Antitrust Law Daily Wrap Up, ADVERTISING—3d Cir.: Retailer unable to pull the wool over distributor for mislabeling yarn content, (Sep 3, 2015)

By Linda O’Brien, J.D., LL.M.

A yarn retailer failed to sufficiently allege racketeering and false advertising claims to pursue an action against a group of yarn designers and a distributor for allegedly participating in a conspiracy to sell mislabeled yarn to the retailer, the U.S. Court of Appeals in Philadelphia has ruled. Thus, the district court’s grant of summary judgment in favor of the distributor and designers was affirmed (The Knit With v. Knitting Fever, Inc., September 2, 2015, McKee, T.).

In September 2008, specialty yarn store The Knit With (TKW) filed suit against Knitting Fever, Inc., a distributor of hand knitting yarn, and several individual yarn designers and suppliers, asserting Lanham Act false advertising claims and violations of the Racketeer Influenced and Corrupt Organizations Act (RICO). TKW alleged that Knitting Fever mislabeled the cashmere content of certain yarn supplied to TKW. In August 2012, the district court granted summary judgment in favor of the defendant and dismissed all claims. TKW appealed.

RICO. The district court did not err in dismissing the plaintiff’s RICO conspiracy claims. To pursue a RICO claim, the plaintiff must show that the defendants agreed to the commission of a pattern of racketeering. TKW contended that Knitting Fever and the yarn designers conspired to cover up the absence of any cashmere content in the yarn at issue. According to the appellate court, the plaintiff’s complaint failed to include any specific allegation that the designers intended to facilitate a conspiracy or operate a RICO enterprise. The plaintiff’s allegation that the defendants participated in a racketeering scheme that injured the plaintiff’s business was conclusory and was entitled to no deference.

Furthermore, TKW’s argument that the designers need only be aware of the enterprise’s activities and were not required to agree or participate in the enterprise’s corrupt acts was rejected. The appellate court noted that, while an alleged conspirator need not agree or participate in each of the predicate acts, it must conspire to conduct or participate in the activities of the corrupt enterprise. The fact that the designers held trademark licenses and entered into distribution agreements to sell products using that trademark did not permit an inference that the designers agreed to conduct or participate in the activities of a racketeering enterprise.

False advertising. The district court properly dismissed the plaintiff’s Lanham Act false advertising claims for lack of standing. The appellate court noted that the U.S. Supreme Court decision in Lexmark International, Inc. v. Static Control Components, Inc., 134 S.Ct. 1377 (2014) held that to come within the zone of interests test, a plaintiff must allege an injury to a commercial interest in reputation or sales. In the appellate court’s view, TKW, a yarn retailer who was allegedly misled by its distributor into purchasing mislabeled yarn, was not within the zone of interests protected by the Lanham Act. Thus, TKW lacked standing to bring a Lanham Act false advertising claim.

The case is No. 12-3219.

Attorneys: Robert J. Guite (Squire, Sanders & Dempsey) for The Knit With. Joanna J. Cline (Pepper Hamilton) for Knitting Fever Inc., Designer Yarns, Ltd. and Filatura Pettinata VVG Distefano Vaccari & C SAS.

Companies: The Knit With; Knitting Fever Inc.; Designer Yarns, Ltd.; Filatura Pettinata VVG Distefano Vaccari & C SAS

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