In International Star Class Yacht Racing Association v. Tommy Hilfiger, U.S.A., Inc., the Court of Appeals for the Second Circuit held that an infringer's failure to follow the advice of counsel to perform a full trademark search must be taken into account in assessing the infringer's bad faith.

Plaintiff International Star Class Yacht Racing Association ("ISCYRA"), an organization that governs and promotes Star Class yacht racing, is the owner of rights to the design of Star Class boats. Star Class boats must bear either a red five-point star, ISCYRA's insignia, or one of the several stars awarded at ISCYRA competitions. ISCYRA's red five point star is also used together with the words STAR CLASS in connection with, among other things, its line of yachting clothing and promotional items.

Defendant Tommy Hilfiger ("Hilfiger"), on the other hand, is a designer of men's clothing which included in its 1994 Spring Collection a line of clothing bearing the words STAR CLASS with a red five-point star. The garments also bore the Hilfiger name and were marketed as "'classic nautical sportswear' with 'authentic details taken from the sport of competitive sailing' and 'elements and patterns taken directly from actual racing sails'". While designing this line, Hilfiger requested from its attorneys a federal trademark search in Class 25 (clothing) for the words STAR CLASS. In so instructing its attorneys, Hilfiger did not disclose that these words would be used for clothing with a nautical theme. The search revealed no identical marks. Hilfiger's attorneys then recommended that Hilfiger conduct a full trademark search before using the words STAR CLASS; however, Hilfiger did not perform this search until ISCYRA commenced a lawsuit against Hilfiger for trademark infringement. This full search revealed that STAR CLASS was, in fact, a mark used in connection with yachting. Hilfiger nevertheless continued to sell clothing bearing the allegedly infringing marks and had sold over $3 million worth of such clothing by the time the case went to trial.

The district court granted ISCYRA's request for an injunction against Hilfiger's use of the words STAR CLASS, but denied relief as to use of the red five-point star and for an accounting of profits, actual damages and attorneys' fees. ISCYRA appealed the denial of an accounting and attorneys' fees on the basis that the district court erred in finding that there was no bad faith, and the denial of actual damages on the basis that sufficient consumer confusion was shown. ISCYRA also appealed the district court's finding that the red five-point star was not entitled to trademark protection.

The Second Circuit affirmed the district court's decision as to actual damages and the protectibility of the red five-point star, but vacated its decision as to an accounting of profits and attorneys' fees on the ground that it made clearly erroneous and incomplete findings of fact as to Hilfiger's bad faith. In the Second Circuit, an accounting of profits and attorneys' fees in a trademark infringement case can be awarded only where the plaintiff has shown that the infringer acted in bad faith.

The Second Circuit held that, in assessing Hilfiger's bad faith, the district court should have considered Hilfiger's failure to conduct a full search after its attorneys advised doing so. Contrary to the district court's view, the Second Circuit found that Hilfiger's conduct of the initial limited search did not exonerate Hilfiger, given that Hilfiger subsequently ignored its attorneys' advice to conduct a full search before using the words STAR CLASS. This is especially the case here, where Hilfiger specifically marketed its clothing as containing "authentic details . . . from the sport of competitive sailing" and, therefore, "should have shown greater concern for the possibility that it was infringing on another's mark." In particularly harsh language, the court observed: "Hilfiger's choice not to perform a full search under these circumstances reminds us of two of the famous trio of monkeys who, by covering their eyes and ears, neither saw nor heard any evil. Such willful ignorance should not provide a means by which Hilfiger can evade its obligations under trademark law." Moreover, while an infringer who acted on advice of counsel generally cannot be deemed to have acted in bad faith, the court held that the converse is also true, i.e., "the failure to follow the advice of counsel given before infringement must factor into an assessment of an infringer's bad faith."

The Second Circuit also held that the district court should have taken into account Hilfiger's willful disregard for ISCYRA's rights by continuing its sales of the allegedly infringing garments after ISCYRA commenced suit against Hilfiger, and in spite of the fact that Hilfiger's second trademark search disclosed the existence of ISCYRA's STAR CLASS mark. The Second Circuit concluded that Hilfiger, accordingly, "cannot lay claim to a 'good faith' belief that it was not infringing on ISCYRA's mark". While Hilfiger obviously assumed that it would win the lawsuit, the court observed that "Hilfiger lost that bet and should not escape the consequences of its conduct."