IP Case Briefs – General Steel Domestic Sales, LLC v. Chumley.  U.S. District Court Colorado.  False Advertising, trade secret and cybersquatting law.

SUMMARY:

A company that engaged in the sale and distribution of prefabricated steel buildings terminated one of its employees. The terminated employee founded a competing company and allegedly began using false advertisement to compete with its previous employer.

FACTS:

General is a company engaged in the sale and distribution of prefabricated steel buildings. General briefly employed Defendant Ethan Chumley (“Chumley”) but terminated his employment in July 2005. Chumley subsequently founded Defendant Atlantic Building Systems, Inc. (“Atlantic”) (together “Armstrong”) a company that also engages in the sale and distribution of prefabricated steel buildings in direct competition with General.

In June 2011, Mr. Chumley purchased the internet domain name generalsteelscam.com, and began hosting a website on it that, General contends, contained false and defamatory material directed at General and its employees. While General was able to secure a ruling with an international agency that oversees domain name disputes requiring Chumley to turn on the generalsteelscam.com domain to General, Chumley created other websites under similar names with allegedly defamatory content. Chumley used a process known as “back-linking” to promote his websites by taking advantage of search website page-ranking algorithms and purchased advertising space from search websites.

In December 2012, Chumley allegedly began calling General's customers, and while pretending to be an investigator with the Colorado Attorney General's Office, invited the customers to file complaints against General. Additionally, General alleges that Chumley sent letters to General's customers from the “Consumer Advocacy Alliance—General Steel Investigation Unit,” which does not exist, inviting customers to file claims or complaints against General.

General asserts six claims:

(1) false advertising under the Lanham Act, 15 U.S.C. § 1125(a)(1)(B),

(2) violation of the Anti-Cybersquatting Consumer Protection Act, 15 U.S.C. § 1125(d), against Armstrong, relating to the registration and use of the generalsteelscam.com website;

(iii) common-law libel against Armstrong;

(iv) unjust enrichment against Armstrong;

(v) civil conspiracy against Armstrong;

and

(vi) misappropriation of trade secrets, in violation of C.R.S. § 7-4-101 et seq. against Armstrong, relating to these Defendants acquiring and using General's “valuable customer information” and “customer lists and/or databases.”

Armstrong's reply to the complaint included allegations that General maintains a network of websites that contain false and misleading content. Armstrong cites representations by General such as that General manufactures steel buildings, that General was founded in 1928 (rather than 1995), that it manufactures and supplies steel to the U.S. military and auto industry, as false.

Armstrong also alleges that General misappropriated Armstrong's trademarked logo by including a modified version of Armstrong's logo in electronic brochures that reads “Fraudulent Steel.” Armstrong also alleges that General includes its logo on various websites as a link to General's page.

Armstrong asserts two counterclaims: (i) copyright infringement, in violation of 17 U.S.C. § 501 et seq., against both General and Mr. Knight; and (ii) false advertising, in violation of 15 U.S.C. § 1125(a)(1)(B), against both General and Mr. Knight.

Both issues came before the Court on motions for summary judgment. The Court also ruled on a Discovery dispute.

ISSUE:

Can a company that engages a third party to create and promote its website be sued for the actions of the third party? 

RULE OF LAW:

That statute prohibits “any person who, on or in connection with any goods or services…uses in commerce any…false or misleading description of fact…which in commercial advertising of promotion misrepresents the nature, characteristics, qualities or geographic origin of his or her or another person's goods, services, or commercial activities.” 15 U.S.C. § 1125(a)(1)(B).

As a general rule, a master is subject to liability for torts committed by its servant if the servant is acting in the scope of its designated authority; by contrast, a master is not typically liable for tortious acts committed by its servant if the servant is acting outside the scope of authority. See Restatement (Second) of Agency, § 219. In determining whether a person or entity is a servant or independent contractor, the Court considers numerous factors, including:

(i) the extent of control which the master may exercise over the work;

(ii) whether the person performing the work is engaged in a distinct occupation;

and

(iii) whether the work is typically done under direction or completed independently, among several others. Restatement (Second) of Agency, § 220.

The right of the master to control is the most important of these factors and is often determinative.

To constitute “commercial advertising or promotion” under the Lanham Act, a factual representation must have four characteristics: (i) it must be “commercial speech”; (ii) it must be made by (or on behalf of) a defendant who is in commercial competition with the party asserting the Lanham Act violation; (iii) it must be “for the purposes of influencing consumers to buy defendant's goods or services” (whether part of a “classic advertising campaign” or in “more informal types of ‘promotion' ”); and (iv) it must be disseminated sufficiently to the relevant purchasing public to constitute advertising or promotion within that industry. See Proctor & Gamble Co. v. Haugen, 222 F.3d 1262, 1273–74 (10th Cir.2000).

