IP Law Daily, TRADEMARK—D.N.H.: Former owner of flea market might be liable for contributory infringement of Coach’s trademarks, copyrights, (Feb 4, 2014)

By Mark Engstrom, J.D.

Luxury handbag designer Coach, Inc. could proceed with trademark and copyright claims against the former owner of a flea market who had rented space to third-party vendors that had sold counterfeit Coach goods, the federal district court in Concord, New Hampshire, has ruled (Coach, Inc. v. Sapatis, January 31, 2014, Barbadoro, P.). Because the former owner continued to exercise control over the flea market and its vendors, his motion for summary judgment was denied as to seven contributory trademark and copyright claims, but granted as to a single unfair competition claim under New Hampshire common law. Summary judgment was granted on all claims against the company that had operated the flea market until its sale in 2008.

Background. Defendant Peter Sapatis owned a large field and adjacent residence in Londonderry, New Hampshire, where he established the Londonderry Flea Market as a sole proprietorship. In 2003, Sapatis formed a limited liability company—Londonderry Marketplace—that operated the flea market until 2008, when Sapatis sold the business to his daughter, Alaina Paul, for $100,000. The contract between Sapatis and Paul specified that Paul would pay $100,000 to Londonderry Marketplace, over a ten-year period, with interest accruing on the outstanding balance. Paul contemporaneously assigned her entire interest in the flea market to TABA Enterprises, a limited liability company that was owned by Paul.

Coach sued Sapatis, Londonderry Marketplace, Alaina Paul, and TABA Enterprises, and sought injunctive relief and damages for violations of federal and state laws that pertained to trademarks, copyrights, and unfair business practices. Sapatis and Londonderry Marketplace moved for summary judgment.

Coach asserted eight claims against Sapatis: (1) contributory trademark counterfeiting; (2) contributory trademark infringement; (3) contributory trade dress infringement; (4) contributory false designation of origin and false advertising; (5) contributory trademark dilution; (6) contributory copyright infringement; (7) state common law trademark infringement; and (8) state common law unfair competition.

Sapatis argued that he was retired and that Morrow, a TABA employee, was primarily responsible for the operation of the flea market. Paul argued that Sapatis never retired. According to Paul, Sapatis continued to assist her and Morrow in the operation of the flea market.

Contributory trademark infringement. In Inwood Laboratories, Inc. v. Ives Laboratories, Inc., 456 U.S. 844 (1982), the U.S. Supreme Court held that a provider of a product that: (1) intentionally induced another to infringe a trademark or (2) continued to supply its product to one whom it knew or had reason to know was engaging in trademark infringement was “contributorially responsible for any harm done as a result of the deceit.”

In this case, Coach did not allege that Sapatis had intentionally induced vendors to infringe its trademarks under the first prong of Inwood. Rather, Coach alleged that Sapatis had violated the second prong of Inwood by continuing to provide his services to vendors that he knew or had reason to know were infringing Coach’s marks.

Although Sapatis’s argument—that the mere ownership of land, without an ownership interest in the flea market, precluded contributory liability—was “not unreasonable at first glance,” case law was abundantly clear: the relevant inquiry was not whether the defendant had owned the venue where trademark infringement had occurred, but whether the defendant had “sufficient control over the individuals” who were directly engaging in infringement. In this case, Coach’s allegations made it exceedingly clear that Sapatis’s activities went “far beyond” mere ownership of land that was leased to a separate entity.

Viewing the evidence in a light that was most favorable to Coach, the court concluded that Sapatis had exercised sufficient control over the flea market and its vendors, during the time period in question, for a reasonable jury to conclude that Sapatis was contributorially liable for the vendors’ conduct. According to the court, Coach’s allegations strongly supported the inference that Sapatis’s contribution to the flea market’s operations had “increased the level of infringement by providing a centralized place … where infringing works could be collected, sorted, found, and bought, sold, or exchanged.”

More specifically, the court concluded that a jury could reasonably believe that Sapatis was, in essence, the flea market in the eyes of: (1) customers, who had received the bulk of their email responses from Sapatis, had their phone calls answered by Sapatis, had witnessed Sapatis patrolling the flea market “all weekend,” and had their arguments with vendors resolved by Sapatis; (2) vendors, who were shown spaces to rent by Sapatis, were informed by Sapatis about flea market policies that had been developed by Sapatis, had maintained longstanding relationships with Sapatis, and had sometimes wrote their rent checks directly to Sapatis; and (3) third parties, such as Coach, who had consistently referred to Sapatis as the flea market’s owner, without ever being corrected by Sapatis or anyone else, until the lawsuit was filed.

In addition, many vital aspects of the flea market’s operations were controlled by Sapatis, including bookkeeping, grounds-keeping, supplies, and financial decision-making. Although Sapatis claimed to have received no direct income from the flea market or its vendors, that representation “seriously misrepresent[ed]” the fact that Sapatis had personally drawn rent payments directly from customer admission fees and vendor rent payments—on his own schedule and without Paul’s involvement. Even if Paul and TABA “technically” owned the flea market and contracted with its vendors, a reasonable jury could conclude that Sapatis had exercised the requisite control over the flea market’s vendors, including those who had infringed Coach’s trademarks.

In light of those facts and findings, the court denied summary judgment to Sapatis on Coach’s claims for contributory trademark counterfeiting and contributory trademark infringement.

