01
May
2003

Recent Cybersquatting Case: Spider Webs Fail to Lure E&J Gallo Winery

Intellectual Property Alert

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PUBLISHED ON: May 1, 2003

The Ernest and Julio Gallo Winery (“Gallo”), owner of the famous trademark “ERNEST & JULIO GALLO”, successfully wrested the domain name “ernestandjuliogallo. com” (the “domain name”) from Spider Webs Ltd. (“Spider Webs”). The Court of Appeals for the Fifth Circuit recently affirmed the decision of the U.S. District Court for the Southern District of Texas, which had issued an injunction under the Texas Anti-Dilution Statute (“ADS”), ordered the transfer of the domain name and awarded statutory damages of $25,000 under the Anti-Cybersquatting Consumer Protection Act (“ACPA”). E. & J. Gallo Winery v. Spider Webs Ltd., No. 01- 20333-CV (decided on April 3, 2002).

Spider Webs warehoused more than 2000 internet domain names, of which about 300 were names that could be associated with existing businesses, e.g., firestonetires.com, oreocookies.com, avoncosmetics. com and bluecrossblueshield. com. It sold some of these names on its own website and on eBay—the internet auction house. Although it had never offered the domain name at issue for sale, Steve Thumann, one of the partners of Spider Webs, admitted that they “hoped that Gallo would contact us and we could assist them in some way.” He also admitted that the domain name was valuable on account of the goodwill that Gallo had developed in its name. Over the years, Gallo spent more than $500 million promoting its brands. When Gallo did contact Spider Webs, it was by way of letter requesting transfer of the domain name. Spider Webs refused and the suit followed.

Approximately six months after Gallo brought the suit, Spider Webs published a website (“the Website”) at ernestandjuliogallo.com that contained the words “Whiney Winery” and provided links to pages that discussed the lawsuit, the risks associated with alcohol use and misrepresentations by corporations regarding the deleterious effects of consumption of alcohol. The first page contained a disclaimer that stated “This site is not affiliated with Ernest & Julio Gallo (R) Wineries”. However, none of the other linked pages contained such a disclaimer. The District Court granted partial summary judgment to Gallo regarding its claims of violations of the Texas ADS and the ACPA. It held that Gallo owned a distinctive mark and Spider Web’s actions were likely dilutive of that mark. Further, Spider Webs had registered the domain name in bad faith under the ACPA’s standard and its use was not fair use, which was violative of the ACPA. Spider Webs did not appeal the holdings that Gallo’s registered mark was famous and distinctive and that Spider Web’s domain name was identical or confusingly similar to Gallo’s mark. It, however, did appeal the holding that it acted with “bad faith intent to profit” as required by the ACPA for a finding of cybersquatting.

The ACPA was enacted by Congress to provide for situations arising out of the use of the internet as a medium of promotion, advertisement and sales by commercial entities. In pertinent part, it provides for civil liabilities against a person who (i) has a bad faith intent to profit from a mark, and (ii) registers, traffics in, or uses a domain name that is either identical to or confusingly similar to a mark that is distinctive or famous at the time of registration of the domain name, or is dilutive of a famous mark.

To assist courts in their determination of whether a person has acted in bad faith, the ACPA sets out a few nonexclusive factors. Some of the factors that applied to this case are: a) trademark or other intellectual property rights, if any, of the defendant in the domain name; b) the defendant’s prior use, if any, of the use of the domain name in connection with the bona fide offering of any goods or services; c) the defendant’s bona fide noncommercial or fair use of the mark in a site accessible under the domain name; d) the defendant’s intent to divert consumers from the mark owner’s online location to a site accessible under the domain name that could harm the goodwill represented by the mark, either for commercial gain or with the intent to tarnish or disparage the mark, by creating a likelihood of confusion as to the source, sponsorship, affiliation, or endorsement of the site; e) the defendant’s offer to transfer, sell, or otherwise assign the domain name to the mark owner or to any third party for financial gain without having used, or having an intent to use, the domain name in the bona fide offering of any goods or services, or the person’s prior conduct indicating a pattern of such conduct; f) the defendant’s registration or acquisition of multiple domain names which the defendant knows are identical or confusingly similar to marks of others that are distinctive at the time of registration of such domain names, or dilutive of famous marks of others that are famous at the time of registration of such domain names, without regard to the goods or services of the parties; and g) the extent to which the mark incorporated in the defendant’s domain name registration is or is not distinctive and famous within the meaning of subsection(c)(1) of this section.

