Opinion ID: 577151
Heading Depth: 2
Heading Rank: 1

Heading: Secondary Liability

Text: 22 The most interesting issue in this case is CSI's liability for Parvez's sales. Hard Rock argues that CSI has incurred both contributory and vicarious liability for the counterfeits, and we take the theories of liability in that order. 23 It is well established that if a manufacturer or distributor intentionally induces another to infringe a trademark, or if it continues to supply its product to one whom it knows or has reason to know is engaging in trademark infringement, the manufacturer or distributor is contributorially responsible for any harm done as a result of the deceit. Id. at 854, 102 S.Ct. at 2188 (footnote omitted). Despite this apparently definitive statement, it is not clear how the doctrine applies to people who do not actually manufacture or distribute the good that is ultimately palmed off as made by someone else. A temporary help service, for example, might not be liable if it furnished Parvez the workers he employed to erect his stand, even if the help service knew that Parvez would sell counterfeit goods. Thus we must ask whether the operator of a flea market is more like the manufacturer of a mislabeled good or more like a temporary help service supplying the purveyor of goods. To answer questions of this sort, we have treated trademark infringement as a species of tort and have turned to the common law to guide our inquiry into the appropriate boundaries of liability. David Berg & Co. v. Gatto Int'l Trading Co., 884 F.2d 306, 311 (7th Cir.1989). 24 CSI characterizes its relationship with Parvez as that of landlord and tenant. Hard Rock calls CSI a licensor, not a landlord. Either way, the Restatement of Torts tells us that CSI is responsible for the torts of those it permits on its premises knowing or having reason to know that the other is acting or will act tortiously.... Restatement (Second) of Torts § 877(c) & cmt. d (1979). The common law, then, imposes the same duty on landlords and licensors that the Supreme Court has imposed on manufacturers and distributors. In the absence of any suggestion that a trademark violation should not be treated as a common law tort, we believe that the Inwood Labs. test for contributory liability applies. CSI may be liable for trademark violations by Parvez if it knew or had reason to know of them. But the factual findings must support that conclusion. 25 The district court found CSI to be willfully blind. Since we have held that willful blindness is equivalent to actual knowledge for purposes of the Lanham Act, Lee, 875 F.2d at 590, this finding should be enough to hold CSI liable (unless clearly erroneous). But we very much doubt that the district court defined willful blindness as it should have. To be willfully blind, a person must suspect wrongdoing and deliberately fail to investigate. Id. The district court, however, made little mention of CSI's state of mind and focused almost entirely on CSI's failure to take precautions against counterfeiting. Mem.Op. at 5-6. In its conclusions of law, the court emphasized that CSI had a duty to take reasonable precautions. Mem.Op. at 7. In short, it looks as if the district court found CSI to be negligent, not willfully blind. 26 This ambiguity in the court's findings would not matter if CSI could be liable for failing to take reasonable precautions. But CSI has no affirmative duty to take precautions against the sale of counterfeits. Although the reason to know part of the standard for contributory liability requires CSI (or its agents) to understand what a reasonably prudent person would understand, it does not impose any duty to seek out and prevent violations. Restatement (Second) of Torts § 12(1) & cmt. a (1965). We decline to extend the protection that Hard Rock finds in the common law to require CSI, and other landlords, to be more dutiful guardians of Hard Rock's commercial interests. Thus the district court's findings do not support the conclusion that CSI bears contributory liability for Parvez's transgressions. 27 Before moving on, we should emphasize that we have found only that the district court applied an incorrect standard. We have not found that the evidence cannot support the conclusion that CSI was in fact willfully blind. At the Tri-State, Barelli saw Parvez's shirts and had the opportunity to note that they had cut labels and were being sold cheap. Further, Barelli testified that he did not ask vendors whether their goods were counterfeit because they were sure to lie to him. One might infer from these facts that Barelli suspected that the shirts were counterfeits but chose not to investigate. 