Organic ‘Shroom Grower Has Injunction Upheld

(CN) - The 9th Circuit on Tuesday upheld a permanent injunction against a California importer of Japanese mushrooms for infringing on another company's trademarks.

Hokuto Japan, a mushroom producer with 29 factories located throughout the island nation, markets a number of varieties in Japan, including maitake, white beech and brown beech mushrooms. It uses traditional, factory-farm practices to grow the fungi, which it sells in 3.5-ounce packages to the Japanese domestic market.

Hokto USA has produced and marketed the mushrooms in the United States since 2006.

To appeal to American consumers, however, the subsidiary sought designation as certified organic. Such a designation required Hokto USA to cultivate its products with state-of-the-art technology and techniques. It would have to grow its mushrooms in a sterilized culture medium, under strict climate controls, and then use robots to transport and package them before they went to market.

While Hokto built a new growing facility in San Marcos, Calif., its Japanese parent company Hokuto grew mushrooms for the subsidiary under conditions meeting the U.S. Certified Organic standard. It acquired several trademark registrations and made Hokto USA a license for the exclusive use of the marks in the United States.

Once the San Marcos facility became operational in 2009, a shortage of white beech mushrooms forced Hokto USA to again seek supplemental supplies from Hokuto.

Meanwhile, unbeknownst to Hokto USA, Hokuto was also supplying mushrooms to Concord Farms, and U.S.-based grower and importer. The mushrooms Concord Farms imports to the U.S. are nonorganic and packaged in Hokuto's Japanese packaging, which includes some of the same marks that Hokto USA used.

A representative of Hokto USA discovered in July 2009 that a supermarket display had packages of nonorganic mushrooms imported by Concord Farms mixed in with Hokto's products. All of the products were under a sign that proclaimed them to be "organic" and "Made in the USA."

Worried that consumers would be confused by the nonorganic products, Hokto asked Concord Farms to refrain from using its marks. When Concord refused, Hokto USA filed suit. A federal judge in California ruled for the plaintiff and permanently enjoined Concord Farms from selling Hokuto Japan mushrooms in the United States. The 9th Circuit affirmed Tuesday, noting that the case "implicates the set of trademark principles governing so-called 'gray-market goods': goods that are legitimately produced and sold abroad under a particular trademark, and then imported and sold in the United States in competition with the U.S. trademark holder's products."

Ultimately the court found that Concord's mushrooms are materially different from Hokto's products and therefore are not genuine Hokto USA goods.

"Because Concord Farms's mushrooms are not "genuine" Hokto USA goods, Concord Farms is not exempt from potential liability under trademark law," Judge Kim Wardlaw wrote for a three-judge panel.

Consumer confusion with regard to the two products is also possible, the panel found.

"As the District Court correctly noted, mushrooms are a 'low-cost consumer good,' and reasonably prudent purchasers are unlikely to carefully examine the mushrooms' packaging before each purchase," Wardlaw wrote.

While Hokto USA failed to introduce evidence of actual confusion, the panel, like the District Court before it, concluded that "there was no genuine dispute of material fact as to whether Concord Farm's importation of Hokuto Japan mushroom is likely to confuse consumers."

Concord Farm meanwhile failed to support its claims of patent fraud and "naked licensing."

The only evidence that Concord presented involved Hokuto Japan's application to register its marks. It argued that Hokuto claimed it would use the markets on a wide variety of non-mushroom products, when it fact it had no intention to do so.

Though representatives for Hokuto Japan had conceded this point, the 9th Circuit said it needed more evidence as to why the registration should therefore be canceled.

Concord Farms additionally failed to prove that Hokuto Japan abandoned its right to the exclusive use of marks by engaging in naked licensing - assigning the marks to Hoktu USA providing for a mechanism to oversee the quality of the mushrooms it sells, according to the ruling.

Noting Hokto USA's "close working relationship" with Hokuto Japan, Wardlaw said the parent company "was familiar with and reasonably relied upon Hokto USA's efforts to control the quality of the mushrooms it distributed."

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