Penn. dilution is broader than federal dilution; former licensee might not own marks despite its registrations

I.M. Wilson, Inc. v. Otvetstvennostyou “Grichko,” No. 18-5194, 2020 WL 6731109 (E.D. Pa. Nov. 13, 2020)

The OG parties are Russian and Czech entities that manufacture and sell ballet and pointe shoes under the name GRISHKO.

In the early 1990s, Grishko and I.M. Wilson partnered to distribute Grishko-branded products in the United States via an exclusive licensing agreement. Around that time, Mr. Grishko wrote two letters that allowed I.M. Wilson to register the GRISHKO house mark, the ownership of which, among other things, is currently contested here. The partnership lasted until the music stopped in 2016, when Grishko terminated the exclusive licensing agreement. The exclusivity arrangement officially ended in March 2018 and Grishko began directly selling to U.S. customers.

IMW then sued; a preliminary injunction in its favor was subsequently vacated after the court found that “[e]njoining the defendants from selling GRISHKO-branded products in the U.S. in no way rectifies the irreparable harm the Court found to be caused by Mr. Grishko’s communications,” which had interfered with IMW’s relationships with its distributors by claiming that IMW didn’t have the rights it claimed.

This opinion deals with the OG parties’ counterclaims: (1) Lanham Act and common law claims arising from I.M. Wilson’s use of disputed marks and trade dress, (2) claims arising from the parties’ since-terminated licensing agreement, and (3) claims arising from I.M. Wilson’s actions while this litigation was pending.

Grishko produces several lines of pointe shoes, each bearing unique model names, and it’s applied to register certain of them at the PTO.

Mr. Grishko purportedly gave IMW permission to register the Grishko mark in the US based on the understanding that I.M. Wilson would own the registration so long as that I.M. Wilson remained in an exclusive relationship with Grishko. He signed the following statement, which reads in full: “I agree that I.M. Wilson, Inc. is the owner of the Trademark, GRISHKO and its goodwill in the United States of America. I further consent to the use of my name in that trademark.” The PTO wanted more, and so he signed another document: “In addition to the consent to I.M. Wilson, Inc. that I previously granted on August 5, 1992, I hereby grant I. [sic] Wilson, Inc. the right to register the trademark GRISHKO in the U.S. patent and trademark office.”

Some years later, the USPTO declined to register Mr. Grishko’s applications for the marks GRISHKO and NICOLAY GRISHKO due to the existence of IMW’s registration. As a result, the parties allegedly reached an agreement that IMW wouldn’t renew that registration upon its expiration, so it expired in 2004. In 2007, IMW applied to register GRISHKO in connection with “ballet slippers; dance shoes; dance tights; dance leotards; and dance dresses.” It eventually submitted the August 1992 and March 1993 documents to support its application, which then succeeded in 2009; IMW now owns seven federal registrations consisting of or incorporating the GRISHKO name, four of which are now incontestable.

Mr. Grishko’s cancellation proceeding is suspended pending the outcome of this litigation.

Grishko alleged that, after their agreement terminated, IMW subsequently began using a third-party Chinese manufacturer to produce its shoes, which has allegedly caused widespread consumer confusion as to the source of IMW’s products, constituting trademark and trade dress infringement, trademark dilution, and unfair competition.

In addition, Grishko alleged that IMW falsely advertised itself as the “Exclusive Distributor for North America,” not just the US, while there was an exclusive distributor in Canada and a nonexclusive arrangement in Mexico. IMW allegedly continues to advertise online that it is the exclusive U.S. distributor of Grishko-branded pointe shoes even though the exclusive licensing arrangement has been terminated. IMW also allegedly made false statements to U.S. dance retailers. Specifically: “[Grishko] began a major campaign to undercut us and you, our valued retailers, through their trademark-infringing sales via grishkoshop.com .... You may have received a letter from Nikolay Grishko on I.M. Wilson’s GRISHKO letterhead containing unfortunate and misleading claims.” When the court granted the preliminary injunction, IMW notified retailers that Grishko was enjoined from selling GRISHKO-branded products in the United States before the injunction formally took effect.

Trademark/trade dress counterclaims: The court couldn’t resolve ownership of the house mark or model marks at this stage. The first writing was ambiguous as to whether it was irrevocable. “The Court would not ordinarily expect an agreement irrevocably transferring the ownership of a valuable mark—particularly one’s own surname—to be concluded in two lines of text.” The agreement was so short that it was silent on the issue of consideration, which IMW argued was “in exchange for its ongoing efforts to invest in and develop the U.S. market for Grishko products.” But that wasn’t evident, just as it wasn’t evident that it was a temporary assignment for registration purposes only as Grishko argued. Ambiguity also inhered in the fact that IMW “drafted the document and presented it to Mr. Grishko in English—not his native language.” This couldn’t be resolved on a motion to dismiss.

So too with the model marks, “sole mark,” and trade dress, though IMW argued that they were necessarily transferred in order to ensure that the assignment of the main mark wasn’t naked/without associated goodwill. In particular, the court wasn’t persuaded that acquiring the main mark’s goodwill necessarily included the model marks:

I.M. Wilson cites exclusively to case law from the 1980s for the general proposition that trademarks must be owned by a single source. Defendants rely on the USPTO Manual that suggests that trademarks can have multiple owners and a case holding that evidence is capable of “decoupl[ing] the product marks from the famous house mark” where product marks have independent significance. Suffice it to say, neither effort wins the day yet.

One case did conclude that the goodwill symbolized by certain trademarks did not include the transfer of unregistered product marks and trade dress. Hetronic Int’l, Inc. v. Hetronic Germany GmbH, No. CIV-14-650-F, 2019 WL 3003679, at *31 (W.D. Okla. Mar. 22, 2019). And Callman’s treatise distinguishes goodwill that follows the house mark and that which is associated with the model marks. The treatise explains that “an exclusive transfer of a trademark apart from the business organization can only be done with respect to product marks. House marks are inseparable from the organization.” The court characterized this as “quite the opposite of I.M. Wilson’s argument,” but the question is: what is transferred? The quoted Callman language addresses a transfer of a single product mark out of a business organization versus an attempted transfer of the house mark without the business; it doesn’t directly address what happened here.

Anyway, ownership of the model marks, sole mark, and trade dress is contested! The court pointed out that a schedule listing all the marks to be transferred would have been a lot more probative of intent.

Also, Grishko could plead ownership/first use in the US by relying on IMW’s licensed use. “Because Grishko introduced all but one of the model marks while I.M. Wilson was acting as its licensee, I.M. Wilson’s use of the marks were on behalf of, and so for the benefit of, Grishko.” IMW argued that the second writing was a pure transfer, not a license, but that was contested.

And the incontestable registrations could be challenged because of Grishko’s possible prior rights and the allegations of fraud on the PTO in using the allegedly outdated/revoked consents in 2007, which were sufficient to survive a motion to dismiss. However, the court cautioned that it would be hard to prove fraud on the PTO. The party against whom fraud is alleged enjoys “considerable room for honest mistake, inadvertence, erroneous conception of rights, and negligent omission.” And, “even were Grishko to prevail on the fraud theory, at most, the marks would revert to an unregistered status but still be the property of I.M. Wilson” unless Grishko further proved that it was the owner.

Also, “[s]witching to an arguably inferior manufacturer without more does not rise to misrepresentation sufficient to warrant cancelling the registration.”

Grishko also sufficiently pled the existence of a protectable trade dress. It provided specifics and photos, and while some of the elements were not unique (“use of pink satin for the exterior of the pointe shoes made of an unremarkable shade of pink”), it did plead that Grishko was the only manufacturer that places a “unique identification number that can be used to identify the specific individual who inspected” the shoe, and spelled out other components and their locations. While certain aspects of the alleged trade dress could be seen as inherently functional—including the unique inspector identifier number and the placement and orientation of the size and width markings—other aspects were plausibly “inherently aesthetic (i.e., the pink satin trim, white inner sole, stitch patterns, and diamond sole mark)”—and thus nonfunctional. The trade dress as a whole was plausibly nonfunctional.

And Grishko adequately alleged secondary meaning. While IMW argued that its allegations about sales and advertising didn’t show that the trade dress had independent secondary meaning, Grishko did enough for a motion to dismiss.

Since likely confusion was also pled, trademark infringement counterclaims survived. So too with false designation of origin. “Should a dancer wearing an allegedly harmful shoe—but believing it to be a Grishko—suffer an injury, so too would Grishko’s business and reputation. Section 43(a) of the Lanham Act is designed to reach this type of conduct.”

Pennsylvania trademark dilution: The state law requires state fame, but did not specify whether “niche” fame sufficed. Because a pre-2006 federal court had reasoned that federal fame allows niche fame, and reasoned that the state would do the same thing, the court here concluded that state law—which wasn’t amended after the TDRA was enacted—still allows for niche fame. Thus, dilution was properly alleged. I don’t think this is a great idea. There’s still no reason to think that Pennsylvania wanted niche fame; it just got dragged along with the Third Circuit’s interpretation of the federal law, which Congress deemed wrong. Pennsylvania’s legislature shouldn’t be forced to correct that mistake too. (Insert your own comment about the Pennsylvania legislature.)

