Monday, December 08, 2014

A case peppered with TM and advertising issues

United Tactical Systems v. Real Action Paintball, Inc., 2014 WL 6788310, No. 14-cv-04050 (N.D. Cal. Dec. 2, 2014)

UTS sued RAP4 mostly over the trademark PepperBall; the court granted a preliminary injunction based on some of its claims.  Nonparty PepperBall Technologies (PBT), a dominant player in the relevant market, sold irritant projectiles called PepperBalls: “Irritant projectiles are generally small plastic spheres that contain an irritant powder that functions similar to pepper spray [but can be shot from a distance], and are primarily sold to law enforcement and military.”  PepperBall Technologies sold live rounds in a red shell, as well as other projectiles in different colors, such as green marking rounds and clear training rounds.

PBT’s PepperBall mark became incontestable.  It developed the irritant powder, and outside manufacturers assembled it into plastic shells; one manufacturer was Perfect Circle, which made most of BPT’s projectiles for nearly 14 years. More recently, PBT used a company called APON, though it wasn’t clear whether PBT ever sold APON-made projectiles.

PBT ran into money troubles.  Perfect Circle and another company, Tiberius Arms, bought PBT’s loans and formed a new company, Advanced Tactical Ordnance Systems (ATO).  Doing business as Phoenix International, ATO bought “all the tangible and nontangible assets” of PepperBall Technologies at a Uniform Commercial Code foreclosure sale, allegedly acquiring the incontestable PepperBall trademarks, goodwill, business name, and trade secrets.  UTS alleged that ATO ensured a seamless transition, retaining most employees, trainers, and suppliers. ATO thus became the supplier of PepperBall irritant projectiles, with parent company Perfect Circle continuing to manufacture PepperBall projectiles. ATO sold standard live rounds, which were all red, and maximum strength rounds, which were half-red and half-black.

RAP4 is a competitor using marks incorporating LESS LETHAL.  Its projectiles have come from various suppliers over the years, and it generally used orange shells to indicate live rounds.  (Frankly, I would think the industry would want to settle on one universal color for live rounds, to avoid dangerous misunderstandings!)  At one time, RAP4 bought irritant projectiles from SWAT, which RAP4 alleged merged with PBT, after which RAP4 sold those projectiles as PepperBall branded products—the only time it used such branding, according to RAP4.

After the foreclosure sale, RAP4 negotiated with PBT’s former COO for an exclusive dealing agreement for RAP4 to get irritant projectiles from APON, effective April 2012.  In August, RAP4 used its website and email to announce “RAP4 Resumes PepperBall Technologies Inc. Production.”  The announcement said:

RAP4 is proud to announce the acquisition of machinery, recipes, and materials once used by PepperBall Technologies Inc., the manufacturer of Less Lethal Live Rounds that are trusted by law enforcement and military units far and wide. Now we manufacture our Less Lethal Live Rounds directly, on that original machinery, and conforming with the original specifications, to provide our customers with improved quality control uninterrupted supplies. With the inspiring success and service-proven track record of our Less Lethal Launchers, comes the need for high-quality, highly effective less lethal ammunition like that originally manufactured by PepperBall Technologies Inc.

Earlier this year, PepperBall Technologies Inc was liquidated and foreclosed by their creditors. RAP4 acted immediately through acquisition and resume [sic] the machinery, recipes, and materials required to continue production of our Less Lethal Live Rounds. That means we have direct oversight of quality control, and the ability to keep producing those less lethal rounds that have proven themselves as invaluable tools time and again. [....]

With PepperBall Technologies Inc.’s equipment, recipes, and standards integrated into our manufacturing, we will be able to offer even more innovations ... and an uninterrupted supply of the less lethal rounds that our police and military customers need!

The post had pictures of RAP4’s new projectiles, which used red and red-black to indicate standard and maximum strength live rounds. A day later, RAP4 issued “clarifications” stating that “The Original Recipe and machinery to produce pepperballs was acquisitioned by RAP4 and RAP4 is now able to manufacture the original pepperball under the name of RAP4 Less Lethal.” The clarification also acknowledges that “Pepperball Technology is Forclosed [sic]” and “[a]ll rights to the name Pepperball belong to the new owners, which is Phoenix International.”  A few days later, after a C&D from ATO, RAP4 sent out another email and added another statement to its website:

RAP4 Less Lethal Live Rounds are produced by the original OEM manufacturer that once produced for PepperBall Technologies Inc. In 2012 PepperBall Technologies Inc. was liquidated and foreclosed and now PepperBall Technologies Inc. and brands belong to Phoenix International LLC. Because of this reason, RAP4 and original OEM manufacturer have been able to team up and have improved the formula and process for making Less Lethal Live Rounds. Now RAP4 is able to guarantee the highest-quality product and provide continuous availability!
— RAP4 is not associated nor affiliated with PepperBall Technologies Inc. and brands. All rights to the PepperBall Technologies Inc. and brands belong to its new owner.
— RAP4 live rounds are NOT made by the current PepperBall Technologies Inc.

