Antitrust Law Daily Wrap Up, ADVERTISING—6th Cir.: Manufacturer of ‘cloned’ lighting products did not falsely designate origin of goods, (Aug 6, 2015)

By Thomas Long, J.D.

A manufacturer of “cloned” versions of lighting products could not have engaged in false designation of origin or false advertising under the Lanham Act by misrepresenting that it was the creator of the products at issue, the U.S. Court of Appeals in Cincinnati has held. The Lanham Act covered only representations regarding the origin of the tangible objects themselves, not the originator of the ideas embodied in them. Advertisements that truthfully identified the manufacturer as the producer of the tangible objects were not actionable (Kehoe Component Sales Inc. v. Best Lighting Products, Inc., August 5, 2015, Griffin, R.).

Background. Best Lighting Products, Inc., was a designer and marketer of exit signs and emergency lighting products for commercial buildings. It modeled its products on other companies’ patented products and then altered the designs of the products in order to make “something unique or different,” which it would produce at a lower cost than competitors.

In 2000, Best began buying parts for its products from Kehoe Component Sales Inc., doing business as Pace Electronic Products (“Pace”). Soon after, Pace began making fully assembled products for Best, to Best’s specifications. Because Pace was new to the lighting products business, Best’s founder, Alvin Katz, spent a significant amount of time instructing Pace on how to manufacture the tooling needed to make the products that Best wanted Pace to manufacture.

The relationship between the parties did not go smoothly. Best complained that Pace had delivered defective products; Best refused to pay for the product, and Pace stopped shipments to Best. In 2007, the parties entered into a supply agreement, under which Best agreed to pay its outstanding debt to Pace and to purchase a minimum amount of products from Pace each year, and Pace agreed, among other things, not to use any tooling owned by Best other than for the manufacture of products for sale to Best, and not to sell emergency lights or related products to any party in North America without Best’s written consent.

In 2008, the parties ended their commercial relationship. Pace remained in possession of all the tooling that had been used to make Best’s products, and to make “cloned” products that Pace sold to third parties prior to the effective date of the supply agreement. Best owed Pace nearly $900,000 for delivered products.

In August 2008, Pace filed a breach of contract suit against Best, alleging that Best failed to pay for $900,000 worth of products that Pace had delivered to it. Best requested a setoff for breach of warranty and counterclaimed for breach of contract, tortious interference, misappropriation of trade secrets, conversion, and fraud. While this case was still pending, in August 2010, Pace filed a separate action against Best, asserting that Best had misappropriated Pace’s trade secrets and tortiously interfered with Pace’s contracts. Best responded with the same counterclaims it had asserted in the 2008 action, and added several Lanham Act claims.

After the parties’ cross-motions for summary judgment were granted in part, a bench trial on the remaining claims and counterclaims was held. The district court found that Best had breached its contractual obligations by failing to pay for products delivered by Pace, but that Pace was liable to Best for breach of warranties, breach of contract, tortious interference, misappropriation of trade secrets, conversion, and both false designation of origin and false advertising under the Lanham Act. Best was awarded over $1.3 million in damages and over $850,000 in attorney fees, and Pace was enjoined from manufacturing the cloned products in question and from using or referencing products that “originated with Best” in marketing materials. Pace appealed.

Trade secrets misappropriation—statute of limitations. Pace argued that Best’s claims under the Ohio Uniform Trade Secrets Act (OUTSA) were barred by OUTSA’s four-year statute of limitations. The district court found that the injury that started the limitations period running occurred in August 2004, when Best’s founder, Alvin Katz, learned that Pace was selling to Best’s customers products that were facsimiles of Best’s products and confronted Pace about it. Best did not file its OUTSA counterclaims until October 2008, but the district court concluded that Best’s filing was timely because Pace misappropriated Best’s trade secrets again when it offered for sale competing products on or after January 10, 2007, with the aid of the know-how conveyed by Katz.

This district court erred in reaching this conclusion, according to the appellate court. OUTSA specifically provided that a continuing misappropriation constituted a single claim. The first discovered or discoverable misappropriation of a trade secret commences the limitation period, and the limitation period was not re-started by Pace’s continued use of the same trade secret. Therefore, the district court should have determined that Best’s OUTSA claims were time-barred. The district court’s finding that Best prevailed on those claims and was entitled to damages on them was reversed.