 Compare Componentone, L.L.C. v. Componentart, Inc., No. 02: 05CV1122, 2007 WL 4302108, at *1 (W.D. Pa. Dec. 6, 2007) (reaching the opposite result; noting that “niche market fame” was a “creature of judicial construction of federal law” and does not appear in the Pennsylvania anti-dilution statute). Rejecting that case, the court here reasoned that it was still bound by the Third Circuit’s old interpretation of Pennsylvania law, since state courts haven’t spoken. (The court acknowledged that “this issue is unlikely to reach a Pennsylvania state court given removal jurisdiction, and the fact that parties often plead both federal and state law trademark claims.” To me this is extra reason not to stick with the mistake!) “In the 14 years since the TDRA, Pennsylvania has chosen not to reform its state anti-dilution law to conform with the federal standards. …. Principles of federalism restrain this Court from reading in a stricter standard than the law currently provides.”

Anyway, Grishko sufficiently alleged fame in the performing arts community and among dancers. It alleged that its marks and trade dress were recognized by Pennsylvania’s premier professional ballet company—the Pennsylvania Ballet—in addition to the “American Ballet Theatre, West Ballet, and other organizations throughout the United States.”

False advertising: Grishko alleges that IMW’s “exclusive North American distributor” claims harmed its relationship with distributors in Canada and Mexico and impacted its ability to enter into new exclusive distribution and licensing agreements worldwide, and that it continues to advertise online as the exclusive wholesale distributor for Grishko-branded products.

IMW argued that Grishko only pled injury to its reputations with retailers, not that consumers withheld trade from it, and that it wasn’t plausible that advertisements in the U.S. directed to U.S. consumers harmed Grishko’s worldwide reputation. No:

I.M. Wilson incorrectly attempts to cabin the scope of “consumers” within the meaning of the Lanham Act. “[N]othing in the language of § 43(a) specifically requires a false representation be intended to influence the ultimate consumer, whoever that might be.” The relevant “purchasing public” varies according to the specifics of the industry.… Grishko sells goods through retail relationships as well as through wholesaling.

Grishko alleged that IMW’s marketing necessarily diverted sales away from Grishko because “[c]onsumers and retailers viewed I.M. Wilson as the sole purveyor of Grishko-branded products.” This was enough to allege statutory standing.

And a false statement made in the US is cognizable under §43(a) even if the economic harm occurs outside the US.

So too with the allegedly false claim of being the exclusive distributor after the parties’ relationship ended.

Litigation-related allegations: Grishko alleged defamation because IMW told retailers that Grishko was (1) undercutting and undermining retailers; (2) no longer supplying high-quality products; and (3) not abiding by court orders. Shortly after the preliminary injunction issued, IMW sent a cease and desist letter to one of the largest U.S. dance retailers and a letter to various retailers supposedly apprising them of the recent order. Though IMW argued that it was substantially true, the court wasn’t going to resolve that at this stage.

In Pennsylvania, out-of-court statements made by parties to a proceeding enjoy a qualified privilege provided those “statements are a fair and accurate report of statements made or pleadings filed” in the proceeding and the individual does not “make his report with the sole purpose of causing harm to the person defamed.” The C&D “sufficiently remains within the bounds of protected statements. The letter recounts I.M. Wilson’s litigation position that it is the exclusive owner of the GRISHKO house mark and notifies the recipient of the pending litigation.” So too with the letter to retailers. Though it says those retailers “have been undercut” by Grishko’s recent sales efforts, “read in context, these statements provide the basis for I.M. Wilson to seek an injunction,” and IMW made the very same claims in court (unlike certain political campaigns one could mention).

Even though the letter was sent before IMW posted the bond and so the PI wasn’t in effect, the court order had been entered, and the letter “expressly notes that it was ‘perfect[ing] the injunction,’ and attached a copy of the order granting the preliminary injunction. The Court rejects Grishko’s attempt to fashion a defamation claim on a technicality.”

The remaining possible basis was IMW’s July 2019 letter to its customers, which “rehashed” the present trademark claims and discusses the “unsatisfactory” quality of Grishko’s recent shipments. While IMW argued that this was mere opinion, the court thought that statements about the quality of goods should have been, and weren’t, pled as commercial disparagement. “Opining on the quality of the ballet shoes does not go to the honesty and fairness of Grishko’s dealings” and thus the letter wasn’t capable of defamatory meaning. Nor could it be defamation per se, since it was just a negative opinion. (In a footnote, the court noted that it’s not clear why corporate entities should be eligible for defamation per se, because corporations can’t be embarrassed or humiliated, but “Pennsylvania law continues to recognize it as a viable claim for corporations to assert.”)

Tortious interference with business relations: Under Pennsylvania law, interference is “privileged when the actor believes in good faith that his legally protected interest may otherwise be impaired by the performance of the contract.” Where the parties are competitors, there must be a showing that the defendant engaged in “independently actionable conduct” for plaintiff to succeed on a tortious interference claim. The court was persuaded by IMW’s argument that it had a duty to send notice to the retailers to apprise them that the court had entered an order enjoining Grishko, in order to bind them, since the Federal Rules of Civil Procedure say that PIs bind only people who receive “actual notice.” Plus, the defamation claims failed and so there was nothing independently actionable, even though Grishko sufficiently alleged actual damages.

failure to disclose influencer payment/review connections is misleading

EIS, Inc. v. Wow Tech Int’l GMBH, 2020 WL 7027528, No. 19-1227-LPS (D. Del. Nov. 30, 2020)

The parties make vibrators. EIS sued defendants for violations of the Lanham Act, Delaware common law on unfair competition, the Delaware Deceptive Trade Practices Act, Delaware tortious interference laws, the Colorado Consumer Protection Act, and patent-related claims.  

Defendants argued that the state and federal false advertising claims were preempted by patent law. One of the defendants allegedly told one of EIC’s customers that the customer was infringing its patent rights by distributing and/or re-selling EIC’s product. “[T]o avoid preemption, bad faith must be alleged and ultimately proven, even if bad faith is not otherwise an element of the tort claim.” “In general, a threshold showing of incorrectness or falsity, or disregard for either, is required in order to find bad faith in the communication of information about the existence or pendency of patent rights.” However, EIC sufficiently alleged bad faith: Taking the allegations of the complaint as true, the defendant’s first US patent didn’t issue until after it contacted the customer. “That Defendants made a representation about patent rights when it knew no such patent rights existed in the United States is sufficient (if proven) to establish bad faith under Federal Circuit law.” Even if it had (as it argued) a German patent when it contacted the customer, and even if that product infringed the German patent, a German patent is unenforceable in the US.

Lanham Act commercial advertising or promotion: The statements forming the basis for the claim were (1) Instagram posts by the owner of a sex toy boutique about EIS’s products and (2) negative Amazon reviews of EIS’s products from an account displaying defendants’ We-Vibe logo. Defendants argued that, even if (as the complaint alleged) they paid the owner to post “false and misleading reviews,” that didn’t constitute commercial speech, and likewise the reviews didn’t propose commercial transactions. Although some courts have gotten this wrong, the court correctly held that the complaint sufficiently pled commerciality. The shop owner was allegedly “an industry insider and Instagram influencer” with nearly 70,000 subscribers, and her Instagram story referred to the parties’ competing products with an economic motivation. Likewise, as to the reviews specifically targeting EIS’s products, defendants, as competitors, had an economic motivation for deterring customers from purchasing competing products. It didn’t matter that there was no explicit reference in the reviews to defendants or their products. Anyway, the complaint alleged that “any potential purchaser of Plaintiff’s products who read the reviews could have clicked on the username of the reviewer and found the link to Defendants’ website on the associated account page. Hence, even without an explicit reference to Defendants, the review could lead the potential purchaser to Defendants’ website, where the purchaser could purchase competing products.”

EIC also sufficiently alleged falsity. It alleged that the Instagram influencer was being paid to share her story, but didn’t disclose her financial relationships with defendants. “That she did not disclose her financial relationship makes her story at least misleading, and establishes falsity for purposes of a Lanham Act claim, even if [she] actually held the beliefs she expressed.” Likewise, the complaint sufficiently alleged that the reviews were posted by defendants, and not by (as they purported to be) bona fide purchasers.

Similar reasoning also sustained the Delaware Deceptive Trade Practices Act and common law unfair competition claim.

Tortious interference with business relations also survived because plaintiffs didn’t need to identify a specific lost customer. The complaint alleged that defendants knew of EIC’s ongoing business relationships with its distributors and retailers; demanded that retailers stop selling its products; and threatened to raise prices or cease sales if retailers did not give in to that demand; EIC also alleged damages.

