Crocs chomps on competition

NIWOT – On July 16 Crocs Inc. and Boulder-based Jibbitz LLC filed a lawsuit in Colorado federal court against Tan at the Beach Tanning Salon – an Alabama-based company – alleging the company sold foam-clog footwear and accessories online under the names Crocos, Crocos Clogs, Crocos Shoes and Croco Charms.

Crocs and Jibbitz alleged the merchandise infringed on their trademarks, copyrights, patents and trade dress. It also said the company was guilty of “cyber-squatting” with a registered Web site confusingly similar to Crocs’ trademark.

An extremely profitable company, Crocs’ revenues and earnings show no sign of slowing down. The company recently stated that its second-quarter profits more than doubled, and earnings tripled compared to last year – jumping to $48.5 million. The stock recently split and is hovering around $55 per share – it was $13 a share in July 2006. Revenues soared to $224 million this past quarter.

Some investors believe the footwear is vulnerable to rip-off discounters, and Crocs will have to spend an inordinate amount of time and money fending off imitators flooding the market with cheap knockoffs.

It’s impractical for the Niwot-based company to go after every imitator. Crocs has to pick its battles carefully and target those cases that appear winnable.

“For companies like Crocs, often what goes into the calculation is: ‘What’s the likelihood we’re going to prevail on this? Because if we’re going to put money into going after this, it has got to be something we can win,’´ said Tracy Gray, a partner with the Hogan and Hartson law firm. “If you’re aggressive enough and you pick the company you can actually shut down, then word gets out on the street, and you’re known as a company that will enforce their rights.”

With so much cash in the bank – Crocs’ profit in 2006 was more than $200 million – the company can afford to pull some heavy legal punches. Other valuable weapons in its arsenal include patent, copyright and trademark protection on their footwear design, manufacturing methods, name and logo.

Trade dress – another protection method encompassing a product’s packaging and visual appearance – is a bit trickier to qualify and leverage. The owner has to prove the product is distinctive, and any imitators are likely to cause customer confusion. Luckily for Crocs, the more original the product is, “the better opportunity you have at trade dress protection,” Gray said.

That still doesn’t make it easy.

“To really enforce your trade dress you need to be aggressive and go after those parties who are knocking off your product,” Gray said. “Unfortunately, the Internet has made it extremely difficult to track them down. The minute you shut them down they are operating under another domain name out of another country.”

Investors are closely watching the legal jousting between Crocs and its competitors.

The company has pending actions in the U.S., Europe, Latin America, Asia and Africa. Each carries allegations of patent and trade dress infringement. Crocs is seeking exclusion orders banning the sale of infringing products.

A protracted legal battle has ensued with Holey Soles Holdings Ltd. out of Canada, which filed a counterclaim seeking a declaratory judgment that Crocs does not have any valid copyright or trade dress rights, and that the manufacture, sale and distribution of Holey Soles footwear products does not constitute unfair competition. According to Crocs’ 2007 annual report, the case is still pending.

This past January Crocs filed a breach of contract suit against Australia Unlimited, makers of Old Friend Footwear. The company had been involved in a previous lawsuit that was settled in Crocs’ favor. Australia Unlimited had introduced a new shoe design not approved by Crocs.

Crocs would not comment on any of its pending lawsuits. However, Erik Rebich, the company’s general counsel, said via e-mail, “We use multiple sources to track down infringers and the source of infringing products. Crocs is pursuing many different infringers and will continue to take action against others who infringe and attempt to trade on Crocs’ intellectual property rights.”

Perhaps the strongest arrow in Crocs’ legal quiver is Croslite – the proprietary, “closed-cell resin” material that delivers a light, soft and anti-bacterial footwear product. Croslite is not patented, but it is protected as a company trade secret formula.

“The unique Croslite material is one of many key differentiators that enable Crocs to successfully market its footwear products to a broad range of consumers worldwide and set itself apart from imitators,” Rebich said.

“For a company like Crocs, the look and feel of its products contributes to their uniqueness. A lot of the knockoffs appear inferior, which can negatively reflect on Crocs,” Gray said.

In addition to overseas discounters and knockoff artists, industry-leading retailers like Skechers, Target and Payless sell their own lines of competing “foam-based” clog footwear, which poses a more nuanced challenge for Crocs.

“The problem then is that you have two companies with substantial market share, and you could quickly end up with large-scale, very expensive litigation,” Gray said. “When there is a substantial product similarity, and a likelihood of confusion between products offered by two industry leaders, you need to determine that you have strong legal grounds on which to stand prior to initiating a legal action.”

Skechers, which recently launched a national television advertising campaign promoting a line of casual footwear styles very similar to Crocs, is a far cry from the slick, sometimes shady, online retailers producing cut-rate imitations.

In order to fight against competitors like Skechers, Crocs may need amp up its own marketing campaigns to keep its brand at the forefront of consumers’ minds, Rebich said.

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