Thursday, March 19, 2009

Supplier turned competitor faces false advertising and trademark claims

Irwin Industrial Tool Co. v. Worthington Cylinders Wisconsin, LLC, 2009 WL 606218 (W.D.N.C.)

Irwin does business as BernzOmatic. It sued Worthington for breach of contract, unlawful price discrimination, Lanham Act violations, and related state law claims. According to the complaint, BernzOmatic makes tools, including hand torches and other gas combustion devices; it has registered trademarks for BERNZOMATIC and a recognizable trade dress including color. BernzOmatic is the market leader in consumer hand torches and cylinders. For over twenty years, Worthington’s predecessor Western supplied BernzOmatic with hand torch cylinders, which BernzOmatic then sold under its own brand. Worthington acquired Western in 2004, assuming its oblgiations under the contract between Western and BernzOmatic: Worthington would be the sole supplier of specified cylinders at set prices; BernzOmatic was the sole outlet for those cylinders; and BernzOmatic had the exclusive right to sell them to distributors and retailers.

In 2005, the parties negotiated a new agreement that allowed Worthington the exclusive right to sell cylinders to certain specified customers, and also allowed Worthington to terminate the exclusivity provisions of BernzOmatic purchased fewer than 14.25 million cylinders in a 12-month period. In 2007, Worthington notified BernzOmatic that it was terminating the exclusivity provisions, and that it considered BernzOmatic’s recent acquisition of Ultra Blue Technologies to be in bad faith, because Ultra Blue’s PowerCell products directly competed with sales of Worthington Cylinders. BernzOmatic didn’t contest the termination, but pointed out that Worthington’s own exclusivity rights were terminated as well, and argued that the PowerCell products were smaller and thus not covered by the parties’ supply agreement.

Shortly thereafter, Worthington notified BernzOmatic that it was terminating the entire supply agreement because of the purported breach arising from the PowerCell sales. BernzOmatic alleged that Worthington knew that there was no breach, and had known about PowerCell for over a year before raising it as an issue. Rather, BernzOmatic alleged, Worthington just wanted a pretext to avoid the price agreement and sell cylinders directly to mass merchants and others. Worthington then dramatically increased its prices, but BernzOmatic had no alternative sources and thus had to pay the new prices, disrupting its ability to supply its customers. When BernzOmatic found a new supplier, it still paid higher prices.

Worthington began selling its own cylinders in direct competition with BernzOmatic. They were substantially similar to the previous cylinders, including the same trade dress with a distinctive blue color for propane and yellow for MAPP gas cylinders.
(Here’s a website selling Worthington cylinders with a picture of what appears to be a BernzOmatic cylinder.) Worthington began advertising using a picture of a hand tearing away a BernzOmatic label on its hand torch cylinder, revealing a Worthington label underneath and states: “Uncover the name you've trusted all along … All the quality you've come to expect in hand torch cylinders is now available direct from the source.” BernzOmatic considers this disparaging. (Here’s a website stating that BernzOmatic has attempted to avoid products liability claims by blaming Worthington and its predecessor for making the cylinders.)

BernzOmatic alleged that the ad falsely stated or implied that consumers shouldn’t trust BernzOmatic, that they were really purchasing Worthington when they thought they were purchasing BernzOmatic, and that BernzOmatic is not the brand that they trusted it was. Moreover, BernzOmatic alleged that the ad was likely to cause confusion about affiliation, connection, association, origin, sponsorship or approval.

The court first rejected the “trust” claim. Nothing in the ad explicitly says that consumers shouldn’t trust BernzOmatic, nor could such a representation reasonably be implied. Indeed, the ad is flattering: BernzOmatic has been, and should be, trusted—and because Worthington is the “source” of BernzOmatic cylinders, so should Worthington.

Next, BernzOmatic alleged that the ad falsely stated or implied that consumers were buying a Worthington product when they thought they were buying a BernzOmatic product. Worthington argued that this statement was neither false nor misleading, because it was literally true. However, the ad could reasonably be read to imply that Worthington has been the source of BernzOmatic cylinders for the entire time that BernzOmatic has been selling them, but this isn’t true—Worthington took over only in 2004 and stopped in 2007, not “all along.” This was enough to state a false advertising claim. For the same reasons, BernzOmatic sufficiently pled a false or misleading association between Worthington and BernzOmatic to state a claim.

Query: would this be the same result if the nominative fair use test were applied? In the 9th Circuit at least, nominative fair users don’t have to speak with exquisite precision. In the 3rd, by contrast, nominative fair use requires an accurate statement of the relationship between the parties. “All along” might be inaccurate, though it’s a bit vague.

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