Monday, September 21, 2015

A pox on both their steel buildings: unusual copyright and false advertising rulings

General Steel Domestic Sales, LLC v. Chumley, -- F. Supp. 3d --, No. 13-cv-00769, 2015 WL 5353080 (D. Colo. Sept. 15, 2015)
A bizarre copyright fair use ruling mars this iteration of this long-running, bitter dispute between the parties, who compete to sell prefabricated steel buildings, while its discussion of naked SEO raises a lot of questions, not least for SEO companies.
General Steel briefly employed Chumley, who then founded defendant Atlantic Building Systems.  After Chumley lost to a UDRP, he registered, which General alleged contained defamatory content.  Chumley promoted the site through SEO, creating “hundreds or thousands of placeholder websites that consist primarily of links containing variations on the name ‘General Steel,’ all of which link back to or to web pages belonging to Armstrong.” The prominent place of the site in search results for “General Steel” allegedly discouraged potential General customers. Likewise, Chumley allegedly purchased ads that displayed when a user searched for “General Steel” or its variants.
Chumley also allegedly began calling General’s customers, posing an investigator with the Colorado Attorney General’s Office and inviting the customers to file complaints against General. And he allegedly sent letters to General’s customers from the “Consumer Advocacy Alliance – General Steel Investigation Unit,” a fictitious entity, to the same effect.
General sued for false advertising, violation of ACPA, libel, unjust enrichment, civil conspiracy, and misappropriation of trade secrets.
Armstrong counterclaimed for false advertising based on various factual claims General Steel made about itself and copyright infringement based on General’s uses of Armstrong’s logo, including a modified version that replaces the phrase “Armstrong Steel” with the phrase “Fraudulent Steel.” General also allegedly used ads showing Armstrong’s logo and reading “buy an Armstrong Steel building!” that, when clicked, redirected to General’s website.  Why the latter conduct isn’t straight-up trademark infringement, obviating any need to fool around with copyright, is unclear to me.
General sought summary judgment on Armstrong’s counterclaims.  As to false advertising, Armstrong challenged various claims by General: statements that General was a “manufacturer” of steel buildings, that it has been in existence for more than 50 years, that it supplied steel to the U.S. military during World War II, that it had a “history of 100% customer satisfaction” and “zero unresolved customer issues,” and that it made false statements about Armstrong.
The allegedly false blog posts and pay-per-click ads containing most of these statements were not created by General itself, but by a SEO company called JEMSU, whose employees or contractors wrote the text with backlinks to General’s website, trying to appear to be legitimate, independent sources of content about General.  The undisputed false statements include statements that General manufactures steel, steel buildings, and products like automobile rims (in fact, General manufactures nothing and only serves as a seller of others’ products); that it has a storied history dating back more than 50 years (when, in fact, that history belongs to a different entity with a similar name); and so on.  General argued that it couldn’t be responsible for what JEMSU, an independent contractor, did, but the court found a genuine issue of material fact about whether JEMSU was General’s agent.
General argued that, beyond giving JEMSU instructions about not identifying General as a “manufacturer” in the written content, it deferred entirely to JEMSU’s expertise and exercised no control over how JEMSU proceeded to perform the work.  But there was evidence both of the ability to exercise control and of its actual exercise.  JEMSU’s principal stated in deposition that, if asked by General, JEMSU “could … have put prohibitions on what [JEMSU] could publish about them.” JEMSU currently submits the content it intends to post on General’s behalf to General for approval prior to posting, and General could have but didn’t request such review earlier. After Armstrong filed its counterclaims, General requested that JEMSU remove certain content it had posted on General’s behalf, and JEMSU did so. After General discovered that a JEMSU employee had written false content about General manufacturing “steel rims” for vehicles, General “told [JEMSU] that they needed to evaluate everything that [the JEMSU employee] had written” and rewrite it if necessary.  General hired JEMSU to achieve one goal: raising General’s search engine profile, arguably making it like a master who hires a full-time cook (who is the master’s agent despite having moment-to-moment autonomy).
