Antitrust Law Daily Wrap Up, ADVERTISING—DColo: Keyword Advertiser Did Not Infringe Trademark, But Was Liable for False Advertising under Lanham Act, (May 8, 2013)

By William Zale, J.D.

A prefabricated steel building seller did not infringe its competitor General Steel’s registered trademarks by using "General Steel Buildings" and "general steel" as paid keywords in search engine advertising and in comparative website advertisements, but the seller was liable under the Lanham Act for its literally false comparative advertising, the federal district court in Denver has ruled (General Steel Domestic Sales, LLC v. Chumley, May 7, 2013, Brimmer, P.). On the false advertising claim, the court entered an injunction and ordered the seller to disgorge profits

The plaintiff, General Steel, has a registered trademark on its logo, consisting of the outline of a building with horizontal lines and the words "General Steel Corporation" incorporated within it, and also on the word mark "GENERAL STEEL CORPORATION." Defendant Ethan Chumley, a former General Steel employee, created defendant Atlantic Building Systems, LLC, doing business as Armstrong Steel Corp.

Trademark infringement, unfair competition. General Steel argued that Armstrong’s use of the phrase "General Steel Buildings" (or the lowercase "general steel") in its Google AdWords advertisement copy, as a paid keyword through the AdWords program, and in the text of several websites created by Armstrong infringes General Steel’s registered federal trademark in violation of the Lanham Act and constitutes unfair competition under Colorado law.

The failure to produce any evidence rebutting the presumption validity was grounds for concluding that General Steel has a valid and protectable mark in the term "General Steel," the court found. The court also determined that "General Steel" had acquired secondary meaning in light of uncontroverted evidence that General Steel had spent over $50 million on marketing since the late 1990s and that "General Steel" is the third most searched term in the metal building industry. Widespread awareness of the plaintiff’s name is corroborated by the nature of Armstrong’s use of the term "general steel" in the copy of its AdWords advertisements, the court added.

The court, however, rejected General Steel’s argument that Armstrong’s intentionally misleading advertisements caused "initial interest confusion"—a "bait and switch" tactic that permits a competitor to lure consumers away from a service provider by passing off products or services as those of another, even though the confusion is dispelled by the time of sale. Evidence at trial showed that steel buildings are expensive, complicated to erect, and are not the type of purchase that would be made without a thorough consideration of the available options. The degree of care required to purchase a steel building decreases the likelihood that a customer’s choice would be significantly impacted by stumbling across one company’s website before another’s, according to the court. These factors cut against a likelihood of confusion between the two companies based on the use of "general steel" in Armstrong’s AdWords campaign.

While Armstrong was using "general steel" to refer to the plaintiff’s company, the court did not find that such use was likely to cause confusion among consumers in light of all of the surrounding information in the website advertising that identified Armstrong Steel as the source of the website and distinguished Armstrong Steel from General Steel. The court found that defendants’ use of "general steel" as a supposedly generic term in website copy was intended to further Armstrong’s web search optimization, that is, to increase the likelihood Armstrong’s website would appear near the top of the list of organic search results whenever someone ran a search for "general steel." Armstrong also purchased the term "general steel" as a keyword from search engines so that searches incorporating that term would trigger the display of Armstrong’s advertisements in the "sponsored links" section of the search results.

These uses of "general steel" were not sufficient to support a trademark violation on the theory of initial interest confusion, the court concluded. Application of an overly restrictive rule could destroy the valuable resource that search engines have become if it prevents those search engines from doing what they are designed to do: present users with the information they seek as well as related information the user may also find helpful or interesting. The court held that the advertisements were unlikely to confuse consumers.

False Advertising. Armstrong made the following literally false and material statements in the context of its comparative advertising campaign: (1) presenting itself as a manufacturer that fabricates steel buildings; (2) stating that it provided pregalvanized steel and steel fasteners as standard features and that General Steel did not; and (3) stating that it provides "general steel buildings" and "general steel construction." General Steel did not present sufficient evidence to show that Armstrong’s warranty offer, its characterization of itself as an industry leader, or its characterization of itself as an OEM manufacturer were false or misleading.

Injury may be presumed when a defendant’s statements are literally false and the defendant has explicitly compared its product to the plaintiff’s or the plaintiff is an obvious competitor with respect to the misrepresented product, the court noted. Because Armstrong made materially false statements in the context of advertisements explicitly comparing Armstrong and General Steel, and because the court found that Armstrong engaged in a pattern of willful deception, the court presumed that the statements injured General Steel.

Because General Steel did not provide an evidentiary basis for the extent of its injury, its claim for false advertising survived only to the extent it sought injunctive relief and disgorgement of profits. Injunctive relief was proper because General Steel showed that (1) Armstrong’s pattern of willful deception indicates it was likely to cause General Steel future harm, absent injunctive relief; (2) the balance of hardships favored injunctive relief; and (3) an injunction was not adverse to the public interest. The defendants were enjoined from (a) falsely presenting Armstrong as a manufacturer of steel buildings or falsely stating that it fabricates steel buildings; (b) falsely stating that General Steel does not provide pregalvanized steel and steel fasteners; and (c) stating that Armstrong provides "general steel buildings" or "general steel construction."

A disgorgement award may be predicated either on the theory that the defendant has unjustly enriched itself through misappropriation of the plaintiff’s property interest in its protected mark or on the theory that an award of profits will deter future willful violations, the court observed. Armstrong was not only asked by General Steel, but required by the major search engines, to stop using General Steel’s name in its advertising. Nonetheless, Armstrong issued new advertisements falsely comparing itself to General Steel and falsely stating that it provides "general steel" buildings. It continued to disseminate these false advertisements even after General Steel brought an administrative claim before the World Intellectual Property Organization and after the close of discovery in this case, showing that enforcement proceedings are not sufficient to deter Armstrong from disseminating false advertising. Armstrong’s pattern of willful deception betrayed a conscious desire to benefit from false statements, which in turn supports a disgorgement award to deter future misconduct, the court found.

A disgorgement award was appropriate because the defendants benefitted from the unlawful conduct, other remedies appeared to be inadequate, Chumley played a lead role in creating and disseminating the false advertisements, and there was no evidence that General Steel sat on its rights, according to the court. Although Armstrong published its comparative advertisements for a period of at least 18 months, from mid-August 2010 through mid-February 2012, there was no credible evidence at trial regarding Armstrong’s gross or net earnings in 2011 or 2012. The court awarded as disgorgement Armstrong’s profits during the four-and-a-half- month period in 2010 when it disseminated false comparative advertising. Armstrong’s prorated profits for this period amounted to a total of $243,462.

The case is No. 10-cv-01398-PAB-KLM.

Attorneys: David Samuel Fein (Building Services Group, LLC) for General Steel Domestic Sales, LLC. Jacob W. Paul (Leyendecker & Lemire, LLC) for Ethan Daniel Chumley.

Companies: General Steel Domestic Sales, LLC; Atlantic Building Systems, LLC

Cases: Advertising ColoradoNews