Bad horse

(I also considered "getting back on the horse," since I hope to resume a more regular blogging pace shortly, but the Joss Whedon reference won out.)

Famous Horse Inc. v. 5th Avenue Photo Inc., --- F.3d ----, 2010 WL 4117673 (2nd Cir.)

Famous Horse, which operates a chain, V.I.M., that sells name-brand jeans and sneakers at low prices, bought some Rocaware brand jeans from 5th Avenue at a discount, but then discovered that the jeans were counterfeit. 5th Avenue, however, allegedly continued to sell the counterfeit jeans to other stores, telling potential customers that V.I.M. was a satisfied customer. Famous Horse sued under §32 and §43(a) of the Lanham Act, and the district court dismissed the complaint for failure to state a claim.

The court of appeals reversed. The district court had ruled that trademark infringement under §32 requires alleged confusion as to the source of a product, and §43(a) false endorsement requires likelihood of confusion between the parties’ products. The court of appeals held that “likelihood of customer confusion” is indeed a requirement, but that confusion need not be as to the origin of the product under either provision. Section §43(a) “specifically defines misrepresentation causing confusion as to affiliation, association, or sponsorship as infringing activity.” The Second Circuit has already applied this principle to claims that one company falsely portrayed another as a satisfied customer. See Courtenay Commc'ns Corp. v. Hall, 334 F.3d 210 (2d Cir. 2003). So Famous Horse sufficiently alleged that 5th Avenue used a "word, term, name, symbol," or a "false or misleading representation of fact, which is likely ... to deceive as to the ... sponsorship, or approval of [its] goods ... by another person." 15 U.S.C. § 1125(a)(1)(A).

Likewise, Famous Horse sufficiently alleged that 5th Avenue “used its marks in connection with the false representation that it was a satisfied customer, a use that is plainly likely to deceive and create confusion and mistake regarding the relationship between Appellees' goods and services and Famous Horse,” and §32 doesn’t specify the type of confusion required. But how can this make sense of the traditional multifactor confusion test? The people to whom the representations were made aren’t Famous Horse’s customers, they’re competitors; Famous Horse can’t possibly lose any relevant goodwill even if competitors end up thinking “what dupes!”

And then: Famous Horse didn’t sufficiently allege use in commerce with respect to goods, because the mark at issue wasn’t placed in any manner on the goods, etc., as required by §1127. However, it sufficiently alleged that 5th Avenue used its mark in commerce for 5th Avenue’s services. However, “in order to prove the claim, Famous Horse must present evidence of what services the Appellees provided and subsequently advertised using the V.I.M. mark.” (Again, I don’t really get it. 5th Avenue seems to be a provider of goods, not services.) Moreover, §43(a) isn’t limited by the §32 requirements (citation provided), including §1127’s definition of “use in commerce” (no citation provided), so Famous Horse states a valid §43(a) claim.

Say what now? §43(a), it should be noted, requires that a defandant “uses [some misrepresentation] in commerce,” not just “uses,” and so this decision goes beyond Rescuecom in abandoning the statutory definition of “use.” Given the angsting in Rescuecom, I would have expected more out of such a ruling than a terse paragraph offering no justification for why “use in commerce” means something different in §43(a) than it does in §32.

Reaching out in another way to give Famous Horse a remedy (because §43(a) false endorsement just wasn’t enough!), the court then ruled that Famous Horse could sue for unfair competition under the Lanham Act based on 5th Avenue’s sales of counterfeit Rocawear jeans even though it did not own the Rocaware brand.

Famous Horse argued that it was injured by (1) losing sales of genuine Rocawear jeans to 5th Avenue when customers mistakenly buy counterfeits from 5th Avenue or 5th Avenue’s customers; (2) suffering harm to its reputation as a discount seller of genuine brand-name jeans. The Lanham Act’s language is extremely broad, stating that “any person who believes that he or she is or is likely to be damaged by” conduct violating the law can sue. But courts have universally narrowed this language to protect only people with a commercial interest, not consumers. (Why? The court does not provide a rationale, and given decades of precedent there’s no reason it should; who wants consumer plaintiffs, anyway?)

Having disposed of consumers, we turn to commercial plaintiffs, as to whom courts have split. Note that a §43(a)(1)(B) claim would require Famous Horse to allege (1) “commercial advertising or promotion” and (2) materiality, but no one seems interested in that right now.

