Case(s): Zazu Designs v. L’Oreal, 979 F.2d 499 (7th Cir. 1992).
Cosmair, Inc., a licensee of L’Oreal, S.A., wanted to begin selling hair-coloring shampoo in 1985 under the name ZAZU. L’Oreal contacted Zazu Hair Designs (“ZHD”), an existing hair salon, to verify that it did not sell products under that name. With this confirmation, L’Oreal began selling and advertising its ZAZU products in 1986. While L’Oreal was doing so, the owners of Zazu Designs were developing their own hair products and sending the products to friends. In September 1986, Zazu Designs began selling these products in its salon. Zazu Designs sued L’Oreal for trademark infringement and for an injunction to prevent L’Oreal’s future use of the mark “Zazu,” as well as for damages from L’Oreal’s prior use of the mark.
The district court found that Zazu Designs had the exclusive right to use the term “Zazu” when marketing hair products. The district court granted an injunction against L’Oreal to prevent its future use of the mark, and awarded Zazu Designs $100,000 in damages for lost profits and $1 million for corrective advertising. L’Oreal appealed the district court’s decision.
Seventh Circuit Decision & Use in Commerce
In a decision that set “use in commerce” standards for the circuit, the Seventh Circuit reversed, holding that ZHD’s salon services and limited sales of hair care products were not sufficient to establish rights in the “ZAZU” mark for hair care products. Instead, L’Oreal was held to be the owner of the ZAZU mark for hair care products. According to the Seventh Circuit, “[u]nder the common law, one must win the race to the marketplace to establish the exclusive right to a mark.” And “ZHD’s sales of its product are insufficient use to establish priority over L’Oreal” because ZHD’s sales “neither link the Zazu mark with ZHD’s products in the minds of consumers nor put other producers on notice.” The Seventh Circuit expressly distinguished cases which allegedly establish use sufficient for registration from those that establish use sufficient for priority.
As a second and independent reason for reversal, the Seventh Circuit held that “ZHD did not establish that L’Oreal’s sales injured it in the slightest, let alone that it is entitled to $2.1 million plus hefty attorneys’ fees.” The $100,000 in actual damages was based solely on conjecture that ZHD could have made $4 per bottle on 25,000 empty bottles on which ZHD printed the ZAZU mark. The corrective advertising figure of $1 million was arbitrarily determined “by taking 20% of the $5 million L’Oreal had spent advertising ZAZU hair coloring.” The $1 million in punitive damages was based on the court’s understanding that L’Oreal had a net worth of $20 million and a belief that 5% in punitive damages was necessary to deter future conduct. The district court also based the punitive award on a number of unethical actions by trial counsel for L’Oreal.
According to the Seventh Circuit, “[n]one of the awards–not the $100,000 for lost profits, not the $1 million for corrective advertising, and not the $1 million in punitive damages rests on an adequate foundation.” However, in view of the unethical acts of L’Oreal’s trial counsel, the case was “remanded so that the district court may consider whether a sanction is appropriate for L’Oreal’s misconduct during the litigation.”