A federal appeals court issued its opinion on August 17th in Tiffany & Co. v. Costco Wholesale Corp., vacating a $21 million judgment against Costco Wholesale Corp. Costco had marketed unbranded diamond engagement rings labeled “Tiffany” on point-of-sale signage.

Tiffany & Co. sued Costco in the U.S. District Court for the Southern District of New York alleging trademark infringement, counterfeiting, and unfair business practices in violation of the federal Lanham Act and New York law, seeking tens of millions of dollars in damage. Several thousand customers bought Tiffany-set rings at Costco before Costco removed Tiffany from store signs after Tiffany complained.

Costco defended its marketing practice and filed a counterclaim arguing that the word “Tiffany” was used across the industry as a specific style ring with a diamond solitaire in a six-prong setting. According to Costco, its use of the term “Tiffany” was not likely to confuse consumers; and, it further argued, “Tiffany” is not a legally-protected trademark, but instead is a generic or descriptive term for a “Tiffany setting.” As such, Costco argued, Tiffany’s federal registration should be invalidated.

The district court in Manhattan granted Tiffany’s motion for summary judgment, holding that no reasonable jury could credit Costco’s arguments, and further concluding that Costco’s infringement constituted counterfeiting as a matter of law. Further, the district court dismissed Costco’s counterclaim and defenses, including Costco’s claim of fair use, which focused on Costco’s argument that it was using the purportedly generic “Tiffany” name merely to refer to the setting, and not to identify the source of the rings, and thus, cannot be infringement.

At trial, a jury awarded Tiffany $13.8 million in compensatory lost profits and punitive damages which the district court increased to a little over $21 million. In doing so, the district judge determined that Costco “displayed at best a cavalier attitude toward Costco’s use of the Tiffany name in conjunction with ring sales and marketing.”

On Costco’s appeal, the U.S. Court of Appeals for the Second Circuit, in a 3-0 decision, vacated the grant of summary judgment, agreeing with Costco that the determination of liability was inappropriate at the summary judgment stage. The appeals panel determined that in several instances, the district court too quickly dismissed Costco’s rebuttal evidence pointing away from infringement, including on the issues of actual confusion and disputed survey evidence, Costco’s good faith, and the level of consumer sophistication. Costco’s evidence “was sufficient to raise a question as to whether potential buyers of Costco’s diamond engagement rings were actually confused by the appearance of the word ‘Tiffany’ on Costco’s signs.” The Second Circuit determined that a reasonable juror could have found that Costco’s rings did not infringe Tiffany’s trademarks, or that Costco acted in good faith and that its signage for the rings was protected by fair use, and that Costco consumers would be sufficiently discerning to know that “Tiffany had nothing to do with Costco’s diamond engagement rings.”

After examining all of the fair use factors, the Second Circuit found that Costco had raised a material issue of fact as to its liability for trademark infringement and counterfeiting, and that the fair use defense should have been presented to a jury. The case was returned to the district court for a new trial.