Contributory trade dress infringement; contributory false designation of origin and false advertising; and contributory trademark dilution. Neither the Supreme Court nor the First Circuit had discussed contributory trade dress infringement, but several “influential courts” had recognized it as a cause of action. The same was true for contributory false designation of origin and false advertising. As for contributory trademark dilution, the District of New Hampshire had previously recognized that cause of action, and another district court had explained that the claim required a showing that the defendant had “either encouraged others to dilute or, as in Inwood Laboratories, continued to supply their product [or service] to one whom it knows or has reason to know is engaging in trademark infringement.”

Because the parties proceeded as if all three causes of action existed in the First Circuit, and each essentially incorporated the “knows or has reason to know” standard from Inwood, the court assumed, without deciding, that the parties were correct in their beliefs.

Because Sapatis had moved for summary judgment on the sole ground that he could not satisfy the Inwood standard because he had not exercised sufficient control over the flea market, the court denied his motion with respect to contributory trade dress infringement; contributory false designation of origin and false advertising; and contributory trademark dilution.

Contributory copyright infringement. The court noted that the First Circuit had never directly addressed contributory copyright infringement. One analogous case concerning contributory copyright infringement in the context of a flea market reached the Ninth Circuit, however, and that court had applied a “material contribution to the infringing activity” standard to hold that the plaintiff had stated a claim against a flea market owner for contributory copyright infringement. In fact, the Ninth Circuit relied on “essentially the same facts as it did in the contributory trademark infringement context.”

Ultimately, liability for contributory trademark infringement was more narrowly circumscribed than contributory copyright infringement. Therefore, if a reasonable jury could find that Sapatis’s actions had satisfied the Inwood standard for contributory trademark infringement, it could similarly find that his actions satisfied the less stringent “material contribution” standard for contributory copyright infringement. For that reason, the court denied summary judgment to Sapatis on Coach’s claim for contributory copyright infringement.

Common law contributory trademark infringement. Although case law was scant, the New Hampshire Supreme Court “appear[ed] to rely primarily on federal law” when state trademark claims arose. The court in this case thus saw “see no reason why the New Hampshire Supreme Court would not recognize the common law tort of contributory trademark infringement in line with the Inwood standard.” The court thus assumed, without deciding, that a cause of action for contributory trademark infringement existed under state law. Sapatis’s motion for summary judgment was therefore denied, for reasons already discussed, on Coach’s claim for common law contributory trademark infringement.

Common law unfair competition. The court assumed, without deciding, that New Hampshire would recognize a viable claim for unfair competition if someone had engaged in conduct that deceived the general buying public. In this case, however, Coach failed to identify a material representation that likely deceived or misled a potential customer.

Coach noted Sapatis’s “interface with vendors and customers on behalf of the Flea Market, his marketing of its commercial activities, and his supervision [of] the vendors who sold the Infringing Products.” Although those activities probably gave customers, vendors, and Coach representatives the “false impression” that Sapatis “continued to own the Flea Market beyond 2008,” Sapatis’s “representations” were immaterial, for the purpose of an unfair competition claim, because the evidence did not indicate that those representations “affect[ed] the conduct of prospective purchasers” or were “likely to cause a diversion of trade from [Coach] or harm to [its] reputation or good will.” In all likelihood, customers would have behaved exactly the same way, and Coach would have suffered exactly the same harm, even if customers had no doubt that Paul and TABA were the Flea Market’s proprietors, according to the court.

The sale of counterfeit products may have created an inference of consumer confusion,” the court acknowledged, but that fact would only support an unfair competition claim against the infringing vendors. As for Sapatis, nothing in the record indicated that he had ever made a representation that “[d]eceived consumers and the public into believing that Infringing Products [we]re genuine or authorized by Coach.” Summary judgment was therefore granted to Sapatis on Coach’s claim for common law unfair competition.

Claims against Londonderry Marketplace. Coach asserted the same claims against Londonderry Marketplace as it asserted against Sapatis. Londonderry Marketplace argued that it could not be held liable for any unlawful activity that may have occurred in 2011 and 2012 because it had “nothing to do with the flea market after November 2008.”

According to the court, the record did not mention Londonderry Marketplace after 2008, except for a brief discussion of its winding down and administrative dissolution. Coach failed to identify specific evidence that indicated that Sapatis had purported to act on behalf of Londonderry Marketplace, in his dealings with the flea market, at any point after 2008. Indeed, Coach conceded that Sapatis’s “unambiguous representations” in his affidavit “strongly suggest[ed] that [his] infringing activities, at least since some point in 2009, were entirely undertaken on his own, individual behalf and not as a representative of [Londonderry Marketplace].” Because Coach failed to proffer any evidence that linked Londonderry Marketplace to the unlawful activity that allegedly had occurred at the flea market, the court granted summary judgment to Londonderry Marketplace on all eight claims.

The case is Civil No. 12-cv-506-PB.

Attorneys: Erica Mecler Caron (Adler, Pollock & Sheehan) for Coach, Inc., and Coach Services, Inc. Gary M. Burt (Primmer, Piper, Eggleston & Cramer, PC) for Peter J. Sapatis.

Companies: Coach, Inc.; Londonderry Marketplace, LLC; TABA Enterprises, LLC

Cases: Trademark Copyright NewHampshireNews