IP Law Daily, TRADEMARK—5th Cir.: Infringement of refurbished Rolex watches affirmed, but laches defense prohibited disgorgement of profits, (Jan 29, 2024)

By Linda Panszczyk, J.D.

The Fifth Circuit also added non-genuine bezels to the district court’s injunction to make it consistent with the district court’s other findings.

In a trademark infringement case involving refurbished Rolex watches, the U.S. Court of Appeals for the Fifth Circuit affirmed the district court’s judgment insofar as it concluded that BeckerTime, the refurbisher, infringed Rolex’s trademarks, that the laches defense prevented disgorgement of BeckerTime’s profits, and that Rolex was not entitled to treble profits or attorney fees. As for the injunction, the Fifth Circuit agreed with Rolex that the district court should have enjoined the sale of Rolex watches with non-genuine bezels, thus affirming, as modified, the district court’s injunction in part (Rolex Watch USA, Inc. v. Beckertime, LLC, January 26, 2024, Douglas, D.).

Background. This is a trademark infringement dispute involving allegations of counterfeit sales and infringing use of Rolex’s marks by BeckerTime. Rolex is a luxury watch seller with a legally protectable interest in numerous trademarks. BeckerTime sells primarily decades-old preowned watches containing Rolex branded parts. The at-issue watches sold by BeckerTime in this case were identified as “Genuine Rolex,” but contained both Rolex and non-Rolex parts. The watches specifically considered by the district court contained additional diamonds, which were added “as hour markers to the refinished dials by drilling holes in the dials and placing aftermarket diamonds or other stones and settings in the holes.” To refinish dials, BeckerTime “strips the dial down to bare metal, then, after the refurbishing process is complete, reapplies Rolex’s trademarks.” These “modifications” were not performed or authorized by Rolex.

BeckerTime listed the retail prices of their modified watches with comparison prices to new Rolex watches, but for the watches considered, the district court found that “Rolex has never sold a watch matching the description” provided by BeckerTime. The at-issue watches contained at least one Rolex trademark and “aftermarket bezels (not made or endorsed by Rolex) . . . including bezels with added diamonds.” BeckerTime further applied “aftermarket bands or straps (not made or endorsed by Rolex)” that “sometimes include a genuine Rolex clasp or buckle displaying Rolex’s trademarks.” The parts BeckerTime added to the at-issue watches “do not bear any markings indicating BeckerTime is the source.” Further, the district court found that the parts replaced, such as the bezel, dials, and bracelets, “are integral and necessary to the at-issue watches.”

In September 2020, Rolex sued BeckerTime alleging counterfeit and infringing use of Rolex’s trademark in connection with the advertising, promotion, service, and sale of watches and individual watch parts that were not authorized or sponsored by Rolex and were not genuine products of Rolex. Rolex sought to enjoin BeckerTime from infringing its trademark and to force it to disgorge its profits related to infringement.

After a bench trial, the district court determined that BeckerTime infringed Rolex’s trademark but refused to disgorge BeckerTime of its profits after finding that the laches defense applied. It then enjoined BeckerTime from further infringement, subject to various exceptions. The parties cross-appealed, with Rolex seeking a modification to the injunction, treble profits, and attorney fees, and BeckerTime seeking the application of an alternative test to determine infringement.

Trademark infringement. The appellate court concluded that the district court applied the correct legal framework to determine that BeckerTime infringed on Rolex’s trademarks, rejecting BeckerTime's argument that a modified test for infringement involving “decades’ old” products arises from the Supreme Court’s decision in Champion Spark Plug Co. v. Sanders, 331 U.S. 125 (1947), where the Supreme Court carved out an exception that, in the context of a refurbished good, it would be a misnomer to call the article by its original name, even though the words "used" or "repaired" were added. In Champion, the misnomer exception did not apply because it involved no more than a restoration of their original condition, not a new design.

