Journal of Information, Law and Technology

The Ninth Circuit holds that Internet Domain Name E-mail and Web Service Provider is not a Cybersquatter for Trademark Dilution Purposes Avery Dennison Corp. v. Sumpton

Richard Margiano
Associate
White & Case LLP
New York

Margiri@ny.whitecase.com

This is a case note published on: 29 October 1999

Citation: Margiano R, 'The Ninth Circuit holds that Internet Domain Name E-mail and Web Service Provider is not a Cybersquatter for Trademark Dilution Purposes Avery Dennison Corp. v. Sumpton', 1999 (3) The Journal of Information, Law and Technology (JILT). <http://www.law.warwick.ac.uk/jilt/99-3/margiano.html/>

Abstract
A horse of a different color, or not a horse at all? The Ninth Circuit said no horse, in effect, when it declared that defendant Sumpton, the president of ‘Mailbank,’ an Internet e-mail and web site provider, was not a cybersquatter, in Avery Dennison Corp. v. Sumpton (decided Aug. 23, 1999). In yet another recent Ninth Circuit Internet Trademark Law decision, seeking to define the metes and bounds of Intellectual Property law on the Net, the Avery Dennison decision is sure to inspire debate.

In Avery Dennison, an appeal of a summary judgment and injunction decision in favor of plaintiff, the court analyzed whether a company by its business of owning and leasing 12,000 domain names, including <avery.net> and <dennison.net>, to third parties for use as e-mail and web site addresses, diluted plaintiff Avery Dennison’s registered trademarks ‘Avery’ and ‘Dennison.’ In so analyzing, the Ninth Circuit had to determine two major issues: (1) whether plaintiff’s marks were famous within the meaning of the Federal Trademark Dilution Act (‘Dilution Act’); and (2) whether defendant engaged in ‘commercial use’ of the marks. The court concluded that on the evidence it had before it, plaintiff’s marks were not famous and defendants did not make commercial use of the marks - reversing the district court on both grounds, with instructions to enter summary judgment for defendants.

Since Avery Dennison is a circuit court decision on trademark law as applied to the Internet, this makes the case prima facie significant. Furthermore, the court’s discussion concerning showing famousness of a mark in a specialized market segment for dilution purposes, adds to a sparse and controversial body of law. Also, the facts comprising defendants’ activities make this domain name case unique in terms of whether there is ‘commercial use’ for dilution purposes. The court’s ruling on commercial use may have long-term effects and significantly reduce the ability of a mark owner to exploit its mark on the Internet.

This article discusses the district court opinion and the facts of the dispute next. The circuit court opinion is then summarized, followed by an analysis and conclusion.

Keywords: 

1. Introduction: Background and the District Court Decision
The very first lines of the district court opinion state: ‘Defendants are ‘cybersquatters,’ as that term has come to be commonly understood. They have registered over 12,000 internet domain names not for their own use, but rather to prevent others from using those names without defendants’ consent . . .And like all ‘cybersquatters,’ defendants seek to make a financial return by exacting a price before consenting to allow others to use the domain names on which they have chosen to ‘squat.’

Defendants operate a web site at <mailbank.com>. At this web site a browser can obtain an e-mail or web site address reflecting his name, interest, business, hobby, etc., from the 12,000 domain names defendants have registered. Defendants charged an initial fee of $19.95 and then $4.95 per year for leasing a name, at the time of suit. The domain names available for lease included <avery.net> and <dennison.net>, which defendants had listed in its ‘surnames’ category.

Plaintiff owns the federally registered marks ‘Avery’ and ‘Dennison’ under which it has marketed office products and industrial fasteners since the late 1800s. Plaintiff has sales of $3 billion per year under its marks and spends more than $5 million per year in advertising. Plaintiff maintains several domain names on the Internet, including <avery.com>, <averydennison.com> and several other similar names in the <.com> Tld, in which it conducts business. Plaintiff filed suit in the Central District of California asserting federal and state claims of trademark infringement, dilution and unfair competition, stemming from defendants’ use of the <avery.net> and <dennison.net> domain names.

On cross motions for summary judgment, the district court granted plaintiff summary judgment on its claim for dilution. Judge Letts found the ‘Avery’ and ‘Dennison’ marks to be ‘famous’ based on ‘plaintiff’s longstanding use of these marks and the degree to which these marks are recognized by individuals in the community.’ The court also held that defendants made ‘commercial use’ of the marks. The court promulgated a broad rule declaring that there is commercial use of a mark where ‘(a) it is registered as a domain name by a registrant who is not otherwise identified by or associated with any of the commonly accepted meanings of the domain name, and (b) it is not used by the registrant as its own domain name, but rather is held by the registrant for sale or license to others.’ Although the defendants claimed that it licensed domain names for non-commercial e-mail use only, the court held that eventually ‘the laws of economics would require the defendants to sell or license each of their 12,000 names to the highest bidder for whatever use the buyer or licensee wished to make of them.’

Upon finding famousness and commercial use, the court then cited the rule that where ‘someone other than the trademark holder registers the trademark name as an internet domain name’ this does ‘lessen the capacity of a famous mark to identify and distinguish goods or services.’ The court reasoned that not to find dilution here, would eliminate 12,000 last names, giving examples of such as ‘Ford, Edison and Wrigley,’ from their ‘highest and best use as domain names.’ Defendants appealed.

2. The Ninth Circuit Decision
The Ninth Circuit in Avery Dennison, held that defendants’ actions in licensing the <avery.net> and <dennison.net> domain names did not constitute dilution of the ‘Avery’ and ‘Dennison’ marks. In order to show dilution, under the Federal Trademark Dilution Act, plaintiff must prove three elements: (1) his mark is ‘famous;’ (2) the defendant’s use is ‘in commerce;’ and (3) that the defendant’s use has had the effect of ‘lessening the capacity of a famous mark to identify and distinguish goods and services.’ The Ninth Circuit granted summary judgment in favor of defendants on elements (1) and (2), and found a genuine issue of material fact on element (3), thus holding no dilution. A discussion of the court’s holding regarding elements (1) and (2), famousness and commercial use, follows next. Its’ finding concerning element (3) was not necessary to the decision, and has little precedential value so is not evaluated.

2.1. Famousness
The Dilution Act protects only ‘famous’ marks. A famous mark is a mark that is ‘truly prominent and renowned.’ The Dilution Act provides eight nonexclusive factors for use in determining whether a mark is famous. The circuit court analyzed the level of distinctiveness of ‘Avery’ and ‘Dennison’ under the statutory list of factors, finding that although the marks were distinctive enough for trademark protection, they did not rise to the level of distinctiveness required for dilution protection.

Ruling that plaintiff could establish famousness under the Dilution Act by showing fame in either a localized trading area or a specialized market segment, rather than the ‘a substantial part of the United States,’ where the ‘diluting uses are directed narrowly at the same market segment,’ the court found that defendants direct their uses at a different market segment. The court reasoned that since defendants target Internet users who desire vanity e-mail addresses, and plaintiff targets purchasers of office products and industrial fasteners, plaintiff could not establish famousness in this way.

After finding that plaintiff failed to show famousness under the specialized market segment analysis, the Ninth Circuit also held that Avery Dennison’s marks lacked famousness among consumers in general. One reason the court so held was ‘use of the marks by third parties.’ The court relied on evidence indicating use of the ‘Avery’ mark in the names of 800 businesses, and the ‘Dennison’ mark in the names of 200 businesses, including businesses who market products on the Internet. Furthermore, although plaintiff submitted three market research studies in an attempt to show famousness, the court discredited all of them. The court held that the relevant universe of respondents should have been ‘consumers in general’ and not consumers in the specialized market segment of office supply purchasers, as plaintiff’s surveys used, since plaintiff and defendant targeted different market segments. So the court gave no weight to plaintiff’s ‘flawed’ survey evidence.

The Ninth Circuit held that the ‘Avery’ and ‘Dennison’ marks did not possess the ‘famousness’ level of distinctiveness required by the Dilution Act and directed summary judgment for defendants on this issue. The court then discussed commercial use.