There was also a genuine dispute of fact about whether General granted JEMSU the authority to publish the false content.  General argued that it told JEMSU that it could write anything that was truthful, but not refer to General as a manufacturer of buildings.  One of JEMSU’s founders testified that he remembered thus, but that General never informed them that JEMSU should not refer to General as a manufacturer, or otherwise placed any limitations on the content JEMSU would create.  A jury could find that General simply told JEMSU to “have at it,” which means that JEMSU’s posting of false information could be within the scope of the authority delegated to it.
General then argued that the false statements weren’t “advertising” because the content was never intended to be read by humans.  Thus, it failed to meet the “for purposes of influencing consumers to buy” and “disseminated sufficiently to the relevant purchasing public” elements of the classic Gordon & Breach test for “commercial advertising or promotion.”  (Query: if the content was only meant to affect search engines’ algorithms, and if it worked—something not at all discussed by the court—then doesn’t this mean that search engines are deeply failing in their mission?)
The court disagreed.  JEMSU’s content wasn’t arbitrary or utterly irrelevant to General’s operations – “for example, it does not consist of links to General’s website embedded in randomly-generated sentences, paragraphs from ‘Moby Dick,’ or even portions of generic, neutrally-phrased encyclopedia articles about the history and manufacture of steel.”  With some humorous exceptions, JEMSU created materials that were intended to appear to be “legitimate news articles, reports, or testimonials about General and that frequently contained praise for General.”  (Making a separate falsehood, and one also violating FTC guidelines, that these articles represented independent assessments of General’s goods and services.)  E.g.:
“General steel has you covered”: “I wish I still had a picture of the fifty year old grain silo that general steel [linked] built for my grand daddy back when he was running the family farm. You could put that picture up to a picture of a grain silo built today and I tell ya, you’d be hard pressed to find a difference between the two...Most people don’t believe me but I tell them that general steel just knows their stuff and sometimes that is all you need to have a quality product that lasts and lasts....”
Other posts claimed to be from a CEO of an auto manufacturing company; a purchaser of wheel rims; a captain of a US Navy ship (this article appeared on “Everyday Mommy,” a website whose tagline is “Being a mom is a choice, and a full-time job!”); a writer offering advice to small airports that needed hangars; etc.  The articles were designed to promote General and create positive associations between it and quality products.  “The ultimate purpose of the testimonials was to influence the algorithms to reflect the quantity and quality of favorable comments for the benefit of the ultimate consumer,” and that was promotion.  (Compare the function of press releases.)
And then the court makes a weird swerve, asking whether the promotion “reached the ultimate consumer.”  Most ads are unread; most commercial mail is tossed out; people mute or skip TV commercials or go to the bathroom while they’re on; there’s even good evidence that our eyes skip over banner ads so well that most of us don’t even process their existence.  Dissemination is easily measured; reception not so much—very few plaintiffs would be able to produce evidence one way or another about that.  And there’s really no reason to try to figure out how many people read advertising that attempted to reach lots of them; it’s the attempt that makes it advertising.  But the court was swayed by the argument that General “never intended any human being to read the material JEMSU posted,” only search engine algorithms.  (Again, I’d point out that this constitutes a separate act of false advertising, and that would have also reached any consumers who searched for General Steel.  In addition, to the extent that the strategy succeeded, snippets would also show up in search results, containing the words of praise for General Steel.)  The record didn’t show that there was more than an “incidental” amount of traffic to the JEMSU pages. 
In Sports Unlimited, Inc. v. Lankford Enterprises, Inc., 275 F.3d 996 (10th Cir. 2002), dissemination of a document to between two and seven individuals all associated with the same project was insufficient, as a matter of law, to constitute “advertising or promotion in the industry” under the Act, particularly when there was evidence that the plaintiff bid for as many as 150 jobs per year. A plaintiff must show “some level of public dissemination of the information.”  Though I’d read “dissemination” to focus on the defendant’s efforts, the court found that Sports Unlimited meant that “a dissemination of information must reach some numerically-significant quantity of actual or potential customers of the parties’ products.”  The record didn’t show how many actual or potential customers saw the JEMSU pages.  “It is possible that the visitors reached the pages as a result of an internet search for information on steel buildings, but it is just as plausible that that they had no interest in steel buildings and arrived at the pages due to a coincidental search -- say, for information about navy battleships or the whereabouts of a high school classmate with the same name as a JEMSU article’s ostensible author – or due to a typographical error.”