However, the Colorado CPA claim based on alleged misrepresentations about patent rights was dismissed with leave to amend for failure to satisfy Rule 9(b); the who/what/when of the misrepresentations weren’t sufficiently identified.

timeshare exit lawyer wins a round: no harm causation shown

Club Exploria, LLC v. Aaronson, Austin, P.A., No. 18-cv-576-Orl-28DCI, 2020 WL 6585802 (M.D. Fla. Nov. 10, 2020)

Another timeshare v. timeshare exit lawyer case that goes much better for the defendant than some others. Briefly, the plaintiff seems to have relied heavily on favorable precedents without developing enough evidence that this specific firm did the same bad things.

Defendant law firm specializes in timeshare owner grievances against developers; its websites contain colorful statements and media aimed at optimizing internet visibility, and clients are emailed a link to one of the sites when their retainer agreement is sent to them. Exploria alleged that Aaronson uses false and misleading website advertisements to convince timeshare owners that they can easily cancel their timeshare contracts if they hire Aaronson. Aaronson allegedly then advises owners to stop paying their loan and fee obligations.

An example of the website statements:

Timeshare ownership often feels like entrapment. At the Aaronson Law Firm, we know this because we hear our Clients’ stories.

....

But chances are good that your timeshare developer is exposed legally in ways that are relatively straightforward and provable. You owe it to yourself to hire experienced, competent counsel. At the Aaronson Firm, we have over 80 years of combined legal experience. And we are willing to sue, if necessary, in the interest of getting your timeshare cancelled….

YOUR LEGAL PROBLEMS ARE NOT INSURMOUNTABLE!

If you need to cancel your timeshare, the timeshare Attorneys of the Aaronson Law Firm stand ready and able to help you!

The sites also explained that they would use formal demand letters to “initiate” recission, with an attached proposed civil complaint in a carrot/stick arrangement.

Its blog stated that “[q]uite often, one’s signature on a timeshare contract is obtained by fraud.… But to address it properly, it is imperative that you retain a licensed attorney.” Experienced counsel, it stated, “will know how to exploit other points of vulnerability. For example, the developer may well be perpetrating an ongoing conflict of interest. Improper handling of trust funds are [sic] also a major issue.”

Its websites contained videos purporting to be testimonials of Aaronson’s clients, but actors and Aaronson employees played the roles of lawyers and owners. “In both instances, the role players read statements of actual unhappy timeshare owners.” [Generally ok, if disclosed.] However, “[o]ne of the websites also included two printed testimonials that were written by the web designer and an Aaronson employee but attributed to timeshare owners.” [Not ok.] The websites did mention some timeshare developers by name, but not Exploria, and the court indicated that the focus of the criticism was the timeshare industry in general.

Aaronson represented at least 22 Club Exploria owners attempting to cancel their timeshare contracts, but Exploria sought damages for six in particular. The court found, based on deposition testimony, that the owners who stopped making payments did so of their own accord, without instruction from the firm or before hiring the firm.

Tortious interference: Aaronson knew of the contract between the parties, but Exploria didn’t show that defendants intentionally caused the contract to be breached. Whether Aaronson’s legal theories were good ones didn’t matter without causation. Exploria’s primary evidence was testimony given by a different person in an unrelated litigation who testified that Aaronson advised him to cease making payments as part of a legal strategy to terminate a timeshare with Diamond Resorts. The fact that two of the six owners stopped paying after hiring Aaronson wasn’t enough for a reasonable jury, especially given the testimony of the only owners deposed that no one from the law firm told them to stop paying, that they chose to stop paying for other reasons, and that letters Aaronson sent to Exploria on their behalf did not lead them to believe that they had been relieved of their payment obligations. Many Aaronson retainer agreements stated: “To avoid the possibility of a counterclaim, it is important that you remain current on your payments with the developer.”  Prior cases involved very different evidence, and indeed Aaronson fixed one mess made in the unrelated Westgate litigation.

FDUTPA prohibits “unfair or deceptive acts or practices in the conduct of any trade or commerce.” The court concluded that, though nonconsumers do have standing under FDUTPA, the practice of law was not “trade or commerce.” While lawyers are not per se exempt from FDUTPA, lawyers acting to exercise a legal remedy are typically not considered to be engaged in trade or commerce. That was the case here with Aaronson’s website ads and representation of clients. Aaronson actually went to litigation on a regular basis, unlike the lawyer in Westgate who, the court there found, “actively avoid[ed] judicial involvement through all of his work.”

Lanham Act: No showing of proximate causation: there wasn’t evidence that the website ads caused owners to withhold business from Exploria.

The court nonetheless addressed other elements of the Lanham Act claim. There were genuine issues of material fact on falsity/misleadingness. Rather than deeming the accusations against the timeshare industry as a whole to be puffery (“fraud,” “pack of lies,” “improper handling of trust funds,” sociopathic sales associates, “ongoing conflicts of interest,” and the owners “being taken for a ride”) the court found it couldn’t determine the truth of those statements at this stage. And there was record evidence that the sites’ claims that the timeshare developers are likely “exposed legally in ways that are relatively straightforward and provable” and that Aaronson’s strategies give timeshare owners “the best chance to have [their] timeshare successfully rescinded” were false. The evidence was that, of the 100–150 timeshare cases the lawyer has taken to litigation, the contracts were found unenforceable roughly six times. And there was no record evidence that any of the Affected Owners’ contracts were successfully rescinded. That didn’t show there were no legal grounds to dispute the agreements or that Aaronson was never successful, but a jury could find that Aaronson’s website “falsely or misleadingly stated timeshare developers’ legal vulnerability as well as the availability of remedies like rescission.” [There is a line of cases about when legal claims are falsifiable v. puffery, but the court does not cite them and might not have been directed by the parties to them.]

Likewise, a jury might find the claims literally false; if they found them misleading, the case would fail because Exploria had no evidence of consumer reaction.

However, Exploria’s failure to show materiality was fatal regardless. There was no expert testimony or other evidence that the website advertisements were likely to be material to consumer purchasing decisions. The record didn’t even show that every owner found Aaronson through its websites; only one of the 6 named did so, and she wasn’t deposed. The rest were referred by another lawyer. One had no recollection of visiting the site, and another’s spouse told her nothing about the site. “Clearly the website statements were not material to these owners even if they did indeed view them.”

Trade libel: also failed for want of materiality.

press release in supplement battle could be false advertising

ThermoLife Int’l LLC v. NeoGenis Labs Inc., 2020 WL 6395442, No. CV-18-02980-PHX-DWL (D. Ariz. Nov. 2, 2020)

Plaintiff/counterdefendant ThermoLife and defendant/counterplaintiff HumanN both hold patents related to the use of nitrate technology for supplements. ThermoLife alleged that HumanN engaged in false advertising and false marking by, among other things, marking three of its nitrate-related products with inapplicable patent numbers. HumanN’s counterclaims were based in part on a previous, unsuccessful lawsuit that ThermoLife filed against HumanN, in part on a press release that ThermoLife’s principal Kramer issued after this lawsuit was filed, and in part on ThermoLife’s alleged interference with HumanN’s business relationship with Amazon.com.

This decision deals with ThermoLife’s motion to dismiss the counterclaims.

The prior litigation was stayed when the PTO instituted proceedings to reexamine the ThermoLife patent asserted in the suit. During reexamination, Kramer allegedly sent a letter to HumanN to “open a dialogue for possible resolution” of the litigation. He “threatened to bring a false advertising suit” and another infringement suit based on two additional patents if “HumanN did not...negotiate a deal.” Kramer and ThermoLife allegedly “promise[d] to stifle competition for HumanN if HumanN agree[d] to a sub-license, and alternatively threatened to drive HumanN out of business entirely if it [did] not.” ThermoLife voluntarily dismissed the infringement suit, but allegedly continued to demand that HumanN pay licensing fees despite HumanN’s contention that it didn’t practice the patent.

ThermoLife also told Amazon that HumanN’s products infringed another of ThermoLife’s patents, as a result of which Amazon took down some of HumanN’s product listings. This allegedly caused HumanN to expend “significant efforts to restore its product pages,” rendered HumanN “unable to sell three of its top selling products on Amazon” for one month, and diminished HumanN’s seller ranking.

ThermoLife ultimately sued again, and issued a press release entitled “ThermoLife Serves HumanN A Beet Down For Selling Falsely Advertised And Misbranded Products Including SuperBeets, BeetElite, And Neo40.”  

The Sherman Act attempted monopolization counterclaim was dismissed because of failure to sufficiently define the relevant market, albeit with leave to amend.

Lanham Act false advertising: This was based on the “Beet Down” press release, which disclosed that ThermoLife had filed this action and described ThermoLife’s basis for doing so.

ThermoLife argued that because the press release simply repeated the allegations contained in its complaint in this action, while prefacing each set of allegations with the phrase “has alleged,” the press release was truthful. Not so. The headline was not qualified and affirmatively stated that HumanN “sell[s] falsely advertised and misbranded products.” “Resolving all reasonable inferences in favor of the non-movant, this is a statement of fact.” Also, a quotation from Kramer included an assertion that “HumanN relies on false representation after false representation to deceive consumers into purchasing HumanN’s products.” This was also plausibly a statement of fact rather than a statement of opinion.

