The Profound Ways that Wal-Mart Affects the Brands That It Sells

There is certainly no shortage of commentary on how the unprecedented expansion of Wal-Mart has affected American society, both for good and ill.

There are those who lament Wal-Mart's treatment of its own workers which the New York Times describes as "authoritarian," and those critics who decry Wal-Mart's (and similar large retailers') policies as tantamount to encouraging modern slavery.

But the chain also has its supporters, who argue that Wal-Mart can offer community support, as well as low prices on staple commodities for consumers on public assistance.

But the proliferation of Wal-Mart's ubiquitous retail stores has affected the very brands that it sells, often in ways that are subtle but profound.  Here are just a few:

• Potential for Quality Deterioration:  For certain basic products, Wal-Mart has a "clear policy" that its prices must go down from year to year, rather than up.  If a particular vendor does not keep its wholesale prices competitive with other suppliers, they risk having their brand removed from Wal-Mart's shelves in favor of a lower-priced competitor.  Critics say that this eventually pressures all vendors to shift manufacturing jobs to China and other developing nations, where the cost of labor is less expensive.  Over time, they argue, the quality of Wal-Mart's products must inevitably decline, rather than improve.
  
• Decreasing Brand Diversity:  Any retailer only possesses a limited amount of visible shelf-space to display products in a category, such as baby diapers.  Because of their packaging and size, baby diapers occupy a fair amount of the retailers' valuable "real estate."  Therefore, a retailer must carefully choose which brands to carry.  Wal-Mart, one of the nation's savviest retailers, chooses among the competing brands to determine shelf-space return on investment. Consequently, Wal-Mart chooses to devote 95% (or more) of its shelf space to Luvs, Pampers and Huggies, the three top sellers in that category. Per square foot, across all its stores, it simply may not make economic sense for Wal-Mart to even consider carrying any smaller, "alternative" brands such as Seventh Generation diapers which appeal to shoppers who want diapers free of bleach, latex or fragrances.  Wal-Mart's customers therefore benefit from lower prices for Luvs, Huggies and Pampers, but are not presented with a diverse selection of alternatives.  Over time, this trend can harm brand diversity, as Seventh Generation must rely upon niche market health food stores and online retailers to compete, thus creating a significant entry barrier for smaller brands.
• Weaker Intellectual Property protections:  Perhaps desiring to sell cheaper, lower quality mass-market versions of popular designs, Wal-Mart has also advocated and lobbied very effectively for limiting intellectual property protections for budding designers.  For example, in 1997, children's clothing maker Samara Brothers had sued Wal-Mart for "knocking off" its entire clothing line of high-end clothes.  Wal-Mart didn't dispute the copying, but took the case all the way to the U.S. Supreme Court to challenge the designer's claims, a process which took years and cost hundreds of thousands of dollars in legal fees.  The Supreme Court ultimately ruled that Samara's clothing line was unprotectable as a matter of law because it couldn't satisfy stringent legal "distinctiveness" criteria. Wal-Mart won not only the case, it helped to set precedent in its favor whenever it chooses to copy other designers. The Samara case is still the prevailing law of the United States, which limits the availability of trade dress protection to product configurations. The commercial reality is that very few private parties have the resources to litigate such cases against Wal-Mart, all the way to the Supreme Court, and even fewer can win. In contrast, Wal-Mart possesses both the will and the resources to dedicate serious efforts to altering the legal landscape in its favor.

Is it Trademark Infringement to Make Your Own Fakes?

The Huffington Post is reporting that there is a run on a particular pantone of red paint in the United Kingdom.

Why red paint?

Faced with the high price of genuine Christian Louboutin designer pumps, some cash-strapped British wannabe fashionistas are painting the soles of their high heel shoes a specific shade of red, in a deliberate imitation of the designer's federally registered trademark.

In response to the Huffington Post article, I was asked the obvious question by many people:  "Is that practice legal in the United States?"

I had to pause to make sure that I was absolutely convinced that the following statement was really true:

"Yes.  This practice is absolutely legal in the United States."

Intentionally applying a counterfeit, imitation trademark to a product for one's own personal use, assuming that there is ZERO chance that the item will ever be sold or offered for sale to anyone -- is perfectly legal under current U.S. trademark laws.  It is perfectly legal to own, wear and proudly display a counterfeit product on one's own person.

The Lanham Act, codified at 15 U.S.C. § 1051 et seq., is the primary federal statute of trademark law in the United States.  The Lanham Act prohibits a number of activities, including trademark infringement, trademark dilution, false advertising and false designation of origin.

