Wednesday, December 13, 2017

Allegedly false certification for competitor brings trade secret, deceptive practices claims

Duro Corp. v. Canadian Standards Assoc., 2017 WL 6326862, No. 17 CV 1127 (N.D. Ohio Dec. 11, 2017)

Duro, a distributor of high end gas ranges, sued the CSA, a nonprofit consumer product safety testing organization, for misappropriation of trade secrets, violation of the Ohio Deceptive Trade Practices Act, and Lanham Act violations.  The CSA issues a “Certificate of Compliance” to tested products that meet the requisite standards.  Duro Ranges have been CSA-certified, as Duro highlights in its advertising, allegedly contributing to its success and profitability. A non-party, Hyxion, manufactures Duro Ranges in China.  Hyxion allegedly used designs it acquired for the manufacture of Duro Ranges to begin manufacturing its own brand of “knock off” ranges which are virtually identical in design to Duro Ranges, but which use cheaper parts.  The Hyxion “knock offs” have also been certified by CSA, and this certification allegedly harmed Duro’s sales.

The main allegation of the complaint is that CSA’s certification of the Hyxion ranges was improper, and wrongly based on the belief that the Hyxion ranges were identical to Duro’s even though Hyxion used different parts. As a result, CSA allegedly used the Duro Range drawings and test results to certify corresponding Hyxion ranges instead of independently testing the Hyxion ranges. The CSA website which advertises its certification of the ranges refers to the Hyxion ranges as having the trade name “Hyxion/Duro” despite the lack of affiliation.

On the state law trade secret claim, CSA argued that, because Duro provided the Duro Range drawings to its manufacturer, Hyxion, it did not take reasonable steps to maintain their secrecy, and also that the test results didn’t belong to Duro, and therefore cannot be Duro’s trade secrets.  The court found the complaint sufficiently alleged trade secret misappropriation for the design drawings, which were to be treated as confidential under the parties’ agreement. “Disclosure of proprietary information, as necessary, to parties essential to the manufacturing and marketing of a product does not strip that information of its trade secret status if reasonable steps are taken to ensure the confidentiality of the information,” as was alleged here.  However, the test results couldn’t be trade secrets; they weren’t identified as confidential in the parties’ agreement, and they were independently developed by CSA.  The federal trade secret claim failed because there was no alleged misappropriation on or after May 11, 2016, that law’s effective date. Hyxion’s continuing use of the CSA certification might be relevant to damages, but there was no allegation that the design drawings themselves were appropriated beyond the initial misuse.

The Ohio Deceptive Trade Practices Act covers, among other things, “(1) passing off good or services as those of another (2) causing the likelihood of confusion or misunderstanding as to affiliation, connection , or association with, or certification by another; (3) representing that good or services have sponsorship, approval, characteristics...status, affiliation, or connection that they do not have; (4) representing that goods are of a certain standard, quality, or grade...if they are of another.”  Duro argued that two statements/practices were deceptive: (1) CSA’s ads for its own services, specifically the statement that its certification mark should offer “peace of mind to retailers, regulators, consumers and end users the word over by indicating that your products have been independently tested and have met the required standards for safety & performance,” and, (2) CSA’s certification of the Hyxion products.

The first statement wasn’t adequately alleged to be false; indeed, Duro’s claims relied on the “peace of mind” idea being true and therefore increasing sales.  Thus, Duro couldn’t claim any damage from CSA’s ad.  Indeed, if Duro truly believed that CSA’s independent testing claims were actually false, Duro itself “could potentially be at risk of violating of the ODTPA.”

However, CSA’s certification of Hyxion was plausibly alleged to violate the ODTPA through false certification. The complaint alleged that CSA materially represented, through its certification, that Hyxion’s products met certain safety standards, even though CSA had not properly tested the products. Further, the complaint alleged that CSA listed Hyxion’s products as having a trade name of “Hyxion/Duro” on its website, which could have caused consumer confusion over whether Hyxion was affiliated or associated with Duro.  The court also noted that “[i]t is difficult to imagine how Duro would be able to prove deception, or causation of damages if it cannot eventually prove that CSA would not have certified the Hyxion products but for the alleged misuse of Duro’s information,” which is an interesting point—the falsehoods alleged are related to, but not necessarily determinative of, the ultimate harm-causing behavior, the certification itself.

The court also dismissed the Lanham Act claims, because they weren’t alleged to be in “commercial advertising or promotion.” Duro sufficiently pled that the statement of certification was commercial speech that is disseminated to a substantial portion of the plaintiff and/or defendant’s existing customer or client base. However, the complaint failed sufficiently to allege that the statement was made for the purpose of influencing customers to buy CSA’s goods or services, as the Sixth Circuit test requires.  An out-of-circuit case allowed a claim to proceed where a statement was made to support affiliates and thus directly increase the defendant’s own profits, but “[n]o such economic incentive exists for CSA’s certification of the Hyxion ranges under the alleged facts of this case.”

No comments: