Monday, July 09, 2012

Dastar doesn't bar claim that supplier switch confused consumers

Organ Recovery Systems, Inc. v. Preservation Solutions, Inc., 2012 WL 2577500 (N.D. Ill.)
ORS sued defendants for breach of contract, false advertising and unfair competition under the Lanham Act, deceptive trade practices, and consumer fraud.  Some defendants counterclaimed.  ORS sells solutions that are used to preserve kidneys during transplant procedures. ORS attempted to improve one solution's packaging and shelf life and entered into a contract with PSI to have PSI assist with testing, manufacturing and obtaining regulatory approval for the product, known as KPS–1. Defendant BTL competes with ORS, and ORS alleged that PSI misappropriated ORS’s confidential information, using it in FDA applications and delivering it to BTL. ORS also alleged that defendants gave current and prospective customers false information about ORS products.  (Note the unraised standing issue: PSI appears to be a supplier, not a competitor, of ORS, but that doesn't affect the court's analysis of the false advertising claims.)
ORS’s Lanham Act claims against PSI were based on a letter PSI sent to, among others, an Illinois organization called Gift of Hope Organ & Tissue. PSI said that a company that had distributed the solution “in compliance with” PSI’s FDA applications was now distributing a solution not made by PSI, and that this was “critical to you and your patients” because the instructions for use might differ, the PSI product had been “stability tested, reviewed and certified” for certain important features.  The letter continued, “The transplant solution is an integral part of your organ transplant procedure. We know that patient safety is paramount and that full disclosure is essential to protecting your patient. Please check the product label to determine the manufacturer of the solution being supplied to your center.”  ORS alleged that PSI sent this letter to organ procurement organization (OPO) administrators, hospitals, and other potential ORS customers throughout the country, leading numerous customers and potential customers to express confusion and concern to ORS and to others in the market.
PSI argued that this wasn’t commercial advertising and promotion because of the obviously wrong 7th Circuit caselaw that reads “promotion” out of the statute.  Advertising is promotional material “disseminated to anonymous recipients,” not “face-to-face communication” or “letters sent to customers.”  The court here, however, salvaged something by pointing out that the 7th Circuit has never held that “anonymous” “must mean that a corporation cannot know the identities of the recipients of the communications.”  Instead, the Lanham Act covers “unsolicited statements to numerous potential clients with which [an advertiser] had no relationship” (subject to Gordon & Breach limits).  ORS alleged that the letter went to potential customers around the country, and it was addressed to “Dear OPO Administrator” rather than to a named individual or business, which supported the argument that it was a mass unsolicited communication. Even if PSI’s letter was specifically targeted to OPOs, in that PSI knew the identities of all the recipients because it had a mailing list (and wasn’t mailing the letter to people with no possible interest in receiving it!), ORS properly alleged that the letters were “a generalized solicitation rather than an individualized communication.”  That was enough.
PSI then argued that ORS didn’t sufficiently allege actual consumer deception, since it was arguing misleadingness rather than literal falsity.  But ORS alleged that three OPO employees expressed confusion/uncertainty, two directly to ORS, and that was sufficient to survive a motion to dismiss.
ORS separately claimed that defendant BTL violated the Lanham Act by sending a broadcast email to “Organ Procurement Professional[s]” and putting out a press release stating falsely that BTL made the FDA-approved label change for room-temperature storage of the solution possible, when it was ORS that did so.  (Dastar?)  Broadcast email and a press release could be advertising/commercial speech.  “Even if ORS knew all of the businesses that would receive the broadcast e-mail, the allegations would allow for a finding that the e-mail was not specifically targeted to any of them individually.… [T]he e-mail was an anonymous communication not in the sense that a television commercial is anonymous, but in that it was a generic communication to a large group, and each recipient was provided with the same material.”  However, claims that BTL attempted to snag one specific ORS customer by disparaging ORS, and that BTL made similar statements to others, couldn’t be the basis of a Lanham Act claim because they described individualized communications. “The Lanham Act does not cover every instance in which a business speaks to the customer of another business, even if the speaker is lying.”  A specific attempt to acquire a particular customer wasn’t “advertising” for Lanham Act purposes.  (Not this court’s fault, but this conclusion makes achingly clear why the 7th Circuit rule misreads the Lanham Act’s “advertising or promotion.”  Robert Post would say that individualized communications aren’t even commercial speech in terms of the constitutional protection they should get—but they sure seem like promotion, even if one then applies an extra magnitude test as with the Gordon & Breach “disseminated sufficiently to the relevant consumers” standard.)  Similarly excluded from the Lanham Act’s coverage were ORS’s allegations that BTL responded to a CFP from a UK transplant organization with false statements about ORS, and allegations that named BTL personnel “told” something to named OPO personnel.  “Although ORS contends that these communications are examples of a larger advertising campaign, the manner in which they are alleged in the amended complaint does not permit that characterization.”  (Presumably the court would deem phone marketers following scripts to merit the “advertising” label, given what it said above.)