Anyway, what the court then says is: none of the various tests for standing hold that only the owner of a trademark has standing. This is a beautiful rhetorical move. That statement is undoubtedly true. But: standing for what? Traditionally, only the owner of a trademark has standing to sue for trademark infringement, which is the basis of Famous Horse’s alleged harm under this theory, which is separate from its false endorsement claim. See Kam Lee Yuen Trading Co. v. Hocean, Inc., 2010 WL 3155812 (N.D. Cal.). Mark McKenna’s work on channeling claims into various doctrines is of relevance here; courts regularly cabin false advertising law to protect copyright’s and patent’s spheres of influence; why not trademark?

The “categorical approach” of the 7th, 9th, and 10th circuits require the plaintiff bringing an unfair competition claim to be in competition with the alleged false advertiser. The 3rd, 5th, and 11th Circuits use a more flexible standard. (Pause here to complain that this is not true: in fact the Phoenix of Broward test is more often used to disable plaintiffs from suing than to enable them.)

“On at least one occasion, we have applied the strong categorical test that in order ‘to have standing for a Lanham Act false advertising claim, the plaintiff must be a competitor of the defendant and allege a competitive injury.’” Telecom Int'l Am., Inc. v. AT & T Corp., 280 F.3d 175, 197 (2d Cir. 2001) (alterations omitted). And other Second Circuit cases have stressed the importance of competition. However, this merely strongly favors standing; it is not an absolute requirement. Instead, “a plaintiff must demonstrate (1) a reasonable interest to be protected against the alleged false advertising and (2) a reasonable basis for believing that the interest is likely to be damaged by the alleged false advertising. Competition is “a strong indication of why the plaintiff has a reasonable basis for believing that its interest will be damaged by the alleged false advertising.”

Here, Famous Horse and 5th Avenue were “in essence competitors.” Thus, Famous Horse had standing, and its lost sales were sufficient competitive injury. “Although Famous Horse sells at retail, and Appellees primarily sell at wholesale, the goods they sell are in direct competition in the marketplace, and Appellees' products are supplied to retailers in direct competition with Famous Horse.” (Interestingly, this was the theory of standing rejected in the 3rd Circuit’s Conte Bros. case, later extended by Phoenix of Broward.)

Famous Horse [sufficiently] alleges that Appellees' conduct directly undermines its competitive standing in the marketplace…. Famous Horse asserts a specific interest because it has a particular market niche that is especially likely to be harmed by counterfeit sales …: first, its reputation as a discount store was harmed because consumers believed that it sold Rocawear jeans at inflated prices compared to counterfeit jeans supplied by Appellees; and second, consumers who learn of counterfeit Rocawear jeans on the market will believe that V.I.M. similarly peddles counterfeit clothes.

The court analogized to PPX Enters., Inc. v. Audiofidelity, Inc., 746 F.2d 120 (2d Cir. 1984), in which holders of royalty interests in Jimi Hendrix recordings alleged that Audiofidelity falsely advertised recordings as featuring Hendrix when Hendrix actually appeared only as a background performer. This was a straightforward commecial interest and plaintiffs would lose money if consumers bought Audiofidelity recordings instead of plaintiffs’. Comment: Of course, there the plaintiffs had an ownership interest in the underlying subject matter; here Famous Horse does not. But “lost sales and a unique harm” suffices. Even though the allegedly misleading statements about the origins of 5th Avenue’s products don’t attempt to associate the jeans with Famous horse, it’s still sufficient to allege that “defendants' presentation of counterfeit goods undermines the plaintiffs' ability to market genuine products.” Thus, Famous Horse properly stated a false advertising claim under the Lanham Act.

The court held that Famous Horse had alleged a reasonable interest to be protected against Appellees' alleged false advertising as well as a reasonable basis for believing that this interest will be damaged by the alleged false advertising, and had properly stated a false advertising claim under the Lanham Act. The majority rejected the dissent’s use of Conte Bros. as unnecessarily “complicat[ing] the inquiry without clarifying the result” (which means that this decision starts and ends with points on which I wholeheartedly agree—there’s a legitimate false endorsement claim here, and Conte Bros. as it's been applied of late is nonsense). The majority would reach the same result under Conte Bros. “[W]e find no reason to bar Famous Horse--the only party to have demonstrated the necessary interest, initiative, and resources to do so-- from bringing suit to remedy these harms.” (Don’t we usually require trademark owners to look after themselves? What would happen if the “counterfeiting” claim were that 5th Avenue had copied the unregistered designs on Rocawear jeans, which Famous Horse alleged were protectable trade dress? Allowing third parties to decide when infringement has occurred may be a regrettable move.)