28 On the other hand, we do not wish to prejudge the matter. For it is undisputed that Hard Rock made no effort to broadcast the information that legitimate Hard Rock t-shirts could only be found in Hard Rock Cafes. Moreover, there does not seem to be any particular reason to believe that inexpensive t-shirts with cut labels are obviously counterfeit, no matter what logo they bear. Cf. Lee, 875 F.2d at 590 (genuine Vuitton and Gucci bags unlikely to display poor workmanship or purple vinyl linings). The circumstantial evidence that Barelli suspected the shirts to be counterfeit is, at best, thin. On remand, the district court may choose to develop this issue more fully. 29 Perhaps recognizing that the district court's opinion is unclear, Hard Rock urges us to find CSI vicariously liable for Parvez's sales, regardless of its knowledge of the counterfeiting. Indeed, if we accept this theory, CSI is liable for Parvez's sales even if it was not negligent. 3 See, e.g., Shapiro, Bernstein & Co. v. H.L. Green Co., 316 F.2d 304, 309 (2d Cir.1963). 30 We have recognized that a joint tortfeasor may bear vicarious liability for trademark infringement by another. David Berg, 884 F.2d at 311. This theory of liability requires a finding that the defendant and the infringer have an apparent or actual partnership, have authority to bind one another in transactions with third parties or exercise joint ownership or control over the infringing product. Id. The case before us does not fit into the joint tortfeasor model, and Hard Rock does not argue that it does. 31 Instead, Hard Rock wants us to apply the more expansive doctrine of vicarious liability applicable to copyright violations. Under the test developed by the Second Circuit, a defendant is vicariously liable for copyright infringement if it has the right and ability to supervise the infringing activity and also has a direct financial interest in such activities. Gershwin Publishing Corp. v. Columbia Artists Management, Inc., 443 F.2d 1159, 1162 (2d Cir.1971) (hereinafter CAMI ); F.E.L. Publications, Ltd. v. National Conf. of Catholic Bishops, 466 F.Supp. 1034, 1040 (N.D.Ill.1978); see also Dreamland Ball Room, Inc. v. Shapiro, Bernstein & Co., 36 F.2d 354, 355 (7th Cir.1929) (owner of dance hall liable for copyright violations by band hired to entertain paying customers); Famous Music Corp. v. Bay State Harness Horse Racing & Breeding Ass'n, 554 F.2d 1213, 1215 (1st Cir.1977) (owner of racetrack liable for copyright violations by company hired to supply music over public address system). The purpose of the doctrine is to prevent an entity that profits from infringement from hiding behind undercapitalized dummy operations when the copyright owner eventually sues. Shapiro, Bernstein, 316 F.2d at 309. 32 The parties have argued vigorously about the application of this doctrine to the facts. 4 But we need not decide the question; for the Supreme Court tells us that secondary liability for trademark infringement should, in any event, be more narrowly drawn than secondary liability for copyright infringement. Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417, 439 n. 19, 104 S.Ct. 774, 787 n. 19, 78 L.Ed.2d 574 (1984) (citing fundamental differences between copyright and trademark law). If Hard Rock referred us to some principle of common law that supported its analogy to copyright, we would be more understanding of its claims. But it has not. Further, there is no hint that CSI is playing at the sort of obfuscation that inspired the Second Circuit to develop its more expansive form of vicarious copyright liability. Hard Rock must look to Congress to provide the level of protection it demands of CSI here. 33 In sum, we find that CSI may bear contributory liability for Parvez's unlawful sales, but we see no evidence on the record that would support a finding that CSI is vicariously liable. Accordingly, because the district court's findings fail to establish that CSI knew or had reason to know that Parvez was selling counterfeits, we must vacate the judgment against CSI and remand for further proceedings.B. Injunctive Relief 34 CSI argues that entry of a permanent injunction is inappropriate even if it is liable, because