“ADIDAS AMERICA INC.

V.
PAYLESS SHOESOURCE INC. ”
INTELLECTUAL PROPERTY RIGHTS
Submitted by

VISHNU DHANGAL

ROLL NO 19193

Submitted to

DR. GEETIKA WALIA

(Assistant Professor of Law)

RAJIV GANDHI NATIONAL UNIVERSITY OF LAW,

PATIALA, PUNJAB

1|Page
 ACKNOWLEDGEMENT

I would like to take this opportunity to express my profound gratitude

and deep regard to Dr. Geetika walia (Assistant Professor of Law) for his
guidance and valuable feedback and constant support throughout the
duration of project. Her suggestions were of monumental help in the
rough work of my project.

I would also like to express my gratitude to Rajiv Gandhi National

University of Law, Patiala for giving me the topic that enriched my
knowledge. I also like to thank the library staff for constant support.

Lastly I am thankful to my parents and friends for their constant support

and coordination in the completion of the research work.

2|Page
 TABLE OF CONTENTS

1. Introduction ................................................................................................................. 4

2. Background and Facts of the Dispute .......................................................................... 4

3. Issues and Arguments Raised ...................................................................................... 6

4. Decision ....................................................................................................................... 7

5. Analysis ....................................................................................................................... 9

6. Conclusion ................................................................................................................. 10

3|Page
 ADIDAS AMERICA INC. V. PAYLESS SHOESOURCE INC.

1. Introduction

The case of Adidas America Inc. v. Payless Shoesource Inc. is a leading example of how
a court evaluates an infringement claim. This case is best known for a jury awarding $305
million in damages, which was later reduced in a retrial. However, believes that this
decision is more than just a reduction in damages because it clarifies the elements and
ambiguities of an infringement claim.

The purpose of this case is to show how the defendant's liability was established in the
first place, namely, by interpreting the evidence on the record and bringing to light
elements such as intent, likelihood of confusion, actionable harm, and determination of
dilution of a registered trademark in a trademark violation.

2. Background and Facts of the Dispute

Adidas America Inc. (“Adidas”) is a manufacturer and seller of athletic and casual
footwear. Since 1952, Adidas has exclusively been placing a ‘Three Stripe Mark’ on is
products. The mark displays three parallel and equidistant serrated stripes of contrasting
colour shades on each side of the footwear that run diagonally from the mid sole towards
the shoelace. In 1969, Adidas introduced the Superstar Trade Dress, which includes three
parallel stripes, a flat sole, rubber shell toe, and a coloured portion at the back of the
brand's footwear. In 1994, Adidas registered the trademarks and its slight variations with
the U.S, Patent and Trademark Office1.

Payless Shoesource Inc. (“Payless”) is a leading company that retails in discounted

athletic and casual footwear. Payless markets and sells shoes bearing parallel stripes. The
brand primarily sells shoes with two and four straight-edged parallel stripes that run from

1
Adidas America., Inc. v. Payless ShoeSource, Inc., No. CV 01-1655-KI, 2008 WL 4279812 (D. Ore. Sept.
12, 2008).

4|Page
the mid-sole to the shoelace. It also sells shoes with a shell toe, flat sole, and a coloured
section at the shoe's backside.

Payless and Adidas signed a Settlement Agreement in 1994, which stated that Payless
would not sell shoes with the Three-Stripe Mark or two or four double serrated stripes of
contrasting shades running from the midsole section to the shoelaces. Adidas first
introduced the Three-Stripe Mark in 1952 and has spent millions of dollars promoting it
since then, necessitating the need for an agreement. The proceeds from the sale of
trademarked footwear have generated billions of dollars annually around the world,
including hundreds of millions in the United States of America. Payless, on the other
hand, is a major casual footwear retailer that does not sell Adidas shoes. However, since
they share the same customer base and advertise their products through the same media
channels, an Agreement was needed to protect the infringement of the trademarks.

Adidas filed a class action lawsuit against Payless in 2001, alleging that the latter had
broken the Agreement. Payless' shoes, with two and four straight-edged stripes, were
claimed to be identical to Adidas' Three-Stripe Mark and Superstar Trade Dress. In this
case, the District Court ruled that the Agreement barred Adidas' claims and that an
infringement claim for a shoe that did not exist before the Agreement was signed was
barred.

