Brand Expectations in the Restroom: 4th Circuit Applies Contributory Trademark Infringement Doctrine to Post-Purchase Confusion Case

Brand Expectations in the Restroom: 4th Circuit Applies Contributory Trademark Infringement Doctrine to Post-Purchase Confusion Case

When one approaches the self-serve fountain drink machine at any given fast-food joint, it is usually safe to expect that the liquid beverage sputtering out of the “Coca-Cola®” nozzle would indeed be filling your cup with a Coca-Cola® product. But would one expect the same brand name association to be upheld in the restroom? In a recent Court of Appeals case, the 4th Circuit held that a paper towelling manufacturer was liable for contributory trademark infringement when it actively encouraged its distributors to supply its own brand of towelling into a competitor’s towelling dispenser.

Georgia-Pacific Consumer Products, LP (GP) is the designer/manufacturer of the touchless paper towel dispenser, “enMotion”. GP designed the enMotion dispenser to work exclusively with its non-standard, ten-inch “high-quality, fabric-like feel” paper towelling.  The enMotion dispenser and paper towelling were introduced in 2002, with no other such products existing on the market at the time. The enMotion dispensers have five of GP’s trademarks visible on its surface, but the enMotion paper towelling does not bear any source-identifying marks. GP leases the enMotion dispensers to distributors, who then sublease to hotels, restaurants, etc. for use in restrooms. The leases/subleases contractually oblige the leasees to only use enMotion paper towelling. It was GP’s intention to create a branded-dispenser situation akin to a branded Coca-Cola soda fountain dispenser, which the user would expect the dispenser to only dispense genuine Coca-Cola products.

The von Drehle Corporation (VD) began marketing and selling in 2005 their own ten-inch paper towelling to be used specifically with the enMotion dispensers. VD’s towels are of notably lower quality than GP’s, with a “slick, scratchy feel”. GP brought the lawsuit against VD for contributory trademark infringement and unfair competition.

The lawsuit was brought to a 4th Cir. District Court, which gave summary judgment in favour of GP, which was then affirmed by the 4th Cir. Court of Appeals. Although VD had not physically stuffed the enMotion dispensers with their paper towelling, it was held that VD was liable for contributory trademark infringement as VD intentionally sold its paper towelling to distributors and marketed to customers (i.e. hotels, restaurants, etc.) to use VD towelling as a direct substitute in eMotion dispensers. This ultimately created post-purchase confusion among restroom users as to the source of towelling from enMotion dispensers.

In assessing liability for contributory trademark infringement, the Court of Appeals referred to the Supreme Court decision in Inwood Laboratories, Inc v Ives Laboratories, 456 U.S. 844, 853-54 (1982), which held that “a manufacturer or distributor could be held liable to the owner of a trademark if it intentionally induced a merchant down the chain of distribution to pass off its product as that of the trademark owner’s or if it continued to supply a product which could readily be passed off to a particular merchant whom it knew was mislabelling the product with the trademark owner’s mark”. Applied to VD, the Court of Appeals held that the record contained sufficient evidence to find that VD directly induced trademark infringement and continued to supply its product to distributors knowing that such an infringement was taking place.

The Court’s analysis continued, however, as VD cannot be liable for contributory trademark infringement without first finding a corresponding direct trademark infringement. In a trio of studies accepted by the District Court, it was found that between 70-74% of study participants expected there to be an association of various degrees between the enMotion dispensers and the towelling being dispensed. Between 45 to 47% expected the brand of the towelling to be the same as the dispenser. The Court held that this situation was “no different from a hotel placing a Coca-Cola brand fountain dispenser in its lobby for the complimentary consumption of its patrons, while surreptitiously stocking it with generic cola. There is no question that, in such a case, the hotel is using the Coca-Cola trademark to service its customers (i.e. in commerce) by distributing generic cola in a Coca-Cola brand fountain dispenser.”

In defining the relevant audience for the confusion analysis, the Court rejected the district court’s limitation of the audience to distributors who purchased VD’s towelling and their respective end-user customers. It is established in 4th Circuit case law that the non-purchasing public can also be considered in the confusion assessment if it can be shown that public confusion will adversely affect the plaintiff’s ability to control his reputation among “its labourers, lenders, investors, or other group with whom the plaintiff interacts” (which also includes post-sale confusion).