Arizona’s state-law litigation privilege also didn’t bar HumanN’s Lanham Act claim. And the press release wasn’t protected by Noerr-Pennington immunity. It accused HumanN of falsely marking HumanN’s products with patents the products do not practice; it didn’t mention ThermoLife’s patents except for in Kramer’s quote, “ThermoLife holds the patents for the technology in HumanN’s products, not HumanN.” But that seemed to be about ThermoLife’s earlier contention that “contrary to HumanN’s false advertising, none of [the] patents that HumanN licenses and falsely marks on its products protect ‘patented Nitric Oxide technology.’ ” ThermoLife couldn’t claim Noerr-Pennington immunity for asserting its patent rights “in a press release about a lawsuit that has nothing to do with enforcement of its patents.”

The substantive analysis was the same for Arizona unfair competition and trade libel claims, but the court had to analyze Arizona’s litigation privilege. At this stage, ThermoLife hadn’t shown that it was entitled to a qualified privilege. Although the general rule is that “[a]nyone may describe what transpired at a public proceeding so long as the publisher provides a fair and accurate rendition...[o]ne exception to this wide application is the speaker who by design uses the privilege to republish defamation he previously made during the public proceeding.” This was because “[t]he privilege does not sanction self-serving re-publication.” That was exactly the scenario alleged here. Arizona also holds that a speaker can forfeit its entitlement to the qualified privilege via “abuse of that privilege,” such as by “excessive publication...to an unprivileged recipient not reasonably necessary to protect the interest upon which the privilege is grounded.” Given the posture, it was vital that “whether the occasion for the privilege was abused is a question of fact for the jury.”

Tortious interference with relations with Amazon: Federal patent law preempts state tort law where the state tort is based on “conduct that is protected or governed by federal patent law.” Thus, “patentees do not violate the rules of fair competition by making accurate representations, and are allowed to make representations that turn out to be inaccurate provided they make them in good faith.” HumanN didn’t sufficiently allege that plaintiffs acted in bad faith when they told Amazon that HumanN’s products infringed. “HumanN has not identified any authority suggesting that a judicial determination of infringement is a prerequisite to notifying a potential infringer (or a third party) of infringement.” And, while HumanN alleged specific facts suggesting that ThermoLife was aware that HumanN’s product didn’t infringe the initially asserted patent yet chose to file suit anyway, it didn’t provide any comparable allegations concerning the report to Amazon, which involved different patents.

Arizona also has a Patent Troll Prevention Act (PTPA), which prohibits “an assertion of patent infringement in bad faith.” The statute expressly exempts civil actions “that include[ ] a demand or assertion of patent infringement.” But HumanN sufficiently alleged that ThermoLife “threaten[ed] HumanN with sham litigation, even after [ThermoLife] dismissed its sham infringement suit.” As for bad faith, ThermoLife argued that the challenged communications contained “a detailed infringement analysis” and that there is “no dispute” that it provided information set out in the PTPA as relevant to the bad faith analysis: the patent number, contact information of the patent owner or assignee, infringement facts, and an explanation of standing. But on a motion to dismiss HumanN plausibly alleged bad faith. HumanN alleged that ThermoLife’s infringement analysis was unsupported, contradictory, and without merit and that, after ThermoLife dismissed its infringement suit, ThermoLife still “insisted” that HumanN grant a $1 per unit licensing fee and pay $1 million in “back damages” within 10 days. Those could plausibly show bad faith, and providing the information listed in the statute isn’t automatically sufficient to defeat a PTPA claim. The statute made clear that the factors are “nonexclusive”—a court may consider “[a]ny other factor that the court determines to be relevant.”

The court found it unnecessary to resolve whether federal law preempted the PTPA because ThermoLife raised the issue only in passing in a footnote.

solar flareup: Panasonic and Tesla successor in interest in false advertising battle

I know you want to read about a false advertising dispute that, for once, tries to work around the restrictions of trademark law and not the other way around!

Kinect Solar, LLC v. Panasonic Corp., No. 1:20-CV-378-LY, 2020 WL 6385292 (W.D. Tex. Oct. 30, 2020) (magistrate R&R)

Panasonic entered into a partnership with Tesla to manufacture a line of solar panels known as “SolarCity” solar panels. Tesla began liquidating its SolarCity panels in 2019, and Kinect bought them. It began selling the SolarCity panels “through its normal channels” at a price that was “substantially discounted” compared to the solar panels that Panasonic sells directly through its own distribution network. Panasonic calls these “grey market” sales, even though they … aren’t? And one reason we know this is that there is no trademark counterclaim, despite trademark claims being much easier to win than false advertising claims.

Kinect allegedly contained Panasonic’s authorized installers “claiming that they were selling discounted SolarCity modules that were backed by and warranted by Panasonic.” Panasonic allegedly received messages from its authorized installers “inquiring whether the SolarCity solar panels were subject to the same warranties as Panasonic solar panels and whether these panels were part of Panasonic’s authorized installer program.”

A Panasonic rep told Kinect: “I just want to make sure that you guys understand that these panels do not have Panasonic Warranty and only Tesla is responsible for their warranty on those panels so the fact that we make them has not value to them [sic]. We’ll soon communicate to all our authorized installers about this to make sure they are aware of it.”

Kinect argued that this and related statements to installers were false, because Panasonic issued an “OEM Warranty” on the SolarCity panels. Panasonic acknowledged that Panasonic owed a 10-year workmanship warranty to Tesla for the SolarCity panels.

Panasonic then sent a letter to “certain of its business partners,” stating that the SolarCity panels “were not covered under any warranty by Panasonic Life Solutions of America,” and allegedly disseminated the letter to PV Tech, “an online news and trade company,” which published an article titled “US solar installers of Tesla designated panels [are] on the market with no warranties.” This allegedly harmed Kinect’s sales, and Kinect sued for business disparagement, defamation, tortious interference with prospective business relations, and unfair competition.

Panasonic counterclaimed for Lanham Act false advertising and tortious interference with business relations. Panasonic alleged that “there are significant differences in warranties and benefits associated with the two brands of solar panels including the entity issuing and administering the consumer warranty.” The Panasonic warranty only applies where the SolarCity panels are included in a photovoltaic systems sold by SolarCity/Tesla. And the SolarCity panels provide purchasers a 10-year limited warranty for workmanship by Tesla, while Panasonic-brand panels are provided a 25-year workmanship warranty. Kinect allegedly “knew that the limited warranty associated with the SolarCity panels was provided to end consumers by Tesla,” but nonetheless marketed the SolarCity panels under the Panasonic brand name and failed to disclose the differences between the brands of panels, including the warranties. Panasonic “is now inundated with installer and consumer questions and complaints directly associated with the misinformation being spread by Kinect.”

The magistrate largely recommended refusing to dismiss the claims/counterclaims, with the exception of an undeveloped common-law unfair competition claim.

Kinect’s business disparagement claim: Requires “(1) publication of disparaging and false words, (2) with malice, (3) which cause special damages, and (4) lack of privilege.”

Panasonic argued that it was literally true that the SolarCity panels were not covered by warranties issued by Panasonic Life Solutions Company of America, as it said, but Kinect sufficiently alleged implied falsity because the panels were backed by another Panasonic entity/division, and omitting that fact from the Panasonic letter created a false impression that Kinect was falsely advertising the presence of a Panasonic warranty. Kinect also sufficiently alleged the other elements, including special damages by alleging that sales representatives “have had prospective purchasers decline to purchase the [SolarCity panels], citing the reason that they were informed that the panels were not covered by a Panasonic warranty.”

Defamation: Requires that “(1) the defendant published a false statement; (2) that defamed the plaintiff; (3) with the requisite degree of fault regarding the truth of the statement (negligence if the plaintiff is a private individual); and (4) damages, unless the statement constitutes defamation per se.” Similarly, the challenged statements were capable of a defamatory meaning. A plaintiff can bring a claim for defamation “when discrete facts, literally or substantially true, are published in such a way that they create a substantially false and defamatory impression by omitting material facts or juxtaposing facts in a misleading way.”

Tortious interference with prospective business relations: Here, Kinect didn’t identify specific prospective or existing clients with which it would have done business but for Panasonic’s conduct, so the magistrate recommended dismissal.

Panasonic’s false advertising counterclaim: Also facially plausible. The court couldn’t resolve whether Panasonic was right on a motion to dismiss. Panasonic alleged that Kinect marketed the solar panels with “a doctored spec sheet … which completely removes the Tesla name and refers to the SC-Series as “Panasonic SC Modules.” In fact, the only company identified on the spec sheet is Panasonic with the words ‘manufactured by Panasonic’ at the top of the sheet.” Although this was literally true, Panasonic plausibly alleged misleadingness because “the panels were manufactured by Panasonic for Tesla in accordance with Tesla’s specifications” and the original spec sheet “clearly identified Tesla as the seller issuing the end consumer warranties.” The revised specification sheet could plausibly lead a reasonable consumer to believe Panasonic would be their contact for the warranties covering the SolarCity panels. [Given what I said above, I should say that this does strike me as a perfectly coherent false advertising claim, and grey goods cases would benefit from being framed as false advertising cases so that courts would take materiality seriously, as they do in false advertising cases.]

