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Viacom International, Inc. v. IJR Capital Investments, L.L.C.

United States Court of Appeals, Fifth Circuit

May 22, 2018

VIACOM INTERNATIONAL, INCORPORATED, Plaintiff-Appellee,
v.
IJR CAPITAL INVESTMENTS, L.L.C., Defendant-Appellant.

          Appeal from the United States District Court for the Southern District of Texas

          Before REAVLEY, SMITH, and OWEN, Circuit Judges.

          PRISCILLA R. OWEN, CIRCUIT JUDGE:

         Viacom International, Inc. (Viacom) sued IJR Capital Investments, L.L.C. (IJR) for infringing on its common law trademark of The Krusty Krab- a fictional restaurant in the popular "SpongeBob SquarePants" animated television series-after IJR took steps to open seafood restaurants using the same name. The district court granted summary judgment to Viacom on its trademark infringement and unfair competition claims. IJR appeals, asserting that Viacom does not have a valid trademark for The Krusty Krab and that its seafood restaurants would not create a likelihood of confusion between the two marks. We affirm the judgment of the district court.

         I

         In 1999, Viacom launched the animated television series "SpongeBob SquarePants" on its Nickelodeon network. The show revolves around SpongeBob SquarePants, a sea sponge that wears square shorts, lives in an underwater pineapple, and works at the fictional The Krusty Krab restaurant as a fry cook with an array of characters including a cranky co-worker and the owner of The Krusty Krab. The show has become the most-watched animated television series for 15 consecutive years, with over 73 million viewers in the second quarter of 2016 alone. While the audience is predominately comprised of children, one-third of all viewers are 18 or older.

         The fast food restaurant The Krusty Krab played a prominent role in the pilot episode of the series and has appeared in 166 of 203 episodes. The Krusty Krab was featured in two "SpongeBob SquarePants" feature films that grossed $470 million (and incurred $197 million in promotional expenses). The Krusty Krab Restaurant is also an element of Viacom's mobile app "SpongeBob Moves In" (seven million global downloads), appears in a play called The SpongeBob Musical, and is frequently mentioned in the franchise's advertisements and online outreach (approximately seven million page views across platforms per week). The press has referenced The Krusty Krab many times when discussing the show.

         The Krusty Krab is also licensed to third parties for a variety of products. These licensed products include: licensed Krusty Krab playsets from Just Play, Mattel, The LEGO Company, and Mega Brands, Inc. ($1.4 million in royalties since 2009), the video game "SpongeBob SquarePants Creature from The Krusty Krab" (over one million units), The Krusty Krab aquarium accessories (187, 000 units), reusable franchise-themed stickers of The Krusty Krab, The Krusty Krab shirts sold at The SpongeBob Store at Universal Studios, Florida, and more. Viacom has never attempted to license The Krusty Krab mark to a restaurant. However, Viacom's subsidiary company Paramount Pictures Corporation did license Bubba Gump Shrimp Co. for seafood restaurants based on the fictional business from the 1994 movie "Forrest Gump."

         In 2014, IJR's owner, Javier Ramos, decided to open seafood restaurants in California and Texas. Ramos asserts that he was describing the crusted glaze applied to cooked seafood when his friend Ivan Murillo suggested naming the restaurant Crusted Crab, which quickly became The Krusty Krab. Both Murillo and Ramos deny having considered SpongeBob during this conversation, however Murillo has since stated that those who see the name may think of the restaurant from "SpongeBob SquarePants." Also, an IJR investor mentioned SpongeBob "out of the blue" while discussing the restaurant. Ramos said that he first became aware of the fictional restaurant from "SpongeBob SquarePants" when he performed a search using Google to determine if there were restaurants with a name similar to The Krusty Krab.

         Because Ramos's search did not find an actual restaurant that used the mark, IJR filed a trademark application with the United States Patent and Trademark Office (USPTO) for THE KRUSTY KRAB. Viacom had not previously registered The Krusty Krab mark. The USPTO approved IJR's mark and published the application for opposition. Viacom did not oppose at this time, and the USPTO issued a notice of allowance for the mark authorizing issuance once IJR filed a statement of use.

