Monday, May 13, 2013

Remington Steel: false advertising, but not TM infringement, from false identities

General Steel Domestic Sales, LLC v. Chumley, 2013 WL 1900562 (D. Colo.)

General Steel sued defendants, including Chumley and his company Armstrong Steel, for trademark infringement, unfair competition, and false advertising.  After a trial, the court rejected the infringement claims but found that defendants had engaged in false advertising.

General Steel had a registered trademark for its logo, the outline of a building with “General Steel Corporation” in it, and also on the word mark “GENERAL STEEL CORPORATION.”  General Steel and Armstrong compete to sell prefabricated steel buildings.  These range in size and purpose and cost from $10,000-$200,000.

General Steel has spent over $50 million in marketing, mostly on radio ads, from the late 1990s.  It also has a history of some adverse court decisions on consumer protection issues, which are available to consumers online, as were other negative comments even before Chumley’s activities detailed here. General Steel’s sales peaked in 2002 and then steadily declined; its principal attributed the decline to a case arising out of the Colorado AG’s complaint.

Chumley worked as a salesperson for General Steel for about 9 months and left disgruntled.  He then moved to another competitor, Olympia Steel, and sent an obscene email to General Steel employees under a mocking pseudonym, and created/directed the creation of a porn website falsely attributed to a General Steel employee.  He then moved to Colorado to open an Olympia office, but then created the defendant business entities, doing business as Armstrong, which sold its first building in April 2009.

Chumley used Google AdWords to target General Steel, e.g.: “General Steel buildings – Steel framed buildings | Armstrong Steel ... Checkout [sic] various Armstrong Steel buildings – Building frames for your general steel buildings like commercial steel buildings, industrial steel buildings.”  He was also involved in issuing a number of internet press releases and articles using false claims to publicize Armstrong’s capabilities.  Some of the articles used quotes from a fictional person, “J.P. Remington, III, V.P. of International Affairs for Armstrong Steel.” One falsely claimed that Armstrong established an “enrichment program . . . benefit[ting] the less fortunate children of the Middle East” by helping to rebuild schools in Iraq. It also claimed that it had been required to “postpone international deliveries by one month to meet rising demand here in the U.S. for their steel buildings.” Chumley’s email address sent emails purporting to be from Remington. Chumley blamed a former employee for writing the emails and false articles, but the court didn’t find this credible.

In 2010, Armstrong characterized itself as “one of the largest pre-engineered steel building manufacturers in North America,” and stated that “Armstrong Steel is a leading manufacturer of pre-engineered steel buildings and conventional metal buildings for commercial, industrial and religious building projects.” Its website described Armstrong as “the leader in metal buildings and steel metal buildings.” Chumley testified that Armstrong sold approximately seventy buildings from the time of its founding through April 2010.

The 2010 website also said that “[e]ach piece of steel we fabricate is representative of our experience, know-how and cutting-edge technology,” but Armstrong did not fabricate any steel at that time. Likewise, the website stated that Armstrong had an “onsite, environmentally-controlled painting facility” which “applies the finishing touches to every piece of your steel building structure without adding cost to your metal building project,” but Armstrong didn’t have an on-site painting facility, nor was the claim “[o]ur facilities utilize laser precision engineering” true.

Searching “general steel” on Google in February 2010 would likely have produced the sponsored ad: “General Steel Buildings Price Your Building Online Or Let Us Do It. Guaranteed Lowest Prices!”  By June 2010: “General Steel Buildings Price an Armstrong Steel Building Online in Minutes Or Let Us Do It.,” or, just before the lawsuit commenced, “Don’t Buy General Steel Without Pricing Armstrong First. Price a Steel Building in Minutes!,” “Before You Buy General Price Armstrong Steel First Guaranteed Lower Prices!,” and “General Steel v Armstrong Don’t Buy a General Steel Building Without Pricing Armstrong First!”

Once the lawsuit started, Chumley doubled down on the “General Steel” ad campaign, expanding it to Bing and Yahoo because defendants were “in litigation over it” and “may as well maximize.”  Later, the search engines told Armstrong to stop using “General Steel” in its ad copy.

Then, Armstrong began directing visitors to its home page to a webpage entitled “May the Best Building Win.” The page continued, “Compare the Two Finest Buildings on the Market Today and Let Reputation and Price Be the Deciding Factors!” General Steel’s corporate logo was on the left and Armstrong’s corporate logo was on the right.  Then purported features were listed.  Armstrong claimed for itself a “40 year paint warranty,” “40 year wall panel warranty,” “35 year roof panel warranty,” and “Stainless Steel Fasteners.”  However, Armstrong customers didn’t receive any warranty documents. Plus, both parties provided steel fasteners for a premium, making that comparison false (by necessary implication).  Additional text invited customers to compare the two, and there was a small print disclaimer of any affiliation between the two.

