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Earning Your Stripes (or Injunction): The Ninth Circuit Reiterates the Burden of Proving Irreparable Harm in Trademark Cases

May 29, 2018 – The TMCA

by Benjamin Greenberg

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We previously posted about an Oregon federal district court’s summary judgment rulings, favorable to Adidas, in the storied battle between heavyweights Adidas and Skechers. (Adidas America, Inc. v. Skechers USA, Inc. (D. Or. 2017)). Earlier in the case, the district court entered a preliminary injunction prohibiting the sale and marketing of Skechers’ Onix and Cross Court shoes, based on claims that the Onix infringes on the trade dress of Adidas’ Stan Smith shoe, and the Cross Court infringes and dilutes Adidas’ Three-Stripe trademark. This month, the Ninth Circuit reversed, in part, the preliminary injunction order, holding that the district court abused its discretion in issuing a preliminary injunction with respect to the Cross Court because Adidas did not show it would be irreparably harmed from the sale of this model shoe. In contrast, the Ninth Circuit affirmed the district court’s ruling with respect to the Stan Smith, holding that the district court did not clearly err in finding a likelihood of irreparable harm based on the record evidence. The Ninth Circuit’s ruling underscores that the presumption of irreparable harm in trademark infringement cases is long gone, even where likelihood of success on the merits is established; instead, a party must submit credible evidence to show that irreparable harm is likely.

The district court’s preliminary injunction order entered in February 2016 found that Adidas had produced sufficient evidence of irreparable harm to warrant injunctive relief. It reasoned that: (a) Skechers’ infringement undermines Adidas’ substantial investment in building its brand and reputation of its trademarks and trade dress; and (b) Skechers’ attempt to “piggy back” off of Adidas’ efforts by copying or closely imitating Adidas’ marks means Adidas loses control over its trademarks, reputation, and goodwill—“a quintessential irreparable injury.” The district court order relied on evidence presented by Adidas that: (1) it had spent tens of millions promoting the Stan Smith, and nearly forty million annually on goods bearing the Three-Stripe mark; (2) it spent significant time and money in building and maintaining its perception among consumers as a premium sports brand, whereas consumers perceive Skechers as a “lower end value brand”, based on testimony from its marketing executive; and (3) consumer survey evidence that approximately 20% of surveyed consumers believed that Onix was made by, approved by, or affiliated with Adidas, indicating that Adidas’ carefully constructed brand image is likely to be confused with or associated with Skechers’ value brand. The district court thus concluded that “Adidas had produced evidence that Skechers’ continued sale of its Onix and other contested shoes will harm Adidas’ reputation and goodwill—harm that is not compensable by money damages.”

The district court also found that Adidas had produced evidence that Skechers’ infringing footwear will diminish Adidas’ ability to create scarcity and drive demand for the Stan Smith -- a strategy Adidas had employed in 2013 in advance of its “reintroduction campaign.” Finally, the district court noted that Adidas’ Director of Sports Style Brand Marketing testified that the Stan Smith is one of Adidas’ most coveted shoes, and it works to control every aspect of the shoe that it can (materials, price, seller, who is seen wearing it, etc.). The district court reasoned that Skechers’ infringing shoes are likely to irreparably harm Adidas’ ability to control the quality of goods bearing Adidas marks or trade dress.

In affirming in part, and reversing in part, the Ninth Circuit’s likelihood of irreparable harm analysis largely hinged on its prior decision in Herb Reed Enterprises, LLC v. Florida Entertainment Management, Inc., 736 F.3d 1239, 1250 (9th Cir. 2013), in which the Court held that “[e]vidence of loss of control over business reputation and damage to goodwill [can] constitute irreparable harm,” so long as there is concrete evidence in the record of those things. With respect to the Stan Smith, the Ninth Circuit was persuaded that there was sufficient evidence from which the district court could conclude that Adidas was likely to suffer irreparable harm to its brand reputation and goodwill if the preliminary injunction did not issue. The Court relied on evidence in the record of significant investment in promoting the Stan Smith through specified and controlled avenues, significant media from various sources that was not initiated by Adidas, and evidence of Adidas’ efforts to carefully control the supply of Stan Smith and the damage that would occur if the market were flooded, in addition to the above-discussed consumer survey. In finding that the district court’s irreparable harm ruling was not clearly erroneous, the Ninth Circuit reasoned that “[t]he extensive and targeted advertising and unsolicited media, along with tight control of the supply of Stan Smiths, demonstrate that [A]didas has built a specific reputation. And, the customer surveys demonstrate that intangible benefits will be harmed if the Onix stays on the market because consumers will be confused about the source of the shoes.”

