The opinion of the court was delivered by: Kenneth M. Karas, District Judge
AMENDED OPINION & ORDER*fn1
Zino Davidoff SA ("Davidoff"), a joint stock company organized under the laws of Switzerland, brings this action against CVS Corporation ("CVS"), alleging trademark infringement in violation of sections 32(1), 43(a), and 43(c) of the Trademark Act of 1946 (the "Lanham Act"), as codified at 15 U.S.C. §§ 1114(1), 1125(a), 1125(c), as well as several state trademark claims. On December 22, 2006, the Court issued a temporary restraining order (the "TRO"), which prohibited CVS from selling counterfeit goods and required CVS to hold aside for Davidoff's inspection certain Davidoff products. The TRO was extended on CVS's consent and remains in effect. Davidoff now seeks to replace the TRO with a preliminary injunction enjoining CVS from selling any counterfeit and certain gray-market Davidoff goods. CVS does not oppose an injunction prohibiting the sale of counterfeit goods; however, CVS argues that it has a right to sell the disputed gray-market Davidoff products so long as those products are not counterfeit.
The Court held a preliminary injunction hearing on May 14 and 15, 2007. During that hearing, the Court heard testimony from Guido Baumgartner, Hans-Jurgen Weissgraeber, Erich Joachimsthaler, James Duggan, and Marie-Josee Rivard. With the agreement of the Parties, direct examination was largely conducted by affidavit. The Court finds that all of the witnesses were credible.
For the reasons stated herein, Plaintiff's application for a preliminary injunction is GRANTED.
A. The Davidoff Fragrances
Zino Davidoff created the Davidoff brand in 1911, in Geneva, Switzerland. (Am. Compl. ¶ 8.) In 1991, Davidoff launched its DAVIDOFF COOL WATER ("COOL WATER") cologne for men, which was followed, in 1997, by a women's COOL WATER fragrance. (Id. ¶ 9.) Davidoff's COOL WATER fragrances are considered "prestige" products, and, as such, they command a price premium over their competitors due in part to the value of the Davidoff brand name. (Joachimsthaler Aff. ¶¶ 17-18, 31.) It is undisputed that Davidoff holds valid trademarks for all of the COOL WATER products at issue. (Stipulation, May 2, 2007, ¶¶ 3-4.)
B. Davidoff's Quality Control Procedures
Coty Inc., through its affiliates and subsidiaries, is the primary authorized distributor of Davidoff fragrances in the United States. (Weissgraeber Aff. ¶ 1.) Together with Davidoff, Coty Inc. exercises "strict quality control over [Davidoff's] fragrance products." (Id. ¶ 4.) Davidoff and Coty Inc.'s quality control procedures take place at three stages: i) the development of the formula; ii) the production of the product; and iii) the packaging of the product. (Id. ¶ 7.) It is the quality control procedures related to Davidoff's product packaging that are at issue here.
With respect to packaging, one means by which Davidoff assures quality is through its coding system. Davidoff applies "a unique numeric production code [the "Unique Production Code" or "UPC"] . . . or a numeric batch code . . . to each unit to permit [Davidoff] to trace and resolve quality issues." (Id. ¶ 5.) The batch code is a non-unique number that, as the name suggests, identifies the batch from which each particular unit was produced. While the batch code provides some limited information about the product, it does not uniquely identify each unit, as hundreds of units may contain the same batch code. (Hr'g Tr. 48.) The Unique Production Code, in contrast, is a longer number that is unique to each individual unit. Embedded in the UPC is information such as the date of the product's production -- "down to the very second [the bottle] has been filled" (id. at 39) -- the ingredients used to produce the product, the production line from which it came, and the distribution chain "from the factory . . . down to the customer." (Id.) Davidoff uses Unique Production Codes on all of its luxury brands, including COOL WATER, "because they are more frequently counterfeited . . . and because consumers expect the absolute best from [Davidoff's] luxury brands." (Weissgraeber Aff. ¶ 6.)
Davidoff views the UPC system as "an important part of [its] programs regarding: (i) anti-counterfeiting; (ii) worldwide quality assurance; and (iii) theft protection, investigation and prosecution." (Baumgartner Aff. ¶ 5.) Because counterfeit products either lack a UPC number altogether or repeat the same UPC number on multiple units, once Davidoff has identified counterfeit UPC numbers, it is often able "to differentiate an authentic product from a counterfeit quickly and easily -- and to train investigators, Customs officials and law enforcement authorities to spot the fakes."*fn2 (Id. ¶ 6.)
In the event that Davidoff becomes aware of a potential quality issue, the UPC also "enables [Davidoff] to pinpoint exactly where and when it arose and what other units are affected, if any, in [the] distribution chain." (Weissgraeber Aff. ¶ 9.) This use of the UPC is not merely pretextual; Davidoff and Coty Inc. have used this process to verify the safety and quality of COOL WATER fragrances (id. ¶ 10a), and to recall Davidoff and other fragrances in the past (id. ¶ 10). The traceability provided by the UPC similarly assists Davidoff in its anti-theft measures and "greatly increases [the] chances of finding and taking action against the thieves, and possibly the distributors and retailers of the stolen . . . products." (Baumgartner Aff. ¶ 15.)
C. The TRO and CVS's Davidoff Inventory
Pursuant to the TRO, beginning in January 2007, Davidoff conducted inspections of CVS's inventory of COOL WATER products. In total, Davidoff's inspectors examined 33,369 units of COOL WATER fragrances. Of these, 836 units were identified as counterfeit and 16,600 units were found to be decoded gray-market products. (Andersen Aff., Ex. A; Pl.'s Ex. 10.) According to James Duggan, one of the inspectors who examined the goods, the Unique Production Codes had been removed from the decoded goods using a number of different techniques, including: i) cutting portions of the box or the label on the bottle to remove the UPCs; ii) using chemicals to wipe away the UPCs; and iii) grinding the UPCs from the bottom of the ...