Armstrong argued that literal falsity meant that it didn’t need to show any actual deception, which was true but not relevant to whether JEMSU’s posts were “advertising.”  Thus, General won summary judgment.
What about the pay-per-click ads?  One ad read “The #1 Steel Building Manufacturer! Call Toll Free: [phone number].” It was undisputed that General was not a “steel building manufacturer.”  Again, the record suggested that General reviewed this ad text and could be held responsible for it.  This part of the false advertising claim proceeded.
Armstrong also challenged statements made directly by General: (i) a graphic reading “Awarded Best in the Industry 2007 –present,” when, in fact, no such award exists; (ii) a statement that General has a “customer service track record of zero unresolved customer issues since the company was established”; and (iii) a statement that “No other steel building company can compete with our company’s history of 100% customer satisfaction.” In fact, General has been the subject of numerous complaints to the Better Business Bureau and has been sued by customers some 20 times.

General argued that these statements were all puffery or unfalsifiable.  The court agreed as to “Awarded Best in the Industry,” “as no reasonable consumer would rely on such an assertion without first inquiring further into the nature and credibility of the entity granting the award.” (Citing Hackett v. Feeney, 2011 WL 4007531 (D. Nev. 2011) (a boast that a particular theatrical performance was “Voted #1 Best Show in Vegas,” when no such “vote” ever occurred, was mere puffery)). But “zero unresolved customer issues” and “[a] history of 100% customer satisfaction” were specific, measurable claims that could be evaluated as true or false. Their truth could be verified or falsified by finding out whether there were examples to the contrary.  (But this wasn’t too exaggerated to be believable?)
General argued that one could read the words various ways to make them true: that General considered customer complaints “resolved” even if the customer did not, or that a customer could be “satisfied” in some respects even if infuriated in others. That wordplay “does violence to the ordinary meanings of those terms as they would be understood by reasonable consumers.” At least, those claims meant that every customer was on balance satisfied with their transactions, and that any customer encountering a problem with General’s performance was ultimately able to reach a mutually-acceptable resolution of the issue.  Given the evidence of falsity, General couldn’t win summary judgment on this ground.  (Intriguingly, the court didn’t require any evidence about how many potential customers visited General’s website.)
General then argued that Armstrong couldn’t show damages.  A presumption of injury and causation is only appropriate when a defendant’s false advertising directly compares the parties’ products.  Armstrong might be only one of many competitors; they couldn’t all seek the same money damages, but a presumption of injury for each one would allow that.  Without any other evidence, Armstrong wasn’t entitled to money damages.
Copyright infringement: Armstrong alleged that General infringed its copyright in two ways.  First, General’s website had an “e-brochure” warning of unsavory techniques by competitors.  On the left side, a column read “IS THIS THE OTHER STEEL COMPANY?” and showed an image of a laptop computer displaying a shield logo with the words “FRAUDULENT STEEL” above a yellow four-pointed star on an orange background.

Second, at least one JEMSU-created blog had an ad, “Buy an Armstrong Steel Building!,” accompanied by the actual Armstrong “shield” logo, a photograph of a building, and box reading “click here for more information.” The ad led to General’s website, not to Armstrong’s.
General argued that its use “FRAUDULENT STEEL” was fair use, but the court denied it summary judgment on that ground.  First, General used most of the elements of Armstrong’s mark – “the shape, color, and graphical elements are essentially identical between Armstrong logo and General’s version of it, as is the use of the word ‘steel.’”  This reasoning is silly, because “fraudulent” changes the overall impression so much that the similarities only evoke the original; also, this reasoning shows the danger of giving copyright in small works.
Second, the purpose of General’s use was not to comment or criticize the mark itself, but rather to criticize Armstrong, which isn’t fair. This reasoning is much worse; it is certainly transformative to use a symbol of an entity to criticize that entity.  Prince v. Cariou and Green Day, among others, don’t even require the transformative content to comment on the original; commenting on the entity that has chosen this image as its logo is far more clearly within the scope of transformative fair use.  See, e.g., Katz v. Chevaldina, (11th Cir. Sept. 17, 2015) (use of unflattering photo to criticize subject of photo was fair use). The obviously censorial motive here, having nothing to do with copyright’s intended incentive function, makes the manipulated logo a no-brainer fair use.  And, of course, this is what comes of using copyright to do trademark’s job—trademark parody doctrine easily understands that mocking a signifier can mock the signified.