In 2006, Adidas sued Payless for trademark infringement, federal dilution, unfair
competition, unfair and deceptive trade practises, and injury to business and reputation,
seeking injunction relief, profit recovery, enhancement of damages, attorney's fees and
costs, and dilution damages. The Ninth Circuit overturned the District Court's previous
dismissal of the jury trial in this decision. As a result, Payless filed a motion in District
Court asking for the jury's verdict to be reconsidered.

5|Page
 3. Issues and Arguments Raised

The entire dispute between the parties relied on Adidas’ allegation that Payless had been
indulging in trademark infringement since 2001 and was violating the Agreement
concluded in 1994. To substantiate its claim, several issues were presented before the
Ninth Circuit.

The most significant issue in the instant matter was whether the alleged infringement was
a good faith interpretation of the Agreement or whether the defendant had an intent to
infringe in the instant case. Adidas contended that Payless’ shared marks similar to the
petitioner company’s registered trademarks-, and this was an infringement prohibited as
per the Agreement. Payless, however, argued that the marks used were straight-edged
stripes and not serrated stripes and two and four stripes, and not three. The defendant
claimed that since the Three-Stripe Mark wasn’t utilized, the Agreement wasn’t violated
and it had used the marks on its shoes out of a good faith interpretation of the Agreement,
assuming there was no prohibition on sale and designing of straight-edged stripes and had
no intent to infringe Adidas’ trademark. Lastly, due to a lack of evidence of any intent to
infringe or deceive a prudent customer about the product's source, Payless claimed it
could not be held liable.

The second issue deliberated upon was whether there was any dilution of the registered
trademark’s image by the alleged infringement. For this purpose, we must understand that
the dilution of a trademark refers to using a trademark for a commercial purpose, and
such a mark is sufficiently similar to a famous mark. Such usage results in the blurring of
the trademark and tarnishes its value distinctively, causing harm or impairment to the
public perception of the famous trademark through such association.

Adidas contended that due to existing similarities between the design of the two brands
and actions of the alleged infringer, there is a likelihood of initial interest and post-sale
confusion by Payless’s actions, leading to evidence of actual confusion for the purchaser.
The doctrine of initial interest stipulates any merchant who causes an initial confusion to

6|Page
divert a potential customer’s attention from its competitor’s products and wrongfully
profits on the goodwill their competitor accrues will be deemed liable. The doctrine
allows the court to find an infringement of any initial caused to the customer about its
provenance, even before it is actually purchased, and even if the confusion no longer
exists at the point of sale.

Adidas argued that Payless's infringement and the likelihood of confusion caused due to
actionable similarity between their products affected the value of the petitioner's
registered trademarks, resulting in dilution. Further, the petitioner claimed that the
defendant company’s shoes are of inferior quality and submitted direct evidence of a
survey that depicted a likelihood of confusion among customers regarding the quality of
the footwear due to the two and four stripe marks on the shoes and all of this had led to a
negative perception of the brand’s footwear. The defendant, however, contended that
there is no significant popularity attached to Adidas’ trademark, and so, there is no
dilution present. Payless also argued that to impose liability, Adidas must prove that such
commercial use of the Three-Striped mark was after the trademark became renowned.

4. Decision

Deciding on the first issue, the Ninth Circuit held that Payless’ shoes come off as
strikingly similar to Adidas’ products. It decided the issue using the confusion theory,
i.e., looking into the relatedness of the disputing parties' goods, the nature of similarity
existing, the defendant's intent, and evidence of any actual confusion caused. It was seen
that an infringement claim could not be decided upon a mathematical premise, i.e., three
stripes do not equal four, rather, the alleged infringement's total effect is taken into
consideration. It was seen that there existed an actionable similarity between the marks of
the two parts, and such substantial similarity raised relevant questions on the intent of the
defendant company. Considering the evidence on record, it was that there existed
sufficient direct and circumstantial evidence showing that Payless’ had copied Adidas’
registered trademark. It was in entirety held that good faith interpretation did not stand,
there was no ‘unwilling intention to infringe’ in the present dispute, and the likelihood of

7|Page
confusion caused by the defendant party raised essential questions on its credibility and
intent.