The district court did not address Champion. It instead relied on the traditional likelihood of confusion analysis whereby, to recover on a claim of trademark infringement, a plaintiff must first show that the mark is legally protectable and must then establish infringement by showing a likelihood of confusion. Here, the district court first determined that Rolex’s marks were registered and incontestable and then determined that Rolex had shown that BeckerTime’s use of the mark created a likelihood of confusion in the minds of consumers.

Here, the Fifth Circuit declined to consider additional factors requested by BeckerTime because there was no need in this case. Although the district court did not expressly cite Champion, the appellate court's review of the record indicated it properly considered and applied Champion. In this case, BeckerTime did more than recondition or repair vintage Rolex watches. As the district court found, BeckerTime produced “modified watches,” with “added diamonds,” “aftermarket bezels,” and aftermarket bracelets or straps. It found that the watches sold by BeckerTime were “materially different than those sold by Rolex.” In fact, the district court found that Rolex has never sold watches matching the descriptions provided by BeckerTime. Unlike the plugs in Champion that were nevertheless Champion plugs and not those of another make, BeckerTime’s watches were of another make and cannot properly be called genuine Rolex watches. In fact, throughout its brief, BeckerTime described this process as “customization,” not restoration, the Fifth Circuit noted. Accordingly, Champion’s misnomer exception properly applied to the facts of this case and the district court did not err by conducting a traditional digits of confusion analysis.

In applying the correct test, the district court concluded that “the digits of confusion point towards a likelihood of confusion and therefore infringement.” The district court found that customers had “inquired as to the authenticity,” stating “they are confused as to whether the watch is fully genuine Rolex.” The district court also found that BeckerTime “ha[d] received complaints about the quality of the watches and complaints that the watch was not actually composed of exclusively genuine Rolex parts.” Although BeckerTime included many disclaimers, the district court found these were insufficient because subsequent potential purchasers might not have access to those disclaimers, and because the disclosures could mislead purchasers into thinking there is a comparable genuine Rolex watch, when in fact, there was not always one.

Application of laches defense precluding disgorgement of profits. As to the district court's application of the laches defense precluding disgorgement of BeckerTime’s profits, the Fifth Circuit pointed out that the district court found that there was “insufficient evidence to show [BeckerTime] had unclean hands” and that “Rolex failed to show [the] subjective and knowing bad faith necessary to foreclose [BeckerTime’s] equitable defenses.” This finding considered the “inherent” aspect of reselling luxury goods—that sellers wish to benefit from the reputation and goodwill of the brand name. But it rejected that this alone was sufficient to show unclean hands. The record supported the district court’s conclusion, as the emails between BeckerTime and its customers showed, it went to great lengths to clarify which parts were original Rolex, which were customized or modified, and which were aftermarket. This supported the district court’s conclusion that BeckerTime did not intentionally infringe Rolex’s mark and thus was not precluded from raising this equitable defense.

The district court concluded that, at a minimum, Rolex’s agent “should have known about BeckerTime in 2010, ten years prior to the filing of the lawsuit, and no later than 2013 when [a Rolex employee] wrote that BeckerTime watches were junk.” It further found that “Rolex offer[ed] no valid justification for this delay.” It determined that “BeckerTime likely would not have shifted its business model to be reliant on the sale of altered Rolex watches if Rolex had brought this suit promptly. BeckerTime relied on Rolex’s cooperation in building this valuable business, and Rolex assisted BeckerTime with the importation of watches for repair or return.” Accordingly, the district court determined that Rolex may not disgorge BeckerTime of its profits. The district court's conclusion was not an abuse of discretion, said the appellate court.

On appeal, Rolex offered no justification for the delay, instead arguing that BeckerTime failed to show prejudice. But the record supported that the ten years of permitted sales enabled BeckerTime to build up a successful business that it would not otherwise have invested in absent Rolex’s delay in filing suit. This was clear prejudice. Accordingly, the district court correctly decided that BeckerTime not be disgorged of profits resulting from Rolex’s delay in filing suit.

