Organ Recovery Systems, Inc. v. Preservation Solutions, Inc.,
2012 WL 2577500 (N.D. Ill.)
ORS sued defendants for breach of contract, false
advertising and unfair competition under the Lanham Act, deceptive trade
practices, and consumer fraud. Some
defendants counterclaimed. ORS sells
solutions that are used to preserve kidneys during transplant procedures. ORS
attempted to improve one solution's packaging and shelf life and entered into a
contract with PSI to have PSI assist with testing, manufacturing and obtaining
regulatory approval for the product, known as KPS–1. Defendant BTL competes
with ORS, and ORS alleged that PSI misappropriated ORS’s confidential
information, using it in FDA applications and delivering it to BTL. ORS also
alleged that defendants gave current and prospective customers false information
about ORS products. (Note the unraised standing issue: PSI appears to be a supplier, not a competitor, of ORS, but that doesn't affect the court's analysis of the false advertising claims.)
ORS’s Lanham Act claims against PSI were based on a letter
PSI sent to, among others, an Illinois organization called Gift of Hope Organ
& Tissue. PSI said that a company that had distributed the solution “in
compliance with” PSI’s FDA applications was now distributing a solution not
made by PSI, and that this was “critical to you and your patients” because the
instructions for use might differ, the PSI product had been “stability tested,
reviewed and certified” for certain important features. The letter continued, “The transplant
solution is an integral part of your organ transplant procedure. We know that
patient safety is paramount and that full disclosure is essential to protecting
your patient. Please check the product label to determine the manufacturer of
the solution being supplied to your center.”
ORS alleged that PSI sent this letter to organ procurement organization
(OPO) administrators, hospitals, and other potential ORS customers throughout
the country, leading numerous customers and potential customers to express
confusion and concern to ORS and to others in the market.
PSI argued that this wasn’t commercial advertising and
promotion because of the obviously wrong 7th Circuit caselaw that
reads “promotion” out of the statute.
Advertising is promotional material “disseminated to anonymous
recipients,” not “face-to-face communication” or “letters sent to
customers.” The court here, however,
salvaged something by pointing out that the 7th Circuit has never held
that “anonymous” “must mean that a corporation cannot know the identities of
the recipients of the communications.”
Instead, the Lanham Act covers “unsolicited statements to numerous
potential clients with which [an advertiser] had no relationship” (subject to Gordon & Breach limits). ORS alleged that the letter went to potential
customers around the country, and it was addressed to “Dear OPO Administrator”
rather than to a named individual or business, which supported the argument
that it was a mass unsolicited communication. Even if PSI’s letter was
specifically targeted to OPOs, in that PSI knew the identities of all the
recipients because it had a mailing list (and wasn’t mailing the letter to
people with no possible interest in receiving it!), ORS properly alleged that
the letters were “a generalized solicitation rather than an individualized
communication.” That was enough.
PSI then argued that ORS didn’t sufficiently allege actual
consumer deception, since it was arguing misleadingness rather than literal
falsity. But ORS alleged that three OPO
employees expressed confusion/uncertainty, two directly to ORS, and that was
sufficient to survive a motion to dismiss.
ORS separately claimed that defendant BTL violated the
Lanham Act by sending a broadcast email to “Organ Procurement Professional[s]”
and putting out a press release stating falsely that BTL made the FDA-approved
label change for room-temperature storage of the solution possible, when it was
ORS that did so. (Dastar?) Broadcast email and
a press release could be advertising/commercial speech. “Even if ORS knew all of the businesses that
would receive the broadcast e-mail, the allegations would allow for a finding
that the e-mail was not specifically targeted to any of them individually.… [T]he
e-mail was an anonymous communication not in the sense that a television
commercial is anonymous, but in that it was a generic communication to a large
group, and each recipient was provided with the same material.” However, claims that BTL attempted to snag
one specific ORS customer by disparaging ORS, and that BTL made similar
statements to others, couldn’t be the basis of a Lanham Act claim because they described
individualized communications. “The Lanham Act does not cover every instance in
which a business speaks to the customer of another business, even if the
speaker is lying.” A specific attempt to
acquire a particular customer wasn’t “advertising” for Lanham Act
purposes. (Not this court’s fault, but
this conclusion makes achingly clear why the 7th Circuit rule
misreads the Lanham Act’s “advertising or
promotion.” Robert Post would say that
individualized communications aren’t even
commercial speech in terms of the constitutional protection they should get—but
they sure seem like promotion, even if one then applies an extra magnitude test
as with the Gordon & Breach “disseminated
sufficiently to the relevant consumers” standard.) Similarly excluded from the Lanham Act’s
coverage were ORS’s allegations that BTL responded to a CFP from a UK
transplant organization with false statements about ORS, and allegations that
named BTL personnel “told” something to named OPO personnel. “Although ORS contends that these
communications are examples of a larger advertising campaign, the manner in
which they are alleged in the amended complaint does not permit that
characterization.” (Presumably the court
would deem phone marketers following scripts to merit the “advertising” label,
given what it said above.)
