Tuesday, September 30, 2014

Stay away from Juliet: keyword infringement and dilution case continues

Romeo & Juliette Laser Hair Removal, Inc. v. Assara I, LLC, No. 08-CV-442, 2014 BL 263647 (S.D.N.Y. Sept. 23, 2014)

A keyword case gets past the pleading stage (though the worst part is the dilution ruling).  The parties compete in the hair removal business.  R&J, which operates in the NYC area, alleged that Assara used its marks, bought deceptive ads through Google, and posted fraudulent reviews to consumer websites to divert customers from R&J to Assara. 

In 2007, Assara allegedly bought “Romeo & Juliette” as a keyword, and also allegedly used “Romeo Juliette Laser” in “hidden links and text on its websites” to deceive the public about R&J’s source or sponsorship of Assara’s services.  Assara also allegedly published defamatory statements about R&J on consumer review sites such as Yelp.

Trademark infringement claims: R&J sufficiently alleged the validity of its mark and likely confusion by alleging that “whenever the public searched for plaintiff's mark a sponsored link to defendants' website would appear,” and that its name and marks were used on “hidden links” (hunh?) on Assara’s website.  This was allegedly likely to confuse the public about the connection between the parties, “because a person searching on the internet for hair-removal services using plaintiff's marks stood a strong chance of being directed to defendants' website.”  Not analyzed: whether this “direct[ion]” would be the result of confusion or interest in competing alternatives.

Plus, R&J sufficiently alleged willfulness/bad faith, required for NY unfair competition, because posting negative reviews to consumer websites would harm plaintiff's business.

Dilution under the Lanham Act.  Incredibly, the court found that the complaint alleged the fame of the mark, because R&J alleged that “its marks were used widely in advertisements on the internet and that its services were readily searchable through internet search engines.” Of course, this does not allege facts making wide recognition by the general consuming public of the United States plausible.  It alleges only that plaintiff ran ads and had a website that didn’t use robots.txt to exclude itself from search engines.  Even aside from that, the complaint alleges that plaintiff’s services are confined to the New York City area.  How could it be widely recognized by the general consuming public of the United States?  This claim shouldn’t pass the laugh test. Cf., e.g., TCPIP Holding v. Haar (2d Cir. 2001) (holding, before the TDRA increased the fame standard, that trademark holder’s annual sales of $280 million were not enough to constitute fame); Avery Dennison Corp. v. Sumpton, 189 F.3d 868, 879 (9th Cir. 1999) (marks used for decades and parent company had annual sales of $3 billion and annual advertising costs of over $5 million; no fame).

No matter.  R&J alleged confusing use and negative reviews, which sufficiently pled dilution through damaging its reputation and inappropriately associating it with Assara.  Also: disparaging the services identified by the mark is not the same as disparaging the mark.  Otherwise all the careful limitations on defamation and disparagement, mandated by the First Amendment I should emphasize, disappear for owners of famous marks.  This is neither sensible nor constitutional.  The plaintiff’s review-based allegations should fail for the additional reason that they plead disparagement of the services, not disparagement of the mark.

As for the deceptive business practices claim under NY GBL §349, when a competitor plaintiff brings a claim, its gravamen must be consumer injury or harm to the public interest.  Trademark infringement isn’t enough without “specific and substantial injury to the public interest over and above the ordinary trademark infringement,” including potential danger to the public health or safety.  While R&J alleged misleading consumer-oriented misconduct, it didn’t allege facts showing the public health or safety were threatened.  Claim dismissed.

Query: why not the obviously applicable Lanham Act false advertising claim based on the allegedly false reviews?  

Common law defamation and disparagement claims did survive.  Both require special damages or per se actionable statements.  A statement is defamatory per se if it impugns "the basic integrity" of a business. For product disparagement, “a plaintiff need not plead specific damages if the nature of the plaintiff's business makes it difficult, if not impossible, to identify which customers have been lost.”  Allegedly disparaging and false reviews on consumer websites plausibly maligned the basic integrity of R&J’s business, and the fact that the misconduct occurred online made it impossible at this stage to determine actual lost customers. (Which is one reason the common law torts aren't suited for mass advertising cases.)

Monday, September 29, 2014

Reading list: is efficiency all there is in copyright?

Oren Bracha and Talha Syed, Beyond Efficiency: Consequence-Sensitive Theories of Copyright, 29 Berkeley Tech. L.J. (2014).

