informal representations to competitor's customers can violate Lanham Act

Display Works, LLC v. Pinnacle Exhibits, Inc., No. WMN-15-2284, 2015 WL 7454084 (D. Md. Nov. 24, 2015)

 

The parties entered into a nondisclosure agreement in connection with a potential acquisition by Pinnacle.  Pinnacle agreed that it would, among other things, refrain from directly or indirectly soliciting for employment any employee of Display Works for two years. Display Works alleged that Pinnacle breached the agreement by hiring multiple employees during the two year period. Further, Pinnacle allegedly falsely told Display Works’ customers that it was reorganizing, portraying it as bankrupt or financially distressed in an attempt to lure customers away.  

 

The court found that “hiring multiple employees of plaintiff during the prohibition period,” does not, in and of itself, constitute a breach of contract, since the contract didn’t outlaw hiring, only certain types of solicitation.  Its terms explicitly allowed Pinnacle to hire employees who contacted Pinnacle on their own initiative; whose employment with Display Works was terminated for at least three months; or who responded to an advertisement or general solicitation not directed at employees of Display Works. The complaint failed to allege solicitation outside those boundaries.

 

As for Lanham Act false advertising, Pinnacle argued that the complaint didn’t allege “advertising or promotion,” because the complaint alleged only that Pinnacle told certain Display Works customers that Display Works was “reorganizing” to lure them away, and that Pinnacle disseminated false rumors about Display Works.  Informal representations to a competitor’s customers can constitute “promotion,” depending on the size and structure of the market; further inquiry was not appropriate on a motion to dismiss.

 

In Maryland, injurious falsehood requires: (1) a falsehood which tended to disparage plaintiff’s title to its property, or its quality, or to its business in general, or some element of its personal affairs; (2) actual malice or with reckless disregard for the truth; and (3) the falsehood played a material and substantial part in inducing others not to deal with the plaintiff, and that as a result the plaintiff suffered special damage. Though Pinnacle argued that Display Works failed to allege the precise content of the statement or its context, the court found that the allegations were sufficient to put Pinnacle on notice. However, the allegations of special damages weren’t pled with sufficient particularity—Display Works needed to plead either particular named lost customers or a general diminution of business and extrinsic facts showing that such special damages were the natural and direct result of the false publication, so the claim was dismissed.