Just the cost of doing business? That is what many are asking following the district court judge’s decision in the Gucci America, Inc v. Guess?, Inc. (SDNY 2012) trademark infringement litigation, where a large $120 million damages claim became a small $4.648 million payout for Gucci.

On May 6, 2009, Gucci filed suit against Guess, alleging Guess designs or marks infringed on five Gucci trademarks. Gucci sought an injunction and $120 million in damages. Just over three years later, on May 21, 2012, the judge granted Gucci injunctive relief and a small fraction of the damages sought.

Gucci is an Italian fashion company, and is one of the largest and most recognizable luxury goods, fashion, and accessory brands in the world today. The Gucci brand appears on everything from watches to cars, and signifies membership in an “exclusive club.” Thus, its consumers are both wealthy “lifestyle” consumers who regularly wear Gucci’s products, and “aspiration” consumers, who may be younger and less wealthy, but who “aspire to the exclusivity that the Gucci brand represents.” Between 2004 and 2009, Gucci sold approximately $1.3 billion worth of products.

Guess is also a fashion company, but aimed at the mid-level market. Guess’ target market is women 15-30 who identify with the “sexy, trendy, flashy image of the Guess brand.” Consumers understand that the Guess brand and style is not the same as Gucci’s. Over the last ten years, Guess has been the subject of approximately twelve trademark infringement complaints. In each of those cases, Guess either resolved the matter with the complainant, or immediately stopped using the questionable mark.

Both companies spend huge amounts on advertising and promoting their brand every year.

The case arises out of Guess’ use of several designs which Gucci claims infringed on and diluted five of its marks. Particularly at issue were Gucci’s marks involving (1) a Green-Red-Green stripe used on handbags, luggage, and different leather goods; (2) a repeating “GG” pattern consisting of a pair of inward facing, inverted “G”s; (3) that pattern’s use in conjunction with a diamond; (4) a stylized “G”; and (5) a script mark bearing the brand’s name. The corresponding Guess marks were (1) various three coloured stripes, including a Green-Red-Green stripe, used on some of its shoes; (2) a trademarked a “Quattro G” logo and pattern consisting of four interlocking “G”s; (3) the use of this pattern rotated 45 degrees clockwise and surrounded by a stitched diamond-shaped border [interestingly, this mark was registered with the PTO as a “square”]; (4) a square stylized “G”; and (5) a script mark bearing the brand’s name.

In her final decision, the judge granted Gucci injunctive relief barring Guess from using the Quattro G Pattern in brown/beige, a Green-Red-Green Stripe (but not stripes with other colors), and certain Square G marks. Guess was allowed to continue using the other marks. On the damages side, the judge held Gucci was only entitled to an accounting of profits and limited the damages to those profits gained in sales of products with the Quattro G pattern in brown/beige colorways and the GRG stripe. Thus, out of a $120 million claim, the judge only granted Gucci $ 4.648 million in damages.

Guess reported nearly $2.7 billion in net revenues from worldwide product sales and licensing in 2011. An adverse ruling of $4.648 million is merely a drop in the bucket.

What went so wrong for Gucci?

Primarily, many of Gucci’s arguments were flawed from the start. Fashion, like literature, is built on a shared vocabulary: a skirt is a skirt, a shirt is a shirt, and a shoe is a shoe. Like copyright, one cannot monopolize the basic building blocks of fashionable expression, though the slightest creative variation may be worthy of protection. And use of that slight creative variation to denote the source of a ware or service is exactly what trademark law is designed to protect.

The key inquiry in a trademark infringement case is whether the defendant’s mark is likely to cause consumer confusion as to the origin or sponsorship of the defendant’s goods or services. Particularly, courts look to see if numerous ordinary prudent purchasers are likely to be misled or confused as to the source of the product or service because of the defendant’s use of the mark in the marketplace. In the context of post-sale confusion, when a consumer chooses to purchase a lower-cost product knowing the public is likely to be confused or deceived into thinking it holds the same prestige as the genuine product, Hermes Int’l v. Lederer de Paris Fifth Ave., Inc., 219 F.3d 104, 108 (2d Cir. 2000), the plaintiff must establish a “likelihood of confusion among an appreciable number of post-sale observers, taking into account all the vagaries involved with post-sale observation.” This makes post-sale confusion cases particularly difficult to prosecute, since much of the proffered evidence is speculative.

