Thursday, August 25, 2016

NY false advertising law lacks rigid false/misleading distinction

Classic Liquor Importers, Ltd. v. Spirits International B.V., --- F. Supp. 3d ----, 2016 WL 4419457, No. 15 Civ. 6503  (S.D.N.Y. 2016)

Classic Liquor is a newcomer to the liquor business that recently launched a line of vodkas under the mark ROYAL ELITE.  It brought a declaratory judgment claim against SPI based on SPI’s “elit by Stolichnaya” vodka brand. The court declined to grant summary judgment on non-infringement, but dismissed most of SPI’s false advertising-based counterclaims.  The state-law claims that survived indicate the importance of state-law claims where competitors are allowed to sue; state laws may not follow the calcified false/misleading distinction made under the Lanham Act.

Several ROYAL ELITE marks have been approved for publication, and SPI has opposed two of them.  SPI has four relevant registered marks, STOLICHNAYA ELIT and three figurative/stylized:
One stylized mark

Another stylized mark

The most recently registered stylized mark

Plaintiff made changes to the bottle during the course of the litigation: “ROYAL” is now close to the same font size as the word “ELITE”; a label bearing the ROYAL ELITE mark around the neck of the bottle was replaced with a sticker bearing the mark vertically; and there were other changes, all of which the court deemed immaterial to the matter at hand.
Royal Elite bottle

Stoli elit bottle

The false advertising counterclaims were based on: (1) the inclusion of the ® symbol next to the word “ROYAL” (falsely signifying that plaintiff owns a trademark registration in ROYAL or ROYAL ELITE) and (2) the inclusion of the words “Since 1867” on the front of plaintiff’ s bottle.

SPI failed to bring an infringement claim, even though that’s generally a compulsory counterclaim in a declaratory action for non-infringement. But that didn’t entitle Classic Liquor to a default judgment of non-infringement; instead, the burden still rested on SPI to prove infringement, and if SPI did so, it could still get an injunction.  Starter Corp. v. Converse, Inc., 170 F.3d 286 (2d Cir. 1999).

Strength: while two of SPI’s marks were incontestably distinctive, that didn’t “make every component of those marks irrefutably strong for purposes of the Polaroid analysis.” SPI didn’t have a word mark in ELIT, but rather it had registrations for stylized versions of ELIT, a word mark in STOLICHNAYA ELIT, and variations on the stylized versions plus other stuff.  SPI’s confusion theory depended only on ELIT.  The court brushed aside SPI’s implausible argument that ELIT was a coined term; “[a] slight misspelling of a word will not generally turn a descriptive word into a nondescriptive mark,” especially given SPI’s positioning of ELIT as “ultra-luxury” and its argument that ELITE and ELIT had the same commercial impression.  Self-laudatory terms are usually deemed descriptive, but a weird outlier case in the Second Circuit says they’re suggestive. Estee Lauder Inc. v. The Gap, Inc., 108 F.3d 1503, 1509 (2d Cir. 1997), so district courts make case by case determinations.  Here, that didn’t save ELIT from descriptiveness. SPI argued that “elite” wasn’t an adjective describing a quality or characteristic, but rather a noun that “normally designates a group or class of persons in society.” Fortunately, the Eighth Circuit has already spoken on this precise issue:

Our dictionary defines “elite,” when used as an adjective, to be synonymous with “choice, superior, select.” Webster’s Third International Dictionary 736 (1976) (citing “an [elite] brand of coffee” as example of usage). Although plaintiff contends, based on another dictionary, that “elite” may refer only to persons, we conclude that the word may be used to describe objects as well. Because the word “elite” indicates superior quality, as used here it is a “self-laudatory” mark. ... Because “elite” is descriptive, plaintiff must show that the mark has acquired secondary meaning to obtain protection.

Jeld-Wen, Inc. v. Dalco Indus., Inc., 198 F.3d 250, 1999 WL 1024002, at *3 (8th Cir. 1999) (unpublished per curiam) (footnote omitted).

The court then found disputed issues of fact over whether ELIT had developed secondary meaning, despite an April 2015 market research report that SPI commissioned finding that “overall awareness of elit remains very low” and that “[t]he main reason to try elit by Stolichnaya is due to a desire to experiment with new brands.” An SPI internal marketing document states that “[t]he correct full name is: elit by Stolichnaya” and instructs, “[n]ever use: elit by Stoli, or Stoli elit. Wherever possible ‘elit by Stolichnaya’ should be written on one line.” The product had only $6.6 million and $5 million in sales in 2014 and 2015, respectively, and numerous other spirits brands that use variations of ELITE in trademark registrations and to market liquor products.

However, elit was supported by an annual marketing budget in the range of $3 million per year. Awareness of elit significantly increased since July 2014; the brand enjoys strong retention rates; and the brand’s recognition on social media has substantially improved. There was also some evidence that the product is colloquially referred to as “elit.” SPI further argued that the exclusive, high-end vodka market is by definition small, and that marks for luxury brands can achieve secondary meaning without having meaningful market share. Moreover, SPI argued that many of the registrations identified by Classic Liquor had been cancelled or abandoned, and that those that have not were easily distinguishable from the ELIT Marks.  Drawing all reasonable inferences in favor of SPI, this was enough to find a genuine factual dispute over protectability/strength.

Similarity weighed slightly in favor of SPI.  The court declined to defer to the USPTO’s “implied view—by virtue of having approved plaintiff’s applications for publication—that plaintiff’s marks do not give rise to a likelihood of confusion.”  The publication decision wasn’t accompanied by any analysis of the issues raised here, and the TTAB opposition proceedings are stayed.

