Tuesday, September 05, 2023

state consumer protection law gives competitor plaintiff more leeway than Lanham Act, court holds

SME Steel Contractors, Inc. v. Seismic Bracing Company, LLC, --- F.Supp.3d ----, 2023 WL 4463246, No. 2:17-cv-00702-RJS-DAO (D. Utah Jul. 11, 2023)

The parties compete in the design of buckling-restrained braces, which are structural devices that help buildings withstand seismic activity. One of the defendants (Hinchman) used to work for plaintiff SME. Although BRBs are increasingly being “used in new structural steel construction projects, the BRB industry is still developing and might be considered a ‘niche product’ even within the steel construction industry.” I’m going to ignore the patent claims.

Hinchman asked the University of Utah to evaluate and test five of [based on later discussion, SBC’s] BRBs. The University issued a report concluding two of the five BRBs did not satisfy American Institute of Steel Construction (AISC) 341-10 requirements. The report stated, “Further development is required for improving these two BRB types.”

Defendant SBC sent a ninety-page document titled “Design Manual” to at least six prospective clients, including the statement: “These patented methods have now been tested and qualified for use on projects in accordance with governing building codes (AISC 341).” It also made lots of claims about the experience of its “team,” including their participation in specific named projects. It claimed a “[p]roduce capacity of over 5000 BRBs per year.” The Design Manual also included several technical drawings of BRBs, which allegedly infringed plaintiff Core-Brace’s registered drawings.

Plaintiffs also publicized the resulting lawsuit among customers, which triggered counterclaims.

Core-Brace alleged both false advertising and false association from the statements in the design manual and related documents. The court found that Core-Brace lacked standing: “a plaintiff suing under § 1125(a) ordinarily must show economic or reputational injury flowing directly from the deception wrought by the defendant’s advertising; and that occurs when deception of consumers causes them to withhold trade from the plaintiff.”

Even if, as Core-Brace argued, “the recipients of Defendants’ materials were instrumental in the Defendants being awarded the projects to the detriment of Core-Brace,” that didn’t constitute evidence that the recipients considered or relied on the alleged misrepresentations. Core-Brace didn’t need to definitively exclude other reasons, but it needed to identify evidence “demonstrating a nexus between the alleged misrepresentations and its injury.” This was a failure of proximate cause.

The Tenth Circuit has held that courts may presume injury “once a plaintiff has proven that the defendant has falsely and materially inflated the value of its product (or deflated the value of the plaintiff’s product), and that the plaintiff and defendant are the only two significant participants in a market or submarket.” But Core-Brace failed to show literal falsity or provide extrinsic evidence of actual confusion.

The statement “[p]roduce capacity of over 5000 BRBs per year” was not literally false . Acause SBC could use third party manufacturers; “produce” was ambiguous, unlike “fabricate.” Also, even though SBC had produced less than 9 BRBs, it wasn’t literally false to say what it could produce.

What about “patented methods have now been tested and qualified for use on projects in accordance with governing building codes (AISC 341)”? Two didn’t, but SBC argued that it only offered BRBs that satisfied the testing requirements. This was ambiguous.

And “greatly overstat[ing]” defendants’ experience and qualifications wasn’t literally false.

Nor did Core-Brace provide consumer surveys indicating confusion or any examples of actual confusion, or evidence indicating why SBC was awarded specific projects over Core-Brace.

Core-Brace argued that deception could be presumed because of defendants’ bad intent.  But the only evidence was that Hinchman would have known what potential clients were looking for and that Core-Brace “was the only other major competitor in the marketplace.” Summary judgment for defendants.

Plaintiffs did better on aspects of their Utah Truth in Advertising Act (UTAA) claims that did not require showing likely confusion. (Is there a harm requirement? If there was no confusion, could there be harm?) Specifically:

Subsection (e) states that a deceptive trade practice occurs when a person “represents that goods or services have sponsorship, approval, characteristics, ingredients, uses, benefits, or qualities that they do not have or that a person has a sponsorship, approval, status, affiliation, or connection that the person does not have.”

Subsection (g) states that a deceptive trade practice occurs when a person “represents that goods or services are of a particular standard, quality, or grade, or that goods are of a particular style or model, if they are of another.”

No Utah cases explain the proof requirements, but the words “likelihood of confusion” aren’t in there. So it could go to trial. I don't know on what statements, since the court rejected the Lanham Act false advertising claims (and see just next for even more weirdness).

