Wednesday, May 28, 2014

publicizing a falsely obtained injunction can be false advertising

Peek v. Whittaker, 2014 WL 2154965, No. 2:13–cv–O1188 (W.D. Pa. May 22, 2014)
The court sets the stage: “This case is the latest skirmish in the on-going battle between two carpet-cleaning rivals, and is the federal court spill-over of their hotly-contested Pennsylvania state court lawsuit.”  Extremely briefly: Whittaker and his company sued Peek (et al.) in state court.  Peek’s coventurers were former Whittaker employees, and Whittaker initially obtained a preliminary injunction against Peek, which Whittaker then disseminated in the carpet-cleaning world.  When discovery had taken place, the state court dismissed trade secret claims against Peek as without foundation (and dismissed claims for violation of restrictive employment covenants because they had by then expired).
Among other things, Whittaker’s computer expert at the state-court PI hearing testified that Stephenson, one of the state-court defendants, had connected hard drives to Whittaker’s computer network that were capable of downloading all the information in Whittaker’s customer databases.  Plus, Whittaker argued that the state-court defendants were attempting to use chemical formulas for carpet-cleaning fluids, and the identity of the manufacturer of those fluids, which were trade secrets, as was the identity of Whittaker’s equipment manufacturer (with which the state-court defendants had discussions).  On this basis, the state court granted a PI on the grounds that the state-court defendants “engaged in a conspiracy to unlawfully utilize confidential information and trade secrets obtained while [state-court defendants] Stephenson and Offutt were employed by [Whittaker Co.] and use this information to the advantage of all defendants by engaging in a business competing with [Whittaker Co.].”  The PI was appealed and affirmed.
After substantial discovery, the same judge dismissed the state-court complaints, finding “no evidence that any defendant obtained a compilation of [Whittaker Co.’s] customers and customer data.” As it turned out, Whittaker admitted that Stephenson’s laptop didn’t have any access to the customer databases.  And those external drives contained nothing that could be “considered to be trade secret or confidential,” nor did anything else he took.  The identity of Whittaker’s fluid manufacturer was well known, not a trade secret, and the formula belonged to the manufacturer, not to Whittaker, which didn’t even know the formula.  With no evidence of any trade secret misappropriation, the complaints failed; the state-court judge observed that “the record presently before the [c]ourt is much different that [sic] the record upon which the [c]ourt relied in issuing its preliminary injunction.”
Peek (et al.) then sued in federal court, alleging that the initial state-court claims were knowingly false when made.  Peek also alleged that Whittaker sent copies of the PI as soon as it was issued to third-party carpet manufacturers and customers to persuade them not to do business with Peek, and successfully persuaded the fluid manufacturer not to sell to Peek’s company.
The court sustained plaintiffs’ Dragonetti Act (codified claim for abuse of process) and common-law abuse of process claims in part.  While there was probable cause to proceed on the anticompete clause in the relevant employment contracts—there was evidence that a former employee did seek to breach his agreement, and so the Dragonetti Act claim based on the lawsuit against him failed—that didn’t make all the state-law claims immune.  The other plaintiffs (Peek, never an employee, and the company Peek formed) could still proceed, since all of Whittaker’s claims against them were based on trade secret/misappropriation allegations.  And those were the ones that allegedly always lacked probable cause.  The complaint also sufficiently alleged an improper purpose, interference with plaintiffs’ ability to establish a competing business.  Because the legal analysis differed a bit with the common law abuse of process claim—the question was whether the legal process in question was used “primarily not exclusively to achieve a goal unauthorized by the procedure in question”—even the existence of probable cause wasn’t enough to defeat it, even as to the former employee.
Lanham Act false advertising: “While Plaintiffs’ claim may not be a textbook Lanham Act cause of action, the Court has not found, nor been presented with, any case law suggesting that Section 1125(a) contains any sort of prohibition or limitation that would preclude this false advertising claim.”  Plaintiffs alleged that defendants’ knowingly false statements about their own products—that they, and information about their origin and manufacture, were trade secrets that had been misappropriated—were the basis for the PI.  Defendants then publicized the PI, which included factual recitations based on these allegedly false statements, to customers and third party businesses.  Plaintiffs further alleged that this dissemination did in fact deceive recipients and influence their purchasing decisions.  Though Section 1125(a) does not have “boundless application,” this was plausibly “the type of unfair trade practice contemplated by the text of the statute.”   
Comments: (1) For once, I don’t see a Dastar problem, since the falsity wasn’t in the claim of origin but the claim of trade secrecy; even if you don’t think that’s a statement about the characteristics of defendants’ goods/services, it does seem to be a statement about plaintiffs’ commercial activities, also covered. (2) Interesting interactions here with the line of cases saying that "we sued X for patent infringement" isn't generally actionable as false advertising.  By sticking so closely to abuse of process, plaintiffs seem to have avoided that caselaw.
State law unfair competition claims, which tracked the Restatement (Third) of Unfair Competition definition, also survived.  Here the Restatement does require statements about the actor’s own goods, services, or commercial activities, but the court considered this “nearly identical” to §43(a)(1)(B) anyway.
The fraud claim was dismissed because plaintiffs themselves didn’t receive the misrepresentations or rely on them.  Under Pennsylvania law, the plaintiff must be the one who detrimentally relied to bring a fraud claim.
The court ended by reiterating that it was taking the facts as alleged in the light most favorable to plaintiffs; all depends on factual development, which if history is any indication will be extensive.

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