Wednesday, August 25, 2010

Buyer of allegedly infringing goods lacks standing against seller

Kam Lee Yuen Trading Co. v. Hocean, Inc., 2010 WL 3155812 (N.D. Cal.)

Plaintiff KLY and Hocean are wholesalers specializing in Asian foods. In 2009, Aik Cheong Neo brought an action against KLY, Hocean, supermarket chain Welcome Market, Inc., and nineteen other wholesalers, distributors, and retailers alleging infringement of his IP rights in the design and packaging of a mushroom seasoning. Hocean allegedly sold KLY infringing mushroom seasoning, which Welcome Market then sold to its customers. Welcome demanded that KLY reimburse it for its defense costs, which KLY did because Welcome was KLY’s largest customer. Welcome hired Latham & Watkins and counterclaimed to cancel Neo’s trademark registration, along with asserting other defenses. Neo ultimately dismissed all his claims with prejudice. KLY reimbursed Welcome $153,000.

KLY then sued Hocean to recover those costs, claiming that Hocean’s mushroom seasoning had packaging and labeling that infringed "and/or constituted false designation of origin of [Neo's] mushroom seasoning," in violation of Section 43(a)(1) of the Lanham Act. The court found that KLY lacked standing to bring a trademark infringement claim because it had no interest in Neo’s mark. KLY argued that it was bringing a false advertising claim instead. In the 9th Circuit, §43(a)(1)(A) and (a)(1)(B) have different standing requirements. For (A), the plaintiff must allege "commercial injury based upon the deceptive use of a trademark or its equivalent to satisfy standing requirements," and a "commercial interest in the product wrongfully identified.” For (B), a plaintiff must claim a "discernibly competitive injury."

Moreover, §43(a)(1) claims aren’t allowed if they would “indirectly eviscerate” the standing requirements of other causes of action—that is, no private cause of action for violating the FDCA. Similarly, the 9th Circuit barred a Lanham Act claim that would require litigating an underlying copyright infringement claim where the plaintiff lacked standing to bring the infringement claim. KLY argued that it had suffered commercial injury, and that its past possessory interest in the allegedly infringing product was a sufficient commercial interest.

The court thought that KLY’s argument over its injury “would eviscerate the standing limitations Congress established for bringing a Lanham Act trademark infringement action” (though of course it is the courts, not Congress, that created current standing doctrine, as the court had just stated). The case law doesn’t support allowing false association claims premised on infringement of a third party’s mark. In Sybersound, the copyright case, plaintiff and defendants were competitors that produced and sold karaoke records to distributors. Plaintiff claimed that defendants produced karaoke records without purchasing the necessary licenses from copyright holders, which put the plaintiff at a competitive disadvantage. The 9th Circuit held that "[c]onstruing the Lanham Act to cover misrepresentations about copyright licensing status ... would allow competitors engaged in the distribution of copyrightable materials to litigate the underlying copyright infringement when they have no standing to do so." A similar rationale applied here. KLY’s injury couldn’t be severed from the underlying trademark infringement action: to prove that Hocean caused KLY’s harm, KLY would have to prove Neo’s case.

The court also held that it would reach the same conclusion other under standing tests such as Conte Bros./Phoenix of Broward. KLY’s injury was not of the sort the Lanham Act is designed to remedy, such as lost sales/goodwill. This was not a dispute between two competitors, but a dispute between a buyer and seller over the quality of a good. State commercial law is the proper remedy.

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