The parties competed directly, favoring SPI.

There was “some evidence of confusion in the marketplace” in that “a lounge in New York City known as Vandal lists both ‘Royal Elit’ (sic) and ‘Stoli Elit’ on its nightclub’s bottle menu.” [Although it could just be that nobody can spell, which is part of the reason for the usual rule about minor misspellings.] “It is at least plausible that customers viewing this menu would be likely to mistakenly believe that the two products are affiliated.” Similarly, a brand promoter hired by Classic Liquor referred to “Royal Elite” as “Royal Elit” in correspondence with Classic Liquor. These “isolated instances of actual confusion” didn’t show actual consumer confusion, but were “probative of how easily consumers might do so,” and slightly favored SPI.

The court did reject SPI’s argument that confusion was shown because a search for “elite” and “vodka” on Pinterest returned photos of both Royal Elite and elit by Stolichnaya. “Given the contrived nature of the search, the Court does not find the results to constitute evidence of actual confusion. The results do, however, reinforce the Court’s determination, discussed above, that ELIT is a descriptive, self-laudatory term.”

Good faith/bad faith: Another genuine issue. Based on the timeline, Classic Liquor’s argument that the ROYAL ELITE mark was inspired by the legend of Tamerlane’s “Royal Elite” brigade and by the fact that the vodka is consumed primarily by upper-crust Uzbeks was flatly contradicted by the record. “Whether plaintiff’s apparent misrepresentation is an inadvertent (or immaterial) one or whether plaintiff is attempting to mask a bad-faith motive for adopting the ROYAL ELITE mark is a factual issue that cannot be resolved on summary judgment.”  The court pointed to other evidence that could indicate bad faith: Classic Liquor’s national sales director instructed an employee that the preferred placement for Royal Elite products was to the left of SPI’s Stolichnaya products.

Consumers: SPI argued that “desire for luxury products and status symbols does not imply a sophisticated consumer,” but its internal marketing documents revealed that it catered to “a more sophisticated segment of the vodka market,” so this factor favored Classic Liquor.

Overall, summary judgment was inappropriate.

False advertising: ® wasn’t a misrepresentation of an “inherent quality or characteristic” of the goods.  SPI responded that this language is just the Second Circuit’s way of saying “materiality,” and that, because ® was literally false, materiality was presumed.  But the court of appeals has said: “Falsity alone does not make a false advertising claim viable; ‘[u]nder either theory [of falsity], the plaintiff must also demonstrate that the false or misleading representation involved an inherent or material quality of the product.’” Apotex Inc. v. Acorda Therapeutics, Inc., 823 F.3d 51, 63 (2d Cir. 2016).  The court here reasoned: “The purpose of federal registration is to put the public on notice of the registrant’s ownership of the mark; the goods or services to which the mark pertains are entirely irrelevant.”  Thus, the false marking was not actionable as a matter of law.

As for Classic Liquor’s use of “Since 1867” on its vodka bottles, this wasn’t an unambiguous falsity.  SPI argued that, if the claim meant selling vodka since 1867, it was false; if it meant that the same product had been sold by others since 1867, it was false; and if it meant that its Tashkent distillery could trace its roots to a distillery founded in 1867, that too was false. But this very list showed ambiguity, and there was no extrinsic evidence of consumer deception.  (One of Classic Liquor’s witnesses testified that some distributorship customers have asked about the significance of “Since 1867,” “a fact which further demonstrates that the message of the designation is ambiguous.”)

The district court then addressed the argument that “it would be illogical to require extrinsic evidence of consumer deception if it were the case that each possible message conveyed by an ambiguous statement was indisputably false.”  [Note from RT: This argument was implicitly accepted by an older Second Circuit case finding each of three possible meanings false and thus finding literal falsity. Johnson & Johnson v. GAC Intern., Inc., 862 F.2d 975, 979 (2d Cir. 1988).]  However, Classic Liquor provided an additional, non-false potential meaning: “Since 1867” refers to the fact that the distillery was founded in 1867, not that the vodka has been produced in the exact, same building using the exact same equipment that was in use in 1867.

Consumers might very well be misled by “Since 1867,” deeming it to refer to the product or to Classic Liquor itself rather than to the distillery that manufactures Royal Elite vodka. But that possibility, without extrinsic evidence, wasn’t enough.  Thus, Classic Liquor won summary judgment on the Lanham Act claim, which also kicked out the coordinate common-law unfair competition claims.

SPI’s counterclaims brought under §§ 349 and 350 of the New York General Business Law “are not mere Lanham Act analogues.”  They require (1) consumer oriented conduct, (2) that was misleading in a material way, and (3) that injured the plaintiff.  “The inclusion of this symbol on plaintiff’s vodka bottles—which, again, serves to put potential infringers of a mark on constructive notice that the mark is owned—was not consumer-oriented as a matter of law.”

However, the “Since 1867”-based claims survived, because state law doesn’t make the rigid false/misleading distinction requiring extrinsic evidence of deception for all ambiguous claims. “[T]he inquiry under §§ 349 and 350 of the New York General Business Law is objective in nature, requiring courts to assess whether a given practice or advertisement is “likely to mislead a reasonable consumer acting reasonably under the circumstances.”  Whether the misrepresentation caused SPI damage was a disputed issue of fact.  [And materiality?]

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