Trademark Infringement: Case “Adidas and Payless Shoessources” and “the 3M Company and Hua Wei Advanced Materials”

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Introduction:

It is crucial for the business to protect its trademark in order to avoid loss, damage, and confusing customers’ minds, which negatively influences directly to the firm reputation and firm image, and value. Trademark is a significant domain name, logos, symbols, phrases, product design, or product packages (trade dress), which is identified to the owner, is recognized by the customers, is distinguished among competitors, and only the owner has the exclusive right to use and trade on the market. Trademark infringement is formed when unauthorized use of another party’s trademark or service marks in the connection of its product or services that causes confusion, mistake, or deception of product or services. This report will choose two specific cases regarding trademark infringement, analyze and discuss the damages as well as offer opinions to the decision of the jury to the case. In addition, the issue which emerges in two cases will be demonstrated and some solutions will be offered in order to address the problem.

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Case 1: Adidas vs Payless ShoeSource

Case summary:

This case reveals one of the most well-known intellectual property disputes in the United States, where the prosecutor Adidas America Inc sued the defendant Payless ShoeSource Inc for violating, illegally used, and modified Adidas’ all-time signature three-stripe mark in their products. Payless was found wilfully and liable for this trade for the assumption of its liability, because of keep selling the infringed shoes after they signed the commitment with Adidas in terms of ‘agreeing to stop to sell shoes regarding trademark dispute with Adidas in 1994’. Payless was accused liable for “trademark and trade dress infringement, dilution, unfair competition and misleading the market by arising out of the selling of those shoes which infringed three-stripe mark of Adidas America Inc. This infringement was believed to result in economic and branding damages for Adidas in terms of lost profit and lost business value. Originally, the jury awarded Adidas $30.6 million in actual damages, $137 million for lost profits, and $137 million in punitive damages. However, the court found the jury’s verdict in lost profits was too extreme and subjects to Adidas’s expertise, not industrial compliance. When examined with the same method, the figure only comes close to $19 million. As that appeared to be punitive rather than compensatory, hence, it violated the Lanham Act. Consequently, the mitigation was considered by the court and the lost damages were $19.7 million.

There are factors that contribute to the final decision of the court, which are:

  • Payless did act wilfully in disregard of Adidas’s trademark and trade dress rights and other determined proximate causes.
  • Adidas lacks proof for actual damages in lost sales or becomes financial vulnerability because of the infringement in the 267 lots of Payless’s shoes which accused infringed Adidas’s marks.

Additionally, the plaintiff can not win the legal argument with the customer behaviour analysis because of it is illegitimate and unreliable, and can not prove the real impact on branding and reputation, and the jury’s decisions. Hence, Adidas was face difficulty to provide evidence of the lost profits. However, the final monetary compensation for Adidas is reduced to $65 million instead of $305 million by the District Court after considering properly the right of the two parties.

Case analysis:

According to the International trademark association, the monetary award of trademark violation should be demonstrated by the actual damages that effect directly to the plaintiff’s business activities, which influence sales volume and trigger the negative effects on the firm. It is also cited that, usually the trademark law inclines to stop the infringement behavior rather than recovering by a monetary award. In this case, even the court reduced more than seventy-five percent of the award, it is still received much attention in the US trademark infringement because the business can obtain significant potential monetary compensation. Hence, trademark infringement seems to attract an easy compensation award for the plaintiff, therefore Adidas took advantage to maximize its full power of brand protection, Payless was not the only one who got into these complications. Those companies that involve the trademark lawsuit with Adidas include Nike, Sketcher, Abercrombie & Fitch, Forever21, and many others.

However, a trademark represents the brand’s reputation, identification, and distinctive recognition from competitors, and thus it is crucial to protect and against any elements that negatively influence on the brand image. As a result, Adidas’ action is understandable because of its business’ value protection. In the current market, products align with cost-consciousness, and value for money takes place and grows. Retailers like Payless ShoeSource started selling athletic shoes with a similar design which is just a perfect choice. These similarities resemble ‘pleasant confusions’ which aim to provide consumers with more affordable but still up to scratch with top-notch stylings. Unfortunately, as a trademark represents intrinsic characteristics for distinguishing a particular product amongst others, this act instantly becomes an infringement. The three-Stripe mark is strong even though it’s not inherently distinctive; it’s not a generic mark or a descriptive mark that also carries its distinctiveness through its secondary meaning. It represents and reminds consumers of the one exclusive brand, Adidas is entitled to protection. Adidas made its history through 50-year with the proud ‘three-stripe’ famous logo and Superstar Trade Dress for all outstanding and world top athletic achievements. Therefore, when a lower-quality product brand such as Payless Shoes uses parts of its famous logo, it’s immediately perceived as an intention to dilute brand image for consumers which causes damage to Adidas’ reputation. Payless’ argument regarding the mathematic component of the design (i.e. 2 & 4 does not equal to 3) did not save them from being liable for infringement by merging and modifying the only numbers but keep identical, parallel stripe design to Adidas’ “Three-Stripes Mark”. This has a huge impact on the overall appearance of the mark to almost identical designs between both brands from the first view or at least confusingly similar.

