Friday, August 18, 2017

taking customer list as conversion; false claims of official investigation as false advertising

Yeti Enters. Inc. v. Tang, 2017 WL 3478484, No. 13-cv-01203 (D. Or. Aug. 14, 2017)

This is a tangled story that illustrates how false advertising claims can arise from failed business agreements.  Plaintiff NPK sued Nicholas Jackson and Jessica Lilga for conspiring with Jim Heagle to eliminate NPK from the distribution market for frequency-water products.  NPK contracted with Yeti to market and distribute Yeti’s product known as frequency water, which appears to be sold as a better way of preventing plant mildew/mold than regular water.  NPK created three plant washes, Mighty Wash, Power Wash, and PM Wash, all of which contained and were marketed as containing frequency water.

Jackson is a part owner of NPK, though his relationship with NPK was bad for a while.  Lilga initially took over Jackson’s responsibilities as VP of sales when Jackson was incarcerated, though that relationship was also difficult and ended after three weeks.  As Jackson continued to negotiate his exit from NPK, he sent Heagle a draft copy of a proposed NPK ad that depicted a new series of products: “They’ve been lying to you. I mean, sitting there telling you they weren’t going to do other products. They already did.... They’ve got their whole nutrient line....” Heagle moved to terminate Yeti’s distribution agreement with NPK; the termination letter said that the “last straw” was the draft ad.  Yeti and NPK worked out an agreement for continued supply for a year, in exchange for which NPK would turn over to Yeti certain frequency-water-related trademarks that NPK had registered in its name.  This agreement didn’t work out; the parties sued each other in state court.  NPK also sued Jackson in state court; Jackson countersued.

By this time, NPK’s distribution agreement with Yeti had ended and NPK had relaunched its product line without Yeti’s frequency water. Jackson began working with Left Coast, a former distributor of NPK’s products, to launch a competitive product line using Yeti’s frequency water. Jackson promised to supply Left Coast with a list of 1300 Sunlight stores; Sunlight was a major NPK customer.  Left Coast then sent emails to NPK’s customers stating that it had “decided to discontinue distributing products from NPK industries” because NPK’s new plant-wash line, which no longer contained frequency water, was susceptible to molding.  It also stated that Left Coast would now “provide the original frequency altered formulations and will be marketing under the trade names Mega Wash, White Wash, and Freq Wash....” The emails, plus the new Left Coast product line, halved NPK’s sales, which had already been halved earlier in the year due to the loss of Yeti’s frequency-water products.  

In this litigation, NPK sued Jackson for fraudulent misrepresentation, violations of the Lanham Act, common law trade libel, conversion, and breach of the parties’ nondisclosure agreement.

Fraudulent misrepresentation requires showing, by clear and convincing evidence: (1) a material misrepresentation that was (2) false, (3) made with knowledge of its falsity or with ignorance of its truth, (4) with the intention that it be acted upon by the party claiming fraud, and (4) that the acting party in fact justifiably relied on the material misrepresentation, (5) suffering an injury as a result. Typically, “mere silence is not fraud,” but “[w]here the law imposes a duty on one party to disclose all material facts known to him and not known to the other, silence or concealment in violation of this duty with intent to deceive will amount to fraud....” NPK argued that Jackson “had a special relationship with [NPK] which included the duty to disclose to [NPK] all information which could damage its business,” including his assistance in bringing competitive products to the market and assistance in cutting NPK out of the plant-wash distribution market.

The court disagreed.  Members of an LLC who aren’t managers, as Jackson wasn’t once he was incarcerated, owe no duty to disclose information that could damage its business.  As for fraudulent misrepresentation through active concealment, the evidence didn’t show active concealment—“Jackson repeatedly attempted to leave NPK and made his intentions to do so quite clear.” His failure to disclose private business negotiations was distinct from active concealment, which requires the fraudster to take steps that eliminate an opportunity to discover the truth, leading the victim to rely on the falsity.

