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Tiffany vs. Costco: Jury Awards Tiffany Substantial Damages for Costco’s Sale of Counterfeit Diamond Rings

Emily Miao, Ph.D.Fall 2016 (snippets)

In a highly publicized decision of over a year ago,[1] Judge Swain of the U.S. District Court of the Southern District of New York ruled in favor of the luxury retailer Tiffany and Co., deciding that Costco Wholesale Corp., the largest U.S. warehouse club chain, willfully infringed Tiffany’s trademark. According to the court, Costco sold counterfeit diamond engagement rings bearing the Tiffany name and confused consumers by using the word “Tiffany” in display case signage. The court rejected Costco’s fair use defense and assertion that “Tiffany” is a generic description of a type of ring setting. Judge Swain’s initial ruling against Costco allowed Tiffany to take Costco before a jury to seek damages, including recovery of Costco’s profits from the sale of the diamond rings, statutory damages, and punitive damages.

After several delays, the jury finally met at the end of September for “Phase I” of the trial during which they decided (1) the amount of Costco’s profits and statutory damages under the Federal Lanham Act, and (2) whether Tiffany was entitled to punitive damages under New York General Business Law § 349 and New York Common Law. “Phase II” was triggered when the jury found Costco liable for punitive damages. In their Phase I verdict, the jury determined that Costco profited by $3.7 million from the infringing sales, but decided that this amount was inadequate to compensate Tiffany, and added an additional $1.8 million bringing the total award for profits to $5.5 million.[2] The jury also awarded $2 million for statutory damages.[3] The jury further decided that Tiffany was entitled to punitive damages, and in the “Phase II” verdict awarded Tiffany an additional $8.25 million in punitive damages.[4]

Analysis of Costco’s Profits

Tiffany had originally sought an accounting of profits based on the sale of both “non-subject goods” (e.g., Costco memberships and goods other than diamond rings) and “subject goods” (e.g., diamond rings). Under Second Circuit law, in calculating “defendant’s profits,” a court is to base its analysis on “infringing sales,” or on sales that can in some way be tied to the Lanham Act violation alleged.[5] The court held that Tiffany presented no evidence tying the “non-subject goods” to Costco’s alleged infringement of the Tiffany mark, and therefore granted Costco’s motion to strike the demand for an accounting on non-subject goods. Regarding the “subject goods,” however, the court held that Costco did not act in good faith and therefore Tiffany would be allowed to seek an accounting for profits from the sale of subject goods.[6] The court’s decision paved way for the jury to decide, in a damages phase of the trial, whether or not Tiffany was entitled to damages for Costco’s unlawful use of Tiffany’s mark.

During the damages trial, Tiffany argued that it was entitled to millions in damages from profits realized by Costco, while Costco asserted that the amount based on actual sales would be no more than $382,000.[7] The Jury disagreed with Costco, and awarded Tiffany $5.5 million based on Costco’s profits.

Analysis of Statutory Damages

In addition to awarding Costco’s profits, the jury awarded Tiffany statutory damages in the amount of $2 million. The Federal Lanham Act states that when a counterfeit mark is used, up to $2 million may be awarded for a willful violation, the exact amount depending on what the court considers just.[8] In Judge Swain’s initial ruling, the court held that, as a matter of law, Costco used a counterfeit mark, and that Tiffany had satisfied the willfulness requirement.[9] The jury was then instructed to consider factors such as Costco’s profits reaped, Tiffany’s lost revenue, the value of the mark, the deterrent effect on others, and whether Costco’s conduct was innocent or willful, among others.[10] As a result, the jury in “Phase I” of the damages trial determined that the maximum $2 million in statutory damages was justified.

Analysis of Punitive Damages

Tiffany originally sought punitive damages based on Costco’s alleged infringement under both Federal and State law. Under Federal law, the court held that the Lanham Act prevents the collection of punitive damages.[11] Under State law, however, the court noted that New York General Business Law § 349 and New York Common Law allow punitive damages, albeit with an exceptionally high bar.[12] Under these laws, “punitive damages are available where a defendant’s conduct has constituted gross, wanton or willful fraud or other morally culpable conduct to an extreme degree.”[13] In the court’s opinion, evidence in Tiffany’s favor in this respect included emails sent from Costco jewelry buyers asking vendors to copy Tiffany designs, and testimony indicating that Costco employees were aware of customer confusion but did nothing to remedy it.[14]

The jury ultimately agreed with Tiffany, and in “Phase II” of the damages trial, decided to award Tiffany $8.25 million in punitive damages.