The court’s own examination of the marketing spec sheet—integral to the complaint and thus properly considered on a motion to dismiss—showed that the words “Manufactured by Panasonic” had been added, while this was deleted:

Modules are manufactured by Panasonic to the specification of SolarCity. Modules are only warranted by Panasonic if the modules are included in a PV system sold by SolarCity or Tesla. SolarCity and Tesla make no warranties related to the modules, which are sold as-is. SolarCity will handle any warranty claims on behalf of any purchaser.

Also, a reference to the module technology replaced “Manufactured by Panasonic for SolarCity” with “Panasonic SC Series Modules.” This was enough for a motion to dismiss.

Panasonic’s tortious interference claim was also sufficient, which seems a little contradictory since Panasonic didn’t identify specific customers, but it did allege that, “[w]hen the end-consumers and installers discovered that Kinect misrepresented the product affiliation, warranties, and benefits associated with the SolarCity panels, the end-consumers looked to Panasonic to remedy the mistake. In order to protect the goodwill of the Panasonic brand and maintain the loyalty of its customers, [Panasonic] assisted with the replacement of the SolarCity panels with Panasonic branded panels for these end-consumers,” which sufficed.

 

sunglasses reseller liable for (c) infringement, maybe TM/false advertising/tortious interference

Maui Jim, Inc. v. SmartBuy Guru Enters., No. 1:16 CV 9788, --- F.Supp.3d ----, 2020 WL 4435320 (N.D. Ill. Feb. 24, 2020)

Maui Jim alleged that the defendants sold non-genuine Maui-Jim-branded sunglasses while using its copyrighted photographs to falsely advertise that they are an authorized retailer. The defendants counterclaimed that Maui Jim’s statements about their legitimacy constituted defamation or, alternatively, unjust enrichment. The court partly granted and partly denied cross-motions for summary judgment, because first sale is now so narrow a defense that it is almost unavailable for non-used goods; MJ established liability on its copyright claims outright but must go to a jury on trademark/false advertising. Also, there are a troubling number of redactions here, including for facts that the court relies on in its holding; hard to see how this can properly inform the public of the legal basis for the decision.

Defendants sold a redacted number of non-prescription and prescription pairs of Maui-Jim-branded sunglasses into the United States between 2009 and 2019. The prescription sunglasses contained third-party prescription lenses glazed into a Maui-Jim-branded frame. Maui Jim alleged that its sunglasses incorporate patented technology to “wipe out glare and UV rays, and boost[] color via lens treatments.” Its sunglasses have earned the Skin Cancer Foundation’s Seal of Recommendation as an effective UV filter for the eyes and surrounding skin. Maui Jim has registered trademarks, and registered copyrights for the 93 professional photos at issue here, each issued within five years of Maui Jim’s first publication. 

Maui Jim averred that it required all Maui Jim sunglasses be sold with authentic Maui Jim lenses, frames, and parts, and not modified in any manner. Defendants disputed this, noting that nothing in Maui Jim’s European authorized retailer agreements stated that its warranty would be voided if an authorized retailer sold Maui Jim sunglasses to third parties or if third-party lenses were glazed into its frames, and claiming that Maui Jim authorized retailers in the U.S. had glazed third-party lenses into Maui Jim’s frames without consequence.

The parties disputed whether their warranties differed, and whether Maui Jim’s warranty was an integral part of its product offering. Along with some redacted information, Maui Jim’s representative indicated that customers used Maui Jim’s repair department for, on average, three to four non-Maui Jim prescription lenses per week between 2015 and 2018.

Defendants ship all their Maui-Jim-branded sunglasses sold to the United States from Hong Kong, , and some number of shipments of Maui-Jim-branded sunglasses contained a packaging slip that identified a different party as the manufacturer, which defendants blamed on faulty computer coding. Defendants also admitted that they wrongly included a Maui Jim’s 2009 Drop Ball Certification (a certification that lenses comply with certain regulatory requirements) in a limited number of shipments to U.S. consumers. Defendants additionally admitted to at least twenty examples of delayed shipments to its purchasers of Maui-Jim-branded sunglasses, thirteen of which were delayed due to FDA or customs issues.

Defendants’ webpage touts the supposed authenticity of eyewear that it sells from “some of the world’s leading eyewear manufacturers” and their “relationships with some of the world’s leading suppliers.” It oece contained a diagram indicating that their supply chain is direct from the manufacturer to the customer rather than the “traditional supply chain” that routes from the manufacturer to an exporter to an importer to a wholesaler to a shop and then to a customer. An accompanying sentence said: “By offering the world’s largest range of authentic designer eyewear, sourced directly from the world’s leading eywear [sic] suppliers, we are here to help you find what you love.” Defendants argued that this “was accurate and consistent with SmartBuyGlasses’ practice for the majority of its sales including manufacturers/brands – such as [redacted] and [redacted] – from which it buys genuine products from the manufacturer of the brands and ships it to its consumers.”

MJ alleged that the FAQ falsely answered “Can I trust the authenticity of the products?” with “All of our products have a 100% Authenticity Guarantee, no exceptions. SmartBuyGlasses takes great lengths to ensure the high quality and product authenticity that our customers have come to expect, and all products are accompanied with official tags and manufacturer warranties.”

Defendants’ website does say that “SmartBuyGlasses is not affiliated with nor an official re-seller for Maui Jim ....” when consumers select a MJ-branded frame, and it has small, grey type on the bottom of the pages, stating that it is “a leading independent retailer of the world’s best designer eyewear since 2006 and is not owned by or affiliated with the brands it sells unless stated otherwise.” MJ, however, commissioned a survey that allegedly found that 40.1% of respondents, net, took away the false impression that SmartBuyGlasses is an authorized MJ retailer. Also, the MJ-specific language, which goes on to say “therefore we provide our own comprehensive 24 month warranty, as Maui Jim do not support their own 24 month warranty with us,” was added after litigation began. The parties also disputed whether defendants’ website adequately informed consumers that they were purchasing third-party prescription lenses rather than MJ lenses.

MJ also argued that the website falsely suggested that defendants had an “operation centre” in New York. Although defendants don’t have physical location or physical office in New York, they do have an “operational dropship location in New York.”  [Query how MJ plans to show this misrepresentation, if it is one, harmed them.]

Authenticity: There was a material dispute over the authenticity of (some of) the MJ branded sunglasses based on MJ’s claim that it hadn’t sold enough pairs to the third parties from whom defendants bought to make up their supply, though MJ apparently wasn’t able to determine from test purchases that there were any counterfeits or stolen products.  Since the burden was on defendants to show that first sale applied, they weren’t entitled to summary judgment on that ground alone.

Separately, there were issues about material difference, which would prevent a first sale defense. At least twice, a MJ CSR told a customer that Defendants’ omission from Maui Jim’s authorized retailers list didn’t automatically mean that defendants’ Maui-Jim-branded sunglasses were inauthentic. But MJ still argued that none of defendants’ MJ sunglasses had been subject to an authorized first sale by Maui Jim. Its digital marketing manager told CSRs to respond to customer inquiries about unauthorized retailers “that these sites are not listed and therefore are selling diverted, used, damaged or counterfeit goods and they void our 2 year warranty by purchasing on these sites.”

The court first addressed the burden of proof for a first sale defense: the party asserting the defense has the burden to “show ownership through lawful acquisition.” “Defendants are best suited to know who gave them the Maui-Jim-branded sunglasses they sell on their website.” And “blanket self-serving testimony and testimony from third-parties” was insufficient to grant summary judgment, at least in light of MJ’s own evidence that it hadn’t sold (enough) pairs to the identified third party sources. But nor was MJ entitled to summary judgment, because there was a material question of fact on sourcing.

What about material differences?

The first sale doctrine does not apply to products that have been materially altered from their original form. It is incumbent upon the reseller to show that the differences are not of the kind that consumers would likely consider in purchasing the product. An alteration is material if it changes something about a product that is relevant to consumers’ decision to purchase the product.

I note that the application of this rule has made first sale defenses almost unwinnable for unused goods, despite Supreme Court precedent recognizing that used goods are subject to first sale even though they are basically always materially different from unused goods. For used goods, proper disclosure of their used status is sufficient to avoid actionable consumer deception despite material differences. Though courts occasionally gesture at disclosure for unused goods too, they don’t take it seriously, I guess because they think cutting off the used-goods market would be more socially detrimental than allowing total trademark owner control of initial sales channels, which seems like a competition policy decision that trademark law should not be making. Even this relatively balanced opinion is willing to countenance this control.

MJ identified three alleged material differences, two of which the court accepted as creating material factual issues. (1) Defendants’ sunglasses customers experience inordinate delays; (2) Defendants’ sales do not qualify for Maui Jim’s warranty program; (3) Defendants “sold MAUI JIM-branded sunglasses after removing the original lenses and mounting in the frames prescription lenses that did not come from Maui Jim” but rather were “manufactured using a process over which Maui Jim had no control.”