         Beyond filing an intent-to-use trademark application, IJR also developed a business plan for potential investors in The Krusty Krab. The business plan included a logo for the restaurant and described the eatery as a "Cajun seafood restaurant" that would sell shrimp, crawfish, and po-boys. IJR intended to target families, singles, and students through print, radio, and online advertisements. The business plan makes no reference to the SpongeBob franchise or the fictional restaurant The Krusty Krab. IJR also purchased four domain names for the restaurant concept, leased property in California, and procured restaurant equipment.

         In November 2015, Viacom sent a cease-and-desist letter that demanded the withdrawal of IJR's trademark application and alleged infringement of The Krusty Krab mark. IJR promptly responded, declining to cease use and asserting that Viacom does not actually use The Krusty Krab as a trademark and that there was no likelihood of consumer confusion. However, IJR postponed opening any restaurants. Viacom then filed suit in January 2016.

         Viacom asserted nine claims against IJR including unfair competition under the Lanham Act and trademark infringement under Texas common law. The complaint included allegations that IJR's use of the mark in connection with restaurant services was likely to cause, or to have caused, confusion or mistake and to have deceived potential customers, causing them to believe that the services offered by IJR were affiliated with, sponsored by, or connected with Viacom; use of the mark would materially influence customers' purchasing decisions for restaurant services; and as a result, Viacom suffered and would continue to suffer damages to its goodwill and reputation.

         Viacom commissioned a consumer survey and an expert report by Dr. Edward Blair. The survey found that 30% of respondents thought The Krusty Krab was connected with Viacom and 35% of respondents associated the hypothetical restaurant with Viacom. IJR filed a Daubert motion to exclude Dr. Blair's report and testimony-alleging it was flawed-and Viacom filed a motion for summary judgment on eight of its nine claims.

         The court held a hearing on the motions and denied IJR's motion to exclude Dr. Blair's report. The district court then granted, in part, Viacom's summary judgment motion on its common law trademark infringement and Lanham Act unfair competition claims. The district court held that: Viacom established ownership of the mark through sales and licensing; Viacom demonstrated that The Krusty Krab has acquired distinctiveness; and every likelihood-of-confusion factor indicated IJR's proposed use would probably cause confusion. Viacom then requested that the district court dismiss its other seven claims with prejudice and enter final judgment. The district court did so, and IJR appealed.

         II

         A trademark infringement action under Texas common law is analyzed in the same manner as a Lanham Act claim.[1] For Viacom to prevail on these claims, it must show (1) that it owns a legally protectable mark in The Krusty Krab and (2) that IJR's use of the mark creates a likelihood of confusion as to source, affiliation, or sponsorship.[2]

         IJR contends that the district court erred in granting summary judgment for Viacom. We review de novo a district court's grant of summary judgment.[3]IJR specifically asserts that there are genuine issues of material fact as to whether Viacom owns a legally protectable mark and whether there is a likelihood of confusion between the two The Krusty Krab marks.

         A trademark infringement action cannot be sustained unless the mark is legally protectable.[4] While Viacom has never registered The Krusty Krab mark, the Supreme Court has held that the Lanham Act "protects qualifying unregistered marks."[5] The Lanham Act provides that the term "trademark" includes "any word, name, symbol, or device, or any combination thereof" that is used or intended to be used "to identify and distinguish" one's goods "from those manufactured or sold by others."[6] Viacom's mark is legally protectable if it establishes ownership by demonstrating that it uses The Krusty Krab as a source identifier.[7] Often this court has bypassed the use inquiry and conducted only a distinctiveness analysis.[8] However, the two issues are separate questions, [9] and because the use-as-a-source-indicator requirement is at issue in this case Viacom must establish both use and distinctiveness.[10] We first consider the use of The Krusty Krab mark. Whether Viacom actually uses The Krusty Krab as a source identifier is a question of fact.[11]