In contrast, the Court found that there was no evidence in the record that could support a finding of irreparable harm with respect to the allegedly-infringing Cross Court. The Court noted that Adidas advanced a narrow argument of irreparable harm as to the Cross Court: that Skechers harmed Adidas’ ability to control its brand image because consumers who see others wearing Cross Court shoes will associate the allegedly lesser-quality Cross Courts with Adidas and its Three-Stripe Mark (i.e. post-sale confusion). The Court first reasoned that Adidas’ theory relies on the notion that Adidas is viewed by consumers as a premium brand, while Skechers is viewed as a lower-quality, discount brand; and that Adidas did not set forth probative evidence of Skechers’ less favorable reputation. According to the Court, the only evidence in the record on this point was from Adidas employees, and Adidas did not provide sufficient specificity regarding consumer perception. The Court thus concluded that that the district court’s ruling that Skechers is viewed as a “value brand” is unsupported and conclusory, not grounded in evidence offered by Adidas.

The Court also found that Adidas’ theory of post-sale confusion conflicted with its theory on the merits, and counterintuitive, begging the question: “[h]ow would consumers who confused Cross Courts for Adidas shoes be able to surmise, from afar, that those shoes were of low quality? If the ‘misled’ consumers could not asses the quality of the shoe from afar, why would they think any different about Adidas’ products? In which case, how could Adidas’ premium brand possibly be hurt by any confusion?” Accordingly, the Court found that even if Skechers does make inferior products (or even if consumers tend to think so), there is no evidence that Adidas’ theory of post-sale confusion would cause consumers to associate such lesser-quality products with Adidas. And, even if consumers were likely to be confused as to the maker of the shoe, the Court cannot simply assume that such confusion will cause irreparable harm, where Adidas failed to provide concrete evidence that it will. The Court contrasted the more specific evidence presented by Adidas that its reputation and goodwill were likely to be irreparable harmed by the Onix based on Adidas’ extensive marketing efforts of the Stan Smith and its careful control of the supply.

Circuit Judge Clifton wrote a strongly-worded dissent chiding the majority’s Cross Court ruling on irreparable harm. Judge Clifton argued that the theory of post-sale confusion proffered by Adidas was not as narrow as the majority made it out to be, and quite consistent with a common theory of post-sale confusion in the trademark context. He explained that post-sale confusion could divert potential customers who believe they can obtain the prestige of Adidas’ goods without paying its normal prices. He mentioned his time in private practice thirty years ago defending Louis Vuitton against the sale of cheaper imitations. He was persuaded in those cases of the harm that could be caused (as Professor McCarthy described it) “if the prestige of carrying a bag with the Louis Vuitton trademark could be obtained at a fraction of the price, and if viewers could not tell the difference, the value of the trademark would be in jeopardy. And, if someone did confuse the cheap imitation for the real thing, the lesser quality of the imitator could further imperil the perceived value of the Louis Vuitton products and trademark.” He argued that a similar harm would occur to Adidas as a result of Skechers’ shoes imitating the Three Stripes mark.

Judge Clifton also vehemently disagreed with the majority’s ruling that there was no evidence in the record to support Adidas’ claim of irreparable injury. He argued that Adidas provided ample evidence of harm, including sworn declarations and live testimony by several Adidas employees supporting Adidas’ contention that it has established a reputation as a premium sports brand, whereas Skechers’ brand perception is a “value brand” or “lower-end brand.” Judge Clifton argued that the majority improperly elected to discount that evidence, by applying its own skepticism toward employee testimony, despite the fact that the district court found the evidence to be credible. He contended that the notion that the appellate court can decide for itself that evidence relied upon by the district court should be ignored because it was provided by an employee of a party is unsupported and badly misguided. Judge Clifton concluded that the district court was well within its discretion to infer that confusion between Skechers’ “lower-end” footwear and Adidas’ footwear was likely to harm Adidas’ reputation and goodwill as a premium shoe brand—which is precisely the type of harm that is “irreparable.”

