Friday, March 07, 2008

Extraterritoriality of false advertising law

Software AG, Inc. v. Consist Software Solutions, Inc., 2008 WL 563449 (S.D.N.Y.)

Plaintiff Software AG is an “enterprise integration software vendor” that operates in about 70 countries. Its key products, which include database management systems (ADABAS) and a programming language (NATURAL), are “mission critical” for its clients, many of which are large multinationals. ADABAS and NATURAL are Software AG trademarks.

Defendant Consist is an American company with a Brazilian affiliate, Consist-Brazil under the control of Consist’s president. For over 30 years, Consist or its predecessor had been the exclusive distributor of Software AG products in 7 South American countries, including Brazil. Software AG attempted to terminate the relationship in 2006, but Consist took the position that Software AG’s notice was insufficient. In December 2007, the court ruled that the notice was sufficient and thus the parties’ contract was terminated.

In 1986, with Software AG’s full knowledge, Consist-Brazil registered NATURAL and ADABAS in Brazil. (As it turned out, it subsequently registered them in Argentina and Uruguay as well.) Under German law, which governed the parties’ contract at the time, this registration was for Software AG’s benefit. However, there was no express provision for conveying the Brazilian marks to Software AG in the event of termination.

The district court found that “Consist has taken a number of steps to frustrate the ability of Software AG to assume its rightful place as the distributor and maintainer of its own products in the Territory.” The parties’ contract authorized Consist-Brazil to provide maintenance for customers’ Software AG products, but only while the contract was in effect. Yet Consist-Brazil promised customers that it could continue to provide maintenance services after January 1, 2008. One customer therefore signed a new two-year contract, worth about $85,000 a month, that would also include new versions of seven Software AG programs. Consist-Brazil entered into 179 similar agreements in Brazil.

Moreover, as a practical matter, Consist-Brazil employees only provided basic maintenance services in Brazil. More advanced support services were provided by Software AG employees from its Denver facility. Consist no longer has access to those more advanced services. Basically, Consist-Brazil breached its contracts with its Brazilian customers, because it can’t offer them much support, nor can it provide them with software updates and fixes. Without this support, users could have big trouble with their Software AG products, which could affect Software AG’s goodwill.

In January 2008, Consist-Brazil posted two notices in Portuguese on its Brazilian website, promising to fulfil all its contractual obligations to its customers, including updating and technical support, and quoting a portion of its contract with Software AG to support its claim that it could continue to provide support and updates. The court found that Consist-Brazil’s statements were literally false and that Consist’s president knew this.

After the preliminary injunction hearing, some other things happened. The court was not well pleased:

The Court has also been advised that [Consist has] commenced two lawsuits …. In these actions, Consist has obtained, ex parte, orders that (1) enjoin Software AG from using its own trademarks, NATURAL and ADABAS, in connection with the distribution and maintenance of its own products in Brazil, and (2) direct Software AG to provide Consist with access to maintenance services and products that Software AG has no contractual obligation to provide and that Consist has no contractual right to receive. This Court does not know whether Consist has accurately and fully advised the Brazilian court about the pendency of this action, or about the fact that, even as its applications were being made, this Court was preparing a decision--after a full hearing at which both sides had every opportunity to present their positions--relating to the very issues that were the subject of the ex parte applications in Brazil. However, the Court specifically finds that Consist, [Consist’s president,] and their United States counsel, the law firm of Duane Morris LLP, acted in bad faith, and with the intent to compromise this [Court's] ability to rule on the matters before it and to issue effective relief ….

Unsurprisingly, the court found in Software AG’s favor on its breach of contract claims, including breach of an obligation to transfer the Brazilian trademark registrations to Software AG. Likewise, the court found Consist liable for tortious interference with prospective business relations; Consist-Brazil’s customers would have gone to Software AG for their mission-critical needs if not for Consist-Brazil’s actions.

Software AG also brought a Lanham Act claim. The question was whether the Lanham Act could apply extraterritorially. The test in the Second Circuit asks a court to balance (1) whether there’s a substantial effect on US commerce; (2) whether the defendant is a US citizen; and (3) whether there’s a conflict with trademark rights under foreign law. (Note: (3) doesn’t seem applicable to most false advertising cases, and as we’ll see the court modified it here – which allowed the court to sidestep the issue of Brazilian trademark rights.) At least two factors must tilt in favor of the plaintiff to apply the law extraterritorially.

There was a substantial effect on US commerce. Consist-Brazil’s misrepresentations “substantially affected U.S. commerce by causing confusion among Brazilian customers about who can and cannot provide them with support for their products.” Brazilian customers have thus refused to enter into maintenance agreements with Software AG; these agreements, if entered into, would be worth millions of dollars, and advanced support would be provided from Software AG’s Denver facility.

The statements on Consist-Brazil’s website were made with Consist’s knowledge and approval, and at the specific instruction of Consist’s president, a New York resident. Consist is a US corporation with its principal place of business in New York City. Factor two thus favored extraterritoriality.

The court found no relevant conflict between US and foreign law. The representations about Consist-Brazil’s ability to provide maintenance were literally false, and thus objectionable under both Brazilian and American law, since Brazil bars “the publication of false information in order to obtain a competitive advantage.” (Comment: I see why the court so concluded … but aren’t the statements presently true, in that Software AG is under court order in Brazil to provide the necessary services? Perhaps they’re misleading, or even false by necessary implication.)

In any event, all three factors pointed towards extraterritorial application of the Lanham Act. Irreparable injury was also easily shown. Consist-Brazil’s conduct interferes with Software AG’s ability to establish its own business in Brazil, even though it’s the only entity that can legally offer the relevant services. Moreover, because the old contract didn’t provide for specific payment for support and update services – they were provided for free as part of the exclusive distribution agreement – “the net effect of the Brazilian injunction is to require Software AG to provide products and services to Consist for free without receiving any income from Consist, its former distributor.” That’s irreparable injury.

The court enjoined Consist and its affiliates from taking any further actions to keep Software AG from using its marks in Brazil until a final judgment had been entered. This necessarily included a prohibition on continuing the Brazilian lawsuit; the court extensively considered its power to do so, and concluded that an anti-foreign-suit injunction was required under the circumstances.

No comments: