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Unauthorized internet reseller of plaintiff’s products is not guilty of trademark infringement, and does not cause actionable initial interest confusion, by using plaintiff’s trademarks in meta tags of website at which plaintiff’s and its competitors’ products are sold, and in...

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Century 21 Real Estate Corporation, et al. v. Lending Tree Inc.

425 F.3d 211, No. 03-4700 (3rd Cir., October 11, 2005)

Third Circuit Adopts New Test For Determining Propriety Of Nominative Fair Use

In a 91 page decision, a three member panel of the Third Circuit, by a two to one margin, adopted a new test to determine the propriety of a defendant's use of another's mark to describe the mark holder's own product.  A classic example of such a nominative fair use is an advertisement by an independent auto repair shop that contains the marks "VW" and "Volkswagen" to accurately inform the public of the type of cars the shop repairs. 

The judges agreed that this issue should not be resolved by application of the "nominative fair use" test utilized by the Ninth Circuit in New Kids on the Block v. News America Pub., Inc., 971 F.2d 302 (9th Cir. 1992) and its progeny.  But the panel was unable to agree on the appropriate test to apply. 

The two member majority "adopted a two step approach to nominative fair use cases."  Under the majority's test, the mark holder bears the burden of proving that the challenged use of its mark is likely to confuse the consumer as to the source of defendant's product, or its affiliation with, or endorsement by, the mark holder. 

In making such a showing, the mark holder cannot rely on the ten factors regularly examined by the Third Circuit in trademark cases, known as the Lapp factors, to determine likelihood of consumer confusion.  Instead, the majority instructs that two of those factors -- degree of similarity between the owner's mark and the allegedly infringing mark, and the strength of the owner's mark -- be ignored altogether.  The majority directs the courts to focus primarily on the following four of the remaining eight factors: (1) the price of the goods and other factors indicative of the care and attention that may be expected of consumers when making a purchase, (2) evidence of actual confusion, (3) the length of time, if any, defendant has used the mark without actual confusion, and (4) the intent of defendant in utilizing the mark.  While courts may, in an appropriate case, consider the remaining Lapp factors, listed below, in analyzing if the mark holder has met its burden of establishing likelihood of confusion, the four factors noted above are the ones on which the courts should primarily focus.  The remaining Lapp factors courts may consider are: (1) whether the parties' goods are marketed through the same channels and advertised through the same media, (2) the extent to which the targets of the parties' sales efforts are the same, (3) the relationship of the parties' respective goods in the mind of the consumer because of a similarity of function, and (4) facts suggesting the consuming public may expect the mark owner to expand into the defendant's market.

Once the mark holder meets its burden of proving confusion under this modified Lapp test, the burden shifts to the defendant to prove the affirmative defense of nominative fair use.   As announced by the majority, this requires the defendant to show: (1) the challenged use of plaintiff's mark is necessary to describe both plaintiff's product or service and defendant's product or service; (2) defendant has used only so much of plaintiff's mark as is necessary to describe plaintiff's products or services; and (3) the defendant's conduct or language reflects the true and accurate relationship between plaintiff and defendant's products or services.  If the defendant can show each of these elements, he may proceed with the challenged use, even if it will engender some confusion among consumers.

In a scathing dissent, Circuit Judge Fisher strongly criticized the majority's new test as being both contrary to binding precedent and judicially unmanageable.  He further opined that the test adopted by the majority impermissibly places on the defendant the burden of negating likelihood of consumer confusion. 

Judge Fisher set forth his own alternative test for determining the propriety of a nominative fair use.  Under this test, there is no bifurcated, burden shifting, approach.  Nor is nominative fair use an affirmative defense to be established by the defendant making a challenged use of the mark at issue.  Rather, the appropriate inquiry for the court is whether the challenged use of the mark is likely to confuse consumers, as to which issue the mark holder bears the burden of proof.  In analyzing this issue, Judge Fischer would also use a modified Lapp test.  Under Judge Fischer's test, like that of the majority, courts would ignore both the similarity of the marks, and the strength of the mark.  Similarly, the courts would focus primarily on the same four Lapp factors that are at the center of their examination of confusion under the majority's test.  However, under Judge Fisher's test, negative findings on the remaining four Lapp factors would counsel against a finding of confusion arising out of defendant's nominative use.  Thus, a finding that the parties' goods were marketed through different channels or sold to different consumers, or performed different functions, would weigh against a finding of confusion.

