Although they may have thought they were within their legal limits, the executives at Payless Shoesource were operating on the edge of trademark law.

Sure, Payless was selling shoes modeled after some of the best-selling shoes made by German-based Adidas-Salomon (now Adidas). The Payless shoes had stripes that were similar to Adidas’ three-stripe trademark. And many of the shoes had a style similar to the trade dress of Adidas’ Superstar line. Payless employees even referred to them as Adidas knockoffs.

But that’s not trademark infringement, Payless asserted in court after Adidas sued the Topeka, Kan.-based shoe retailer. It’s certainly not willful infringement as Adidas asserted, Payless claimed, because it had acted in reliance on the opinion of outside counsel. (The identity of outside counsel was concealed in court documents.)

These attorneys had assured Payless it was doing nothing wrong. So the company moved for summary judgment, asking the trial judge to throw out Adidas’ claims of willful infringement.

Oregon Federal Judge Garr King refused. His December 2007 ruling in Adidas America Inc. v. Payless Shoesource Inc. provides some important lessons for businesses across the country about how and when to rely on the opinions of trademark counsel.

“Anyone involved in the trademark clearance process–whether in-house or as outside counsel–should use this case as an opportunity to revisit their standard practices in preparing clearance opinions,” says Jeremy Thornton, an IP lawyer in the Columbus, Ohio, office of Schottenstein Zox & Dunn.

Unforgotten Foes
This isn’t the first time Adidas has sued Payless for infringement. In 1994, Adidas alleged Payless was selling athletic shoes with three decorative stripes confusingly similar to Adidas’ three-stripe mark.

Adidas dropped its lawsuit later that year when Payless agreed not to sell athletic shoes bearing “three substantially straight parallel stripes on the side of the shoe” or “two or four parallel double-
serrated stripes.” Both parties lived up to the settlement agreement. Payless, however, continued to sell shoes that had two or four straight-edged stripes.

So in 2001, Adidas again filed suit, alleging among other things that by selling these two- and four-stripe shoes, Payless was willfully infringing Adidas’ three-stripe mark and Superstar trade dress. And if found guilty of willful infringement, Payless could face some hefty penalties.

One well-established way to overcome allegations of willful infringement is for a defendant to claim it relied in good faith on the opinion of its legal counsel. Although this opinion-of-counsel defense is
commonly used in patent infringement suits, it is rarely asserted in trademark cases. Therefore, according to many trademark experts, the court’s decision in Adidas is important because it sets forth strict standards for using the opinion-of-counsel defense in a trademark case.

Competent Counsel
The Oregon District Court followed the rule, laid out in many prior patent cases, that the opinion-of-counsel defense is available only where the defendant reasonably relied on competent legal advice. The court then determined there were good grounds to doubt that Payless reasonably relied on its counsel and to question whether its counsel provided competent legal advice.

For instance, although Payless had obtained infringement “risk assessments” from outside trademark experts, many of these assessments were conducted only after Adidas had initiated the current lawsuit. “It is difficult to see how Payless could have relied in good faith upon advice that it did not seek or obtain until after Adidas filed suit for willful infringement,” the court wrote.

More significantly, the court found problems with the opinion provided by outside counsel. These attorneys had reviewed only 40 of the 267 shoe styles at issue, and the court felt this was insufficient. “With respect to the unreviewed shoes, it is difficult to see how Payless can rely on advice that it did not actually seek or obtain,” the court wrote.

Payless argued that all of its shoes were “effectively” reviewed because once a particular design had been approved, the “approval … carried over to any other proposed shoes that shared the exact same design pattern.” The court rejected this argument, noting that the unreviewed shoes were not exactly the same as the reviewed shoes.

The court also disapproved of the concise opinions that the outside counsel provided, which often summed up the risk of infringement in a single phrase or sentence. For instance, the entire opinion about one shoe was “low-moderate.” The court found the legal opinion “conclusory and superficial,” because it “fail[ed] to cite any relevant legal authority, and provide[d] no legal or factual analysis.”

Impractical Standard
The court’s ruling may seem reasonable enough, but it would require many companies to change their usual trademark review procedures. “Many clients do not want long, detailed analysis in trademark clearance opinions,” says Scott Johnston, a trademark litigator in the Minneapolis office of Merchant & Gould. “They want an answer, preferably a ‘yes’ or a ‘no.’” He adds this is particularly true when inside and outside counsel work together frequently and neither side feels it is necessary to detail the complete framework for each legal conclusion.

The court’s standard for an acceptable legal opinion is so tough that it flies in the face of commercial reality, according to some trademark experts.

“The practical reality is that it would be pretty hard to do [such a detailed analysis] when your company requires a massive volume of trademark clearance,” says Anthony Malutta, a trademark partner in the San Francisco office of Townsend, Townsend and Crew. “It may not be practical for defendants to assert an opinion-of-counsel defense in design infringement cases,” he adds.

The ruling also could significantly strengthen plaintiffs’ leverage in trademark infringement suits. “It could render it increasingly difficult for a trademark defendant to obtain summary judgment on one of the most common grounds used to defeat a claim of willful infringement,” says Frank Hiscox, an IP attorney in the Palo Alto office of White & Case. “Disposing of willfulness claims early on summary judgment has long been an important defense strategy. This decision could change the landscape by making that strategy much harder to pursue.”

The ruling seems likely to cause U.S. businesses to toughen their trademark clearance procedures–at least in certain circumstances. “In situations where the parties have litigated before, the issues are close, or a challenge is likely, the opinion [of counsel] should be thorough and intended for the court or jury, in addition to the client,” Johnston says.