Monday, March 03, 2014

false comparative ads lead to profit disgorgement

General Steel Domestic Sales, LLC v. Chumley, No. 10–cv–01398, 2014 WL 788015 (D. Colo. Feb. 27, 2014)

The Rule 59(e) motion to amend judgment in this false advertising case was denied for want of clear error. The parties, General Steel and Armstrong, compete in the market for steel buildings.

Previous ruling.  Eric Goldman on the TM aspects, where General Steel lost its claims based on defendants' keyword advertising triggered by "General Steel" (which as of this morning seems to continue, and clicking on defendants' sponsored link leads to a page that labeled "industry related legal matters," which seems to mean cases brought against or lost by General Steel; defendants' own loss is as yet unrepresented). 
Defendants argued that the court erred in finding literal falsity from ads that listed “Pre Galvanized Secondary Framing” and “Stainless Steel Fasteners” beneath Armstrong’s logo and didn’t list these features beneath General Steel’s logo.  Armstrong argued that this was literally true because Armstrong includes those features unless customers decline them, but General Steel doesn’t include them unless customers ask.

The advertisements at issue do not draw the fine distinction upon which Armstrong relies. …The clear import of the advertisement is that these features are available in Armstrong buildings, but not available in General Steel buildings. The evidence at trial established that this implication is false because both companies provide these features at additional cost. That these features may be accounted for in Armstrong’s–but not in General Steel’s–initial price quotation does not render the advertisement true, nor does it undermine the Court’s conclusion that both companies provide these features if customers are willing to pay more for them. The advertisement does not use the term “standard” or explain that General Steel customers may also obtain these features.

Another reminder: in comparative advertising, it is important to compare apples to apples. 

Defendants also argued that the court erred in finding that Armstrong was advertising comparatively when it claimed to provide “general steel buildings” and “general steel construction.” This matters, the court noted, because “courts may presume that a plaintiff has been harmed by false comparative advertising that specifically targets its company or brand, but may not presume injury with respect to non-comparative advertising.”  But all the statements on which the court relied for its disgorgement award were on the “May the Best Building Win” webpage, available at a domain name “maythebestbuildingwin.” The first full paragraph of text explained that “[t]here’s really only 2 companies to consider–Armstrong & General Steel.... How do the two finest buildings on the market stack up against one another? Take a look and decide for yourself.”  The court declined to consider statements appearing later on the webpage to be different ads.  In those portions, Armstrong referred to “general steel” buildings and construction.  This merely emphasized its targeting of General Steel.  “Given that the term ‘general steel’ refers to plaintiff General Steel, Armstrong’s claims to provide ‘general steel’ buildings can be understood as a false comparative advertisement in which Armstrong is offering itself as an alternative source of its competitor’s products.”

Finally, defendants argued that the court erred in ordering disgorgement of Armstrong’s profits.  “[A] plaintiff need only establish the defendant’s gross sales of an infringing product, or a product that was falsely advertised, in order to shift the burden onto the defendant to show appropriate deductions from those profits.” Defendants cited Lindy Pen Co., Inc. v. Bic Pen Corp., 982 F.2d 1400 (9th Cir.1993), which stated that the “plaintiff has only the burden of establishing the defendant’s gross profits from the infringing activity with reasonable certainty,” and argued that General Steel was required to show “with reasonable certainty” that defendants’ profits flowed directly from its false comparative advertising. But Lindy Pen continues: “Once the plaintiff demonstrates gross profits, they are presumed to be the result of the infringing activity. The defendant thereafter bears the burden of showing which, if any, of its total sales are not attributable to the infringing activity, and, additionally, any permissible deductions for overhead.”

Here, there was evidence that Armstrong’s internet ads were highly effective, generating tens of thousands of leads; that 90% of Armstrong’s ad budget went to internet ads; that “general steel” was the third most common search term in the industry, “supporting an inference that the May the Best Building Win webpage would frequently appear in the list of organic search results of consumers searching for information regarding General Steel” (note: Eric Goldman may disagree about this!); that Armstrong’s profits rose while it disseminated its false advertising; and that Armstrong persisted in making false statements even after litigation had begun. This was enough to link the false advertising to Armstrong’s profits.

Defendants’ expert supposedly opined that Armstrong’s comparative advertising generated only 7.5% of its leads.  But in fact, he concluded that 7.5% of Armstrong Steel’s traffic was “a result of paid search advertising directed towards searchers using queries related to the General Steel brand.” Since the comparative ads at issue here weren’t part of paid ads, but instead displayed on Armstrong’s own website, that didn’t matter.
Note: one lesson reinforced by this case is that comparative advertising can't be the basis of a successful trademark claim, whether in Smith v. Chanel or online.  False advertising law is the only Lanham Act remedy for unwanted use of a mark by a competitor when that competitor is making comparisons.  But "only remedy" and "weak remedy" are not the same thing.

General Steel Domestic Sales, LLC v. Chumley, No. 10–cv–01398, 2014 WL 788040 (D. Colo. Feb. 27, 2014)

Same case: the district court declined to award General Steel prejudgment interest.  This is discretionary; its purpose is to compensate the wronged party for the lost time value of its money, and should be awarded when it would serve as compensation and when the equities favor the award.  Courts have declined to award prejudgment interest on disgorged profits when a plaintiff failed to show that it would’ve enjoyed those profits absent the unlawful conduct. Here, General Steel failed to establish actual damages, and the award was based on a presumption that Armstrong’s false comparative advertising harmed General Steel plus a finding of willfulness.  Thus, there was no basis for finding that prejudgment interest would be compensatory.

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