The “fair use” doctrine permits persons to make use of a copyrighted work “for purposes such as criticism, comment, news reporting, teaching…, scholarship, or research.” 17 U.S.C. § 107. To determine whether a party's use of a copyrighted work is a “fair use,” the statute requires the Court to consider four factors:

(i) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes;

(ii) the nature of the copyrighted work;

(iii) the amount and substantiality of the portion used in relation to the copyrighted work as a whole;

and

(iv) the effect of the use upon the potential market value of the copyrighted work. 

Res judicata precludes litigation of issues that were actually decided or could have been decided in a prior action. Santana v. City of Tulsa, 359 F.3d 1241, 1246 n. 3 (10th Cir.2004). It applies where:

(i) the prior suit resulted in a final judgment on the merits;

(ii) the same parties were involved in both suits;

and

(iii) the same cause of action is pressed in both suits.  

To determine whether the same cause of action is at issue in both cases, the Court looks to “all claims or legal theories that arise from the same transaction, event, or occurrence,” applying a pragmatic test that “giv[es] weight to such considerations as whether the facts are related in time, space, origin, or motivation, and whether they form a convenient trial unit.”

The Anti-cybersquatting Consumer Protection Act, 15 U.S.C. § 1125(d)(1)(A), provides civil liability for a person who “registers, traffics in, or uses a domain name that is…identical or confusingly similar to” a mark owned by another, if the person using that domain name “has a bad faith intent to profit from that mark.”

ANALYSIS: 

ARMSTRONG'S CLAIMS AGAINST GENERAL

Discovery Dispute

The Court upheld the Magistrate Judge's rulings on various discovery requests, finding that several of Armstrong's requests constituted “fishing expeditions.”

False Advertising

Armstrong contended that General made numerous false representations of fact in numerous contexts. The Court noted that to establish a Lanham Act claim, Armstrong must show:

(i) that General made materially false or misleading representations of fact;

(ii) in connection with its commercial advertising; 

(iii) in commerce;

(iv) that such representations were likely to cause confusion or mistake as to the characteristics of its goods or services;

and

(v) that such use caused injury to Armstrong. World Wide Ass'n of Specialty Programs v. Pure, Inc., 450 F.3d 1132, 1140 (10th Cir.2006).

It wasn't disputed that some of the content in question was created by an entity called JEMSU by which JEMSU performed “search engine optimization” designed to heighten General's ranking in internet search engines. Here, JEMSU's employees (or contractors it hires) wrote the pieces, each containing one or more links that point back to General's website. General argued that JEMSU operated as an independent contractor, creating and publishing the content without any control or direction from General and so General cannot be held liable for any false representations contained in content published by JEMSU.

• Independent Contractor 

The Court engages in the independent contractor analysis to determine whether JEMSU could be considered an independent contractor of General's. The Court found that there was a genuine dispute of fact as to whether JEMSU was acting as an agent of General when it published the allegedly false content on Generals' behalf.

General alleged that it did not have control over JEMSU because it never tried to control how JEMSU performed the creation and publication of the website content, nor did it have control over the content of the materials that JEMSU published. Further, General alleged that beyond instructing JEMSU not to refer to General as a “manufacturer” in the written content, it deferred entirely to JEMSU's expertise. The Court found evidence to the contrary and noted that a deposition of JEMSU's principle (“Mr. Olsen”) demonstrated that General had the ability to exercise control over JEMSU. Mr. Olsen further explained that all content was submitted to General for approval and that General had requested that JEMSU remove certain content that it had posted on General's behalf and JEMSU did so. This testimony was corroborated by the deposition of Travis McCain, an official of General.

The Court also held that there was a question of fact as to whether General granted JEMSU the authority to publish the false content. General contends that, when it retained JEMSU, Mr. McCain told JEMSU that “you could write anything that's truthful, [I] told them they weren't allowed to refer to General Steel as a manufacturer or a fabricator of buildings in any way, shape, or form. But other than that, they were the experts and have at it.” The testimony of Sean Hakes, a former JEMSU founder who had since left, and was serving as a consultant at the relevant time period, supported General's contention that few limitations were placed on JEMSU.

Based on the availability of facts which support both parties' contentions, the Court refrained from deciding this issue on summary judgment.

