use of an established mark as false advertising

Topek, LLC v. W.H. Silverstein, Inc., No. 12–cv–494, 2014 WL 1124311, 2014 DNH 060 (D.N.H. Mar. 20, 2014)

This colorful business dispute caught my eye because “false advertising through use of a trademark” cases are so rare, and this opinion shows why—courts are often unwilling to regulate use of a mark through false advertising law.

Topek presently has a lot, if not all, of the assets of Yankee Barn Homes, “a nationally-recognized builder of custom-designed post and beam homes” founded in 1969.  In 2011, it was unable to pay its creditors; its debt to its primary lender was secured by security interests in virtually all of its assets, including its “intellectual property, trade names, design templates, and goodwill” as well as its real property.  Shortly after Yankee began experiencing difficulties, Silverstein contacted it, and they signed a letter of intent “essentially ceding control of Yankee to Silverstein.” The lender learned of the proposal and refused to approve it, as was apparently its right under its security instruments.  Yankee and Silverstein moved forward anyway; Silverstein began integrating its operations with Yankee’s and began holding itself out to the public as Yankee Barn Homes.

The lender fought back, filing suit against Silverstein.  Yankee apparently realized that it couldn’t actually follow through on its deal without the lender’s approval, and conveyed to the lender all or virtually all of its assets.  The lender then conveyed the same assets, including all of Yankee’s general intangibles such as “copyrights, trademarks, and trade names, including the name Yankee Barn Homes,” as well as its existing inventory, machinery, manufacturing equipment, customer lists, computer records, phone numbers, and ICC certifications—to Topek.  Topek re-opened Yankee’s facility and rehired many of Yankee’s former employees.

Soon thereafter, “Topek concluded that despite a state court order directing Silverstein to stop doing so, Silverstein continued to exercise (or attempt to exercise) control over former assets of Yankee and, in so doing, was interfering with Topek’s ownership of those assets.” It intervened in the ongoing lender-Silverstein litigation.  The state court in that case found that Yankee conveyed all its real and personal property to the lender, and that the lender conveyed all fixed assets to Topek.  However, Silverstein retained the phone numbers from the former Yankee; represented itself to outside parties as “Yankee Barn Homes”; used Yankee certifications; and  interfered with Topek’s Facebook page by claiming copyright infringement of photos used by Topek of Yankee Barn Homes.  The state court, finding likely confusion and irreparable harm, enjoined Silverstein “from (A) representing to anyone that [Silverstein] has purchased Yankee Barn Homes or has any authority to act on behalf of Yankee Barn Homes; and (B) from using or exerting any control over property owned by Yankee Barn Homes, including, but not limited to, the Yankee Barn Home website.”  

The present litigation mostly concerned Topek’s infringement claims.  I will only discuss Silverstein’s motion for a preliminary injunction against Topek’s allegedly false advertising.  Silverstein argued that, while Topek may have bought Yankee’s assets, it didn’t buy the company by acquiring the stock, and therefore wasn’t a successor in interest. Thus, it wasn’t entitled to “hold itself out to the public as ‘Yankee Barn Homes,’ or say that it has been in business since 1969, or claim that it has built award-winning homes throughout the country, or display pictures of homes that it never actually built, or display testimonials from clients who purchased their homes from what Silverstein considers to be the ‘true’ Yankee Barn Homes.”

The court quickly distinguished  Paper Thermometer Co. v. Murray, 2012 WL 194369, 2012 DNH 017 (D.N.H. Jan. 23, 2012), a reverse passing off case involving a defendant who purchased plaintiff’s goods, re-labeled them, represented to the public that it (rather than plaintiff) had engineered and manufactured them, and then sold those products as its own.  Topek argued that its purchase of Yankee’s assets resulted in a “de facto merger,” reasoning that if Topek could be liable for Yankee’s financial obligations, it necessarily can hold itself out to the public as Yankee.

The court found this unpersuasive too; the cases about successor liability weren’t really on point to a question about what name Topek could sell under, or whether it could “claim to manufacture the same high-quality homes today that Yankee Barn produced for many years.”

Fortunately, the court found guidance from Callman on Unfair Competition.  Callman says that it’s

patently misleading to advertise a false date of establishment or to suggest, without warrant, that the reputation of a newly established business is well-known to the public. Reference to an early date of establishment suggests that the business is an experienced, firmly established, successful and reliable concern. Therefore, the dispositive question in any case is whether the business enterprise, as a unit, including all its human elements and its corporeal and incorporeal values, has continued, substantially unchanged, since its inception.....

Many status changes don’t break continuity.  These include “its development from a small craft shop to a big industrial unit; a change in its legal form, e.g., from individual ownership to a partnership or corporation; a change of firm name or trademark; a change of ownership; expansion to other lines of business; bankruptcy; or the transfer of the old business to a new corporation.” Retention of firm name or trademark also evidences continuity.  “Such continuity, however, may be broken by the removal of the business to another country, by its conversion to an entirely different product line, or by its division into several parts transferred to different successors.”

Silverstein didn’t allege any factors indicating a break in business continuity, and several factors suggesting such continuity were present.  Topek bought all or virtually all of Yankee’s assets, including domain names, copyrights, trademarks and service marks, and goodwill. And it operated the same manufacturing facility from which Yankee operated since 1972, using much of Yankee’s former workforce.  Since neither party adequately addressed the relevant issues, and since Silverstein bore the burden, the motion for preliminary injunction was denied.