shipping facilitator escapes direct (c)/TM claims; alleged hinkiness not enough for contributory liability either

AK Futures LLC v. LCF Labs Inc., No. 8:21-cv-02121-JVS (ADSx), 2022 WL 17887590 (C.D. Cal. Sept. 28, 2022)

Brick and mortar infringement still exists, and this opinion considers both copyright and trademark claims. AKF sued LCF etc. for unlawfully manufacturing, importing, advertising, marketing, selling, and distributing unauthorized, counterfeit versions of its popular CAKE brand of hemp-derived Delta-8 products. The logo is registered with the Copyright Office, and AFK applied for trademark registration as well.

AKF contracted with two corporate defendants to be AKF’s third-party fulfillment intermediaries for several hundred thousand units of disposable vaping devices, batteries and related goods. Then AKF discovered that defendants had launched their own, allegedly infringing “PIE” brand, allegedly palming the products off as AKF’s “latest” spinoff brand.

Defendants allegedly used a counterfeiting network  consisting of “cover up” entities, including the relevant defendant for this motion, Mothership, of “master suppliers,” “shippers,” and “distros” to import, manufacture, sell, advertise, market, import, assemble, package, distribute, ship as many as 125,000 counterfeit units a day. Mothership was allegedly a “cover up business” that does not “actually do the transporting itself” but “provides ‘cover’ for a massive transportation operation consisting substantially of third-party contractors who provide distribution services.” Mothership’s operation was allegedly akin to Uber: it “matches an ever-changing array of third-party transportation companies ... to shipments needed on a regular basis” to distribute products to hundreds of “distros” across twenty-five states. Mothership allegedly facilitated “Bills of Lading” on behalf a shipper that contained pervasive discrepancies with respect to the identities of the account holders, shippers, and consignees.

Copyright infringement: Infringement requires unauthorized exercise of an §106 right, including the exclusive right to “distribute copies” of the copyrighted work “by sale or other transfer of ownership, or by rental, lease, or lending.”  But the distribution right does not include “the mere transportation of goods without a transfer or sale of ownership interest in the goods.” A party who merely facilitates the infringing activity cannot be directly liable for copyright infringement.

At this stage the court couldn’t decide whether or not Mothership was in fact a “freight broker” or a “shipper,” “freight forwarder,” “customs broker,” and so on. The complaint simply alleged that Mothership “causes” the transportation of counterfeited goods. However, AKF failed to state a direct copyright infringement claim against it, insofar as AKF conceded that Mothership “does not do the transporting itself.”  Also, allegations that a defendant “transported” the goods “still do not state a claim for copyright infringement.” “Transportation” isn’t listed anywhere in §106, and if that’s not enough, then arranging for transportation isn’t enough either.

What about §43(a) of the Lanham Act? “Use” is also an element of trademark infringement. Case law holds that “shippers, freight forwarders, importers, customs brokers, and consignees who do more than merely facilitate the infringement can be held liable for direct trademark infringement” as part of the distribution chain. Here, however, AKF didn’t allege that Mothership ever marketed, sold, or advertised the “Cake” mark. Instead, it alleged that Mothership facilitated substantially all “Bills of Lading,” for nationwide unauthorized Cake–branded products and matched third-party transportation companies to shipments needed to regularly distribute these products across the nation. These allegations might support a claim of contributory trademark infringement, but not direct infringement. “The facts contained in the [operative complaint] do not reflect more than a mere facilitation of the alleged trademark infringement. There are no allegations in the FAA1 to support that Mothership, in matching transportation companies to shipments needed, did anything to ‘trad[e] upon the goodwill or of association with the trademark holder.’”

The ultimate test for direct liability is whether the defendant’s acts caused confusion. “Thus, it must be the case that Mothership’s conduct of providing ‘Uber-style’ transportation services for shipment of the products somehow created confusion in the minds of consumers as to the origin of AKF’s Cake marks.” That wasn’t alleged. [This is a bit strangely phrased—the issue is confusion as to the origin of the allegedly infringing products, not the mark itself, but the court’s core point seems well taken that not everyone in the causal chain is a direct infringer. (BTW, as described by the court, “counterfeit” is not right—even if PIE infringes, it’s not counterfeit since there’s no registration even for CAKE yet, and PIE is not a copy of CAKE even if it’s confusingly similar.)]

Contributory copyright infringement: In Luvdarts, LLC v. AT&T Mobility, LLC, 710 F.3d 1068 (9th Cir. 2013), the Ninth Circuit said the “actual knowledge” or “willful blindness” mental states could satisfy the knowledge element. But in Louis Vuitton Malletier, S.A. v. Akanoc Solutions, Inc., 658 F.3d 936 (9th Cir. 2011), the court cited with approval a “know or have reason to know” standard. The Ninth Circuit then acknowledged, without resolving the discrepancy, in Erickson Products. v. Kast, 921 F.3d 822 (9th Cir. 2019), that while Luvdarts was decided after Louis Vuitton, it did not “explicitly overrule it.” Ah, the Ninth Circuit, where precedent goes to be shrugged at.

Under either the “willful blindness” or “constructive knowledge” standard, the Court finds that AKF failed state a claim against Mothership. AKF alleges that Mothership prepared “Cake-related Bill of Lading” for defendant Al Ziq, the “shipper” of record on its bills of lading. Al Ziq allegedly listed its place of business at a residential apartment complex without an apartment number while its actual principal place of business was in Ontario. AKF also alleged that Mothership “turned a willfully blind eye” to LCF, who “us[d] false aliases,” and the “highly suspicious contents of the shipments it facilitates.” But AKF didn’t allege facts that explained why those actions would alert Mothership to Al Ziq or LCF’s purported acts of infringement. It didn’t allege why Mothership would have reason to suspect that the contents would be highly suspicious. It didn’t allege that Mothership ever handled, saw, or had reason to know what the contents contained. Nor did it allege that Mothership knew of the discrepancy in Al Ziq’s business addresses or why this would alert Mothership to Al Ziq’s acts of infringement. It wasn’t clear why preparing bills of lading “would have or should have alerted Mothership to the fact that it was facilitating its client’s infringement.”

Contributory trademark infringement requires allegations that the defendant “(1) intentionally induced the primary Lanham Act violation; or (2) continued to supply an infringing product to an infringer with knowledge that the infringer is mislabeling the particular product supplied.” AKF argued that Mothership had constructive knowledge “LCF was selling counterfeit Cake branded products” but the court found the same allegations discussed for copyright to be insufficient to plausibly plead even constructive knowledge.