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finding unclean hands as a matter of law because although the defendant allegedly "has misled its customers as to the geographic origin of its ... goods," the defendant "has shown that [the plaintiff] has misled its [own] customers as to geographic origin" which is "directly related to the subject matter of [the plaintiff's] claims"
Summary of this case from Grasshopper House, LLC v. Clean & Sober Media LLCOpinion
Case No. CV 03-6432-R (RZx).
May 7, 2004
The Motion of Plaintiff and Counterdefendant Mared Industries Incorporated ("Mared") for Partial Summary Judgment that Diamond Blade Warehouse, Inc. ("DBW"), is Barred by Unclean Hands from Relief Under the Lanham Act, and the Motion of Defendant and Counterclaimant DBW for Partial Summary Judgment that Mared Is Liable for Damages Under the Lanham Act came on regularly for hearing on May 3, 2004. Mared was represented by Deborah A. Klar, Esq., and Robert M. Shore, Esq., of Liner Yankelevitz Sunshine Regenstreif LLP, and DBW was represented by James S. Cooper, Esq., of Levinson Kaplan Arshonsky Kurtz, A P.C. After considering the papers supporting and opposing the Motions and the arguments of counsel, the Court finds and holds as follows:
Mared and DBW are competing sellers of industrial cutting tools such as diamond blades. DBW's Second Counterclaim for Relief alleges that Mared is liable for false advertising under the Lanham Act because its removal of country-of-origin labels, together with its use of the trade name Detroit Industrial Tools, misleads customers into believing that Mared's blades are manufactured in the United States, when in fact they are not.
The parties have filed cross-motions for partial summary judgment on this claim. DBW argues that it has established a willful Lanham Act violation by showing that Mared removed country-of-origin labels from foreign-made blades. Mared responds by arguing that DBW has failed to prove several elements of a Lanham Act violation, that any violation of the Lanham Act was not willful, and that DBW is guilty of unclean hands because it (a) uses the brand name "Americut" on foreign-made blades, and (b) employs classic American symbols such as the American flag, the Statue of Liberty, Mount Rushmore, and the Space Shuttle in advertising those goods.
First, the Court finds and concludes that DBW has failed in its motion to demonstrate several elements of a Lanham Act violation. A false advertising claim under the Lanham Act has six elements — (1) the defendant must make false statements about its own product or the product of another, (2) the statements must be made in advertising, (3) the advertisements must actually deceive or have the tendency to deceive a substantial segment of their audience, (4) the deception must be likely to influence the purchasing decision, (5) the defendant must cause the false advertisements to enter interstate commerce, and (6) plaintiff must be likely to be injured either by direct diversion of sales from itself to the defendant or by a lessening of the good will which its products enjoy with the buying public. Cook, Perkiss Liehe, Inc. v. Northern Cal. Collection Serv., Inc., 911 F.2d 242, 244 n. 2 (9th Cir. 1990) (elements (1) through (4) and (6)); Southland Sod Farms v. Stover Seed Co., 108 F.3d 1134, 1139 n. 3 (9th Cir. 1997) (element (5)).
DBW has failed to introduce evidence supporting elements (2) through (6) of a Lanham Act false advertising claim. Since DBW is the Counterclaimant, it bears the burden of proof, and its failure to introduce evidence defeats its motion for partial summary judgment. Watts v. United States, 703 F.2d 346, 347 (9th Cir. 1983); United States v. Dibble, 429 F.2d 598, 601 (9th Cir. 1970).
First, Mared obtains its sales via telemarketing, so its customers do not see the goods (or the lack of a label on those goods) until after the sale is complete. However, to constitute advertising or promotion, a communication must tend to "influenc[e] consumers to buy defendant's goods or services."Coastal Abstract Servs., Inc. v. First Am. Title Ins. Co., 173 F.3d 725, 735 (9th Cir. 1999) (quotation marks omitted). Where, as here, the alleged communication is not seen at all until after the sale is complete, there is no advertising.