Both ATO and RAP4 received communications from customers and others indicating that they believed that (1) RAP4 had purchased PepperBall Technologies, and (2) RAP4 made and sold PepperBalls. RAP4 allegedly told customers over the phone that it was PepperBall Technologies and that it sold official PepperBalls, and didn’t correct customers’ misunderstandings when they contacted RAP4.

Further developments: A preliminary injunction against RAP4 in Indiana was dissolved on appeal for lack of personal jurisdiction.  ATO stopped selling all-red PepperBall projectiles in late 2012.  UTS allegedly acquired ATO’s assets, including PBT’s assets.  UTS, operating as PBT, now sells half-red, half-white PepperBalls as well as half-red, half-black ones.  RAP4 continued to sell its PAVA Less Lethal projectiles, and added Peppershot Less Lethal projectiles.

On the Section 32 and counterfeiting claims, RAP4 contested whether ATO validly acquired the mark from PBT or UTS validly acquired the mark from ATO.  UTS didn’t submit a written assignment from PBT or from ATO.  Though assignments recorded in the PTO are prima facie evidence of execution, they aren’t conclusive; the Assignment Branch of the PTO doesn’t examine substance.  Without a written assignment of goodwill, could UTS be the “registrant” of the incontestable mark?  Some courts presume that marks presumptively pass to a buyer, absent contrary evidence. Others look for a writing, to ensure against accidental assignment, clarity of rights, and predictability/certainty of ownership.  Given this uncertainty, there were too many unresolved issues to find that UTS was likely to show that it was the “registrant” for purposes of Section 32/counterfeiting claims.

Section 43(a) claims don’t require a registration, only commercial injury.  Commercial injury is generally presumed “when defendant and plaintiff are direct competitors and defendant’s misrepresentation has a tendency to mislead consumers” (citing the 9th Circuit’s decision, with a see also for Lexmark).  Given the competition between the parties, UTS could sue under §43(a).

Turning first to false association: RAP4 argued that “pepperball” is generic, submitting “dozens of pages of online printouts from newspaper articles, online forums, etc., where people have used the terms ‘pepperball,’ ‘pepper ball,’ and ‘pepper-ball’ amongst other things to refer to irritant filled projectiles.”  Incontestability is no bar to a genericity finding, but registered marks are entitled to a strong presumption of validity.  (Query how this works where the court has just found that UTS can’t proceed under §32 at this point.)  The court found this issue “perplexing,” given evidence that other manufacturers used “Pepper Balls” to identify irritant projectiles.  RAP4’s evidence was “compelling” but “limited,” and some of it could be construed as referring to PepperBall branded projectiles in particular.  There wasn’t enough evidence to find genericity yet.

This wasn’t a “traditional” confusion case.  UTS alleged that RAP4 used the PepperBall mark in announcements, metatags, and “hidden text” on RAP4’s website.  RAP4 argued that its use was nominative, while UTS argued that RAP4 was using the mark to speak about its own products, not UTS’s.  The court correctly noted that New Kids also applies where “the defendant’s ultimate goal is to describe his own product.”

Starting with the last announcement, RAP didn’t falsely suggest it was sponsored or endorsed by the trademark holder.  However, it “implicated the source-identification function by essentially implying it was the new source of PepperBalls.”  The evidence showed confusion (note that the nominative fair use test does not have actual confusion as an element; New Kids specifically declined to consider evidence of actual confusion).  UTS cited a number of consumers writing things like: “I have received an e-mail from RAP 4 stating they are taking over your business. Is there any information you can give me regarding this email and the training and equipment we have been purchasing from you over the years?” and “What do you know about Pepperball going out of business and being purchased by another company called RAP4? Is this true and, if so, how would it affect us?”  And here we get to the incoherence of “misleadingness”: Tabari and New Kids involved truthful uses that allegedly implied sposnorship, but “[u]nlike Toyota Motor Sales and New Kids, UTS alleges that RAP4’s use of the PepperBall mark was misleading.”  Note: the only way this makes any sense is to read “misleading” to mean “false,” in that the information conveyed that these were the “real” PepperBalls was not true; it’s ordinarily unproblematic to say that facially true claims can be misleading, but New Kids takes that implied falsity off the table for a certain class of uses.