• The False Representations as “Advertisements” 

General argued that the false statements published by JEMSU on behalf of General cannot constitute “false advertising” under the Lanham Act because the content that was published was never intended to be read by humans. General contended that the bits of content fail to meet the third and fourth elements of the “commercial advertising or promotions” test under the Lanham Act. It argued that the content was not published “for the purpose of influencing customers” and was “not intended for human consumption” but rather was intended only to influence algorithms used by search engines. The Court rejected this argument, noting that the content published by JEMSU was not arbitrary or utterly irrelevant to General's operations. Rather, the articles generated by JEMSU typically promoted General as a business and were designed to engender positive associations between its name and quality products and services discussed by the authors. The ultimate purpose of the testimonials was to influence the algorithms to reflect the quantity and quality of favorable comments for the benefit of the ultimate consumer. Therefore, the Court holds that this is “promotional” information and the real question concerned whether it reached the ultimate consumer.

The Court turned to the question of whether the “incidental” amount of consumer traffic was enough to support the content reaching the ultimate consumer. The Court cites Sports Unlimited, Inc. v. Lankford Enterprises, Inc., 275 F.3d 996, 1003–04 (10th Cir.2002), which makes clear that “to constitute an actionable advertising or promotional campaign, a dissemination of information must reach some numerically-significant quantity of actual or potential customers of the parties' products.” The Court notes that the record is unclear as to how many humans might have encountered the materials published by JEMSU. It is possible that the visitors reached the pages as a result of an internet search for information on steel buildings, but it is just as plausible that that they had no interest in steel buildings and arrived at the pages due to a coincidental search—say, for information about navy battleships or the whereabouts of a high school classmate with the same name as a JEMSU article's ostensible author—or due to a typographical error.

Armstrong does not allege any answers to those ambiguities. Rather, Armstrong argues that when a false advertising plaintiff demonstrates that a defendant's advertisement is “literally false” courts do not require the plaintiff to show that the advertisement has an actual or potentially deceptive effect on the consuming public, instead presuming that the deception has occurred. The Court acknowledged that this is a generally-correct statement of the law, but it begs the question of whether the web content posted by JEMSU is “advertising.” As cases like Sports Unlimited suggest, publication of information does not become “advertising” until it reaches an audience of sufficient size. Because no evidence has been provided by Armstrong on whether or not this is the case, the Court granted summary judgment to General on the false advertising claims premised on the JEMSU “blog posts.”

• Pay-Per-Click Advertisements 

General, through JEMSU, purchased certain “pay-per-click” advertising from search providers. When users entered certain search terms on certain search providers, an ad for General would appear along with the search results, reading “The #1 Steel Building Manufacturer! Call Toll Free: [phone number].” It was undisputed that General was not a “steel building manufacturer,” meaning that this advertisement was false. General argued only that it cannot be liable for the false pay-per-click advertisements because they were created by JEMSU without General's knowledge, control, or authorization. On the other hand, the Court noted that Mr. McCain's own testimony seemed to suggest that he, on behalf of General, reviewed the text of these advertisements. Therefore, the Court allowed a Lanham Act false advertising claim premised on these ads to proceed.

• General's Own Statements 

Armstrong claims that some of the content General used to promote itself on its own website was false. General contended that the statements that Armstrong pointed to as false were mere puffery or were so vague and non-specific that they cannot be considered “false” – in other words, without a generally-agreed upon definition of what “customer satisfaction” means or to whose satisfaction a customer complaint must be “resolved,” one cannot affirmatively say that the representations are true or false. Here, the Court agreed with General that the boast “Awarded Best in the Industry” is mere puffery, as no reasonable consumer would rely on such an assertion without first inquiring further into the nature and credibility of the entity granting the award. But the Court agreed with Armstrong that the statements “zero unresolved customer issues” and “[a] history of 100% customer satisfaction” are specific, measurable claims that can be evaluated as true or false. Because Armstrong came forward with evidence that these statements were false—that certain customers never resolved their complaints with General and that many customers sued General over unresolved issues—the Court denied General's motion for summary judgment on the false advertising claim as it relates to these assertions.

• Damages

To establish the requisite element of causation and damages in a false advertising claim under the Lanham Act, a plaintiff must show that the false advertising caused consumers “to withhold trade from the plaintiff.” See Lexmark Intern., Inc. v. Static Control Components, Inc., U.S. 134 S.Ct. 1377, 1391, 188 L.Ed.2d 392 (2014). Once again, Armstrong tacitly concedes that it cannot demonstrate any actual damages it suffered that can be traced to General's false advertising. Instead, Armstrong invokes a presumption of injury that can arise in certain circumstances. Because Armstrong relies exclusively on the presumption of injury, offering nothing more to demonstrate any non-speculative harm that it claims to have suffered the Court granted summary judgment to General on Armstrong's Lanham Act counterclaim for false advertising to the extent it seeks money damages.

