Tuesday, October 02, 2007

This charming lawsuit

Chamilia, LLC v. Pandora Jewelry, LLC, 2007 WL 2781246 (S.D.N.Y.)

The parties compete to design and make charm bracelets. Customers purchase a bracelet and then pick out charms that screw on to the bracelet to customize their own look; I have gleaned from various internet sites that the parties’ charms fit on each other’s bracelets, along with those of a third competitor, Biagi. Previously, Chamilia entered into a consent judgment with Pandora resolving Pandora’s claim of copyright infringement. Chamilia “bravely” sued Pandora for having “maliciously engaged ... in a smear campaign to destroy” Chamilia by accusing Chamilia of patent infringement. Chamilia alleged false advertising, false patent marking, and state law claims for slander of title, defamation, business and product disparagement, tortious interference, and unfair competition.

Pandora’s designs are protected by Danish copyright law. (And registered in the US, more to the point.) Pandora also filed a patent application for a method of constructing its jewelry and began putting “patent pending” on ads and promotional material. Pandora provided Chamilia notice of the application after it was published by the PTO. Pandora’s president spoke with Chamilia’s sales representative, accusing Chamilia of copyright infringement and allegedly saying that Pandora had a “worldwide patent” that would be used to shut Chamilia down, though this is disputed. This ultimately resulted in a consent decree in which Chamilia agreed to destroy its infringing inventory, and a later settlement of a case against a Chamilia retailer.

Pandora allegedly said a bunch of nasty things about its patent (or pending patent) rights and Chamilia’s behavior at trade shows and in repeated threatening phone calls to Chamilia customers. Pandora also sent letters to its reseller customers revising the terms and conditions of their relationship; specifically, it required each reseller to pledge not to sell any other similar brand of modifiable jewelry. About 450 resellers signed the letters. Pandora later sent letters to its resellers saying that “the Chamilia sales force has been trying to strong-arm some of our customers into buying their product” and reminding them they were obliged “to not carry the knock-off companies.” These acts allegedly had negative effects on Chamilia’s business.

Though the court found an issue of material fact as to falsity – the parties dispute whether Pandora claimed a “patent” (false) or “patent pending” (true) – it dismissed the claims anyway. Chamilia’s other claims based on Pandora’s disparaging use of “knock-off” failed because Chamilia did sign a consent decree on infringement. No reasonable juror could find that the “knock-off” description was false. Regardless, the court found that Pandora’s statements weren’t made in “commercial advertising or promotion.” Though statements at trade shows can suffice, in this case they weren’t sufficiently widespread – there was only admissible evidence of four allegedly disparaging statements, and two phone calls, in a market with hundreds or thousands of customers.

Separately, the court concluded that the letters to resellers were made in the context of existing exclusive business relationships, thus not advertising or promotion. “Because the … letters are designed to structure nascent or existing business relationships, but are in any case not a solicitation of new business, they do not meet the prong of the … test requiring ‘commercial advertising or promotion’ to be made ‘for the purpose of influencing consumers to buy defendant’s goods or services.’” This latter conclusion, I think, is pretty pernicious, especially when it includes “nascent” business relationships – at some point, resellers are going to have to decide whether to continue the relationship or switch to another retailer, and Pandora’s statements about Chamilia could influence that. Perhaps more persuasively, the court concluded, “[i]f communications between two parties with an exclusive sales agreement inherently constituted commercial advertising and promotion under the Lanham Act, the parties to the agreement could never communicate to each other their opinions on when a breach had occurred without fearing liability under the Act.” Still, I’m more persuaded by the court’s conclusion on lack of falsity; the advertising/promotion question is dicta.

Chamilia also alleged false patent marking. The statute, 35 U.S.C. § 292, requires (1) advertising or use of the word “patented” in connection with a device that is not patented; and (2) intent to deceive. Because Section 292 is (unlike the Lanham Act) a penal statute, it is strictly construed, and doesn’t apply to “promotion,” only advertising. Remarks at trade shows and in phone calls don’t qualify even under a broad definition of advertising because they were one-on-one conversations.

Chamilia’s slander of title claims also failed. Allegations of patent infringement can be slander of title if they are false, reasonably calculated to cause harm, and result in special damages. The court found insufficient evidence of malice to create a jury question. “Mere falsity, prior disputes between the parties, and ‘[s]uspicion, surmise and accusation’ are insufficient to raise an inference of malice.” There was no evidence that Pandora’s representatives knew their statements were false or had any doubts about their truth. Even the phone message saying “now our patent application that has been publicized and you are selling something that violates my patent and therefore I can sue you for your profits,” was not shown to be malicious. Though it reflects a misunderstanding of the law, there’s no evidence the nonlawyer who said it knew better.

Chamilia’s defamation and product disparagement claims fared no better. The common interests privilege protected the letters to resellers with whom Pandora had exclusive agreements, since they protected an existing business relationship against perceived unfair competition. This privilege is conditioned on lack of malice, but there was insufficient evidence of malice, as noted above. There was a material question about whether the phone calls were motivated by ill will. Pandora’s representatives “made frequent angry phone calls to and often left agitated voicemail messages with Plaintiff’s retailers,” showing sufficient hostility to justify a finding of malice. But Chamilia still lost, because it couldn’t show special damages – economic or pecuniary loss, as opposed to general reputational harm. Chamilia’s evidence was mostly inadmissible hearsay.


Anonymous said...

Do I detect a Smiths reference? :-)

RT said...

Return the bracelet, she said ....

Stereoette said...

!! thats my case! i was the law clerk! (well, at least on the earlier phases)

(settles down)

I really am going to send you a question on the article I'm writing - I went to the "scholarship" camp at NYU last week and so its back in the front of my mind. I want to do a little bit more research first so I dont look silly, though.


RT said...

That's great -- I'm happy to hear that NYU is continuing to do useful things for grads.