This article originally appeared in the Association of Corporate Counsel: Baltimore’s Focus magazine (3Q2022, p. 7-9). Written by Jim Astrachan, Kaitlin Corey, and Donna Thomas.
A trademark infringement suit awarding Variety Stores $95 million dollars against Walmart is instructive as to what the courts in the Fourth Circuit require to establish trademark infringement and willful trademark infringement. Variety Stores, Inc. v. Walmart Inc., 852 Fed. Appx. 711 (4th Cir. 2021) (unpublished).
While the large monetary award has been resolved behind the scenes through a confidential settlement following Walmart’s successful appeal relating to the trial court’s jury instructions concerning whether Walmart acted willfully, the magnitude of the award and the Court’s explanation of what is required to establish trademark infringement are worthy of discussion. This is especially important for those who are called upon to advise their client about whether a trademark is clear and available for use. The analysis for clearing a trademark for use is similar to the analysis that applies to determining whether a client will succeed if it sues on the grounds of trademark infringement.
Variety Stores involved use by Walmart of the mark BACKYARD GRILL on barbecue grills and grilling supplies that it offered for sale in its stores. The dispute was whether Walmart’s use of BACKYARD GRILL infringed Variety’s rights in its federally registered mark, THE BACKYARD and its unregistered marks BACKYARD and BACKYARD BBQ.
While there are some significant rights that are reserved for those who own a federal trademark registration, as a general rule, the first user of a mark for goods or services in a territory establishes common law rights in that mark. Emergency One, Inc. v. American Fire Eagle Engine Co., Inc., 332 F.3d 264, 267-68 (4th Cir. 2003). A common law user of a mark can prevent other users from subsequently adopting the same or a similar mark, for the same or related goods or services, in that territory if the use is likely to cause confusion. See 15 U.S.C. § 1125(a).
Variety owns a chain of retail stores that sell outdoor products such as lawn and garden equipment and barbecue grills. Walmart’s product line is larger but it too sells barbecue grills. When Walmart decided to sell private label grills, it searched for an appropriate name to brand the barbecue grills.
Names similar to those used by Variety were considered by Walmart’s legal department and were rejected. Walmart eventually landed on the mark BACKYARD GRILL despite being aware that Variety had registered THE BACKYARD for other goods/services (i.e. retail store services in the field of lawn and garden equipment and supplies), but not specifically barbecue grills. By failing to research what products Variety used THE BACKYARD mark on and relying solely on the goods/services covered by Variety’s federal registration, Walmart overlooked Variety’s use of the BACKYARD and BACKYARD BBQ marks for grills. Eventually, Variety sued Walmart for trademark infringement under 15 U.S.C. §§ 1114 and 1125, and for unfair and deceptive trade practices under North Carolina law.
To demonstrate federal trademark infringement under the Lanham Act, and generally under the common law, Variety had to establish that it owned a valid and protectable mark and that Walmart’s use in commerce of its similar mark created a likelihood of confusion in the minds of an appreciable number of consumers and would-be consumers. CareFirst of Md., Inc. v. First Care, P.C., 434 F.3d 263 (4th Cir. 2006). Courts in the Fourth Circuit are instructed to look to nine factors to evaluate, as a question of fact, whether trademark infringement exists:
- The strength or distinctiveness of the mark;
- the similarity of the two marks;
- the similarity of goods or services the marks identify;
- the similarity of the facilities (i.e. channels of trade) used by the parties;
- the similarity of advertising used by the parties;
- the Defendant’s intent in adopting the mark;
- the existence, or lack, of actual confusion;
- the quality of Defendant’s product; and
- the sophistication of the would-be consumers of the goods or services.
George & Co. LLC v. Imagination Entertainment Ltd., 575 F.3d 383, 393 (4th Cir. 2009).
- The Strength or Distinctiveness of the Mark
The strength or distinctiveness of the mark is one of the most important factors in a court’s analysis because if a mark is weak, consumers are less likely to associate the mark with a source, so confusion will not result. Courts consider both conceptual and commercial strength, determining conceptual strength by categorizing the mark as (i) fanciful, arbitrary or suggestive, each of which is inherently distinctive and conceptually strong; (ii) descriptive, which is weak until secondary meaning is acquired; or (iii) generic, which is never capable of distinguishing the goods of one seller from another.
