With Contributions From Matthew Verdin

Michael Kors, LLC and Costco Wholesale Corp. recently settled a trademark infringement lawsuit that the famous fashion designer company filed against the warehouse giant over a nationwide “bait and switch” ad campaign for Mother’s Day.  The lawsuit raises the question of how brand owners can best police their trademarks for unauthorized or improper use that may denigrate the brands’ value.

Michael Kors filed the July 2013 lawsuit in New York federal court after Costco blasted an email advertisement that allegedly “baited” members of the mass-market discount retailer into thinking they could purchase Michael Kors’ luxury handbags for as low as $99.  According to the fashion company’s website, comparable handbags retail from about $200 to more than $2000.

The Mother’s Day advertisement featured pictures of ten designer handbags, four of which allegedly were “unmistakably . . . Michael Kors handbag[s]” that prominently featured the fashion label’s trademark.  The problem according to the lawsuit: “Michael Kors handbags are not generally available for purchase by consumers at Costco’s retail stores or on its website.”  In fact, representatives of Michael Kors visited 19 warehouse locations of Costco, which is not an authorized Michael Kors retailer, and did not find a single Michael Kors handbag.

The “switch,” according to the complaint, happened when consumers “took the bait” and were “lured” into shopping for Michael Kors highly-sought after luxury handbags at Costco: Costco gained revenue from shoppers who went to the retailer’s website or warehouse locations looking for luxury Michael Kors handbags but bought something else.  In particular, the complaint alleged that the warehouse giant’s ad was intended “to deceive consumers about the handbags stocked in Costco’s stores and on its website, because doing so increased sales of other products sold by Costco, added to the perceived value of Costco’s handbag selection and made Costco’s other handbags look more valuable by means of their association with Michael Kors’ luxury handbags.”

Whether Michael Kors’ litigation strategy effectively protected its trademark is unclear, because the details of the settlement were not disclosed.

But even if Michael Kors received the better end of the deal, aggressive litigation practices may sometimes backfire.  Tiffany & Co. filed a similar lawsuit against Costco in New York federal court on Valentine’s Day of last year, claiming that the budget-friendly wholesaler improperly  identified engagement rings with the Tiffany brand name at warehouse locations nationwide.  In response, Costco not only denied the claim, but asserted a counterclaim that “Tiffany” and “Tiffany setting” are generic terms for a type of ring setting, not a trademark of Tiffany & Co.

In a ruling earlier this year, Judge Swain—the same judge who oversaw the Michael Kors dispute—denied Tiffany’s request to dismiss Costco’s counterclaim.  Tiffany now must litigate the validity of its trademark for the terms “Tiffany” and “Tiffany setting” as applied to ring settings, demonstrating that brand owners should think carefully before bringing suit to protect their trademarks—or risk losing the very asset they are trying to protect.