Monday, April 02, 2012

Lanham Act recognizes agency liability, not aiding and abetting

L-3 Communications Corp. v. Jaxon Engineering & Maintenance, Inc., 2012 WL 1020516 (D.Colo.)
Plaintiff L3 alleged that its employees, including some who left to be part of Jaxon, invented ways of testing measures that are supposed to protect electronic equipment against EMP damage, and that these methods and other business information were its trade secrets.  Nonetheless, defendants departed and created Jaxon to compete with L3.  While still employed by L3, defendant Randall White allegedly met with L3’s major customers to convince them to support his new, competing business, and he used L3's internal acquisitions systems to purchase equipment that would later be diverted to the new business.  In July 2009, though not yet in business, Jaxon obtained contracts from Serco, one of L3’s major clients, allegedly as a result of collusion that prevented L3 from bidding meaningfully.
L3 asserted many claims, most of which I’ll ignore.  Defendants argued that the resulting Lanham Act claim should be dismissed against individual defendants, as to whom there were no allegations that they participated in statements promoting Jaxon, because the Lanham Act doesn’t recognize imputed or aiding/abetting liability for false advertising.  Jaxon invoked Electronic Lab Supply Co. v. Cullen, 977 F.2d 798 (3d Cir.1992), which was not on point because it was about whether attorneys who sought an ex parte seizure order in a Lanham Act case could be considered an “applicant” for a wrongful order, thus subjecting them to liability under a different section of the Lanham Act.  The narrowness of the wrongful seizure remedy stood “in sharp contrast to the relatively broad scope of a Lanham Act false advertising claim under 15 U.S.C. § 1125(a).”
But the court wasn’t convinced by L3’s citation of Proctor & Gamble Co. v. Haugen, 317 F.3d 1121 (10th Cir.2003), either.  P&G involved a long, complicated case about Amway’s liability for the acts of its distributors.  The 10th Circuit suggested that it was proper to import into the Lanham Act “common law concepts of agency, apparent authority, and vicarious liability,” and held that Amway wasn’t responsible for acts of independent contractors under vicarious liability principles.  The case on which P&G relied, however, carefully distinguished “aiding and abetting” liability, where liability is founded on encouraging a substantive offense, from agency liability.  The latter addresses who should be held responsible for a substantive offense that has indisputably been committed.   Aiding and abetting liability, which targets the wrong of encouraging another wrong, is largely confined to securities fraud in the federal system, while agency liability is common.
Following P&G, the court held that agency liability is part of the Lanham Act, but not aiding/abetting liability.  Thus, L3’s Lanham Act claims against employees would stand or fall based on the sufficiency of allegations that they acted as agents of Jaxon in bringing about the false advertising at issue.
The allegations here were insufficient.  “L3's Lanham Act claims against the employees of Jaxon does not allege, as an agency-based claim typically would, that an act of false advertising by a subordinate permits liability to be escalated up the chain to a person who allegedly authorized that act; rather, L3's theory of liability seeks to push liability downward, exposing low-level employees in Jaxon to liability for conduct engaged in by their superiors, for which they had no alleged ability to control or direct.”  Though L3 argued that those defendants transferred L3’s trade secrets to Jaxon with actual or constructive knowledge that Jaxon would misrepresent the technology as its own, that only addresses aiding/abetting.
Defendants also briefly challenged L3’s allegations of injury.  The court found that a reasonable inference from the allegations “is that Jaxon is only able to compete with L3 for contracts by unlawfully exploiting L3's trade secrets, and that if Jaxon were prevented from using such secrets, it would not be able to advertise and bid for the same contracts as L3. This is sufficient, at this early stage of the litigation, to satisfy the injury element of the claim.”
Unsurprisingly, the tortious interference claims also survived as to the defendants identified as directly participating in the bid-rigging.

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