If someone were to offer a product for sale that infringes upon, dilutes or causes confusion with a protectable trademark or design, that person would be civilly (and possibly even criminally) liable under the Lanham Act for monetary damages and an injunction (a court order) against their continued conduct.  The goods can also be confiscated and destroyed.

In a case where I represented French designer Hermes of Paris, a 3-judge panel on the influential U.S. Court of Appeals for the Second Circuit in Manhattan unanimously wrote:

"Such a practice [of selling knockoffs] does harm the public, however, by creating post-sale confusion, not just among high-end consumers, but among the general public, which may believe that the knockoff is actually the genuine article.  In fact, high-end consumers may be less confused than the general public in the post-sale context because many of them will be aware of the existence of copies.  In either case, a loss occurs when a sophisticated buyer purchases a knockoff and passes it off to the public as the genuine article, thereby confusing the viewing public and achieving the status of owning the genuine article at a knockoff price."  Hermes Int'l et al. v. Lederer de Paris Fifth Avenue, Inc., et al., 219 F.3d 104, 106 (2d Cir. 2000).

But in each of its relevant prohibitions against knockoffs, the Lanham Act deliberately utilizes a key word -- commerce.

Absent some form of actual, intended or apparent "use in commerce," the imitation shoes that a person makes solely for their own personal use and display cannot be accused in a federal court as being an infringement, dilution or false advertising.

Indeed, that result is true even if the copycat shoes are admittedly designed to cause the third-party, "post-sale" consumer confusion that the Court of Appeals said is harmful.

Cheap knockoff shoes can also "dilute" the fame and power of a well-known brand (especially if the imitation shoes are lousy quality, which would "tarnish" the fame of the red-sole Louboutin trademark).

But the manufacture and use of personal copycat red soled shoes, assuming no use in commerce other than the mere act of a private person wearing them, is simply not illegal under current U.S. federal law.

That perverse outcome means that even if an ill-intentioned person were to manufacture many pairs of such shoes, for no commercial purpose other than to deceive their friends and onlookers into believing that they are fashionable enough to own a hundred pair, there is nothing the trademark owner can legally do to stop that person.

Perhaps the more interesting and unresolved question is...could a designer accuse a famous celebrity who chooses to wear knockoffs on the red carpet, of essentially "endorsing" the fake goods in an unlawful commercial manner?

Meat Loaf Sues Impersonator for Cybersquatting

First and foremost, I must confess that I am a fan of Marvin (now “Michael”) Aday, better known to the world as the singer Meat Loaf.  I have the seven anthems from Bat out of Hell Part I permanently etched on my iPod, and every word of Phil Rizzuto’s monologue from Paradise By the Dashboard Light memorized.  I am also a trademark lawyer who generally represents Plaintiffs in Court against infringers, including having litigated major cases involving “replicas” and “knockoffs.”  So it was with great interest and pro-Meat Loaf bias that I read about the singer's recently filed federal Complaint against U.K.-based impersonator Dean Torkington.

In contrast to the legitimate MeatLoaf.net site, Dean Torkington apparently registered the Internet domain name MeatLoaf.org. MeatLoaf.com was apparently already taken (not by the rocker, but by Rebeccah’s Fine Foods, who registered it in 1995, and who doesn’t seem to have done much with it since then).

Initially, it is worth noting that Torkington’s website and materials identify himself as a “tribute.”  Tribute bands and celebrity impersonators present a challenging (if not amusing) area of intellectual property law.

The Torkington "mini-tour bus."

With most tribute bands, there is not likely to be much evidence of actual confusion at the point when an ordinarily prudent consumer buys a ticket to a tribute show.  (Such a duped consumer would be no true fan of Meat Loaf, as Torkington is at best, a poor-man’s Meat Loaf).  I must confess that if I saw Torkington’s tiny little "tour bus" parked in the lot, I would most certainly NOT suspect that the genuine Meat Loaf was nearby, and would not begin my search for an autograph.

Rather, in such cases, a Plaintiff must rely on more creative applications of trademark law, such as the doctrine of initial interest confusion, otherwise known as the “bait and switch.”  Under this established concept, even ordinarily prudent consumers are initially confused and attracted to the second-comer’s product or service, only to later discover the lack of authenticity.  Such infringement is still legally actionable, as it serves to divert interest and undermine the brand owner’s rights.

Aday references this theory in his Complaint, in which he asserts that true fans are searching for the genuine website on the Internet, only to discover Torkington’s close imitation.  Further, Torkington's use of logos and images is a little too close for comfort, and there is even an allegation that Torkington created a YouTube handle "Michael Aday" to fraudulently impersonate the Plaintiff.

