Fake Gucci bags too good to recall

In the split decision of Gucci America Inc v Daffy's Inc, the US Court of Appeals for the Third Circuit has affirmed a district court ruling and has rejected the plaintiff's request for an order compelling the defendant to recall counterfeit handbags it had sold and pay the profits of sale to the plaintiff.

Daffy's, a chain of retail stores offering popular brands at discount prices, acquired from its supplier handbags that appeared to be the Jackie-O style of handbags manufactured by Gucci. Daffy's attempted to authenticate the bags by showing one to a clerk at a Gucci outlet store and sending a damaged bag to the Gucci repair centre, neither of which disputed the bags' authenticity. Daffy's proceeded to sell 588 bags before being informed by Gucci that the bags were counterfeit and that it must stop. Daffy's subsequently withdrew the bags from its stores and adopted a policy of buying no more Gucci merchandise, to avoid the possibility of purchasing counterfeits.

Gucci filed a suit under Sections 32(1) and 43(a) of the Lanham Act, requesting that Daffy's recall the counterfeit handbags and pay the profits to Gucci. A district court refused the action and Gucci appealed.

Relying on Section 34(a) of the Lanham Act, the Third Circuit emphasized that courts are authorized to issue injunctions for trademark violations according to principles of equity and upon such terms as the court may deem reasonable. The court also noted that Section 35(a) provides that recovery of a defendant's profits and any damages are subject to the principles of equity.

The court stated that there are three criteria that should be considered when determining whether to issue an order for recall. The court should examine whether:

• there was a wilful or intentional infringement by the defendant;
  
  
• the risk of confusion to the public and injury to the trademark owner was greater than the burden of the recall to the defendant; and
  
  
• there was a substantial risk of danger to the public due to the defendant's infringing activity.

Although the court found that Daffy's had infringed Gucci's trademark, the majority of the court denied Gucci's requests.

After concluding that Daffy's was an innocent infringer, the court balanced the equities encompassed in the second prong of the test. Since the counterfeit bags were "virtually indistinguishable" from Gucci-manufactured bags, the court found that a recall would harm Daffy's with little benefit to Gucci because notified consumers might accept their bargain and decline to come forward, and the quality and relatively high price of the fakes undermined claims that Gucci's mark had been tarnished.

In addition, the court noted Daffy's attempts to minimize damages to Gucci by voluntarily withdrawing the offending merchandise from its shelves, and the court concluded that Daffy's was, thus, highly unlikely to infringe Gucci's trademark again. Given the district court's careful application of the correct equitable standard to the evidence, the Third Circuit found that the district court had not abused its discretion in refusing to order a recall or award profits.

The dissent argued that Daffy's infringement of Gucci's trademark constituted a prima facie case of irreparable injury as a matter of law and the lower court had erred in denying profits on the grounds that Daffy's had not infringed wilfully. Furthermore, Daffy's was aware of the business risk, and the lower court had ignored the purpose of the trademark statute, which is to protect the public from deceit and to allow businesses to secure the advantage of their good names and reputations.

Danielle Klausner and Susan Natland, Knobbe Martens Olson & Bear LLP, Newport Beach