Friday, November 09, 2018

False patent marking claim fails in cannabis case despite clear falsity/motive to crush competition: mostly it didn't work

Kremerman v. Open Source Steel, LLC, 2018 WL 5785441, No. C17-953-BAT (W.D. Wash. Nov. 5, 2018)

This case involved cannabis distillation equipment. Kremerman sued OSS for design patent and trade dress infringement and related claims. OSS counterclaimed for false patent marking, false advertising under the Lanham Act, and violation of Washington’s Consumer Protection Act. After some claims were dismissed, Kremerman filed a motion to voluntarily dismiss the affirmative claims and submitted a terminal disclaimer to the PTO disclaiming the remaining term of his patents. (The court also says this disclaimer rendered his trade dress claims moot, which doesn’t seem right in itself.)  The court here dismisses the counterclaims.

OSS contends Kremerman claimed his distillation products were patented when they were not and that he falsely disparaged OSS and its owners with the intent to dissuade customers and suppliers from doing business with OSS and to put OSS out of business.  Basically, OSS had a Chinese manufacturer (along with some Kremerman suppliers) copy/reverse engineer the Kremerman distillation heads, which Kremerman found out about on social media: I kind of love that he found out by seeing an image of his distillation head on OSS’s Instagram page. One supplier’s employee testified that OSS told him Kremerman was a former employee of theirs and that OSS actually owned the rights in Kremerman’s designs.

Kremerman allegedly claimed on his website that his products were patented when there were merely pending applications, and in deposition he testified that he told a supplier that he had patents when in fact, the patents had not issued, because he felt he had to “protect himself.”  In addition, Kremerman allegedly claimed that he was in litigation with OSS before he filed suit, also to discourage others.  He made these kinds of claims in statements both to suppliers and potential customers, e.g., “I have 2 patents on distillation, and there is a reason why everyone tries to copy me!...Oh and we are involved in a federal lawsuit for counterfeiting because of them.” 

The statements were written from Summit Industrial’s email and posted on its webpage or were sent from Kremerman’s email and/or posted on his “Jonathan von Braun” Facebook page (he used several names to promote his products/communicate with customers and others in the industry). There was evidence he promoted his products on Facebook account, even though he maintained it was a private/friends-only acccount.

The court found that Kremerman’s statements specifically representing that he had patents on the distillation heads even though no patents issued until late December 2016 were clearly false as a matter of law. For example, “THIS GLASSWARE IS PATENTED” “is something that could easily have been proven false and is one that customers reading Summit Industrial’s webpage would rely upon due to Kremerman’s presence in the industry.”

Did Kremerman act with an intent to deceive?  He testified that he corrected his website when he was “alerted to it by his attorneys” and he came to understand he had “mistakenly used the word ‘patented’ rather than ‘patent pending.’ ” He also testified that he “did not understand the process…. I believed that when your name is put on an application the patent is yours. …” One supplier testified that Kremerman accurately informed him of the status of his patent applications and, even though Kremerman referred to his products as “patented” in certain communications, he did not believe Kremerman ever intended to mislead him. A C&D letter sent and then posted on Kremerman’s webpage specifically stated that Kremerman’s patent applications were filed and patents were pending. Kremerman also testified that he did not understand the lawsuit process and was “under the assumption that once you begin the process of suing someone, it is the same thing whether or not you have filed in federal court.”

However, when he made the statements at issue, he knew he did not have issued patents. Even if he failed to appreciate the difference between pending patents and granted patents, he claimed he had “granted patents” before he had filed any patent application. Nor did his alleged failure to understand the difference preparing for a lawsuit and actually being in a lawsuit explain his statement “I have 4 of my own patents, and I have already won cases with my counterfeiters,” at a time when no lawsuits had been filed and nothing had been won. He made other statements inconsistent with his claims of lack of understanding, such as “I just released my third patent two weeks ago. And my fourth patent is under final review.”

However, the false patent marking statute applies only to “advertising,” not “promotion.” Thus, “the expression ‘uses in advertising’ cannot refer to any and all documents by which the word ‘patent’ is brought to the attention of the public; it can only refer to use of the word ‘patent’ in publications which are designed to promote the allegedly unpatented product, namely, advertisements.” “Advertising” is defined as “the action of calling the attention of the public esp[ecially] by means of printed or broadcast paid announcements.” Most of the statements at issue were in one-on-one emails, not to the public, and not in paid announcements.

