6th Circuit holds that targeted ads are commercial advertising or promotion

Grubbs v. Sheakley Gp., Inc., 2015 WL 7964109, -- F.3d – (6^th Cir. Dec. 7, 2015)

 

District court’s ruling covered here (with my raised eyebrow).  The court of appeals affirms the dismissal of the RICO claims (they’re RICO claims), but reverses the dismissal of Lanham Act claims based on the consequences of a mass employee departure.

 

Grubbs owns Tri–Serve, Ltd.; TriServe # 1, LLC; and Capital Concepts, Inc.  Capital Concepts is a financial planning, wealth management, and tax preparation firm, while the other firms were successors to four professional employment organizations, which are a type of Ohio regulated entity to which employers may outsource certain administrative tasks, such as payroll, workers’ compensation, and benefits.  Tri-Serve provides PEO services to the greater Cincinnati, Ohio market.

 

After she purchased Tri-Serve, Grubbs asked Defendant Strunk–Zwick to manage the newly acquired companies because of her expertise with PEOs. Strunk–Zwick was subject to a non-competition agreement.  Defendant Larry Sheakley owns and operates the Sheakley Group of Companies, which also provide “401(k) services, flexible benefit plans, workers’ compensation, payroll, [and] human resources outsourcing solutions,” headquartered in Cincinnati.

 

One of the Sheakley defendants solicited Strunk–Zwick to ask for her assistance with Sheakley’s PEO division while she was still employed by Tri-Serve. “During March and April 2009, Strunk–Zwick was paid by Sheakley on a consulting basis, and was sometimes absent from the Tri–Serve office during business hours in order to provide services to Sheakley.”  Sheakley solicited Strunk-Zwick and other Tri-Serve staff members to join Sheakley, and coordinated the transfer of Tri-Serve clients to Sheakley.  Defendant Steve Wolf, a Sheakley VP, suggested that Strunk–Zwick tell Tri–Serve clients that “we are partnering with Sheakley and that we may transition them over to give them better service etc.”  For example, Strunk-Zwick sent an email to 22 Tri-Serve clients:

 

We are moving! In order to better serve you, we are partnering with Sheakley HR and moving our offices. As many of you know, we have partnered with Sheakley over the years with regards to our workers compensation and unemployment management. We have been blessed to have experienced tremendous growth over the last 6 months. We find ourselves needing more office space and more resources to ensure that our customer service level continues to meet your expectations. By moving into Sheakley Group we will be able to provide you and your employees with additional resources, services, and benefits, while continuing to provide you with the service that you have grown accustomed to expect from TriServe. Nothing will change from your standpoint. We will have new contact information, but nothing else will change. You will begin to see the Sheakley HR name and we will be introducing new benefits and new services to assist you with growing your business. …

 

Effective Monday, July 6, 2009 our Contact Information will be:

TriServe LTD c/o Sheakley HR Solutions…

 

“Several Tri–Serve clients expressed dissatisfaction with the move, were upset that they had received no notice, and worried that all of their information had been transferred to Sheakley.”  At that point, Strunk-Zwick resigned from Capital Concepts.  Before she left Capital Concepts, she removed all files, including all customer files; took Tri-Serve’s 2009 tax returns; and deleted computer files and e-mails.  Sheakley continued to use the Tri–Serve name thereafter.

 

Grubbs had sporadic contact with Strunk–Zwick and Sheakley for the next several months as they tried to work out various issues with payroll, taxes, and similar matters for 2009. As of August 2009, health insurers and workers’ compensation departments were still sending third-quarter invoices to Tri–Serve at Grubbs’ office, but Sheakley, not Grubbs, received the client payments.  Strunk-Zwick denied possessing Tri-Serve’s own tax documents; Grubbs continued receiving bills for Tri–Serve, “which she paid from her retirement account.”  (Nice detail, plaintiff’s lawyers!)

 

Grubbs sued in 2013.  The district court dismissed her Lanham Act and RICO claims, and declined pendent jurisdiction over 15 state-law claims.

 

False designation of origin: Grubb argued that Strunk-Zwick’s conduct could be imputed to Sheakley.  Vicarious liability exists when “the defendant and the infringer have an actual or apparent partnership, have authority to bind one another in transactions, or exercise joint ownership or control over the infringing product.”  The “partnership” email sent to 22 clients used that language at Wolf’s suggestion.  “The intent to create an apparent partnership in the eyes of the Tri–Serve clients is self-evident from this language.”

 

Next, the court considered whether there was “trademark use” or instead use in a “non-trademark way,” which would fall outside the Lanham Act. “This finding may be dispositive: plaintiffs cannot succeed on a trademark claim where trademark law does not apply.” The district court found that the email used Tri-Serve’s mark in a non-trademark way, as a source of comparison between the two organizations.

