Wednesday, March 30, 2011

Threat letters aren't "advertising or promotion"

Luxpro Corp. v. Apple Inc., 2011 WL 1086027 (N.D. Cal.)

Luxpro and Apple compete to sell mp3 players. In previous scuffles, Luxpro was forced to abandon the name “Super Shuffle” and use “Super Tangent” instead for one of its products because of German litigation, and was also subject to partially successful trade dress litigation in Taiwan. Allegedly, during and after the Taiwanese litigation, Apple threatened Luxpro’s distributors and retailers to stop them from doing business with Luxpro, threatening them with the same type of litigation Apple filed against Luxpro and threatening to withhold Apple products from them. Luxpro alleged various misrepresentations and disparaging statements about Luxpro's products, including that Luxpro was selling cheap knock-offs and cheap and illegal copies of Apple's iPod products.

The court first held that Noerr-Pennington was not a complete shield for Apple. Petitioning the government for redress is generally immune from antitrust, statutory, or tort liability, unless litigation is a mere sham; conduct incidental to prosecuting a suit is also protected. Apple’s pursuit of injunctions in Germany and Taiwan were not shams, and the doctrine applies to actions in foreign countries.

However, Apple’s alleged threats to Luxpro’s commercial partners were not protected. Apple argued that the letters were warnings of potential lawsuits if the companies continued to sell Luxpro products and thus incidental to the prosecution of a lawsuit. In the Ninth Circuit, Noerr-Pennington immunizes parties who send pre-litigation demand letters warning a potential adversary about a possible lawsuit, because that’s conduct incidental to the prosecution of the suit. This provides “breathing space” for the right to petition the government. However, Luxpro made some allegations that Apple generally threatened Luxpro's commercial partners to stop doing business with Luxpro without suggesting the possibility of a lawsuit or mentioning the enforcement of any intellectual property rights. The court couldn’t conclude at this stage that all of Apple's threats were incidental to the prosecution of a lawsuit.

Some of Luxpro’s claims for intentional interference with prospective economic advantage and one claim for intentional interference with contractual relations were sufficiently well-pled to survive a motion to dismiss.

The court found that Luxpro failed to state a Lanham Act false advertising claim. Apple’s statements weren’t made in “commercial advertising or promotion.” Apple’s demand letters weren’t designed to influence Luxpro’s customers to buy Apple’s products. Deterring companies from doing business with Luxpro isn’t necessarily the same as persuading them to do business with Apple. Luxpro didn’t allege any facts to show that Apple threatened Luxpro’s partners to influence them to buy Apple products, though the court granted leave to amend.

Luxpro also stated a claim for defamation, but not trade libel. Defamation is about the character of a person or business; trade libel is about the goods. Luxpro alleged that Apple told Luxpro’s partners that its products were "cheap 'knock-offs,' " "cheap copies," and "illegal copies" of Apple's iPod products. These were assertions of objective fact sufficient to ground a defamation claim. Trade libel, however, requires a plaintiff to plead special damages. At a minimum, the plaintiff must plead that it had an established business, the amount of sales for a substantial period preceding the libel, the amount of sales subsequent to the libel, and facts showing that such loss in sales were the natural and probable result of the libel. Pleading general economic loss, including loss of goodwill and lost profits, was insufficient.

Luxpro’s California Section 17200 claim survived under the “unlawful” prong, since unfair competition under the statute covers anything that can be called a business practice that is forbidden by law, thus borrowing other violations of the law—including tort law. Given the properly pled tort claims above, the Section 17200 claim also proceeded.

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