Misappropriating goodwill of abandoned mark is false advertising

ITEX Corp. v. Global Links Corp., No. 2:14–cv–00057, 2015 WL 557067 (D. Nev. Feb. 11, 2015)

 

A false advertising theory might not work in every case of a new entity adopting an abandoned mark, but it proved fruitful for the plaintiffs here. (Trademark portions of the case remain to be decided.)

 

ITEX is a barter and exchange company that provides a marketplace for commercial transactions, which enables member businesses to trade products and services without exchanging cash. ITEX trains and supports independent brokers who enroll new members, educate them in marketplace policies and procedures, and provide information about products and services available in the marketplace. ITEX’s revenue mainly comes from a percentage of each transaction that occurs within its marketplace.  ITEX is the product of mergers and acquisitions, including of BXI Trade Exchange, Inc./BX International, Inc., founded 1960, known as the original barter exchange company. With 20,000 members, it operated under the “BXI” word trademark and “BXI circular arrow” trademark as early as 1987. A company known as BXI Exchange, Inc. remains ITEX’s wholly-owned subsidiary.

Defendant Global Links is a real estate development company; defendant BXI Trade Exchange, Inc. (“BTE Nevada”) was formed in 2006 for the purpose of transferring pre-existing real estate assets between privately held corporations. In 2012, defendants discovered that the registration for the BXI mark had been cancelled in 2010. They then filed for “BXI Trade Exchange”; a registration issued in 2014.

 

In 2013, Global Links issued a press release titled “Global Links Corp. Acquires BXI Trade Exchange, Inc.—The Original Barter Company.” Among other things, the release stated:

 

BXI, formerly the world’s largest barter trade exchange, will soon be fully operational with plans to once again become the premier marketplace for the barter industry.... Saul Yarmak, the former Chairman and Principal Owner of BXI before taking a break from the industry, is committed to once again be a driving force in the day-to-day operations of the exchange. The company’s stated intention is to quickly make BXI the recognized “Gold–Standard” of the barter industry while maintaining the highest level of ethics and reputation it was previously known for. At its peak, prior to the widespread use of the Internet for online business communications and transactions, BXI had more than 100 offices and 22,000 business members.

 

(Yarmak was involved with a predecessor BXI entity to ITEX, but sold all his interest and ITEX owned all the goodwill.)  Subsequent statements were to similar effect, such as that BXI was “back in business with plans to again become the premier marketplace for the barter industry,”and “if you were a previous BXI member[,][w]e are anxious to welcome you back.”  Defendants posted a “Short History of BXI” claiming the history of the other BXI entities since 1960, including, “Because of its 36 years of solid service and proven record in the trade industry, BXI enjoys a prestigious position in barter circles and is well positioned to service the growing need for additional barter exchanges across the country. We continue our out of the box approach and look forward to 36 + more solid years.”

 

ITEX sued for false advertising and sought an injunction barring defendants from making any further statements that BTE Nevada was related in any way to the BXI exchange business that ITEX purchased in 1998 and then reacquired in 2005.

 

The court found that there was no material issue of fact about many of the statements at issue: they were clearly false, either facially or by necessary implication.  Equivocating about the meaning of “BXI” meant that the statements were literally false—the term either referred to the original BXI business (no legal relationship to defendants) or BTE Nevada’s exchange business, and either way there was falsity, since BTE Nevada was not the original barter company and Global Links did not acquire the original one. This was not puffery, but a claim about a specific entity that consumers would rely on due to the history of the BXI name.  “Back in business,” “re-opening” and the like were also false because BTE Nevada has never been in the exchange business, quit, and then reentered the market.

 

The court also found the statements misleading, since defendants were “adamant” that they established a new BXI, and even represented in regulatory filings that the “present BXI is in no way connected to the past BXI.”  But they presented their company as a continuation of the old one in their ads. 

 

While the validity of defendants’ mark wasn’t before the court at this time, it was clear that they were presenting BTE Nevada as the successor-in-interest of plaintiff’s BXI entities. Even assuming that the mark was valid and noninfringing, the mark wouldn’t allow them to misappropriate the goodwill of the original BXI exchange business. First, most of the statements at issue predated the registration date for the mark (though that really shouldn’t matter since trademark rights depend on use, not registration).  Second, the falsity here wasn’t problematic because of the BXI name; the statements were problematic “because they state that BXI is back, that it is re-opening, and that it will once again be the industry leader.” The necessary implication was a link between BTE Nevada and the earlier BXI.  Even assuming that ITEX abandoned the BXI mark, that didn’t make defendants’ statements any less false or misleading, “and regardless of whether ITEX uses the BXI name currently, it still owns what was the original BXI exchange business.”

 

Defendants’ statements were misleading “because a consumer in the industry would undoubtedly understand these statements to mean that BTE Nevada is the successor-in-interest to BX International.”  Defendants’ promotional claim that “the company has gained a tremendous amount of interest and outreach from former members” further solidified the misleadingness, since BTE Nevada had no former members. The context—press releases—showed a tendency to mislead by associating the two entities.