As for ORS’s state law false advertising/unfair competition
claims against BTL, BTL argued that ORS failed to allege a significant
connection between the conduct at issue and Illinois, as required. The “critical question” was “whether the
circumstances relating to [the] disputed transactions ... occurred primarily
and substantially in Illinois,” but the place of injury was only one relevant
factor; if the bulk of a fraudulent transaction occurs in Illinois and the
injury or deception was the only thing outside the state, that could be
actionable. Here, one of the two
defendants collectively referred to as BTL was a Delaware corporation with its
principal place of business in Illinois, and ORS was also headquartered in
Illinois. It was likely that the
disputed communications originated in Illinois and that ORS was harmed in
Illinois, so the claim survived a motion to dismiss.
ORS also brought a claim against BTL for tortious
interference, but the court found that it mostly failed to identify anyone with
whom it had a sufficiently strong expectation of future business. “Mere unsuccessful solicitation does not give
rise to a tortious interference claim.”
Entry into preliminary negotiations can be sufficient, but responding to
a call for proposals doesn’t reach that level.
With respect to one potential client, One Legacy, ORS did allege that
BTL’s misstatements caused it to rescind a previous oral commitment to buy from
ORS; however, ORS didn’t allege that BTL knew about ORS’s expectation.
BTL counterclaimed for false advertising by ORS,
specifically misrepresenting that it has FDA approval to sell its SPS–1
solution with a label indicating that the solution does not need to be filtered
before use. ORS submitted a letter from
the FDA indicating the FDA’s concern over this part of the label; a reply letter
from ORS stating that data indicated that filtered and unfiltered solutions
were equivalent, and that PSI’s version of the solution had been approved for
marketing without a filtering requirement; and a subsequent letter from the FDA
stating that it had found that SPS–1 was “substantially equivalent ... to legally
marketed predicate devices” and that ORS could therefore market the product
subject to applicable labeling/misbranding rules. ORS argued that this showed unambiguous FDA
approval. Though the court agreed that
the letters appeared consistent with this argument, this was a motion to
dismiss, and in any event neither the counterclaim nor the letters had
sufficient details about FDA practice to say that the FDA letter constituted
“approval.”
PSI also counterclaimed, alleging that after it rejected a
proposed exclusivity agreement with ORS, ORS terminated PSI and hired another
manufacturer, whose products proved substandard. PSI alleged that ORS solicited business by
telling prospective customers about PSI's services and didn’t tell customers
about the switch, and that ORS's current customers therefore believed that the
solutions were made by PSI. PSI also
alleged that ORS continued to use an instructional insert stating that the
solution does not have to be filtered before use. Because this insert was
originally added by PSI, PSI alleged that its presence further confused
consumers as to source.
ORS responded: Dastar,
plus the binding Bretford Mfg., Inc. v.
Smith System Mfg. Co., 419 F.3d 576 (7th Cir. 2005) (applying Dastar to bar furniture manufacturer's
claim against another manufacturer for the uncredited use of its pre-made table
legs). In Bretford, the consumer knew who’d produced the finished
product. ORS argued that, though PSI
manufactured the solution, that wasn’t the finished product, which was solution
labeled and bagged by ORS. (If, as seems
likely, things can happen to the solution that affect its safety/efficacy
depending on how the product is packaged for the consumer, I’d be inclined to
find this argument persuasive; compare the cases on material alteration in
trademark law.)
PSI argued that its claim was for passing off—consumers
thought that ORS was selling PSI solution—not reverse passing off. Still, Bretford
was pertinent for focusing on the finished product. At this point, the court was unconvinced by
ORS’s arguments. “PSI's allegations
clearly suggest that the customers at issue believe that they are buying
solution. The solution is not just a component of its package; it is a tangible
product. By contrast, a customer who buys a table likely would not consider the
purchase to be ‘wood’ or ‘legs.’ PSI's allegations that customers have asked it
to provide more information about its solutions further support its implication
that the customers understand the product they are purchasing to be coming from
PSI.”
However, these claims were still dismissed, without
prejudice, because false representation claims under the Lanham Act are subject
to Rule 9(b) (sigh). The allegations were
too conclusory. Though there were
specific allegations about two particular OPOs who expressed confusion or
uncertainty to PSI about the PSI-ORS relationship, the counterclaim had no
detail about how these customers came to believe or continued to believe that
PSI made the solutions. “Although false
designation claims need not involve allegations that the defendant misused a
specific logo or mark, there does need to be some indication that the defendant
made a false representation.” PSI stated
that ORS informed its customers that the solutions had been made by PSI when
the PSI-ORS relationship began, but failed to specify the “designation, design
element, advertising, solicitation, or other means of communication” ORS used
to convey this information. Likewise,
though PSI alleged that the continued use of PSI’s instructional insert was
confusing, it didn’t attach a copy of the insert to the complaint or identify
any characteristics of the insert that might lead to continued association with
PSI. (Somehow I doubt that the court is,
in the end, going to want to impose a rule that makes manufacturers disclose to
consumers when they change component providers, but perhaps the centrality of
the solution to the final product and the pull of trademark expansionism will
prove me wrong.)
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