Adidas Awarded $305M in Suit Against Payless

Jennifer · May 7th, 2008, 05:08 PM

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A legal battle between Adidas AG and Payless ShoeSource over parallel stripes resulted in a huge win for Adidas: a jury award of $305 million.

Charlie Henn, a partner at the Kilpatrick Stockton LLP law firm that represented Adidas, said the jury award from a federal court in Portland included roughly $30 million in actual damages, $137 million for profits Payless made on the infringing goods and $137 million in punitive damages.

"Our belief is that this is the largest award ever in a trademark case," said Henn. He noted the judge has discretion to tweak the amount and might raise the award.

"The jury in this case sent a very clear message to companies that are engaged in the practice of selling knockoffs," said Henn.

The Oregon jury award wrapped up a six-and-a-half-year trademark dispute that began when the German athletic giant sued Payless for infringing on its three-stripe design.

Topeka, Kan.-based Collective Brands Inc., parent to Payless, doesn't plan to pay without a fight.

"The company is reviewing the verdict and assessing its impact," Collective said in a statement. "The company believes that the verdict was excessive and unjustified. The company will ask the court to set aside the verdict and, if it is not granted, intends to take all necessary steps to overturn it."

Adidas began using its recognizable three-stripe design in 1952 and trademarked the design in 1994.

The hefty award surpassed earnings for all of Adidas' operations in the first quarter.

Adidas on Tuesday said its first-quarter net income gained 32 percent, while a decline in Reebok's sales tempered strong growth at its Adidas brand in the period.

The Herzogenaurach, Germany-based activewear giant said net income totaled 169 million euros, or $253.1 million at average exchange, while its gross margin rose 2.3 percentage points to a 49.1 percent. Its operating margin, meanwhile, increased 1.7 percentage points to 10.8 percent.

In the period, the Adidas Group's overall sales topped 2.62 billion euros, or $3.93 billion, up 3 percent in euro terms and 10 percent on a currency-neutral basis.

Trumpeting the group's results as a bright light in a mixed earnings season, chairman and chief executive officer Herbert Hainer said: "We couldn't have started 2008 better. With strong momentum at Adidas and TaylorMade-adidas Golf, these brands rose to new competitive levels in terms of sales and profits."

However, Canton, Mass.-based Reebok International Ltd. again failed to achieve growth. While Adidas revenues increased 8 percent to 1.97 billion euros, or $2.95 billion, sales of Reebok goods fell 13 percent to 454 million euros, or $680 million. On a currency-neutral basis, Adidas' sales grew 14 percent, while Reebok's declined 6 percent. Hainer said the group is still repositioning Reebok, working to improve its point-of-sale impact and clean up its distribution. Tough retail environments in the U.S. and the U.K., Reebok's two key markets, have not helped that ongoing repositioning, he said. In the quarter, Adidas recorded strong sales growth in all regions except North America, where revenues declined 17 percent to 578 million euros, or $865.7 million, due to lower sales at both Adidas and Reebok.

In Europe, business grew 9 percent to 1.25 billion euros, or $1.87 billion. In Asia, sales spiked 18 percent to 594 million euros, or $890 million, driven by strong growth in China and South Korea. Latin American revenues grew 13 percent to 177 million euros, or $265.1 million. On a currency-neutral basis, sales declined 7 percent in North America, while they grew 12 percent in Europe, 25 percent in Asia and 18 percent in Latin America.

Order backlogs, which analysts follow as a key indication of future sales, increased 13 percent on-year for Adidas while Reebok backlogs declined 13 percent. While Hainer doesn't expect to see improvements in Reebok's backlogs until the second half, he told analysts during a conference call Tuesday that the rising number of freestanding Reebok stores in emerging markets meant backlogs could no longer offer a clear indicator for future revenues.

Despite a challenging economic context, Adidas confirmed its full-year 2008 targets of high-single-digit sales growth on a currency-neutral basis. It expects growth from emerging markets to offset a decline in Reebok's North American sales to generate mid- to high-single-digit growth for the brand in 2008. The group's net income is expected to grow by at least 15 percent this year.

"With two major sporting events lined up this summer, we know that the world's eyes are going to be firmly fixed on our group and on our brands," Hainer said, referring to Adidas' sponsorship of Euro 2008 in June and the Beijing Olympics in August.

The company's stock closed up 5.7 percent on the German stock exchange to 42.70 euros, or $66.04 at current exchange.