Defendant LendingTree, Inc. (“LendingTree”) operates a web-based real estate referral service whereby consumers can input their location and receive information about real estate brokers in their community. LendingTree’s referral network consists of more than 2,500 real estate offices operated by approximately 650 broker member companies, about 40 percent of which operate a Century 21, Coldwell Banker or ERA franchise. In January 2003, counsel for these three companies (the plaintiffs) sent a letter to LendingTree demanding that it stop using their trademarks on its website. LendingTree then modified its website, but the plaintiffs were not satisfied with the changes and sued for trademark infringement. The companies alleged that LendingTree violated their trademarks by including on its website such items as a Coldwell Banker for-sale sign that was partially obscured by the word “sold,” and a statement that LendingTree gives consumers “access to a national network of brokers representing the country’s leading real estate companies, including Coldwell Banker, ERA and Century 21.”Despite additional changes to defendant’s website, the district court rejected LendingTree’s nominative fair use defense and entered a preliminary injunction prohibiting LendingTree from certain uses of the plaintiffs’ trademarks. On appeal, the Third Circuit created a new burden-shifting two-step approach to nominative fair use cases: first, the plaintiff must prove that the defendant’s use of its trademark creates a likelihood of confusion, and then the defendant bears the burden of showing the affirmative defense of fair use, based upon a three-prong test.
The Third Circuit reviewed the case in light of the Supreme Court’s recent decision in KP Permanent Make-Up, Inc. v. Lasting Impression I, Inc., 543 U.S. 11 (2004). In that case, the Supreme Court held that the plaintiff in a trademark infringement action has the exclusive burden of demonstrating likelihood of confusion, with no burden on the defendant to disprove it. The Third Circuit held that this reasoning also applies in the nominative fair use context, and it therefore concluded that a bifurcated analysis should be employed.
With regard to the plaintiff’s burden of proving likelihood of confusion, the Third Circuit panel recognized that its traditional test – a set of factors derived from Interspace Corp. v. Lapp Inc., 721 F.2d 460 (3d Cir. 1983) (the “Lapp factors”) – is not completely compatible with the fact pattern of nominative fair use. The Court explained that unlike classic fair use, “nominative use involves the use of another’s trademark in order to describe the trademark owner’s own product” (emphasis in original). Therefore, the Court recommended the elimination of two Lapp factors that do not “fit” in the nominative fair use context – the degree of similarity between the owner’s mark and the allegedly infringing mark, and the strength of the owner’s mark. Among the remaining Lapp factors, the Court explained that four were most relevant in analyzing the present case: “(1) the price of the goods and other factors indicative of the care and attention expected of consumers when making a purchase; (2) the length of time the defendant has used the mark without evidence of actual confusion; (3) the intent of the defendant in adopting the mark; and (4) the evidence of actual confusion.”
The Court held that after the plaintiff has proven likelihood of confusion, the burden shifts to the defendant to prove fair use. The Court adopted a slightly modified version of the three-prong nominative fair use test employed by the Ninth Circuit. Under the Third Circuit’s test, the defendant must prove three elements: “(1) Is the use of the plaintiff’s mark necessary to describe both plaintiff's product or service and defendant's product or service? (2) Is only so much of the plaintiff’s mark used as is necessary to describe plaintiff's products or services? (3) Does the defendant’s conduct or language reflect the true and accurate relationship between plaintiff and defendant's products or services?”
After explaining its new bifurcated approach for evaluating nominative fair use cases, the Court remanded the case to the district court for evaluation under the new test.
In a partial dissent, Judge Fisher argued that the majority has misused the Ninth Circuit’s nominative fair use test as an affirmative defense because the test is actually “nothing more than a likelihood of confusion substitute.” Judge Fisher also noted that the majority’s two-part approach essentially shifts the burden of proving non-confusion onto the defendant, in violation of the Supreme Court’s holding in KP Permanent.
