Friday, August 09, 2019

on 12(b)(6), court holds that "blockchain" could be distinctive for one co's digital wallets

Blockchain Luxembourg S.A. v. Paymium, SAS, No. 18 Civ. 8612 (GBD) (S.D.N.Y. Aug. 7, 2019)

The Second Circuit really doesn’t want to kick out trademark claims early.  I can easily imagine a court in the Seventh Circuit using the flexibility offered by Twiqbal and its own common sense to kick out these trademark claims, based in significant part on claimed rights in “blockchain” for … you guessed it.

Plaintiff BLK sued Paymium for trademark infringement, unfair competition, and false advertising under the Lanham Act, along with New York state law claims for deceptive acts and practices, false advertising, injury to business reputation, and dilution, and New York state common law claims for unfair competition and misappropriation. Almost everything survived.

BLK purports to be “one of the world’s leading providers of digital currency services.” It claims to own rights to five word marks: (1) BLOCKCHAIN (first use 2011), (2) BLOCKCHAIN.INFO (2011), (3) BLOCKCHAIN.COM (2013), (4) BLOCKCHAIN MERCHANT (2012), and (5) BLOCKCHAIN PRINCIPAL STRATEGIES (2018) for varying combinations of digital wallet services, mobile application services, website services, and suite services [involving blockchain]. It also has a registered design + word mark that disclaims “blockchain” (first use 2017; color not claimed as a feature).

When it applied to register BLOCKCHAIN COMPASS FUND and BLOCKCHAIN ASCENT FUND, it received office actions requiring disclaimer of “blockchain” as merely descriptive, and it added the required disclaimers.
logo as used

registration (color not claimed as a feature)

BLK claims to be “the most popular digital wallet in the world and the United States” with “more than 32 million BLOCKCHAIN-branded wallets in 140 countries around the globe, including more than 4.5 million wallets in the United States alone.”

In 2018, Paymium announced that “it would launch as a new platform for its digital currency services and that it would provide those services not under its prior brands, but under the mark BLOCKCHAIN.IO” and a design mark incorporating the word. It launched an initial coin offering in September 2018.  BLK alleged likely consumer confusion.

At this stage, the court refused to find that the alleged marks were inherently descriptive.  Disclaimer of the term at the PTO doesn’t bar an argument that the term is, or has become, distinctive of the plaintiff’s marks. And anyway even disclaimed terms have to be considered in a likely confusion analysis. Although BLK’s complaint states that blockchain describes “the technology underlying cryptocurrencies, such as bitcoin, and used for virtually limitless other applications and by many industries,” it also alleged that “digital currency is only a small subset” of the products supported by blockchain technology.  [But so what?  “Red” is descriptive of a variety of products, from lipstick to cab companies; it’s descriptive when it’s used to describe.  Although it’s true that courts have suggested otherwise, it’s fundamentally inconsistent with Abercrombie to think that terms are only descriptive if they uniquely describe the goods/services at issue.]  It was sufficient to allege that the Blockchain marks were “inherently distinctive and/or have acquired distinctiveness for the [BLK] Products.” Likewise, though defendants argued that BLK didn’t sufficiently allege secondary meaning, that’s a fact-intensive inquiry that requires a robust evidentiary record.  [Instead of just being wrong like the previous reasoning, this is a matter of how you think about Twiqbal.  Facially implausible claims—like claims to own the term “blockchain” for digital wallets, which is how everyone knows about blockchain even if it has other possible applications—reasonably require greater factual specificity in pleading to make them plausible. When it comes to product design trade dress, for example, many (not all) courts require more specifics than just pleading acquired distinctiveness.]

Here, it was enough to allege provision of digital wallet and website services since 2011, mobile app services since 2012, and suite services since 2018, along with strong sales of its digital wallets under the marks, half a million wallets sold in December 2017 and more than one million wallets sold prior to February 2018. BLK also attached numerous examples of unsolicited publicity for its products as early as October 2014. These allegations plausibly established secondary meaning.

Defendants argued that, in the context of blockchain—where many third parties also use the term to describe similar products—the allegations were implausible. But this was a factual dispute unsuited for a motion to dismiss. [Query whether given the third-party uses, if the claims ultimately fail a fee shift should be warranted given the extremity of claiming to own “blockchain” for digital wallets. But with precedent like the My Other Bag case in the Second Circuit, that will be a hard sell.]

Unsurprisingly, BLK also adequately alleged that its design + word mark and the Blockchain.IO design + word mark were confusingly similar, especially given that no single factor is dispositive in the multifactor confusion test. BLK alleged that “[t]he BLOCKCHAIN.IO Design Mark mimics the BLOCKCHAIN Design Mark” because both Design Marks are “made up of smaller geometric shapes” and “are followed by the Blockchain name in dark blue.” “Given the similar design elements, it cannot be determined that, as a matter of law, the marks are so dissimilar that there is absolutely no possibility of confusion.” [As far as I can see, the marks are made up of smaller geometric shapes in the same way that words are made up of letters, similarity-wise.]

