business tort review: Lanham Act doesn't cover all commercial defamation

In my advertising law class, I teach that common-law business torts are both broader and narrower than the Lanham Act.  Here we have examples of both features: the scienter requirement and the lack of limitation to "commercial advertising and promotion."

Innovasystems, Inc. v. Proveris Scientific Corp., No. 13–05077, 2014 WL 3887746 (D.N.J. Aug. 6, 2014)

The parties are the only domestic suppliers in the market for equipment used to test aerosol drug delivery products, and compete over a limited universe of customers.  Innova, a debtor in possession, alleged that Proveris published defamatory statements about its financial stability and intellectual property, violating New Jersey statutory and common law, the Lanham Act, and title 11’s automatic stay.  The court dismissed most of the claims but allowed some to proceed.

Proveris sued Innova in 2005 for patent infringement.  After various events, Innova conceded infringement on 9 of 11 claims; a jury found this not willful and not to merit any damages, but the district court permanently enjoined Innova from making the device found to infringe.  Innova developed a new iteration of the device it believed didn’t violate the injunction, but the court found in Proveris’s favor in the resulting litigation, including finding Innova in contempt.

Zachary Pitluk, a Proveris employee, began emailing prospective customers about the ruling, e.g. he wrote to one pharmaceutical executive that “[c]ontempt is a rare and almost always fatal condition for small business.”  In several other emails, he asserted that Innova faced criminal liability, e.g., “Innova was found to be in contempt of court, which is a very serious crime,” and infringed yet further patents. 

On the eve of the damages trial for the new suit, Innova filed for bankruptcy under Chapter 11. Pitluk sent a second wave of emails about Innova’s financial stability and ability to service customers.  One email to an overseas client implied that the injunction prohibited international sales, an assertion Innova strongly contested.  One Innova customer canceled a $400,000 purchase order and two distributors stopped selling Innova products.

The court considered Innova’s claims to sound in defamation, but Innova asserted “the full panoply of business torts”: defamation; trade libel and disparagement; tortious interference with prospective economic gain and contractual relations; Lanham Act false advertising; and false advertising/unfair competition under New Jersey law.

Defamation: the court found that claims that Innova was going out of business were not defamatory.  Statements about future conduct aren’t verifiable and thus actionable unless they “imply false underlying objective facts.”  The objective fact implied by Pitluk’s claims about Innova going out of business was that Innova was in a weakened financial position, but that was accurate and appropriate in light of the bankruptcy filing. “To the extent Proveris overstated the financial vulnerability of Innova, it was to an insufficient degree to render the assertion false.”

Likewise, the accusation of further infringement was not defamatory.  First, the court found that malice was required, not mere negligence.  Matters involving public concern require malice to be actionable, and allegations of infringement are matters of public concern.  Also, Proveris was denigrating a particular good, which is more a trade libel issue than one of defamation.  Trade libel always requires malice, unlike some varieties of defamation.  Innova failed to allege facts from which actual malice might reasonably be inferred.  Proveris implied that it would seek a finding that a different component infringed a different patent; this future orientation meant that pleading its knowledge that no court had found the component infringing didn’t sufficiently plead malice.

Allegations of criminal conduct: Pitluk’s assertion that Innova’s contempt ruling “is a very serious crime” was actionable.  “Courts place great importance on precluding inaccurate accusations of criminal liability, as evidenced by the fact that the imputation of a criminal offense to another constitutes slander per se, whereby a plaintiff need not prove any form of actual damage to his reputation.”

Sales overseas:  Pitluk told a prospective customer in India that “Innova has been found guilty of contempt of court of Federal judge Roberts order [sic] to stop selling, promoting, manufacturing or marketing the infringing ADSA system,” allegedly inaccurately implying that the injunction barred sales of the device made and sold abroad.  Proveris argued that this was in fact true, and submitted an excerpt of a hearing transcript from the court that issued the injunction, but that was outside the pleadings.  This claim also proceeded.

Trade libel: this claim was dismissed for failure to allege special damages, which is one element that distinguishes trade libel from defamation.  The lost purchase order and distributors allegedly followed the second round of Proveris’s statements about Innova’s financial weakness, but those statements weren’t actionable.  Thus, Innova didn’t allege the requisite pecuniary harm from a false allegation.  Restating the claim as one for tortious interference with economic gain didn’t help.

Lanham Act false advertising: The court found that the statements weren’t “commercial advertising or promotion,” even though it had already noted that the market for the parties’ products was quite limited. Statements must be “disseminated sufficiently to the relevant purchasing public to constitute advertising or promotion within that industry” to be actionable, while communications that “target ... merely particular individuals” aren’t enough. The court held that the complaint just alleged emails to particular individuals.  But the court didn’t specifically assess what percentage of the specific market was reached; in a small enough market, misrepresentations to even one client can be enough.

New Jersey common law unfair competition: this is an amorphous tort designed to enforce “standards of fairness or commercial morality in trade,” though the classic case is palming off.  Despite its breadth and vagueness, it at least requires misappropriation of property with some sort of commercial or pecuniary value, and no such misappropriation was alleged here.

Finally, Innova’s allegations of violation of the automatic stay triggered by the bankruptcy filing survived.