there is no reason to believe that it will permit more vendors to infringe Hard Rock's trademarks. In this Circuit, however, [i]t is within the discretion of the trial court to grant or deny an injunction against conduct which has ceased and is not likely to recur. Schutt Mfg. Co. v. Riddell, Inc., 673 F.2d 202, 207 (7th Cir.1982); Scotch Whisky Ass'n v. Barton Distilling Co., 489 F.2d 809, 813 (7th Cir.1973). More generally, a plaintiff in a trademark case: 35 is entitled to effective relief; and any doubt in respect of the extent thereof must be resolved in its favor as the innocent producer and against the [defendant], which has shown by its conduct that it is not to be trusted. 36 Polo Fashions, Inc. v. Dick Bruhn, Inc., 793 F.2d 1132, 1135 (9th Cir.1986) (quoting William R. Warner & Co. v. Eli Lilly & Co., 265 U.S. 526, 532, 44 S.Ct. 615, 618, 68 L.Ed. 1161 (1924)); see also Champion Spark Plug Co. v. Sanders, 331 U.S. 125, 130, 67 S.Ct. 1136, 1139, 91 L.Ed. 1386 (1947); 2 J. Thomas McCarthy, Trademarks and Unfair Competition § 30:2 at 466 (2d ed. 1984). On remand, if the district court finds that CSI is liable, the entry of an appropriate injunction will again be within its discretion. To paraphrase the Ninth Circuit: if CSI sincerely intends not to permit the sale of Hard Rock merchandise at its flea markets, the injunction harms it little; if it does, the injunction gives Hard Rock substantial protection of its trademarks. Polo Fashions, 793 F.2d at 1135-36. C. Attorney's Fees 37 Section 35 of the Lanham Act, 15 U.S.C. § 1117 (1988), provides that prevailing plaintiffs may be awarded attorney's fees in two circumstances. If a defendant has sold counterfeit goods by mistake or through negligence, attorney's fees may be awarded in exceptional circumstances. § 1117(a). But if the violation consists of intentionally using a mark or designation, knowing such mark or designation is a counterfeit mark, treble damages and attorney's fees must be awarded unless there are extenuating circumstances. § 1117(b). Willful blindness is sufficient to trigger the mandatory provisions of subsection b. Lee, 875 F.2d at 590. 38
39 In response to Hard Rock's claim for attorney's fees, CSI argues that it cannot be liable for mandatory attorney's fees under subsection b because even if it is a contributory infringer, it did not intentionally us[e] a counterfeit mark. We reject this argument. If CSI can bear contributory liability under substantive provisions that impose liability on those who use[ ] a counterfeit mark in commerce, 15 U.S.C. §§ 1114 & 1125 (sections 32 and 43 of the Act), there is no reason to believe that it cannot intentionally us[e] a counterfeit within the meaning of section 35(b). 40 On remand, if the district court finds CSI liable as a contributory infringer, it should consider whether its findings also amount to intentional use. If CSI is liable because it knew that the t-shirts were counterfeit, or because it was willfully blind, an award of attorney's fees is mandatory under section 35(b). If, however, CSI is liable, but only because it had reason to know that the shirts were counterfeits, 5 then the district court should award attorney's fees only if it finds that the circumstances were exceptional. 41 Finally, CSI also argues that Hard Rock failed to come up with competent evidence to support an award of attorney's fees and that it already received its fees when it settled with the primary infringer, Parvez. But since the district court refused to award attorney's fees, it never had a chance to pass on these questions. We decline to do so here and leave these arguments for the district court on remand.
42 The district court's findings about Harry's suffer from the same defect as the findings about CSI. It is simply not clear whether the court used the phrase willful blindness to mean that Harry's suspected the goods were counterfeit but decided not to investigate or to mean that Harry's failed to take precautions. The evidence would support either conclusion. Unfortunately, because of the ambiguity, we must remand this question as well, although the finding of liability stands. 6 If the district court finds that Harry's was willfully blind as to the counterfeit nature of the t-shirts it sold, it must award attorney's fees to Hard Rock under section 35(b). Only if Harry's was not willfully blind does the exceptional circumstances standard from section 35(a) apply. 7