The article’s argument is complicated and I would disserve it by trying to summarize, but a core point is that, to the extent that cultural flourishing-type theories of copyright diverge from purely efficiency-based ones, that divergence needs to be explained. Even a cultural flourishing proponent should want to encourage the production of new works that could then be part of a cultural conversation, which means that incentive/access balancing in the efficiency vein will ordinarily produce the same answers as a cultural flourishing account. The authors then try to identify situations in which a proponent of a non-efficiency-based copyright theory would accept deviations from the “efficient” situation, and use fan fiction as one of their examples. (I’m chuffed that fan fiction is now a “familiar” issue in legal analysis, though I don’t think it’s as controversial as they do.) The authors go through the basic incentive arguments and agree that there’s very little reason to see a negative incentive effect of fan fiction, but then suggest that, from the conventional economic perspective

unrestricted production of fan fiction is likely to create high amounts of wasteful duplicative activity. The argument here is not that fan fiction is likely to be a good substitute for the original or for any official follow up. Rather, it is that much of the fan fiction produced constitutes a close substitute for other fan fiction, from the point of view of consumers. To be sure, readers of the genre have their preferences among writers or stories, and different variants are better tailored to some subset of preferences. Nevertheless, in a corpus of thousands of stories in the Star Wars universe there is likely to be a high degree of overlapping demand satisfaction, and thus the real efficiency problem with fan fiction may not be a jeopardizing of incentives as much as the waste of so much effort and cost expended in creating a multitude of works that are mostly close substitutes of one another.

As a result, they contend, cultural flourishing-type theories will accept fan fiction under a broader range of circumstances than efficiency accounts (I say broader range because, when you plug the numbers in, efficiency theories might well also often find fair use). That’s because “the creation of fan fiction is a prime example of meaningful human activity.” They point out that this perspective addresses the product differentiation theory directly: creation isn’t waste. Indeed, I was reminded of a fantastic comment on yet another bad story about fan fiction:

By this rationale [that most fan fiction writers won't write professionally], it is a waste of time and effort to join your local pub football team and knock a ball around with your mates every weekend, because you’re never going to be headhunted for the Premier League; a waste of time and effort to experiment with delicious new recipes and feed them to your friends and family, because you’re never going to open a restaurant; a waste of time and effort to flirt with a pretty girl if you know you’re probably never going to see her again; a waste of time and effort to run a marathon if you’re not going to win any prize money; a waste of time and effort to take pictures of your child’s first faltering steps if you’re never planning to become a professional photographer; a waste of time and effort to join a choir or play the guitar on the beach if you’re never going to record a number one album; a waste of time and effort to learn how to thoroughly blow somebody’s mind in bed if you don’t plan to become a sex worker.
The point of such pursuits sir, is that, in and of themselves, THEY GIVE YOU JOY. They enrich your life.

From a cultural flourishing perspective, then, a utility calculus shouldn’t be treating the duplicative effort as cost, but rather as benefit. On the reader’s side, it can sometimes be wearying to search through all the different Smallville stories with similar plots—but then again, I really appreciate the ability to get new variations on a theme I already know I love. Perhaps I just have a higher-than-average tolerance for minimal differentiation, but since it’s not copyright law driving the creation of these fanworks, we’re already getting the differentiated works that don’t bear any resemblance to Smallville: everybody wins!

However, as the authors note, this just means the original utilitarian calculus got it wrong; this shift can occur inside efficiency analysis itself. And here’s the part of their argument I just can’t follow: they say that flourishing theory sometimes means valuing certain activities more “those who engage in” fan fiction do, “as revealed through their preferences” (emphasis added), in which case we could support freedom in fan fiction even if efficiency analysis didn’t. But, aside from the well-known problems of preference endogeneity, which they do mention, I don’t see why this is so. Distributionally, adding a marginal incentive for the large corporations whose works are most likely to inspire fan fiction would almost certainly harm the amateurs who presently produce and consume fan fiction more than it helps us by incentivizing additional marginal Marvel movies we can go watch. Valuing our preferences just as much as we do ourselves would suffice to show that this should not be done.