2.2. Commercial Use
The defendants argued that they reserved 12,000 ‘surnames’ as domain names, and just incidentally, most happened to also be trademarks. The defendants alleged that their business in licensing out these names/marks as e-mail and web site addresses did not constitute commercial use of the trademarks. The circuit court agreed and reversed the district court’s holding regarding commercial use. The court ruled that where one does not trade ‘on the value of marks as marks’ by, for example, attempting to ‘sell the trademarks themselves,’ there is no commercial use. The court believed that defendants intended ‘to capitalize on the surname status of ‘Avery’ and ‘Dennison’’ and not the trademark status of the words, so defendants made no commercial use of the marks, only of the surnames. Without commercial use plaintiff’s claim for dilution failed. The circuit court directed summary judgment for defendant on this issue.

3. Analysis and Conclusion
The plaintiff in Avery Dennison handed the Ninth Circuit two tough issues to resolve. The famousness and commercial use components of the decision had little precedent to draw on, and what precedent existed, went in different directions. The resulting opinion created new law in the relatively sparse body of Internet dilution case law that has developed in the precious few years since the President signed the Dilution Act into law.

3.1. Famousness
The Ninth Circuit analyzed the famousness of the ‘Avery’ and ‘Dennison’ marks in two different consumer universes. The court first discussed whether the marks proved strong enough in a specialized market segment, office supply product purchasers. McCarthy calls this the ‘‘big fish in a small pond’ theory of relative strength.’ In Avery Dennison the court declared that this particular fish can be diluted only where the defendant uses the mark in the same market segment.

Satisfying the ‘famous’ element of dilution by showing fame in a small market segment only is an unsettled area of the law. Some case law suggests that a mark owner cannot establish fame in this way. Other authorities advocate dilution protection from marks that are famous only in a particular market segment. McCarthy, in discussing ‘Marks famous to a small segment,’ argues that a court should categorize such a mark as ‘famous’ only where ‘it is known to more than 50 percent of the defendant’s potential customers.’ McCarthy, citing the Restatement, also advocates that ‘fame in only a small, segmented line of business cannot give rise to a viable claim for dilution when another uses the mark in a much broader market.’

Avery Dennison adopted a different approach. It now seems clear that in the Ninth Circuit, plaintiff will have to show that defendant uses the mark in the same market segment, to prove ‘at least some subliminal connection in a buyer’s mind between the two parties’ uses of their marks’ in order to satisfy the famousness requirement. The ‘at least some subliminal connection’ implies less than a majority, so under the Avery Dennison approach a plaintiff would not have to show that 50 percent or more of defendant’s potential customers know of the mark, Avery Dennison advocates a lower threshold, where the uses are in the same market segment. Under McCarthy, this type of dilution may occur even where the defendant and plaintiff operate in different market segments but not in Avery Dennison. A report of the Trademark Review Commission provides authority for the Avery Dennison view: ‘[d]ilution is possible with respect to one purchaser universe but not another. For example, if a mark is famous at the industrial level but not at the consumer level, protection may be appropriate at the industrial level but not at the consumer level.’

Although the Avery Dennison approach has support from the Report upon which the Dilution Act is based, it nonetheless seems at odds with the language of the statute as enacted, while McCarthy’s view expands it without violating it. The statute suggests that Dilution may occur in different consumer universes but does not address the particular ‘big fish in a small pond’ scenario. Washington Speakers Bureau says: ‘it seems an odd act of statutory interpretation that permits the owner of a famous mark to prevent dilution only by competitors in the owner’s niche market, particularly since in such an instance, relief would already be available to the mark’s owner under a § 43(a) infringement theory.’ 

To adopt either the Avery Dennison or the McCarthy approach may unduly expand dilution protection to marks that are not really famous, as famous was intended. Furthermore, both approaches adopt what sounds like a ‘likelihood of confusion’ component in spite of the fact that the statute expressly says that Dilution applies without the need to show likelihood of confusion.

