Cascade Yarns, Inc. v. Knitting Fever, Inc., 2015 WL 1735517, No. C10–861 (W.D. Wash. Apr. 15, 2015)
This is another round of an “extensive” lawsuit between the parties, who compete to sell yarn. Relevant here are Cascade’s claims against KFI under the Lanham Act and Washington state law for for false advertising related to the country of origin labels on KFI’s Katia and Mondial yarns. KFI had previously admitted that certain yarns were sold by KFI in limited quantities in 2012 without labels properly reflecting their Chinese origins.
KFI argued that Cascade’s false advertising claims had to fail because Cascade had no evidence of injury, despite its assertion of sales diversion. Cascade argued that it was pursuing a theory of disgorgement, which didn’t require direct injury. To get money damages, Cascade needed to show actual injury; literal falsity leads to a presumption of consumer deception, but not a presumption of damage to the plaintiff when the literal falsity is noncomparative and there are numerous competitors in the market. This principle avoids awarding plaintiffs a windfall that would be punitive rather than compensatory. “The fact that failure to designate country of origin may be actionable under the Lanham Act does not mean that any competitor in the market is entitled to recover.” Thus, the Lanham Act damages claim was dismissed.
In a footnote, the court rejected KFI’s argument that Cascade lacked Lanham Act standing under Lexmark. “Cascade’s allegations of lost profits and damage to its business reputation satisfy the requirements of Article III standing, and as a direct competitor alleging diversion of sales, Cascade meets the prudential standing requirements that its claim fall within the ‘zone of interests’ protected by the Act and that its alleged injuries be proximately caused by the Act’s violation.”
As for the availability of injunctive relief, competitors need not prove injury. “Cascade’s failure to raise a triable issue of fact as to causation and injury does not affect the viability of its Lanham Act claim to the extent that Cascade seeks injunctive relief.” However, Cascade still needed to show the other elements of a false advertising claim.
The court first rejected KFI’s unclean hands defense. Although Cascade admitted to having briefly sold four King Cole yarns that were not properly labeled as to country of origin, that didn’t foreclose its claim for injunctive relief. “Indeed, there is good reason to permit an injunction action to proceed where a monetary action would be barred: in the former case the Court must take into account the public’s interest in being freed from deceptive practices in addition to a litigant’s interest in being compensated where harmed by them.” (Query how this comports with eBay and Winter.)
KFI admittedly mislabeled three yarns when they were first imported in 2012, but they bore corrected labels by the end of 2012, and there was no evidence of further mislabeling. Cessation alone didn’t moot the claim for injunctive relief; the burden is on the defendant to show that its reform is “irrefutable and total,” and injunctive relief may also be appropriate for a terminated but willful violation. There was no evidence of willful violation here. “KFI has provided ample assurance that it will not again sell these three Mondial yarns without properly designating their Chinese origin.” Thus, the court wouldn’t “waste judicial resources in fashioning an entirely superfluous remedy” as to those yarns.
However, there was a genuine issue of material fact as to continued mislabeling of another variety of yarn. A witness admission that it was made in Turkey rather than Italy raised a question of proper labeling. KFI continued to list the yarn on its website “without assurance that any past mislabeling has been irrefutably addressed.” Cascade would be allowed to seek equitable relief from the court (not a jury). The state law claims received the same treatment.