Friday, April 30, 2010

Revealing source of private label product may be misappropriation

Guidance Endodontics, LLC v. Dentsply International, Inc., 2010 WL 1608949 (D.N.M.)

Guidance is a small endodontic-equipment company, and Dentsply is both a competitor and a supplier. Dentsply is allegedly one of the largest firms in the field; its competitive products include obturators (for filling holes in teeth), files (for cutting away parts of teeth), and ovens (for warming some obturators to make the filling material malleable), which are used in root canal surgery.

Guidance uses the trademark OneFill for its obturators, which must be heated before use. Dentsply’s obturator is called ThermaFil. Other competitors use the names SuccessFil and Quick-Fill (an example of the general rule that marketers prefer descriptive terms to arbitrary/fanciful ones).

In 2008, the parties entered into a manufacturing and supply agreement whose contours are contested. Allegedly, Dentsply agreed to manufacture all Guidance’s proprietary products and Guidance agreed to purchase all its requirements for such products from defendants. The supply agreement allowed Guidance to use the OneFill mark. It allegedly required defendants to make files or obturators that were improvements or successor products of similar design to the Guidance files or obturator, as long as Guidance presented specifications.

The defendants alleged that Guidance represented to them that Guidance wouldn’t attempt to trade off their goodwill in the dental community, nor would Guidance market its products for use with Dentsply/defendants’ products, nor would it tell its customers that defendants manufactured the Guidance products, though the court noted that the supply agreement doesn’t contain any of these representations.

Defendants eventually refused to supply obturators on the ground that Guidance had violated the supply agreement and the Lanham Act by doing things like telling people that defendants made Guidance’s products and saying that Guidance obturators were the same as ThermaFil obturators. The parties couldn’t work things out, and this suit followed.

The Lanham Act counterclaims were based on the first version of Guidance’s marketing materials, including a brochure promoting the full Guidance line, a 2-page mailer marketing the EndoTaper files, and two versions of a 2-page mailer marketing the OneFill obturators. Though Guidance has revised the materials, there is still some “offensive” language—reference to a “Thermal Filling Obturator”—in the current mailer. Guidance also advertised OneFill, its heated obturator, as “the Best Thermal Filling Obturator System in the World.” It’s the same obturator as Densfil and Thermafil.

Anyway, the court found a triable issue on the Lanham Act false advertising counterclaims, but only as to two statements. The complained-of statements were (1) OneFill is the “World’s Best Thermal Filling Obturator;” (2) OneFill is the “Best Thermal Filling Obturation System in the World;” (3) “EndoTaper Complete is the best Endo System in the World;” (4) “EndoTaper is the Best NiTi File System in the World;” (5) “[n]ow you can treat every case better, quicker and safer with EndoTaper;” and (6) EndoTaper “files can be used like ProTaper F1 to F5 or used in a Crown-Down like ProFile, GT, Endo Sequence, or K3 to create the perfect canal shape more efficiently and easier than any other file system.” However, Guidance admitted that EndoTaper does not always create the perfect canal shape.

As you might imagine, puffery was a key defense. Context matters to determining puffery, as does the relative expertise of the speaker and the listener. The size of the audience is another factor: “the larger the audience the more likely it is that the statement is puffery.” (This thought has to be taken with a grain of salt, like most ads—given that the Lanham Act covers only advertising or promotion, interpreted to require reasonably wide distribution, there’s no reason to presume that mass advertising is nonfactual just because it’s mass, though that may have an impact on whether specific language in an ad should be understood in a technical or a general sense.)

Anyway, the first four statements were puffery; the last two were “probably not,” presumably meaning that Guidance could still argue puffery to the factfinder. The first four are all “best in the world” claims, the “quintessence of puffery” given that “[w]hether one thing or another is the ‘best’ is a normative assessment that involves weighing potentially infinite and sometimes immeasurable factors.” Likewise, these statements were made in marketing materials, “wherein a seller is expected to cast his wares in the best possible light to tempt consumers to buy his product rather than any other.” (Again, I’m not sure how to square this factor with the “advertising or promotion” limitation—perhaps the idea is that if a sales pitch is supposedly individualized, involving interaction with a human salesperson who promises that some product or service is the “best,” there may actually be an implied factual representation that the salesperson has considered the customer’s specific needs, in which case “best” might be nonpuffery. But it doesn’t seem that factual statements should become less factual merely because they’re widely disseminated.)

Guidance’s consumers are relatively sophisticated and should have substantial experience with endodontic products. “Finally, because these statements were made in advertising, the audience is about as large as it can be under the circumstances.” (See above.) In combination with the “distinctly subjective” nature of the term “best,” this reinforced the court’s conclusion on puffery.