Dismissing the defendant’s claims in the second issue, the Ninth Circuit observed that
Adidas’ trademark was established in the 1970s and is famous since then, so any
conflicting statements regarding its popularity are insignificant. It looked into the Federal
Trademark Dilution Act (“FTDA”) and Trademark Dilution Revision Act 2006
(“TDRA”) to evaluate whether Payless’s actions resulted in the dilution of Adidas’
trademark. As per FTDA, an owner is entitled to injunction relief if there is a commercial
use by another entity that distinctly dilutes the owner’s trademark's reputation. However,
as per TDRA, the injunction relief can be granted even if there is a likelihood of such
dilution due to the infringer’s mark being identical or nearly identical to the protected
trademark. It was held that genuine confusion regarding the product's material source was
created, leading to a likelihood of confusion. This was further proved by providing a
customer survey that served as substantial evidence of the likelihood of confusion caused
and led for a ruling that there existed an essential similarity between the products.
Determining the dilution claims, the Ninth Circuit relied on the rule that if a registered
trademark is used by another to grab initial customer attention, despite no actual sale
being done, any resulted confusion may still constitute an infringement. It was held that
the marks used by Payless’ and the product quality concerns of the product negatively
impact the customer’s perception of Adidas’ shoes, which is seen as a source of quality
footwear, and thereby highlights the initial interest of the defendant and was held to be a
dilution of Adidas’ trademark.

The Ninth Circuit concluded that the Three-Striped Mark and Superstar Trade Dress have
a valid registration and are distinct, and this is incontestable. Payless’ actions, however,
caused a likelihood of confusion among the already existing somewhat similar customer
base. Further, significant questions of Payless’s intent arose due to the evidence on
record. Hence, Payless actions were seen as a violation of the Agreement and was held
liable for trademark infringement in the instant case. It was also viewed that the
defendant’s actions had negatively affected Adidas, and dilution had occurred. Therefore,

8|Page
the Jury awarded Adidas actual damages of approximately $30.6 million, lost profits of
approximately $137 million, and punitive damages of approximately $137 million.
The District Court, in this case, ruled that the post-trial motions of the defendant were not
a matter of law; however, it accepted the remittitur for the punitive damages awarded by
the Jury. It held that the punitive damages were overstated and were reduced to $15
million, despite the defendant's conduct. It was also felt that the loss of profits was
overstated and more punitive than compensatory. Hence, loss of profit was reduced to
$19.7 million from $137million. Overall, even during reconsideration of the verdict the
District followed the pattern of Jury and did not deviate from it.

5. Analysis

Trademark infringement occurs when one party's mark is similar or identical to another
party's trademark, causing customers to be confused about the product's source and
origin. The decision in this case is a watershed moment in the history of trademark
infringement. Adidas attempted to protect its distinctive trademarks, the Three-Striped
Trademark and Superstar Trade Dress, in the dispute. In this case, the Ninth Circuit
deviated from the general rule that misconduct requires a conscious intent to deceive a
party. The court's decision was based on the assumption that the elements of a trademark
infringement claim do not include intent or actual confusion. For determining the liability
of an infringer, the total effect of infringement is seen, and proof of intent to confuse
customers is not needed. By relying on the facts and evidence on record defendant's
liability was ascertained.

Overall, a new rule was established for determining infringement by evaluating the nature
of the infringement and its effect. When the effect of the infringement and the resulting
injury or dilution to the trademark owner is present, a party's unwilling infringement
position may fail. As a result, liability can be assigned if there is a risk of
misunderstanding and any resulting dilution. Using this viewpoint, the defendant was
found liable in this case.

9|Page
The significance of this decision can still be seen today: it demonstrates that in order to
obtain monetary and injunctive relief, the plaintiff must demonstrate a likelihood of
confusion and how it confused the customer. The most difficult part of the case may be
demonstrating a coherent theory of how actionable harm is likely to occur. It is now
established that in order to determine intent, the court examines the doctrinal features,
ambiguities, and evidence of active inducement. However, if the accused relies on a good
faith infringement, or non-intentional infringement, the excuse may fall short if the belief
is flawed, or if the claim is ambiguous.

6. Conclusion

The landmark case demonstrates the importance of investigating existing facts or acting
as a fact-finder to determine whether an alleged trademark infringer acted with wilful or
malafide intent. The judgment establishes a remarkable evidentiary standard by striking a
balance between the wilful violation and pieces of evidence determining the intent. The
decision has paved the way for courts to handle infringement claims in which a defendant
claims innocence based on a non-intentional infringement. It allows it to ascertain
genuine violations by acting as a fact-finder and not allowing erroneous excuses to stand
in the way of determining justice in an infringement claim and protecting the legitimate
owner's interests.

10 | P a g e