Thursday, June 12, 2008

Supplemental complaint: internet resale case survives summary judgment

Standard Process, Inc. v. Total Health Discount, Inc., 2008 WL 2337279 (E.D.Wis.)

Hey, an internet resale-of-goods case that isn’t entirely about ridiculous metatag/initial interest confusion claims! Yet somehow they take pride of place anyway. Standard Process sells dietary supplements through resellers; Total Health Discount resells them, but is not an authorized reseller. Standard Process bars authorized resellers from selling to any other health care professionals or businesses; selling via e-commerce including the internet; and selling Standard Process via retail directly to the general public, except behind-the-counter sales from pharmacies or health clinics.

Nonetheless, Total Health carries Standard Process products as one of its over 350 brands. Standard Process terminated one reseller after discovering his connection to Total Health, and sent Total Health a threat letter about its use of the Standard Process logo and pictures of Standard Process supplements on its website. As a result, Total Health removed the logo and the pictures (note: removing the pictures, while understandable, was caving to bullying; that’s an unwarranted demand), but continued to use the Standard Process name and product names in plain type. It also added this disclaimer at the top of its Standard Process page: “Total Health is not an authorized seller of Standard Process, Inc., products. Total Health purchases Standard Process supplements from authorized third parties for resale, and is in no way affiliated with, authorized, sponsored or related to Standard Process, Inc.”

The court denied summary judgment on Total Health’s first sale defense, because Total Health made other statements suggesting an affiliation with Standard Process: it referred to Standard Process’s 75th anniversary and described its accomplishments using the first-person pronouns “we” and “our.” In addition (and this really shouldn’t have counted, since it’s no evidence of affiliation), Total Health pays to show up in search results for “standard process.” Citing the terrible 10th Circuit Australian Gold decision, the court found that the undisputed facts didn’t establish that Total Health’s conduct was protected by first sale.

The same result applied to the nominative fair use defense. Given (1) the payment for display in search engine results, and (2) the use of “we” and “our,” the court couldn’t determine on summary judgment that Total Health satisfied the third prong of the New Kids test, which requires that the user “do nothing that would, in conjunction with the mark, suggest sponsorship or endorsement by the trademark holder.” Again, (1) is ridiculous; first of all, buying the mark as a keyword isn’t a use “in conjunction” with the mark—at most, it’s use of the mark itself. And even if we make all inferences in favor of the nonmoving party, where’s a scintilla of evidence to suggest that buying keywords suggests sponsorship or endorsement? Nonetheless, the court cited Australian Gold and Promatek to the effect that the search engine purchases could cause initial interest confusion about whether Total Health was “favored or authorized.”

Standard Process also argued that Total Health engaged in false advertising under Wisconsin state law and the Lanham Act because the statement “Total Health purchases Standard Process supplements from authorized third parties for resale” is literally false. Standard Process claimed that, in fact, Total Health buys its supplements directly from Standard Process by using fictitious shell accounts in the names of individuals who opened accounts with Standard Process at the behest of Total Health. This, it argued, harmed its brand and goodwill because Total Health’s statements suggest that Standard Process doesn’t enforce its resale policy, leading to “hundreds” of calls and emails from end users and resellers asking whether Total Health is authorized and why Total Health is selling Standard Process products on the internet. (And this is a consumer harm because …?)

Total Health responded that its conduct caused no harm, and could only increase revenue. Moreover, it argued that its disclaimer is not literally false, since it buys Standard Process products from third party accounts who have authorized Total Health to place orders as their agent. And the “evidence” of confusion is actually from Standard Process account holders complaining about competition, not from consumers. Nor is any confusion material.

The court found that genuine issues of material fact precluded summary judgment here as well. A factfinder could conclude that the statement isn’t literally false, or that it is confusing to consumers who conclude that Standard Process has “changed its philosophy” that its products must be “provided within the context of an ongoing relationship” between an end user and an authorized retailer. (On the latter, really? I’d love to see the evidence that consumers think anything about whether Standard Process enforces its resale policy—I doubt they have any beliefs at all, whether correct or mistaken—my suspicion is that the issue is so immaterial that it never even rises to consciousness.) Moreover, a reasonable factfinder could conclude that the statement is literally false because Total Health is effectively buying for itself, which would mean that Standard Process wouldn’t be required to prove actual confusion. And the statement might be material because it induces consumers to buy the supplements without the advice of a health care professional. (Query: wouldn’t the appropriate remedy be a reformulated disclaimer, to the effect that these are legitimate Standard Process products, but Total Health isn’t an authorized Standard Process reseller?)

There was also an interesting dispute over Standard Process’s claim of intentional interference with contractual relations. Total Health designated the list of customers from whom it purchases Standard Process products as confidential and only for the eyes of Standard Process’s outside counsel. Standard Process claimed that it couldn’t make its case without sharing that information with the business side. But, since it wasn’t clear that the list was necessary to establish whether Standard Process used an enforceable contract, and it was undisputed that Standard Process would terminate every account on that list, causing Total Health to lose 18% of its business, the court refused to remove the confidentiality designation. “Under the circumstances of this case, it is understandable that Standard Process would like to control the sales and marketing of its own products and prevent Total Health from obtaining its products for resale. However, the court is not inclined to grant such relief in a discovery motion.”

Moreover, Standard Process didn’t submit evidence that there was a binding contract. Its unilateral resale policy didn’t establish a contractual relationship with its account holders. “Indeed, in return for account holders’ promises not to sell to other businesses, sell via the Internet, or sell in a retail setting directly to the general public, Standard Process commits to nothing.” It merely retained the option to stop doing business with account holders who act against its interest. That’s not a contract.

In addition, there was no evidence that Total Health interfered with a contractual relationsihp, or caused harm to Standard Process. The sales generated by Total Health could “easily” be a benefit to Standard Process, not an injury. (Isn’t this inconsistent with the reasoning on the false advertising claims?) Thus, Total Health received summary judgment in its favor on this claim.

1 comment:

  1. Anonymous10:57 AM

    What then would be the guidelines for selling Standard Process Products online? Would you have to remove the pictures and place: “Your Name Here is not an authorized seller of Standard Process, Inc., products. Your Name Here purchases Standard Process supplements from authorized third parties for resale, and is in no way affiliated with, authorized, sponsored or related to Standard Process, Inc.”
    below the products you are selling. Could Standard Process then go after you for selling online because of its resale policy? I personally believe that this case creates a presidence for selling products online without being an authorized reseller of the products. Great Article Rebecca, keep up the great work!