Philip Morris USA v. Otamedia

Citation: Philip Morris USA, Inc. v. Otamedia Ltd., 331 F.Supp.2d 228 (S.D.N.Y. 2004)(full-text); 2005 U.S. Dist. LEXIS 1259 (S.D.N.Y. Jan. 28, 2005) (Magistrate Judge’s Report and Recommendation for an award of treble damages and attorney’s fees).

Factual Background
Plaintiff cigarette manufacturer sued defendant, which sold gray-market cigarettes (i.e., plaintiff’s branded cigarettes intended for sale abroad) to U.S. consumers via its websites “yesmoke.com” and “yessmoke.com.” Defendant’s websites also displayed logos and images that were confusingly similar to plaintiff’s trademarks.

Trial Court Proceedings
Defendant initially retained counsel but later informed the court that it would take no further action in the case. The court then entered default judgment and enjoined defendant from “using or licensing the use of [plaintiff’s] marks” and “supplying cigarettes, fulfilling orders for drop shipping, and/or facilitating the importation into the United States of [plaintiff’s] Gray market Cigarettes for any other website, customers, or affiliates, or any member of its ‘affiliate program.’” The order also required defendant to “post a notice on its website which informs customers that [it] does not sell [plaintiff’s] branded cigarettes to customers residing in the United States.”

Plaintiff sought to modify the order to include the transfer of the domain names “yesmoke.com” and “yessmoke.com.” Plaintiff argued that it had no other effective remedy given defendant’s refusal to comply with the court’s judgment. Defendant argued that transfer was inappropriate because it sold many other products on its websites and sold to many other countries, and any transfer would “destroy [its] entire business, the majority of which, [it] claimed, does not violate the judgment.”

The court granted the parties two weeks to submit relevant information on what percentage of defendant’s overall sales derived from U.S. sales of gray-market cigarettes bearing plaintiff’s marks. Plaintiff asserted the sales totaled 66% of defendant’s U.S. cigarettes sales, while defendant argued it constituted only 3.4%. The evidence, however, pointed to defendant’s devotion to selling cigarettes as its mainstay. First, the domain names “yesmoke.com” and “yessmoke.com” encouraged people to smoke. Second, at the top of defendant’s website, the title “Your Online Cigarette Store” appeared above a picture of a man “conspicuously similar” to plaintiff’s “Marlboro Man” character. Third, right up until a few days before the hearing, defendant’s website displayed packs of plaintiff’s cigarettes. On the date of the hearing, however, defendant replaced plaintiff’s cigarettes with a different brand of cigarettes. Fourth, a link entitled “See our wide selection of available brands” directed users to a page that displayed only plaintiff’s brands of cigarettes. Fifth, drop-down menus at each ordering page defaulted to the United States after asking viewers to select their location.

In light of this evidence, coupled with the inference from defendant’s refusal to comply with the judgment and defendant’s fabricated and deceiving testimony and other evidence, the court found that defendant’s Internet business was “devoted, almost exclusively, to selling cigarettes” and that very likely a majority of those cigarettes were gray-market cigarettes of plaintiff sold to customers in the United States. The court thus granted the transfer of the two domain names to plaintiff.

Several months later, plaintiff filed an application for an award of damages and attorney’s fees requesting $177.2 million in damages and $60,391.62 in attorney’s fees. Because defendant failed to appear and refused to comply with discovery, plaintiff had to rely on estimated revenues derived from defendant’s sale of gray-market cigarettes.

Based on an Internet research firm’s estimations, defendant sold approximately 9 million cartons of Philip Morris brand cigarettes over the relevant 17-month time period generating estimated revenues of $131.5 million from U.S. consumers. The court found the requisite bad faith for an accounting of defendant’s profits because defendant persistently defied the default judgment entered in 2003.

Furthermore, defendant’s failure to appear in this action demonstrated its “indifferent attitude toward the applicable trademark law and from which willfulness can be inferred.” The Magistrate Judge recommended an award of profits in the amount of $57,891,030, trebled to $173,734,291.62 due to defendant’s willful infringement, as well as attorney’s fees in the amount of $60,391.62.

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