Monday, July 09, 2012

Taking credit for firm founders' prior work creates Lanham Act problems

Basile Baumann Prost Cole & Assocs., Inc. v. BBP & Assocs. LLC, 2012 WL 2426132 (D. Md.)
How can a company show its heritage when there’s been a split between founders?  As this case shows, it can be a risky endeavor, and the breakup agreement might not cover all the issues.
In 1990, Basile, Prost, and Baumann formed an economics and real estate consulting firm, Basile Baumann Prost & Associates, Inc.   It advised local, state, and federal agencies and used the acronyms “BBPA” and “BBP,” and in 1995 launched  Basile and Prost worked mostly at the state and local level, while Baumann spent most of his time with the US Navy.  In 2006, Baumann sold his share to Cole, and the company changed its name to Basile Baumann Prost Cole & Associates, Inc., which began to refer to itself as “BBPC,” used as a logo and on business cards, though the webside stayed

The parties disputed whether the plaintiff, herein the Corporation, stopped or continued using BBP and BBPA after Cole was added; Cole said it continued, especially among clients “with longstanding relationships with the firm,” while Basile said it didn’t.  The Corporation’s marketing materials included lists of awards the firm received and client testimonials, e.g., “BBPC displayed aggressive, well organized efforts to expedite the project .... BBPC went out of their [sic] way ... at short notice to ensure financial documents were finalized.”
In 2009, Basile and Prost, who worked with state and local governments, decided to split with Cole, who worked mainly with the Navy.  The Corporation agreed to redeem Basile and Prost’s shares in exchange for $1.8 million, 83 jobs, 138 “leads and proposals,” and “[a]ll goodwill created on all past contracts and clients by Basile and Prost [within the last four years] to include but not be limited to any and all use of job qualifications and materials and job references for Basile and Prost's contracts and clients.”  The Corporation “retain[ed] all [other] assets, properties[,] and rights,” including the company name, office location and lease, telephone number, domain name and website, two-thirds of the Corporation's staff, and 70 percent of its contracts by revenue, along with the direct federal defense-related goodwill etc.  A noncompete clause provided that, for four years, Basile and Prost would not “in any manner ... actively solicit business from any party who [wa]s currently a prospective client or ha[d] been, at any time during the four ... years prior to the date of [the] Agreement, an active client ... of ... Cole and the Corporation.”
Basile and Prost then formed BBP & Associates LLC, an “economics and real estate development advisory firm” in Annapolis.  For some time, the LLC shared office space with the Corporation. The LLC used the following logos, along with

Apparently internally, Basile proposed the following statement distinguishing the LLC from the Corporation: “[i]f you must say when we were organized, better wording might be ‘BBPC was founded in 1990, and in 2009 was legally restructured, resulting in the formation of BBP and Associates LLC.’”  The LLC then sent an announcement to Basile and Prost's industry contacts and current, former, and potential clients, stating that “BBP & Associates, LLC (BBP LLC) ha[d] moved to a new location!”  A mass email followed:
Ralph Basile and Jim Prost are pleased to announce the establishment of BBP & Associates, LLC (BBP LLC). The firm continues to service all of the state, local, private[,] and non-direct Department of Defense work conducted by the firm that they founded in 1990. That firm, which was reorganized at the end of 2009 and is trading as BBPC, continues to service the remaining direct contract with the Department of the Navy….
A past Corporation client forwarded the email to Cole and asked whether the Corporation was going to change its name.  The LLC’s financial manager testified that, in 2010, several LLC clients sent payments to the Corporation, which would then deposit the money and cut a check to the LLC.  The LLC gave presentations in North Carolina and Virginia using the green BBP logo, describing itself as a nationally recognized firm with projects in 47 states and 4/5 countries, serving over 1250 clients.  The Corporation also received mail from the city of Orlando intended for the LLC.
In May 2010, Basile told Cole that the Corporation had violated the non-compete provision of their greement by improperly soliciting local government work, and listing on its website two projects that Basile and Prost had done in the past four years.  The Corporation removed the two projects from its website, then asked Basile and Prost to stop using the BBP “service mark,” change the appearance of the LLC’s website (specifically mentioning the color scheme and borders), and adopt a replacement name.  The LLC responded that the Corporation had abandoned BBP and BBPA, but changed its website and logo:
Shortly, the LLC modified the logo further:

An entity called RKG submitted a proposal to a Rhode Island planning authority listing the LLC as its subcontractor, describing the LLC in terms similar to those above, stating that the LLC had been involved in Defense Department/Navy downsizing, and including an LLC brochure listing many projects purportedly completed by the LLC that were in fact completed by the Corporation when Basile was a principal.  The planning authority awarded the contract in part because of RKG’s experience with the Navy.  The Corporation also submitted a proposal under the name “Basile Baumann Prost Cole & Associates, Inc.”  Cole later wrote to a representative of the Planning Authority to ask how another firm had been able to obtain a copy of the Corporation's sealed bid. She responded that she “remember[ed] [Cole's] firm and another who submitted a proposal having almost the same name.”  She “[did]n't know if that [had] caused any confusion amongst the proposals.”  A prospective client of the Corporation forwarded it an email from the LLC describing the LLC’s work, including its work in Baton Rouge; the client wrote that he’d “noted your work in Baton Rouge.”  There’s more, including alleged confusion by a representative of the LLC’s insurer and another client who’d been transferred from the Corporation to the LLC, but those events give the flavor of what went on; the LLC continued to attribute to itself projects that the Corporation had engaged in before the split, and claimed to have existed for a number of years before its formation.
After the lawsuit was filed, the LLC altered its website claims to have “caused construction of over $7 billion of development in 47 states and 4 countries while assisting over 1,100 public sector clients meet their development objectives” by adding a note, “*Includes locations where work was managed and/or completed by senior BBP LLC staff, including assignments by Basile and Prost when they were Principals and senior technical staff at other consulting firms.”  The LLC’s website also used endorsements verbatim from the Corporation’s marketing materials (sometimes with the substitution of the LLC’s name for the entity named in the Corporation’s testimonials, e.g., “BBP LLC displayed aggressive, well organized efforts to expedite the project .... BBP LLC went out of their [sic] way ... at short notice to ensure financial documents were finalized”).  After the Corporation sued, the LLC changed these testimonials to refer to Basile and Prost, with brackets to indicate the alterations.  Below the testimonials, the LLC added the same asterisked note.  Of 36 testimonials on the LLC’s website, only 3 weren’t originally from the Corporation’s marketing materials.  Its website also listed the same awards as the Corporation did, in the same order, with the same photos; the asterisk also got added there.
The court denied the parties’ cross motions for summary judgment on the Lanham Act claims.  First, the court rejected the LLC’s argument that the Corporation doesn’t own “BBP,” since it transferred or abandoned the goodwill associated with such marks.  The Corporation argued that it transferred only the personal goodwill of Basile and Prost.  While a sale of a business and its goodwill will carry with it the trademark of the business even if not expressly mentioned, what happened here was more complicated.  It was clearly not the sale of the Corporation’s entire business and goodwill, and thus didn’t necessarily transfer the trademark.  Nor did the LLC meet its burden of showing that the Corporation abandond BBP marks, at least as to services for state and local governments, by transferring certain assets and agreeing not to compete with Basile and Prost in that market for four years.  The Corporation was still using the website and BBPC mark; Cole also testified that the firm still used “BBP” and “BBPA,” especially among clients “with longstanding relationships with the firm.”  There was also no showing that the Corporation lacked the intent to use the marks in the reasonably foreseeable future; it was still providing services to governments and institutional clients, and one could reasonably read the parties’ agreement to bar the Corporation only from soliciting certain clients of Basile and Prost's for four years.
The court also found sufficiently disputed facts on likely confusion.  The marks are similar; the parties are both based in Annapolis and arguably perform similar work in economics/real estate consulting.  The LLC’s ads had been similar to the Corporation’s, as had its website.  A reasonable jury could find intent to confuse because the second B in BBP refers to Baumann, who’d never been affiliated with the LLC but did work for the Corporation.  Defendants also made several representations “that could reasonably be construed as attempts to present the LLC as the Corporation.” In an email to an employee (which the court treated as relevant without addressing whether this was a relevant audience), Basile said that the Corporation had been “legally restructured, resulting in the formation of [the LLC].”  And in several bids for work and in marketing materials, the LLC said that it existed long before its January 2010 formation and its claimed to have completed projects that were done by Basile and Prost when they were principals at the Corporation. Its website said that it had provided services to “literally hundreds of clients” when it had advised “far fewer” than 70 to 80 clients.
Evidence of payments made to the wrong entity and misdirected mail, etc. might not count as actual consumer confusion, but still counted as evidence a reasonable jury could use to find likely confusion.
The Corporation also alleged that the LLC’s statements about its clients, testimonials, projects, and awards and recognitions constituted false advertising under the Lanham Act.  The LLC argued that the Corporation failed to show materiality or injury.  The court defined materiality as a claim to have “a characteristic that most consumers would find appealing,” which I think is too narrow.  Anyway, the LLC claimed to have served about 600 clients, which were mostly served by the Corporation; it claimed to have accomplished a number of “firsts” in its industry, ditto; it claimed to have completed 45 projects, ditto; and it used testimonials describing work done by the Corporation and claimed awards given to the Corporation.  The defendants argued that no customer would purchase the LLC’s services by reading the website literature, but would rather contact it directly and learn more; thus the claims weren’t material.
The Corporation disagreed; if the website didn’t help get business, why would the LLC put it together?  The court found that a reasonable jury could find materiality.  The claims at issue all related to characteristics a consumer would want from a consulting firm, and materiality is generally a question of fact for the jury.  Similarly, a jury could find likelihood of injury from sales diversion/lessened goodwill.
Defendants also argued that they were just intending to tout the achievements of Basile and Proust, but intent isn’t an element of a Lanham Act violation.  (It seems to me this is better framed as a literal falsity/implied falsity argument.) 
For similar reasons, the ACPA claim against survived.  Defendants argued that there was no confusing similarity, and based their argument in part on their Google search for “BBP,” which didn’t turn them up; the search the court relied on a search for “BBP Annapolis,” which produced links to the LLC’s site as the top two results and the Corporation’s as the third.  Given the evidence on likely confusion, a jury could infer that the defendants intended to divert customers by creating a likelihood of confusion as to the source of the LLC’s site.
The evidence was, however, insufficient to grant the Corporation’s cross motion for summary judgment.  For example, the LLC’s business focuses mainly on state and local government, while the Corporation is primarily focused on the Navy.  Because neither targets the general public, a reasonable jury could find that consumers’ sophistication made confusion unlikely.  Even the crossed wires on payments have other explanations: they were made shortly after the transfer of contracts to Basile and Proust, and may have been transitional artifcats.  The other confusion instances might be dismissed as de minimis.  In addition, a jury could favor the defendants on intent.  They sent out a mass email distinguishing the LLC from the Corporation, and changed their website and logo when the Corporation complained.

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