         III

         While registration of a mark is "prima facie evidence of . . . the registrant's ownership of the mark, "[12] ownership "is established by use, not by registration."[13] An ownership right "accrues when goods bearing the mark are placed on the market."[14] Viacom's mark clearly appears on goods in the market, such as The Krusty Krab playsets and aquarium ornaments. The question in this case, however, is whether Viacom uses The Krusty Krab to indicate origin[15] because the purpose of trademark law is to "prevent[] competitors from copying 'a source-identifying mark.'"[16]

         Before we assess whether Viacom uses The Krusty Krab as a source identifier, we address a threshold question: Can specific elements from within a television show-as opposed to the title of the show itself-receive trademark protection? We conclude that they can. While this court has never explored this precise issue, we have affirmed a judgment against the junior use of Conan the Barbarian-the title character of a comic book series-in a restaurant concept.[17] This holding suggests that trademark protection may be granted to certain characters, places, and elements of a broader entertainment entity. Additionally, other courts have unequivocally extended this protection to fictional elements of entertainment franchises. In Warner Bros., Inc. v. Gay Toys, Inc., [18] the Second Circuit held that trademark protection may extend "to the specific ingredients of a successful T.V. series."[19] The Second Circuit held in that case that the General Lee-an orange muscle car with a Confederate flag emblem that was "prominently featured" on the successful television series "The Dukes of Hazzard"-fell "within the ambit of Section 43(a)" of the Lanham Act.[20] Subsequently, the Seventh Circuit also affirmed an injunction barring the junior user from making a model of the "General Lee."[21] The underlying purposes of trademark are to protect goodwill and "to protect consumers against confusion and monopoly, " and "to protect the investment of producers in their trade names to which goodwill may have accrued and which goodwill free-riders may attempt to appropriate by using the first producer's mark, or one that is deceptively similar."[22] Extending trademark protection to elements of television shows that serve as source identifiers can serve those purposes.

         The success of "SpongeBob Square Pants" is not in dispute, but use within a popular television series does not necessarily mean that the mark is used as a source identifier.[23] "The salient question" is whether The Krusty Krab mark, "as used, will be recognized in itself as an indication of origin for the particular product or service."[24] If the mark "creates a separate and distinct commercial impression . . . [it] performs the trademark function of identifying the source."[25] In evaluating whether elements of a television series are trademarks, the focus is on the role that the element plays within the show and not the overall success or recognition of the show itself. When an element only occasionally appears in a successful television series, the indication-of-origin requirement may not be met.[26]

         For instance, in Paramount Pictures Corp. v. Romulan Invasions, Paramount (a subsidiary of Viacom) sought trademark protection on the Romulan mark, a fictional alien race in the "Star Trek" series.[27] The Romulan mark was featured in television episodes, movies, books, licensed plastic spaceship models and dolls, puzzles, games, and more.[28] The Trademark Trial and Appeal Board (T.T.A.B.) concluded that the mark was "only" used "from time to time" and held that Paramount "failed to establish any use of the term Romulan . . . as a mark to distinguish its services."[29] Star Trek fans may vehemently disagree with this analysis as a factual matter. However, we cite this decision to illustrate the conceptual aspects of the law in this area.

         When an element plays a more central role in a franchise, trademark protection is ordinarily granted. For example, the Southern District of New York held that the Daily Planet, the employer of Clark Kent in "Superman, " was a common law trademark because "[t]he totality of evidence demonstrates that the Daily Planet has over the years become inextricably woven into the fabric of the Superman story."[30] Twenty-five years later, the Southern District of New York also held that Kryptonite-a registered trademark-was a protectable ingredient of the broader "Superman" franchise because it is "a staple of the Superman character and story, " the mark "is immediately recognized or associated with the character Superman, " and it "identif[ies] the entertainment and other goods and services created, distributed and/or licensed by or on behalf of DC Comics."[31] Likewise, the Second and Seventh Circuits granted trademark protection to the General Lee from "The Dukes of Hazzard" because of its critical role in the television series.[32] The Fifth Circuit has upheld trademark protection for a cartoon character that was central to the comic strip.[33]

         The Krusty Krab is analogous to protected marks like the Daily Planet, General Lee, and Conan the Barbarian. The mark is integral to "SpongeBob SquarePants, " as it appears in over 80% of episodes, plays a prominent role in the SpongeBob films and musical, and is featured online, in video games, and on licensed merchandise. The Krusty Krab's central role in the multi-billion dollar SpongeBob franchise is strong evidence that it is recognized in itself as an indication of origin for Viacom's licensed goods and television services.