If the authors are just saying that fans don’t have enough money in their pockets to pay the corporations for this tradeoff, then they’ve sub rosa decided not to follow flourishing theory, which values things that people can’t pay for with cash.  One defining feature of cultural theories about copyright, it seems to me, is attention to distributional consequences and a Rawlsian willingness to accept lower total aggregate production for better treatment of those on the bottom.  (In a footnote, they say they bracket the question whether fans are disproportionately likely to be low on financial resources. I don’t think that can be bracketed in a cultural theory, and even if fans were wealthy, the difference between how people behave with free/communal resources and how they behave in markets persists through most situations, though not so much with economists.) Part of the problem is that I’m not sure how we “reveal” our preferences for particular configurations of, or potential changes to, copyright law. (Well, certain campaign donors do, but that’s not most of us.)  We reveal our preferences for particular works, but even a purely rational actor will have a hard time getting from there to overall copyright law’s scope.

The authors then suggest that the difference between efficiency and flourishing theories still matters because of the possibility of expanded licensing of fan fiction, which would allow production of fan fiction with money flowing to copyright owners. But their description of Kindle Worlds as the precursor of broader licensing is descriptively inaccurate (for reasons I detail elsewhere) and also undervalues the profound behavioral differences between free and paid access. A paid, walled garden will not “enable copyright owners to capture the demand for fan fiction at relatively low transaction costs, while still allowing much of this demand (by both producers and consumers) to be satisfied,” because much of the demand comes from fandom’s free and communal nature. Kindle Worlds doesn’t let you play for free. The authors recognize the role of commodification, and state that if my argument is right, then “commodification of fan fiction through copyright protection would defeat rather than serve the purpose of preference satisfaction.” In which case we’re back to the lack of divergence between efficiency properly understood and cultural flourishing.

One strength of the flourishing theories, which the authors mention in passing but don’t spend much time on, is that they enable us to structure law in a way that the utilitarian theories on their own don’t. Those theories fail to tell us what the law should be because we have absolutely no idea what numerical values to put on the variables even if we’re absolutely confident we’ve captured every variable that affects creativity and access. (My favorite example of this problem is Posner’s equation in Sex and Reason that can “determine” whether abortion ought to be banned, whose solution requires you to input v, the value of the fetus.) So utilitarians end up either indeterminate or guessing. Because flourishing theories give us strong defaults, they can say “protect critical uses” and “protect noncommercial uses” and move on.

selling a book without authorization doesn't violate Lanham Act

Smith v. BarnesandNoble.com, LLC, No. 1:12-cv-04374, 2014 BL 263099 (S.D.N.Y. Sept. 23, 2014)

Smith wrote a book, Hardscrabble. He contracted with Smashwords, an online ebook distributor, to sell his book. Smashwords distributed Smith’s book to its retail partners, including B&N, to list online for sale.  Smith ended his relationship with Smashwords in 2011, but nobody told B&N. Thus, five months after Smith terminated his contract with Smashwords, the book was still available for sale on B&N’s website. [It’s not clear from this description whether a sale could’ve been completed.]  As soon as Smith notified B&N of the problem, B&N took the listing down, but he demanded cash and B&N declined to pay, so he sued for infringement, contributory infringement, and unfair competition.

B&N didn’t sell any copies of Hardscrabble.  But B&N did provide access to portions of the book.  The various online “see inside” features B&N offered weren’t available for Hardscrabble. B&N’s “Read in Store” feature allows a customer to browse an eBook using the Nook for up to an hour while in a B&N retail store, but discovery revealed that no customer used it for Smith’s book during the relevant period. However, one customer did obtain a sample of the eBook in June 2010, which was stored in the customer’s digital locker on B&N’s servers and was accessed on at least 7 different occasions during the relevant period. [This is another casualty of the first sale doctrine: your backup is B&N’s, and if permission is withdrawn your authorized use disappears—note that the customer chose the sample at a time when its distribution was fully authorized.  In a nondigital space that would be the end of the matter.  And also note that the customer is now allegedly an infringer, liable for statutory damages, because they chose a sample of a book during the period that sample was fully authorized.  I would at least find an implied license for this use to continue post-termination.]

First, the court kicked out the Lanham Act claim.  Dastar teaches that “[t]he words of the Lanham Act should not be stretched to cover matters that are typically of no consequence to consumers.” Claims based on allegedly false representation of affiliation between an author and a distributor are therefore barred.  Smith argued that the continued listing of the book would cause confusion about the origin, sponsorship or approval of Smith’s goods or commercial activities (?).  The court wasn’t having it.  There wasn’t even an alleged misrepresentation of authorship.  The unauthorized use of his name, allegedly diverting traffic away from authorized sites (though not, apparently, sales), was “not one of consequence to consumers.”

