Gaming company Atari recently filed a complaint in San Francisco federal court against Nestlé for exploiting the name of its iconic video game “Breakout” in the company’s advertisements for the popular KitKat candy bar.

Accused of mimicking the classic Breakout video game screen and replacing bricks with KitKat bars, the global food and drink company now faces accusation of copyright and trademark infringement. Atari also alleges that Nestlé has impaired Atari’s ability to license its IP rights for “Breakout” and other games in various markets, including the candy market.   

Josh Reisberg, Counsel from Axinn, Veltrop & Harkrider, sat down with Inside Counsel to weigh in on this recent lawsuit filed against Nestlé and any subsequent developments in the case. He regularly advises clients on the protection, enforcement and monetization of intellectual property and shared insight into what challenges might lie ahead as Atari seeks compensation and punitive damages for the alleged infringement. 

According to Atari’s complaint, Atari monetizes its video game IP through licensing, and has a correspondingly strong interest in preserving all current and future licensing streams that could be negatively impacted through third-party exploitation and potential brand dilution. Atari’s interest in protecting any IP directed to its video games such as “Breakout” is likely heightened this summer given that Atari recently announced plans to sell a new video game console–the Ataribox–its first new console in 24 years. 

“It’s difficult to see how this lawsuit could have been avoided other than through Nestlé’s avoiding any reference in its advertising to any Atari video game,” explained Reisberg. “The legal claims that Atari states are fact-specific and require application of various legal tests to determine whether IP has been infringed or whether Atari’s trademark has been diluted. Because these tests are fact-specific and can be applied with different results, a potential plaintiff often is not precluded by rules such as Rule 11 of the Federal Rules of Civil Procedure from filing the lawsuit in the first instance.”

The significance of this case, in Reisberg’s opinion, is with respect to Atari’s claims under the Lanham Act, and with the viability of the nominative fair use doctrine as a defense to trademark infringement. Referencing another’s trademark is common in all forms of media, from TV to movies to comparative advertising. The Ninth Circuit developed the doctrine of nominative fair use as a defense to trademark infringement where an alleged infringer uses another’s trademark to refer to the trademark holder’s product rather than the alleged infringer’s product.  

The defense consists of a three-pronged test, sometimes referred to as the NKOTB test because the doctrine was developed by the 9th Circuit in the seminal 1991 case, New Kids on the Block (NKOTB) v. News America Publishing Inc. Per Reisberg, the three prongs are: The product in question must be one not readily identifiable without the use of the trademark; only so much of the mark or marks may be used as is reasonably necessary to identify the product and; the user must do nothing that would, in conjunction with the mark, suggest sponsorship or endorsement by the trademark holder. 

“The defense is interesting for two reasons,” he explained. “First, in the 9th Circuit, the plaintiff has the burden to disprove the defense. Logistically, if Nestlé invokes this defense, Atari will need to prove that it is not applicable. Second, the concept of nominative fair use has not been readily adopted by other Circuits since its inception in the 1991 NKOTB case. Indeed, the 2nd, 3rd, and 5th Circuits each apply a framework for addressing nominative fair use in the concept of trademark infringement different from the framework applied by the 9th Circuit. “

Consistent with the statutorily defined fair use defense, the doctrine of nominative fair use strikes a balance between a desire not to chill expressive, artistic, and even commercial speech, and the need to protect consumers from confusion as to the origin of goods and services. According to Reisberg, this case may present another opportunity for the courts to address the viability of the defense, which has not always been applied clearly, even in the 9th Circuit.   

Atari faces challenges in proving the merits of its claims. For example, in the context of Atari’s Lanham Act claims, the principle underlying those claims is whether confusion existed among ordinary consumers as to the source, sponsorship, affiliation, or approval of Nestlé’s Kit-Kat bars. Did ordinary consumers believe that Atari sponsored or approved Kit-Kat bars? Did ordinary consumers believe that Atari was the source of Nestlé’s Kit-Kat bars? Did Nestlé attempt to appropriate the cachet of Atari’s Breakout video game for its Kit-Kat bars? 

“Atari’s complaint provides no details concerning the scope of the alleged consumer confusion, which would need to be developed through costly discovery,” he said. 

If Nestlé raises a nominative fair use defense, it faces its own challenges, for example, in showing that the third prong of the NKOTB test has been satisfied. Did Nestle do anything through its advertisements to suggest sponsorship or endorsement by Atari? Did Nestle’s replacement of the bricks in the “Breakout” video game screen with Kit-Kat bars suggest such sponsorship or endorsement? 

Reisberg said, “If Nestlé prevails, then there can be no trademark infringement liability. If Nestlé does not prevail, Atari must still prove liability by showing a likelihood of confusion among ordinary consumers.”

So, what are trademark best practices that companies should follow to protect themselves from lawsuits like this? 

“This case is an example of the limitations of the fair use defense to forestall litigation,” he said. “Nestlé might very well have a legitimate fair use defense to Atari’s Lanham Act claims given that Nestlé is using the term in question either descriptively–by asking consumers to break out–or to refer to Atari’s “Breakout” video game rather than Nestlé’s own Kit-Kat products. But having a strong fair use defense typically is insufficient to prevent a potential plaintiff from filing a lawsuit and to prevent the parties from having to engage in costly litigation.”

According to Reisberg, the best practice for any company seeking to refer to another’s trademark in any form of commercialized speech is to obtain permission from the trademark holder, and agree on language to use along with the speech to ensure no likelihood of confusion among ordinary consumers as to the source, sponsorship, endorsement, affiliation, or approval of the company’s goods or services by the trademark holder.