To determine commercial strength, or, in other words, an association of a mark with a source in the minds of consumers, courts evaluate advertising expenditures; consumer studies linking the mark to a source; sales success; unsolicited media coverage of the product or services; attempts to plagiarize the mark; and length and exclusivity of use. Perini Corp. v. Perini Constr., Inc., 915 F.2d 121, 125 (4th Cir. 1990). The stronger the mark, the more likely it will be that consumers will associate it with a source and that a junior user entering the marketplace will cause confusion. In Variety, Variety’s BACKYARD mark was found to be commercially strong based on its continuous use of the mark since 1993, its expenditure of over $40 million in advertising products and services under the mark (from 1993-2012) and its sales of over $64 million of products under the mark (from 2002-2015). The BACKYARD mark was also found to be conceptually weak based on the fact that such term was widely used in other marks, including several in the grilling industry.
- Similarity of the Two Marks
In determining the similarity of marks, courts consider similarities in the appearance, sound and commercial impression/ meaning of the marks. In evaluating similarities, a court will give greater weight to the dominant or salient portions of the mark. For example, in composite marks comprised of distinctive and descriptive terms (such as Backyard Grill), the distinctive term (i.e. “Backyard”) is accorded more weight than the descriptive term (i.e. “Grill”) in comparing marks. In Variety, the marks were found to be similar because they had similar “linguistic design,” featuring the identical dominant word “Backyard” followed by a descriptive word. In addition, the parties’ marks employed similar color schemes.
- Similarity of Goods or Services the Marks Identify
When the goods or services of the junior user compete for sales with the senior user’s goods or services, the goods or services should be found to be substantially similar, and that factor ought to support a finding of infringement. In Variety, the marks at issue were used in connection with identical, competing grill products, thereby favoring a likelihood of confusion. But goods or services do not need to be identical or in direct competition in order to be considered similar. George & Co., 575 F.3d at 397. Where goods and services are related in some manner and/ or the circumstances surrounding their marketing could cause consumers to mistakenly believe that the parties’ goods/ services come from the same source, this factor supports a likelihood of confusion. For example, relatedness of goods or services can be shown by evidence that the goods/services are complimentary or that other companies offer both parties’ goods/services under the same mark, such as banking services and mortgage lending services.
- Similarity of the Facilities
The Court found that the facilities used by Variety and Walmart to sell their grills were similar. Both were found to compete in a similar manner in overlapping markets in at least 17 jurisdictions. Both were big-box stores selling a variety of merchandise. There were no basic differences between their modes of distribution. Because of the similarity in the facilities used to sell their merchandise, this factor favored likelihood of confusion.
- Similarity of Advertising
Similar to evaluating use of facilities by both parties, courts also consider the marketing channels used. Courts assess how consumers encounter the marks in the marketplace, including the way in which products are advertised and where in the store you would locate the two products if they were being sold in the same store. For this factor, courts also consider the media used, the geographic area in which advertising occurs, the appearance of the advertisements and the content of the advertisements. CareFirst of Md. Inc. v. First Care, P.C., 434 F.3d 263, 273 (4th Cir. 2006). In Variety, the parties’ advertising was found to be similar (thereby favoring a likelihood of confusion) and Walmart did not dispute such finding on appeal.
- Defendant’s Intent in Adopting the Mark
A question posed by courts when evaluating whether a defendant was willful or acted with the intent to infringe the plaintiff’s mark, is whether the defendant intended to capitalize on the goodwill associated with plaintiff’s mark. CareFirst, 434 F. 3d at 273.
Intent can be a major factor in evaluating infringement, but like actual confusion, intent is not necessary to establish likelihood of confusion. Some courts have held that when a defendant adopts a mark with knowledge of the plaintiff’s mark, a presumption of willfulness arises. E.& J. Gallo Winery v. Consorzio Del Gallo Nero, 782 F.Supp. 457 (N.D. Cal. 1991). But the Fourth Circuit has stated that the “intent of a junior user is relevant only if the junior user intended to capitalize on the goodwill associated with the senior user’s mark.” CareFirst, 434 F.3d at 273 (citing Sara Lee Corp. v. Kayser-Roth Corp., 81 F.3d 455, 466 (4th Cir. 1996). The absence, however, of intent or bad faith renders this factor neutral because intent to infringe is an issue whose resolution may benefit the cause of only the senior user and not the alleged infringer.