Shipping delays: Although case law holds that “a physically identical product is nevertheless ‘materially different’ from the genuine article if ‘the bundle of services’ that attach to that genuine article is not available to the consumer,” shipping delays are different from other alleged service differences because they would naturally be attributed to the seller, not the manufacturer, and “are wholly unrelated to the product’s brand.”

Warranty: MJ argued that its warranty didn’t apply to sunglasses purchased outside of its authorized dealers; defendants argued that MJ’s “own communications with customers belie that contention.” The court disagreed: Instances where MJ told customers that they would repair and replace a customer’s sunglasses as long as they were authentic didn’t indicate that the repair would be made pursuant to a warranty. 

So the next question was whether MJ’s warranty was materially different from defendants’ own warranty. “[A]bsence of or a different warranty has been held to be a material difference.”

The court relied on a prior case about Hyundai equipment, which illustrates Jeremy Sheff’s point about the damage that post-sale confusion reasoning has done to direct infringement doctrine. In that case, the defendant’s customers agreed that they knew they were purchasing a product without a warranty, but the defendant still lost on summary judgment because, “[w]hile it may have been [his] intention to warn all of his customers ... this would not protect subsequent customers who may purchase the equipment from [his] customers.” (How often are sunglasses resold compared to large vehicles, by the way?)

It was undisputed that the parties have received inquiries from both present and potential customers about their respective warranty coverages. But whether their respective warranties were identical was disputed. Defendants argued that their warranty was identical or better, but: (1) Maui Jim’s warranty offers repair in addition to replacement, while SmartBuyGlasses’ does not; (2) Maui Jim’s warranty is tracked from the date the customer receives the product, whereas SmartBuyGlasses’ tracks it from the order date, meaning that Maui Jim’s is longer (without even accounting for alleged slower shipping speeds); and (3) both warranties only cover manufacturer’s defects, so MJ, as manufacturer, was “logically better suited to determine whether an issue is a manufacturer’s defect or not.”

These differences must be material to overcome first sale. It was defendants’ burden to show the absence of materiality. Defendants hadn’t done so: (citation to redacted materials) and there was evidence that the warranty did matter “as highlighted in consumer complaints and consumer inquiries directed to both Maui Jim and SmartBuyGlasses.” And “the fact that warranties and repair services were ranked [redacted] in consumer priorities when choosing premium sunglasses could support a finding that Maui Jim’s warranty is a material part of a consumer’s purchasing decision, especially given Defendants do not offer repair services.” [Look, if the court is relying on this for its legal conclusion, it should not be redacted—I have no idea what the justification for this is. Any concept of trade secrets that covers this information is appallingly overbroad.]

In addition, “a jury could find that the difference in warranty provider alone could warrant a material difference even if the warranties’ terms were identical. For example, we conjecture that a warranty from an institutional manufacturer would certainly be perceived more valuable to a consumer than the same warranty term provided by a discount retailer.”

Quality control: MJ argued that, even if the glasses were “once authentic,” MJ’s inability to control their quality once they arrived in defendants’ hands constituted a material difference. Of course, this rationale, taken seriously, would make the unauthorized resale of any used product unlawful—my Toyota has been out of Toyota’s control for over ten years! Anything could have happened! (And admittedly, much has.) However, the court reasoned that “[q]uality control measures may create subtle differences in quality that are difficult to measure but important to consumers.” Thus, courts don’t require trademark owners to show differences in actual quality. That would be too hard! But “quality control” also isn’t a magic phrase. “Rather, the test is whether the quality control procedures established by the trademark owner are likely to result in differences between the products such that consumer confusion regarding the sponsorship of the products could injure the trademark owner’s goodwill.” MJ needed to show that “its quality control procedures create a likelihood that their sunglasses are different from those that it does not control,” in particular that it stops enough substandard product from reaching a consumer “to create a material difference between the categories of authorized and unauthorized sales.” That wasn’t clear on this record.  

Finally, MJ argued that the “sponsorship exception” to first sale applied because defendants falsely indicated that they were authorized resellers. “Thus, use of a plaintiff’s trademark in promotional materials such as advertising or displays is not protected by the first sale doctrine, but use of a plaintiff’s trademark solely to identify a product up for sale is protected.” [This is a weird way to phrase it: advertising or displays are often ways to identify a product for sale. If a used car dealership truthfully advertises that it has Toyotas for sale, that can’t itself falsely imply sponsorship.] The court rephrases: “conduct that goes beyond the mere resale of trademarked goods and its incidental advertising may not be protected by the first sale doctrine.”

“Maui Jim chiefly takes issue towards SmartBuyGlasses.com’s representation that it works directly with leading eyewear manufacturers and suppliers,” such as the diagram showing a supply chain direct from the manufacturer. Even SmartBuyGlasses’ VP testified that this diagram was a poor representation of SmartBuyGlasses’ procurement model. Also, MJ submitted [redacted] instances where defendants’ customer service representatives supposedly indicated that they were an authorized Maui Jim dealer. One example: a customer asked “Are you an authorized Maui Jim’s dealer?” and a CSR responded: “Yes, we are.” The court also worried about the statement “all our products are 100% authentic[ ] [w]e source the authentic items through authorized distributors,” even though that doesn’t say that defendants are authorized distributors. That statement was in response to the following message: “your section ‘Authenticity’ says you work directly with the manufacturers, in this case Maui Jim, so why is it that they don’t know where you get your MJ sunglasses from.” More plausibly, a customer asked how defendants can “guarantee authenticity when [its] not an authorized dealer of Maui Jim products?” The CSR stated that it “source[s] it from the manufacturer itself.” When the customer responded by telling the representative that Maui Jim had told that customer that they “aren’t supplying you guys with glasses,” the representative changed course: “we do not source the item from Maui Jim brand, we source it from the factory or manufacturer on where they also ordered their items.” While defendants called these statements mere mistakes, they at least created a factual issue.

I’m not sure why this misrepresents sponsorship as opposed to misrepresenting the quality of the product, but defendants also at least sometimes included “Maui Jim’s 2009 Drop Ball Certification,” which certified that the lenses had been tested for impact resistance, which was not true.

What about the website disclaimers? First, “SmartBuyGlasses may have confused customers with its contradictory statements throughout its website that it is authorized by ‘all’ brands rather than a more accurate word like ‘most’ or ‘many’ brands.” Second, the survey showed 40% net deception, though 60% didn’t perceive sponsorship. Too many disputed material facts!

Likely confusion: also disputed. If the goods were in fact counterfeit, there would be a presumption of confusion. MJ’s digital marketing manager oversaw secret test purchases and testified that some were not manufactured by MJ. MJ’s VP of Marketing also testified that he could tell that some of the glasses sold through SmartBuyGlasses.com were counterfeit because they were sold “without our Maui Jim lenses.” Is that counterfeiting? Well, there’s a question of material fact over whether defendants adquately notified customers about the lenses.

As to the multifactor test, the analysis here is wonky because the usual multifactor test is not suited to the question of whether actual Maui Jim frames sold by someone else confuses people about source, which is why first sale and nominative fair use and other defenses are important. Interestingly, the court finds degree of care to be neutral, because “Maui Jim sunglasses are both premium (and so relatively expensive) and widely accessible on the internet.” MJ’s alleged instances of actual confusion, though disputed, were admissible hearsay because they were business records of a regularly conducted activity that were made at or near the time they transpired.

Dilution: summary judgment also denied (no discussion of fame).

False advertising claims covered four (or maybe five) things: (1) Defendants’ CSRs’ statements in response to customer inquiries about authenticity, (2) the website’s authenticity guarantee, (3) the website supply chain image, (4) the alleged statement that defendants have a U.S. location, and (5) the non-MJ lenses inserted in MJ frames.

CSR statements: Were these “advertising or promotion”? No; they were individual statements made in response to customer inquries,  not “promotional material disseminated to anonymous recipients.”

Website authenticity guarantee: Defendants pointed to their disclaimers, including “With some of the brands that we sell, the manufacturers’ warranty will be available worldwide however for other brands the official warranty may not be available in your country due to territorial limitations and/or brand policies. To cover all scenarios, we offer our own exclusive 24-month warranty against all manufacturers’ defects without exception” and the MJ-specific disclaimer it added. There was a question of material fact on falsity, despite the existence of the survey, given the disclaimers and other questions discussed in the trademark section. The survey wasn’t enough because it didn’t specifically evaluate the effects of the disclaimers.

comparative supply chain graphic

Supply chain image: There was a factual dispute over the misleadingness of showing a direct supply chain from manufacturer to consumer, rather from manufacturer to an exporter to an importer to a wholesaler to a shop and then to a customer. Defendants argued that the diagram was accurate and consistent with their practice for the majority of sales including [redacted] brands, and that disclaimers took care of remaining uncertainty.