Judge Clifton also reasoned that the district court’s determination did not even depend on establishing Skechers’ reputation as a lower quality brand; instead, the loss by Adidas of its control over its mark was by itself irreparably harmful. He argued that there was substantial evidence in the record regarding the value of Adidas’ mark and its management of the mark through investment and quality control over its product, evidence which the majority ignored.

The Ninth Circuit’s decision highlights the significant burden now imposed on parties seeking a preliminary injunction in trademark cases, a substantial departure from the presumption of irreparable harm that was applied once-upon-a-time ago. It also highlights a hurdle for the senior user that wants to obtain injunctive relief for infringement without delay, but now may be required to support its contention of irreparable harm with evidence extending beyond its own ranks, such as by commissioning a consumer survey, an undertaking that can delay the ability to seek immediate injunctive relief. In short, a trademark holder seeking to fully protect its mark from infringement must not only act quickly, it must also make a significant showing of irreparable harm at the preliminary injunction stage.

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That included information that MdR had originally acquired while acting for Harbour. As held in the case of Hilton v Barker Booth & Eastwood (a firm) [2005] 1 WLR 567, a solicitor owing duties to two clients cannot simply prefer one over the other, and it was unrealistic to suppose MdR would investigate the same claims for Harbour, then represent the Claimants, while disregarding everything it had already learned. The obvious commercial expectation was that this earlier work would be used to advance the Claimants' case. MdR sought to rely on a confidentiality clause in a 2024 retainer agreement between it and RGL Management Ltd (a claims management company acting on behalf of the Claimants) to argue that it was relieved of any duty to disclose information obtained while acting for other clients. The provision stated that MdR may "have acted for persons in the same or similar sector as yours and by agreeing to the terms of this letter you agree that will have no duty to disclose to you any confidential information that we have obtained, or might in the future obtain, from acting for such persons or which is derived from any other source". The Court rejected this on several grounds. Claimants who had already become MdR's clients had an existing right to information in the Harbour Communications where it was relevant to their claims before the 2024 retainer agreement. If they were to surrender that right, it would have required their informed consent (also required under the SRA Code of Conduct). The Court found no evidence that such informed consent had been given. The terms had simply been made available to the Claimants through a portal, with no indication that Claimants understood they were giving up existing rights to relevant information. The Court found that even if the terms had been contractually binding, that would not have amounted to informed consent. In addition, the wording of the clause was not sufficiently clear to show that the Claimants had agreed to waive access to this information. (iv) Was disclosure reasonable, proportionate, and necessary at this stage? The Claimants argued that it was neither reasonable nor proportionate for disclosure to be given at such a late stage (approximately two weeks before the start of the preliminary issue trial) and that it was not necessary for the just disposal of the proceedings. The Court rejected this, but it drew a distinction between two categories of documents within the Harbour Communications: Documents bearing on the actual knowledge of the individual drivers, including communications with the LTDA, were not privileged, likely straightforward to review, and directly relevant to the preliminary issue. Their disclosure was ordered as reasonable, proportionate, and necessary. Documents reflecting only MdR's or Harbour's own assessment of the merits were of more marginal, indirect relevance and largely likely to fall under legal advice privilege. A review to isolate the smaller pool of non-privileged material in this category would be time-consuming for limited benefit, so this was excluded from the order. Key Points to Note The judgment is an important reminder of several practical points: However closely a funder is involved in evaluating a claim's merits, litigation privilege will only apply to communications where the sole or dominant purpose of the communication is the conduct of litigation, not the funder's own decision on whether to finance it. Unless that communication separately attracts legal advice privilege, it may need to be disclosed. The same considerations apply to other communications. For example, in RBS Rights Litigation [2017] 1 WLR 3539 the argument that an After the Event (ATE) policy was subject to litigation privilege was rejected on a similar basis. Whilst in this case, there was no dispute as to whether litigation was in contemplation, it is important to note that litigation privilege will not automatically apply to the investigative stages of a claim, i.e. before litigation is in contemplation. Even where litigation is reasonably contemplated, the dominant purpose test must still be satisfied. Material created primarily for fact-finding, risk assessment, or other investigative purposes will not attract litigation privilege unless those activities are actually undertaken for the dominant purpose of conducting the litigation. (See The Director of the Serious Fraud Office v Eurasian Natural Resources Corporation Ltd [2017] EWHC 1017 (QB)). 