Saturday, July 22, 2006

Vaporware claim evaporates under Lanham Act scrutiny

Chapdelaine Corporate Securities & Co. v. The Depository Trust & Clearing Corporation, 2006 WL 2020950 (S.D.N.Y.)

Plaintiff Chapdelaine owns the software-based Fail Management System that enables licensees to track and confirm failed fixed-income securities trades, including mortgage-backed securities. Defendant DTCC facilitates post-trade clearance, settlement, and depository transactions. Among the other financial services Depository provides is automated trade comparison, which includes processing failed securities trades.

The parties began negotiating about licensing the Fail Management System. They entered into a nondisclosure agreement, pursuant to which DTCC allegedly forfeited its right to develop a competing software system. Nonetheless, after negotiations terminated, DTCC announced plans to develop its own software system to confirm failed trades for fixed-income securities. This announcement, made at a bond market industry conference, allegedly caused potential Fail Management System licensees to cease negotiations with Chapdelaine. Thus, according to Chapdelaine, the announcement was false and issued for the purpose of discouraging potential licensees from negotiating or entering into agreements with Chapdelaine.

Although the court refused to dismiss plaintiff’s Sherman Act claims, it did dismiss the Lanham Act claim, for multiple reasons. First Chapdelaine lacked standing, because DTCC was not yet a competitor; it only announced its intention to develop a product that doesn’t yet exist. Furthermore, the allegedly false statement was not material – it didn’t deal with the “nature, characteristics or qualities” of DTCC’s software, but rather to DTCC’s development plans. (This comes about because of the somewhat odd Second Circuit rule that “materiality” means dealing with “nature, characteristics or qualities.” If you ask whether the existence or nonexistence of a product would influence a reasonable consumer’s decision to buy it, I think most of us would consider that material. And, if you follow the Second Circuit rule, you could persuasively argue that “existence” is part of the nature or qualities of a product.) Finally, because DTCC’s statement only announced its intention to develop a product, it was not made in commercial advertising or commercial promotion. (This last is just weird. If a studio runs a trailer for a movie that’s just entered production, is it not an ad?)

If the court is correct, there is essentially no competitor remedy for deceptive claims about “vaporware,” except in antitrust law if there’s sufficient market power. Traditional defamation/trade libel won’t work, because there’s no claim made about the plaintiff’s products, and yet the defendant’s claims might have induced customers to wait for its product rather than purchase the plaintiff’s. Perhaps some state consumer protection statutes might offer a remedy.

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