Direct, secondary liability under Lanham Act for statements targeted at foreign markets

Operation Technology, Inc. v. Cyme International T & D Inc., No. SACV 14-00999,  2016 WL 6246806 (C.D. Cal. Mar. 31, 2016)

Plaintiff (ETAP) alleged that defendants (CYME, IPET-CO, and Amir Aslani) violated the Lanham Act via pseudononymous, disparaging remarks made about its software.  The question here was whether a reasonable jury could find that CYME caused a false statement to enter interstate commerce.  ETAP argued for direct and vicarious liability, and the court found a genuine issue of triable fact.

Direct liability: ETAP’s evidence was that the campaign of disparaging communications against ETAP began, or expanded, during the Summer of 2013. Just before the relevant communications were sent to two customers, CYME employees received in their inbox, from the alleged originator of the disparaging communications, “what appear to be prior draft versions.” Aslani sent one to a CYME regional technical manager with the text, “I will be there in 20 min. just have a look at attached files. 20 hours working results of evaluating ETAP.” There was no “direct evidence” that CYME employees responded to these emails with encouragement, or edits, though there was evidence that CYME employees reviewed, edited, or contributed to other marketing materials from Aslani, which was relevant circumstantial evidence that CYME oversaw his communications.  “[T]he timing of the emails, and the lack of record evidence of Aslani being immediately reprimanded for these materials, permits the reasonable and justifiable inference in ETAP’s favor that at least one of the three CYME employees who received these communications had a role in shaping them.”

The then-director of CYME testified that he investigated the source of these emails, and asked Aslani whether he was behind the email and told him that “we don’t run a business like that.” However, the director only emailed his direct employees to tell them to “make sure that these things doesn’t [sic] go out of our office,” actually removing Aslani from an email chain when giving this warning. Aslani also remained CYME’s sole authorized retailer for his region for at least the subsequent eighteen months. A reasonable jury could therefore find that CYME employees were participants in the initiation of Aslani’s purported campaign of disparaging communication, making CYME directly liable.

Vicarious liability: ETAP presented sufficient evidence for a jury to find that Aslani was an agent of CYME for purposes of Lanham Act liability. The labels used by the purported agent and principal aren’t dispositive.  There was a material issue on agency because (1) Aslani and CYME agreed to make Aslani the sole authorized sales representative for the area he worked in; (2) CYME retained certain controls over the scope of Aslani’s work as the sales representative; and (3) Aslani was largely insulated from the risk of purchasing CYME’s software without a resale customer.  Even if Aslani was an agent, he wouldn’t necessarily create Lanham Act liability for CYME for conduct that was not authorized and was outside of the scope of Aslani’s authority to act on behalf of CYME.

A reasonable jury could find that CYME ratified Aslani’s conduct, because CYME was on notice of the likelihood that Aslani was behind the initial disparaging comments and similar disparaging comments made in subsequent months. A CYME representative accepted Aslani’s denials of responsibility “without significant further inquiry,” even though two CYME employees guessed that he was behind the communications. “[B]ecause Aslani suffered no repercussions for his behavior, … a reasonable inference is that he would have considered his activities authorized by CYME.”  Moreover, the parties’ agreement restricted Aslani’s conduct, and communication between them was frequent. “A jury could reasonably find that Aslani was in a much closer, more tightly controlled relationship than a simple reseller of software.” There was no evidence that Aslani considered his own acts unauthorized. 

CYME also argued that the case involved an impermissible extraterritorial application of the Lanham Act.  However, the disparaging communications took place, at least in part, within interstate commerce.  A US customer of ETAP received a disparaging email from a CYME Sales Manager for North America as part of CYME’s efforts to solicit that customer’s business.  Although it was retracted, the Lanham Act could be applied “when there is evidence showing a CYME employee affirmatively steered a disparaging communication into the United States, an act of interstate commerce.”

Further, the Lanham Act could be applied based on the foreign acts alone. The Ninth Circuit’s test: “[F]irst, there must be some effect on American foreign commerce; second, the effect must be sufficiently great to present a cognizable injury to plaintiffs under the federal statute; and third, the interests of and links to American foreign commerce must be sufficiently strong in relation to those of other nations to justify an assertion of extraterritorial authority.”  First, ETAP is an American company that sells to customers in the U.S. and abroad, and ETAP showed a genuine factual issue on harm.

The final factor required balancing multiple factors.  (1) The degree of conflict with foreign law or policy: there was no evidence that applying the Lanham Act would cause any conflict. (2) The nationality or allegiance of the parties and the locations or principal places of business of any corporations involved: ETAP is US-based and CYME is a Canadian based subsidiary of a multinational company that has operational headquarters in the US, making it related to a company with “substantial ties” to the US. (3) The extent to which an order by a U.S. court can be expected to achieve compliance with the Lanham Act: the court could order CYME to stop and to remove the incentive for disparaging communications. (4) The relative significance of effects on the United States as compared with those elsewhere: ETAP felt the effects in the US, thoug there was little other evidence of the disparaging communications entering the US market. (5) The extent to which there is an explicit purpose to harm or affect U.S. commerce: none shown; the apparent purpose was to affect competition in the Middle East, where Aslani was directly competing.  (6) The foreseeability of such effect: “the disparaging communications were put into the stream of international communication channels” and “received by entities as far apart as Australia and Bulgaria.” Other disparaging communications were posted to YouTube, viewable worldwide. (7) The relative importance to the violations charged of conduct that occurred within the United States as compared with conduct abroad: only one communication occurred within the US, and didn’t affed the potential customer’s decision before it was retracted.  Balancing the factors, the found that extraterritorial application of the Lanham Act was appropriate.