Over the past decade, sellers of counterfeit goods have flocked to the web, taking the formerly brick-and-mortar-based trade, such as Canal Street sales, online, and saturating sweeping e-commerce marketplaces and standalone websites, alike, with everything from trademark infringing face masks to counterfeit footwear and luxury handbags. The stunning rise in online sales of fake goods does not mean that former physical hotspots are not still in operation, nor does it mean that attempts by trademark holders to hold bad actors accountable for such sales have disappeared, as brands continue to routinely file trademark lawsuits focused on the online offering of counterfeit or otherwise infringing products.
While trademark infringement lawsuits play out in courts across the U.S. in connection with the sale of fakes online, an appeals court has found that landlords can be held contributorily liable for trademark infringement when they knew – or should have known – of a tenant’s infringement and took little to no action to stop that infringement. That is what the U.S. Court of Appeals for the Second Circuit held early this year in Omega SA v. 375 Canal, LLC, a long-running case that pitted Swiss luxury watch group Omega SA against the property owner of 375 Canal Street in Manhattan over the sale of counterfeit Swatch and Omega watches.
The defendant in the case, landlord 375 Canal, LLC (“375 Canal”) knew that counterfeit goods were being sold at its leased Manhattan property for years and in fact, was previously sued by the City of New York and Louis Vuitton Malletier on the basis of counterfeiting and other trademark violations. Despite previous penalties, injunctions, and settlements, counterfeit items continued to be sold at 375 Canal, and an individual working at the defendant’s Canal Street location sold a counterfeit Omega watch during a police sting in —, prompting counsel for Swatch SA to send a letter to one of the 375 Canal property owners, informing him of potential contributory and vicarious liability in connection with the sale of counterfeit products on the premises.
Despite Omega’s letter and despite 375 Canal’s claims that they removed the offending tenant, vendors that occupied the defendant’s outpost continued to sell counterfeit goods. Omega filed suit against 375 Canal in a New York federal court in September 2012 for contributory trademark infringement after Omega’s private investigator purchased a counterfeit Omega Seamaster watch at 375 Canal’s premises, alleging that the defendant continued to lease its space despite knowing that its vendors were selling counterfeit Omega goods.
In response to Omega’s suit, 375 Canal maintained that it was not liable for contributory infringement because Omega did not prove that it continued to lease its space to a specific, identified vendor that it knew or should have known was selling counterfeit Omega goods. Unpersuaded, a panel of judges for the Second Circuit found that this argument conflicted with the court’s decision in Tiffany (NJ) Inc. v. eBay Inc., stating that a landlord “may be held liable for contributory trademark infringement despite not knowing the identity of a specific vendor who was selling counterfeit goods, as long as the lack of knowledge was due to willful blindness.”
While landlords do not have a duty to look for infringement occurring on their property, they do have to undertake efforts to “root out” infringement once they know or should know of its occurrence. Because 375 Canal had known of the counterfeiting occurring at its property for years, a jury awarded $1.1 million in damages to Omega for the defendant’s contributory infringement of Omega’s trademarks.
Looking Beyond Canal Street
The outcome in the Omega case is relatively straightforward because of the nature of the (clearly-counterfeit) products at play, and Defendant 375 Canal’s high level of prior knowledge about its tenants’ infringing activities. However, it remains unclear how the decision in this case would apply to instances in which the nature of the products, themselves, is not quite so clear-cut, such as when authentic products are modified, and what that would mean in terms of a landlord’s knowledge of the authenticity of those products – or the lack thereof.
This scenario is likely to be prove a relevant one given the rate at which luxury brands have been losing some control in the market (due, in part, to the rise of e-commerce and the burgeoning resale segment), and have been facing off against sellers of trademark-bearing products that have been modified and/or that are being sold in different conditions (or are subject to different terms) than the ones maintained by the rights holder and its authorized retailers.
Luxury brands have increasingly been utilizing trademark law to police the sale of their goods in such post-sale capacities. While the First Sale doctrine states that a trademark owner cannot prevent the subsequent resale of its goods once it releases them into the market, this doctrine does not apply if the product is “materially different” than the product sold by the trademark holder. A blatantly fake Omega watch like the ones at issue in Omega is infringing, but the jury is still out regarding what level of alteration, for instance, makes a good “materially different,” and therefore, transforms an otherwise authentic product into an infringing one.
Despite this ambiguity, brands like Chanel and Rolex have been hollowing out the First Sale doctrine by attacking alternate distribution channels for selling “materially different” goods, in furtherance of a bid to ensure that potential customers buy their goods from them directly and/or are not misled about the nature of the unauthorized goods.
By clearly establishing landlord liability for trademark infringement, Omega may represent another avenue for luxury brands to chip away at the First Sale doctrine. Upon receiving a notice of (alleged) infringement from a rights holder, such as a luxury brand, a landlord has two options. It can terminate the tenant’s lease to forestall future liability, or it can attempt to determine whether the tenant is actually selling infringing goods, and potentially uphold the lease, thereby, challenging the rights holder’s claim. (A commercial landlord will likely have a provision in its lease empowering it to declare that a tenant is in breach of the lease agreement if participating in illegal activity, allowing the landlord to unilaterally terminate the lease without penalty.)
But as instances of modification/alteration demonstrate, the concept of “authentic” versus “infringement” is not always as cut and dry as it may seem, which could complicate the ability of a landlord to determine whether its tenant is infringing upon a brand’s trademarks. Because Omega establishes that a judgment may be looming, it may be safer for a landlord to accept a trademark holder’s notice of infringement at face value and evict the tenant, even though the tenant may not be infringing upon a brand’s trademarks.
Further complicating the matter is the requisite level of landlord knowledge regarding a tenant’s infringement. Omega states that there is no affirmative duty to police, but there is no prescribed level of action between doing nothing and being willfully blind, and policing, the latter of which is supposedly unnecessary. Since almost all cases adjudicated to this point have featured landlords and vendors who were the subject of police raids or civil settlements prior to the present suit, the current standard evaluating landlord knowledge appears to be a fact-specific, “I know it when I see it” standard. By sending notices of infringement, a brand may effectively become both judge and landlord.
Julie Tamerler is a judicial law clerk for President Judge Michael J. Koury, Jr. in Easton, Pennsylvania. Her work, “The Ship of Theseus: the Lanham Act, Chanel, and the secondhand luxury goods market,” is forthcoming in the Fordham Intellectual Property, Media & Entertainment Law Journal.