Australian Gold Inc.'s gamble to sue an Oklahoma family that it believed was selling its indoor tanning lotions illegally over the Internet paid off handsomely, in more ways than one.
A federal appeals court last month upheld a lower court's ruling, in which a jury awarded the Indianapolis-based company $5.23 million in damages relating to the infringement of its trademark.
More critical than the award, which executives do not expect to fully collect, is the fact that a permanent injunction prohibits the defendants from ever selling Australian Gold products via the Web. That's mainly due to the court's handing possession of the sites to Australian Gold.
Lawyers for the company hail the lawsuit as a landmark case in the realm of federal trademark law. They say they are unaware of another decision in which the use of meta tags and pay-for-placement services have been found to infringe upon a trademark.
Major Internet search engines employ pay-for-placement search results, in which companies pay to appear as a top query result. Meta tags are used to increase the probability that a customer who types a particular query into a search engine will see a Web site.
Australian Gold's attorneys argued in court that the defendants paid to use the company name to divert customers to their Web site, and also used the name in its meta tags.
A panel of three U.S. Court of Appeals judges for the 10th Circuit unanimously agreed with the lower court's decision.
"These people were just bootlegging it, basically," said Leslie Hartlieb, Australian Gold's president and CEO. "We choose to market our products through salons, and they were getting out through the Internet."
Although the problem persists-the company is currently involved in additional litigation-Australian Gold has made great strides in curtailing the activity. Its lawyers at Indianapolis-based Ice Miller LLP have sent a few hundred letters to violators-many simply uninformed about the law-ordering them to cease operations.
This case represents a major hurdle for the company, and in proving trademark infringement in general, as some in the industry believed the case could not be won.
"[Australian Gold] could have easily given up, because it was not easy and it was not cheap," said Ice Miller partner Michael Wukmer. "But they decided they had a point to make and stuck it out."
At trial, the defendants argued that, beyond its distributors, Australian Gold had no control over its products because there was no binding contract. Absent a contract, they did nothing wrong.
The appeals court, in affirming the lower court's ruling, said Australian Gold clearly suffered damages because it lost opportunities to sell additional products available from salons. A customer who buys indoor tanning lotions, for instance, also might purchase body sprays, moisturizers or facial products, given the opportunity.
It's doubtful Australian Gold can stop those who sell one or two bottles of its products on eBay, the popular online auction site, but it needs to thwart the fullfledged Internet marketing businesses, said Mike Gilley. He operates 12 Laundry & Tan Connection locations in Indianapolis and Louisville, and supports Australian Gold's efforts.
Therein lies the difficulty in proving these types of cases, Wukmer said.
"Many people believe the Internet is a license to do whatever you want to do," he said. "It is such a new and revolutionary tool that there should be no limits. Business takes a different approach."
Australian Gold and its attorneys uncovered the defendants' operations in January 2001 after receiving complaints from some salon owners who sell the company's products.
But the defendants actually obtained products from authorized distributors who violated their agreements. During one seven-month stretch, they placed orders totaling up to $18,000 three times a week. Australian Gold discovered the activity and terminated its contract with one distributor. The defendants then turned to an anonymous supplier who sold products out of a van for cash only, court documents said.
Attorneys argued that "amateurs" on the Internet had taken away the exclusivity salon owners reaped from the distribution channels and compromised the products. Australian Gold has spent more than $1 million, according to court documents, to enforce the integrity of the agreements it makes with independent distributors to sell its products only to tanning salons.
Gilley said someone could buy a product from one of his tanning salons, fill the bottle with a moisturizer, and resell it on the Internet.
"The next person who ends up with that bottle is going to be real unhappy," Gilley said. "I think that is why Australian Gold is trying to control its distribution."
Australian Gold has much at stake. It is the largest indoor tanning lotion manufacturer in the world, Hartlieb said. She declined to divulge revenue, but said about 18,000 of the roughly 25,000 tanning salons sell their products purchased from a network of distributors.
The case went to trial in Oklahoma City in June 2003. The defendants, a husband and wife and a son and daughter-in-law, operated at least seven Web sites in which they resold various products over the Internet.
"It was a cash bonanza for them," said Wukmer, who tried the case with firm associate Scott Matthews. "They made hundreds of thousands of dollars a year, and it came out at trial that they diverted a lot of it from the IRS."
Australian Gold, on the northwest side of Indianapolis, manufactures and distributes 300 Australian Gold, Swedish Beauty and Caribbean Gold tanning products. Privately held Sunshine Holdings owns Australian Gold and ETS Inc., a manufacturer of tanning beds. Trevor and Edna Gray launched ETS in 1984.