It’s notable that the court says nothing more about the other factors, such as the nature of the work (a commercial logo, with little need of copyright’s incentive function) and the effect of the use on the market for the copyrighted work (zero).
The allegedly deceptive use of the unmodified logo is more troubling, though the harm, again, is really trademark harm, and so the stated reason for denying summary judgment is badly wrong.
General argued that it lacked sufficient control over JEMSU, but—without diving into the copyright-specific twists that secondary liability has taken—the court denied summary judgment on the basis of the reasons given above. 
Armstrong then moved for summary judgment on General’s claims against it.  False advertising: the site contained statements that allegedly harmed General, such as false statements that the website is “by consumers for consumers” and that much of the negative content came from actual General customers and false or misleading statements about General’s customer relations. 
General also alleged that letters sent under the name of the “Consumer Advocacy Alliance” contained false statements about the sender’s identity and about General’s involvement in a trial. Likewise, Armstrong sales employees allegedly made telephone calls to General’s customers, falsely claiming to be calling from a governmental agency.
First, the court found that a reasonable factfinder could determine that Chumley was the author of much of the website’s content, and thus “by consumers, for consumers” was false.  However, the rest of the allegations were messy, based in part on General’s references to a different website (  For example, the website at issue here reported that “General Steel employees [have stated] that they too are growing tired of the lies. Daily sales meetings have been referred to as ‘daily indoctrination.’”  General’s affidavit stated that this was “false and outrageous,” but the court thought that General’s witness on this point was “in no apparent position” to so claim unless he had personal knowledge of every communication by every General employee.  General’s affidavit also said that the statement that there have been “dozens and dozens of lawsuits involving transactions with General Steel” was false, but didn’t specify how the witness knew this or the actual number of lawsuits that were filed by customers.  However, there was enough evidence that at least some of the listed statements were literally or implicitly false to deny the summary judgment motion.  To deal with the problem, the court stated that the parties would have to identify all their false advertising claims with “pinpoint-precise” specification, usually verbatim, before trial.
Armstrong then argued that the site didn’t constitute “advertising or promotion” but was merely a noncommercial gripe site.  As a direct competitor, however, Armstrong had a strong commercial interest in diverting customers from General, and so it was engaged in commercial advertising. 
Armstrong also argued that General couldn’t show actual or likely deception, but putative former General customers claiming that General was a “scam” etc. would clearly be likely to affect purchasing decisions.
Armstrong then argued that the false advertising claim was barred by res judicata; an earlier suit found Armstrong liable for false advertising.  In that case, General put on some evidence at trial concerning and the judge made some findings about it.  He found, inter alia, that Chumley denied operating the site but admitted to “submitting large amounts of content to it,” and that the evidence at trial “did not establish that [the site’s content] was false.” However, the false advertising contained on the site at issue here wasn’t part of the same transaction, event, or occurrence litigated in the earlier case.  That earlier case “focused on Armstrong boasting of false accomplishments on its own website and falsely appropriating General’s name in pay-per-click advertisements; those claims had no necessary connection to Armstrong making websites that falsely disparaged General.”  Plus, the site at issue here was begun only months before the trial of the earlier case, long after the deadline for amending pleadings and adding claims. Evidence about this website was offered for the collateral purpose of showing Chumley’s intent to harm General. Thus, res judicata didn’t apply.
ACPA: Was “confusingly similar” to General’s trademark in GENERAL STEEL? UDRP cases sometimes say that the answer is still yes if the registrant adds a disparaging term, but federal courts generally say no.  Summary judgment for Armstrong.
Libel: The court had already rejected Armstrong’s arguments that General couldn’t show falsity and that the CDA protected it, so summary judgment was denied.  The court dealt with the other claims quickly, kicking out the civil conspiracy and trade secrets claims for lack of sufficient evidence.

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