Under 15 U.S.C. §§ 1125(d)(1)(C), 1117(d), if a court finds a violation of the ACPA, it may order the transfer of the domain name to the owner of the mark and may also award statutory damages. However, the ACPA also provides a “fair use” defense, i.e., “bad faith intent” shall not be found in a case in which the court determines that the person believed and had reasonable grounds to believe that the use of the domain name was a fair use or otherwise lawful.

The Appeals Court found that apart from the domain name itself, Spider Webs had no intellectual property or trademark rights in the name ‘ernestandjuliogallo’, the domain name did not contain the name of any of the defendants and Spider Webs had no prior or current use of the domain name in connection with the bona fide offering of goods or services. Since one of the defendants had admitted that the domain name was “valuable” and that it was hoped that Gallo would contact them so that they could “assist” them in some way, Spider Webs’ use of the domain name was commercial and there was no indication that it was “fair use”. Thus, the first four factors favored a finding of “bad faith”.

After some cases were decided against them, savvy cybersquatters were careful not to offer their domain name for sale to the trademark owners in an attempt to escape liability under the ACPA, thereby leaving trademark holders without efficacious remedy. In this case too, Spider Webs did not approach Gallo for sale of the domain name. The court said that “[t]he ACPA was passed to address situations just like this one” where the domain name was registered in the hope that the trademark owner would contact them to purchase the name.

Further, there was no evidence that the domain name was actually used by Spider Webs until the lawsuit began. Following precedent from the Second and Third Circuits, the court held that when a registrant first uses a website associated with a domain name after litigation begins, it undermines any claim that the use was in good faith or was “fair use” under the ACPA. The fact that Spider Webs hosted a website using Gallo’s trademark that disparaged the instant litigation and alcohol, is indicative of intent to harm Gallo’s goodwill and to tarnish its mark. Gallo’s mark was famous and distinctive and Spider Webs had registered and offered for sale domain names that are identical or similar to well-known trademarks. The court held that all these pointed towards a finding of bad faith intent to profit under the ACPA.

Spider Webs also appealed the award of statutory damages to Gallo on the grounds that Gallo did not suffer any actual injury and that the domain name was registered prior to the enactment of the ACPA. The court rejected both these arguments, holding that, firstly, although Spider Webs had registered its domain name prior to the enactment of the ACPA, its actions would fall within the ACPA’s purview because the use of the domain name was post-enactment. Secondly, the statutory damages provided for in the ACPA were akin to the provisions for statutory damages under copyright law. In the context of copyright law, the Supreme Court had held that the rule of statutory damages “not merely compels restitution of profit and reparation for injury but also is designed to discourage wrongful conduct”. F.W. Woolworth Co. v. Contemporary Arts, Inc., 344 U.S. 228, 233 (1952). Therefore, even if Gallo had not suffered any loss of business due to the defendant’s actions, Spider Webs would still be liable because those actions put Gallo “at risk of losing business and having its reputation tarnished”.

This case presents a fine example of the court reaching beyond a cybersquatter ’s disingenuity in order to protect valuable rights of a plaintiff. As cybersquatters become more savvy and seek to take advantage of unexplored areas in trademark jurisprudence, courts attempt to extricate and preserve hard-earned goodwill and trademark rights. Trademark holders can now look forward to not only wresting a domain name from the clutches of a cybersquatter, but also an award of statutory damages.