<i>adidas v. Payless</i>

A brief recap of the history of the parties' dispute ' that dates back to a prior action between the parties in the 1990s, when adidas first accused Payless of unlawful conduct with respect to its shoe designs and sales ' is helpful. The prior action was resolved on the basis of a 1994 settlement agreement, in which Payless agreed not to sell athletic shoes featuring 'three substantially straight parallel stripes on the side of the shoe running diagonally from the outsole forward to the lacing area,' or 'two or four parallel double-serrated stripes of contrasting color running diagonally from the outsole forward to the lacing area.' In exchange, adidas agreed to dismiss the prior action with prejudice and to release any claims that it 'brought or could have brought' based on Payless's use of 'two and four parallel double-serrated stripes' on footwear.

In the aftermath of the 1994 settlement, Payless stopped selling three-stripe athletic shoes. At some point between that time and 2001, however, Payless began selling two- and four-stripe shoes that became the subject matter of the current litigation. Following the filing of adidas's 2001 Complaint and the discovery that ensued, the 1994 settlement agreement became a centerpiece of the litigation, as Payless urged a broad reading of the agreement to preclude adidas from bringing claims against Payless for any two or four parallel stripe shoes, regardless of whether the stripes were serrated or the designs were in existence in 1994. In January 2003, the United States District Court for the District of Oregon awarded summary judgment to Payless, holding that the 1994 agreement precluded adidas's claims.

Ninth Circuit Ruling

In January 2006, however, the Ninth Circuit reversed, concluding that the 1994 agreement did not prevent adidas's 2001 claims, because adidas released only those claims that it brought or could have brought before the prior action was dismissed. Here, however, the shoes at issue were not sold by Payless until after the 1994 agreement was entered into and thus, adidas could not have brought claims against shoes not in existence at the time.

Returning to the District Court on remand from the Ninth Circuit, the parties filed cross-motions for partial summary judgment. In its summary judgment motions, Payless again raised the 1994 agreement ' this time, as a defense to willfulness ' along with other defenses, including laches, waiver, estoppel, abandonment, acquiescence, unclean hands, trademark misuse, and contractual estoppel. Payless also moved for summary judgment on adidas's claims of infringement and dilution. adidas in turn moved for partial summary judgment on Payless's affirmative defenses and on Payless's counterclaims seeking to cancel adidas's Three-Stripe Mark.

Summary Judgment

On Dec. 21, 2008, the district court granted summary judgment to adidas on all of Payless's affirmative defenses (laches, waiver, estoppel, abandonment, acquiescence, unclean hands, trademark misuse, and contractual estoppel). The court denied Payless's summary judgment motion on willfulness, in which Payless had contended it made a 'good faith' interpretation of the 1994 settlement agreement and, similarly, denied summary judgment on Payless's advice-of-counsel defense. The court further found genuine issues of material fact existed with respect to adidas's infringement and dilution claims under federal and state law.

In reaching these summary judgment determinations, the district court reasoned, among other things, that Payless could not demonstrate the requisite economic or expectations-based prejudice necessary to establish laches because it did not prove it had invested in stripes as a trademark; internal Payless documents provided sufficient circumstantial evidence of a deliberate attempt to trade on adidas's goodwill for adidas's willfulness charge to survive summary judgment; the advice-of-counsel defense could not be decided on summary judgment because there were significant questions as to whether Payless's counsel actually reviewed each of the shoes at issue; and numerous material-fact issues existed around adidas's infringement and dilution claims.

In its likelihood-of-confusion summary judgment analysis, the court found that, as a matter of law, there is an actionable similarity between Payless's use of two or four stripes and adidas's Three-Stripe Mark; the Three-Stripe Mark is strong and entitled to protection; and adidas had established some degree of actual consumer confusion worthy of being tried before a jury. Significantly, adidas acknowledged that point-of-sale confusion was not at issue in the case, but maintained that initial-interest and post-sale confusion were sufficient grounds to support its infringement and dilution claims. On adidas's dilution claim, the district court held that the record supported a finding that adidas's Three-Stripe Mark is famous, and has been famous since as early as 1970, and that issues of material fact existed as to whether the parties' marks were sufficiently identical and whether Payless's use had actually diluted adidas's rights.

In proceeding to trial, the focus of the case became the breadth of protection to which adidas's Three-Stripe Mark and Superstar Trade Dress are entitled, Payless's intent in using two and four stripes, and the degree to which consumers were confused (and to which their mental associations with the adidas brand were blurred or tarnished) by Payless's designs.

The Trial

Trial began on April 8, 2008 and continued for nearly a month. adidas opened its case in chief with the strength of its Three-Stripe Mark and Superstar Trade Dress, introducing evidence of extensive sales and marketing over the last 50 years for the Three-Stripe Mark and 38 years for the Superstar Trade Dress, unsolicited media coverage of the marks, and expert witness testimony. adidas also relied on several confusion surveys showing that footwear bearing two and four parallel stripes caused confusion among the relevant public with adidas's Three-Stripe Mark. In what ultimately resulted in a finding of willfulness, adidas presented the jury with internal Payless documents and employee testimony that Payless intentionally attempted to trade on adidas's goodwill in designing, manufacturing, and selling the footwear at issue.

