Schluter Systems, L.P. v. Telos Brands, Inc.

Background

Schluter Systems, L.P. sued Telos Acquisition Company 10, LLC and Telos Brands, Inc. under federal trademark law and various California statutes and common-law theories. Schluter alleged that it owned a registered trademark for the bright orange color used on its tile-installation products, including waterproofing and drainage membranes. It alleged that Telos sold virtually identical orange products on Amazon.com.

The parties communicated about the dispute after Schluter filed suit, and they stipulated to an extension of time for Telos to respond to the amended complaint. Telos never filed an answer. The court found that Telos had notice of the lawsuit and Schluter’s request for default judgment, including through communications with James Serena and Marc Roca. Schluter also attempted service at several addresses and by email.

Trademark infringement and default judgment

The court applied the standards for default judgment under Federal Rule of Civil Procedure 55(b)(2). Although well-pleaded allegations concerning liability are generally treated as true after default, the court independently assessed whether default judgment was warranted under the seven factors identified in Eitel v. McCool.

The court found that Schluter had a protectable ownership interest in the Orange Mark. Schluter had used orange in connection with its products since 1990 and had registered the mark. The court also found that the Orange Mark was valid because the color had acquired “secondary meaning”—that is, consumers associated the color with Schluter—and because the color was not a functional product feature that competitors needed to use.

The court further found a likelihood of consumer confusion. It relied on the virtual identity of the products, the fact that the parties were direct competitors selling related products through the same online marketplace, the strength of Schluter’s mark, evidence suggesting intentional copying, and evidence that some consumers had actually mistaken Telos products for Schluter products. The court recognized that online shoppers might distinguish the products based on price, labeling, and reviews, but concluded that the evidence of actual confusion and the products’ similarity were sufficient.

The court determined that the complaint was sufficient, that the amount sought was not a reason to deny default judgment, that there was little likelihood of a meaningful factual dispute, and that Telos’s failure to respond was unlikely to be excusable neglect. It therefore granted Schluter’s motion for default judgment. The final order entered default judgment against Telos Brands on all causes of action.

Willfulness and damages

The court found the infringement willful based on Schluter’s allegations that Telos knew about the Orange Mark and intentionally copied it, the striking similarity between the products, and communications indicating that Telos was aware of Schluter and its patents.

Schluter elected statutory damages under the Lanham Act and sought $1,000,000. The court rejected that amount as a windfall because Schluter had not shown that every Telos sale replaced a Schluter sale, had not provided a methodology for calculating its actual lost sales, and had not accounted for the effects of price, product functionality, or Telos’s production and sales costs. The court awarded $300,000 in statutory damages as a reasonable approximation of Telos’s profits that would compensate Schluter and deter willful infringement.

Attorney fees and liability of the defendants

The court denied Schluter’s request for attorney fees because, under the rule applied by the court, electing statutory damages under the Lanham Act precluded an award of attorney fees.

The court declined to impose joint and several liability on Telos Acquisition and Telos Brands. Schluter had alleged that Telos Brands owned Telos Acquisition and that both companies were directed by James Serena, but it had not adequately alleged that Telos Acquisition participated in the distribution chain or that the companies were alter egos. The court concluded that only Telos Brands was liable for the damages award.

Injunction

The court found that Schluter satisfied the four requirements for a permanent injunction: irreparable injury, inadequate legal remedies, a balance of hardships favoring equitable relief, and consistency with the public interest. It found that the request was not moot because there was no evidence that Telos could not or would not reenter the market.

The court held that Schluter’s proposed injunction was too broad because it would have prohibited use of the Orange Mark in connection with any goods or services in the flooring field and would have barred Telos from competing unfairly in any manner. Instead, the court issued a narrower injunction. Telos Brands and the specified persons and entities acting with it were prohibited from using the Orange Mark, or a confusingly similar or colorable imitation, in connection with waterproofing and drainage membranes for use with tile installations.

Disposition

The court entered default judgment against Telos Brands on all causes of action, ordered Telos Brands to pay Schluter $300,000 in statutory damages, denied attorney fees, and issued the narrowly tailored injunction. The order disposed of Docket No. 24.