As was to be expected, given that the District Court did not apply the newly minted nominative fair use test pronounced in the majority's opinion, the District Court's decision was reversed, and the case remanded for further consideration in light of the Third Circuit's decision.

Lending Tree Uses Plaintiffs' Trademarks On Its Web Site And In Marketing Materials

Lending Tree operates a website at which it offers consumers referrals to, and the opportunity to do business with, lenders, real estate brokers, auto insurers and other financial service companies.  Interested consumers can obtain information about real estate brokers, including a number of plaintiffs' own franchisees, who participate in Lending Tree's real estate referral network.

Plaintiffs permit their franchisees to utilize plaintiffs' marks in the operation of real estate brokerage businesses.  While each franchisee is permitted to use one of plaintiffs' respective marks (Century 21, ERA and Coldwell Banker), that use must be done in conjunction with the franchisee's "d/b/a" name.  Thus, the Smith brokerage could only be called Century 21 Smith Realty, not simply Century 21 Realty.

The dispute at issue centered on Lending Tree's use of plaintiffs' marks on Lending Tree's website, and in other marketing materials.  Among other things, plaintiffs objected to:  (1) a statement by Lending Tree on its "Find a Realtor" homepage stating that Lending Tree will "give you access to a national network of brokers representing the country's leading real estate companies, including Coldwell Banker, ERA and Century 21 . . ." with plaintiffs' marks listed in block letter format; (2) a statement on Lending Tree's website that Lending Tree is "represented by large independent real estate companies and members of major franchises - Coldwell Banker, Century 21, Prudential, ERA, Re Max, GMAC and Realty Executives;" and (3) printed marketing materials stating that Lending Tree "is affiliated with more than 700 certified brokers, such as Coldwell Banker, Century 21, Prudential, ERA and RE/MAX."

Complaints by plaintiffs brought various modifications in Lending Tree's marketing materials, including the discontinuance of its use of plaintiffs' marks in a stylized logo format, and the addition of a disclaimer on Lending Tree's website notifying readers that Lending Tree "is not sponsored by or affiliated with the parent franchisor companies of any of the participating members of its network."  Dissatisfied with Lending Tree's responses, plaintiffs commenced, and prosecuted, this action, charging Lending Tree with unfair competition and trademark infringement in violation of §§ 32 and 43(a) of the Lanham Act.

District Court Issues Preliminary Injunction

The District Court rejected Lending Tree's defense of nominative fair use and enjoined Lending Tree from using plaintiffs' marks, either on its website, or in its marketing materials, in the manner described above.

On appeal, the Third Circuit reversed and remanded for reconsideration in light of the new test the majority adopted for determination of the propriety of a defendant's nominative fair use of another's mark.  The Third Circuit did not, in its decision, either resolve the underlying dispute between the parties, nor indicate how it should be resolved.

Ninth Circuit's New Kids On The Block Test Rejected

In analyzing the propriety of defendant's conduct, the Third Circuit refused to apply the nominative fair use defense adopted by the Ninth Circuit in New Kids on the Block and its progeny.  That test, noted the Third Circuit, had not been adopted by any other Circuit court to date.  The Third Circuit found this test flawed because it dispensed with plaintiff's burden of proving that consumers were likely to be confused by defendant's nominative use of plaintiff's mark.  Instead, under the Ninth's Circuit test, the defendant can prevail if he makes a three part showing that:

First, the product or service in question must be one not readily identifiable without use of the trademark; second, only so much of the mark or marks may be used as is reasonably necessary to identify the product or service; and third, the user must do nothing that would, in conjunction with the mark, suggest sponsorship or endorsement by the trademark holder.