 

Hensley Manufacturing v. ProPride, Inc., 579 F.3d 603 (6th Cir. 2009), found no actionable trademark use where an inventor, Jim Hensley, left the company bearing his name and designed products for its rival, who described the products by identifying Jim Hensley as the designer, with a disclaimer that Jim Hensley was no longer affiliated with Hensley Manufacturing.  This was not trademark use.  However, Hensley was inapposite.  The email provided a new address of Tri-Serve at Sheakley HR Solutions at One Sheakley Way, designating geographic source and implying that those services would be originating from both Tri–Serve and Sheakley HR. Likewise, including a link to www.triservehr.com suggested that Tri–Serve would still be the source of payroll services, as before. Domain name use was use “in a trademark way.”

 

Likely confusion:  Tri-Serve is a suggestive mark, “toward the stronger end of the spectrum,” and “Tri–Serve customers were perfectly acquainted with the name.”  The services directly compete, making confusion likely in cases of sufficient similarity.  Mark similarity: defendant copied “wholesale,” favoring confusion.  Actual confusion: Some clients expressed dissatisfaction and worry, and they started sending payments to Sheakley, indicating that they were duped.  Marketing channels/customer base: the same.  Degree of customer care: there was no evidence that business owners purchasing HR services need to be held to an unusually high standard—the question was whether “a typical buyer exercising ordinary caution receiving Strunk–Zwick’s e-mail could be confused as whether the HR services were coming from Sheakley or Tri–Serve.”  Intent: “The use of the Tri–Serve name cannot have been anything other than purposeful; we therefore read Strunk–Zwick’s e-mail as calculated to mislead the Tri–Serve clients into diverting their business to Sheakley.” 

 

All the factors supported a finding of likely confusion, and this was not in any way counterintuitive.  “Taking the facts in the light most favorable to Plaintiffs, as we must, we read the frequent use of the first person plural throughout the e-mail to mean Tri–Serve, not simply Strunk–Zwick and the other Tri–Serve staff members who were entering Sheakley’s employ; according to the e-mail, all of Tri–Serve was moving, and was partnering with Sheakley.”  The email was chock full of ambiguous (at best) references, which could sow confusion and strongly implied affiliation, even though Grubbs—the actual owner of Tri-Serve—did not affiliate with Sheakley.

 

False advertising:  The district court used the Gordon & Breach test for “commercial advertising or promotion.”  The Sixth Circuit hasn’t adopted Gordon & Breach, but circuit precedent was silent about what constitutes “advertising or promotion.”  The court of appeals here noted the Seventh Circuit precedent stating that advertising was “promotion to anonymous recipients,” but (like other courts) didn’t note that the Seventh Circuit subsequently walked that back a bunch.  (Does this failure by subsequent courts to notice later refinements tend to happen more with Seventh Circuit cases because they are so breezy about precedent generally and thus it’s harder to tell when they’re limiting/contradicting earlier precedent?)  The Second Circuit has adopted most of Gordon & Breach in Fashion Boutique of Short Hills, Inc. v. Fendi USA, Inc., 314 F.3d 48 (2d Cir.2002), requiring that “the contested representations are part of an organized campaign to penetrate the relevant market. Proof of widespread dissemination within the relevant industry is a normal concomitant of meeting this requirement.”

 

Like the Second Circuit, the court of appeals adopted the Gordon & Breach requirements that “commercial advertising or promotion” must consist of “ ‘commercial speech’ that is made for the purpose of influencing the purchasing decisions of the consuming public.”  Likewise, it adopted the “organized campaign to penetrate the relevant market” standard, which need not entail widespread, market-wide dissemination.  “[P]roducers today employ data as never before to track our consumption habits, especially on the Internet, and send out personalized promotional material accordingly.”  Targeted promotion to a discrete segment of a larger market could be an organized campaign even without “flooding” the market.  “[T]he plain meaning of the terms ‘commercial advertising’ or ‘commercial promotion’ accommodates targeted communications to a substantial portion of a company’s existing customer or client base.” 

 

Still, not all commercial speech should be actionable under the Lanham Act (because …?). Thus, the appropriate definition was:

 

(1) commercial speech; (2) for the purpose of influencing customers to buy the defendant’s goods or services; (3) that is disseminated either widely enough to the relevant purchasing public to constitute advertising or promotion within that industry or to a substantial portion of the plaintiff’s or defendant’s existing customer or client base.

 

No competition was required.  (This is also entailed by Lexmark, as other courts have observed.)

 

The letter to all of Tri-Serve’s clients fit squarely within this definition.

 

The complaint sufficiently pled that the emails contained several false and misleading statements of fact about Tri-Serve’s services and its “partnership” with Sheakley.  “Tri–Serve was not moving and the companies had no relationship whatsoever.” The new address at One Sheakley Way “was also a false representation of the geographic origin of the PEO services and could also have created a further misimpression as to the relationship between the companies.”  There was also evidence of actual deception, necessary for a damages claim.  Health insurers and workers’ compensation departments billed Tri–Serve at Grubbs’ office, but clients paid Sheakley, not Grubbs. 

 

What about interstate commerce? Grubbs didn’t allege that the e-mail, or the mailed versions thereof, ever traveled outside Ohio, or where any of the relevant e-mail servers might have been.  However, a civil plaintiff need not allege that an e-mail crossed state lines to survive a motion to dismiss; stating that an email was sent was enough to allow the reasonable inference that the allegedly false advertisements were introduced into interstate commerce.