However, the court refused to grant summary judgment on direct and contributory copyright infringement claims, which must be annoying to B&N; it said it’d explain later. 

Allegedly false inventorship/ownership claim could be false advertising

Parallel Synthesis Technologies, Inc. v. DeRisi, 2014 WL 4748611, No. 5:13-cv-05968 (N.D. Cal. Sept. 23, 2014) (magistrate judge)
Plaintiff Parallel, allegedly “seduced by the potential for a long-term partnership,” shared its proprietary Parallume assay with DeRisi, a professor of biochemistry and biophysics at the University of California, San Francisco. DeRisi allegedly plotted with former Parallel employee Baxter simply to take Parallume.  Parallel sued DeRisi, Baxter, UCSF, the UC Board of Regents, individual members of the Board, and the interim Chancellor of UCSF.
According to the complaint: Parallume allegedly “enables researchers to identify the components of a particular mixture of nucleic acids and protein-antibody pairs,” allegedly saving costs and increasing speed over the alternatives.  Parallume includes both physical components and protocols, and Parallel has related patent applications pending. Baxter was a senior scientist with access to Parallume research and materials.  DeRisi allegedly contacted Parallel in 2008; he was an old friend of Baxter’s and he expressed interest in using Parallume in his own research.  He wanted to use Parallel as a subcontractor for a grant, and said he had a large financial backer and that he intended to work with Parallume to develop disease surveillance technology.  Parallel employees, including Baxter, met with DeRisi’s team multiple times.  Parallel provided Parallume beads for a grant “pre-proposal,” and DiRisi told Parallel that “this grant, if successful, will be mutually beneficial.” Parallel then supplied additional Parallume samples in confidence and a letter of reference to assist with the proposal.  Then DiRisi ended contact, submitted the proposal, and received a $1 million grant.
Meanwhile, Baxter gave notice of his intent to leave Parallel.  He became an independent contractor for Parallel and began conducting research in DeRisi’s UCSF lab. However, Baxter allegedly shared Parallel confidential information with DeRisi, plagiarized Parallel’s confidential work, and did not report DeRisi’s true intentions.  The plagiarism allegedly occurred in a journal article by Baxter and DeRisi, which “teaches the use of combinations of multiple rare earth downconverter emitter materials to spectrally encode beads in order to multiplex biological assays in a ratiometric manner.”  Those materials were the Parallume beads Parallel had supplied in confidence, but the article said that the underlying research was supported by the Keck Foundation.  Parallel offered to settle the resulting dispute if they retracted the paper, but UCSF refused.  DeRisi and UCSF began to offer commercial licenses to use Parallume-derived technology as described in the paper.
Parallel alleged breach of fiduciary duty, fraud, false advertising, misappropriation of trade secrets, and related claims.
The court found that the complaint stated a claim for breach of duty of loyalty as to Baxter stemming from the alleged collusion and plagiarism; both as an employee and as an independent contractor, Baxter owed a duty of loyalty to Parallel.  Likewise, the complaint stated a claim for aiding and abetting the breach by DeRisi, since it sufficiently alleged that DeRisi knew or had reason to know that Baxter was in breach of his duty of loyalty by sharing Parallel’s confidential information for the period when he was a Parallel employee, but not for the period when he was an independent contractor.  Fraud claims also survived as to the claim that Parallel wouldn’t have shared its materials if not for misrepresentations that it would be included in the grant and future projects, but not as to alleged misrepresentations about DeRisi’s large private financial backer.  And trade secret claims survived despite the allegations about Parallel’s pursuit of patents, which require disclosure.  Parallel alleged that its applications didn’t disclose the specific technology at issue here, which was enough at this stage.
Lanham Act false advertising: Baxter and DeRisi argued that they didn’t compete with Parallel. But they allegedly “advertise for and sell licenses for the same Parallume technology.”  That was sufficiently direct, as long as the complaint alleged commercial injury based upon a misrepresentation about a product.  Parallel adequately pled that this licensing of Parallume technology, and their claim that they and not Parallel are inventors and owners of the technology, harmed or likely would harm Parallel’s own sales by discrediting its claims.  (Note that this is exactly the false advertising claim that Dastar says should survive.) 

