October 9, 2020 - This Week at the Ninth

This Week at The Ninth: Counterfeiting and Superfund

This week, we examine a Ninth Circuit decision addressing whether a plaintiff pursuing a Lanham Act counterfeiting claim must demonstrate that consumers were likely to be confused (the answer: yes), and another resolving the tricky issue of whether the federal government’s regulation of a polluted site rendered it liable for the costs of remediating that pollution (the answer of a divided panel: no).

ARCONA, INC. v. FARMACY BEAUTY, LLC
Resolving an issue of first impression in the Ninth Circuit, the Court holds that the Lanham Act, 15 U.S.C. § 1114, requires plaintiffs to establish a likelihood of confusion for a trademark counterfeiting claim.

Panel: Judges Lee, Bumatay, and Molloy (D. Mont.), with Judge Lee writing the opinion.

Key highlight: “[A] counterfeit claim is merely the ‘hard core’ or ‘first degree’ of trademark infringement, and there is nothing in the statutory language of Section 1114 that suggests that a counterfeit claim should be construed differently from an infringement claim.”

Background: Arcona registered the trademark “EYE DEW” for an eye cream sold in a tall, cylindrical, silver bottle encased in a slim, shiny cardboard box. Around the same time, Farmacy began selling its own “EYE DEW” eye cream in a short, wide, white jar in a squarish white box. Arcona sued for trademark counterfeiting, arguing that it did not need to show a likelihood of confusion to pursue that claim under the Lanham Act. The district court disagreed and granted partial summary judgment to Farmacy on the ground that the only similarity between the products was the name. Given the different house mark and packaging, the court found it “implausible that a consumer viewing [Farmacy’s] EYE DEW product would be tricked into believing that product is actually one of [Arcona’s] EYE DEW products.”

Result: The Ninth Circuit affirmed. While the Court noted that it has repeatedly held that likelihood of confusion was required to establish trademark infringement under the Lanham Act, it acknowledged that whether likelihood of confusion was also required to establish counterfeiting under the same provision was an issue of first impression. The plain language of § 1114 answered that question, the Court reasoned, because it provides that ““[a]ny person who . . . use[s] in commerce any reproduction, counterfeit, copy, or colorable imitation of a registered mark . . . which such use is likely to cause confusion, or to cause mistake, or to deceive . . . shall be liable in a civil action by the registrant for the remedies hereinafter provided.” Although two other remedial provisions of the Act do not mention confusion, the Court pointed out that they both refer back to § 1114. A likelihood of confusion requirement is also consistent with Ninth Circuit decisions interpreting other provisions of the Lanham Act, and with decisions of the Second and Fifth Circuits reaching the same conclusion about counterfeiting. 

On the merits, the Ninth Circuit agreed with the district court that the court need not presume confusion because the products at issue were not identical. It wrote: “A court should not myopically focus on only the alleged counterfeit marks to the exclusion of the entire product or even common sense.” Finally, the Court concluded that no reasonable consumer would be confused by the parties’ “EYE DEW” products because the packaging, size, color, and shape of the products were dissimilar, other companies had used the phrase “EYE DEW,” and there was no evidence that Farmacy’s use of the mark was intentional copying. 

UNITED STATES v. STERLING CENTRECORP INC.
The Court unanimously holds that a parent company is liable under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) for the cleanup of a Superfund site owned by its subsidiary, but rejects (by a 2-1 vote) the contention that the federal government regulation of that facility exposed the government to CERCLA liability as an “operator” of that facility. 

Panel: Judges Melloy (CA8), Bybee, and N.R. Smith, with Judge Melloy writing for the majority and Judge N.R. Smith dissenting in part.

Key passage: “[O]perator liability requires something more than general control over an industry or facility. It requires some level of direction, management, or control over the facility’s polluting activities.”

Background: The Lava Cap Mine, located in the Sierra Nevada Mountains, was one of the most productive silver and gold mines in California. With World War II requiring the country to conserve needed resources, the federal government issued orders effectively shutting the mine down. It never reopened. In 1952, Sterling’s subsidiary Keystone acquired ownership of the mine. Nearly 30 years later, a dam collapse caused a release of water contaminated by the mine’s mill tailing to seep into the local water system. A state agency ordered Sterling’s subsidiary, Keystone, to take certain abatements steps, but it failed to do so. Following a more significant dam collapse in 1997—which “washed an estimated 10,000 cubic yards of arsenic-contaminated mill tailings into the local water system”—the federal government declared the site a Superfund site and began the process of cleaning it up under CERCLA.

The United States and the California Department of Toxic Substances Control sued Sterling to contribute to the $32 million in response costs incurred at the site. Sterling counterclaimed, asserting that the government’s order during World War II had made it an operator of the mine and therefore also liable for contribution. The district court granted summary judgment to the United States on the question of its liability, and, following a bench trial, found that Sterling was liable for all of the response costs. 

Result: The Ninth Circuit affirmed. The Court first rejected Sterling’s principal argument—that it was not an “operator” of the mine within the meaning of CERCLA because the site had been operated by its subsidiary Keystone. As the Court explained, in the CERLCA context, whether a parent corporation is an “operator” of a site owned by its subsidiary turns on the degree of control it exercised over operations related to pollution. Here, the Court panel held, substantial evidence supported the trial court’s finding that Sterling exercised such control, as it had directed Keystone’s response to California’s abatement efforts following the first dam collapse. 

Next, the Ninth Circuit agreed with the district court that the United States could not, by contrast, be liable as an “operator.” As the majority reasoned, to be a CERCLA operator, the entity must have some “actual participation in decisions related to pollution.” Here, the government had issued an order that “instructed the mine to shut down its mining operations.” But “[t]hat is the extent of its involvement,” as it had never conducted or managed any operations relating to pollution, or even necessarily known about the existence of the contaminated mill tailings. Moreover, the Court continued, the government’s order did not require the mine to abandon its “existing pollution controls,” as the order contained a specific exception for mines to continue maintaining their facilities. 

Finally, the Court rejected Sterling’s challenge of the scope of the government’s cleanup efforts, concluding that the EPA’s selected remedy—which involved construction of a pipeline—was not arbitrary and capricious. As the Court explained, this pipeline achieved the EPA’s objective of securing clean drinking water, and the agency had reasonably considered and rejected less expensive alternatives that would have been less protective.

Judge N.R. Smith dissented on the question of the government’s liability as an “operator.” In his view, “There can be no dispute that the United States exercised direction over the facility’s activities.” He emphasized that the government’s order had not simply required the mine to cease operations, it had also prohibited the removal of any waste from the facility. Accordingly, he declared: “[I]t is hard to imagine a circumstance where a party could exercise more authority over a facility’s operations related to pollution than to completely shut down those operations as the United States did here, specifically forbidding the removal of toxic ore waste from the mine.”