Second, DBW has introduced no evidence that the lack of labels actually deceives or has a tendency to deceive the public. "Where a statement is not literally false and is only misleading in context . . . proof that the advertising actually conveyed the implied message and thereby deceived a significant portion of the recipients becomes critical." William H. Morris Co. v. Group W, Inc., 66 F.3d 255, 258 (9th Cir. 1995). DBW is relying not on a literally false statement, but on silence that DBW contends is misleading in context. But DBW has introduced no evidence that the lack of labels on Mared's products actually deceived or had a tendency to deceive Mared's customers. Indeed, DBW has introduced no evidence at all of customer reaction to Mared's products.
Nor, for purposes of its motion, can DBW shift to Mared the burden of proof on this issue. See U-Haul Int'l, Inc. v. Jartran, Inc., 793 F.2d 1034, 1041 (9th Cir. 1986) ("The expenditure by a competitor of substantial funds in an effort to deceive consumers and influence their purchasing decisions justifies the existence of a presumption that consumers are, in fact, being deceived."). Mared has introduced evidence that would permit a jury to find that it did not spend substantial funds to remove country-of-origin labels. Indeed, Mared's evidence, if accepted by the jury, demonstrates that it simply used warehouse staff who were already on hand to perform this task.
Mared also has introduced evidence that would permit a jury to find it did not intentionally mislead its customers. It is undisputed that Mared stopped removing country-of-origin labels in September 2003, approximately three months before DBW filed its Counterclaims in this action, and that Mared now includes country-of-origin labels on its foreign-made goods. Mared's president, Larry Nussbaum, declared that he was prompted to investigate and remedy the situation when Mared engaged a supplier that provided advertising materials touting the American origin of the supplier's goods. According to Mr. Nussbaum, he was concerned that these new advertising materials might confuse Mared's customers into believing that all of Mared's goods were American-made. This concern began the process that resulted in Mared's change of policy. This testimony, if accepted by a jury, would permit it to conclude that Mared did not intend to mislead its customers, and this conclusion, in turn, would prevent DBW from shifting the burden of proof to Mared on the issue of deception.
"A prima facie case requires a showing that . . . the deception is material, in that it is likely to influence the purchasing decision. . . ." Jarrow Formulas, Inc. v. Nutrition Now, Inc., 304 F.3d 829, 835 n. 4 (9th Cir.), cert. denied, 537 U.S. 1047 (2002). But DBW introduced no evidence that customers are more likely to buy American-made diamond blades than they are to buy foreign-made blades. This lack of proof also requires denial of its motion.
Another element of a Lanham Act false advertising claim is the requirement that the false advertising enter interstate commerce. DBW has failed to sustain its burden of proof on this issue as well. DBW responds with two separate arguments. First, it contends that the lack of labels satisfies this requirement because Mared sells its goods in interstate commerce. But as noted above, the physical appearance of the goods and their packaging does not constitute advertising at all in this case, because customers do not see them until after the sale is complete. Second, DBW contends in its reply papers that Mared sales representatives affirmatively told some customers, during telemarketing calls, that Mared's blades were American-made. But there is no evidence that any of these calls crossed state lines.
DBW has moved for partial summary judgment that it is entitled to damages from Mared. "[I]n a suit for damages under section 43(a) [of the Lanham Act] . . . actual evidence of some injuryresulting from the deception is an essential element of the plaintiff's case." Harper House, Inc. v. Thomas Nelson, Inc., 889 F.2d 197, 210 (9th Cir. 1989). DBW has introduced no evidence that it lost any sales at all to Mared, much less that any lost sales are the result of Mared's alleged deception. In the absence of evidence that DBW was damaged, it can receive an award of Mared's profits only by showing that Mared's conduct was willful.Adray v. Adry-Mart, Inc., 76 F.3d 984, 988 (9th Cir. 1995). Here, as discussed above, a jury could infer based on Mared's voluntary cessation of the complained-of practice that Mared did not intend to deceive its customers. Thus, DBW has failed to demonstrate as a matter of law that it is entitled to any monetary relief.
