Tien Hsin Industries is a Taiwan corporation that manufacturers bicycle components sold in America by Full Speed Ahead (FSA). Tien Hsin moved for summary judgment on Campagnolo’s false advertising claims on the ground that it had no knowledge of or involvement with the allegedly false ads published by FSA. Tien Hsin is owned by four shareholders: Yudi Chiang, her husband Douglas Chiang, Douglas Chiang’s mother, and Douglas Chiang's sister. Yudi Chiang is FSA’s sole shareholder. FSA and Tien Hsin do not share any employees, and FSA is managed on a day-to-day basis by people other than Chiang. Before 2001, when FSA was reincorporated in Washington, Tien Hsin marketed its products in North America directly and placed ads on its own behalf. Tien Hsin owns the FSA trademark, with FSA holding an oral license. Tien Hsin invoices FSA in writing for products. In particular, neither Yudi Chiang nor any Tien Hsin employee directs FSA’s advertising. Tien Hsin does not advertise FSA-branded products on its website.
Tien Hsin did indirectly influence the ad campaign at issue. It publishes a yearly manual with product information for all its products, including FSA branded products, and FSA often gets technical information from that manual. In the ads at issue here, however, independent testing was the basis of the challenged claims. Tien Hsin also provided FSA’s European branch with the prototype crankset that was independently tested, resulting in data used as the basis of the ad campaign. Tien Hsin indirectly compensates FSA for advertising on its own behalf and for Tien Hsin’s benefit. Tien Hsin sells to FSA at lower prices than to other distributors. FSA’s marketing benefits Tien Hsin not just because the products originate with Tien Hsin, but because FSA meets with customers, distributors, and OEMs to promote its own goods; because many of those do significant business in Asia, they often end up buying directly from Tien Hsin. Thus, the low price FSA pays is compensation for FSA sales efforts that benefit Tien Hsin and not FSA.
The business relationship is close enough that one of FSA’s witnesses referred to FSA as “our [Tien Hsin’s] U.S. company” or “the U.S. office.” And sometimes Yudi Chiang will ask FSA’s manager to negotiate business deals on behalf of Tien Hsin because Yudi Chiang and her husband do not speak fluent English. Tien Hsin makes the decisions, but the manager communicates and represents Tien Hsin’s position.
First the court found no direct liability. No Tien Hsin employees contributed to, commissioned, reviewed, or participated in the creation or dissemination of the ads. There was no evidence that the challenged ads were based on data from any Tien Hsin publication, and Campagnolo didn’t allege that Tien Hsin’s product guide was itself a false ad. Nor did providing the crankset help Campagnolo’s case, because there was no evidence that Tien Hsin provided it for the purpose of creating ads, or that Tien Hsin had a hand in allegedly misusing that testing data.
Campagnolo argued intentional inducement, which the court found to be a cognizable theory of liability for false advertising. However, there was no evidence of inducement here; no Tien Hsin employees were involved with creating the ads. “Tien Hsin may have contemplated through its pricing arrangement that FSA would advertise and Tien Hsin would benefit as the owner of the FSA trademark, but Tien Hsin did not direct or control the advertisements nor induce FSA to make its advertisements false.”
Campagnolo also analogized to contributory trademark infringement, which can lead to liability for one who continues to supply a product knowing that the recipient is using it to infringe. The court, however, found no cases holding that a defendant can be subject to liability for false advertising by selling a product falsely advertised by the buyer, and Campagnolo did not convince the court that the rationales were the same. Anyway, here there was no evidence that Tien Hsin knew of the ads, or “more importantly” of their falsity.
The court then rejected vicarious liability as well. Campagnolo argued that Tien Hsin was FSA’s alter ego, and that FSA is Tien Hsin’s agent. The court found it clear that the two are closely related, with FSA existing almost solely to distribute Tien Hsin’s products, Tien Hsin owning the FSA mark without any written contract, and FSA paying an “aggressively” low price for Tien Hsin products in order to subsidize FSA’s ads, which redound to Tien Hsin’s benefit. Plus, FSA on occasion conducts negotiations on behalf of Tien Hsin.
This was, the court ruled, akin to a subsidiary-parent relationship. FSA can’t function independently of Tien Hsin. “It is not an ordinary business practice for an independent company to have the trademark to its own name owned by a completely unrelated company, especially when there is no written agreement guaranteeing a continued license to that mark.” Despite the close relationship, however, they are separately incorporated companies. A parent corporation is not liable for the acts of its subsidiaries, save in exceptional cases involving abuse of the corporate form: where there is unity of interest/ownership such that the two entities no longer exist separately, and where failure to disregard the corporate form would allow fraud or injustice—not merely limitation of liability, since limitation of liability is the purpose of the corporate form.
Here, the facts couldn’t support a finding that one company was an alter ego of the other. FSA and Tien Hsin have separate offices, assets, and employees, supervised and financed separately. FSA is not undercapitalized, a major factor in “piercing the veil” of limitation of liability. There was no indication of abuse of the corporate form to avoid a duty.
Additionally, a principal may be liable for the acts of its agent if those acts are on the principal’s behalf and within the scope of the agency. Control is often the crucial factor in determining agency; control can’t just be a right to supervise performance in conformity with the contract, but must extend to the manner of performance. But it’s not clear how to apply this where the alleged principal and agent are separately incorporated entities. “A corporation’s managers always act as agents for its shareholders--the principals. Yet even where a subsidiary is wholly owned, the parent corporation--the shareholder or principal--is generally not liable for the subsidiary’s torts.” The court expressed doubt whether alter ego and agency theories of liability were in fact separate. To the extent that they are, agency liability required more than the agency present in all parent-subsidiary relations: total control, “well beyond the normal control exercised by parents over subsidiaries.”
Tien Hsin had some control because it owned the FSA trademark, Yudi Chiang owned the stock, and Tien Hsin was nearly the sole supplier. But that wasn’t “total domination” sufficient for vicarious liability. FSA wasn’t a sham or a shell, and Tien Hsin didn’t control its day-to-day operations. Specifically, Tien Hsin didn’t exercise any oversight over ad content. On the rare occasions when FSA’s manager would negotiate on behalf of Tien Hsin, Tien Hsin's directors explicitly authorized it in writing.
Summary judgment for Tien Hsin.
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