         Viacom has extensively licensed The Krusty Krab mark. A "trade or service mark may be acquired through its use by controlled licensees."[34] Even if only the licensee uses the mark, "[o]wnership rights in a trademark or service mark can be acquired and maintained through the use of the mark by a controlled licensee."[35] The record verifies that The Krusty Krab appears on many consumer products including: reusable SpongeBob-themed stickers; multiple Krusty Krab playsets from brands like Lego; an aquarium ornament; a video game; and shirts, among other products. On most of those products, The Krusty Krab is featured prominently and contributes in identifying the good. This licensing regime has generated millions of dollars for Viacom and provides further evidence that Viacom uses The Krusty Krab as a source identifier and therefore owns the mark.

         That the mark typically appears alongside the "SpongeBob SquarePants" trademark does not threaten its status as a trademark. Both the Federal Circuit and the T.T.A.B. have held that a "word mark does not lose its strength as a trademark when the manufacturer['s mark] is identified along with the branded product."[36] For example, Pop-Tarts received trademark protection even though the "primary or house mark 'KELLOGG' always appears on the labels, packages, and advertising material" because Pop-Tarts was "likely to create a commercial impression separate and apart from 'KELLOGG.'"[37] Likewise, The Krusty Krab creates a distinct commercial impression signifying to consumers that products like Krusty Krab playsets or aquarium ornaments originate from the famous fictional restaurant that employs their beloved sea sponge character. The primary "SpongeBob SquarePants" mark does not hinder The Krusty Krab in performing the trademark function of identifying source.

         Viacom's ownership of the mark is not undermined by the word mark's varying styles, fonts, and sizes on the licensed products. Other circuits have observed that "[c]onsistent and repetitive use of a designation as an indicator of source is the hallmark of a trademark."[38] The Krusty Krab is a word mark- not a design mark-so the focus is whether the words themselves are consistently used as an indicator of source. While the title, font, and prominence of the mark are inconsistent, the words "Krusty Krab" are consistently used on the licensed goods and support Viacom's ownership claim.

         The Krusty Krab's key role in "SpongeBob SquarePants" coupled with the consistent use of the mark on licensed products establishes ownership of the mark because of its immediate recognition as an identifier of the source for goods and services.

         IV

         While Viacom has established ownership of the mark through its use as a source identifier, Viacom must also prove that The Krusty Krab mark is distinctive in order to establish that it is legally protectable.[39]

         "[A] mark can be distinctive in one of two ways."[40] "[A] mark is inherently distinctive if '[its] intrinsic nature serves to identify a particular source.'"[41] Even if a mark is not inherently distinctive, it can acquire distinctiveness "if it has developed secondary meaning."[42] The district court held that Viacom failed to demonstrate that its mark is inherently distinctive, but that The Krusty Krab had acquired distinctiveness through secondary meaning. Because we agree that the mark has acquired distinctiveness through secondary meaning, we pretermit consideration of whether the mark is inherently distinctive.

         A mark develops secondary meaning "when, in the minds of the public, the primary significance of a [mark] is to identify the source of the product rather than the product itself."[43] One commentator has explained that "[i]n determining what can qualify as a trademark, it is crucial that the designation in question perform the job of identifying and distinguishing the goods or services with which the symbol appears."[44] To determine whether a mark has acquired secondary meaning, courts consider the following seven factors:

(1) length and manner of use of the mark or trade dress, (2) volume of sales, (3) amount and manner of advertising, (4) nature of use of the mark or trade dress in newspapers and magazines, (5) consumer-survey evidence, (6) direct consumer testimony, and (7) the defendant's intent in copying the [mark].[45]

Several "factors in combination may show that" a mark has developed secondary meaning "even if each factor alone would not."[46]