The Court found support for its rejection of the Ninth Circuit's test in both applicable statutes (See e.g. §§ 32 and 43(a) of the Lanham Act) and recent Supreme Court precedent concerning classic fair use, KP Permanent Makeup Inc. v. Lasting Impression I, Inc., 125 S. Ct. 542 (2004).  These authorities, held the Court, mandated that to prevail in a trademark infringement action, the mark holder bear the burden of establishing that defendant's use of its mark is likely to confuse consumers, even in cases arising out of an alleged fair use of another's mark.

Nominative vs Classic Fair Use

At this point, it would be useful to distinguish between nominative and classic fair use.  A classic fair use of another's mark is expressly permitted by statute, and encompasses the use of plaintiff's mark to describe defendant's products.  The mark is not used as a mark at all, but rather for its alternative descriptive meaning.  Classic fair use cases have involved the use of marks such as "Dentist's Choice," "Thirst Aid" and "Fish Fri" in an allegedly descriptive sense, to describe, not the mark holder's products, but rather those of the defendant. 

Unlike classic fair use, the nominative fair use defense rests on judicial precedent, and not statute.  Nominative fair use cases have generally focused on the use by defendant of another's mark to describe the mark holder's own product, and by these references the defendant's own product as well.  In addition to the Volkswagen repair shop example, cited above, a nominative fair use was at issue in New Kids on the Block, which addressed the use by newspapers of the "New Kids" mark in reader polls to identify their favorite "New Kid." 

Trademark Holder Must Prove Likelihood Of Consumer Confusion

Having found that the plaintiff had the burden of establishing likelihood of confusion, the majority turned next to the manner in which the mark holder would meet this burden.  In the Third Circuit, courts analyze this issue by examining ten factors, known as the Lapp factors.  The majority held that application of all of these factors in a nominative fair use case would always lead the court to conclude that such a use was confusing.  As such, the Court modified the likelihood of confusion test to be applied in such circumstances.

Under this modified test, the first two Lapp factors-the degree of similarity between the owner's mark and the alleged infringing mark, and the strength of the owner's mark-are not to be considered at all.  These factors, held the Court, would always point to confusion, even in circumstances where the defendant was using the mark nominatively in circumstances not likely to confuse.  The premise here is that a proper nominative fair use will not confuse the public about a product's source.

The majority directed courts instead to focus on following four Lapp factors: (1) the price of the goods and other factors indicative of the care and attention that may be expected of consumers when making a purchase, (2) evidence of actual confusion, (3) the length of time, if any, defendant has used the mark without actual confusion, and (4) the intent of defendant in utilizing the mark.

While the remaining Lapp factors can be examined in an appropriate case, the four factors enumerated above are the ones on which the courts should primarily focus.  The remaining factors courts may consider are: (1) whether the parties' goods are marketed through the same channels and advertised through the same media, (2) the extent to which the targets of the parties' sales efforts are the same, (3) the relationship of the parties' respective goods in the mind of the consumer because of a similarity of function, and (4) facts suggesting the consuming public may expect the mark owner to expand into the defendant's market.

Defendant's Burden To Establish Nominative Fair Use

Once the mark holder has established a likelihood of confusion, the burden shifts to the defendant to establish the affirmative defense of nominative fair use.  While the majority's test, like that of the Ninth Circuit, imposes a three part showing on the defendant, the actual showing required by the Third Circuit varies significantly from that of the Ninth Circuit.  Under the test adopted by the Third Circuit, the defendant must show:  (1) the challenged use of plaintiff's mark is necessary to describe both plaintiff's product or service and defendant's product or service; (2) defendant has used only so much of plaintiff's mark as is necessary to describe plaintiff's products or services; and (3) the defendant's conduct or language reflects the true and accurate relationship between plaintiff and defendant's products or services.

The Third Circuit's test requires the defendant to show that its use of plaintiff's mark is "necessary" to describe both plaintiff's and defendant's products.  The Court held that "necessary" does not mean "indispensable."  Rather, a use would be "necessary" if the "identification by defendant of plaintiff's product or service would be rendered significantly more difficult without use of the mark."  Moreover, the use must not only be "necessary" to describe plaintiff's products, but necessary to describe defendant's products as well.  As stated by the Court: 

While it should be asked whether plaintiff's product needs to be described by reference to its mark, should it not also be examined whether defendant's use of it, at all, is necessary to accurately describe what defendant does or sells, or whether its reference to plaintiff's mark is actually gratuitous?

