U.S. federal court rules that removal of UPC could be trademark infringement

Ruling says removing codes thwarts anti-counterfeit efforts, reduces value of some goods

-- Packaging Digest, 8/5/2009 10:22:00 AM

In a recent decision, a federal court has warned that the act of selling goods with altered or removed UPC codes may be no less of a trademark infringement than, say, peddling knockoff Gucci handbags.

The new precedent has particular importance for certain retail chains, which routinely sell so-called "grey market" goods -- items purchased by a retailer through legal, but non-authorized or unofficial channels (for example, imported from another country) -- that often have had their UPC labels removed.

"This case, which highlights the evolving function of trademarks in today's global marketplace, centered on whether CVS could sell Zino Davidoff fragrances with the UPC labels removed," noted Tara A. Branscom, a partner in LeClairRyan, a law firm that handles a broad range of intellectual property and technology matters.

In its June 19 ruling, the U.S. Court of Appeals for the Second Circuit upheld a lower court's view of UPC labels as providing important quality-control protections for consumer-product manufacturers. "The warning was clear enough: If you sell goods that lack their original UPC labels, you could end up fighting a trademark-infringement case in court," said Branscom, who was not involved with the CVS case.

In addition to employing UPCs for tracking purposes (including recalls), manufacturers like Davidoff use the labels to ferret out counterfeits. Before a manufacturer can prevail against retailers that sell "decoded" goods, however, they must convince a court that they exert sufficient control over the quality of the products, Branscom noted.

"The whole premise here is that retailers are subverting manufacturers' quality-control measures by selling products that lack UPC identification," said the veteran attorney. "And so the Second Circuit, in upholding the Southern District of New York's preliminary injunction against CVS, declared that manufacturers' quality-control measures must be 'established, legitimate, substantial and non-pretextual' before they can take action. It said trademark holders must be able to show that they abide by their own quality-control procedures. And it put the onus on manufacturers to prove that retailers, by selling these decoded products, are in fact diminishing the value of the trademark in question."

In 2006, manufacturer Zino Davidoff sued drugstore chain CVS for selling allegedly counterfeit Davidoff products, including its popular "Cool Water" line. In the course of that legal action, Davidoff discovered that on approximately 16,600 items in CVS's inventory, the UPCs on the packages and labels affixed to the bottles had been removed by cutting the box, chemically removing the print or grinding the bottles. Davidoff amended its suit to include claims for the sale of goods with the UPC labels removed, and the trial court granted Davidoff's motion to stop CVS from selling these "decoded" products.

CVS appealed, arguing that the sale of these "decoded" goods, which were in their original packaging with the Davidoff trademarks visible and unaltered, did not negate their genuineness or constitute infringement. The Second Circuit Court of Appeals rejected this argument. Nor was it swayed by CVS's argument that Davidoff's quality-control measures were a mere pretext and that the UPC's were, in fact, used by the manufacturer for commercial rather than quality-control purposes.

"The mere fact that the UPC system provides Davidoff additional benefits that may be unrelated to quality control does not negate its legitimate function in protecting Davidoff's marks from quality defects and counterfeiting," the court said. CVS's argument that Davidoff had not shown that any of the chain's sales involved inferior products was equally unsuccessful. In the court's view, "the actual quality of the goods is irrelevant; it is the control of quality that a trademark holder is entitled to maintain."

The Second Circuit also noted that UPC tampering may damage a manufacturer's distinctive packaging, which may further diminish the value of luxury goods -- like fragrances. In finding that CVS was likely to be liable for trademark infringement for selling goods without UPCs attached, the court noted: "Mutilated packaging makes the item less appealing to such a purchaser, who runs the risk that the gift will be viewed by the recipient as a sketchy, cheap purchase from an illicit source or of the sort given by Tony Soprano to Carmela."

This case serves as a warning to manufacturers and retailers alike, concluded Branscom. Trademarks help guarantee, to the consuming public, that goods will be of the same quality regardless of where they are sold," she explained. "Anti-counterfeiting devices like UPC labels serve both commercial and quality-control functions. They should not be removed or tampered with. Further, trademark owners seeking to protect the quality of their goods should establish and consistently follow substantive quality-control measures."

Source: LeClairRyan