Finally, DBW has failed to demonstrate willfulness as a matter of law. A defendant's false advertising constitutes a willful violation of the Lanham Act only if the defendant harbored a "deliberate intent to deceive." Lindy Pen Co. v. Bic Pen Corp., 982 F.2d 1400, 1406 (9th Cir. 1993) (false affiliation claim);see also ALPO Petfoods, Inc. v. Ralston Purina Co., 913 F.2d 958, 966 (D.C. Cir. 1990) (reversing the district court's finding that the defendant's false advertising was willful because the evidence did not support a finding that defendant had "a specific intent to mislead consumers and attack business rivals"). In other words, willfulness requires bad faith. Gracie v. Gracie, 217 F.3d 1060, 1068-69 (9th Cir. 2000) (false affiliation claim). Here, as discussed above, a jury could find that Mared did not intend to deceive its customers, and that finding would defeat willfulness.
Even if DBW's motion did not suffer from a failure of proof on essential elements of its claim, it still would not be entitled to judgment because Mared has proved its affirmative defense of unclean hands. For purposes of DBW's motion, it is enough that a jury could find that Mared has proved its defense. In fact, as discussed immediately below, the Court finds and holds that Mared has proved the defense as a matter of law.
First, the Court holds that the unclean hands doctrine provides a defense to false advertising claims under the Lanham Act. The Ninth Circuit has expressly recognized the availability of the defense to false affiliation claims. Japan Telecom, Inc. v. Japan Telecom Am., Inc., 287 F.3d 866, 870 (9th Cir. 2002). Courts in other circuits have acknowledged that in a proper case, unclean hands is a defense to a false advertising claim as well.Highmark, Inc. v. UPMC Health Plan, Inc., 276 F.3d 160, 174 (3d Cir. 2001) ("The doctrine is applicable in actions seeking relief under the Lanham Act."); Burndy Corp. v. Teledyne Indus., Inc., 584 F. Supp. 656, 663 (D. Conn. 1984) ("Defendant is correct in asserting that if plaintiff has acted such that the doctrine of unclean hands was factually established, plaintiff could be refused redress."). Indeed, according to the Supreme Court, "[I]t is essential that the plaintiff should not in his trade mark, or in his advertisements or business, be himself guilty of any false or misleading representation. . . ." Worden v. California Fig Syrup Co., 187 U.S. 516, 528 (1903) (emphasis added).
The unclean hands defense has two elements. "To prevail, the defendant must demonstrate that the plaintiff's conduct is inequitable and that the conduct relates to the subject matter of its claims." Fuddruckers, Inc. v. Doc's B.R. Others, Inc., 826 F.2d 837, 847 (9th Cir. 1987). The undisputed facts establish both of these elements.
It is undisputed that DBW uses the "Americut" brand name as one of several brand names for its various products. Other brand names used by DBW include SuperBlade, Mustang, Wolverine, G2, Stratos, and Owl. The Americut blade displays a partial image of an American flag. It is undisputed that DBW's Web site and printed catalog prominently display a blade labeled with the Americut brand name, together with images of an American flag, the Statue of Liberty, Mount Rushmore, and the Space Shuttle. It is likewise undisputed that DBW's printed catalog refers to its "factory" in Buffalo Grove, Illinois, and that DBW in fact has never had a factory. The Court holds that these uses of the "Americut" name and American symbols are, in context, a statement that products labeled with the "Americut" name are manufactured in the United States.