Finally, the court noted that the claim “may well be difficult to prove at trial.” In principle, it might be plausible that Famous Horse was harmed by Rocawear counterfeiting, but “proof of actual losses will be difficult given that plaintiff's V.I.M. stores operate in a large market that includes luxury retailers selling name brands at full price, discounters of various stripes, and numerous counterfeiters selling fake versions of name brands.” Still, Famous Horse did enough to survive a motion to dismiss. (I’m intrigued by the absence of two names I would have expected in this discussion: Iqbal and Twombly. Not that those cases should have changed the result, but this seems like a good case to discuss what plausibility really means.)

Judge Livingston concurred on everything but the false advertising claim. The dissent would have applied Conte Bros., and also picked up on the fact that the majority was curiously unwilling to come out and say that this was a §43(a)(1)(B) claim, despite the fact that it used the term “false advertising” a lot. The dissent expressed uncertainty whether this was a false advertising or false association claim, but considered the standing test to be the same either way, so that it didn’t matter.

So, applying Conte Bros.: (1) Nature of the alleged injury: Famous Horse alleged both commercial injury (lost sales) and competitive harm (its reputation as “the place to go for discount genuine designer jeans” was undercut by the availability of less expensive and seemingly genuine designer jeans elsewhere. This was squarely within the category of harm the Lanham Act was designed to remedy, and favored standing. Judge Livingston noted that the Second Circuit hasn’t focused as strongly as other circuits on requiring “competitive” harm, allowing “commercial” harm to qualify, or potential competitive harm (as when competition in the future is likely); she would have adapted the Conte Bros. factors for greater consistency with circuit precedent.

(2) The relative directness or indirectness of the asserted injury. Here, a more substantial showing should be required when the parties are not obviously in competition. Famous Horse is a retailer, while 5th Avenue sells primarily wholesale. While it’s possible for parties operating at different market levels to compete, as in antitrust, there was here little reason to think that the parties were competitors in “every relevant economic sense” (quoting Areeda’s antitrust treatise). In fact, such a claim is hard to credit here where Famous Horse is also complaining that 5th Avenue told other retailers that Famous Horse was a satisfied customer. As a result, the alleged injury here is both “significantly less obvious and more indirect” than when the parties compete, because it relies not on misrepresenting the nature of the jeans to people who would otherwise be Famous Horse customers but on inducing third-party retailers to buy and sell the jeans as if they were genuine Rocaware at a lower price. This indirectness disfavors standing.

(3) Proximity to the allegedly injurious conduct: “[I]t is clear that in this case there is a party more proximately affected than Famous Horse by the Appellees' alleged dealing in counterfeit Rocawear jeans--namely, the owner of the Rocawear label--whose self-interest will lead it to respond to unfair competition taking the form of misuse of its trademark.” In fact, Famous Horse’s complaint alleged that it found out about the alleged counterfeiting from Rocawear’s attorneys. Judge Livingston shared my skepticism about the analogy to PPX Enterprises, because Famous Horse couldn’t claim an equivalent level of interest in Rocawear jeans. The “unique” harm to their reputation and prices is actually a theory that a number of retailers could claim. This factor disfavored standing.

(4) Speculativeness of a damages claim: The majority conceded that Famous Horse’s stores operate in a large market, and that it may be difficult to prove that their sales are specifically affected by 5th Avenue’s behavior. Famous Horse’s second theory of injury, that it would be harmed because counterfeit jeans sold at lower prices by others will give it a reputation for inflated prices, was particularly speculative, and in tension with some of its other theories. This weighed against standing as well.

(5) The risk of duplicative or complex damages: This also weighed against standing, for the same reasons. Luxury retailers selling at full price, discounters, Rocaware, “and perhaps even the makers of competing brands of designer jeans” might plausibly claim that counterfeiting causes them commercial injury. Famous Horse’s alleged reputation as a discount purveyor of genuine brand-name jeans was also not unique: other discounters and maybe even luxury retailers could claim competitive harm in that counterfeits make their jeans seem overpriced. Though this case involved a local rather than national market, and an allegedly unique market position, it still raised the specter of granting standing “to every retailer with a bare claim of commercial injury … only now with the addition of a highly speculative claim as to harm suffered due to a unique position in the market.”

Judge Livingston considered the case a close one, but on balance the case was too tenuous, especially given the ability of Rocawear to sue. “Ultimately, I do not think the principles of prudential standing counsel hearing the claim of a party whose only distinguishing feature from any other retailer of a counterfeited good is a speculative one as to harm to its purported reputation.”