Monday, February 12, 2018

Tiger, tiger burning bright: Did he who made the Lokai make thee?

Lokai Holdings LLC v. Twin Tiger USA LLC, No. 15-CV-9363, 2018 WL 739435 (S.D.N.Y. Feb. 6, 2018)

Lokai sued Twin Tiger for trade dress infringement, unfair competition, and false advertising based on Twin Tiger’s sale of bracelets similar to those of Lokai; both parties’ bracelets include dark and light beads.  Lokai alleged that “the contrasting beads of its bracelets are intended to represent balance and the cycle of life with the dark bead filled with mud from the Dead Sea, the lowest point on earth, and the light colored bead filled with water from Mount Everest, the highest point on earth.”  Here, the court dismissed Twin Tiger’s counterclaims based on failure to disclose that the water could leak out of the beads and that endorsers were compensated for social media promotion. In addition, Twin Tiger counterclaimed based on letters Lokai sent to Twin Tiger’s customers, requesting that they cease selling Twin Tiger’s bracelets and threatening litigation based on infringement of Lokai’s intellectual property rights.
Lokai bracelet

Twin Tiger bracelet

The court found both alleged falsehoods insufficient to make out a Lanham Act claim.  Lokai’s website says “The white bead carries water from Mt. Everest, and the black bead contains mud from the Dead Sea.” The idea that the water would always stay in the white bead wasn’t the only reasonable interpretation of the statement, and thus it couldn’t be literally false.  Nor did Twin Tiger sufficiently plead implicit falsity; at the pleading stage, the plaintiff must “offer facts” to support the allegation that consumers or retailers were misled or confused by the challenged ad, though consumer survey or other extrinsic evidence isn’t required to be incorporated into the complaint.  [What would suffice?  Is an allegation that “reasonable consumers believe that the water would stay in the bead for the working life of the bracelet” an allegation of fact, or is it conclusory?  What about allegations that leak-resistant containers this size do exist, and that reasonable consumers would expect that their jewelry would be leak-resistant?  Courts are not always too clear about what they want here.]

As for failure to disclose that Lokai compensates certain influences, celebrities, and media outlets for their endorsement of Lokai products in online and social media advertising, Twin Tiger argued that this violated FTC guidelines.  The FTC directs that “a connection between the endorser and the seller of the advertised product that might materially affect the weight or credibility of the endorsement (i.e., the connection is not reasonably expected by the audience) ... must be fully disclosed.” There’s no private right of action under the FTC Act, though its interpretation “can and should inform what constitutes false advertising under the Lanham Act.”  However, “the Lanham Act requires an affirmative misrepresentation or an omission that renders an affirmative statement false or misleading—not a failure to disclose something material.” [What about the implicit misrepresentation that the celebrities/influencers chose to promote the bracelets because they liked them, rather than because they were paid to do so? That’s the premise of the FTC Endorsement guidelines, after all.]
The California and New York state law claims failed too, though with some details differing. Under California law, “the presence of a disclaimer or similar clarifying language may defeat a claim of deception.” On Lokai’s website, albeit not on the same webpage, Lokai states: “Injected with water sourced by sherpas from the heights of Mt. Everest, the white bead represents life’s highest moments ... The water may evaporate over time.” This disclosure made it unreasonable “for any consumer or retailer to believe that water will remain permanently in the bracelet.” [This reasoning seems to contradict the general rule that the disclaimer has to be one that reasonable consumers will perceive—under Williams v. Gerber Products, will reasonable consumers read through multiple webpages to find qualifications?]

Likewise, “Twin Tiger cannot engineer [a private cause of action under the FTCA] through California law.”  [What about California law’s “unlawful” component, which does exactly that, though perhaps not with Endorsement Guides that lack the force of formal rules?]  “More important, outside of conclusory allegations of a violation of the FTC Guidelines, Twin Tiger has not alleged any facts that plausibly raise an inference that the non-disclosure of paid endorsements is likely to lead consumers to believe that the endorsements are unpaid.”

Finally, and failing to note the developing split on this issue, the court ruled that the New York § 349 claim didn’t allege sufficiently “consumer-oriented” conduct, because harm to competitors was the core of the claim here, even though the FTC regulations were relevant to § 349, which is “substantially modeled on the Federal Trade Commission Act.”

The tortious interference counterclaims were dismissed because Twin Tiger didn’t allege sufficient facts on the specific contracts or business relationships at issue. The names of the entities weren’t enough without details about when the contracts were formed, when they took place, and what the major terms were; attaching the contracts to the complaint might have worked.

Furthermore, the court struck Twin Tiger’s affirmative defense of unclean hands because the alleged misconduct wasn’t sufficiently related to the subject matter of the litigation.  Trade dress infringement was distinct from advertising about the bracelets or alleged inequitable misconduct in obtaining a design patent.

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