However, UCSF, the Board of Regents, the individual regents, and the interim chancellor were all entitled to sovereign immunity.  A Lanham Act false advertising claim doesn’t protect a property interest, the hallmark of which is a right to exclude, even if the claim is based on allegedly false statements about the plaintiff’s products.  (Funny, then, that trademark dilution is conceived of as a property right.)  In addition, injunctive relief might be available against the state official who authorized the licensing of Parallume technology, but not the named defendants under Ex Parte Young.
Parallel’s state law false advertising claim against Bater and DeRisi also survived.  Defendants argued that they weren’t in any position to provide relief, since UCSF and not Baxter and DeRisi controls the information posted on UCSF’s website including offers to license the technology.  But USCF allegedly posted these claims based on assertions made in the published paper, and so if Baxter and DeRisi could be enjoined from claiming ownership or inventorship of Parallume technology and compelled to retract the claims in their paper, Parallel might get relief. 

Count the circuit splits in this nonfamous foreign marks case

Paleteria La Michoacana, Inc. v. Productos Lacteos Tocumbo S.A. De C.V., 2014 WL 4759945,  No. 11–1623 (D.D.C. Sept. 25, 2014)

For different versions of the background story, you can see this Wharton article (which confuses trademark and copyright, and favors the US company in its take on the “orphan” status of the relevant marks in Mexico) and this reprint from the WSJ (which favors the foreign claimant, at least in its rhetoric).  Also for background: “Michoacán” is the name of a Mexican state, and home to many Purépecha Indian people, whose traditional dress for women commonly consists of hair braids on each side, a white blouse, a pink skirt, and sandals.

Paleteria La Michoacana (PLM) sued Productos Lacteos Tocumbo (PROLACTO), challenging a TTAB decision regarding various registered and unregistered trademarks used to sell “Mexican-style” ice cream bars, called paletas, and other frozen ice cream treats. PROLACTO counterclaimed for violation of the Lanham Act and DC law.

PROLACTO is a family-owned company founded in Mexico in 1992. The founding family had a long history of operating ice cream stores (“paleterias”) in cities and towns throughout Mexico since the 1940s. Its use and ownership of the marks in Mexico is hotly disputed (see first link above) and “mostly irrelevant to the legal issues at hand,” but starting in 1995 it did successfully register many marks in Mexico, including LA MICHOACANA NATURAL. A few years later, it began licensing close family members of the founding directors in the US to use some of the marks.  Its US use is only through licensing.

PROLACTO’s first license was in 1999, when Rigoberto Fernandez opened a paleteria called LA MICHOACANA in Homestead, Florida. “In April 2001, Fernandez and his sister, Mary Fernandez, opened a second paleteria under the same name in West Palm Beach, Florida, where they used PROLACTO’s Mexican marks for the sale of ice cream products.” In October 2002, Mary Fernandez opened a paleteria under the name Michoacana Natural Ice Cream in Rosenberg, Texas, a suburb of Houston. Mary Fernandez opened additional stores in Houston over the next few years.  And in July 2009, PROLACTO licensed a Michoacana Natural Ice Cream store in Sonoma, California.

PLM began in 1991 as an informal partnership between two brothers, an ice cream business called Paleteria Michoacana in Turlock (northern California); this eventually became PLM. PLM’s products are distributed throughout various parts of the country and sold in “large club stores like Costco, supermarkets like Wal–Mart, Hispanic grocery stores like El Super and Vallarta, drug stores like Walgreens, and a variety of other retail outlets.”  PLM hasn’t made direct sales in Florida. 

Neither party’s products are sold in DC.  The parties’ products (treating PROLACTO’s licensee like PROLACTO for these purposes) only cross paths in “limited geographical areas,” in Texas and northern California, where the parties’ goods are sold in the same general area and in at least one instance at the same store.  (Pause to note that “Texas and northern California” is an awful lot of America.)  The products are relatively inexpensive (from $0.89 to $2 each for a single serve bar) and typically bought on impulse.