Lost profit:

In this case, the strips caused confusion to consumers’ minds, and thus, this triggered the lost profit to Adidas. However, Adidas has no evidence of its sale losing or lost profit during the trademark infringement by Payless. Even though Adidas marketing professionals testified that Payless infringement shoes damaged Adidas brand distinctiveness, customers’ positive association, perceived quality, and consumers’ loyalty, Adidas lost the ability to prove its damages. According to the principles of damages by Todorovic v Waller 150 CLR 402 at 412 Gibbs CJ and Wilson J, ‘The plaintiff is free to do what he or she wishes with the sum awarded; the court is not concerned to see how it is applied’. As a result, Adidas aggressively calculates the damages up to $305 million while do not have any evidence of lost sale. However, in this case, the court deducted the awards to $65 million based on the types of damages theoretically –lost profit rather than based on the lost sale. Lost profits is one of the types of economic damages, which is caused by the disruption of the business by the negative effects of those factors including trademark violation, patent infringement, and breach of the contract. The lost profit is calculated based on the length of the loss period, projecting lost revenue, measuring profitability, time value of money considerations, and mitigation and offsetting profits. Moreover, it depends on the specific facts and situation of the case. Assume that Adida uses the ‘but-for’ method to calculate their damages during the wrongful of Payless, then was it reasonable for the lost profit that Adidas actually suffered? The ‘but-for’ method is usually used to estimate the performance of the business without the occurrence of the incident. As mentioned before, Adidas has no evidence to improve the lost profits or poor performances during the trademark infringement, thus, the amount of the award was exaggerated and illogical. In addition, the statistic shows that the net sales of Adidas from 2006 to 2008 increased gradually from $10.08 to $10.8 billion euros. That is why the jury decided to reduce the amount of monetary compensation. In fact, this amount of money was still unaffordable for Payless due to the poor performance in sales in the infringement activities, but it worth punishing the act of trademark dispute. According to Payless annual report, its net sale was $3 million and $3.5 million in 2007 and 2008 respectively. Therefore, the court did consider properly to the defendant in spheres of reducing the award because of knowing that the award was higher than the actual damages. Consequently, it is quite fair in this case.

Reasonable certainty:

In order to prove the damages, Adidas must prove the wrongful act of Payless that causes the loss to the firm and illustrate the amount of the loss with reasonable certainty by estimated. In fact, Payless admitted that their design was inspired by Adidas’ and Payless’s workers were caught to use the same name. For instance, Payless employees referred to many of the accused shoes by the name of the corresponding Adidas model such as knock-offs, Country Ripple or Samoa. Based on the above evidence, it is clear that Payless intentionally copy the design and the jury’s verdict on Payless with wilful infringement is rational. As a result, Adidas is successful to demonstrate Payless’s wrongful action. However, Adidas did not clearly demonstrate the loss estimation with reasonable certainty and did not carry any financial figures to convince everyone with the actual loss and visible damage that Payless has caused to them. The initial $305 million of the reward was found to be influenced heavily by Adidas’ experts configure opinions for corresponding relevance of the evidence data. Especially Trade Dress, although Superstar was significantly well known via evidence of sales, advertising, and product popularity in media, it does not assure the dress mark to sufficiently acquire secondary meaning. Payless defended by improving the limitation of probative value and showing evidence of the secondary meaning of its design. Adidas submitted credible evidence in the form of consumer surveys (where the monetary can entitle for the confusion of consumers in terms of the preference of consumers purchase a reasonable price for the products) and expert opinion to be “difficult to conclude the actual damages of the plaintiff because of lacking reasonable evidence”. As a result, the actual damages of Adidas can not be exactly calculated due to lacking of financial figures evidence. This may the main reason for the jury to reduce more than 75% of the initial award that Adidas wished to obtain. For this reason, the final award seems reasonable and represent the court had considered properly the damages based on the actual situation between the plaintiff and the defendant.