         Whether a mark has acquired secondary meaning is a question of fact.[47]At summary judgment, this court considers whether IJR raised a fact question as to secondary meaning-i.e. whether consumers associate The Krusty Krab only with Viacom.[48] Viacom's "burden of demonstrating secondary meaning 'is substantial and requires a high degree of proof.'"[49] Nonetheless, summary judgment may be granted if the "record compels the conclusion that the movant is entitled to judgment as a matter of law."[50]

         The first factor-length and manner of use-supports Viacom. The Krusty Krab appeared in the pilot episode of "SpongeBob SquarePants" eighteen years ago. Over 80% of the episodes aired from 1999 through today have included The Krusty Krab, and it is a central element of the SpongeBob universe. The recurrent use of The Krusty Krab over the past eighteen years in a widely viewed television program is undisputed, as is the manner of use.

         As for volume of sales, Viacom has earned millions on licensed products that display The Krusty Krab mark, and two feature films in the SpongeBob franchise-which prominently featured The Krusty Krab-grossed a combined $470 million. This court has considered the sale of items grossing $30, 500 to be low volume, [51] but has affirmed a finding of secondary meaning on review of a summary judgment when sales totaled $93 million.[52]

         The relevant question with regard to factor three-the amount and manner of advertising-"is not the extent of the promotional efforts, but their effectiveness in altering the meaning of [the mark] to the consuming public."[53]There have been numerous print and Internet advertisements for The Krusty Krab-licensed products, and $197 million was spent in promotional expenditures for the two "SpongeBob SquarePants" feature films. The effectiveness of this advertising is evident from the success of product sales and the films. Though the effectiveness of the advertising as to The Krusty Krab mark, specifically, has not been directly proven, its depiction in advertisements is such that the public would recognize the mark as more than an artistic backdrop.

         With respect to the nature and use of the mark in media-factor four- The Krusty Krab is often referenced by the press. The mark frequently appears on the "SpongeBob SquarePants" social media platforms and is integrated into the SpongeBob website and mobile app. This evidence supports Viacom's assertion that its word mark has acquired secondary meaning.[54]

         The record does not contain consumer-survey evidence as to whether The Krusty Krab has acquired secondary meaning, but "survey evidence is not required to establish secondary meaning."[55] There is no direct consumer testimony nor any consideration of IJR's intent in the distinctiveness inquiry. Therefore, there is no evidence pertaining to factors five and six. The evidence regarding IJR's intent in copying the mark is discussed in more detail below. That evidence is inconclusive.

         IJR does not dispute the underlying facts but asserts that they merely establish that the public recognizes "SpongeBob SquarePants" as a distinct source of products; according to IJR, The Krusty Krab is just a cartoon restaurant. This is not a reasonable inference from the undisputed evidence. The record clearly shows that The Krusty Krab is a focal point in the "SpongeBob SquarePants" television series and films, The Krusty Krab has continually been depicted in the advertising and promotion of the franchise over the past eighteen years, and it is used in the sale of products. The factors lead inescapably to the conclusion that in the minds of consumers, The Krusty Krab identifies the source of products, which is Viacom, the creator of the "SpongeBob SquarePants" fictional universe and its inhabitants. Viacom's mark has acquired distinctiveness through secondary meaning as a matter of law.

         V

         Viacom must also prove that IJR's use of The Krusty Krab creates a likelihood of confusion as to source, affiliation, or sponsorship.[56] It has met that burden.

         To establish a likelihood of confusion, Viacom must show "a probability of confusion, which is more than a mere possibility of confusion."[57] Word association with Viacom's The Krusty Krab is insufficient to establish a probable likelihood of confusion, and the court "must 'consider the marks in the context that a customer perceives them in the marketplace.'"[58] To assess whether use of a mark creates a likelihood of confusion as to affiliation, sponsorship, or source, this court considers the so-called "digits of confusion."[59] The digits form a "flexible and nonexhaustive list"[60] that includes the following seven factors:

(1) the type of mark allegedly infringed; (2) the similarity between the two marks; (3) the similarity of the products or services; (4) the identity of retail outlets and purchasers; (5) the identity of the advertising media used; (6) the defendant's intent; and (7) any evidence of actual confusion.[61]

         At times, our court has listed eight factors, the additional one being "the degree of care exercised by potential purchasers."[62] However, neither of the parties in the present case, nor the district court, has discussed that factor. In any event, "[n]o single factor is dispositive, and a finding of a likelihood of confusion need not be supported by a majority of the factors."[63]

         Likelihood of confusion is a question of fact.[64] However, "summary judgment is proper if the 'record compels the conclusion that the movant is entitled to judgment as a matter of law.'"[65] The district court held "that all of the factors support a likelihood of confusion" and ruled in Viacom's favor. Because all inferences must be made in the non-movant's favor at summary judgment, [66] the district court erred in finding that every digit of confusion weighs in Viacom's favor. Nonetheless, Viacom has established that as a matter of law there is a likelihood of confusion between the two marks.

         Context is critical to a likelihood-of-confusion analysis, and we "must consider the application of each digit in light of the specific circumstances of the case; otherwise, we risk inadvertently lowering the standard of confusion."[67] Because of the posture of this case, context is limited as IJR has not yet opened its restaurant. However, IJR has filed an intent-to-use trademark application for the name "The Krusty Krab" in restaurant services. It has also taken steps towards opening the restaurant such as leasing property, procuring equipment, purchasing domain names, and developing a comprehensive business plan. This court must not divine the theme and details of the restaurant, but the record contains sufficient context to conduct a likelihood-of-confusion analysis.

         "The first digit, the type of mark, refers to the strength of the mark."[68]In evaluating the strength of The Krusty Krab mark, the focus is on Viacom's mark.[69] The more distinctive a mark, the stronger the mark.[70] Strong marks are entitled to more protection because there is a greater likelihood "that consumers will confuse the junior user's use with that of the senior user."[71]Viacom's mark is strong because it has acquired distinctiveness through secondary meaning.[72] Therefore the first digit weighs in favor of a likelihood of confusion.

         The second digit is the similarity of the marks. Assessing the similarity of the marks "requires consideration of the marks' appearance, sound, and meaning."[73] "Even if two marks are distinguishable, we ask whether, under the circumstances of use, the marks are similar enough that a reasonable person could believe the two products have a common origin or association."[74]Viacom's The Krusty Krab is a word mark, and IJR's mark has identical spelling and pronunciation, including the unconventional use of K's instead of C's. While marks can share a key word and still be "stylistically and typographically distinguishable" so as to produce different commercial impressions, [75] IJR's mark is verbatim the same and there is no genuine issue of material fact with respect to this digit of confusion. Logos for the two marks may differ, but the words themselves are indistinguishable and would likely confuse consumers as to the source, affiliation or sponsorship of IJR's The Krusty Krab restaurant.

         The third digit in the likelihood of confusion analysis is the similarity of the products or services. The more similar the products and services, the greater the likelihood of confusion.[76] Viacom's The Krusty Krab has a distinct theme as a fictional hamburger restaurant, whereas IJR has not fully developed a theme for its planned seafood restaurant. Existing context suggests that the restaurants will have little thematic overlap. For example, IJR's business plan never references SpongeBob, and IJR's sample menu serves po-boys and boiled seafood, not fast food hamburgers. While there is little evidence of thematic overlap between the restaurants, IJR nevertheless plans to open a restaurant, and given the success of SpongeBob, that indicates a likelihood of confusion.

         Furthermore, "[t]he danger of affiliation or sponsorship confusion increases when the junior user's services are in a market that is one into which the senior user would naturally expand."[77] In Conan Properties, Inc. v. Conans Pizza, Inc., this court recognized the logical extension of fictional characters to restaurants, explaining that "today's consumers expect [cartoon character] endorsements and act favorably toward them" in the restaurant setting.[78]Here, both marks already identify restaurants. Furthermore Viacom could naturally develop a real The Krusty Krab restaurant based on the fictional eatery, as its subsidiary did when it licensed Bubba Gump Shrimp Co., a fictional ...


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