Monday, May 30, 2011

Court dismisses ridiculous TM claims added on to trade secret case

Dow Corning Corp. v. Xiao, 2011 WL 2015517 (E.D. Mich.)

Dow alleged that Xiao and related entities stole Dow’s trade secrets and misused its trademarks to lure customers away from Dow’s trichlorosilane ("TCS") and polysilicon businesses.

Xiao and Michael Little, a chemical engineer formerly employed by Dow for nearly 25 years before he left the company, started LXEng. Little led Dow’s TCS production facility for a period of time and signed nondisclosure agreements.

In the course of contracting with customers/potential customers, Dow alleged, Little and Xiao disclosed Dow trade secrets. Little also allegedly conducted aerial surveillance of Dow’s facilities in Michigan and used that information to explain the manufacturing process to prospective clients. Little then died in a plane crash. Xiao and his company contacted other Dow employees and placed ads in Michigan publications seeking to hire Dow employees with relevant experience. Dow’s counsel wrote to Xiao and LXEng expressing concern that Little may have shared Dow’s trade secrets. Dow asked them to consent to an independent inspection of Little’s laptop, but they refused.

Xiao, allegedly concerned about potential liability to Dow, formed a new company, LXE Solar, which continued LXEng’s business. Although Little was never affiliated with LXE Solar, Dow alleged that the trade secrets Little shared with Xiao and LXEng were still in use.

Dow alleged that the misuse of its trademarks and trade secrets had caused significant harm given Dow’s reputation and the fact that TCS and polysilicon manufacturing requires a multi-step process that has proven difficult to replicate.

Trademark: defendants argued that their use of the marks was not “in commerce,” but the court declined to construe this jurisdictional hook narrowly. The allegations sufficed to allege use in commerce: Dow alleged that, in recruiting new clients, defendants emphasized that they had "pull[ed] all experiences from Dow Corning" and that their technology was "based on both Dow Corning" and another company's products. Defendants allegedly repeatedly used Dow’s trademarks to identify their products, and admitted that that they used Dow’s name as a point of comparison, a source of Little’s experience, and an explanation of the services they could deliver: this was “in commerce.”

But does this state a claim for infringement? Confusion over sponsorship, affiliation or approval would be sufficient to be actionable. Dow argued that it had alleged that each of the factors tilted in its favor: fame, close relationship of the parties’ goods and services, defendants’ use of “Dow Corning” to describe “its” [sic] products, actual confusion (on information and belief), direct competition, likelihood of confusion among purchasers, who "may ... associate the quality" of defendants' goods and services with Dow Corning even if they realize there is no affiliation between defendants and Dow Corning, and specific intent to use the mark to profit from consumer associations. Dow alleged point of sale, post-sale, and initial interest confusion.

Defendants argued that the complaint did not include sufficient allegations to make the claim plausible, despite reciting the elements of a confusion claim. They pointed out that the relevant consumers are sophisticated businesses spending millions on highly technical products.

The court emphasized that this was not a typical trademark case. (Indeed, in other circuits, we’d call it a nominative fair use case.) The parties’ marks were not similar in any way. The only argument here was some kind of affiliation claim. If defendants weren’t using the Dow marks "in a way that identifies the source of [Defendants'] goods" or services, they weren’t using the marks in a "trademark way" and there could be no liability for trademark infringement. So, if they were using the marks only as a point of comparison and to identify the source of Little’s experience, there could be no Lanham Act liability. “Although the complaint alleges substantial wrongdoing by Defendants, it does not plausibly allege that Defendants' used Plaintiffs' trademarks in a
‘trademark way.’” The allegation of confusion as to source or association was implausible.

The Sixth Circuit has defined “non-trademark” use as truthfully describing a past association with another trademark owner. Here, Dow didn’t claim that defendants marked their products with Dow marks, or that they used a similar mark for their own products/services. Rather, it complained about defendants’ marketing materials, but none of those suggested that Dow was the source of defendants’ products or affiliated with Dow in any way.

For example, in one email, Xiao used Dow’s mark, but not in a way that could cause source confusion: “LX is focusing on getting all questions answered and inputs incorporated in designs by collectively pulling all experiences from Dow Corning (Mike downloaded most of his experiences into LX and CDI's process designs), REC and MEMC.” “While Defendants used the Dow Corning mark in marketing communications, they used it as a point of comparison and as a source of Mike Little's experience, but they did not use it to identify the source of their products or suggest an affiliation with Dow Corning. As such, they have not included factual allegations that ‘allow[ ] the court to draw the reasonable inference’ that Plaintiffs will be able to demonstrate likelihood of confusion.”

The court went on to reach the same conclusion using the multifactor test. Though the Dow mark was strong, at least within the relevant industry, and the parties compete, defendants didn’t use a similar mark. Actual confusion favored neither party at the pleading stage; Dow claimed that evidence of confusion would be revealed during discovery. (It’s pretty hard to do the multifactor test at the motion to dismiss stage! That the court is willing to do so, at least where there is a strong policy consideration (comparative advertising/nominative fair use) in play, is good evidence for the proposition that the multifactor test is not really about likely confusion in an empirical sense.)