Of course, because the nature of all tribute bands is, in a sense, expressive and therefore potentially constitutionally protected free speech, tribute bands can readily assert the nominative fair use defense, which can be applied where the defendant's use of the trademark refers to something other than the real product.  A federal court in the New Kids on the Block v. News America Publishing Inc. case articulated a three-part test for nominative fair use:

First, the product or service in question must be one not readily identifiable without use of the trademark; second, only so much of the mark or marks may be used as is reasonably necessary to identify the product or service; and third, the user must do nothing that would, in conjunction with the mark, suggest sponsorship or endorsement by the trademark holder.

There are numerous Meat Loaf tribute bands which may satisfy this test, for example:  Dashboard Lights, Anything for Loaf, and my own personal favorite, Peat Loaf.

Finally, and potentially problematically for Mr. Torkington, if his domain name registration of MeatLoaf.org is deemed to have been in bad faith to capitalize on consumer confusion, he would not only lose the domain name, but face up to $100,000 in statutory damages.

In conclusion, Mr. Torkington may have come a little too close for comfort with his imitation of life.  In the words of the true Meat Loaf’s classic song, Torkington’s tributes will be gone when the morning comes.

Online Counterfeiting Likely to Escalate

Numerous federal lawsuits have been filed by Intellectual Property owners in recent years to attempt to address the intensifying online threat from "rogue websites."

Additionally, the US Department of Justice and US Department of Immigration and Customs Enforcement have seized millions of dollars in assets, as well as shuttered many such websites by utilizing existing criminal laws in the ongoing Operation In Our Sites.

However, while Internet traffic to these sites has been measured and determined to be substantial, little research has been done to empirically survey the existing body of data related to this phenomenon.

A comprehensive empirical survey of over 3,000 Internet websites that federal courts have ordered shut down because of their sale of counterfeit goods has revealed that online counterfeiters can collect immense profits by generating over $10,000 in sales with a $1,000 initial investment.

An analysis of an online counterfeiters' potential profit margin can be summarized in the sample breakdown of typical revenue and costs as follows: The average cost of registering a single Internet domain name: $10-$20 per domain name, annually. The average cost of hosting multiple e-commerce websites on a shared server: $120 to $160, annually. International shipping is either paid for by the customer, or absorbed by seller if it is a nominal cost (less than $10 per item). Credit Card/online payment processing fees: 3-5% of sale price. Wholesale cost of counterfeit goods varies by brand and product category.

For example, a typical counterfeit coat has a $40-$50 wholesale cost, retails for $230-$300 on a rogue website. A typical counterfeit handbag: $40-$50 wholesale cost, retails for $200-$300 on a rogue website. A typical counterfeit bracelet: $10 wholesale cost, retails for $70-$80 on a rogue website. A typical counterfeit watch: $10 wholesale cost, retails for $160 on a rogue website. 


Therefore, starting with a $1,000 investment, if one sets up a hosted e-commerce website ($160) linked to five domain names ($100), and invests the remaining funds ($700) in selling and shipping wholesale counterfeit goods, one could generate: Up to $11,200 by selling 70 counterfeit watches (11.2x the initial investment); Up to $5,600 by selling 70 counterfeit bracelets (5.6x the initial investment); or Up to $4,200 by selling 14 counterfeit coats or handbags (4.2x the initial investment).

This low-risk business model offers a comparable return on investment (ROI) to trafficking in illegal narcotics.  Because of this dramatic ROI, online counterfeiting networks are exponentially spreading on the Internet like an infection. For example, the ROI from a single successful website selling counterfeit products encourages the creation of many more such websites.

Skilled programmers who have access to sophisticated technology and an extensive supply of counterfeit products are creating and operating these sites. To protect their business model, they are employing a variety of creative tactics to frustrate efforts to monitor them and remove them from the marketplace.

For example, they dynamically redirect their websites across multiple servers located in different countries. Significant server bandwidth is dedicated to hosting such sites, with large blocks of server space and IP addresses dedicated to managing the Internet traffic to them. Counterfeiters' websites are creating significant actual consumer confusion. One reason is that prices for counterfeit goods are designed to be credible to suggest genuine, discounted products rather than low quality counterfeits. Goods received are typically shipped directly from locations throughout China and Hong Kong, and

China is the country most often named as the country of the Registrant. However, Registrants do not usually provide legitimate or consistent contact information when registering new domain names, often using gibberish, nonsensical words and false addresses. Further, some Registrants are using the "Privacy Protection" services offered by Registrars to purchase a cloak of further anonymity. Software applications make it easier for infringers to create, register and warehouse thousands of domain names that contain permutations of trademarked brands. These conclusions make it likely that "rogue websites" selling counterfeit goods will likely continue to proliferate, demanding that legal action be taken by brand owners.