Costco Attempts to Defend Sale of Counterfeit TIFFANY Diamonds

On February 15, 2013, Tiffany and Company filed a lawsuit against Costco Wholesale Corporation in the U.S. District Court for the Southern District of New York, alleging that Costco was engaging in the sale of counterfeit TIFFANY diamond engagement rings. 
 
The complaint filed by Tiffany alleges counterfeiting, trademark infringement, dilution, unfair competition, injury to business reputation, false and deceptive business practices and false advertising. Tiffany’s is seeking a permanent injunction, damages, treble damages and punitive damages for the alleged infringement and other alleged unlawful acts, but if you read the complaint carefully it seems pretty clear that what they really want is to make a public example out of Costco. They want everyone to know that they are watching and when they find infringers they will act swiftly. Thus, Tiffany has asked for an apology and they want the world to know that they never have and never will sell their rings to discounters or wholesalers. For more information see Tiffany Sues Costco Over Counterfeit Diamond Rings.

This should have been an open and shut case. But then Costco decided to aggressively defend what seems indefensible.
Costco is basing its defense on the belief that the “[t]he word Tiffany is a generic term for ring settings comprising multiple slender prongs extending upward from a base to hold a single gemstone.” See opening paragraph of the Costco Answer and Counterclaim. In support of this position Costco submitted dictionary definitions, pages from Wedding Planning for Dummies discussing rings, online articles (such as from About.com), online sales pages (such as from Amazon.com) and other materials.
To the uninitiated this line of defense may seem peculiar at first, and then upon learning a bit about the law behind the defense it might seem as if Costco has the upper hand. Let’s dig a little deeper here to see what is going on and then I’ll offer my assessment of what is likely to happen.
First, let’s begin with what we learned from Tiffany & Co. when we contacted them for further comment after Costco filed its Answer. Linda Buckley, who is Vice President of Worldwide Public Relations at Tiffany & Co., told us that their trademark has been registered for over 175 years and they look forward to proving Costco’s infringement in court. She explained:

Costco’s answer seeks to muddy the waters, but one thing remains clear. The TIFFANY mark is a federally registered incontestable trademark, has been continuously used for over 175 years and enjoys worldwide fame and recognition as designating superior goods from Tiffany & Co, and particularly Tiffany & Co. diamond engagement jewelry.  When Costco used that trademark to refer to goods that had nothing whatsoever to do with Tiffany & Co., they infringed Tiffany’s trademark, while damaging both their own customers and the Tiffany brand. Costco’s counter-claim is an unfounded and weak attempt to defend its willful and infringing use of the TIFFANY trademark. We look forward to proving this in the upcoming court case.

Obviously, Tiffany is going to fight. They have to fight hard. Their entire business is build upon luxury quality and it would be devastating if anyone could claim they are selling TIFFANY diamond rings. Tiffany will not roll over, and they will fight as hard as they have to in order to win. Eventually, I think they will indeed win.
Second, what is this business about the TIFFANY mark being incontestable? How can an incontestable trademark be challenged? Incontestable legally does not mean what the word suggests.
An “incontestable” trademark registration is conclusive evidence of the validity of the registered mark, of the registration of the mark, of the owner’s ownership of the mark and of the owner’s exclusive right to use the mark with the associated goods or services. In order for a trademark to achieve incontestable status a filing must be made between the 5th and 6th year after the trademark has been registered.
Achieving incontestable status does not mean that the trademark cannot be challenged. It means that the grounds for challenging a trademark are significantly reduced. A registered trademark can still be challenged even if it is incontestable if the trademark has become a generic name for the goods or services, the trademark is functional, the trademark has been abandoned, or the registration of the trademark was obtained fraudulently. See 15 U.S.C. 1064. There seems to be absolutely no legitimate way to say that the trademark has become functional, it clearly has not been abandoned, and it would be virtually impossible to even begin to demonstrate that it was obtained fraudulently. Thus, in order to defend this counterfeiting case the only option Costco has is to allege that the TIFFANY trademark is generic. It is akin to a “Hail Mary pass” with no time remaining on the clock.
But is the TIFFANY trademark generic? A casual review of the Costco filing could make you think that the TIFFANY trademark has become synonymous with a certain type of diamond ring, which would mean that it has lost its ability to operate as a source identifier. But a closer look at the allegations, at least in my opinion, shows that Costco is attempting to conflate the issue.
The complaint explains in summary fashion the investigation that ensued after Tiffany learned of what Costco was doing. The complaint reads in relevant part:

Subsequent investigation showed that in the jewelry display case at the Huntington Beach Costco location was an engagement ring alongside a point of sale (“POS”) sign marked “639911 – PLATINUM TIFFANY .70 VS2, 1 ROUND DIAMOND RING – 3199.99,” and another ring alongside a different POS sign marked “605880 – PLATINUM TIFFANY VS2.1 1.00 CT ROUND BRILLIANT SOLITAIRE RING – 6399.99.” (emphasis added)  The Costco salesperson also referred to each of the rings as a “Tiffany ring,” and said the store generally carries one of each item.

Thus, Costco was selling TIFFANY diamond rings when they were not from Tiffany & Co.
In the Costco Answer and Counterclaim, Costco defends and comes out swinging saying:

Costco not only denies having infringed or invaded any legal rights of these Plaintiffs, but Costco asks the Court to order that the Plaintiffs be prohibited and enjoined from ever again asserting false claims of the right to exclude use of Tiffany as a generic term for a style or type of ring setting. By its counterclaim herein, Costco seeks a judgment declaring invalid, and ordering modified or partially canceled, federal trademark registrations which the Plaintiffs have put forward as purportedly evidencing or supporting false claims of right to prevent Costco and other retailers from suing the word Tiffany to indicate that a ring has a Tiffany setting, i.e., a setting comprising multiple slender prongs extending upward from a base to hold a single gemstone…

Thus, Costco says they believe they have a right to sell rings that present in a Tiffany setting.
Clearly, at least in my opinion, Costco is overstating their case and affirmatively twisting and misrepresenting what Tiffany has charged them with. This type litigation strategy is unfortunately commonplace. Twist and obfuscate the facts in order to confuse.
Tiffany is not complaining about Costco selling rings in a Tiffany setting, they are complaining about Costco selling TIFFANY diamond rings when in fact they are not TIFFANY diamond rings. So don’t be confused by the artful dodge of Costco. The Costco Answer does nothing to substantively address the charges brought by Tiffany & Co. Even if the district court believes everything asserted in the Costco Answer and Counterclaim they are still liable for trademark infringement because they sold counterfeit TIFFANY diamond rings.
If you doubt the analysis ask yourself this: If Costco believes they did nothing wrong then why were they only selling these diamond rings as “TIFFANY diamond rings” in real world, brick and mortar stores? It is curious that they were not selling these rings they claim to have every right to sell on their online store. That will be quite hard to explain, and if I were the Judge I would need an extremely convincing answer to that question otherwise I would almost certainly view that as conscious knowledge by someone that they knew what they were doing was wrong. Perhaps it can be explained, but I am hard pressed to think of any rationale explanation that would seem convincing.
Finally, from a strategic standpoint I think what Costco is doing here is a mistake. Any reasonably objective observer has to know that Tiffany can’t afford to lose this case and will put whatever they must behind winning. Rather than apologize, explain it was an unfortunate rouge act that can happen in any company as large as Costco, they are doubling down. This doesn’t strike me as thoughtful risk management strategy. Perhaps they are just trying to raise the stakes for a better settlement or to save face, but coming out swinging like this will likely only force Tiffany to take a harder line and make an even bigger example out of Costco.