New York District Court grants in part and denies in part the motion of Cosmopolitan Cosmetic against fragrance producer Coty Inc

Date Published: Jun 21, 2021

Coty INC, a seller, distributor and manufacturer of the luxury fragrance products and owner of proprietary trademark and licensed marks including Calvin Klein, Hugo Boss and Marc Jacob etc. (collectively, "Plaintiffs' Fragrances") along with other several plaintiffs (collectively “Coty Inc.”) filled a civil action against Cosmopolitan Cosmetics Inc’s., Eugene Abraham, and William Gold (collectively "Defendants") at the United States District Court of Southern District Of New York (“District Court”) (Coty Inc v. Cosmopolitan Cosmetics Inc 432 F. Supp. 3d 345 (S.D.N.Y. 2020). Cosmopolitan Cosmetics Inc. is a corporation that sells fragrance to retailers and other distributors. Barring Coty Inc, all the Plaintiffs sued the Defendants for Trademark infringement and counterfeiting of trademark under Section 32(1) of the Trademark Act of 1956 (“Lanham Act”). And all Plaintiffs along with Coty Inc. filled the suit collectively for unfair competition and false designation of origin under Section 43(1) of the Lanham Act and unfair competition under New York Common Law and sought permanent injunction as well as treble profits & damages, compensatory damages and other fees and damages. The subject matter jurisdiction of the suit falls under Section 39 of the Lanham Act. For ascertaining quality assurance and for protecting the anti-theft measures, Coty Inc. at the time of manufacturing the fragrance, affixed the “Production Code” on each of the units which reflected the date of production and facilities. The removal of the Production Code could result in the mutilation of genuine product packages and could degrade the products. The Defendant was selling units of the Plaintiffs’ fragrance wherein the production codes on the products had been obscured, stuck or otherwise mutilated (hereinafter, the "Decoded Products") which is an unauthorized act. The Plaintiff averred that this act was orchestrated by the Defendant to decode the product and conceal the identity of the sellers who are further diverting the product outside the authorized distribution channels. Relying in Ashcroft v. Iqbal, 556 U.S. 662, 681, 129 S.Ct. 1937, 173 L.Ed. 2d 868 (2009) the court pointed out that mere naked assertion does not suffice to survive the complaint. It must contain "enough facts to state a claim to relief that is plausible on its face." 

However, two exceptions exist to the “First Sale Doctrine” for the resale of genuine goods having true mark without ramification from the owner of mark i.e., Quality Control Exception (applies in cases where the goods do not conform the quality control standard of trade mark holder) and the Material Difference Exception (applies when goods differ in a way that would likely be relevant to the decision of a consumer who purchases them). In this case, Plaintiffs sought to invoke the exception of quality control. In the case of El Greco Leather Prods. Co. v. Shoe World, Inc., 806 F.2d 392, 395 (2d Cir. 1986), the Second Circuit court observed that one of the most important protections is the right to control the quality of goods manufactured and sold. To pursue the exception, actual quality is irrelevant. Only the control of quality of the trademark is important and it is not necessary to implement most stringent quality control procedure available; instead, it is permitted to make a business judgment about the procedures to implement. Hence applying the principles, the Second Circuit held that only three things needed to be substantiated by the trademark holder(s) to establish that the product is not genuine i.e., “(I) it has established legitimate, substantial, and no pretextual quality control procedures, (ii) it abides by these procedures, and (iii) the nonconforming sales will diminish the value of the mark."

In this case, the contention of the Plaintiff was that since the Production code was implemented by Coty Inc., rather than by the trademark owner as it was not applied to every unit, the Quality Control exception would not be available. Prima facie in this case, the contention of the Defendant prevailed. Further, the Plaintiff asserted that this production code was applied to each of the fragrances considering which, all of the three criteria for the Quality Control Exception are fulfilled because each of the Fragrances bear a production code which confers the date of production and facilities hence, abiding by the procedure mentioned in the FAC. The removal of the production code will mutilate the genuine product packaging which will degrade the quality of the product and hence, the differences between the Plaintiffs' products which are genuine and the Decoded Products "are obviously significant to the consuming public’. As a counter, the Defendant presented some images to substantiate that the Plaintiff didn’t apply production codes to every unit. The court however, citing Fed. R. Evid. 201(b); Alvarez v. Cty. of Orange, N.Y., 95 F. Supp. 3d 385, 398 (S.D.N.Y. 2015) held that that only those facts are taken into judicial notice which have common knowledge and originated from an unimpeachable source. 

Another contention of the Plaintiff’s was that the decoded products were counterfeit goods because the Section 45 of the Lanham Act defines “counterfeit” as “a spurious mark which is identical with, or substantially indistinguishable from, a registered mark” Despite the fact that the word spurious is not defined anywhere in the statue the circuit court defined it as "deceptively suggesting an erroneous origin; fake." So, a product which was originally manufactured by the trademark holder but is materially different may become a counterfeit product, "despite the use of the true manufacturer's mark.”

In this case the district court further observed that the Defendants were alleged to be the CEO and President of Cosmopolitan whereas the amended complaint had a conclusory statement regarding the involvement of individual officers. Thus, the district court in this case dismissed the amended complaint regarding claims against the Defendant and granted all the claims against Abraham and Gold. 

Coty Inc v. Cosmopolitan Cosmetics Inc 432 F. Supp. 3d 345 (S.D.N.Y. 2020)
Coty Inc v. Cosmopolitan Cosmetics Inc CIVIL ACTION NO.: 18 Civ. 11145 (LTS) (SLC) (S.D.N.Y. Jun. 18, 2020)