stating a warranty policy that defies the law may be false advertising

Bel Canto Design, Ltd. v. MSS HiFi, Inc., 2012 WL 2376466 (S.D.N.Y.)

Discussion of previous opinion.  Bel Canto, which makes high-end audio equipment sued MSS and its principal Boey for trademark infringement based on resales of altered products.  Bel Canto secured a preliminary injunction barring MSS from (1) falsely claiming affiliation with or endorsement by Bel Canto, (2) advertising or selling Bel Canto products bearing altered serial numbers, or (3) advertising or selling Bel Canto products for which warranty protection is unavailable because of actions taken by MSS HiFi such as opening the product’s case. 

MSS filed counterclaims; the court here granted in part and denied in part Bel Canto’s motion to dismiss.  I won’t discuss the antitrust claims (based on Bel Canto’s resale price maintenance-related activities) or the contract claims, which were dismissed.

MSS alleged that Bel Canto had engaged in commercial disparagement: defamatory statements about MSS’s goods/services causing special damages.  The alleged disparagement came in statements on eBay, and in letters to authorized dealers Bel Canto terminated for selling to MSS, saying that MSS engaged in “illegal” behavior, including infringement of Bel Canto's intellectual property rights.  This stated a claim: Bel Canto’s statements could be read to say that MSS’s “Bel Canto” products weren’t genuine.  But the court had already found that Bel Canto was likely to succeed in proving that MSS did in fact infringe Bel Canto’s intellectual property rights.  If proved at a full trial, this would provide a complete defense.  Though the court’s finding was only preliminary, it cautioned MSS to “think very carefully” about continued pursuit of this claim: if they pressed it and lost, the court would entertain a motion for Rule 11 sanctions.  In addition, Bel Canto could renew its argument on summary judgment that these statements were protected by the absolute litigation privilege, though that requires additional factual material not properly considered on a motion to dismiss.

MSS also alleged tortious interference with prospective economic advantage.  Though MSS stated a claim, this cause of action would also collapse if what Bel Canto said to eBay and MSS’s customers was true.  Allegations that Bel Canto terminated its dealers for selling to MSS, however, did not state a claim.  Since MSS didn’t sufficiently allege an antitrust violation, terminating authorized dealers for breaching their dealership agreements by selling to a reseller wasn’t illegal, tortious, improper, or wrongful.

MSS also alleged false advertising in violation of the Lanham Act and New York's GBL.  First, it alleged, Bel Canto conveyed to consumers that its products had a 90-day warranty, which was misleading because it wouldn’t honor the warranty on products sold by unauthorized dealers.  This policy is now disclosed on Bel Canto’s website.  The court found that the counterclaim didn’t adequately allege misrepresentation, and dismissed it without prejudice.  It might be misleading “to say, without qualification, that Bel Canto products carry warranties if some do not.”  But the counterclaim lacked factual specificity: where, when and to whom the claim was made.  The court couldn’t tell whether the statement was unqualified or conditioned.  “To evaluate context, the Court must also know where the representation was made—on the website, in the manual, on the warranty card—and what other information was readily available to one reading it.”

MSS argued that Bel Canto’s disclosure was itself misleading, because under New York law Bel Canto must honor all warranties, even on products sold by unauthorized dealers.  At this stage, the court allowed this theory to proceed.  Previously, the court concluded that MSS hadn’t shown that Bel Canto didn’t have other reasons for refusing to honor any warranty—that is, it’s ok under NY law to refuse to honor a warranty because the case has been cracked, for example.  Facts developed at trial could keep the issue alive.  (The court said something confusing about reliance; reliance here must mean not reliance on the law requiring manufacturers to honor warranties but on the misleading statement that Bel Canto wouldn’t do so: if consumers believed Bel Canto because they didn’t know about the law, then that’s a reason they might have paid more for a product from an authorized dealer—materiality seems to be the appropriate inquiry.)

Finally, MSS argued that Bel Canto falsely said that MSS was selling Bel Canto products in violation of the Lanham Act.  This theory was duplicative of the commercial disparagement claim, and survived subject to the warning above.