Landlord and Principals Liable for Tenant Selling Counterfeit Goods

Luxottica Group, S.P.A. v. Airport Mini Mall, LLC, 932 F.3d 1303 (11th Cir. 2019). Luxottica Group manufactures and holds registered trademarks to luxury goods, including Ray-Ban and Oakley Sunglasses.  Yes Assets, LLC in 2009 purchased a shopping center near the Atlanta Airport which contained between approximately 120 booths leased to individual vendors. Jerome Yeh was an owner of Yes Assets, LLC, which in turn owned the International Discount Mall, an indoor space that contained approximately 125 booths for individual vendors. Yes Assets leased the Mall to Airport Mini Mall, LLC (“AMM”), which was owned by Donald Yeh, Jerome Yeh’s son. Airport Mini Mall then subleased booths in the mall to individual vendors. Jerome Yeh’s daughter, Alice Jamison, managed the mall. The mall was characterized by the Eleventh Circuit and the district courts as a “flea market.” During the time that AMM owned the mall, law enforcement officers executed search warrants on the mall and raided the property three times and seized counterfeit goods, including thousands of counterfeit Ray-Ban and Oakley sunglasses. In a district court opinion, law enforcement officers reported that upon entry to the mall, “vendors would immediately begin closing up their booths and attempting to flee the premises.” Luxottica had private investigators go to the mall, and take pictures of the subtenants selling counterfeit goods. Luxottica sent two cease and desist letters to AMM notifying it that tenants were selling counterfeit sunglasses and identifying the subtenants who were selling the counterfeit goods. Luxottica then brought an action against Yes Assets, AMM, Jerome Yeh, Donald Yeh and Alice Jamison under the Lanham Act, alleging that they were contributorily liable for trademark infringement by the subtenants because they provided services to the subtenants in the form of lighting, water, sewerage, maintenance and repairs, painting, cleaning and parking space for the subtenants and their customers. After a trial in the federal district court for the Northern District of Georgia, a jury found all of the defendants liable for contributory trademark infringement and assessed damages of $100,000 for each infringed trademark, totaling $1.9 million in damages. On appeal, the United States Court of Appeals for the Eleventh Circuit affirmed.

The Lanham Act, aka the Trademark Act of 1946, 15 USC Section 1114, provides that any person who sells counterfeit goods with registered marks can be liable for damages to the owner of the mark. In Inwood Laboratories v. Ives Laboratories, 456 U.S. 844 (1982), a case involving the manufacture of drugs, the United States Supreme Court stated that under the Lanham Act, “if a manufacturer or distributor intentionally induces another to infringe a trademark, or it continues to supply its product to one whom it knows or has reason to know is engaging in trademark infringement, the manufacturer or distributor is contributorily responsible for any harm done as a result of the deceit.” 456 U.S. at 854. The Luxottica court explained the elements of a contributory trademark infringement claim as follows: “A claim for contributory trademark infringement thus has two elements: (1) a person or entity commits direct trademark or infringement under the Lanham Act, and (2) the defendant (a) “intentionally induces” the direct infringer to commit infringement, (b) supplies a “product” to the direct infringer whom it “knows” is directly infringing (actual knowledge), or (c) supplies a “product” to the direct infringer whom it “has reason to know” is directly infringing (constructive knowledge).” In this case, Luxottica presented evidence that the defendants showed willful blindness to their subtenants’ unlawful conduct. The Eleventh Circuit found that willful blindness is a form of constructive knowledge for purposes of the Lanham Act. It also found that the provision of services in the form of providing space, lighting, parking, and other services met the standard for contributory liability.

One important point, in this case, is that the individual principals of the landlord entities were liable. It was not necessary for Luxottica to “pierce the corporate veil” of the corporate landlord to get to the individual shareholders as long as Luxottica established the necessary elements of contributory trademark infringement as to the individuals.

While the Luxottica case was a case of first impression for the Eleventh Circuit, federal appeals courts in other circuits have held that a landlord can be liable when tenants sell counterfeit goods. See Coach, Inc. v. Goodfellow, 717 F.3d 498 (6th Cir. 2013)(sale of counterfeit Coach products); Fonovisa, Inc. v. Cherry Auction, Inc., 76 F.3d 259 (9th Cir. 1996)(sale of bootleg CDs); Hard Rock Café Licensing Corp. v. Concession Services, Inc., 955 F.2d 1143 (7th Cir. 1992)(sale of counterfeit Hard Rock t-shirts). These cases all involved flea markets, but wouldn’t this same rationale apply to a kiosk at an upscale mall?

One takeaway from this case is that retail leases need to require the tenant not to sell counterfeit goods or otherwise violate the Lanham Act, and to give the landlord the power to terminate the lease and dispossess the tenant if the tenant breaches this covenant. But if the lease contains these provisions, and the landlord does not use them, it may be worse for the landlord than not having them. In the Luxottica case, the defendants argued that they lacked clear evidence that their subtenants had defaulted, and that absent clear evidence, they could have been sued for wrongful eviction if they had attempted to evict the subtenants. Circuit Judge Pryor, writing for the Eleventh Circuit, wrote that the leases with the subtenants did not require evidence that the subtenants were selling counterfeit sunglasses, but provided that a verified written complaint that a subtenant was selling counterfeit goods would constitute a breach of the lease and authorize the landlord to dispossess the tenant immediately. The defendants admitted at trial that the search warrants accompanied by a sworn affidavit would qualify as a “verified written complaint” under the subleases. The sublease also provided that a subtenant’s failure to comply with trademark law would constitute a default and permit the landlord to evict the tenant, but they did not do so. So while the landlord had the authority to terminate the subleases because of trademark infringement, the landlord did not do so.

This case and the other cases in which federal courts have found landlords and their principals contributorily liable for their tenants’ sale of counterfeit goods gives manufacturers a powerful tool.  A judgment against the landlord and its principals has more value than a verdict against the people selling counterfeit goods, both in terms of collectability and deterrence.