In September 2011, additional language was added using “general steel” in an unusual way, e.g., “Armstrong will Research, Plan and Price your General Steel Materials Construction Project,” “There are a number of reasons why customers turn to us with their multi purpose metal building and general steel buildings project development needs,” and numerous other references to “general steel buildings.” The additional language also included the claim that Armstrong fabricated steel, which it doesn’t.

There was also a website, Chumley denied that he operated the site, but WIPO ordered the transfer of the site to General Steel based on a complaint filed against Chumley, who admitted to submitting large amounts of content to it. The trial evidence didn’t establish that the content was false, but the court found that his activity on the site indicated that Chumley was committed to damaging the reputation of General Steel.  Plus, the court found, Chumley wrote and posted articles online that purported to have been written by two high-level General Steel personnel.  The articles supposedly written by one, Jeffrey Knight, indicated that he was the webmaster of (and some also said that he was the CEO/owner of General Steel).  Many of the articles indicated that the website allowed customers “who have been ripped off by General Steel” to document their complaints.

The court first analyzed General Steel’s trademark claims based on Armstrong’s use of “General Steel Buildings” or “general steel” in AdWords ad copy, as a paid keyword, and in website text.  The court found that Colorado’s unfair competition law was not broader, at least for these purposes, than the Lanham Act. 

Defendants argued that “General Steel” wasn’t a valid mark. The court disagreed.  The registration was prima facie evidence of validity; Armstrong argued that this was only limited to the full logo. But “General Steel” was the most salient feature of the registered logo mark, and the presumption of validity extended to the words as well.  Armstrong didn’t produce evidence rebutting that presumption.  Moreover, General Steel showed secondary meaning even though it wasn’t required to do so.  Its over $50 million on marketing, using mostly radio ads that by their nature didn’t include the logo, were evidence that it had created an association in people’s minds.  Indeed, General Steel was the third most searched term in the metal building industry after generic searches for “steel buildings” and “metal buildings.”  
Armstrong’s own use of the term showed widespread awareness of General Steel’s strength.  “[I]f Armstrong considered itself a seller of ‘general steel’ buildings, it would not have issued advertisements instructing consumers not to buy ‘general steel,’” but instead used the term to catch potential customers’ attention. Likewise, if “general steel” were a descriptive term, Chumley wouldn’t have created a website called generalsteelscam for a business he was in.  Instead, the site described itself as “a worldwide online consumer reporting Web site and publication that allows customers who have been ripped off by General Steel to file and document complaints about General Steel Buildings ….”

Armstrong presented no credible evidence that “general steel” was a descriptive term for the parties’ products.  Its own use of “general steel” on its website “demonstrates an attempt to embed search terms in website text, often with awkward results.”  But that merely emphasized its targeting of General Steel.  The only other documents using “general steel” in that way were the internet articles for which the court found Chumley responsible.

Turning to confusion, the court found no likely confusion despite defendants’ misleading behavior.  (Here, the availability of false advertising as a separate cause of action may well have prevented a distortion of trademark to encompass techniques that are in themselves legitimate.) 

The court began with the use of “General Steel” and “general steel” in AdWords text.  Product similarity and marketing strategies weighed in favor of finding confusion, and of course the similarity of the marks was strong, despite the absence of General Steel’s logo and of the word “Corporation.”  However, this use didn’t establish an intent to create confusion.  Instead, as demonstrated by the creation of other sites maligning General Steel, the campaign was designed to create contrast, as illustrated by use of the phrase “Don’t Buy General Steel.”  

Still, some ads showed an intent to confuse, supporting General Steel’s initial interest confusion argument.  The court “suspect[ed] that certain customers may well have been lured to Armstrong’s website believing they were heading to General Steel’s.”  They could have easily left, but Armstrong potentially benefitted from General Steel’s goodwill by retaining initially confused customers.  But suspicion of initial interest confusion is not enough; proof is required.  There was no evidence at trial of actual confusion.  Though actual confusion isn’t required, its absence still weighed against finding likely confusion.

Moreover, the degree of care used by consumers “greatly diminishes any initial advantage Armstrong might have gained from improperly drawing people to its website.”  Steel buildings are expensive, complicated, and require a thorough consideration of available options before purchase.  This decreased the likelihood “that a customer’s choice would be significantly impacted by stumbling across one company’s website before another’s.”  Thus, General Steel failed to show likely confusion from the use of “general steel” in ad copy.  (Citing Toyota Motor Sales, U.S.A., Inc. v. Tabari, 610 F.3d 1171, 1179 (9th Cir. 2010) (“[R]easonable, prudent and experienced internet consumers . . . . skip from site to site, ready to hit the back button whenever they’re not satisfied with a site’s contents. They fully expect to find some sites that aren’t what they imagine based on a glance at the domain name or search engine summary.”)).