The central marks at issue were the “Indian Girl” design and marks using various forms of the word “Michoacán”:

PROLACTO filed a successful petition to cancel PLM’s mark No. 3,210,304 for LA INDITA MICHOACANA and design, shown above, for use on ice cream and fruit products.  PLM sought reversal of the TTAB decision; declaratory judgment of no likelihood of confusion between its mark and PROLACTO’s one registered mark; a finding of infringement against PROLACTO for its use of the Indian Girl design with LA INDITA MICHOACANA and separate use of the Indian Girl mark standing alone; and cancellation of PROLACTO’s registered mark No. 3,249,113.  PROLACTO understandably counterclaimed for violations of the Lanham Act (and DC common law) and further cancellations.

On summary judgment, the court resolved a number of issues in PLM’s favor, a few in PROLACTO’s, and found numerous other issues reamining for trial.

TTAB cancellation: A district court reviews the TTAB’s findings of fact deferentially under the substantial evidence standard, and also can consider new evidence.  To win, PLM had to raise a new issue or show that the TTAB’s findings were unsupported by substantial evidence or contrary to new evidence carrying “thorough conviction.” The TTAB found that PROLACTO had priority based on a number of marks.  PLM filed its registration application on June 28, 2005, claiming first use anywhere and in commerce as of February 21, 2005.  The TTAB determined that PROLACTO, through its licensees, began using the Indian Girl design in April 2001.  Then it determined that confusion between the parties’ marks was likely given the similarity of goods, marks, and channels of trade plus the low care exercised by consumers.

However, PLM presented new evidence that it used a version of the Indian Girl design since at least the mid-1990s, and argued that it should be allowed to tack those earlier uses to gain priority. Tacking requires that the earlier mark is “the legal equivalent of the mark in question or indistinguishable therefrom” such that consumers “consider both as the same mark.” Confusing similarity isn’t enough; the marks sought to be tacked must create the same continuing “commercial impression.” (1) Whether this is a question of law or of fact for a jury is the subject of a split (one that the Supreme Court is set to resolve).  Consumer opinion of the similarity of the prior and subsequent marks is the critical issue, and a court’s speculation about what consumers would think is both inappropriate and inconsistent with the likely confusion standard (a question of fact for the jury).  The evidence here created a genuine dispute of material fact over tacking; a jury could find prior use and a continued commercial impression, or it could go the other way.  Summary judgment denied.

Next issue: The TTAB ruled that PROLACTO’s mark No. 3,249,113 for the LA FLOR DE MICHOACAN and design wasn’t sufficiently similar to PLM’s registered mark No. 3,210,304 to cause consumer confusion and require cancellation. (2) PROLACTO wanted reversal on the likely confusion determination, thus triggering the second issue the Supreme Court is going to decide this term: the court would review the TTAB’s findings of fact under the substantial evidence standard, but the legal conclusions de novo.  The TTAB found that the parties’ marks were used on the same products in the normal channels of trade; that the products are impulse purchases and consumers don’t use much care before buying; that LA FLOR DE MICHOACAN translates to “the blossom of Michoacán,” while LA INDITA MICHOACANA translates to “the Indian girl or woman from Michoacán.” The TTAB concluded that PROLACTO’s mark created a different “commercial impression” than PLM’s mark which “outweigh[ed] any similarities caused by the inclusion of the word ‘Michoacán.’”  The district court agreed.

The TTAB didn’t use the same multifactor test as the district court, which would use the judicial standard (viewing the marks in the marketplace, not side by side in a vacuum).  Here, no reasonable jury could find likely confusion between the marks at issue.  Some of the factors weighed in favor of PROLACTO or were neutral (there’s some direct competition; these are impulse purchases, though PROLACTO offered expert testimony that quality differences existed, which would decrease the likelihood of confusion). But PROLACTO didn’t provide a survey or other evidence of actual confusion between the two specific marks at issue.

The court was most persuaded by the lack of visual resemblance between the marks.  The shared use of “Michoacán” wasn’t enough; other factors in the mark could distinguish the two. Here, the design elements were quite different: PROLACTO’s mark featured a swirl surrounding an orange popsicle, while PLM’s mark featured pink and black coloring with a drawing of a little girl holding an ice cream cone with words above and below her image. The different meanings of the phrases and the commercial impressions outweighed similarities in the word “Michoacán” and in the products.  No cancellation and no infringement.

Next counterclaim: PROLACTO alleged that PLM infringed on PROLACTO’s rights in its LA MICHOACANA and the Indian Girl design through its use of registered marks Nos. 3,210,304; 2,905,172; and 2,968,652.  PROLACTO sought to use the famous mark doctrine to establish nationwide priority. 