In Avery Dennison, the Ninth Circuit also discussed famousness in the universe comprising consumers in general, or more specifically, Internet consumers. The key evidence relied on in determining this is usually survey evidence. But the court in Avery Dennison acknowledged that it did not have proper survey evidence before it, since it found plaintiff’s surveys flawed. The court could have remanded so that plaintiff or defendant could take new surveys to develop the necessary evidence. The court did not. Without key information concerning consumer awareness of plaintiff’s marks, the court decided against plaintiff, entering judgment in favor of defendants on this issue. A better course would have been to find a genuine issue of material fact on this issue, since the defendant would still win based on the court’s commercial use holding. The court stripped Avery Dennison of dilution protection in the Ninth Circuit for its Avery and Dennison marks, acknowledging that the survey evidence on the issue was flawed, without giving Avery Dennison a chance to produce an admissible survey, where the outcome of the case did not depend on this holding anyway. This part of the Avery Dennison decision seems controversial in the least; and it will be interesting to see how other courts in the future treat Avery Dennison’s approach to showing famousness in a small market segment.

3.2. Commercial Use
The Avery Dennison court found ‘Mailbank’s’ use of the ‘Avery’ and ‘Dennison’ terms non-trademark use, so not ‘commercial use’ within the meaning of the Dilution Act. To understand the Avery Dennison decision, a brief summary of the pertinent general concepts and precedents is helpful to put Avery Dennison in context, so this follows next.

Commercial use is use ‘in connection with the sale, offering for sale, distribution or advertising of any goods or services.’ The Supreme Court has ruled that the ‘in commerce’ requirement is to be construed broadly. But mere registration of a domain name is not enough to constitute commercial use. Registration of a domain name with the ‘intent to use it commercially is insufficient to convey trademark rights. The general rule is that it is not enough that there is a web site and a domain name registered in the <.com> domain (much less the <.net> domain that Avery Dennison is concerned with), in determining whether there is commercial use. But where the web site, in whatever Tld it is located, advertises or offers for sale any good or service using the mark, this will trigger the Lanham Act. The courts have had some difficulty in defining the boundaries of the spectrum bordered on the one side by commercial use, and on the other by non-commercial use.

During the infancy of the Internet, courts held that where individuals profited by reserving and ‘warehousing’ domain names likely to be useful to trademark owners, intending to subsequently sell them to the owners of the respective marks for prices much higher than the cost of reserving the names, this was not commercial use. Today, courts have shut down these ‘cybersquatters’ by finding such a practice to be ‘commercial’ use.

Then a new twist to ‘commercial use’ of a mark via a domain name, came in Green Products Co. v. Independence Corn by-Products Co. In that case, the defendant registered domain names which were also the marks of the plaintiff. The defendant merely warehoused the names, without creating a web site for them, and the twist was that defendant had no intention of selling the names to anyone. The court still found commercial use, however, reasoning that plaintiff and defendant were competitors in the same market segment and defendant’s ownership of the domain names might have actually resulted in a diversion of business to the defendant.

Now in Avery Dennison, the defendants were selling the domain names, similar to the cybersquatter cases. So the defendants were profiting off of the domain names, but not from the mark owner, as in the cybersquatter cases, and not by diverting business as in Green Products. So the defendants were making commercial use of the domain names, but the court held that this does not equate to commercial use of the trademarks. There is support for this view in the cases. On the other hand some courts adopt liberal interpretations of the ‘commercial use’ requirement which favor mark holders. These cases seem heavily dependent on their facts and circumstances, what will happen in the future remains unclear.

Perhaps the Ninth Circuit was right in its characterization of defendants’ use of the marks. A purpose of the Dilution Act was to ‘stem the use of deceptive Internet addresses taken by those who are choosing marks that are associated with the products and reputations of others.’ The Ninth Circuit believed that the defendants did not have a deceptive purpose, they did not intend to ‘cybersquat’ when they reserved 12,000 domain names. The district court on the other hand, predicted that ultimately defendants would, even if not originally intended, become cybersquatters: ‘the laws of economics would require the defendants to sell or license each of their 12,000 names to the highest bidder for whatever use the buyer or licensee wished to make of them.’ Time will tell whether the district court’s prediction was correct. But what about the district court’s alternative basis, that the Internet is a scarce resource and this kind of use prevents the ‘highest and best use’ of the domain names, minimizing the utility of the Internet. Perhaps this is the kind of policy question better left to the legislature, but meanwhile the Ninth Circuit may have allowed a new breed of cybersquatters to evolve and survive.