Operations graphic showing NY "operation centre"

U.S. location: Also a material question over whether the U.S. dropship location made this truthful.

one prescription lenses statement

another, including ridiculous redaction from public website

Third-party lenses: These were less than 1% of defendants’ sales. MJ argued that defendants advertised that their prescription lenses were manufactured by MJ, but defendants used words like “our” rather than “Maui Jim’s prescription lenses” to describe them; this question was for the jury.

Reverse passing off: At one point, defendants incorrectly identified [redacted] as the manufacturer of MJ branded sunglasses on commercial invoices it sent to its customers. Defendants attributed this as a computer coding error and there was no evidence that there was any benefit to them from doing so, but regardless it wasn’t reverse passing off as defined by Dastar because they didn’t represent the goods as their own. Following the “precise words” used by the Supreme Court and the Seventh Circuit, “Defendants must have substituted its own name for the true manufacturer to be liable for reverse passing off.” Even without binding law, the court would still reject reverse passing off, because MJ didn’t show likely damage based on the invoices, though the result might be different if the mislabeling had been in ads.  

Illinois Uniform Deceptive Trade Practices Act claims survived for the reasons discussed above.

example of MJ photo compared to image on defendants' site

As for the copyright claim, the court easily rejected a fair use defense: the use wasn’t transformative, the modest creativity of the photos was enough, they were used in their entirety, and there was a licensing market for the photos insofar as “a benefit of contracting to act as one of Maui Jim’s authorized retailers is the right to use these copyrighted photographs in advertisements.” And the court found infringement:

 “Although Defendants ask us to infer that this is merely the same pairs of sunglasses shot at standard angles against a standard white background, we hold that no reasonable jury would find these photos are anything but identical.” Damages were a factual issue for trial.

Tortious interference: Whether Maui Jim produced enough evidence to establish the existence of its contracts with third parties was a disputed issue. However, the court rejected the argument that those contracts were unenforceable under European law: “the European Court of Justice squarely addressed the legality of authorized retailer contracts and distribution networks … in the context of luxury or high-end goods and ruled such contracts are not prohibited when three conditions are met: (1) the product necessitates a selective distribution system because it is high quality or technical; (2) resellers must be chosen on the basis of objective criteria; (3) the criteria defined must not go beyond what is necessary. Case C-230/16, Coty Germany GmbH v Parfumerie Akzente GmbH, 2017 EUR-Lex CELEX LEXIS 62016CJ0230, at ¶ 24.” [I don’t really see the court analyzing whether (2) and (3) were satisfied, especially given the factual issue about whether there were such contracts.]

Also, there was no question of material fact that defendants were aware that Maui Jim contracted with authorized retailers and that authorized retailers were prohibited from selling to other retailers (like defendants). In 2008, Maui Jim wrote to defendants: “By purchasing Maui Jim sunglasses from any authorized Maui Jim account, you are inducing that retailer to breach its contract with Maui Jim, which will subject you to civil liability for interference with a contractual relationship.” Defendants acknowledged receipt.

And there was evidence that Maui Jim incurred financial harm from the interference. So defendants’ summary judgment motion was denied.

Counterclaims for defamation: Defendants alleged that Maui Jim’s corporate headquarters and customer service representatives “falsely instructed potential SmartBuyGlasses’ customers that SmartBuyGlasses sells counterfeit goods, that the Maui-Jim-branded sunglasses they sell are ‘fake’ or ‘not authentic,’ and that SmartBuyGlasses ‘is not an authentic website,’” as well as falsely telling customs officials that Maui-Jim-branded sunglasses shipped by SmartBuyGlasses to U.S. Consumers were “not genuine,” causing U.S. customs to seize their authentic sunglasses. Since truth is a defense, the court denied summary judgment here.

NOCI to eBay protected against tortious interference claim by Noerr-Pennington, but defamation survives

Verbena Products LLC v. Pierre Fabre Dermo-Cosmetique USA, Inc., 2020 WL 2988587, No. 19-23616-Civ-Scola (S.D. Fla. Feb. 28, 2020) 

Verbena (aka Beautyvice) sells cosmetic and beauty care products on eBay. Defendant Yellow Brand “is a leading global provider of online anti-counterfeiting services,” while defendant PFDC “sells high quality pharmaceutical and dermocosmetics products around the world, including hair care products under the trademarks RENE FURTERER and PIERRE FABRE.” PFDA sent a notice to eBay accusing Beautyvice of selling counterfeit products, and, as a result, eBay removed Beautyvice’s accused listings. These were, however, allegedly legitimate Rene Furterer products that Beautyvice lawfully purchased and re-sold. Beautyvice submitted a counter notice, but eBay told Beautyvice to resolve this matter directly with the rights owner. 

Beautyvice contacted PFDC and received first a form email and then no other reply; eBay had not restored the listings at the time of suit. 

Lanham Act false advertising: a “single, private communication with eBay” wasn’t commercial advertising or promotion, even though the effect was to limit the dissemination of Beautyvice’s own advertising. Unfair competition under Florida common law and FDUTPA claims failed for the same reason. 

Noerr-Pennington: this doctrine protects First Amendment “petitioning of the government from claims brought under federal and state laws including ... common-law tortious interference with contractual relations.” But it doesn’t preclude defamation liability. Noerr-Pennington extends to acts reasonably attendant to litigation, such as demand letters, but not to sham lawsuits. A sham lawsuit is, first, objectively baseless, and second, brought in the subjective belief “that the process of the suit itself would further an illegal objective. Baselessness is a difficult showing, and Beautyvice didn’t show that the demand letter was “objectively baseless.”  (It seems to me the court has skipped a separate, important step: is a notice of claimed infringement (NOCI) to eBay under eBay’s procedures equivalent to a “demand letter”? It doesn’t actually threaten litigation against anyone, if I understand the NOCI process. That doesn’t mean that the relatively novel NOCI should not be treated like a demand letter for Noerr-Pennington purposes, but it does seem to me to require a distinct analysis, especially since the related §512(f) isn’t subject to Noerr-Pennington as far as I am aware.) 

Anyway, tortious interference claims were kicked out, but not defamation claims.

another timeshare exit company can be sued under state law, but not Lanham Act

Orange Lake Country Club, Inc. v. Reed Hein & Assoc., LLC, 2019 WL 7423517, No: 6:17-cv-1542-Orl-78DCI (M.D. Fla. Oct. 4, 2019)

Another timeshare case, this one kicking out Lanham Act claims but not FDUTPA deceptive practices claims on proximate cause. Defendant TET

allegedly puts out false and misleading advertisements, leading owners to believe that it can relieve them of their timeshares. Those owners then contact TET, which induces them to, inter alia, stop paying on their timeshare contracts and hire TET. Once hired, TET outsources the owners’ cases to “vendor attorneys” like Defendant Mitchell Reed Sussman (“Sussman”), who allegedly engage in fruitless “negotiation” with timeshare companies before employing one of his three deceptive and unlawful methods to “exit” owners from their timeshare contracts. As a result, Plaintiffs claim that the owners who contractually agreed to pay them have defaulted on their obligations, causing harm to Plaintiffs.

The advertising allegedly “create[s] the impression that TET can legally and permanently get owners out of the timeshare contracts for any reason.” It used to claim a “100% success rate,” eventually changed to “highest success rate in the industry.” It also “guarantee[d]” exit, and advertised a “100% money back guarantee,” which deposition testimony indicated was not true. The ads described TET’s process as finding illegal tactics in the underlying timeshare sale and using them to get an exit. Dave Ramsey also served as a paid endorser. Sales reps allegedly advised owners to cease all communication with their timeshare developers, and (at least until 2016 and allegedly later) advised owners to stop making payments under their timeshare agreements. 

Over 95% of TET’s cases went to outside vendors. When accounts went to attorneys, TET allegedly prohibited account coordinators from disclosing the attorney’s contact information to the client, and the attorneys were prohibited from communicating directly with TET clients. [This can’t be ok under Florida’s ethical rules for lawyers, can it? But then again given what Florida lawyers did with foreclosures, why would anyone have noticed?]  TET allegedly requires account coordinators to report that the case is proceeding according to a predetermined timeline, even if untrue, to deceive customers into thinking things are going well.

Defendant Sussman, a vendor attorney, allegedly also treated these cases the same regardless of circumstance, accusing developers of fraud and instructing them not to contact the owners. When a developer thus sends billing statements to Sussman, he throws them away. Sussman employs allegedly ineffective methods to exit the timeshare; Orange Lake rejects his cancellation methods, but Sussman continues to use them and tells owners they’re no longer “responsible for future fees in connection” with the timeshares, leaving them in foreclosure without their knowledge.  “In 2014, TET’s general counsel vocally opposed Sussman’s methods, but Sussman ran amok until April 2016, when TET supposedly terminated its relationship with him. Even then, TET still had approximately 6,000 open files with Sussman, 700 of which remained open as of September 2018.”