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Alaska House Bill 126 (HB 126), sponsored by Representative Neal Foster and passed by the 34th Alaska Legislature, is now law. The bill changes which Alaska Native Corporations (ANCs) must file proxy and annual report materials with the State of Alaska, and makes it easier to reinstate certain dissolved Village Corporations. For many smaller Village Corporations, the practical result is less public disclosure. For shareholders, advisors, and the public, it means some financial information that used to be available through the State will no longer be readily obtained. This eUpdate explains what HB 126 does in plain terms, walks through the practical trade-offs, and answers common questions. 1. What HB 126 Changes The old rule Under prior law (Alaska Statutes Sec. 45.55.139), an Alaska Native Corporation had to file its annual report, proxies, and proxy statements with the Alaska Division of Banking and Securities (the Division) if it had more than $1 million in assets and 500 or more shareholders on its current rolls. A filing ANC was also required to follow the Division’s proxy rules (3 AAC 08.305 through .365), which require specific disclosures such as top 5 executive compensation, and related-party transactions. Because these filings are treated as public records, they gave non-shareholders, including the public and the press, visibility into ANC financial information that is not filed with the SEC. The new rule HB 126 changes how the 500-shareholder test is measured. Now, the asset test is removed, and the shareholder count is based on how many shareholders the corporation originally enrolled when it was formed under the Alaska Native Claims Settlement Act (ANCSA), not how many it has today. As shares have passed down through families over the decades, some Village Corporations that started with fewer than 500 shareholders now have more than 500 recordholders. Under the old current-count test, when those corporations had crossed the threshold, they had to file. Under the new original-enrollment test, they do not. Who is affected Village Corporations that originally enrolled fewer than 500 shareholders are the main beneficiaries. They no longer have to file proxy and annual report materials with the Division or follow the Division’s proxy regulations at 3 AAC 08.305 through .365. Two groups must continue to file as before: all twelve ANCSA Regional Corporations, each of which enrolled more than 500 shareholders at creation, and all Village Corporations that originally enrolled 500 or more shareholders. As reported by the Alaska Beacon, when the bill was under consideration, the Division identified 59 corporations then filing, expected at least seven village corporations to become exempt, and was reviewing roughly 30 more. 2. Practical Analysis HB 126 reduces a real compliance burden for smaller Village Corporations, which now need not spend time and money on State filings. In coming years, the exempt Village Corporations may experience benefits associated with less public disclosure and less regulation. But at the same time, less public disclosure carries trade-offs. Benchmarking will become harder Publicly-filed proxy statements and annual reports have long served as a reference set. Shareholders, corporations, advisors, and counsel use them to compare governance practices, compensation, and financial results across similarly-situated ANCs. Since fewer of these materials will be filed publicly, there will be fewer comparable documents available, which will make benchmarking and market-checking more difficult for like-sized ANCs over time. Executive compensation transparency may be reduced The Division’s proxy rules require disclosure of the compensation of ANC’s top five most highly compensated individuals (3 AAC 08.345(b)(2)), related-party transactions above $20,000 (3 AAC 08.345(b)(3)), and audited financial statements and management’s discussion and analysis (3 AAC 08.365). When a corporation is no longer required to file these disclosures publicly, it becomes harder for shareholders and others to obtain the information, to understand how compensation is set for their corporate leadership, and how it compares across corporations of similar size and complexity. Transparency may matter more as ANCs grow Some ANCs have grown into large, complex enterprises with substantial revenue and many subsidiaries, even with fewer than 500 shareholders. For an ANC with a broad and dispersed shareholder base, public materials can be an important way for shareholders and other stakeholders to understand governance, compensation, and performance across ANCs. Reduced