 

“[W]hile Defendants’ efforts to establish a competing barter and trade marketplace would alone not be actionable, their strategy in this case has been to usurp the goodwill of the original BXI business by relying on the reputation of BX International, BTE California, and BEI, which was accumulated over years of serving BXI members. This is something that Defendants cannot do, even if Yarmak contributed to those efforts.”  Yarmak sold his interest to ITEX, including BXI’s goodwill and reputation; part of ITEX’s acquisition was “the right to claim and utilize BXI’s past history.”

 

Defendants argued that they never claimed that BTE Nevada was the same legal entity as old BXI, and that “the same individual[ ] officers and principals who ran and operated the BXI Trade Exchange” through BX International “have reopened ‘BXI Trade Exchange’ under a valid federal trademark registration.” Nope.  Their press releases didn’t say anything about individuals “once affiliated” with BXI being back in business. And the participation of past BXI employees and affiliates in BTE Nevada’s new exchange enhanced misleadingness. For example, defendants posted photos on Facebook showing Yarmak and other former participants in the original BXI exchange business at BTE Nevada’s “Soft Launch & Training Session” accompanied by comments that “BXI has the management team to become number one again.” “A consumer in the industry familiar with the original BXI exchange business and its affiliates would surely be misled by these comments and photos into believing that BTE Nevada is related to the original BXI exchange business.”

 

Yarmak was free to “tout his experience, knowledge, and past involvement with BX International and the BXI exchange business as evidence that the new BTE Nevada exchange will become the modern ‘Gold-Standard’ in the barter industry.” But what he couldn’t do is imply that BTE Nevada was in any way affiliated with or related to the original BXI.

 

Finally, defendants argued that its statements related to a “company,” not to a “product.” But “a service-oriented company generates goodwill by efficiently and promptly performing the service for which it is hired. The company and its name, therefore, become synonymous with the quality of service it provides.” Thus, defendants’ references were the equivalent of product references (or, really, service references).

 

Literal falsity raises a presumption of deception, which defendants did not rebut. Plus, the record showed likely deception.  Defendants’ own statement about “a tremendous amount of interest and outreach from former members” demonstrated that at least some members of the original BXI exchange network believed and understood BTE Nevada to be affiliated with the BXI business that ITEX bought.

 

Literal falsity also allowed a presumption of materiality; materiality was also shown by the fact that  “the statements at issue here were made for the specific purpose of influencing consumers to join BTE Nevada’s new exchange network and pay the accompanying fees.”  The number of members in a barter exchange network was criticial to its success. “Prior to joining a particular network, it is common sense that potential brokers and members evaluate the exchange company’s operating history, market presence, size of its customer base, and reputation.”  And using the reputation of a previously operating network with a proven track record would obviously help.  “If the operating history of the original BXI exchange business was not material to consumers’ decision of which exchange network to join, Defendants would likely not have gone to so much effort to present BTE Nevada as a continuation of the original BXI.”

 

Defendants argued that ITEX didn’t show actual injury, but only likely injury was required for an injunction, as opposed to damages.  Without discussion of eBay or Winter, the court then quickly concluded that ITEX was entitled to a permanent injunction. The injunction covered “false or misleading statements that imply that BTE Nevada’s new exchange business is related to, affiliated with, or the successor-in-interest of the original BXI exchange.”

 

Defendants could claim that BTE Nevada was a new exchange business that would become the nation’s leader in the barter trade industry. Individuals previously involved with old BXI could truthfully represent their past experience, and defendants could claim that BTE Nevada would be successful because of its management team. They just couldn’t claim that, because those people were working with BTE Nevada, BTE Nevada was somehow a successor to old BXI.

 

BTE Nevada’s right to continue to use the BXI name and mark was still an issue to be decided; the injunction here would continue regardless of the outcome of the trademark infringement portion of the case.

 

The court found this to be an “exceptional” case deserving attorneys’ fees.  Exceptionality requires “fraudulent, deliberate, or willful” behavior.  (Is this still the standard after Icon Fitness?)  The court found willfulness to be an easy call.  Adopting such a similar name was “inherently confusing to consumers.”  Yarmak personally benefited from the sale of the original BXI business, when he parted with the right to use the name and benefit from its goodwill.

Yarmak seemed to want to “have his cake and eat it, too.” Plus, repeatedly claiming to be formerly the “largest” barter trade company, etc., “demonstrates a deliberate attempt to confuse consumers.” Defendants’ deliberate claim to BXI’s history showed an intent to benefit from old BXI’s goodwill. One BTE Nevada broker stated in promotional material that “[her] best years in barter were the 13 years [she] worked for this company starting in 1994, before they sold the membership in 2005.” (The court was unsure whether this showed willful deception by defendants or actual deception on the part of the broker—but either way, defendants’ use of the statement supported the finding of exceptionality.)  Likewise, defendants’ adoption of similar, if not identical, trademarks, also indicated a willful attempt to confuse, even if the marks were valid and non-infringing.  (Not sure how they could be, given this finding, but there’s no motion for summary judgment as to the marks.)