Lanham Act—laches. Pace contended that Best waited too long to file its Lanham Act claims, and the claims were barred by the equitable defense of laches. The relevant time period was the two-year limitations period set by Ohio law. Best knew that Pace was selling cloned products to competitors as early as August 2004, but it did not file its Lanham Act counterclaims against Pace until September 2010.

The record did not fully explain why Best failed to file its Lanham Act claims on a timely basis. However, the appellate court said, it was not necessary to determine whether the district court abused its discretion in ruling against Pace on its laches defense, because the Lanham Act claims failed on the merits.

Lanham Act—false designation of origin. The district court found that Pace violated Section 43(a) of the Lanham Act, 15 U.S.C. §1125(a), in two ways: (1) engaging in false designation of origin by representing that the cloned products that it manufactured and sold had been produced by Pace rather than by Best; and (2) engaging in false advertising by misrepresenting in its catalogs the origin of the cloned products. Both of these conclusions were erroneous, the Sixth Circuit held.

With respect to the false designation of origin, or “reverse passing off,” claim, Best asserted that Pace misrepresented that the cloned products made by Pace somehow originated with Best. However, the Lanham Act protected the ability to control one’s brand; it did not protect the ability to control one’s inventions or innovations. The term “origin” in Section 43(a) did not refer to the person or entity that originated the ideas embodied by the goods in question. Rather, it denoted only the producer of the tangible product sold in the marketplace, and possibly also the trademark owner who commissioned or assumed responsibility for production of the physical product. Therefore, in the context of a reverse passing off claim, use of a trademark made a representation regarding only the product’s physical origin, not its intellectual ancestry.

As established by the U.S. Supreme court in Dastar Corp. v. Twentieth Century Fox Film Corp., 539 U.S. 23 (2003), an entity makes a false designation of origin sufficient to support a reverse passing off claim only when it falsely represents the product’s geographic origin or represents that it has manufactured the tangible product that is sold in the marketplace when it did not in fact do so. Taking tangible goods and reselling them as your own would violated the Lanham Act; taking the intellectual property contained in those goods and incorporating it into your own goods would not.

It was undisputed that Pace manufactured the cloned objects that it represented itself as having manufactured. Therefore, Pace never made a false designation of the products’ origin within the meaning of Section 43(a), the appellate court said. Where the initial ideas for the products came from was irrelevant for purposes of Section 43(a).

Best never claimed that it owned a relevant trademark with respect to the Pace-branded, cloned products. More fundamentally, the court said, Best neither commissioned nor assumed responsibility for the products. Therefore, it could not assert rights under the Lanham Act as a mark owner.

Lanham Act—false advertising. The district court’s finding that Pace engaged in false advertising in violation of Section 43(a) was defective for largely the same reasons that the false designation of origin finding was defective, the appellate court said. The “origin” of the products sold by Pace was Pace, not Best, as the alleged creator of the ideas underlying the products. Accordingly, Best’s advertising was not false when it represented itself as the origin of the challenged products in its catalogs.

The false advertising provision of Section 43(a) prohibited false representations as to the “nature, characteristics, qualities, or geographic origin” of the goods in question. The products’ geographic origin was not at issue. A misrepresentation about the source of the ideas embodied in the tangible goods was not a misrepresentation about the nature, characteristics, or qualities of the object, the appellate court said. The Lanham Act did not encompass misrepresentations about the source of the ideas embodied in the object, such as a false designation of authorship. To hold otherwise would be to project the Lanham Act onto the province of the Copyright and Patent Acts.

The district court did not find that Pace made any misrepresentations about the characteristics of the cloned products themselves, only that the advertisements falsely stated that Pace, rather than Best, was the intellectual origin of the products. Therefore, the judgment finding Pace liable for false advertising was reversed.

Other claims. The Sixth Circuit affirmed the district court’s determination that Pace breached a supply agreement, including that agreement’s non-compete clause, assignment clause, and use clause. Pace also was correctly held liable for tortious interference. The ruling on the conversion claim was, however, reversed.

The awards for damages and attorney fees and the permanent injunction were vacated, and the case was remanded for further proceedings.

The case is No. 14-3347.

Attorneys: Ronald G. Hull (Underberg & Kessler LLP) for Kehoe Component Sales Inc., Pace Technology Co Ltd., and Estate of Frank Patrick Kehoe. Gregory P. Barwell (Wesp Barwell) for Best Lighting Products, Inc.

Companies: Kehoe Component Sales Inc.; Pace Technology Co Ltd.; Best Lighting Products, Inc.

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