Still, there was a question of material fact about whether statements on the website, or on the Facebook page, were “advertising,” inasmuch as “it can hardly be disputed that companies (Kremerman’s included) use their websites to serve the function of advertising by targeting a specific market, trade, or class of customers seeking products in that marketplace.” But the court was not willing to conclude that a single email was “advertising” even when the relevant market was very small.   

Nonetheless, summary judgment against OSS was warranted because on the issue of whether it suffered a competitive injury, which requires “actual competitive harm.” OSS argued that direct competition allowed a general presumption of a competitive injury, but it didn’t show that anything Kremerman said “had a tendency to mislead consumers” [um, the false statements, which the court deemed plausible to consumers because of Kremerman’s market position?] and didn’t show loss of sales, goodwill or ability to market that was caused by the false marking. “This causation is a necessary element of … 35 U.S.C. § 292.”

OSS’s claim that “fielding inquiries from customers regarding the dispute with Kremerman has become a regular, and unfortunate, part of OSS’s business” was insufficient. “A party claiming ‘loss of goodwill’ must offer evidence of (1) the original value of its goodwill and (2) the scope and depth of the defendant’s harm to the plaintiff’s reputation.”  [Trademark owners might want to pay attention to this idea.] Part one can be done, for example, by considering “a plaintiff’s expenditures in building its reputation in order to estimate the harm to its reputation after a defendant’s bad acts.” But there was no evidence that fielding inquiries caused harm to OSS’s reputation in any appreciable manner.

Nor did OSS show lost business or profits, other than a failed attempt to establish a business relationship with an equipment dealer with whom Kremerman had an established relationship and to whom he said he didn’t want them dealing with OSS because they were “crooks” and “counterfeiters.” Though they began a relationship with OSS, the dealer soon told them, “As I [sic] result of pending litigation [we] will be removing your account from our active account base and suspending your account by end of business day.” However, there was no evidence that the dealer made any decision based on false or misleading information provided by Kremerman. Moreover, OSS acknowledged that it was able to secure an alternative supplier of the relevant equipment and didn’t quantify whether it made more or less money doing so.

Although a Lanham Act claim for injunctive relief may be viable even in the absence of proof of damages, OSS didn’t initially ask for injunctive relief, and such an “extraordinary” remedy wasn’t warranted, given that the last challenged statements were from 2016 and there was no evidence of a likely reoccurrence.

What about Lanham Act false advertising? “Courts may presume consumer deception and reliance if the defendant made an intentionally false statement regarding the defendants’ product, even if the statement entailed ‘little overt reference to plaintiff or plaintiff’s product.’” And a court may presume materiality for literally false statements. Here, the challenged statements were: (1) Kremerman’s premature and false statements that he had patents and was in a lawsuit against OSS; and (2) disparaging comments about OSS, its products, and its founders, also made in the same media as (1), e.g., “Pile of garbage counterfeit head”; “Boot the frauds. They are scammers”; “hide yo keys. Oss. Only stolen sh*t”; “…buyers beware, this is counterfeit glass and low quality….we have images of their glass imploding on customers as well as heads in our hands that are known not to work”; “Not to mention the class action suit building from other people they owe money to.” There were other comments about the conduct of OSS’s business; Kremerman in deposition later said that he “misspoke” about things like “We also have found out some dirt with investigators that they do not pay fed tax, or collect it, or give receipts. So the honest answer is they are f*cked. We filed a motion for a audit….”

Were these statements “commercial advertising or promotion”? Statements contained in a few emails to prospective customers weren’t “disseminated sufficiently to the relevant purchasing public”; there was no evidence that the market was small enough for that to be the case. What about the website/FB statements? They “arguably” reached a wider audience (and several were explicitly false), they weren’t widespread ads, and there wasn’t evidence about the size of the relevant market and their exposure to the statements.

“And most importantly, there is no evidence that OSS has or will suffer any injury from the false statements,” as the court discussed above. This also doomed the Washington state unfair business practices claim.

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