In the US, rights are established by use, and foreign use creates no rights within the US.  (3) “There is, however, a narrow yet divisive disturbance to the force of the territoriality principle,” aka the well-known marks/famous marks doctrine, where even in the absence of use “the territoriality principle is disregarded and priority is established through reputation rather than actual use in the United States.”  But this is only law in the Ninth Circuit, which based its ruling on fraud-prevention grounds.  The Second Circuit has rejected the doctrine as a matter of federal law.  The court here recognized powerful arguments on both sides, but didn’t have to resolve the issue because PROLACTO didn’t show the necessary fame in the US.  Fame in Mexico is irrelevent “except insofar as that familiarity actually permeates into the United States at such a critical level that it qualifies for legal protection.”  The Ninth Circuit’s Grupo Gigante decision says that such fame will exist when a “substantial percentage” of consumers recognize the foreign mark, but provides little guidance about what that is. The concurrence said it was 50% consumer awareness, but the majority didn’t use an explicit “majority” standard.  Nonetheless, to prevent the exception from swallowing the rule, the threshold should be “somewhere below, but still very close to, 50% of consumers in the relevant market.”  PROLACTO didn’t show that in any relevant US market, much less the entire country.  No reasonable jury could find nationwide fame, and there also wasn’t enough evidence for individual markets within the US.  Scattered media references to individual licensees’ stores weren’t enough.

As a result, PROLACTO’s rights were dependent on use, and without a registration, the rights were limited to the geographic areas where there was use (and a zone of “natural expansion”).  Here, only Sonoma, California; Houston, Texas; and Florida were potentially at issue, given PROLACTO’s limited commercial use of its marks.  There was also a genuine issue of whether PROLACTO abandoned its rights through naked licensing, particularly given that PROLACTO apparently relied only on oral licenses for many years.

There couldn’t be a fight in Florida, because PLM never sold or distributed its products there. PLM’s hosting of a booth at a trade convention in Florida was insufficient, because PLM didn’t sell its wares there; the convention was closed to the public; and most participants were not based in Florida.  As for northern California, PROLACTO licensed a store in Sonoma in July 2009, while PLM started a business in Turlock in 1991, and registered two Indian Girl marks in 2004-2005, with more thereafter.  Since federal registration provides nationwide priority except for §33(b) remote users, “the undisputed facts show that PLM has priority in the market.”  There was a genuine dispute of material fact about who got to Houston first.

PROLACTO argued that the court should deny PLM any rights because of its allegedly deliberate copying.  But awareness of foreign marks does not constitute bad faith in the US as a matter of law.  However, to the extent that PLM’s adoption of the marks in a given market was based on PROLACTO’s prior use elsewhere in the US, that might not be “good faith,” as the court interpreted the Theodore Rectanus line of cases to require for remote users.  In addition, there was a factual dispute over whether PLM intended to copy PROLACTO’s marks, or whether “PLM merely sought to associate its products with marks that it believed – rightly or wrongly –were used indiscriminately by a variety of companies without any one, recognized source.”  PLM argued that the marks in question were used by “countless companies” in Mexico and the US for paletas.  (In which case how are its “marks” valid?  Sufficient to the day …)  If that was true, PROLACTO might not have protectable rights in many of the marks at issue, which would be fatal to most if not all of its claims.  And finally, the exact contours of the Houston market had to be determined at trial.

Priority isn’t enough; distinctiveness is also required.  The parties apparently agreed that the marks were geographically descriptive.  There was also a factual question over PROLACTO had achieved secondary meaning.  The scale of ads in the US by its licensees wasn’t clear, but appeared to be “limited and sporadic at best.”  PROLACTO had some evidence, including consumer declarations, of consumer perception, as well as an expert report from Jacob Jacoby, but the court found this not probative of whether consumers thought there was a single source for the goods. The court declined to exclude Dr. Jacoby’s report about his confusion survey at this time, but commented that many of the questions were leading “and others demonstrated little more than respondents’ ability to read and comprehend the stimuli.”  A jury would have to rule on secondary meaning.