disclosure may carry more practical weight in those settings than for a small corporation whose shareholders are closely connected to the business. The ANCSA annual report obligation continues It is important not to overstate what HB 126 does. HB 126 changes the state filing proxy requirements. It does not remove the separate obligation under ANCSA itself. That obligation comes from ANCSA at 43 U.S.C. Sec. 1625(c), which requires a Native Corporation that would otherwise be subject to the Securities Exchange Act of 1934 to prepare and transmit to its shareholders an annual report containing substantially the information a company subject to that Act would include. Similarly, ANCs that solicit proxies for an annual meeting are still required to furnish shareholders with those proxy materials under general Alaska corporate law. However, ANCs are now no longer required to transmit proxy statements to the State. ANCs’ reporting obligations to their shareholders are unaffected by HB 126. Any corporation newly exempt from state filing still owes its shareholders a detailed annual report and a proxy statement, even though that report is no longer routed through the State and made public. Reinstatement of dissolved Village Corporations Separately, HB 126 amends AS 10.06.960(k) to remove the prior deadline (previously December 31, 2020) for reinstating an involuntarily dissolved Native Village Corporation. A dissolved Village Corporation may now apply to be reinstated under AS 10.06.633(e) at any time. Reinstatement still runs through the commissioner under AS 10.06.633(e). In general, that means the ANC must apply, cure the neglect or delinquency that led to dissolution, and pay the amounts owed, and the corporation’s name must be available or be changed to one that is. Once reinstated, the corporation and its shareholders are restored to the rights, privileges, liabilities, and obligations they would have had as if the dissolution had never occurred, and corporate and shareholder actions taken during the dissolution are treated as valid. If the previously-used corporate name is no longer available, the board alone may amend the articles to adopt a new name (without the necessity for shareholder approval). 3. Frequently Asked Questions What does HB 126 do? It changes how Alaska measures the 500-shareholder test that decides which ANCs must file proxy and annual report materials with the state. It removes the asset test, and it counts shareholders based on original enrollment rather than the current rolls. It also removes the deadline for reinstating an involuntarily dissolved Native Village Corporation. Which ANCs are affected? Village Corporations that originally enrolled fewer than 500 shareholders, because they may no longer need to file with the Division. Regional Corporations and Village Corporations that originally enrolled 500 or more shareholders must continue to file as before. Does HB 126 eliminate all reporting obligations? No. It changes the state filing requirement under AS 45.55.139, but it does not remove the separate ANCSA obligation (43 U.S.C. Sec. 1625(c)) to provide shareholders with an annual report, and general corporate law still calls for a proxy statement when the ANC solicits proxies. Corporations that remain subject to state filing requirements must also continue to comply with the Division's rules. We think we are now exempt. What should our ANC board and management consider? Confirm your ANC’s original enrollment number and whether your corporation falls below the new threshold. Watch for communications from the State on this topic as they proceed with their research. If your ANC is now exempt, decide how your corporation will meet its continuing ANCSA obligation to shareholders, review proxy and annual meeting materials and timelines, and consider what to communicate to shareholders about any change in how they will receive information. It is worth documenting the basis for any exemption. What should ANC shareholders watch for? Shareholders should watch for how and when they will continue to receive annual report and proxy statement information directly from their ANC, since some material that used to be available through the State’s online website will no longer be publicly filed. If something is unclear, shareholders can ask their ANC how it intends to meet its ANCSA reporting obligations. How Dorsey Can Help HB 126 lightens the State filing load for smaller Village Corporations, but it also raises practical questions: confirming who is exempt, meeting continuing ANCSA obligations to shareholders, keeping proxy and annual meeting processes on track, and maintaining benchmarking when public materials become less available. These are exactly the kinds of judgment calls that benefit from early planning. Dorsey’s attorneys work closely with Alaska Native Corporations and related stakeholders. If you have questions about HB 126, ANC governance, proxy filings, annual reports, disclosure obligations, or shareholder communications, please contact your Dorsey attorney, including the authors of this eUpdate.

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Dorsey Partner Melissa Raphan Elected a Fellow of the College of Labor & Employment Lawyers