Lanham Act claim: Jackson allegedly told NPK’s customers that NPK’s plant-wash products were susceptible to molding; that their products no longer contained frequency water; that frequency-water products would no longer be distributed by NPK; that Lest Coast and other wholesalers discontinued distribution of NPK’s products; and that Yeti was releasing a “new and improved product line....” Further, Jackson allegedly aided in distributing e-mails falsely claiming NPK was being investigated and going to be shut down by the EPA, IRS, DEQ, and other agencies.

NPK easily showed harm from these statements, and the court was convinced that Jackson participated in their distribution.  However, NPK could only show falsity for two statements.  (That conclusion would seem to require a re-evaluation of the harm question—can NPK show harm flowing from the false statements specifically?)  It was true that NPK’s products no longer contained Yeti’s frequency water at the time the statement was made; it was true that Left Coast and others discontinued distribution of NPK’s products; it was true that Yeti was releasing a new-and-improved product line.

The statements that NPK was being investigated by the EPA, IRS, DEQ, and other agencies were not literally false—NPK’s witness testified that NPK was being investigated, though its position was that Jackson and Left Coast had prompted their investigations by providing false information.  However, the statements “were likely to, and in fact did, mislead or confuse consumers, as these statements implied the agencies were going to shut down the company.” The “susceptible to molding” claim was also rebutted at trial, and thus proved false.  These statements were also material: molding would indicate that the products didn’t work as intended, and false statements that NPK would be shut down for regulatory noncompliance “certainly raised the presumption that its products or business was operating improperly or outside the law.”  Thus, NPK proved a Lanham Act violation.

Common law trade libel: the court found that NPK didn’t prove that Jackson made or aided in the distribution of the two false statements maliciously or with knowledge that they were false. In fact, he appears to have believed his own claims (drunk his own frequency water?) that molding would be a risk without frequency water.  This belief also meant he didn’t act with malice.  Though he did “demonstrate a complete disdain for NPK,” that contempt isn’t malice.  The same was true for statements involving agency investigations into NPK.

Jackson was also liable for conversion for getting Lilga to download NPK’s customer database. The court doesn’t address tangible/intangible property as the subject of conversion, instead holding that Jackson’s “exercise of control over [the property] constituted a serious interference because it severely impacted the economic value of the database.” But NPK didn’t provide an accurate assessment of the market value of any of the information converted.  However, “if the property has no market value at the time and place of conversion, either because of its limited product, or because it is of such a nature that there can be no general demand for it, and it is more particularly value to the owner than any one else, then it may be estimated with reference to its value to him.” As secret information, the database could be evaluated in this way.  (I believe that some states wouldn’t allow trade secret liability standards to be circumvented in this way, though it sounds as if this information might well have constituted a trade secret as well.)  The customer database, while valuable, was only part of the results of NPK’s marketing campaign and couldn’t represent the entire value of NPK’s goodwill, which included other elements such as name recognition. Still, its customer relationships were “clearly an integral part of the value of its goodwill.” Thus, the court would factor the conversion into the damages award.

NPK also argued that Jackson breached the parties’ nondisclosure agreement by distributing the customer lists.  There was no question that he breached the express terms of the contract by disclosing NPK’s database of customer lists and by disclosing a proposed ad.  Jackson didn’t show that NPK failed to substantially perform any part of the its side of the agreement. And NPK suffered ascertainable damages that were foreseeable by the parties at the time they entered into this agreement, so Jackson was also liable for this breach.

Civil conspiracy and aiding and abetting: because NPK didn’t show any other torts beyond conversion and violation of the Lanham Act, and because Jackson was already liable for those, he couldn’t be independently liable on those claims.

Damages: “[I]f the plaintiff proves with the requisite degree of certainty that the defendant’s violative actions have resulted in damage, the actual amount of damages need not be proved with exact certainty.”  That was the case here.  “NPK went from sales of $3 million in 2012 and a profit of around $125,000 to virtually no revenues and strictly losses in the years since.” Likewise, NPK could recover for lost goodwill, even though “such damages are not capable of exact ascertainment.”  The court found damages of a little under $166,000. However, the end of Yeti’s distribution agreement was also responsible for NPK’s lost goodwill, and so the court cut the damages in half, for which Jackson’s liability was partly shared with Lilga.  

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