While trademark infringement is a federal law based private action, see Lanham Act, 15 U.S.C. §§ 1114, 1125, each circuit has developed its own, though substantially similar, multi-factored test to find a likelihood of confusion. The courts in the second circuit use an eight factor test from Polaroid Corp. v. Polarad Electronics Corp,.287 F.2d 492, 495 (2d Cir. 1961) to assess a claim of confusion. The test asks the court to assess (1) the strength of the Plaintiff’s mark in its commercial context; (2) the similarity between the Plaintiff’s and Defendant’s marks, including whether they create the same overall impression when viewed serially; (3) the competitive proximity of the product, looking at the nature of the products and the structure of the relevant markets; (4) whether the two companies are likely to directly compete in the same market (the “bridging the gap” factor); (5) actual confusion; (6) the Defendant’s intent or bad faith in adopting and using the mark; (7) whether there is a danger the lower quality of the Defendant’s product will jeopardize the Plaintiff’s reputation; and (8) the sophistication of the consumer (while typically the “consumer” is a direct purchaser, in a post-sale case “consumers” are casual observers and are not necessarily purchasers).

The judge assessed all five marks using the eight factors [author’s note: because the outcome of the dilution claim tracks the confusion claim, I will only discuss the confusion claim, for brevity’s sake]. For all the marks, she concluded that (1) the “bridging the gap” factor was neutral because although Gucci and Guess do not target the same market, Gucci’s “aspirational” customer skews the result; (2) that there was no significant apparent quality difference between Gucci’s and Guess’ products; and (3) that neither party brought evidence showing the sophistication of the consumer, and thus the 8^th factor favored Guess.

The judge commenced her analysis of the Quattro G mark and pattern by stating that many designer houses, such as Fendi, Coach, and Louis Vitton, use an all-over logo pattern on many of their wears consisting of the brand’s initials. This implied that because Gucci and Guess happen to have the same initial—“G”—any use of a basic pattern involving each company’s initial was bound to involve some similarity.

In the bulk of the analysis the judge ruled the two marks visually dissimilar because of the way the diamond/square pattern was anchored at the corners of the shape (double interlocking “G”’s versus single “G”s) and because Gucci’s design featured only double linked “G”s at the corners of the square/diamond, while Guess’ featured either a single “G” or four interlinking “G”s at the center of the square/diamond, but visually similar because both patters involved the letter “G” and a diamond pattern with dots or dashes connecting the corners. Additionally, the use of the pattern in brown/beige on a two-tone canvas background also rendered it visually similar. Weighing the rest of the Polaroid factors, including Guess’ intent to copy the repeating “GG” pattern and diamond motif, the judge found a likelihood of confusion when used in brown/beige, but not when Guess employed other colors.

The judge avoided a full Poloroid analysis for the GRG stripe, finding that because stripe patterns are “’basics’ that every band must be able to use freely in order to compete,” Guess only infringed Gucci’s GRG mark when it used those colors in that pattern.

The stylized “G” was found to be a weak mark, and was only confusing where Guess used a stylized G that was very similar to Gucci’s “G” on two of its shoe styles.

Finally, the “script” mark did not cause a likelihood of confusion primarily because each company’s mark spelled out a different word.

Similarly, on the dilution claim, the judge found Guess’ use of the Quattro G pattern in the brown/beige color scheme and use of the GRG stripe diluted Gucci’s marks by blurring.

In addition to the judge’s analysis on the confusion and dilution issues, Gucci’s case also appeared marred by their overall behavior.

First, Gucci’s treatment of Guess’ activities was wholly inconsistent with the way they treated other infringers. Particularly, the judge found that “Over the years, Gucci has sent out hundreds of cease and desists letters to entities ranging from national companies such as Bebe, Juicy Couture, and Williams-Sonoma, all the way to small-time infringers, such as a counterfeiter working out of her Los Angeles apartment and a rabbi in New York, who they suspected might sell counterfeit Gucci products to benefit his synagogue.” Alternatively, Gucci failed to send any cease-and-desist letter to Guess when it discovered the claimed infringements and chose not to instigate suit earlier because Gucci was busy “combating counterfeiters” and thus faced “budgetary” concerns.

The judge found that Gucci knew for several years that Guess had been using the marks at issue. Particularly, Guess displayed items featuring the allegedly infringing marks in its store windows, and sold products bearing those marks and designs on its own website and on those run by third-parties. Furthermore, Gucci admitted to specifically monitoring Guess’ advertisement, including those containing the marks at issue. Because of these facts, the judge dismissed claims by Gucci’s witnesses that despite these monitoring practices, they had no knowledge of the potential infringement, as not credible.

Second, Gucci failed to bring non-speculative evidence of actual damages in the form of lost sales or harm to brand value. Gucci’s failure to meet the burden of proof on this issue eliminated a large amount of the damages it sought.

Gucci’s behavior toward the Guess threat to its brand and the general merits of claims thus combined to give Gucci a very narrow and very shallow victory over Guess. Perhaps the judge’s view of the case was best summed up in her conclusion. “Oscar Wilde,” she wrote, “aptly called [fashion] ‘a form of ugliness so intolerable that we have to alter it every six months.’ With the instant disputes now resolved … it is my hope that this ugliness will be limited to the runway and shopping floor, rather than spilling into the courts.”

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