In our May 2022 newsletter, we explored trademark infringement and counterfeiting, and how genuine products can descend into the realms of counterfeits, through the lens of Rolex Watch U.S.A., Inc. v. BeckerTime, LLC, a federal court decision out of the Northern District of Texas.

Rolex, the renowned luxury watch seller, accused BeckerTime of infringing its trademarks by selling pre-owned watches, which it identified as “Genuine Rolex” but which contained both Rolex and non-Rolex parts. BeckerTime’s business is the refurbishment of genuine watches by adding diamonds, applying aftermarket bezels, and often utilizing aftermarket bands or straps. In listing retail prices for its modified watches BeckerTime compared its prices to genuine Rolex watches, but for various of the BeckerTime watches compared, Rolex had never sold a watch of that description.

The district court determined that BeckerTime’s alterations resulted in “modified watches” that were materially different from genuine Rolex watches, as such that BeckerTime infringed Rolex's trademarks, and included an injunction against BeckerTime to cease further infringement.

Despite Rolex’s success on the merits, the court sided with BeckerTime in applying its laches defense, and refused to disgorge BeckerTime of its profits, concluding that Rolex's unexplained ten-year delay in bringing the lawsuit amounted to unnecessary delay, and thus, it was not entitled to a recovery of profits.

In a recent development, the United States Court of Appeals for the Fifth Circuit examined the district court's decision and generally affirmed the result. Below, we discuss the appellate court's examination of the case, and why it still rings true: what was once a genuine Rolex watch can become a counterfeit.  

This recent decision teaches not only that trademark owners need to safeguard their trademarks and combat counterfeits, but also that the efficacy of these efforts hinges on taking immediate and forceful action.

The Appeals Court’s Decision

The court of appeals first addressed whether the district court applied the correct legal framework in determining trademark infringement, specifically addressing an analysis under the predominant Supreme Court case, Champion Spark Plug Co. v. Sanders (1947).

In 1947, the Supreme Court considered a case involving the resale of refurbished CHAMPION sparkplugs.  Champion objected – as it did not want its mark used on a product it did not make and did not have a hand in refurbishing. The Supreme Court, however, rejected Champion’s argument.  So long as it was made clear to the buyer that the items were refurbished (which meant it had to be stamped right on the spark plug!), then there was no reason the refurbisher could not resell the product.

But, the court went on to caution, “[c]ases may be imagined where the reconditioning or repair would be so extensive or so basic that it would be a misnomer to call the article by its original name, even though the words ‘used’ or ‘repaired’ were added.” It did not take long for luxury watch companies to “imagine” such cases.  A series of legal suits, several brought by Rolex, held that because certain components of a watch – a case, a dial, a bezel, a strap – are so basic to its function, replacing them with a non-genuine part renders the whole watch inauthentic.  And, as the watch still bears the identical trademark, a counterfeit!

So, these cases hold that if someone replaces the dial on a Rolex watch with their own dial, then the new watch is no longer a genuine Rolex.  Therefore, reselling it with the Rolex mark on it is counterfeiting.  (Rolex is not the only one to have made such claims.  One of the authors of this blog represented Cartier in a series of cases brought against jewelers who added diamonds to Cartier watches and then sought to resell them.  The courts held that these altered watches were no longer genuine Cartier products, and hence counterfeit.)

According to BeckerTime, the district court improperly applied the traditional confusion factors without any discussion of Champion, and that, as a refurbisher, BeckerTime should be allowed to continue its business practices.

Also, Rolex argued that the district court implicitly concluded that Champion's “misnomer” exception applied, allowing the court to rely on the traditional “likelihood of confusion” analysis, and that these factors point towards a likelihood of confusion and therefore infringement.

The appellate court affirmed that BeckerTime's modifications went beyond restoration or repair of genuine watches. In fact, throughout its brief, BeckerTime described its processes as “customization,” not restoration. Accordingly, Champion's misnomer exception was properly applied, and thanks in part to evidence of actual confusion amongst consumers, the district court’s finding of infringement was upheld.

But Alas, Still No Award of Damages

Rolex argued that the district court's failure to consider BeckerTime's “deliberate counterfeiting” was an error that resulted in the denial of monetary damages from the sale of infringing products. Rolex contended that BeckerTime's alleged “unclean hands” should disqualify it from relying on the equitable defense of laches, and maintained that BeckerTime had not demonstrated undue prejudice resulting from Rolex's delayed filing of its lawsuit.

The court of appeals did not agree, emphasizing that Rolex provided no justification for the prolonged delay in filing the lawsuit. Rolex waited over ten years and the record showed that “the ten years of permitted sales enabled BeckerTime to build up a successful business that it would not otherwise have invested in absent Rolex's delay in filing suit. This is clear prejudice.”

Consequently, the court upheld the district court's application of the laches defense, resulting in the preclusion of disgorgement of BeckerTime's profits. In a further setback for Rolex, the court stated that Rolex was not entitled to attorneys' fees. This decision was attributed, in part, to Rolex's failure to request attorneys' fees during the district court proceedings, with no valid excuse provided for such failure.

Conclusion

When used or altered products are resold, especially when a company makes a business of reselling such products, then the reputation of the original trademark owner is being leveraged to sell the item. Although items that are fundamentally altered, as a matter of law, are no longer the product of the original manufacturer, a used or altered Rolex in most consumer’s minds is still a Rolex, thus these altered products are counterfeits.

The decisions above underscore that, while companies like Rolex can indeed safeguard their trademarks and combat counterfeits, the efficacy of these efforts hinges on taking immediate and forceful action. A prompt response to potential trademark infringements is paramount to preserving one's rights and ensuring a full entitlement to monetary rewards.