All this meant that there couldn’t be summary judgment on the related unfair competition etc. claims, with the only truly distinct one remaining being false advertising.  PROLACTO alleged that PLM made numerous false claims on its packaging and website, including using the name “LA INDITA MICHOACANA” and the Indian Girl design; using indicia of Mexico, including pictures of places in Mexico, a PROLACTO-affiliated store in Mexico, a statute in the town of Tocumbo, Mexico, and maps of Mexico in its websites and catalogs; claiming to share its name with, and otherwise implying that it is affiliated with, 15,000–20,000 stores in Mexico; and including on packaging pictures that don’t accurately represent the products inside.

PLM discontinued use of the claim: “La Indita Michoacana is a family company founded in Tocumbo Michoacán in the 1940’s. Since then we’ve continued to make premium ice cream, fruit bars and drinks that give the flavor and tradition of Mexico. Distinguish us by our logo.” Because PROLACTO didn’t submit evidence that would justify a damages award, the only possible relief would be moot as to that claim.

PLM argued that the false advertising claim was barred by laches. The court first found that DC’s three-year fraud statute applied to Lanham Act false advertising claims.  PLM didn’t indicate which ads appeared when, or when PROLACTO knew or should have known of them; thus the court couldn’t evaluate whether laches had been triggered, or whether there’d been prejudice to PLM because of the delay.

PLM also argued that PROLACTO lacked standing.  Under Lexmark, PROLACTO provided sufficient evidence of commercial injury.  Here, that was evidence that it “possesses a business reputation and goodwill within the United States that PLM allegedly attempts to usurp for its own benefit, as well as the possibility of lost sales and customers.” A reasonable jury could conclude that those injuries, if proven, were proximately caused by PLM’s ads.

In addition, PROLACTO won summary judgment on literal falsity and misleadingness of the statements, since PLM didn’t dispute that.  As for materiality, PLM argued that the statements on the packaging were on the back and consumers therefore didn’t read them before purchase.  Even if they did, PLM argued that there was insufficient evidence of an effect on decisions, given that these are inexpensive impulse buys.  But PROLACTO wasn’t required to prove actual influence, only likely effects.  ((4) The court declined to follow the courts that presume materiality from literal falsity.)  There was a genuine dispute of material fact, as materiality often is a question for the jury.  Even the statements on PLM’s website, though less likely to be material “given their attenuated position compared to being placed directly on the product itself,” might be.

The court also accepted PROLACTO’s theory of likely injury to its reputation or goodwill stemming from confusion due to PLM’s advertising.  The products are of different quality.  PROLACTO sells “a more traditional, handmade form of paletas” and PLM sells “a water-based product more similar to a Popsicle.” Given these difference, there was some reason to think that PROLACTO’s goodwill and potential sales could be harmed if consumers were misled by PLM into believing that they were buying PROLACTO’s fruit-based, handmade product.  However, PROLACTO largely relied on affidavits “describing” customers who were confused by and disappointed with PLM’s products.  The court found these to be mainly hearsay.  (To the extent that they report a consumer’s state of mind, they’re not really being submitted for their truth.)  The nonhearsay portions were at least probative of injury, though, by suggesting that consumers were conflating the brands, which could hurt PROLACTO.

PROLACTO’s trademark infringement claim under DC common law was dismissed because it doesn’t operate in DC and showed no plans to do so in the near future.  PROLACTO’s counterclaim for federal dilution was dismissed because, of course, it isn’t famous. In a footnote, the court commented that “the level of fame required for a dilution claim appears to be greater than that required to establish that a mark is sufficiently well-known for the famous mark doctrine to apply.”  Dilution requires nationwide fame, while the famous marks doctrine only looks to the relevant consumer market. McCarthy recommends 75% recognition for federal fame, but survey evidence isn’t the only relevant evidence; the amount of money spent on ads and length of use count too.

PROLACTO’s counterclaims for cancellation of PLM’s registrations based on fraud failed because PROLACTO couldn’t meet the clear and convincing standard for proving that PLM knowingly made false, material misrepresentations with intent to deceive the PTO.  Because use in Mexico confers no rights, even if PLM knew PROLACTO was using the designs in Mexico, its knowledge of commercial use in a foreign country was insufficient to establish fraud on the trademark office as a matter of law.  “Because foreign use cannot create priority – perhaps with exception of the narrow and largely unfollowed famous mark doctrine, which itself still requires meaningful reputational impact in the United States – the fact that a similar mark was used in another country is immaterial to the decision about whether to grant an application.”