Award of treble profits and attorney fees. As to the district court’s decision not to award treble profits and attorney fees, the appellate court rejected Rolex's claims that the district court erred in not awarding treble profits and attorney fees under the Lanham Act. Here, the record supported the district court’s denial of profits to Rolex pursuant to §1117(a) of the Lanham Act because it properly found that the laches defense applied and refused to disgorge BeckerTime of its profits. Further, the Fifth Circuit was satisfied that the injunction properly addresses the equities of the case.

According to the Fifth Circuit, when counterfeit marks are involved, as appeared to be the case here, § 1117(b) of the Lanham Act applies. Under this subsection, when a defendant knowingly and intentionally uses the mark or designation of another, a plaintiff seeking a remedy under § 1117(a) is entitled to three times the defendant’s profits plus reasonable attorney fees in every case, except where there are “extenuating circumstances.” Here, there was no dispute that Rolex failed to move for attorney fees with the district court within the requisite time period and it cited no authority to excuse that failure. Accordingly, the district court did not err in opting not to award treble profits and attorney fees.

Proper scope of the injunction. As for the proper scope of the injunction, Rolex argued that the district court erred by not enjoining BeckerTime from using non-genuine bezels and non-genuine dials on Rolex-branded watches. The Fifth Circuit agreed with Rolex that the district court should have enjoined the sale of Rolex watches with non-genuine bezels. The district court specifically found that “advertisements labeling watches with a non-genuine bezel as a Rolex is likely to confuse customers” and that, like dials and bracelets, bezels “are integral and necessary to the at-issue watches.”

The district court prohibited BeckerTime from displaying the “GENUINE ROLEX” trademark “in any disclosures in connection with goods or services of watches that include: non-genuine (i.e. not made by Rolex) bezels.” Yet by excluding non-genuine bezels from parts 1(a) and (b) of its injunction, the district court treated “integral and necessary” watch parts inconsistently, authorized BeckerTime to sell what it believed would likely cause confusion if advertised, and permitted BeckerTime to use Rolex trademarks on watches with non-genuine bezels, but prohibited the same action if it used the GENUINE ROLEX trademark in a disclosure.

According to the Fifth Circuit, these two orders were difficult to reconcile and so it granted Rolex’s requested relief and added non-genuine bezels to the district court’s injunction to make it consistent with the district court’s other findings and to treat all “integral and necessary” watch parts the same.

However, the Fifth Circuit rejected Rolex’s argument that the district court erred by excluding all non-genuine dials from the injunction. First, under Champion, there was a difference between adding diamonds to a dial and refinishing a dial—the former was customization, the latter restoration. With the right disclosures, as required by the injunction, BeckerTime is free to customize watches for customers upon request. Second, the district court’s order was supported by the fact that BeckerTime’s refinishing process necessarily required removing and reapplying Rolex’s trademarks. The district court here appropriately enjoined BeckerTime from doing what it was doing, not what it could do.

Further, the Fifth Circuit rejected Rolex’s argument that the district court erred in requiring that BeckerTime inscribe “CUSTOMIZED BY BECKERTIME” on the back of the watches, claiming it should not permit them to continue selling “counterfeit” watches at all. But the district court here specifically found that the disclosures BeckerTime made did not “fully alleviate confusion,” and it was reasonable that the district court required an additional disclosure to adequately alleviate any remaining confusion. The appellate court also rejected Rolex’s argument that the district court improperly permitted BeckerTime to sell counterfeit watches upon customer request. The district court reasonably found that, with the required disclosures, no customer requesting a customized watch by BeckerTime would confuse it with a genuine Rolex watch.

The Case is No. 22-10866.

Attorneys: Craig Steven Summers (Knobbe, Martens, Olson Bear, L.L.P.) and Tyler Enright Baker (Sheppard Mullin Richter Hampton, L.L.P.) for Rolex Watch USA, Inc. Michael Beylkin (Zansberg Beylkin, L.L.C.) and Andy Nikolopoulos (Fox Rothschild, L.L.P.) for Beckertime, L.L.C. and Matthew Becker.

Companies: Rolex Watch USA, Inc.; Beckertime, L.L.C.

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