Copyright Infringement

Armstrong purported to hold the copyright on its logo, and alleged that General infringed Armstrong's copyright of the logo in two respects:

(1) General's website contained a link to a document described by the parties as an “e-brochure” which has an image of a similar logo with the words “FRAUDULENT STEEL” emblazoned on it,

and

(2) Armstrong contended that there was at least one instance where a JEMSU-created blog contained an advertisement reading “Buy an Armstrong Steel Building” accompanied by the Armstrong logo, but a reader clicking on this advertisement would be taken to General's website, not Armstrong's.

General argues that Armstrong does not actually own the copyright to the logo because Armstrong retained a company called The Unleaded Group to assist it in creating a logo and never put into writing that Armstrong would own the logo upon completion. After the logo was completed, Armstrong, consistent with the parties' understanding, submitted the logo for copyright registration in the name of Armstrong, identifying it as a work created for hire. General argued that, for various reasons, copyright in the work vested in its author, The Unleaded Group, and not in Armstrong. The Court declined to consider either argument and merely said that since it is clear that Armstrong paid The Unleaded Group the amount the parties agreed upon, and thus, there is no reason to believe that The Unleaded Group did not orally transfer the copyright to Armstrong, then an oral contract existed and the logo was validly copyrighted.

General also argued that the use of the “FRAUDULENT STEEL” logo was protected by the doctrine of “fair use,” because General's use for the purpose of “comment and criticism.” The Court refused to find that General's use of the logo was fair use. General used most of the elements from Armstrong's work and their use of the mark was not to comment or criticize the mark itself but rather for an explicitly commercial purpose.

GENERAL'S CLAIMS AGAINST ARMSTRONG

False Advertising

General asserts its own Lanham Act false advertising claim against Armstrong, stemming from Armstrong's alleged operation of the website www.steelbuildingcomplaints.com (hereafter, “the website”). The website contained material critical of General's products and practices. General also contended that Armstrong sent out letters under a false guise containing misleading information about General's business. General further contends that Armstrong sales employees called General's customers claiming to be a governmental agency.

Armstrong argues that none of the content on the website is “false,” either literally so or by implication. The Court found that a reasonable factfinder could infer that Mr. Chumley is the author of much of the content of the website. From that conclusion, the factfinder could also infer that the various representations on the website that suggest that the website is created “by consumers” or that it is intended to be a resource for consumers is false. Neither party has attempted to specifically corral either the specific false statements or the nature of the false representation that are the subject of General's false advertising claim. Since there is evidence that at least some of the listed claims were false, the Court allowed this issue to proceed to trail.

Armstrong also argued that General could not show that the false representations on the website actually deceived customers or had a likelihood of doing so. The Court declined to explore this argument deeply, noting that in the light most favorable to General, the content of the website could be likely to deceive customers.

Finally, Armstrong argues that General's false advertising claim is barred by the doctrine of res judicata. The Court found that false advertising contained in steelbuildingcomplaints.com could not possibly have been part of the same transaction, event, or occurrence being litigated before a previous judge. Those claims focused on Armstrong boasting of false accomplishments on its own website.

The Court denied Armstrong's motion for summary judgment on the false advertising claims.

Cyber-Squatting

To prevail on a cyber-squatting claim,

General must show:

(i) generalsteelscam.com is “confusingly similar” to General's trademark in the words GENERAL STEEL;

(ii) that Armstrong registered in or used generalsteelscam.com;

and

(iii) that Armstrong did so with a bad faith intent to profit from that name.

Armstrong argued that General cannot show that Armstrong (as opposed to PRQ and Mr. Swartholm) actually used the generalsteelscam.com domain name and cannot show that the domain name is confusingly similar to General's mark. The Court rejected the first argument and turned to analyze the second.

The Court noted that other courts have generally recognized that domain names that consist of a given mark plus a disparaging suffix—e.g. walmartsucks.com, applestinks.com—rarely meet the “confusingly similar” test. General responds that the World Intellectual Property Organization (“WIPO”), an international tribunal set up to resolve disputes over internet domain names, found to the contrary, ruling in General's favor in March 2012 and requiring that the generalsteelscam.com domain be turned over to General. The Court noted that WIPO findings were “not given any deference” by a previous court. Therefore, the Court granted Armstrong summary judgment on the Anti-cybersquatting Act claim.

Click here for more information on Burden of Proof in a UDRP domain dispute case.

Other claims

The Court found that Armstrong did not offer sufficient evidence or legal precedent for its libel, unjust enrichment, civil conspiracy, and misappropriation of trade secret claims and declines to consider these further.

MOTION TO RESTRICT ACCESS

The Court denied General's motion to restrict public access to several documents given the strong public interest in access to judicial records. 

CONCLUSION:

Here, the Court confronts several issues relating to the Lanham Act and false or misleading statements. The Court clarifies what can be considered an advertisement so as to support a Lanham Act claim.

This blog was written by Ms. Claudia Lin, U.S.C. Law Student.

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