In its defense, Payless claimed that other companies had used stripes on footwear over the past several decades. As a result, Payless contended that adidas's Three-Stripe Mark and Superstar Trade Dress existed in a crowded field of stripe designs and should receive only very narrow protection. Payless also argued that Payless buyers did not copy adidas's designs directly, but merely attempted to provide consumers with affordable, low-cost shoes 'inspired' by popular or trendy shoes.

Payless heavily relied on its 'advice of counsel' defense, asserting that it could not willfully have infringed or diluted adidas's trademark and trade dress rights because it had a system in place through which outside attorneys reviewed proposed shoe models prior to sale. adidas, on the other hand, argued that Payless's review process was inadequate at best, reviewed only a handful of the shoes at issue, and existed precisely for the reason of having an advice-of-counsel defense at trial.

In its May 6 verdict, the jury rejected Payless's arguments and found that 266 of the 267 accused lots infringed and diluted adidas's Three-Stripe Mark and/or Superstar Trade Dress. The jury then awarded adidas nearly $305 million, comprised of actual damages in the amount of $30,610,179, disgorgement of profits in the amount of $137,003,578, and $137,003,578 in punitive damages.

The parties have submitted post-trial motions. Payless moved for judgment as a matter of law, for a new trial, or for remittitur on the jury's damages awards. adidas opposed Payless's motions and cross-moved for injunctive relief. The parties are awaiting the court's rulings on these motions.

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Charles H. Hooker III and Sara M. Vanderhoff are associates in the Atlanta office of Kilpatrick Stockton, where they are part of the Intellectual Property Department and Trademark and Copyright Team. Both authors focus their practice on litigation and were members of the adidas trial team. Mr. Hooker can be reached at [email protected] and Ms. Vanderhoff can be reached at [email protected].

After almost seven years since inception, the lawsuit by adidas America, Inc. and adidas-Solomon AG ('adidas') against Payless ShoeSource, Inc. ('Payless') ended at the trial level with a jury verdict against Payless in the amount of $305 million. Payless was found guilty of willful federal trademark and trade dress infringement, trademark and trade dress dilution, and state-law unfair and deceptive trade practices as a result of its sale of footwear bearing confusingly similar imitations of adidas's famous Three-Stripe Mark and Superstar Trade Dress.

On Nov. 8, 2001, adidas filed its Original Complaint, accusing Payless of selling two- and four-stripe confusingly similar imitations of adidas's three-stripe shoes, including its classic Superstar design, as well as other popular adidas shoes such as the Prajna, Mei, Copa Mundial, Campus, Samoa, Stan Smith, Tuscany/adi Racer, and Country Ripple. Between 2001 and the verdict in 2008, Payless continued to introduce new, similar footwear models that adidas would accuse of infringement throughout the pendency of the litigation. In all, 267 Payless lots were accused, of which the jury found all but one to infringe and dilute adidas's trademark and trade dress interests.

A Brief History

A brief recap of the history of the parties' dispute ' that dates back to a prior action between the parties in the 1990s, when adidas first accused Payless of unlawful conduct with respect to its shoe designs and sales ' is helpful. The prior action was resolved on the basis of a 1994 settlement agreement, in which Payless agreed not to sell athletic shoes featuring 'three substantially straight parallel stripes on the side of the shoe running diagonally from the outsole forward to the lacing area,' or 'two or four parallel double-serrated stripes of contrasting color running diagonally from the outsole forward to the lacing area.' In exchange, adidas agreed to dismiss the prior action with prejudice and to release any claims that it 'brought or could have brought' based on Payless's use of 'two and four parallel double-serrated stripes' on footwear.

In the aftermath of the 1994 settlement, Payless stopped selling three-stripe athletic shoes. At some point between that time and 2001, however, Payless began selling two- and four-stripe shoes that became the subject matter of the current litigation. Following the filing of adidas's 2001 Complaint and the discovery that ensued, the 1994 settlement agreement became a centerpiece of the litigation, as Payless urged a broad reading of the agreement to preclude adidas from bringing claims against Payless for any two or four parallel stripe shoes, regardless of whether the stripes were serrated or the designs were in existence in 1994. In January 2003, the United States District Court for the District of Oregon awarded summary judgment to Payless, holding that the 1994 agreement precluded adidas's claims.

Ninth Circuit Ruling

In January 2006, however, the Ninth Circuit reversed, concluding that the 1994 agreement did not prevent adidas's 2001 claims, because adidas released only those claims that it brought or could have brought before the prior action was dismissed. Here, however, the shoes at issue were not sold by Payless until after the 1994 agreement was entered into and thus, adidas could not have brought claims against shoes not in existence at the time.