The court noted that Armstrong’s language on its website in September 2011 could potentially have confused a consumer: “Armstrong will Research, Plan and Price your General Steel Materials Construction Project,” and numerous other references to “general steel buildings.”  “Nevertheless, this language appeared on a website devoted to contrasting Armstrong with General Steel. In that context, the references are more likely to appear discordant rather than to confuse potential customers as to the source of the product.”  The use of “general steel” as a supposedly generic term was intended to further Armstrong’s SEO, bringing it higher in organic results for “general steel.” 
But this, and Armstrong's keyword buys, weren’t enough to show initial interest confusion.  “Although the appearance of a link in a results list may enhance the likelihood that a user will view the associated page, the user must still make an affirmative decision to select the link. In addition, the connection between the search term entered and the appearance of an advertisement is too attenuated to suggest an actual affiliation between the two.”  Given the maturity of internet advertising, it’s much less likely that potential customers, especially sophisticated business customers interested in buying steel buildings, would believe that two companies known to compete were actually affiliated just because of the appearance of an ad.

In an argument Eric Goldman will love, the court rejected General Steel’s assumption that “potential customers entering the term ‘general steel’ into a search engine are searching exclusively for that company, as opposed to executing a broader search for all companies selling similar products.”  Given the latter possibility, an overly restrictive rule on keyword buys would destroy the value of search engines.  Many of the actual uses of “general steel” in website text “occurred either in the context of a clear comparison or in a context that, while puzzling, was unlikely to confuse consumers as to source.”

Further, even assuming that the few ads that didn’t starkly contrast the parties were enough to support a trrademark claim, there was no basis for an injunction, since the AdWords campaign was discontinued after General Steel contacted the search engine companies, who required Armstrong to remove the terms from his ads.   “[E]ven assuming Armstrong desired to reinstitute the advertisements, plaintiff fails to demonstrate that it would be possible to do so or that plaintiff would lack an adequate remedy.”  (Is this the first time a court has relied on search engine trademark policies to deny relief?)

Matters improved substantially for General Steel when the court turned to the false advertising claims, for reasons you can probably guess from the facts above.  The court found that most of the challenged claims were literally false: that Armstrong was a manufacturer that fabricates steel buildings; that it used an on-site environmentally controlled painting facility and laser precision engineering; that it engaged in charitable endeavors and had significant international demand for its products; that it provided pregalvanized steel and steel fasteners as standard features and that General Steel did not; and that it provided “general steel buildings” and “general steel construction” (note the interesting use of false advertising as essentially a cause of action against genericide by a competitor).

However, Armstrong’s advertising of a generous warranty wasn’t literally false even though it didn’t provide customers with warranty documents.  There was no evidence that it had disclaimed warranties, wrongfully denied claims under an existing warranty, or otherwise altered the terms of existing warranties. Even without specific warranty documents, there was no evidence that Armstrong’s representations were insufficient to create a binding and enforceable warranty.

Also, the court disagreed that Amstrong had actionably overstated its size and status in the industry, for example by referring to itself as “the leader in metal buildings.” “Leader” was nonactionable puffery.  (Citing David A. Hoffman, The Best Puffery Article Ever, 91 Iowa L. Rev. 1395 (2006)).  The greater the buyer’s expertise or the wider the audience, the more likely it is that a statement is puffery.  (The “wider audience” thing makes zero sense, but it doesn’t matter here.)  “Leading” is like “best”: on its own, too vague for objective evaluation.  General Steel didn’t provide a concrete definition of the term against which to measure Armstrong’s claim.  “Given the relative sophistication of individuals seeking to purchase steel buildings, the size of the audience targeted by internet advertising, and the placement of these claims within lengthy paragraphs extolling the unspecified virtues of Armstrong, there is no evidence that any consumer did or would interpret these claims as anything more than puffing.”

Finally, General Steel didn’t show that Armstrong’s claim to be an “OEM manufacturer” was false.  Armstrong’s witnesses testified that an OEM manufacturer “is an entity that designs, but does not manufacture, the components of the products it sells, and that Armstrong employs engineers to design the components of its steel buildings.” The court found this testimony credible, and General Steel didn’t provide evidence that the term did or would mislead consumers.

