A fragrance manufacturer was entitled to a preliminary injunction barring a drugstore chain from selling "decoded" gray-market products bearing the fragrance maker's COOL WATER mark, the U.S. Court of Appeals in New York City has determined. The fragrance maker was likely to succeed on the merits of its claim that the drugstore chain engaged in trademark infringement by selling, without authorization, foreign-manufactured versions of the COOL WATER fragrance products that the drugstore chain had decoded by removing their unique production code (UPC) numbers.

Decoding the goods in this manner created a likelihood of consumer confusion because the practice restricted the manufacturer's ability to identify and remove counterfeit goods and undermined its ability to identify, inspect, and, if necessary, recall defective products, the court said. The manufacturer's anti-counterfeiting system was a species of quality control protected under the Lanham Act. By reducing the availability of counterfeit products of inferior quality, the anti-counterfeiting procedures protected customers from confusion, ensured product consistency, and protected the manufacturer from misappropriation of its marks.

Even if the fragrance products in the drugstore chain's inventory did not include counterfeit goods, the decoded gray-market fragrances made detection of counterfeit products far more difficult, according to the court. The introduction of large batches of decoded product on the market could be used as "cover" for counterfeiters' illicit marketing efforts.

In addition, the fragrance maker's quality control system based on its UPC numbers was legitimate, substantial, and nonpretextual, in the court's opinion. The manufacturer closely monitored customer and retailer complaints and used the full traceability permitted by the UPC system to quickly identify and rectify quality-related issues.

The drugstore chain's contention that the trademark claims were meritless because the chain had not actually sold inferior or defective products was rejected. The manufacturer was entitled to protection against acts that subverted its ability to protect the reputation of its marks by exercising quality controls.

Moreover, the court said, the damage done to product packaging by cutting away portions of it or by applying acids to blur markings did detract from the value of the goods. Consumers might regard a product whose packaging has been mutilated as inferior and suspicious. Damaged packaging also was less appealing to consumers purchasing the products as gifts.

Zino Davidoff SA, 2nd Cir., ¶61,457