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Capri Jewelers: Trademark Reminders

On October 2, 2012, Judge Henry Hudson of the U.S. District Court for the Eastern District of Virginia issued an order granting a preliminary injunction to Richmond-area jeweler BFI Holdings, dba Capri Jewelers, enjoining North Carolina-based Diamonds Direct USA from using the service mark DIAMONDS DIRECT in expanding to the Richmond area.  The decision is not momentous, but it was unusual in at least two respects.  First, Diamonds Direct had used DIAMONDS DIRECT as a mark for many years prior to Capri, which did not use DIAMONDS DIRECT until 2012.  Previously, it had only used somewhat similar slogans, like “Buy Direct, Save Direct.”  Second, Capri prevailed in large part based on its Virginia state registration of DIAMONDS DIRECT, secured in 2012 after it learned that the North Carolina company planned to expand to Richmond.  The dispute and the result, albeit preliminary, provide some useful reminders about trademark rights and strategies:

  1. Federal Registration Matters.  Diamonds Direct probably would have prevailed if it had timely federally registered its DIAMONDS DIRECT mark, but it had not.  Federal registrants enjoy presumptive exclusive rights to their marks nationwide.  They cannot enforce those rights in a location where they are not active, but when they start to do business in an area or are poised to do so they are entitled to prevent another from using a confusingly similar mark in that area, even if it was already doing so. 
  2.  Selecting a Distinctive, Unique Mark Matters.  The North Carolina company tried to register its mark DIAMONDS DIRECT federally in 2001, but abandoned the effort. As best I can tell, this was because another company already had registered a very similar mark for about the same services.  In addition, at least two other companies used the same mark without registration in their local trading areas.  These similar uses limited the North Carolina company’s rights.  It might have been able to overcome the obstacles by seeking a concurrent use registration, in which different claimants allocate their rights geographically, but that can be a time-consuming and somewhat costly process.  It probably would have been better served years ago by choosing a mark that was more inherently distinctive and unique in the marketplace. 
  3. State Registration Can Matter, At Least in Virginia.  All states have some trademark registration mechanism, but in most jurisdictions state registration has no real substantive effect, not even one of presumptive validity within the state.  Virginia’s statute is different: in Virginia, a state registration is prima facie evidence of the registrant’s ownership of the mark and its exclusive rights throughout the Commonwealth.  Even though it had just commenced use of DIAMONDS DIRECT this year, Capri obtained a state registration and was able to rely, successfully, on those presumptive rights.  Notably, consistent with prior decisions, Capri could only enforce those rights in its trading area, and so Judge Hudson’s injunction was limited to the Richmond area.
  4.  Common Law Rights are Real, but Amorphous and Difficult to Prove.  Because the North Carolina company lacked a federal registration, the dispute turned on whether it could establish prior rights in Virginia.  Common law rights are defined by what is generally known as the Tea Rose/Rectanus Doctrine (the name referring to two early cases which serve as its foundation).  In this dispute, the issue was whether Diamonds Direct’s limited use of the mark in advertising and the fact that it had some Virginia customers in its database sufficed to establish rights in Virginia.  The court held that the use of the mark in Virginia was more “sporadic” than “deliberate and continuous,” and not sufficient to rebut the presumption flowing from the state registration.  It also held that the company’s history of past marketing and expansion did not support its claim that Richmond was within its “zone of natural expansion.”   

One issue the court did not address was whether Capri, the “geographically-remote junior user” in Tea Rose/Rectanus parlance, adopted the DIAMONDS DIRECT mark in good faith.   The majority of cases nationwide hold that good faith means adoption of the mark by the junior user without any knowledge of the prior, albeit distant, use by the senior user.  While some courts have held that knowledge alone does not necessary destroys good faith, knowledge remains important evidence of bad faith adoption.  Without a doubt, Capri had prior knowledge of the other mark, and indeed it adopted and registered DIAMONDS DIRECT specifically in response to the senior user’s plans to expand to Richmond.   Judge Hudson’s opinion simply does not broach the subject.  A footnote of the opinion states that the common law doctrine has no application to the case.  Perhaps he believed that Capri’s knowledge, even if it meant bad faith adoption, was pertinent only to the common law doctrine and did not suffice to rebut the statutory presumption of exclusive rights in Virginia.  That would seem a dubious stance because it begs the question of what suffices to rebut the state-law presumption.  He does consider the “zone of natural expansion” argument, which is part of the common law doctrine.  If good faith is irrelevant in applying the state statute, it certainly reinforces the importance of registration.

Christopher J. Mugel practices intellectual property law from Kaufman & Canoles’ Richmond, Virginia office.  –Christopher J. Mugel

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