On the literally false claims, no evidence of actual confusion was necessary.  Separately, the court found an intent to deceive, also allowing the court to presume that deception occurred.  Armstrong’s deceptive intent was evidenced by “its persistent use of deceptive means to undermine General Steel’s reputation.” Chumley’s instruction to “maximize” the use of General Steel’s name because Armstrong was already in litigation indicated its determination to target General Steel.  (Why is targeting General Steel not just ordinary competition, as compared to the other things Chumley did?)  After discovery closed, Armstrong expanded its comparison page to include lots of references to “general steel buildings” and “general steel construction”; Chumley contributed content to the website and falsely attributed articles he published online to General Steel officers, “indicating his commitment to damaging General Steel’s reputation.”

Some circuits have also presumed materiality in cases of literal falsity, but the 10th Circuit hasn’t ruled on the issue, so the court evaluated materiality separately.  The court found materiality as to the literally false statements except for statements that Armstrong engaged in charitable endeavors and had significant international demand for its products.  (Also interesting, because statements about a company’s ethics and popularity seem at least potentially material to me, but there doesn’t seem to have been direct testimony about that; note too that the claim to provide “general steel buildings” was found to be material, though I’m not quite clear why.)

Armstrong argued that there was no evidence of injury.  The court agreed as to ads that concerned only Armstrong’s own products without reference to General Steel, since General Steel failed to present evidence that it lost customers, revenue, or goodwill, or was otherwise harmed by Armstrong falsely claiming to possess on-site painting or laser engineering facilities.  The trial evidence showed that General Steel’s sales began to decline seven years before Armstrong entered the market, driven by the broader economic downturn and the Colorado AG’s action against General Steel.

However, the court presumed that Armstrong’s literally false comparative advertising injured General Steel.  Even when a presumption of injury applies, a plaintiff still needs to provide an evidentiary basis showing actual harm to obtain money damages.  The three false statements made in comparative advertising (that Armstrong was a manufacturer that fabricates steel buildings; that it provided pregalvanized fasteners and General Steel didn’t; and that it provided “general steel buildings” and “general steel construction”) as part of a pattern of willful deception presumptively injured General Steel.  But because General Steel didn’t provide an evidentiary basis for the extent of its injury, it could only seek injunctive relief and disgorgement of profits.

Happily for General Steel, those were both available.  As for injunctive relief, loss of goodwill/control over reputation is generally considered irreparable, and a plaintiff has no adequate remedy at law where, as here, a factfinder couldn’t quantify the extent of injury and remedy it through money damages. Plus, Armstrong’s pattern of willful deception indicated a likelihood of future harm absent injunctive relief. The other factors also supported an injunction.

Disgorgement is available under theories of unjust enrichment and deterring future willful violations.  It’s most appropriate when damages are otherwise nominal, though actual damages remain relevant, especially given the remedy’s punitive nature and the risk of a windfall.  Willfulness is necessary but not sufficient for disgorgement.

The court based its willfulness finding on the following: the major search engines stopped Armstrong’s use of General Steel’s name in its ads, but Armstrong nevertheless issued new ads falsely comparing itself to General Steel and falsely stating that it provided “general steel” buildings.  It continued to disseminate its false ads even after General Steel’s WIPO claim against the scam website, “showing that enforcement proceedings are not sufficient to deter Armstrong from disseminating false advertising.”  This pattern of willful deception betrayed a conscious desire to benefit from falsity, supporting disgorgement.

Likewise, the level of certainty that Armstrong benefited from its unlawful conduct favored disgorgement, since Armstrong’s rising profits and persistent use of falsity showed that it derived a commercial benefit from the falsity.  And it deliberately singled General Steel out as its targeted chief competitor.  Armstrong generated the vast majority of its leads through internet sales, “indicating the importance of webpage design and internet advertising to its sales.” 

The disgorgement award was limited according to the limited scope of the established violations.  To determine profits, a plaintiff must only prove defendant’s sales, and defendant must prove all costs or deductions claimed: profits are presumed to be the result of the unlawful activity and the defendant bears the burden of showing which, if any, of its total sales are not attributable to the unlawful activity.  Some degree of speculation is allowed, particularly when it’s necessary in part because of defendants’ poor recordkeeping.

The trial evidence showed that Armstrong earned a net profit of $583,037 in 2009 and $649,232 in 2010, but these were conservative figures because they were based on Armstrong’s own financial statements “without taking into account the possibility that Mr. Chumley diverted profits by improperly charging personal expenses to the company.”  Armstrong didn’t show evidence that its earnings were due to other, non-violative conduct.  Its comparative ads lasted at least 18 months, from mid-August 2010 to mid-February 2012.  But there was no credible evidence at trial of its 2011 or 2012 earnings, so the court awarded its prorated profits during the 4½ month period in 2010 when it was engaging in false comparative advertising: $243,462.  General Steel was also given leave to seek attorneys’ fees and costs.

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