Case 2: The 3M Company vs Chang Zhou Hua Wei Company (3M vs 3N)

Case summary:

In 2005, Chang Zhou Huawei Advanced Material Co.Ltd Company in China was filed to a lawsuit with the 3M Company because of using a similar trademark which exclusive registered by the 3M Company. The 3M Company is well known as American manufacturing’ corporation which produces a wide range of products regarding advanced materials, abrasives, adhesives tape, and worker safety instruments. The firm registered 2 trademarks of its products in class 17, and its subsidiary -3M China Ltd- was licensed in China market in 2004. Hua Wei launched its 3N products under a similar name and similar design as 3M. 3M sued Hua Wei again in 2013, and in 2015, the jury announced that Hua Wei must compensate RMB 3.5 million (approximate $500.000) to the 3M Company due to the trademark infringement. The initial calculation of the plaintiff included RMB 5.1 million of the total damage, and RMB 500.000 of another reasonable cost, which was based on the lost of the firm during the infringement event. But after the consideration of the jury, the amount of the award was reduced.

Case analysis:

Similar to the first case, 3M can not prove the lost profit during the infringement activities; however, the court collected evidence of Hua Wei in making profits on the infringement product which had an upward trend of its overall performance during the wrongful activities. According to Xue, the profits that Hua Wei earned from 3N products in 2011 and 2012 approximate $2.000.000, which led to the overall profit of Hua Wei. Due to the famous and popular of 3M products in China, Hua Wei attained high profits from selling 3N with cheaper price, which brought negative effects to the sale of 3M, including alleviating brand value, image, and reputation reduction. In addition, Hua Wei had a non-cooperative attitude and refused to provide financial figures and documents that caused difficulties to the court to investigate.

Moreover, Hua Wei claimed that their “3N” registered trademark class 19 in 2007, but they actually built the trademark base on other’ intellectual property. Therefore, the ‘3N’ trademark was illegal and these kinds of actions should not be supported and encouraged. As a result, the court did consider in-depth the high level of confusing customers by using the similar products and trademark and selling in the same market, and hence, punished Hua Wei with the amount award that they caused damages to the 3M Company. For this reason, the action and the judgment of the court spread the message to marketer that it will be paid a high cost if the business involving in trademark infringement, and it also builds trust in international corporations who want to integrate to China market.

The issue raised in two cases and methods to solve it:

The common issue which occurs in two cases was it is difficult for the plaintiffs to demonstrate its actual damages by the wrongful act of the defendant even though the wrongful act directly had negative effects to the plaintiff business. In order to prove the lost profits, the plaintiff can reliance on the before-and-after method because this method is the most reliable and straightforward method, which is endorsed by the court in many cases. According to him, the before-and-after method is calculated based on financial statistics including net income, gross margin, sales, and another cost. The lost profits can be considered under the ‘lost period’, which is computed under considering many indicators and the particular situation of each case. Ideally, the plaintiff can use three periods rather than two, which include the benchmark period before the event happen which affect to the business, the period after the event when it influences to the business, and the period in the future when the defendant cease the wrongful act.

Another method can help the plaintiff prove the lost profits are having lay opinion testimony. Lay opinion testimony preferences to the evidence which is given by individuals who are not qualified as an expert, but they witness and testify to inferences or opinions. And lay opinion testimony is involved to Rule 701 of the US Federal law, which is stated that an opinion of a witness is reliable and useful in understanding his or her testimony in the fact of the issue rather than depend on the raw data because the perception of his/her is based on the fact that they witness and observe. And because of the nature of lost profits is obtained from the damages due to the exiting business activities, lay opinion testimony is sufficiency to demonstrate the lost profits of the firm caused by trademark infringement.

Conclusion:

As trademark disputes and dilution are one of the eras of intellectual property which is important to the business to ensure its value, reputation and image are protected in order to avoid unfair competition. Two of the significant cases in this report are the well-known trademark infringement between “Adidas and Payless Shoessources”, and “the 3M Company and Hua Wei Advanced Materials”. In the first case, Adidas did exaggerate compute the lost profits and require Payless to compensate for the damages. However, the jury did consider all the elements and the rights of two parties and decided to reduce the amount of the award which is appropriate for the wrongful act of Payless. In the second case, it was fair when the court fined Hua Wei $500.000 for their infringement action, and the court judgment delivered positive sign of creating a fair competitive environment for international organizations who run the business in China.

Through the analysis, the common issue was found in spheres of the difficulty for the plaintiffs to prove their lost profits during the event. Therefore, in order to address this problem, one of the reliable and potential methods is proving the lost profit by applying the before-and-after method, which is straightforward and recognized by the court. Additionally, by relying on lay opinion testimony, the plaintiff can also demonstrate the lost profits or damages which are caused by the trademark infringement, and thus, can protect the business reputation, value, image, and profits.  

07 July 2022

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