The marketing channels factor favored defendants, since the challenged communications were “direct contacts targeted at specific consumers where the sender has been clearly identified. It seems that the consumer is less likely to be confused by a targeted communication than by a broad advertisement targeted at a general audience, such as one might see on the Internet or in a newspaper.”

Degree of purchaser care also strongly favored defendants. It was highly unlikely that such “sophisticated and focused consumers” would be confused. “Little's experience as a longtime Dow Corning employee is featured prominently in the materials to demonstrate LXEng's ability to compete in the industry. Sophisticated business clients are unlikely to mistake those references for a suggestion that Dow Corning is sponsoring LXEng or otherwise affiliated with the new company.”

Intent and bridging the gap were not particularly relevant. As to intent, it was clear that defendants referenced Dow’s marks (really, they referenced Dow, not its marks, which is the point of nominative fair use) in an attempt to compare their products favorably to Dow’s. But they didn’t deliberately choose a mark similar to Dow’s, and thus they can’t be said to have chosen a mark in an attempt to confuse consumers.

Defendants also argued fair use. Given the wackiness that is the Sixth Circuit’s handling of these issues, they couldn’t plead nominative fair use, even though that’s what it is. So the court held that they used the Dow mark “descriptively,” to identify Little’s former employer and the source of his knowledge. However, the court rejected the defense at this stage of the case: “While potential customers were unlikely to be confused about the affiliation or source of Defendants' products, they may nevertheless have been misled about the technology underlying the products. As a result, the descriptive use of the mark may not have been in ‘good faith.’” I’m not sure that “good faith” should extend to require the defendant to act above reproach with respect to non-trademark matters, but it doesn’t matter here.

False advertising: initially, the court rejected the attempt to require §43(a)(1)(B) claims to be pled with particularity, though my impression is that the trend is to apply Rule 9(b) to such claims.

Defendants first argued that their communications weren’t widespread enough to be “commercial advertising or promotion.” Here, the relevant market is extremely small, at most 128 companies who have made or will make multimillion-dollar investments and won’t respond to ads in general interest publications or even mass mailings. They require individual targeting in tailored communications. Under the circumstances, a handful of emails is enough to constitute commercial advertising or promotion.

Defendants next argued that Dow hadn’t properly pled actual or likely deception. Dow pled that element, and identified specific communications, such as one in which Xiao assured a reluctant customer following Little's death that Little had earlier "downloaded most of his experiences." But, while confusion about affiliation was unlikely, it was still plausible that sophisticated customers could be deceived “about the extent to which Little had access to Dow Corning's proprietary information and his ability to deliver that information to customers.” This could also plausibly be material.

Dilution: Dow argued blurring and tarnishment. There could be no traditional dilution claim because defendants’ marks weren’t similar to Dow’s marks. Dow nonetheless argued that using the actual Dow mark tarnished and blurred it.

In Audi AG v. D'Amato, 469 F.3d 534 (6th Cir.2006), D’Amato ran, where he sold merchandise with the "Audi Sport" logo and Audi's distinctive "ring" mark. The site said: "Who are we? We are a cooperative with Audi of America, and will be providing the latest products for your Audi's [sic] and information on Audisport North America." This was not true. The Sixth Circuit found dilution.

Here, however, defendants didn’t use Dow’s marks to label their own product, pretend that they were Dow, or pretend that they were authorized or sponsored by Dow. They used Dow’s mark in a descriptive, comaparative manner, and emphasized differences between the products, “even suggesting that their products would be better than Dow Corning's products because they would combine the best of several available technologies.” This can’t be called dilution, and also it’s specifically exempted by the federal dilution statute in the provision for nominative or descriptive fair use. (Note the tension with the conclusion above that defendants didn’t make out a descriptive fair use defense as a matter of law on the pleadings; I think this time the court got it right.) “There is a difference between Defendants' suggestion to their customers that they had acquired proprietary Dow Corning technology and were prepared to capitalize on that technology to develop Defendants' own products, and the assertion by the defendant in Audi that their products were actually affiliated with or sponsored by Audi. While the latter is actionable under the dilution statute, the former is not.”

The court also commented that, while it was sympathetic to defendants’ arguments that Dow Corning was not a federally famous mark, Dow had properly pled federal fame.

Dow also properly stated a trade secret misappropriation claim and an unfair competition claim under Michigan common law. Dow’s Michigan Consumer Protection Act claim failed because neither party was engaged in “trade or commerce” as defined in the statute, which means “the conduct of a business providing goods, property, or service primarily for personal, family, or household purposes.”

Defendants argued that Dow’s tortious interference claim, which alleged that defendants persuaded Little to breach his confidentiality agreements with Dow, was preempted by the Michigan Uniform Trade Secrets Act. This was true only for alleged misappropriation of a trade secret; to the extent that Dow sought a remedy for disclosure of confidential information protected by the agreements that was not a trade secret, it could still bring its tortious interference claim. I’m not sure what confidential information would be protected but not be a trade secret, but I’m not up on the law of trade secret.

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