit itself is an antitrust violation fails because there is no evidence that the suit was brought in bad faith, to harass, or in any way such that it would not be immune from antitrust strictures under the Noerr-Pennington doctrine. See id. at 767.

Granada’s arguments regarding damages are premature and can be heard at the forthcoming damages hearing.

Judgment affirmed.