Diversion, yes, but no

Originally posted 2009-11-26 08:30:51. Republished by Blog Post Promoter

Some people have all the luck in the Eastern District of New York.  Whereas me — I think I’ve got it coming to me right down the middle, and then it seems to get, I don’t know — diverted from me!

So some lawyers get assigned judges in the Eastern District of New York whose ideas about trademark law and, well, the Federal Rules of Evidence — and, actually, the Federal Rules of Civil Procedure have, well, um . . . okay, I won’t say.  But in their courtrooms this is the kind of thing happens to “unauthorized resellers,” regardless of the actual “law” stuff.

RDC BIG BEARDI know, regular readers are sick of hearing about the S&L case, but I’m just framing the story here, okay?  Stick with me.

And then there are other judges in that same court who actually not only get it, but really, really, really get it:  There’s no such thing as “diversion” of authentic, untainted merchandise by “unauthorized” resale on the Internet.  Whether or not the manufacuter of a product thinks you need a whole two years of community college or that certificate from beauty school to slather on hair goop or tanning sludge, that preference does not “run with” the over-hyped blech they sell.

So — still setting the stage here, stay with me! — Judge Leonard Wexler, in 2007, went this far to make that point, as reported here exactly two year agos from tomorrow:

L’Oréal maintains that to keep the value, integrity and status of the products, they are supposed to be sold only by company-trained professionals in fashionable salons. Matrix alone “has been the number one professional hair brand on the market, with an estimated 16 percent market share,” L’Oréal said in court papers.

Quality King and Pro’s Choice, however, were obtaining the products in violation of the injunction by buying them, or, as it is called, diverting them, from middlemen and reselling them to nonqualified dealers, L’Oréal contended.

Diverting attention

Diverting attention

In his opinion, Wexler declined to enforce the old injunction, in effect, throwing out L’Oréal’s case against the two companies.

The judge said that if L’Oréal wanted seriously “to stop diversion of Matrix products,” it could terminate those of its distributors who are the sources of the diverted products.

He actually declined to enforce the old injunction, did Judge Wexler, because it would have actually been, well, wrong to!  Because of the law stuff.

Isn’t that enough mazal for Quality King?  Can’t some other lawyers in other courtrooms in that District have some of that good fortune?

No!  Evidently, on appeal of the earlier decision, the Second Circuit affirmed his vacatur (cancellation) of the injunction going forward, but remanded for further determination of whether the injunction should be not only — not “only”! — vacated, but also “terminated,” i.e., retroactively time-traveled into non-ever-existence.

So once more comes Matrix, the plaintiff, and with them this time big guns from the collossal Weil Gotshal, a real New York law firm this time.  So, was it a good idea to spend a good 50% more on fees (not to mention their markup on donuts!) to make the same arguments?

No such luck!  As Shourin Sen reports, Judge Wexler is back again, and he continues resolutely not to take any prisoners in the Quality King wars:

The Eastern District of New York found on Friday that a 1990 injunction entered between Quality King and Matrix Essentials was retroactively vacated to 2002, when the first proven breach of the injunction occurred:

The dramatic change in the diversion market from 1990 (when the consent decree was issued), to the period for which L’Oreal seeks damages (2002-2007), is sufficient, in the court’s view, to justify retroactive vacatur.  Other factors, however, also support the court’s conclusion.  As noted in Matrix I, the re-sale of untainted product is completely lawful, as it can support neither a claim of unfair competition nor trademark infringement.  See Matrix I, 522 F.Supp.2d at 478.  There was never an allegation that product sold during the time period of 2002-2007 was in any way tainted or mislabeled.  Accordingly, there is no question but that the conduct engaged in by Defendants, and the Pro’s Choice Parties was, in the absence of the 1990 Injunction, completely lawful. Finally, the fact that the 1990 Injunction was entered into upon consent of the parties, and not after any hearing or findings by the court, weighs in favor of retroactive vacatur.