In Variety, Walmart knew Variety owned a registration covering THE BACKYARD for retail store services in the field of lawn and garden equipment and supplies, but failed to investigate how Variety was using such mark (which investigation would have revealed use on grills) because it did not consider Variety a competitor. Additionally, Walmart’s legal counsel advised Walmart not to adopt BACKYARD BARBEQUE or BACKYARD BBQ. While the Court instructed that a finding of bad faith would not necessarily flow from knowledge of an earlier mark alone, bad faith could be inferred in this case based on Walmart’s actual or constructive knowledge of Variety’s mark and its failure to further investigate the usage of such mark. Variety Stores, Inc., 852 Fed. Appx. at 720.
- Actual Consumer Confusion
Evidence of actual consumer confusion will provide strong support for a finding of likelihood of confusion and is often considered the most important factor. CareFirst, 434 F.3d at 268; Lyons P’ship v. Morris Costumes, Inc., 243 F.3d 789, 804 (4th Cir. 2001). However, failure to prove actual confusion is not dispositive of an infringement claim. Actual confusion is often established by survey evidence, but it can also be derived from anecdotal evidence. George & Co., 575 F.3d at 398. In the context of survey evidence, a consumer must not be shown a side-by-side comparison of the two products.
In Variety, Variety did not produce evidence of actual confusion, but used experts to discredit Walmart’s surveys, which were offered to prove the absence of confusion, but were claimed by Variety’s experts to show confusion among 11% of the survey participants. Variety Stores, 852 Fed. Appx. at 721. Some courts have determined that survey evidence demonstrating confusion in 10% or more of consumers supports a finding that actual confusion exists. See Sara Lee Corp. v. Kayser-Roth Corp., 81 F.3d 455, 467 n. 15 (4th Cir. 1996). In one case, for purposes of summary judgment, a confusion rate of 17% was found to constitute clear evidence of actual confusion. Rosetta Stone Ltd. v. Google, Inc., 676 F.3d 144, 159 (4th Cir. 2012).
- The Quality of Defendant’s Product
The determination that the quality of a defendant’s products bearing the infringing mark is below that of plaintiff’s products pertains to whether the plaintiff’s reputation could be harmed by the inferior nature of the infringer’s goods. Banfi Products Corp. v. Kendall-Jackson Winery, Ltd., 74 F.2d 188 (E.D.N.Y. 1999). In Variety, this factor weighed in Variety’s favor at the trial court level and was not disputed by Walmart on appeal, so the relevant facts are unknown. This factor is often treated as neutral in the analysis due to the absence of relevant facts.
- Sophistication of the Consumers
Confusion is more likely when the goods associated with the mark are inexpensive, and subject to impulse purchasing. This factor favors the plaintiff when the average unsophisticated consumer does not devote a great deal of care and consideration to choosing the goods. While wine has been held to be an impulse buy, barbecue grills, being more expensive and not consumable, should result in more selective decision making by the consumer. In Variety, this factor weighed in Variety’s favor at the trial court level and was not disputed by Walmart on appeal, so the relevant facts are unknown.
These factors are not exclusive and sometimes courts will consider other circumstances. In considering all of the evidence and weighing the factors, the Court determined that a reasonable jury could find that Walmart infringed on Variety’s mark. The jury found that Walmart willfully infringed Variety’s mark and awarded Variety $95.5 million, including reasonable royalties of $45.5 million (based on 5% of Walmart’s national sales revenue) and $50 million in disgorged profits. The Fourth Circuit vacated the jury’s willfulness finding and monetary award due to the trial court’s failure to instruct the jury on the meaning of willfulness and remanded for further proceedings (which ultimately led to a settlement of the case).
While willfulness is not a prerequisite for an award of profits in an infringement case, it is an important consideration in awarding profits. Romag Fasteners, Inc. v. Fossil Grp., Inc., 140 S.Ct. 1492 (2020). In Variety, the Fourth Circuit agreed that infringement must be more than volitional (such as continued use after notice of a trademark claim) in order to be willful, and noted that willfulness has been defined in other cases and legal authorities to include acting with intent to infringe, cause confusion or benefit from the goodwill or reputation of the trademark holder, acting in bad faith or conduct involving reckless disregard of willful blindness. Variety Stores, 852 Fed. Appx. at 722-23. Although the jury’s willfulness finding and award were vacated and remanded, the Fourth Circuit noted that a reasonable juror could find that Walmart’s knowledge of Variety’s Backyard mark and its failure to further investigate Variety’s use of such mark amount to willful blindness and signify bad faith. Id. at 723. As a result, this decision provides a valuable lesson as to the importance of fully and properly searching a proposed mark for conflicts, including investigating the scope of use of preexisting marks, prior to adoption of the mark.