Friday, August 07, 2015

Another circuit agrees that Dastar-barred claims can't be repled as false advertising

Kehoe Component Sales Inc. v. Best Lighting Products, Inc., --- F.3d ----, No. 14–3347, 2015 WL 4635824 (6th Cir. Aug. 5, 2015)
Best asked Kehoe (“Pace”) to make specialized lighting products for Best.  After Pace made enough units to fill Best’s product orders, it used the same molds to make thousands of additional units of exactly the same products. Pace then sold those “cloned” products under its own name to several of Best’s customers.  Unsurprisingly, a lawsuit resulted.  The district court found Pace liable to Best for misappropriation of trade secrets under Ohio law, “reverse passing off” and false advertising in violation of the Lanham Act, breach of contract, tortious interference, conversion, and breach of warranties, and awarded compensatory and punitive damages, attorneys’ fees, and injunctive relief.  The court of appeals overturned everything but the breach of contract and tortious interference liability.
Before Best contracted with Pace, Pace had never manufactured any emergency lighting products, so Best’s founder spent a significant amount of effort instructing Pace on how to make the molds necessary to make the specific products that Best sought.  At first, there was no contract barring Pace from competing with Best. However, in 2004, he emailed Pace’s president complaining that Pace not only had begun selling products that were identical to the products that it made for Best, but also that Pace had begun selling them to Best’s established customers.
In 2005, Best then complained that some products Pace made for it were defective.  The parties negotiated and Pace transferred some of the molds used to make the products in question to Best.  In 2006, Best refused to pay for a substantial number of products that Pace had delivered to it, and Pace stopped shipments to Best. The parties then negotiated a one-year supply agreement under which Best agreed to pay its outstanding debt to Pace and to purchase a minimum of $7 million worth of products from Pace annually.  Pace agreed to a variety of provisions, including to warrant the quality of the goods, not to “use any [molds] owned by Best other than for the manufacture of products for sale to Best,” to “assign[ ] to Best all designs and intellectual property ... for products developed or to be developed at or by Pace for Best,” and neither to “sell emergency lights or exit signs nor ballasts, nor solicit sales of these items to any party in North America without Best’s prior written consent.”
Pace received several purchase orders for “cloned” products from North American companies before this agreement came into effect, and it shipped products to fill these orders after the agreement came into effect.  Best continued to complain about the quality of Pace products, and by 2008, Best told Pace that “we are at a point where we both know we will not be doing any more business.” When the relationship ended, Pace had all the molds that had been used to manufacture both Best’s products and the cloned products, and Best owed Pace almost $900,000 for products delivered but not yet paid for.
In 2008, Pace sued Best for breach of contract for failing to pay. Best requested a setoff of damages for breach of warranty and counterclaimed for breach of contract, tortious interference, misappropriation of trade secrets, conversion, and fraud. The case was ongoing when, two years later, Pace sued Best for misappropriation of trade secrets and tortious interference.  Best counterclaimed with its existing counterclaims and also counterclaims under the Lanham Act and for patent infringement (the last of which was dropped).
After finding for Best (though finding it liable for breach of contract), the district court awarded Best roughly $1.1 million in compensatory damages, $200,000 in punitive damages, and $850,000 in attorneys’ fees, as well as an injunction barring Pace from making the cloned products and from using or referencing products that “originated with Best” in its marketing materials.
First, the court of appeals found that the trade secret claims were time-barred. Ohio’s Uniform Trade Secrets Act (OUTSA) requires that an action must be commenced within four years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered. A continuing misappropriation constitutes a single claim.  Best learned of the sales to Best’s customers in August 2004, but didn’t counterclaim under OUTSA until October 2008.  The district court held that Pace misappropriated anew when it brought products to market after 2007.  But this was an improper “property-based theory of trade-secret misappropriation, under which each successive use of a trade secret is an additional wrong.”  The limitations period runs from discovery/reasonable discovery, so the claims were time-barred.
The district court also erred by finding that Pace engaged in false designation of origin via reverse passing off, because of Dastar.  The district court reasoned that Pace misrepresented its cloned products by stating that they originated with Pace rather than with Best. But the cloned products did originate with Pace. “Only by denominating the cloned products as ‘Best’s products’ could the district court find that Pace was misrepresenting someone else’s products as its own.” But Dastar barred that interpretation of “origin.” (Citing Mark P. McKenna, Dastar’s Next Stand, 19 J. Intell. Prop. L. 357, 374 (2012) (“A trademark cannot be taken to indicate anything about the origin of the intellectual creation embodied in that good.”)  “Thus, reselling goods that have been manufactured by someone else carries different consequences than making your own copies of those goods and marketing them under your own mark.”
Best argued that it “commissioned or assumed responsibility for (‘stood behind’) production of the physical product,” Dastar.  But that assumed a trademark owner who allowed the use of its mark on a product, and Best never claimed to own a relevant trademark in the Pace-branded cloned products.  More fundamentally, Best neither “commissioned” nor “assumed responsibility” for the cloned products. “As tangible objects, the cloned products are in every respect Pace’s alone—Best would much rather that they never have been produced at all.”  Even assuming that Best’s cited cases, which allowed a reverse passing off claim when a defendant markets another’s product that’s been only slightly modified and then relabeled, survived Dastar, that wasn’t the situation here.
And here’s some useful language, though it’s sad that this needs to be said: “To the extent that the district court’s liability finding stemmed from an intuition that the Lanham Act prohibits wholesale copying, that intuition is misplaced. Protection against imitation and mimicry ordinarily is found in patent and copyright law, not in the Lanham Act.” It doesn’t matter whether Best created the market for these goods.
The false advertising claim failed for the same reasons.  The district court found that Pace’s use of “Best products” in Pace’s own catalogs was a misleading representation of the products’ origin and thereby violated §43(a)(1)(B).  Even if false advertising were an appropriate head of liability, we already know that “origin” only refers to the maker of the tangible object under Dastar.  But regardless, §43(a)(1)(B) covers a false “designation of origin” or other factual misrepresentation about “the nature, characteristics, qualities, or geographic origin” of the goods or services. Geographic origin wasn’t at issue, and a misrepresentation about the source of ideas embodied in a tangible object “is not a misrepresentation about the nature, characteristics, or qualities of the object.”  The characteristics of the good itself—its properties or capabilities—must be implicated.  The only falsity here was the misrepresentation that Pace, rather than Best, was the intellectual origin of the products, and that’s not enough.
However, the court of appeals affirmed the finding of breach of contract, including breach of a noncompete clause.  Pace retained the molds pursuant to its valid lien for unpaid deliveries of products, so it wasn’t liable for conversion. But it was liable for tortious interference with established business relationships and also tortious interference with business expectations.  Pace’s breach of confidence—coupled with the breach of a specific contractual promise intended to shore up that confidence—was a sufficiently “improper” means of competition to give rise to liability for tortious interference.
Remand for this and an issue about the breach of warranty counterclaims; the court of appeals emphasized that the district court was not barred from awarding “the damages and fees (including punitive damages and attorneys’ fees, to the extent that they are available) merited by the parties’ conduct.”

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