Returning to the District Court on remand from the Ninth Circuit, the parties filed cross-motions for partial summary judgment. In its summary judgment motions, Payless again raised the 1994 agreement ' this time, as a defense to willfulness ' along with other defenses, including laches, waiver, estoppel, abandonment, acquiescence, unclean hands, trademark misuse, and contractual estoppel. Payless also moved for summary judgment on adidas's claims of infringement and dilution. adidas in turn moved for partial summary judgment on Payless's affirmative defenses and on Payless's counterclaims seeking to cancel adidas's Three-Stripe Mark.

Summary Judgment

On Dec. 21, 2008, the district court granted summary judgment to adidas on all of Payless's affirmative defenses (laches, waiver, estoppel, abandonment, acquiescence, unclean hands, trademark misuse, and contractual estoppel). The court denied Payless's summary judgment motion on willfulness, in which Payless had contended it made a 'good faith' interpretation of the 1994 settlement agreement and, similarly, denied summary judgment on Payless's advice-of-counsel defense. The court further found genuine issues of material fact existed with respect to adidas's infringement and dilution claims under federal and state law.

In reaching these summary judgment determinations, the district court reasoned, among other things, that Payless could not demonstrate the requisite economic or expectations-based prejudice necessary to establish laches because it did not prove it had invested in stripes as a trademark; internal Payless documents provided sufficient circumstantial evidence of a deliberate attempt to trade on adidas's goodwill for adidas's willfulness charge to survive summary judgment; the advice-of-counsel defense could not be decided on summary judgment because there were significant questions as to whether Payless's counsel actually reviewed each of the shoes at issue; and numerous material-fact issues existed around adidas's infringement and dilution claims.

In its likelihood-of-confusion summary judgment analysis, the court found that, as a matter of law, there is an actionable similarity between Payless's use of two or four stripes and adidas's Three-Stripe Mark; the Three-Stripe Mark is strong and entitled to protection; and adidas had established some degree of actual consumer confusion worthy of being tried before a jury. Significantly, adidas acknowledged that point-of-sale confusion was not at issue in the case, but maintained that initial-interest and post-sale confusion were sufficient grounds to support its infringement and dilution claims. On adidas's dilution claim, the district court held that the record supported a finding that adidas's Three-Stripe Mark is famous, and has been famous since as early as 1970, and that issues of material fact existed as to whether the parties' marks were sufficiently identical and whether Payless's use had actually diluted adidas's rights.

In proceeding to trial, the focus of the case became the breadth of protection to which adidas's Three-Stripe Mark and Superstar Trade Dress are entitled, Payless's intent in using two and four stripes, and the degree to which consumers were confused (and to which their mental associations with the adidas brand were blurred or tarnished) by Payless's designs.

The Trial

Trial began on April 8, 2008 and continued for nearly a month. adidas opened its case in chief with the strength of its Three-Stripe Mark and Superstar Trade Dress, introducing evidence of extensive sales and marketing over the last 50 years for the Three-Stripe Mark and 38 years for the Superstar Trade Dress, unsolicited media coverage of the marks, and expert witness testimony. adidas also relied on several confusion surveys showing that footwear bearing two and four parallel stripes caused confusion among the relevant public with adidas's Three-Stripe Mark. In what ultimately resulted in a finding of willfulness, adidas presented the jury with internal Payless documents and employee testimony that Payless intentionally attempted to trade on adidas's goodwill in designing, manufacturing, and selling the footwear at issue.

In its defense, Payless claimed that other companies had used stripes on footwear over the past several decades. As a result, Payless contended that adidas's Three-Stripe Mark and Superstar Trade Dress existed in a crowded field of stripe designs and should receive only very narrow protection. Payless also argued that Payless buyers did not copy adidas's designs directly, but merely attempted to provide consumers with affordable, low-cost shoes 'inspired' by popular or trendy shoes.

Payless heavily relied on its 'advice of counsel' defense, asserting that it could not willfully have infringed or diluted adidas's trademark and trade dress rights because it had a system in place through which outside attorneys reviewed proposed shoe models prior to sale. adidas, on the other hand, argued that Payless's review process was inadequate at best, reviewed only a handful of the shoes at issue, and existed precisely for the reason of having an advice-of-counsel defense at trial.

In its May 6 verdict, the jury rejected Payless's arguments and found that 266 of the 267 accused lots infringed and diluted adidas's Three-Stripe Mark and/or Superstar Trade Dress. The jury then awarded adidas nearly $305 million, comprised of actual damages in the amount of $30,610,179, disgorgement of profits in the amount of $137,003,578, and $137,003,578 in punitive damages.

The parties have submitted post-trial motions. Payless moved for judgment as a matter of law, for a new trial, or for remittitur on the jury's damages awards. adidas opposed Payless's motions and cross-moved for injunctive relief. The parties are awaiting the court's rulings on these motions.

---

Charles H. Hooker III and Sara M. Vanderhoff are associates in the Atlanta office of Kilpatrick Stockton, where they are part of the Intellectual Property Department and Trademark and Copyright Team. Both authors focus their practice on litigation and were members of the adidas trial team. Mr. Hooker can be reached at [email protected] and Ms. Vanderhoff can be reached at [email protected].