*          *          *

Additionally, we believe that it is important for a court to understand how necessary the use of the mark is to the identification of defendant's product.  That is, the more dependent the ready identification of defendant's product is on the description of plaintiff's product through the employment of plaintiff's mark, the more likely it is that the use is a fair one.

The test's second prong focuses:

on whether only so much of plaintiff's mark as is reasonably necessary to identify plaintiff's product or service has been used by defendant.  Consideration should be given at this stage to the manner in which the mark is portrayed.  For example, did the defendant use plaintiff's distinctive lettering when using plaintiff's mark or did the defendant, as in this case, simply use block letters to spell out plaintiff's names?

Finally the test's third prong does not ask simply whether defendant did anything to improperly suggest plaintiff's sponsorship or endorsement of defendant's product.  Instead, this prong asks if defendant's language reflects the true and accurate relationship between the parties.  As one might expect, disclaimers are important evidence in this regard.

If the defendant can meet this three part burden, it can continue its challenged use of the mark, even in the face of consumer confusion.  Said the Court:

If each of these questions can be answered in the affirmative, the use will be considered a fair one, regardless of whether likelihood of confusion exists.

Dissent Argues That Burden Should Be On Trademark Holder To Prove Confusion, Not On Defendant To Prove Its Absence

In a vigorous dissent, Judge Fisher agreed with so much of the majority's decision that held that the Third Circuit should not determine the propriety of a defendant's nominative use of another's mark by application of the Ninth Circuit's New Kids on the Block test.  However, Judge Fisher went on to sharply criticize the test the majority did adopt, urging that it was both contrary to controlling precedent and judicially unmanageable.

The majority's test, argued Judge Fisher, impermissible imposed on the defendant a burden of negating consumer confusion by requiring defendant to establish nominative fair use as an affirmative defense.

As interpreted by Judge Fisher, the majority's nominative fair use test is really an examination of defendant's intent in using the mark holder's mark with an eye towards determining if his use is properly motivated.  As 'bad' motivation is an indicia of likelihood of consumer confusion, requiring defendant to negate bad intent places on him the burden of establishing consumers would not be confused by his conduct.  Said Judge Fisher:

In sum, the "nominative fair use" defense is nothing more than a venture into Lapp territory, namely, intent as shown through the defendant's purpose, prominence, and truthfulness in connection with plaintiffs' marks.  Although it is troubling that the majority would permit plaintiffs to establish likely confusion based on one Lapp factor alone, it is even more disturbing that the majority would require the defendant to dispel that finding through an affirmative defense looking to the same likelihood of confusion considerations.

Applicable precedent instead called for the issue to be resolved by placing on plaintiff the burden of proving whether the defendant's use was likely to confuse, and whether it was truthful.   In addition to KP Permanent Makeup, Judge Fisher found support for this conclusion in both the Supreme Court's decision in Prestonettes Inc. v. Coty, 264 US 359 (1924) and the Third Circuit's decision in G.D. Searle & Co. v. Hudson Pharmaceutical Corp. 715 F.2d 837 (3rd Cir. 1983).

Judge Fischer went on to set forth the test he believed should be applied to determine the propriety of a nominative fair use.  Under Judge Fisher's test, the appropriate inquiry for the court is whether the challenged use of the mark is likely to confuse consumers, as to which issue the mark holder bears the burden of proof.  In analyzing this issue, Judge Fischer would use a modified Lapp test.  Under Judge Fischer's test, like that of the majority, courts would ignore both the similarity of the marks, and the strength of the mark.  Similarly, the courts would focus primarily on the same four Lapp factors that are at the center of their examination of confusion under the majority's test.  However, under Judge Fisher's test, negative findings on the remaining four Lapp factors would counsel against a finding of confusion arising out of defendant's nominative use.  Thus, a finding that the parties' goods were marketed through different channels or sold to different consumers, or performed different functions, would weigh against a finding of confusion.

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