But UTAA claims for deceptive trade practices failed. Subsection (b) states that a deceptive trade practice occurs when a person “causes likelihood of confusion or of misunderstanding as to the source, sponsorship, approval, or certification of goods and services” And subsection (c) states a deceptive trade practice occurs when a person “causes likelihood of confusion or of misunderstanding as to affiliation, connection, association with, or certification by another.”

Using the trademark likely confusion factors, no reasonable jury could find likely confusion.

Since this wasn’t a trademark case, similarity was inapplicable/neutral. (Um.) Core-Brace analogized to a celebrity persona case, but the court didn’t think a corporation was the same, and anyway defendants weren’t using pictures of the plaintiff corporation. 

Core-Brace asks the court to compare its persona to the ninety-page Design Manual, with specific attention to the drawings, project list, logo, and statements regarding testing.220 Although the court can compare the drawings, logo, and project list, it is unclear how to compare statements about testing, particularly because the Design Manual includes SBC’s testing report from the University of Utah. It is also unclear how to weigh those aspects against the remainder of the Design Manual—including the fact that the Design Manual is repeatedly labeled as property of SBC and does not mention Core-Brace.

Thus, this factor wasn’t relevant. Still, trademark logic is so powerful that the court goes on! (Which may say something about the weaknesses of multifactor balancing tests in general.)

The intent analysis then suggests that a jury could infer bad intent because … Hinchman was a former employee familiar with Core-Brace and thus intended to benefit from Core-Brace’s goodwill, despite the lack of similarity in company names. This is bananapants, and the fact that the court rejects the claim on other grounds doesn’t make it less so.

There was no evidence of actual confusion; that defendants won bids that Core-Brace lost and may have intended to “capitalize” on Core-Brace’s reputation wasn’t a substitute.

Similarity of products/marketing favored Core-Brace, because the parties compete.

Degree of care: favored defendants. BRBs are expensive and sold through a bidding process.

Strength of mark: Although the court decided it couldn’t evaluate similarity and thus dropped it from the analysis, it could evaluate strength—which basically amounts to a bias against competing against big market players. A jury could conclude that Core-Brace had a strong reputation among BRB buyers, so this favored Core-Brace.

Intuitively, the court seems to understand that it’s not doing the right kind of analysis; although the factors weighed in Core-Brace’s favor counting-wise, the court still concludes that no reasonable jury could find confusion likely. The weights of product similarity/mark strength were outweighed by the expense of the goods/sophistication of the consumers. The lack of confusion evidence also mattered some. (Note that, in this analysis, Coke’s lawsuit against Pepsi, or against any new market entrant in the 12-ounce soda market, should proceed, since Coke wouldn’t be arguing that the name infringed—it would be arguing that the competition did, and soda is the opposite of BRBs in sophistication/expense. Coke can likely produce a survey, too.)

Intentional interference with economic relations: no summary judgment for defendants. Again, the court doesn’t seem to have any interest in the idea that the background principle is free competition. Interference is intentional even if a defendant does not act with a purpose of interfering, but knows “interference is substantially certain to occur as a result.” Defendants pointed out that plaintiffs were seeking a “de facto noncompete that is enforceable in perpetuity against any former employee,” whereas Hinchman signed a non-compete clause that expired six months after his resignation. This was just a “policy argument.”

What about the improper means element? Because summary judgment for defendants wasn’t complete, intentional interference with economic relations could also proceed. (Note that the patent claims and the copyright claims, which failed on the merits, couldn’t satisfy this element anyway because of preemption.)

Copyright: even if there was a genuine dispute of material fact on infringement, summary judgment to defendants because Core-Brace didn’t show damages. (The alleged infringement took place before the registration.) To recover indirect profits, a copyright owner must show a “causal link between the infringement and the indirect profits.” Once again, the fact that companies that received the design manual later bought BRBs from defendants didn’t show damage causation.

Plaintiffs’ defamation claims also proceeded, based on emails defendants sent to third parties discussing the present litigation. Defendants merely asserting the statements were hyperbole and not defamatory—without even identifying the statements—wasn’t enough. (I would have thought identifying the statements was plaintiffs’ burden, but perhaps that has been done elsewhere.)

For roughly similar reasons, the counterclaims for defamation, deceptive trade practices, and intentional interference with economic relations based on plaintiffs’ dissemination of lawsuit-related documents to potential customers also survived. At least sauce for the goose is sauce for the gander? Interestingly, the court says that one reason a jury could find the counterclaim statements factual (e.g., that defendants lacked relevant experience and could “endanger human lives”) was because they were in the “factual background” section of the documents.

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