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Despite proof that hundreds of counterfeit Gucci handbags were sold by the Daffy’s chain of discount stores, a divided federal appeals court has ruled that Gucci is not entitled to a court-ordered recall of the bags or any award of Daffy’s profits because the fakes were high-quality and capable of fooling even an expert. Since Daffy’s had attempted to authenticate the bags by taking one to a Gucci store — where a clerk mistakenly said it was genuine — the court found there was no evidence of intentional trademark infringement. “Given Daffy’s initial inquiry and its attempts to ensure that the bags were genuine before offering them for sale, Daffy’s can be viewed as a victim of the same counterfeiting Gucci is complaining of,” 3rd Circuit Judge Theodore A. McKee wrote in Gucci America Inc. v. Daffy’s Inc. And since the fakes were so well made, the court found, Gucci would not be harmed by the public’s mistaking them for Guccis. “Given the quality of the counterfeit bags, third party observers would not perceive anything inferior about them. Accordingly, consumers would not attribute substandard merchandise to Gucci,” McKee wrote in an opinion joined by 3rd Circuit Judge Maryanne Trump Barry. A dissenting judge, however, complained that the majority’s decision “has favored and enriched the infringer and left the innocent and innovative creator of a famous product and trademark owner without any remedy whatsoever.” Senior Circuit Judge Max Rosenn said in the dissent that he would have reversed the lower court’s denial of any injunction, because “trademark infringement amounts to irreparable injury as a matter of law.” Rosenn said the majority’s decision to affirm the lower court “does nothing to discourage trademark infringement, but rewards a party to the deceit by allowing it to retain all of the profits obtained by the use of the producer’s good name and reputation.” A recall also should have been ordered, Rosenn said, because without it, the purchasers would never be notified that the bags were fakes. According to court papers, in May 2000, Daffy’s acquired 594 handbags that appeared to be a particular Gucci model known as the “Jackie-O” from its supplier, Sara’s Collection Inc., which said they were being diverted from a merchant in the Far East. Daffy’s said that it considered Sara’s a reputable supplier but that it nonetheless tried to authenticate the bags by taking them to a Gucci outlet store where a Daffy’s employee pretended that she had received the bag as a gift and wanted to know if it was real. The Gucci clerk examined the bag and said it was genuine based on certain indicia of authenticity, including the quality of the fabric and leather, the Gucci label and appropriate codes on the bag. The clerk also compared the bag with another Gucci bag in the store. Daffy’s also sent one of the bags it had purchased that was damaged to the Gucci repair center in New York for repair. Gucci repaired the bag and returned it without comment. It later turned out that the bags were fakes. “The bags were actually counterfeit, although they were of exceptional quality, expensive and virtually indistinguishable from genuine Gucci bags,” McKee said. Daffy’s sold all but six of the bags — at prices ranging from $300 to $400 — in sales that continued through the summer of 2000. In early September 2000, counsel for Gucci sent Daffy’s a letter demanding that it immediately cease selling the bags and disclose its supplier to Gucci. Daffy’s responded by informing Gucci that the bags had been obtained from a legitimate parallel importer outside of Gucci’s authorized chain of distribution and that it believed the bags were genuine Gucci bags. Despite its belief that the bags were genuine and that it had done nothing improper, Daffy’s said it immediately withdrew the bags from its stores and had since adopted a policy of not buying any Gucci merchandise to avoid the possibility of purchasing counterfeits. Gucci then filed a trademark infringement suit seeking an injunction to bar future infringement, a recall of all bags sold, and an order that Daffy’s disgorge any profits it earned from the sales. U.S. District Judge Alfred M. Wolin of the District of New Jersey held a trial on the issue of authenticity and agreed with Gucci that the bags were fake. But on the issue of remedy, Wolin sided with Daffy’s and concluded that Gucci was not entitled to any injunction, recall or award of profits. Wolin concluded that Daffy’s had not acted “willfully” or even “with willful blindness” when it sold the counterfeits. Instead, Wolin found that Daffy’s was “an innocent infringer.” As a result, Wolin said, the court’s task was to conduct a balancing test to determine whether the risk of confusion to the public and injury to the Gucci trademark was greater than the cost and burden of recall to Daffy’s. The risk of public confusion was low, Wolin concluded, due to the high quality and price of the bags. For the same reasons, he said, there was a low risk of injury to the Gucci trademark. On the issue of the recall, Wolin concluded that the benefits Gucci might derive were outweighed by the negative impact a recall could have on Daffy’s goodwill, as well as the difficulties of obtaining the necessary consumer information for a recall. Although Wolin agreed that Daffy’s had infringed Gucci’s trademark, he denied Gucci’s request for an award of Daffy’s profits, concluding that such an award is allowed only where the infringement is willful. Wolin also rejected Gucci’s request for a permanent injunction after finding that Gucci could not show any “irreparable injury” since Daffy’s was unlikely to infringe Gucci’s trademark again and had minimized the damage by voluntarily withdrawing the bags from its shelves. On appeal, Gucci’s lawyers argued that Wolin gave short shrift to Gucci’s concerns about ongoing confusion of Daffy’s consumers who unknowingly possess a counterfeit “Gucci.” McKee said such a “post-sale confusion” argument has “some initial surface appeal” but did not withstand scrutiny. Instead, McKee found that Wolin had conducted a proper balancing test and that he did not abuse his discretion when he concluded that Daffy’s would be harmed more by a recall than Gucci would be helped. McKee also agreed with Wolin’s conclusion that the high quality and high price of the fake bags effectively limited the damage to Gucci. “The district court quite reasonably concluded that the relatively high price would suggest quality consistent with the image Gucci is apparently trying to protect,” McKee wrote. In dissent, Rosenn said Wolin’s decision “ignored the purpose of the trademark statute to protect the public from deceit and secure to the business community the advantages of its good name and reputation.” Rosenn said that since Wolin’s decision not to order a recall was premised on the harm it would cause to Daffy’s reputation, he should have ordered that Daffy’s disgorge “the profits it made in trading on the Gucci name and reputation.” “This is not an unreasonable request and the least that a court should do to repair the damage to the innocent owner of the trademark,” Rosenn wrote. Rosenn also criticized his colleagues and the lower court for labeling Daffy’s an “innocent infringer” when the evidence showed that, as a discount retailer, it was aware of the risk of counterfeits. As for Daffy’s attempts to authenticate the bags, Rosenn was unimpressed. “This was simply a superficial effort to cover itself in the event of a lawsuit. Daffy’s did not take the bag to the store manager or to someone in authority in the Gucci organization who was familiar with the construction of the bag. It satisfied its concern by asking some unknown retail clerk of unknown experience, of unknown authority, and with unknown familiarity with the intricacies of bag construction,” Rosenn wrote. Gucci was represented in the appeal by attorney Milton Springut of Kalow & Springut in New York. Daffy’s was represented by attorneys Stephen R. Buckingham, David L. Harris and Michelle R. Nance of Lowenstein Sandler in Roseland, N.J.

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