Conclusion

After the initial ruling, Judge Swain set a pre-trial conference for November 3, 2015, and directed Tiffany and Costco to “make good faith efforts to settle the outstanding issues.” But since no settlement between the contentious parties occurred, the damages phase of the trial proceeded and the jury handed a sweeping victory to Tiffany with a total award of nearly $16 million in damages.

Tiffany has been involved for many years in lawsuits regarding its intellectual property. A recent search of the public court records database PACER returned 28 lawsuits since 1991 involving Tiffany copyrights, patents, and trademarks. While the award of nearly $16 million against Costco is one of Tiffany’s largest awards, Tiffany previously won a default judgment in the amount of $26.5 million against numerous defendants for infringement of Tiffany trademarks and for using infringing internet domain names. Many of Tiffany’s other lawsuits have ended in settlement or relatively minor damages awards.

Costco is also no stranger to lawsuits regarding intellectual property issues, both as a plaintiff and (more often) as a defendant. A recent search of PACER returned 190 lawsuits over intellectual property issues since 1991, comprising 47 trademark suits of which Costco was a defendant in 36 cases; 119 patent suits of which Costco was a defendant in 102 cases; and 24 copyright suits of which Costco was a defendant in 22 cases.

Tiffany has a history of policing its trademarks,[15] in particular with respect to certain goods such as its jewelry,[16] its well-known blue gift boxes, cufflinks, and money clips.[17] But Tiffany has not policed its marks with respect to engagement rings until now. Because the facts in this case were straightforward and favorable to Tiffany, it is not surprising that Tiffany won. Had Tiffany lost, there would have been inherent confusion around the use of the TIFFANY mark as applied to diamond rings and ring settings. Such a result would have been contrary to one of the purposes of trademark protection, which is to avoid consumer confusion.[18]

With the conclusion of the damages trial and assuming that Judge Swain accepts the jury’s findings, it is likely that Costco will file an appeal against Judge Swain’s ruling as well as the damages award. Stay tuned for further developments.



[1] Tiffany and Co. v. Costco Wholesale Corp., 127 F. Supp. 3d 241 (S.D.N.Y. 2015).

[2] Verdict Form at 1, Tiffany and Co. v. Costco Wholesale Corp., (No. 13CV1041-LTS-DCF) (S.D.N.Y. Sept. 29, 2016).

[3] Id. at 2.

[4] Verdict Form – Phase 2 at 1, Tiffany and Co. v. Costco Wholesale Corp., (No. 13CV1041-LTS-DCF) (S.D.N.Y. Oct. 5, 2016).

[5] Tiffany and Co., 127 F. Supp. 3d at 259 (citing Am. Honda Motor Co. v. Two Wheel Corp., 918 F.2d 1060, 1063-64 (2d Cir. 1990)).

[6] Id. at 261.

[7] Pete Brush,Tiffany’s Damages Case a Publicity Stunt, Costco Tells Jury, Law360 (Sept. 28, 2016), http://www.law360.com/articles/845762/tiffany-s-damages-case-a-publicity-stunt-costco-tells-jury.

[8] 15 U.S.C. § 1117(c)(2) (2012).

[9] Tiffany and Co., 127 F. Supp. 3d at 255.

[10] Memorandum to Counsel at 24-25, Tiffany and Co. v. Costco Wholesale Corp., No. 13CV1041-LTS-DCF (S.D.N.Y. Sept. 27, 2016).

[11] Tiffany and Co., 127 F. Supp. 3d at 261.

[12] Id.

[13] Id. (citing Altadis U.S.A., Inc. v. Monte Cristi de Tabacos, c.x.a., No. 96CV4209-BSJ, 2001 U.S. Dist. LEXIS 6892 (S.D.N.Y. May 17, 2001)).

[14] Tiffany and Co., 127 F. Supp. 3d at 262.

[15] For example, in 2006 Tiffany had an employee dedicated to monitoring listings on the eBay website for counterfeits and to reporting any violations to eBay on a daily basis. See Tiffany (NJ) Inc. v. eBay, Inc., 576 F. Supp. 2d 463, 484 (S.D.N.Y. 2008) aff’d in part, rev’d in part sub nom. See also Complaint at ¶ 17 (describing other brand protection strategies).

[16] See Tiffany (NJ) Inc. v. Luban, 282 F. Supp. 2d 123, 124 (S.D.N.Y. 2003) (finding the operator of a website that sold counterfeit Tiffany jewelry liable for willful infringement).

[17] See Tiffany (NJ), LLC v. 925LY.Com, No. 2:11-CV-00590-LDG-GWF, 2011 WL 2118634 (D. Nev. May 25, 2011) (issuing a preliminary injunction in favor of Tiffany).

[18] See Two Pesos, Inc. v. Taco Cabana, Inc., 505 U.S. 763, 774 (1992).

 

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