One Orange Lake owner hired TET, which told her to stop payment. The rep assured her that TET had an attorney that would “fix” any issues that arose from cessation. She discovered who was working on her case and left a voicemail, but only got a brief letter claiming he was representing her; all he did was send a C&D to Orange Lake. Ultimately, Orange Lake “voluntarily” accepted a deed in lieu of foreclosure [ed. note: which actually sounds like a relatively good result, but the anxiety and possible credit damage have to be factored in, though the court’s summary doesn’t make clear whether she could have instead afforded to pay forever].  The client demanded a refund from TET, while TET refused and claimed that it helped, even though a month after her release, TET claimed to still be working on an “exit” and claimed Orange Lake was delaying the process.

Other Orange Lake owners who started out current on payments and became delinquent due to TET’s instructions paid late fees to Orange Lake and also paid TET for ineffective services; one hired a different attorney who communicated with Orange Lake, at which point Orange Lake accepted a deed in lieu of foreclosure. TET allegedly took credit for that exit and denied her a refund. Other Orange Lake owners also had frustrating relationships with TET, though interestingly Orange Lake did release some of them (allegedly outside the TET connection). In one case, TET allegedly abandoned clients when they received a foreclosure notice (they ended up with a deed in lieu of foreclosure).

Lanham Act: The damages suffered by Orange Lake—nonpayment of fees—were not proximately caused by the ads. Orange Lake did not allege that its reputation was affected by the ads. The ads accused “Plaintiffs and all timeshare companies generally [the ads don’t seem to have named Orange Lake, so that’s a stretch] of engaging in deceitful, manipulative, or otherwise imprudent behavior,” and Orange Lake’s expert testified that TET’s website “reflect negatively on the timeshare industry and make Website viewers less likely to purchase a timeshare.” This could create a question of fact on reputational harm, but Orange Lake’s complaint didn’t rely on reputational harm, but only on loss of sales.  Because none of the advertisements directed owners to cease paying timeshare obligations, Orange Lake couldn’t show proximate cause. The but-for causation—if not for the ads, clients wouldn’t have hired TET and been instructed not to pay—was too remote. Summary judgment for defendants.

Tortious interference did survive; although predisposition to breach is a defense and the owners wanted to exit their relationships, there was evidence that at least some owners were not predisposed to do so via breach (stopping payment of fees).

FDUTPA: Requires “(1) a deceptive act or unfair trade practice; (2) causation; and (3) actual damages.” Orange Lake argued that TET violated FDUTPA by (1) soliciting Orange Lake owners through false and misleading advertising; and (2) fraudulently inducing Orange Lake owners into retaining TET based on TET’s advertised 100 percent guarantees of exiting timeshares when TET cannot actually fulfill the guarantee.  TET argued that some of its statements were accurate, and others mere opinion/puffery. A reasonable jury could find some of the statements false or misleading. “For example, the evidence reflects that TET’s ‘100% money back guarantee’ is riddled with non-apparent conditions and not honored in many cases. TET tacitly admits this by stating that it has procured exists for half of its 28,000 customers but issued only 800 refunds.” There was also evidence from deposed clients that they were deceived. “TET’s failure to deliver on its advertised promises is sufficient evidence of consumer deception to create a genuine issue of material fact.”

Pot site's negative report on CBD from hops wasn't commercial speech

Peak Health Center v. Dorfman, 2019 WL 5893188, No. 19-cv-04145-VKD (N.D. Cal. Nov. 12, 2019)

Peak allegedly sells plant-based pharmaceuticals and supplements, including an exclusive strain of Humulus yunnanensis, a hops plant, as a source of cannabidiol (CBD). This source of CBD is potentially valuable given the constraints on hemp and cannabis, the typical sources. At the time of the relevant events, Dorfman was the editor-in-chief and a writer for PotNetwork, which distributes cannabis and hemp products, including CBD, and also publishes industry news on its website.

In 2019, Dorfman contacted a Peak principal to ask questions for an article he was writing; his attitude was allegedly disdainful. Peak allegedly provided documents proving that Peak’s CBD came from the hops plants, documents showing lab results supporting its claims, and patent filings for related inventions.  Dorfman published an article titled “A PotNetwork News investigative report: Bomi Joseph’s ‘hops-derived’ CBD was a world-changing cannabis alternative fought over by Isodiol and Medical Marijuana, Inc. But he lied about his discovery—and his identity.” The article asserts that Peak’s hops variant does not exist, that the alleged discoverer’s research publications about Humulus kriya and CBD were plagiarized from others’ legitimate peer-reviewed publications, that he is a convicted felon who served prison time for defrauding various banks of $20 million in the early 2000s, and that he pled guilty in January 2019 to using a false name on a passport application. It allegedly defamed him by stating that  “This time around [Mr. Joseph] may very well have stolen from little old ladies, or the sick and injured—from anyone who purchased ImmunAg or Real Scientific Humulus Oil or one of its derivatives in hopes of curing some pain.” So too for quoting Dr. Volker Christoffel, one of the people whose work Mr. Joseph allegedly plagiarized, e.g., “ ‘The whole story with CBD from hop is insane,’ Dr. Christoffel told PotNetwork via email. ‘By the phylogenetic relatedness it MIGHT be possible, that some hop varieties may have genes and express i.e., form cannabinoids—the biochemical pathways are not so different and there is a theoretical possibility I would not exclude a priori. BUT these are definitively only traces.’ ” This was allegedly reckless because Christoffel never performed or reviewed chemical analysis of Peak’s CBD. And the article failed to disclose that Christoffel was a managing director of a competing cannabis pharmaco, not an independent expert.

Peak sued Dorfman for (1) trade libel; (2) intentional interference with prospective economic advantage; (3) negligent interference with prospective economic advantage; (4) unfair competition under the Lanham Act; and (5) unfair competition under California Business and Professions Code § 17200 et seq.  It alleged harm to its reputation and lost business opportunities worth at least $10 million.

Trade libel, intentional and negligent interference with prospective economic advantage: These all require pleading special damages. A plaintiff must “identify particular customers and transactions of which it was deprived.” Peak did not.

Lanham Act: No false association claim, obviously, and this wasn’t false advertising because the article wasn’t “commercial advertising or promotion” because it wasn’t commercial speech. On its face, the article didn’t look like an ad; it purported to be an “investigative report.”  It didn’t have anything that plausibly promoted PotNetwork’s own products, or anyone else’s.  Allegations of a competitive relationship between Peak and PotHealth weren’t sufficient.  I am nervous about this result but see why the court here reached it; query whether allegations that the news reported on defendant’s site was consistently biased against competitors and thus worked as a disguised ad for defendant would have changed anything.

First Amendment standards: The general tenor of the article was fact-like: it described itself as an “investigative report” “based on an in-depth review of Mr. Joseph’s research, a trove of confidential documents, and interviews with people familiar with the events....” There was, however, figurative or hyperbolic language throughout the article. Defendant described one of Mr. Joseph’s purported collaborators, Donish Cushing, as “a ghost,” because he does not appear in social media or Internet searches, and because “it’s hard to find anyone who has met the man.” The Christoffel quotes also included colorful language: “This is total bullshit”; “The whole story with CBD from hop is insane”; etc.  Use of “figurative and hyperbolic language” weighed in favor of First Amendment protection. 

Some of the statements in the article were susceptible of factual proof: specifically, whether the CBD in Peak Health’s products comes from a hops plant, or specifically a hops plant called Humulus kriya. Dorfman argued that his statements were protected opinion based on fully disclosed facts, but it was the truth of those facts that was at issue. “Dorfman disclosed the facts on which he based his assertion that Peak Health’s hops-derived CBD is a sham: Mr. Joseph’s history of plagiarism, attempts to assert new identities, criminal fraud record, and purchases of large quantities of CBD despite allegedly possessing the ability to produce that CBD from hops, as well as statements from scientists concluding that hops-derived CBD is unsubstantiated and not credible.” Nonetheless, his conclusion about the lack of hops-derived CBD wasn’t a statement of subjective opinion or interpretation; it was “an assertion of fact based on other asserted facts.”

In addition, the complaint flunked Rule 9(b) because it failed to allege why the challenged statements were false.  With respect to the Christoffel statements, Peak alleged only that the statements were unreliable because he didn’t test Peak’s products himself and because he’s involved with a competing business, but Peak didn’t plead facts from which it could be inferred that the CBD in its products came from a specific hops plant. At most, it alleged that its public relations agency provided “proof” of its CBD-related claims to Dorfman, but the complaint didn’t explain why the statements were false.

Peak could, in theory, amend its complaint to remedy these deficiencies as to the falsifiable statements, including the failure to plead special damages and the failure to plead commercial advertising/promotion.

Anti-SLAPP motion: the Ninth Circuit has cautioned against the application of procedural state laws if such application “would result in a direct collision with a Federal Rule of Civil Procedure.” Thus, “granting a defendant’s anti-SLAPP motion to strike a plaintiff’s initial complaint without granting the plaintiff leave to amend would directly collide with Fed. R. Civ. P. 15(a)’s policy favoring liberal amendment.” Dorfman could renew his motion if Peak included amended state law claims in its second amended complaint (or, apparently, if the time for pleadings passed or he otherwise prevailed).