Thursday, October 04, 2018

allegedly perfidious salesman protected from passing off liability, but might have engaged in false advertising

Burton v. Label, LLC, No. 15-CV-5793 (VSB), 2018 WL 4759735 (S.D.N.Y. Sept. 30, 2018)

Label, founded by the Millers, sells bespoke and custom men’s clothing throughout the United States. Schwartzman (for whom Burton is the trustee) worked for Label as Vice President of Sales. While employed at Label, he established his own bespoke tailoring and made-to-measure men’s clothing company, named Trusgan, and thereafter provided his services to Label as an employee of, and through, Trusgan. Label hired a company called ADP to automate its employee payroll system, and began paying Trusgan for Schwartzman’s services through ADP. Allegedly, as a result of an error, ADP began paying Schwartzman’s salary twice through two payroll accounts, and blamed him when it was discovered (after he told Label he was leaving). The Label defendants allegedly began a “campaign of calumny” accusing Schwartzman of fraud and embezzlement, and telling customers that Schwartzman’s claim that he could offer Label’s products at a cheaper price is false because they’d received commitments from their suppliers not to do business with Schwartzman.

Label counterclaimed, alleging various claims against Schwartzman, including violation of the Lanham Act. The Millers allegedly began receiving customer complaints about Schwartzman’s quality of service, and he allegedly tried to steal customers for his own side business during Label work hours and using Label resources. He allegedly surreptitiously contacted Label clients, misrepresented that he was placing orders for them through Label, and instead placed the orders through his own company. In one case, a supplier asked whether the “orders were still under Label,” to which Schwartzman replied, “all these orders are under me not Label,” and “I was only sending them to you because I can’t risk them accidentally being sent through Label.” A client allegedly complained to Label about the fit of the order, delivery times, and customer service, believing that Label had been responsible. Schwartzman allegedly told Label customers that he was opening up his own business and that “he could continue to service these customers at this new business where he would provide better customer service and pricing than Label, while offering the same exact product.” The counterclaims told the alternate story in which the salary double-dipping was indeed Schwartzman’s doing.

After Schwartzman left Label, Label allegedly discovered that Schwartzman “represented ... that he could easily handle former Label clients through Trusgan, because Schwartzman had these Label clients’ measurements and other information regarding their previous orders from Label” and that “he can beat LABEL’s pricing ... by 20% to 30% while offering the exact same product, from the same manufacturers and using the same fabrics.”

The Lanham Act counterclaims had two theories: first, while employed by Label, Schwartzman sold what he represented to be Label products but were not in fact Label products; second, after leaving Label, he told customers that he could offer the same product, but cheaper. The court rejected both claims on the pleadings.

False association: As an example, Schwartzman placed an order with a Label supplier, explaining that the order was for Schwartzman, not Label. Schwartzman’s client subsequently mistakenly complained to Label about “the fit of the order, delivery times, and customer service.” Assuming that Schwartzman was indeed using his position as a Label salesman to sell items represented to be Label goods by placing orders with Label suppliers, “he was simply unlawfully pocketing proceeds that belonged to his employer; he was not falsely representing the origin of his own goods. Selling trademarked goods under its trademarked name is not a violation of the Lanham Act.” Basically first sale, except not quite.

Label argued that it offered not just clothes, but customer service, but that theory didn’t work here. While “distribution of a product that does not meet the trademark holder’s quality control standards” may result in devaluation of the mark and thus not a genuine product, the trademark holder must allege that “(i) it has established legitimate, substantial, and nonpretextual quality control procedures, (ii) it abides by these procedures, and (iii) the non-conforming sales will diminish the value of the mark.” Here, the quality-of-service argument “makes no sense in light of the fact that Schwartzman was the Vice President of Sales at Label, making the quality of service he provided one and the same as the quality of service Label provided.” The complaint even alleged that customer gripes about “the fit of the order, delivery times, and customer service,” were of the type that “had become routine with respect to Schwartzman’s work.” “Thus, there is no distinction between the goods Schwartzman sold as Label goods and actual Label goods supplied under Schwartzman’s watch.”

The false advertising claim had more purchase in theory, but was inadquately pleaded. First, commercial advertising or promotion wasn’t pled, merely “isolated disparaging statements” that “do not have redress under the Lanham Act.” Label “makes no attempt to define the relevant market, but claims to have over 750 clients,” and didn’t specify the number of the clients Schwartzman allegedly contacted.  Likewise, the allegations of falsity would need more specificity to proceed; Label’s briefing indicated that it could replead to state that Schwartzman lacked access to their fabrics and suit styles.

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