It was possible for RAP4 to refer to its own projectiles without using the PepperBall mark; even if it was using the mark to refer to its arrangements with APON and their purported connection to PepperBall products, “there is considerable dispute as to whether RAP4’s statements were true, even without considering the underlying implications of those statements.”  The court concluded that this was more false association than traditional trademark infringement, but found confusion to be likely.

The issue with respect to metatags and “hidden text” was more complicated.  After the Indiana TRO and after RAP4 removed the announcement, it still used the metatags “Pepperball Projectiles,” “pepper ball,” “pepperball,” “pepperballs,” and “Pepperball” on its website, as well as white text on a white background including “pepperball.”  (This is a terrible idea. Search engines ignore it, but courts don’t. There is no upside.)  UTS didn’t provide evidence about how these functioned, and RAP4 didn’t make any arguments either.  Brookfield blessed the initial interest confusion, but recently the Ninth Circuit warned against finding confusion “when a consumer is never confused as to source or affiliation, but instead knows, or should know, from the outset that a product or web link is not related to that of the trademark holder because the list produced by the search engine so informs him.” Network Automation.  Using Sleekcraft, the court found serious questions going to the merits as to infringement from these uses.  Notably, the court found that intent favored UTS because RAP4 used the mark with knowledge that it was another’s trademark.  (Also of note: the court still used “serious questions going to the merits” as an alternative standard for granting preliminary relief, even after Winter.)

False advertising: RAP4’s announcements connected it with PBT and the PepperBall projectiles.  The literally true statement “PepperBall Technologies Inc was liquidated and foreclosed by their creditors,” combined with other statements, including remarks about RAP4’s “acquisition” of PepperBall’s equipment and technology, was likely to mislead consumers into thinking that RAP4’s new projectiles had the same qualities and key characteristics as PBT’s because they came from the same source.  RAP4 argued that its subsequent announcements and disclaimers showed no intent to palm off.  But even the disclaimers had a context; they said that RAP4’s Live Rounds “are produced by the original OEM manufacturer that once produced for PepperBall Technologies Inc.” The implication was that RAP4’s projectiles were, “for all intents and purposes, PepperBalls,” and RAP4 implied it had “improved” the PepperBall formula and quality control, but there was no evidence of this.

The other clarifications were no better. “It has come to our Attention that there has been some misinformation and confusion in relation to our acquisition of PepperBall Technology” insinuates that it had acquired PBT, as did the post title, “Clarification About RAP4’s Acquisition of PepperBall Technology[.]”  RAP4 said it had acquired “[t]he Original Recipe and machinery to produce pepperballs” even as it disclaimed rights in the name.

UTS showed that these statements were likely to deceive by presenting evidence from actually confused customers.  RAP4 argued that a survey was required, but intent to mislead can justify a presumption of likely deception.  (Given the clarity of the confusion evidence here, it might have been stronger to rely on the evidence of actually confused consumers to extrapolate to a significant number.)  The court found UTS’s evidence of intent compelling, given testimony that a key player knew that the use of “acquisition” was confusing.

Deception about RAP4’s ability to produce PepperBall quality projectiles, or better, would be material, given PBT’s strong reputation for quality and reliability.

As for likely injury, the Ninth Circuit has held that the risk of future harm to a competitor, plus the interest in consumer protection, means that competitors need not prove injury for a §43(a) violation.  But anyway, UTS showed likely injury: it sold PepperBall projectiles, and if consumers were misled, sales were likely to be diverted.

Results on the California UCL and FAL claims tracked the federal claims.

UTS also alleged willful infringement of its red and red/black trade dress.  RAP4 rejoined, sensibly, that “because irritant projectiles are used in high-stress crowd-control or military situations, a user needs to be able to quickly distinguish the ‘live’ projectiles from other types, and live projectiles are generally made ‘red’ in color so the users can distinguish them from the other kinds.”  While UTS had the burden of showing nonfunctionality, RAP4 provided evidence that red had utilitarian advantages; PBT’s training materials showed that color was used to signal product features.  RAP4’s witness testified that in “[r]ecent history, our clients do require that the colors be in red for live-fire for reason that they have already successfully train[ed] their personnel to identify by the colors used,” and that other manufacturers also used the color red and/or reddish-orange to identify live pepper-filled rounds.  UTS argued that one specific agency only asked for red so it could buy from US manufacturers, but it didn’t provide evidence for that claim, and even if true, other customers also required red. The Department of Justice even says “distinctive markings and colorings on the different shells would help to more reliably distinguish lethal from less lethal [munitions].”