As for ORS’s state law false advertising/unfair competition claims against BTL, BTL argued that ORS failed to allege a significant connection between the conduct at issue and Illinois, as required.  The “critical question” was “whether the circumstances relating to [the] disputed transactions ... occurred primarily and substantially in Illinois,” but the place of injury was only one relevant factor; if the bulk of a fraudulent transaction occurs in Illinois and the injury or deception was the only thing outside the state, that could be actionable.  Here, one of the two defendants collectively referred to as BTL was a Delaware corporation with its principal place of business in Illinois, and ORS was also headquartered in Illinois.  It was likely that the disputed communications originated in Illinois and that ORS was harmed in Illinois, so the claim survived a motion to dismiss.
ORS also brought a claim against BTL for tortious interference, but the court found that it mostly failed to identify anyone with whom it had a sufficiently strong expectation of future business.  “Mere unsuccessful solicitation does not give rise to a tortious interference claim.”  Entry into preliminary negotiations can be sufficient, but responding to a call for proposals doesn’t reach that level.  With respect to one potential client, One Legacy, ORS did allege that BTL’s misstatements caused it to rescind a previous oral commitment to buy from ORS; however, ORS didn’t allege that BTL knew about ORS’s expectation.
BTL counterclaimed for false advertising by ORS, specifically misrepresenting that it has FDA approval to sell its SPS–1 solution with a label indicating that the solution does not need to be filtered before use.  ORS submitted a letter from the FDA indicating the FDA’s concern over this part of the label; a reply letter from ORS stating that data indicated that filtered and unfiltered solutions were equivalent, and that PSI’s version of the solution had been approved for marketing without a filtering requirement; and a subsequent letter from the FDA stating that it had found that SPS–1 was “substantially equivalent ... to legally marketed predicate devices” and that ORS could therefore market the product subject to applicable labeling/misbranding rules.  ORS argued that this showed unambiguous FDA approval.  Though the court agreed that the letters appeared consistent with this argument, this was a motion to dismiss, and in any event neither the counterclaim nor the letters had sufficient details about FDA practice to say that the FDA letter constituted “approval.”
PSI also counterclaimed, alleging that after it rejected a proposed exclusivity agreement with ORS, ORS terminated PSI and hired another manufacturer, whose products proved substandard.  PSI alleged that ORS solicited business by telling prospective customers about PSI's services and didn’t tell customers about the switch, and that ORS's current customers therefore believed that the solutions were made by PSI.  PSI also alleged that ORS continued to use an instructional insert stating that the solution does not have to be filtered before use. Because this insert was originally added by PSI, PSI alleged that its presence further confused consumers as to source.
ORS responded: Dastar, plus the binding Bretford Mfg., Inc. v. Smith System Mfg. Co., 419 F.3d 576 (7th Cir. 2005) (applying Dastar to bar furniture manufacturer's claim against another manufacturer for the uncredited use of its pre-made table legs).  In Bretford, the consumer knew who’d produced the finished product.  ORS argued that, though PSI manufactured the solution, that wasn’t the finished product, which was solution labeled and bagged by ORS.  (If, as seems likely, things can happen to the solution that affect its safety/efficacy depending on how the product is packaged for the consumer, I’d be inclined to find this argument persuasive; compare the cases on material alteration in trademark law.)
PSI argued that its claim was for passing off—consumers thought that ORS was selling PSI solution—not reverse passing off.  Still, Bretford was pertinent for focusing on the finished product.  At this point, the court was unconvinced by ORS’s arguments.  “PSI's allegations clearly suggest that the customers at issue believe that they are buying solution. The solution is not just a component of its package; it is a tangible product. By contrast, a customer who buys a table likely would not consider the purchase to be ‘wood’ or ‘legs.’ PSI's allegations that customers have asked it to provide more information about its solutions further support its implication that the customers understand the product they are purchasing to be coming from PSI.”
However, these claims were still dismissed, without prejudice, because false representation claims under the Lanham Act are subject to Rule 9(b) (sigh).  The allegations were too conclusory.  Though there were specific allegations about two particular OPOs who expressed confusion or uncertainty to PSI about the PSI-ORS relationship, the counterclaim had no detail about how these customers came to believe or continued to believe that PSI made the solutions.  “Although false designation claims need not involve allegations that the defendant misused a specific logo or mark, there does need to be some indication that the defendant made a false representation.”  PSI stated that ORS informed its customers that the solutions had been made by PSI when the PSI-ORS relationship began, but failed to specify the “designation, design element, advertising, solicitation, or other means of communication” ORS used to convey this information.  Likewise, though PSI alleged that the continued use of PSI’s instructional insert was confusing, it didn’t attach a copy of the insert to the complaint or identify any characteristics of the insert that might lead to continued association with PSI.  (Somehow I doubt that the court is, in the end, going to want to impose a rule that makes manufacturers disclose to consumers when they change component providers, but perhaps the centrality of the solution to the final product and the pull of trademark expansionism will prove me wrong.)

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