Whoa, whoa! “Dramatic change in the market”?  What change in the market?  Check this language out (emphasis worshipfully added):

When the 1990 Injunction was agreed to, Matrix took the issue of diversion seriously.  The company took aggressive stops to protect the professional nature of its product. . . . In direct contrast, during the time period of 2002-2007, there was widespread, unchecked diversion of Matrix products outside of the so-called “professional” chain of distribution.  The profits reaped by L’Oreal during this time period were enormous and unprecedented. . . .  The reality of the marketplace makes L’Oreal’s “professional distribution only” argument ring hollow.  Far from suffering any damage from diversion, L’Oreal’s profits soared as a result of the practice.

Both the 2007 decision and the one from last week (Matrix Essentials v. Quality King Distributors, Inc., 90-CV-1070) are combined in one document here.

Remember what Dick Troll said?  Okay, I’ll take out the name of… that case I’m not going to mention again — but read:

If the Internet retailer is success full then SOMEBODY is ordering more tanning lotion from [Cosmetic Goop Maker]. So what does [Cosmetic Goop Maker] do? Dig deeply into the ordering patterns of its distributors to find anomalies? Or book the orders. That is, until retailer and distributors who are not part of the informal distribution channel start to complain.

They book the orders, for that’s a lot of goop.  This one books orders, that one  complains, the first one sues, and I — I tremble in luckless-in-litigation awe. Yes . . . that’s quite a lot of loot for Matrix, quite a lot of law for Quality King, and quite a lot of luck going all over the place.

And I’m sure neither outcome has anything to do with either side in either case I’ve adverted to here just plain getting the judge to, um, hate them to pieces so much that it diverted Their respective Honors’, eh, judgment.

After all, one of these judges is very, very right about the issue of whether “diversion” is trademark infringement, right?  And one of them . . .

Well, I wouldn’t want to push my luck.

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Author:Ron Coleman

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6 Responses to “Diversion, yes, but no”

  1. Tal Benschar
    November 27, 2009 at 9:16 am #

    The recent Davidoff case in the SDNY shows the way of how to deal with this. You put serial numbers on the product allowing you to trace who the distiutor is. If you find the “diverted” goods, you then terminate that distributor. If the serial number is rubbed off, then the item is counterfeit (assuming there is some bona fide use for either QC, recalls, or stopping counterfeits).

    Of course, you have to be willing to terminate distributors. That may not be economically feasible.

    (Also, BTW, while “diverted” goods are still genuine in terms of trademark law, there still can be a breach of contract claim, as well as tortious intereference with contract if someone induced the breach.)

    • November 29, 2009 at 9:43 pm #

      Tal, that’s a great idea if indeed you really want to discover which distributors are “diverting” product. But Dick Troll’s point, and Judge Wexler’s point, was that the manufacturers mainly don’t — they’re happy to sell the stuff, and to prosecute selectively when they have to do so either for show (i.e., to satisfy non-cheating distributors or “approved” retailers) or to shut down one particularly high-profile or hated “unauthorized” retailer. As you put it, to do otherwise “may not be economically feasible.”

      As to the tortious interference claim against the retailers, that’s a crock; there’s almost never legally cognizable inducement. Unfortunately for some Eastern District defendants (and their families and, um, creditors), however, some judges are not particularly interested in the “legally cognizable” part.

  2. anon
    November 29, 2009 at 8:46 pm #

    The 2007 decision mentioned that counsel for L’Oreal (later replaced with Weil Gotshal) drafted a criminal indictment, which they sent to the US Attorney’s Office in an attempt to leverage a criminal case into a settlement. That strikes me as the type of [jerk]y move that will get your client launched in your case, and in other cases, for more than a few years.

    • November 29, 2009 at 9:09 pm #

      Yes, and that is the subtext of my post. It is true that I think Judge Wexler was right on the law here. But I am also quite confident that L’Oreal can do no right in that courtroom at this point. And that is somewhat troubling — because that’s the point I reached in the other case of my own, but also because even as a legal realist it hurts to watch law being made that way.

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