The Court held that the three studies clearly show that there was a significant amount of actual consumer confusion as to the source of the paper towelling being dispensed. Thus, the likelihood of confusion among restroom visitors was established. It was also held that because of the poorer quality of VD’s paper towelling, there was a risk of injury to the reputation of GP’s trademarks. VD had interfered with GP’s ability to control the quality of its wares, and thus it was likely that the confusion to the restroom users would adversely affect GP’s reputation/goodwill among its “labourers, lenders, investors, or other group with whom the plaintiff interacts”.

The 4th Circuit’s application of contributory trademark infringement liability in this case is a doctrine that has been long-applied in American jurisprudence. The doctrine has had a healthy presence in American courts over the past century and continues to thrive as famous brand owners push for greater legal accountability of ‘middlemen’ who help to facilitate direct trademark infringement. However, such a doctrine is notably missing in the Canadian context. In a recent article co-written by James L. Bikoff, et al. and Keri A.F. Johnston, et al. (“Hauling in the middleman: contributory trade mark infringement in North America", Journal of Intellectual Property Law & Practice, 2010, Vol. 5, No. 5), the authors outline the judicial development of the concept of contributory trademark infringement in America and explain the absence of such a doctrine in Canada.

Bikoff, et al. note that the contributory liability for trademark infringement first appeared in American federal jurisprudence in the 1890s and has developed quickly since then. The doctrine’s application was induced by the futility trademark owners faced when trying to gain legal recourse against individual infringers who are unable to pay for the harm they cause or against infringers that are too numerous or anonymous to be effectively pursued. From an economic standpoint, efficiency “demands that liability be shifted to those in the best position to prevent future infringement, ie those with control over the instrumentalities of infringement”.

Thus, American jurisprudence has evolved to proscribe two requirements for contributory infringement: (1) inducement of direct infringers (i.e. actively encouraging direct infringement) and (2) knowledge of infringement and control over the means of direct infringement. Contributory liability has been applied across various industry sectors and in both “brick-and-mortar” situations (e.g. distributors urging retailers to sell generic goods under brand name) as well as within the more recent Internet realm (e.g. online auction houses permitting sales of counterfeit goods).

In contrast, Johnston, et al. note that the doctrine’s absence in Canada is due to the Trademark Act’s ‘use’ requirement (see s. 19, s.20 ‘Infringement’ or s.22 ‘Depreciation of Goodwill’ of the Trademark Act; see also s.4 for the definition of ‘use’), which make it “virtually impossible to find an intermediary liable for passing off or trade mark infringement”. However, Canadian courts have recognized the concept of ‘secondary’ liability in a negligence tort claim that may be of assistance to brand owners. This avenue of redress is based on the fact that an intermediary has made ”mere errors of judgement that ought to have been foreseen as potentially contributing to the harm of others; it is a question of an intermediary having knowledge, and how that part acted, or failed to act, upon that knowledge”. Thus, this liability can only be applied where the intermediary made errors in judgment in reacting to the knowledge of infringement, which then amount to negligence causing provable damage. The authors conclude that the availability of direct tort liability in Canada can potentially be utilized to effectively help brand owners against intermediaries in Canada.

While the use of a negligence approach in lieu of a trademark infringement doctrine may well be feasible in Canada, the absence of a contributory trademark infringement doctrine in Canadian law seems to be a somewhat peculiar omission. In the copyright realm, authorizing/contributory infringement is a firmly established doctrine that can be traced to s.3 of the Copyright Act, which provides copyright owners the authorization right to their works. The Supreme Court of Canada has held that authorizing infringement will occur when there is a sanctioning and encouraging of the infringing activity with sufficient control over the facilitation of such activity (e.g. see CCH v LSUC, [2004] 1 S.C.R. 339 at para. 38, SOCAN v CAIP, [2004] 2 S.C.R. 427 at para. 127). If this were to be applied in a trademark setting, the active encouragement by VD to its distributors to directly engage in trademark infringement would easily fit the bill of authorizing infringement. Of course, it is also understandable that by opening the law to allow for an authorizing trademark infringement doctrine, it could potentially stifle the operations of third parties or ‘middlemen’ in all industries. But in light of the flood of counterfeit goods and the ease at which they are presented over the Internet these days, it would only seem fair and in line with ‘economic efficiency’ to keep Canada’s intellectual property laws symmetrical. However, whether an authorizing/contributory trademark infringement doctrine will be more effective in aiding brand name control than a negligence liability approach might shape the direction Canadian courts wish to take.