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Court Dismisses in Part Lanham Act Claims for Lack of Standing, Permissible "Gray Goods"

In an August 15, 2013 ruling, Judge Ronnie Abrams granted the cross motions for partial judgment of plaintiff L'Oreal USA, Inc. and defendant Trend Beauty Corp. in L'Oreal's action alleging Lanham Act and state law claims against Trend Beauty.  Trend Beauty was an unauthorized wholesaler of L'Oreal's luxury fragrances.  L'Oreal claimed that "Trend Beauty's unauthorized sale of counterfeit and 'decoded' L'Oreal fragrances in the 'gray market' interfered with L'Oreal's ability to control the quality of its products," and that "the counterfeit and decoded products materially differed from L'Oreal's 'coded' products so as to constitute . . . trademark and trade dress infringement."  The "coding" refers to quality assurance, security and Universal Product Code codes that L'Oreal places on its products.  A "decoded" product is one for which one of the codes have been removed, such as the fragrance bottle has been removed from its outer box.  Trend Beauty admits that it sold decoded L'Oreal products, and further admitted that it sold about 200 units of counterfeit product, but disputes that it knew or should have know that the product was counterfeit.

As a threshold matter, Judge Abrams considered whether L'Oreal, as a licensee of the marks at issue, had standing to assert trademark infringement, and concluded that L'Oreal did not have standing.  The Court noted that "L'Oreal only has standing to bring its trademark infringement claims if it qualifies as a legal representative or assignee of the registrants."  The Court rejected the argument that L'Oreal was the assignee of the marks based on the factual record, and then considered whether L'Oreal is the "legal representative" of the owners of the marks.  Judge Abrams relied on recent a Second Circuit case addressing the issue as a matter of first impression, and ruled that the term requires "a party to show that it 'has the authority to appear on behalf of the registrant/owner with respect to the registrant/owner's legal interests and the registrant/owner is unable or incapable of representing itself and enforcing its own rights.'"  The Court applied this standard, and concluded that L'Oreal was not the registrant's legal representative.  Judge Abrams rejected L'Oreal's dilution claims under 15 U.S.C. § 1125(c) on the same ground.

Since Trend Beauty conceded liability for the counterfeit units, the Court then considered whether Trend Beauty's sale of decoded units constituted unfair competition and false designation of origin under 15 U.S.C. § 1125(a).  Judge Abrams noted that such good are considered "gray goods" and are not usually actionable but under Second Circuit precedent, "their distribution could constitute infringement 'if they do not conform to the trademark holder's quality control standards.'"  L'Oreal argued that the decoded goods did not conform to its quality control standards and differed materially from genuine goods.  The Court set out the three factor test noted in Warner-Lambert Co. v. Northside Dev. Corp., 86 F.3d 3 (2d Cir. 1996) to determine whether a particular code is a legitimate quality control measure:  (i) the trademark owner "has established legitimate, substantial, and nonpretextual quality control procedures; (ii) it abides by these procedures, and (iii) the non-conforming sales will diminish the value of the mark.'"  Applying this test, the Court concluded that one of the codes at issue was a legitimate quality control measure, but that L'Oreal had not carried its burden of showing that the use of the other code was a nonpretextual quality control procedure.

Judge Abrams next considered whether the decoded goods differed materially from the goods as L'Oreal sold them.  The Court found that a "determination as to whether the decoded products materially differ from the coded ones in a manner that would be 'visible to a consumer' in this case is a fact-intensive inquiry that is not ripe for summary judgment."

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