Two of the allegedly false advertising statements were non-actionable because not false. The allegedly false advertising was that Paymium claimed that (1) “it has been operating hack-free since 2013,” (2) “[a]t, we are using a combination of centralized and decentralized features to make atomic swaps simpler, easier, and more efficient to use,” and (3) “[it is] pleased to announce [its] filing has been accepted and [it is] now registered with the SEC!” The alleged consumer harm was that “Paymium has a history of being negligent with consumer information and security protocols. As a result, its services have been subject to major hackings and thefts.”

BLK alleged that “hack-free since 2013” was literally false because Paymium “was hacked several times in 2013,” and thus Paymium was hacked after midnight, Dec. 31, 2012. But Paymium didn’t specify the exact day or month of its last hacking incident, and it was equally reasonable to read the claim as meaning that Paymium hadn’t been hacked since before midnight on December 31, 2013. Nor did it misleadingly imply that “Paymium has had no hacking incidents whatsoever since it became operational in 2011.” “This interpretation is nonsensical because the words ‘since 2013’ cannot mean ‘never’ or ‘since 2011.’” The statement was thus, as a matter of law, not impliedly false.  [The court skips over the middle option, apparently because BLK didn’t argue it—if a reasonable consumer could believe that the claim was based on an Dec. 31, 2012 end date for hacking incidents, the statement could be impliedly false.  I have no idea what a reasonable consumer would believe, though I would probably incline to the “none since midnight on Dec. 31, 2013” interpretation. And a survey to figure out the truth might have a Mead Johnson problem about the meaning of “since 2013,” though Mead Johnson isn’t binding on the SDNY and hasn’t been relied on as persuasive authority in the Second Circuit as far as I recall.]

Likewise, “[a]t, we are using a combination of centralized and decentralized features to make atomic swaps simpler, easier, and more efficient to use,” was allegedly literally false because “Paymium does not offer atomic swaps because they are not yet a viable technology.” But, although, one reasonable interpretation was that Paymium already has the atomic swaps technology, “an equally reasonable and more literal interpretation is that Paymium is in the process of developing atomic swaps technology that is simpler, easier, and more efficient.” It couldn’t be literally false, especially as the sentences surrounding that statement were “explicitly and unmistakably forward-looking as they state that users of [Paymium’s] exchange ‘will be able to use atomic swaps’ and the exchange ‘order book will be centralized.”

However, BLK sufficiently pled that Paymium’s statement that “[its] filing has been accepted and [it is] now registered with the SEC!” was false because Paymium simply filed a Form D with the SEC, and “[t]he filing of a Form D does not mean that a security is ‘registered’ or that it has been in any way scrutinized or approved by the SEC.” The court found that this statement was sufficiently pled to be “commercial advertising or promotion.” BLK alleged that the statement was “designed to promote Paymiurn’s services as more transparent and secure than those of its competitors,” thus influencing potential purchasers, and alleged that it was widely disseminated online, including on Paymium’s Twitter account and Telegram chat.  

Further, BLK plausibly alleged injury/proximate cause. According to BLK, its products “are of the utmost quality and enjoy a strong reputation for their security, safety, and reliability,” whereas “Paymium has a reputation of offering unstable, unreliable, and unsafe products.” BLK alleged that “[d]ue to Paymium’s bad acts, consumers already have actually confused the source of Paymium ‘s products offered under the [BLOCKCHAIN.IO Marks] with the [BLK’s] Products offered under the BLOCKCHAIN Marks,” harming its reputation and diverting investors who might otherwise have bought its products.  Um.  That is definitely a decently pled trademark infringement proximate cause analysis.  It is not a decently pled false advertising proximate cause analysis, which would address the question: how did the SEC statement proximately cause harm to BLK?

The NY GBL §§349, 360-L claims also survived; though §349 requires consumer harm beyond that inherent in trademark infringement, that requirement was satisfied by alleging that Paymium’s products were inferior because Paymium has a long “history of being negligent with consumer information and security protocols. As a result, its services have been subject to major hackings and thefts.”  §360-L is state dilution, which doesn’t require fame, so the claim survived.  For similar reasons, common law misappropriation and unfair competition claims survived—these require bad faith, but BLK adequately alleged that Paymium willingly and knowingly adopted the BLOCKCHAIN.IO marks “in a bad faith effort to mask its long history of security issues by unfairly usurping BLK’s acquired goodwill in its BLOCKCHAIN Marks.”

As Bloomberg's Matt Levine says almost every day, blockchain blockchain blockchain.

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