What about alternative colors used by RAP4 and other manufacturers, like orange/white?  UTS submitted an email indicating that RAP4 selected the red and red/black color scheme “to compete with Pepperball[.]”  However, UTS didn’t show that other color schemes were salable to law enforcement or other customers who’ve come to rely on red. UTS argued that “the only advantage red and red/black projectiles offer Defendants is that it makes it easier for them to sell to departments already trained to use UTS’s system,” but that is functionality.  RAP4 would be at a commercial disadvantage if it couldn’t use red to identify live rounds, and red/black to identify extra strength rounds. 

PBT’s training materials, now UTS’s also constituted evidence of advertising utilitarian features, which was strong evidence of functionality.  The expense of manufacture was neutral, but in total UTS failed to meet its heavy burden of showing that red served no purpose other than identification.

UTS also alleged trademark dilution.  (Seriously?)  UTS failed, of course, to show federal fame.While UTS alleged that it and the prior owners of the PepperBall mark “have spent millions of dollars and fifteen years publicizing the mark and selling the projectiles at issue in this litigation with the PepperBall trademark,” it didn’t provide specific evidence of how that money was spent or when the mark became famous.  It didn’t explain why selling 23 million projectiles at at least $1 each would make the mark recognized by the “general consuming public.”

Trade secret misappropriation: UTS argued that RAP4 contracted with Conrad Sun knowing that he was a former PBT officer and picked his brain, but Sun wasn’t party to the litigation.  UTS argued that RAP4 misappropriated the formula/recipe for the projectiles; UTS’s customer list; and “market leads and market research.”  UTS didn’t show that the last category was proprietary, or that RAP4 possessed or used this information, or even that it was defined with sufficient particularity.  A client list can be a trade secret, but UTS didn’t provide information about how its lists were developed or how RAP4 misappropriated them.

As for the formula/recipes for the projectiles, PBT did develop a formula it considered secret and proprietary. Even its manufacturer Perfect Circle wasn’t allowed to know the formula other than what was on the material safety data sheets. UTS’s evidence indicated that secrecy was maintained throughout the foreclosure sale, and that the proprietary nature of the formula was critical in the foreclosure decision.  RAP4 argued that UTS failed to take reasonable efforts to protect secrecy: the contents of the powder were listed on the material safety data sheets posted on PBT’s website, and the recipies were in PBT’s patents.  Given that UTS didn’t dispute the existence of the patents, the court found no likely success on the merits.

Irreparable harm for the §43 claims: UTS relied heavily on presumptions of harm rejected by Winter, eBay, and Herb Reed.  However, lost control over reputation and damage to goodwill could be irreparable harm, even though speculative injury isn’t sufficient.  UTS established likely irreparable harm “because without such relief continued loss of control over its business reputation is likely.”  Several of the announcements were still online and uncorrected, and UTS was still receiving calls indicating confusion.  Ongoing confusion “is likely to contribute to loss of control over UTS’s reputation and goodwill.”  (If lost control is irreparable without more, then likely confusion is irreparable harm because likely confusion means lost control.  But the Ninth Circuit told us not to collapse the inquiries!)

UTS argued that it was being harmed because RAP4’s projectiles were inferior. This was hotly disputed, but UTS submitted a picture of leaking projectiles allegedly from RAP4.  If accurate, this evidence supported UTS’s lost control theory. 

So, UTS showed irreparable harm due to lost control over its reputation and goodwill.

Though RAP4 showed evidence that the prior injunction harmed it, that was its own fault, and it didn’t show that a new injunction would cause similar harm. The public interest was also served by enjoining confusing uses and misleading advertising.

The court therefore preliminarily enjoined the defendants from using “PepperBall” or “PepperBall Technologies” on or to refer to RAP4 or RAP4’s irritant projectiles; shipping, selling or filling orders for PepperBall projectiles; making any false statements, “directly or indirectly,” about UTS, ATO, PBT, or Phoenix International; and making any false statements about the availability of “authentic” PepperBall projectiles from UTS or PBT.

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