Business betrayal isn't false advertising, could be TM infringement

Kische USA LLC v. Simsek, 2016 WL 7212534, No. C16-0168JLR (W.D. Wash. Dec. 13, 2016)

Kische alleged that former employees—Mr. Simsek and Ms. Walker—abused their positions to misappropriate Kische’s assets and found JD Stellar, a competing business. Kische accused Costanza, its former attorney, of participating in this misconduct, though he gets out of the case because Kische’s allegations did not dispel the reasonable inference that the ex-employees had apparent agency to do what they allegedly did.

Kische “design[s] and import[s] fashionable clothing from manufacturers in Turkey and [sells] them under the mark ‘KISCHE’ to prominent retailers in the U.S., including Nordstrom, T.J. Maxx, Marshalls, Ross[,] and others.” Mehmet Uysal is the owner and sole member of Kische. Simsek and Walker “served as managers and employees of [Kische] for over six years.”  While still employed by Kische, they allegedly (1) formed JD Stellar, a competing company; (2) assigned one of Kische’s registered trademarks—“Marseille”—to JD Stellar without Uysal’s approval; (3) registered the trademark “Dantelle,” which Kische alleges directly competed with Kische, on behalf of JD Stellar; (4) dissuaded Kische’s customers from doing business with Kische; (5) purposefully delayed Kische’s payments to manufacturers and vendors; (6) stole furniture, equipment, and clothing from Kische; (7) made payments from Kische to JD Stellar without authorization; and (8) otherwise improperly utilized Kische’s resources. Kische alleged that its annual revenue of $13 million from the “Kische” mark dropped to zero as a result.

The court found that Kische sufficiently pleaded infringement of the Kische mark, but not the Marseille or Dantelle marks. Even if Marseille was fraudulently transferred, Kische didn’t allege that it still owned the mark, and though Kische alleged ownership of Dantelle, it didn’t allege infringement.  As for Kische the mark, Kische properly alleged that the Stellar defendants sold identical products with an identical mark, supporting the claim of likely confusion.

False advertising claims did not fare so well. First, they’re subject to Rule 9(b), unlike trademark claims subject to Rule 8, because courts have said so.  The court found that Kische’s allegations, including use of the Kische mark as a keyword, use of the Kische address as JD Stellar’s address, and use of Kische’s clothing designs as JD Stellar’s, were not statements of “fact.”  There were no allegations of specific assertions that describe testable, “absolute characteristics” of the products.  [Stellar’s address is certainly a verifiable fact about Stellar’s services, though perhaps at some point it wasn’t false as to customers even if it represented a betrayal of Kische.]  At most, Kische was recycling its Dastar-barred reverse passing off claim, alleging that Stellar sold clothing embodying Kische designs under a different mark.

Kische also alleges that the Stellar defendants made false statements to Kische’s clients and cited the declaration of Lorraine Hooshyar, “[s]ales representative for specialty stores.” But the declaration stated only what buyers—not the defendants—told her: that Uysal “had shipped substandard product,” that Uysal and Kische “were closing their business,” and that a buyer had to “cancel [an order] because [Uysal and Kische] couldn’t meet the delivery or produce the garments.” Hooshyar’s statement “[e]ach and every buyer that I have reached out to has had a bad taste due to the ending and the untruths that have been spoken by [Walker and Simsek]” was about the, but was too conclusory to plead false statements of fact.  Also, the facts as pleaded didn’t justify the inference that the statements constituted advertising or promotion.

Trademark dilution: allegations that Kische’s marks were famous  “due to [Kische’s] reputation for high quality women’s fashion” were insufficient. These included allegations about a video in which a commentator calls Kische a “luxurious line,” customer ratings, purchase orders to “major women’s fashion retailers,” and an email in which “Taste of Eden show[ed that] it thought that [the] Kische cardigan was famous.” That wasn’t enough to show wide recognition by the general consuming public. 

The evidence on which Kische bases its factual allegations shows at most that fashion purchasers recognized Kische’s marks—not that the general consuming public widely recognized the marks. Similarly, the fact that a commentator called the Kische brand a “luxurious line” or that a few customers gave high ratings to Kische’s clothing do not lead to the reasonable inference that the marks are widely recognized by the consuming public.

As for the Washington Consumer Protection Act, Kische insufficiently alleged an unfair or deceptive practice, and separately failed to allege an impact on the public interest. There was no reason to think that the defendants deceived “a substantial portion of the public,” or that additional persons in the same situation would be injured in the same way.  Likewise, fraud claims failed because the relevant misrepresentations were made to the PTO and to Kische’s suppliers, retailers and customers, not to Kische—thus Stellar couldn’t have intended Kische to rely on them, and Kische would have known that the statements were false and couldn’t have relied on them.  As to allegations that the defendants made false representations to Kische about Kische’s financial status, Kische also failed to state a claim.

Allegations for breach of fiduciary duty and conversion of Kische’s assets, including “trademarks, money, and equipment,” did survive, and Kische was allowed leave to amend against the Stellar defendants.