DBW argues that the Americut name and American symbols actually convey the statement that DBW is an American company. The Court rejects this position. DBW uses the "Americut" name, not as part of its company name, but to identify some of its diamond blade products. Moreover, DBW features the Americut blade, and no other brand name, on the front page of its Web site and catalog, together with the Americana referenced above. DBW's reliance onJapan Telecom, Inc. v. Japan Telecom Am., Inc., 287 F.3d 866 (9th Cir. 2002), is unavailing because in that case the plaintiff defeated an unclean hands defense for purposes of summary judgment by introducing evidence of how its customers understood its name. Here, the only evidence in the record cuts against DBW, because it admits that when it first began using the Americut brand name, the blades described by that name were in fact made in America.
Neither DBW's print advertising nor its print catalog nor its Web site discuss the country of origin of DBW's products, including the Americut blade. DBW's telemarketers do not volunteer information about the product's country of origin during their telephone sales pitches. Thus, the only way for a DBW customer to receive information regarding the country of origin of the Americut blade is to ask a sales representative during a sales call, or to take delivery of an Americut blade.
It is undisputed that the Americut blade is not manufactured in the United States. Thus, the use of the Americut name and American symbols is a false statement of fact about the geographic origin of DBW's goods. For that reason, it is inequitable.
DBW's conduct relates to the subject matter of its claims. According to DBW, Mared has misled its customers as to the geographic origin of its (Mared's) goods. However, Mared has shown that DBW has misled its (DBW's) customers as to geographic origin. Thus, DBW's misconduct is directly related to the subject matter of its claims. Indeed, if the Court did not apply the unclean hands defense, there would be a substantial risk that DBW would, if it proved its affirmative case, enjoy a double recovery — once from Mared, and once from its own false advertising.
DBW also argues that Mared is not entitled to invoke the unclean hands defense because, according to DBW, a jury could find that Mared acted willfully. The Court is precluded by precedent from accepting this argument. In Worden v. California Fig Syrup Co., 187 U.S. 516, 527 (1903), the Supreme Court accepted the findings of the trial court and the Ninth Circuit "that the defendants sold a medical preparation named, marked and packed in imitation of the complainant's medicine, for the purpose and with the design and intent of deceiving purchasers and inducing them to buy defendants' preparation instead of the complainant's." Notwithstanding these findings that defendant had acted willfully and with intent to deceive, the Supreme Court held that plaintiff was entitled to no relief due to its own unclean hands. Id. at 540. DBW also argues that it is entitled to use the Americut name because Americut blades were, once, made in the United States. The Supreme Court rejected that argument in Worden as well.Id. at 536-37.
Finally, DBW argues that any deception is cured when its customers receive delivery of Americut blades because those blades, or their packaging, bear country-of-origin labels. The Court rejects this argument as well. The Lanham Act proscribes the use in commerce of "any . . . false or misleading description of fact . . . which . . . misrepresents the . . . geographic origin of his or her or another person's goods, services, or commercial activities." 15 U.S.C. § 1125(a)(1)(B) (emphasis added). "[T]he Act's requirement of truthful marketing would be defeated if we were to allow the dubious veracity of a manufacturer's claim to be cured by the fact that the consumer may not make the same mistake twice." Johnson Johnson v. GAC Int'l, Inc., 862 F.2d 975, 980 (2d Cir. 1988); cf. Brookfield Communications, Inc. v. West Coast Enter. Corp., 174 F.3d 1036, 1063 (9th Cir. 1999) (initial interest confusion is actionable under the Lanham Act, even when consumers are not actually confused at the time of purchase).
Accordingly, it is ORDERED that Mared's Motion for Partial Summary Judgment that DBW is Barred by Unclean Hands from Relief Under the Lanham Act is GRANTED, and DBW's Motion for Partial Summary Judgment that Mared is liable for damages under the Lanham Act is DENIED. The final judgment in this action shall grant judgment in Mared's favor on DBW's false advertising claim under the Lanham Act. DBW's Second Counterclaim for Relief is dismissed with prejudice.
IT IS SO ORDERED.