IP Law Daily, TRADEMARK—D. Or.: Skechers loses pretrial effort to avoid liability, damages over copying adidas’s marks, trade dress, (Aug 9, 2017)

By Cheryl Beise, J.D.

Skecher’s requests for summary judgment limiting liability and damages were denied in a lawsuit filed by adidas against Skechers, which allegedly sold athletic shoes using marks and designs that were confusingly similar to adidas’s registered "Three-Stripe" and SUPERNOVA trademarks and its unregistered "Stan Smith" tennis shoe trade dress, the federal district court in Portland, Oregon, has ruled (adidas America, Inc. v, Skechers USA, Inc., August 3, 2017, Hernandez, M.).

In 2015, adidas filed suit against Skechers, asserting that its footwear products copied adidas’s marks and trade dress. Specifically, adidas alleged that Skechers’ Onix shoe infringed adidas’s unregistered Stan Smith tennis-shoe trade dress; Skechers’s Cross Court shoe infringed adidas’s famous "Three-Stripe" mark; and Skecher’s Supernova shoe infringed adidas’s SUPERNOVA mark. On February 12, 2016, the court preliminarily enjoined Skechers from selling the disputed footwear. Presently before the court were the parties’ cross motions for partial summary judgment as to adidas’s infringement claims, Skechers’s affirmative defenses, and several remedy-related issues.

Stan Smith trade dress. To prove trade dress infringement under Section 43(a) of the Lanham Act, a plaintiff had to establish: (1) distinctiveness; (2) nonfunctionality; and (3) likelihood of confusion. Skechers sought summary judgment on adidas’s infringement claims against Skechers’s Onix shoes because the Stan Smith trade dress was unprotectable because it was either overbroad and generic or nondistinctive and without secondary meaning. adidas moved for summary judgment on Skechers’ functionality defense. The court ruled in favor of adidas on each issue.

The court rejected the notion that adidas’s claimed Stan Smith trade dress was generic or indefinite. For example, the claimed element "classic tennis-shoe profile with a sleek white leather upper" was distinguishable because it described shape, color, and material. In any case, considering the combination of the trade dress elements as a whole, Skechers failed to establish that the Stan Smith trade dress was generic. Skechers also pointed to third-party shoes with the Stan Smith trade dress elements, but adidas’s evidence showed that the very low volume of sales for those shoes was insufficient to show genericness.

The question regarding whether the Stan Smith trade dress had acquired secondary meaning presented a factual question that the court chose not to resolve on summary judgment. The court agreed that adidas’s lack of consumer survey evidence cut against secondary meaning, but found that adidas’s circumstantial evidence was very strong, and certainly strong enough to defeat Skechers’s summary judgment motion.

The court granted summary judgment to adidas on Skechers’s functionality defense. "Skechers’s critical failure is its inability to articulate how the trade dress—as a whole—is functional," the court said. Skechers’s evidence, including two patents covering a couple of particular elements, was insufficient to raise a genuine factual dispute as to the functionality of the trade dress as a whole.

Three-stripe mark. Skechers argued that adidas could not establish a likelihood of confusion or a likelihood of dilution by blurring because the parties’ shoes were not similar enough for the public to create confusion or false association. Skechers did not contest the fame of adidas’s three-stripe mark. However, infringement and dilution both required a fact-intensive analysis of multiple factors. As to both claims, the court found that, while the lack of actual confusion and Skechers’s survey evidence favored Skechers, several factors, including evidence of Skechers’s intentional copying in view of the parties’ prior litigation regarding the three-stripe mark, favored adidas, and there were genuine factual disputes as to other factors.

Fair use. Adidas sought summary judgment on Skechers’s affirmative defense that the Supernova mark was descriptive fair use. As in its previous order, the court rejected Skechers’ argument that it used "Supernova" descriptively rather than as the name of its shoe. While Skechers did raise a factual dispute as to whether it had acted in bad faith, that was not enough to avoid summary judgement because Skechers failed to raise a genuine factual dispute that the term was used to describe the goods rather than as a trademark.

Profits award. adidas moved for summary judgment that Skechers’ profit-reduction theories were inapplicable to this case. Adidas argued that Skechers could not deduct overhead costs (general selling and distribution expenses and income taxes) that it did not actually incur with regard to the infringing shoes. adidas argued that Skechers could not measure disgorged profits by looking at the royalty rate that adidas would have received for the use of its marks, or based on the results of Skechers’ likelihood of confusion surveys. The parties agreed that Skechers had earned $8.3 million in net sales, and that Skechers had incurred $4.6 million in costs, putting its total profit at $3.7 million, but Skechers sought to deduct another $1.7 million in additional "selling" and "general and administrative" costs, as well as income tax expense. Skechers bore the burden of proving that its deductible costs related to the production, distribution, or sale of the infringing goods.

The court determined that Skechers could reduce its profits by overhead costs that actually contributed to the sale, production, and distribution of the disputed footwear, the amount of which was an issue for the trier of fact. The court reserved ruling on whether Skechers could deduct income tax expenses from its gross profits until liability was determined. There was legal support for Skechers’ argument that the applicability of an income tax deduction turned on whether a defendant’s infringement was found to be willful and whether Skechers could prove mitigating circumstances.

The court held that Skechers could not reduce its profits by using a royalty-rate theory or based on its "likelihood of confusion" survey results. Under the Lanham Act, a prevailing plaintiff was entitled to both "defendant’s profits" and "any damages sustained by the plaintiff." 15 U.S.C. §1117(a). The court agreed with adidas that Skechers’ likelihood of confusion surveys, which showed rates of confusion as to the disputed products, were relevant to the issue of liability but could not be used to reduce damages.

Royalty rate damages. Lastly, Skechers moved for summary judgment on adidas’s claim for actual damages based on a reasonable royalty rate. In addition to the $3.7 million that adidas sought in profits, it also claimed $515,183 in actual damages based a royalty rate. Skechers contended that royalty damages were entirely speculative, given that the parties had never entered into any trademark licenses. The court disagreed, noting that courts in the Ninth Circuit have permitted royalty rate damages in the absence of prior licensing agreements between the parties, where evidence provided a sufficiently reliable basis from which the courts could calculate those damages.

The case is No. 3:15-cv-01741-HZ.

Attorneys: Charles H. Hooker, III (Kilpatrick Townsend & Stockton, LLP) for Adidas America Inc., Adidas AG, and Adidas International Marketing B.V. Daniel M. Petrocelli (O’Melveny & Myers, LLP) and Kenneth R. Davis, II (Lane Powell, PC) for Skechers USA, Inc.

Companies: Adidas America, Inc.; Skechers USA, Inc.; Adidas AG; Adidas International Marketing B.V

Cases: Trademark OregonNews