In 2005, Zino Davidoff discovered that its wildly-successful “Cool Water” line of fragrances were on the shelves at CVS. As it turns out, CVS had been purchasing Davidoff’s products outside of the fragrance company’s normal distribution channels since it had refused to sell them to CVS. Davidoff’s fragrances - which were produced thanks to a licensing deal with beauty giant Coty - were only available for purchase from luxury retailers and so, CVS, the pharmacy chain, did not fir the bill.
In an effort to stock the in-demand fragrances, despite Coty’s unwillingness to take it on as an authorized retailer, CVS, looked to other channels for the in-demand fragrances. The result for CVS was a steady supply for Cool Water fragrances. The most immediate problem for Davidoff was that at least some of the fragrances that CVS was selling were fake.
After the pharmacy’s refusal to cave to Davidoff’s cease and desist demands, Davidoff sued CVS for trademark infringement and dilution, and unfair competition, giving rise to a highly-watched and highly-cited case centering on a brand’s right to limit the distribution of not only counterfeit but authentic products.
Within just a few weeks of the Davidoff filing its case, the Southern District of New York granted the company an early win, ordering CVS to immediately – but only very temporarily (i.e., for 90 days) – cease all sales of the allegedly infringing fragrances and allowing Davidoff to inspect all of the Cool Water-branded products in CVS’s inventory.
Davidoff’s review of the CVS-stocked products revealed that some 16,600 units had been tampered with. To be exact, the unique production codes (“UPC”) that Davidoff affixed to each and every one of its products in order to track the points of sale and the authenticity of the products, had removed – either by cutting away the UPC from the box or label, wiping the UPC off with chemicals.
In light of Davidoff’s findings, the lower court granted Davidoff a preliminary injunction, thereby, extending the order that CVS be barred from selling the Cool Water fragrances during the entire duration of the litigation.
On appeal, CVS argued that the preliminary injunction should not have been issued since the goods it was selling with the codes removed were not counterfeits but instead, grey-market goods – i.e., genuine Davidoff goods sold by Davidoff through authorized channels in other countries and subsequently imported by others into the United States. CVS alleged that since these goods were sold in their original packaging with the Davidoff trademarks clearly visible and unaltered, the removal of the codes did not constitute trademark infringement.
The Second Circuit Court of Appeals was not persuaded, and sided with Davidoff, holding that the most relevant question was not whether the products were genuine, but whether their sale without the UPCs interfered with Davidoff’s trademark rights.
With this in mind, the court stated that while the unauthorized sale of gray-market goods may not cause confusion (the core harm in a case of trademark infringement) or dilution, grey-market goods will be considered non-genuine if they do not conform to the mark owner’s quality-control standards, or if they materially differ from authorized products, which is precisely what Davidoff asserted was at play here.
And the appeals court agreed. “Mutilated packaging makes an item less appealing to a purchaser, who runs the risk that the gift will be viewed by the recipient as a sketchy, cheap purchase from an illicit source or of the sort given by Tony Soprano to Carmela.” As such, CVS’s altered products not only ran afoul of Davidoff’s legitimate quality-control mechanisms but also were “materially different” from authorized products with the UPC attached, given the low threshold of only “a slight difference which consumers would likely deem relevant when considering a purchase of the product.”
As such, the Second Circuit affirmed the lower court’s decision and thus, the injunctive awarded to Davidoff, enabling it to prevent CVS’s unauthorized sale of all counterfeit products, but also any products that lack its UPC codes.
As Finnegan, Henderson, Farabow, Garrett & Dunner, LLP’s Robert C. Stanley noted in connection with the Second Circuit’s findings, “This decision highlights that quality-control measures may effectively block the unauthorized sale of gray-market goods. The court repeatedly emphasized the dual purposes of the UPC system, and was persuaded by evidence that Davidoff trained personnel in the UPC’s use to detect counterfeits and used the UPC to detect and recall defective products.”