Wednesday, November 16, 2011

broken promises and broken bones

BSN Medical, Inc. v. Parker Medical Associates LLC, 2011 WL 5509030 (W.D.N.C.)

NB: There is a lot going on in this case other than the false advertising claims, and I’m mostly ignoring the other claims. The core of this case is that BSN alleged that Bruce Parker, inventor of Ortho-Glass (fiberglass used for casts and splints), and his company PMA had taken BSN’s trade secrets, which BSN acquired through transactions with Parker’s companies involving various noncompete and confidentiality agreements. BSN also sued for copyright infringement and state and federal false advertising, as well as other state-law claims. Defendants counterclaimed for state and federal false advertising.

BSN’s false advertising claim centered around defendants’ alleged false marketing of their product as the “original” Ortho-Glass, causing confusion. (Sounds like a possible job for Dastar!) BSN argued that PMA claimed repeatedly to third parties that its products are "the new Ortho-Glass," "identical to Ortho-Glass," "the original Ortho-Glass," "reintroducing the original product," that PMA's products are "what amounts to the same thing as the original Ortho-Glass product," except for the "color of the ink and the name on the box," and that PMA’s EZY Splint was "identical to Ortho-Glass" except for its place of manufacture, its dispenser system, and the cost savings. BSN argued that consumers were confused and that this constituted trading on BSN’s goodwill and reputation and that it lost numerous clients to PMA.

Parker testified that PMA’s new product is not identical to Ortho-Glass, and BSN argued that this proved literal falsity. In any event, BSN argued that the claims were misleading.

PMA argued that the vast majority of statements identified by BSN were inadmissible hearsay, made by independent contractors or distributors, or not made to customers. Only two statements went to any customers that BSN identified as having received false statements. One, an email sent from PMA’s national sales manager, said “Bruce Parker was the inventor and original patent holder of the 7 layer splinting products your members have used years ago. Over the past few years though, Parker Medical has made some changes that customers have mentioned as positive. For example, some have noticed an improved clip and are impressed with our patent pending dispenser system--further improving Parker Splint's cost effectiveness potential. There are also some in-house changes with our original 7-layer design that only a chemist can explain.” This email was also sent after the customer had decided to go with PMA instead of BSN.

The second was a letter sent to the Methodist Healthcare System in Dallas, Texas: “Parker Medical was formed over 17 years ago. Its founder, Bruce Parker, was the original patent holder on Ortho-Glass and after several years of rapid growth and making that brand the market leader in roll form splints, sold to Smith & Nephew. Eighteen months ago that patent expired and Parker Medical re-entered the market place. It is our proven manufacturing and technology expertise, in the same manufacturing facility that easily met the demands of a number of major hospital systems and purchasing organizations, which allows us to economically re-introduce the original product to the healthcare market now.”

PMA argued that “reintroducing the original product” was true in that PMA sold a seven-layer splint like the original Ortho-Glass, whereas BSN has switched to a single-layer product. Indeed, BSN’s director of US marketing said in an email to high-level BSN employees that PMA’s product was "the exact same product" as Ortho-Glass.

The court denied PMA’s motion for summary judgment. The statements could have confused consumers into believing that the PMA products were the same as BSN’s Ortho-Glass. Hearsay objections could be dealt with at trial, and there were at least some admissible statements at issue. (The court also noted a conflict between PMA’s stance on the trade secret claim and its position on the false advertising claim: for purposes of the trade secret claim, PMA argued that its products were not made using the Ortho-Glass process and were not even derived from Ortho-Glass. “This is yet another reason for allowing plaintiff's Lanham Act claim to survive summary judgment, as defendants will need to take one position or another before a jury responsible for fleshing out the Lanham Act and trade secret appropriation claims.”)

Its copyright claim was based on the Ortho-Glass Splinting Manual (2d ed.), a training booklet provided to customers, which had been condensed into a pocket chart (a derivative work). This claim foundered, somewhat unusually, on joint authorship: a product manager led the creation of the manual, and collaborated with two other people, including a freelance graphic designer, on the work. The graphic designer contributed all the graphics and illustrations and did the layout; she testified that she had final say on layout. Though she wasn’t given credit, the court found that this was not dispositive. She contributed copyrightable material and the parties intended their contributions to be merged into an inseparable whole. Thus, she was a joint author and capable of granting a nonexclusive license to defendants, which she did implicitly when they hired her to create their own pocket chart. Thus, as the court explains it, defendants apparently created a work that was substantially similar to a derivative work created by BSN’s predecessor, but the copyright in that derivative work wasn’t registered (too bad for plaintiffs, because if it had been, the license to use the original wouldn’t have helped unless the substantial similarities derived only from similarity to the original, which doesn’t seem to be the case on the facts recited).

PMA’s counterclaims focused on an alleged anti-PMA campaign by BSN, where BSN claimed that PMA’s seven-layer splints were subject to delamination and wrinkling. (E.g., in an email to a company that had switched from BSN to PMA, “Ortho-Glass is a wrinkle-free splint material vs. the 7-layer Parker splint, which wrinkles very easily (causing pressure points) and has delamination issues (causing the splint to breakdown)”; and an illustration in its catalog comparing the two and labeling the 7-layer image with "more delamination," "more layers," "more wrinkles," and "more worries.") BSN replied that it only told the truth, though its director of quality management admitted that it had never had a customer complaint about delamination or wrinkling for decades. Likewise, its senior marketing manager conducted tests on PMA’s products and testified that he was not aware of any such issues. Indeed, he testified that the claims were neither fair nor true, and even the person who said them admitted in deposition that they weren’t true.

PMA also argued that BSN attempted to thwart competition by telling PMA’s potential customers that the parties were involved in a lawsuit, which would result in PMA’s inability to supply product, and that PMA would be out of business within a year.

BSN argued that its statements weren’t made in commercial advertising or promotion. As to the email, BSN argued that it wasn’t made to influence the company to buy BSN’s products because the company had already decided to buy PMA’s products based on price, and because it was made to an educator, not to someone making a purchasing decision. Plus, it was just to one individual.

BSN also argued that internal documents used to convey information to its sales force and Powerpoints used in presentations to healthcare collaboratives weren’t actionable, the former because they weren’t disseminated to purchasers and the latter because they were used to negotiate prices, not to make a sale. (You almost have to admire the lawyer’s ability to make that last argument with a straight face.)

Then BSN argued that the individual’s statements in the email were based on her personal observation and that the catalog illustrations were mere puffery. (Again, wow.) Anyway, BSN argued that its tests have indicated that there is more wrinkling and delimination in seven-layer splints than in single-layer ones.

The court denied BSN’s motion for partial summary judgment. At least some of these statements constituted commercial speech, including statements in the catalog and statements made to potential customers, including oral statements made by sales reps. Plus there was a genuine issue of material fact on literal falsity.

The one caveat, made on the state-law claim, was that PMA didn’t show that the filing of the lawsuit was itself an unfair and deceptive trade practice, even though BSN’s SWOT analyis (strengths, weaknesses, opportunities and threats—I remember those!) listed PMA as a threat and “Slow/disable new OG competitors through lawsuit” as an opportunity. PMA argued that BSN sued solely to interfere with PMA’s business, burying PMA in discovery and motion practice. The court found, however, that BSN had a reasonable basis for suing.

The last rejected argument: Both parties argued that the other failed to present sufficient evidence of damages to survive summary judgment. Here, though, the court followed precedents that, once the elements of a cause of action are established, a plaintiff is entitled to recover at least nominal damages. The court was satisfied that, if either party were to prevail, it could prove at least nominal damages.

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