It's my distributor and my competitor

Night Vision Systems, LLC v. Night Vision Depot, Inc., 2011 WL 3875515 (E.D. Pa.)

NVS sued defendants NVD and Cejay. Cejay counterclaimed for false advertising under the Lanham Act, along with tortious interference with contracts and unfair competition under Pennsylvania law. The court denied NVS’s motion for summary judgment on the counterclaims.

Cejay makes night vision equipment for the military and law enforcement, including Phoenix and Phoenix Junior infrared beacons (used to minimize friendly fire).

In 1994, one of Cejay’s current owners started selling the Phoenix to a company called Night Vision Equipment Company. NVEC hired retired US military personnel to work with Cejay’s owner to develop and sell Cejay’s products through NVEC. NVEC sold its assets to an entity that eventually became NVS, and Cejay kept selling beacons to NVS, which became the largest distributor of Cejay’s combat identification (CID) products, representing 95% of its sales. Cejay offered NVS a 15-20% discount off the price of the products to other purchasers, allowing NVS to win a number of military contracts. The parties didn’t have an exclusive distribution agreement.

The military bought Cejay’s products through several channels: the GSA website, the Defense Logistics Agency via various bid soliciting websites, and prime vendor contracts between the government and suppliers/distributors. NVS sold Cejay products to at least one other distributor with a prime vendor contract. However, the relationship deteriorated. Among other things, NVS asserted ownership over the Phoenix trademarks and demanded an exclusive distributorship agreement. Cejay found other distributors for its CID products, primary among them ADS Tactical.

Cejay argued that NVS made numerous misrepresentations about Cejay products and the NVS/Cejay relationship, such as that it manufactured Cejay’s beacons and that NVS was the exclusive distributor of all Cejay products, because it didn’t want to lose its lucrative position as the middleman.

NVS argued that Cejay lacked prudential standing under the Lanham Act. Conte Bros. instructs courts to consider (1) whether the plaintiff’s alleged injury of a type that Congress sought to address in providing a private remedy for violations of the Lanham Act, (2) the directness or indirectness of the asserted injury, (3) the proximity or remoteness of the party to the alleged injurious conduct, (4) the speculativeness of the damages claim, and (5) the risk of duplicative damages or complexity in apportioning damages. There’s internal redundancy in the test, but it’s still a valuable heuristic. (Comment: feh.)

Nature of the injury: the Lanham Act protects commercial interests harmed by a competitor’s false advertising and strives to secure goodwill against diversion. Cejay had a commercial interest in the sale of its products, but NVS argued that Cejay didn’t suffer competitive harm; instead, NVS’s competitors were other distributors of Cejay products. Cejay responded that both parties sold Cejay products to other distributors such as ADS who in turn resold to the military. Thus, Cejay argued, it competed with NVS for sales to other distributors. NVS conceded that it did sometimes resell to other distributors. Thus, the market for Cejay’s products isn’t a simple distribution chain, and there are some ways in which Cejay is in a competitive relationship to NVS. “By falsely representing that NVS was the sole source of Cejay CID products, NVS ultimately placed Cejay at a disadvantage when other distributors such as ADS sought sources for those products.” There was thus a commercial interest and a competitive harm, making the first factor weigh in favor of standing. (When there’s competition and a direct mention of the competitor, I can’t figure out any legitimate reason to deny standing; that’s part of why the five-factor test is not a particularly useful heuristic except as a supplement in non-direct-competitor cases.)

NVS argued that Cejay benefitted from every NVS sale of Cejay products, so there could be no competitive harm. However, in other cases finding this argument persuasive, the misrepresentations at issue increased the demand for the underlying product. By contrast, the misrepresentations here (as to which Cejay presented enough evidence to create a jury question) didn’t increase demand but channeled it through NVS, preventing distributors from approaching Cejay directly.

Directness of injury: NVS argued that any injury was Cejay’s own fault because it didn’t want to work with a network of competing distributors. The court found the causal chain here fairly direct. As a result of the misrepresentations, other distributors believed they could only buy the relevant Cejay products through NVS, and Cejay lost profits it could have earned from such direct purchases. In Phoenix of Broward, by contrast, customer diversion was unlikely (the court found, on the pleadings, without receiving any evidence, but why would we want evidence about a thing like causation? Sigh) making the causal chain tenuous. “Here, by contrast, the misrepresentations alleged correspond directly with the harm alleged; Cejay claims that NVS told distributors they could only get Cejay CID products from NVS and that these distributors then did not make direct purchases from Cejay, which would have resulted in higher profit margins.” This factor also favored standing.

Proximity: NVS argued that other distributors who compete with NVS to sell Cejay products would be better suited to bring a claim, since they’re the ones who lost opportunities to sell Cejay products. If the market were a purely linear distribution chain, that might be true, but in the more complex market that existed, Cejay was sufficiently proximate to counsel in favor of standing, and it alleged an injury to its own competitive interests that didn’t derive from any injury to another party’s competitive position.

Speculativeness of damages: Cejay had some quantifiable evidence of lost profits, since it was selling to NVS at lower prices than to other distributors. Some case law suggests that courts should consider the “avoidability” of damages. But the lost profits alleged here were less obviously avoidable than the damages alleged in Conte Bros.. (This is not the present court’s fault, of course, but this is some high-level ridiculousness; avoidability is either the same thing as causation or it is improper incorporation of some kind of comparative negligence into the analysis.) To avoid the injuries here, Cejay would have had to have uncovered the allegedly false representations and invest resources in countering them. It would have been better for Cejay to offer independent expert analysis as to lost sales, but this factor “at least marginally” supported standing.

Risk of duplicative damages or complexity of apportioning damages: NVS argued that allowing Cejay to sue would “open the door” for entity in the distribution chain, including NVS customers and direct competitors. Taking Cejay’s allegations as true, numerous distributors competing with NVS were harmed because Cejay was “hidden” from the marketplace as a potential direct supplier and NVS charged them higher prices than Cejay would have. So there is possible liability to other distributors, but, given Cejay’s unique position in the market, there was little risk that finding prudential standing would result in a “great increase” in federal litigation, so this factor was neutral.

Thus, Cejay had standing. (Wow, that “valuable heuristic” required a lot of work to get to the conclusion that an entity that engaged, at least in part, in direct competition with the defendant and that the defendant’s advertising specifically mentioned had standing.)

As for the substance, there was enough to go to a jury on the Lanham Act and other claims.