Wednesday, February 27, 2019

Belmora doesn't replace 43(a)'s usual requirement of protectable subject matter in standard trade dress case

Secret of the Islands, Inc. v. Hymans Seafood Company, Inc., 2019 WL 917209, No. 2:17-cv-342-BHH (D.S.C. Feb. 25, 2019)

SOTI sells salt scrubs and other body products; salt scrubs can be used as hand soap, but also exfoliate and moisturize. Hymans sells salt scrub and skin care products as Holy City Skin Care. Hymans initially displayed SOTI restroom samples in its Charleston, South Carolina restaurant and sold SOTI salt scrubs in its attached gift shop. After two years generating $100,000 in retail revenue from SOTI products, Hymans allegedly started relabeling SOTI products in its gift shop, and SOTI terminated the relationship.  After that, Hymans allegedly “misappropriated SOTI’s brand-value and goodwill by employing restroom-sample displays materially indistinguishable from SOTI displays, employing the same distinctive slogans that SOTI created to market its products to the hospitality industry, and duplicating SOTI’s distinctive packaging.” In July 2012, a SOTI manager informed Hyman’s marketing partner that Holy City’s products infringed on its rights.

The court first found that SOTI pled itself out of court on laches/statute of limitations issues.

The complaint clearly indicated that SOTI knew of the alleged infringement in 2011, when it terminated its relationship with Hymans, and then again in 2012. But SOTI didn’t file suit until 2017, well outside the three-year limitations period applicable to the South Carolina claims. The statutory unfair trade practices claim failed also because it didn’t allege sufficient facts to show an adverse impact on the public interest, as required. Claims of public confusion and deception weren’t enough to transform an “essentially private” business dispute into a matter that could cause “substantial injury to consumers.” There was no allegation that the Holy City scrubs were dangerous, or financially more costly to consumers.  Diversion of consumers and revenue, along with misappropriation of goodwill, were mere private wrongs.

The Lanham Act borrows state law statutes of limitation for measuring laches in the first instance.  Laches requires unreasonable delay by the plaintiff plus harm to the defendant from the delay.  Here, there was a nearly five-year delay between the latest point at which SOTI knew of Holy City’s allegedly infringing products and marketing practices, and the filing of suit.  Not only was there a presumption of unreasonable delay given the timing, but the complaint also pled events that established unjustifiable delay, given the prior relationship between the parties.  Even if it was reasonable not to sue when the relationship terminated, “it must have set off alarm bells for SOTI when, in July 2012, it subsequently discovered that a major corporate entity in the hospitality industry, U.S. Foods, was distributing Hymans’ now fully-branded competing product line—Holy City Skin Care—in notably similar mason-jar packaging.” Instead, SOTI waited to sue until “Holy City’s product line and business were successfully established. The Court finds that this delay was unreasonable, and would have the perverse effect of dramatically multiplying the damages to which SOTI might be entitled if the Lanham Act claims were permitted to proceed, damages which could have been easily mitigated if SOTI brought its claims when it knew they were ripe.” 

Prejudice to defendants was thus also shown by the allegations of the complaint: “Plaintiff … avers that by building a business model dependent upon SOTI’s trade dress and trademarks, Defendants have successfully supplanted hundreds of sales accounts, and diverted millions of dollars in revenue. Thus, the amended complaint demonstrates that Defendants, relying upon SOTI’s inaction, built a valuable business over the course of approximately six years, a venture that axiomatically required the commitment of substantial economic resources.” This was the rare case where no factfinding beyond that alleged in the complaint was required for laches.

Regardless, the Lanham Act claims were also substantively deficient. “The closest that SOTI comes to stating a plausible claim to relief based upon misappropriation of its intellectual property is its reverse passing off theory, where it alleges that Hymans, in 2011, took some amount of SOTI’s sample salt scrub product and placed it in jars with a different label for sale in the Hymans General Store.” But that claim was time-barred.

Instead, the core of  SOTI’s Lanham Act claims was that its marketing system of “providing salt scrub samples in hospitality business restrooms with signs encouraging users to purchase retail product in attached shops, its marketing slogans such as ‘Turn your restroom into a profit center,’ and its packaging the product in mason jars with an attached wooden spoon affixed by an elastic tie around the neck of the jar” was protectable.  But beyond conclusory allegations, SOTI failed to allege that its marketing system, marketing slogans, and mason-jar packaging “were anything other than generic, functional sales modalities.”

SOTI argued that Belmora didn’t require it to possess a protectable mark to proceed under §43(a), but Belmora “does not support the kind of open-ended unfair competition claims that SOTI suggests are permissible under Section 43(a).” Instead, Belmora allowed the owner of a foreign mark to proceed against a US user; it didn’t “open the door to ‘boundless application [of Section 43(a) ] as a remedy for unfair trade practices.’”

SOTI’s false advertising claim was premised on the fact that Holy City labels its salt scrub jars with a gross weight of 780 grams, whereas SOTI labels its packing using the net weight of the salt scrub itself, which is 455 grams. SOTI alleged that South Carolina’s Uniform Weights and Measures Law and implementing regulations to the federal Food, Drug, and Cosmetic Act require that consumer packing must state the net quantity of contents within a packaging container. But there was no showing that 780 grams was not the gross weight, and there was no private right of action to enforce the laws SOTI cited.

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