The fifth and sixth statements also involved superlatives: EndoTaper was “better, quicker and safer” and EndoTaper “files can be used like ProTaper F1 to F5 or used in a Crown-Down like ProFile, GT, Endo Sequence, or KS to create the perfect canal shape more efficiently and easier than any other file system.” The court found the matter sufficiently close that the counterclaims should not be dismissed as a matter of law. A reasonable consumer might believe that “more efficiently,” “easier,” “quicker,” or “safer” could be true, and these attributes are also potentially testable. In fact, a consumer might believe that tests had been done, though defendants alleged that Guidance had no testing to back up its claims.

Because defendants alleged literal falsity, they did not need to provide evidence of actual confusion.

The court also denied summary judgment on defendants’ counterclaim for infringement of their Thermafil mark. Defendants have an incontestable trademark in Thermafil, which was apparently registered without proof of secondary meaning (though if the mark is suggestive, then its incontestability is somewhat meaningless, since incontestability is about precluding invalidation on grounds that the mark is merely descriptive). It is widely recognized in the trade, as Guidance knew when it adopted the term “Thermal Filling” for its marketing materials.

The court found that, while the confusion factors weighed in Guidance’s favor, that weight was not so heavy as to take the issue from a jury. On similarity specifically, the similarities between Thermafil and “Thermal Filling Obturator” and “OneFill Thermal Filling Obturator”—used in Guidance’s advertising materials—needed to be assessed by the jury. There were substantial differences in number of words/length, leading to differences in sound; but there was also substantial overlap, and similarities are generally to be weighed more heavily than differences. This factor wasn’t a slam dunk for either party. Nor were the remaining factors enough help to allow Guidance to win summary judgment. (Surely descriptive fair use is a viable defense here; even if the portmanteau Thermafil is (barely) suggestive, “thermal filling” seems a quite succinct description of what it is that a heat-activated obturator does.)

Likewise, there was a factual issue on defendants’ common-law unfair competition claim. The court first considered whether New Mexico would recognize common-law unfair competition, given its pervasive statutory scheme for regulating deceptive practices. In the end, the court allowed the common-law claims based on false advertising to proceed. (I always wonder: Why do people argue these claims, only to conclude that they stand or fall based on the resolution of the statutory claims? If everyone agrees the standard is identical, why are the lawyers and courts spending the resources on such repetition?) The court found that the New Mexico Trademark Act preempted common-law trademark claims, but then interpreted the counterclaim as asserting a statutory trademark infringement claim identical with the Lanham Act claim.

New Mexico also has a statutory dilution cause of action for marks famous in the state. Guidance got summary judgment because Thermafil wasn’t sufficiently famous. Defendants didn’t submit evidence about the fame of the mark in the New Mexico endodontic market; and in any event there was no reason to think that New Mexico, which uses federal law as persuasive authority, would recognize niche fame.

Defendants lacked standing under the state-law Unfair Practices Act claim, because they weren’t consumers of Guidance’s products, and only consumers are intended to be protected by the law. (Though the court’s section heading suggested that they could get injunctive relief; I’m not sure what happened there.)

The court further held that defendants had raised a factual issue on their claim for “misappropriation of reputation, goodwill, intangible trade values, and standing in the dental community.” New Mexico, the court held, would follow the Restatement (Third) of Unfair Competition, which provides for a misappropriation cause of action in certain circumstances.

The misappropriation was that Guidance told its customers that Guidance products were repackaged Dentsply/etc. products. “Repackaged” is the court’s term; the counterclaims say that Guidance “[told] potential customers and existing customers that Dentsply/TDP made the Products and that the Products were the same as Dentsply/TDP’s products, and [ ] market[ed], promot[ed], and [sold] the Products for use with systems offered for sale by TDP.” One of defendant’s witnesses testified, “Not only have they not taken reasonable efforts [to avoid disclosing the terms of the Supply Agreement], but they have overtly gone to their customers and misappropriated the image of Dentsply and told customers that these products are manufactured by Dentsply. … [T]hey took the opposite of reasonable efforts on the confidentiality agreement, and disclosed this.” Defendants took the position that Dentsply has an excellent reputation, and that Guidance misappropriated Dentsply’s brand without paying for that right in the agreement.

The court thought that this testimony could establish that Guidance used defendants’ name for purposes of trade without consent, as barred by the Restatement.

What about nominative fair use? There doesn’t seem to be any contention that Guidance was saying anything untrue; on these facts, it’s a reseller, and resellers generally get to say what it is that they have to sell—no matter how good the reputation of the manufacturer is. In fact, we usually think that resellers who tell the truth about what they have to sell enhance efficiency. Defendants make the products, but don’t want people to know that they do, a not-unknown situation in private label manufacturing more generally. Is this interest in misleading consumers about what products defendants make one that we want to allow trademark/unfair competition law to support? (Shahar Dilbary has a paper related to this.) How can it be misappropriation to tell the truth? Shouldn’t breach of contract, if any existed, be the only remedy?

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