Antitrust Law Daily Wrap Up, ADVERTISING—Fed. Cir.: Lack of competitive injury doomed false marking, false advertising, and state law claims, (Apr 12, 2017)

By Cheryl Beise, J.D.

A North Carolina federal district court did not err in ruling that key-cutting machine designer Gordon Gravelle failed to establish that his business was competitively harmed by Kaba Ilco Corporation’s sales of key-cutting machines bearing false "patent pending" markings, warranting summary judgment in favor of Kaba on Gravelle’s false marking, false advertising, and unfair trade practices claims, the U.S. Court of Appeals for the Federal Circuit has held. However, the district court’s award of attorney fees to Kaba was vacated and the issue remanded because the appeals court could not determine on the record before it whether the award was proper (Gravelle v. Kaba Ilco Corp., April 12, 2017, per curiam).

Gordon Gravelle, doing business as CodePro Manufacturing, created and sold two electronic key cutting machines, the CodePro 4500 and the RapidKey 7000. Gravelle filed suit against Kaba Ilco Corp. ("Kaba") in the federal district court in New Bern, North Carolina, asserting claims for false marking under the Patent Act, false advertising under the Lanham Act, and violations of the North Carolina Unfair and Deceptive Practices Act (UDPA). Gravelle asserted that his business lost sales because Kaba falsely labeled two features on its machine as "patent pending."

In May 2016, the district court granted summary judgment to Kaba on all of Gravelle’s claims. The court determined that Gravelle failed to establish a proximate competitive injury caused by Kaba’s sales of falsely marked products. The district court subsequently granted Kaba’s request for attorney fees on each claim. Gravelle appealed the summary judgment and attorney fee orders. He also appealed a discovery order requiring him to reimburse Kaba $3,031.25 for expenses incurred in connection with a motion to compel to Gravelle to attend a deposition.

The Federal Circuit found no error in the discovery reimbursement order and in the district court’s grant of summary judgment to Gravel. However, the appeals court vacated the attorney fee order because it could not determine on the present record whether the award was justified.

Competitive injury. All of Gravelle’s claims required proof of competitive injury. The Federal Circuit noted that the Leahy-Smith America Invents Act established that a competitive injury is a prerequisite to filing suit under the false marking statute, 35 U.S.C. § 292(a). In the patent context, a "competitive injury" is a "wrongful economic loss caused by a commercial rival," such as loss of sales or impaired ability to compete caused by the defendant's unfair competition, the court noted. To state a claim for false advertising under Section 43 of the Lanham Act, a plaintiff must allege "an injury to a commercial interest in reputation or sales" that is "proximately caused by violations of the statute. A plaintiff also must allege a proximately caused injury in order to state a claim under North Carolina’s Unfair and Deceptive Practices Act.

The district court correctly found that Gravelle failed to connect the decline in sales of his CodePro 4500 machines to Kaba’s false marking of its machine as "patent pending." Gravelle admitted that the reason the CodePro 4500 sales declined after 2006 was that Kaba had purchased the rights to the machine in November of 2006 and Gravelle "was not permitted to sell any more of these machines, save the 10 he had remaining in shop inventory." In light of Gravelle’s admission, no reasonable jury could infer that the decline in CodePro 4500 sales was caused by Kaba’s false marking, the court said.

With respect to his RapidKey 7000 machines, Gravelle argued that his business was injured because he was "forced" to sell the rights to the RapidKey 7000 Hudson for $20,000, instead of for their true value—more than $8 million in the absence of Kaba’s false marking. The district court held that Gravelle’s estimate was too speculative to support a reasonable finding that Gravelle could have achieved that level of sales, given that he sold a maximum of 19 CodePro 4500 machines per year,even before Kaba’s false marking, and at most 35 RapidKey 7000 machines over five years. The Federal Circuit agreed with the district court. The only evidence that Gravelle put forth to connect his alleged injury to Kaba’s false marking was his assertion that "automatic blade detection" and "automatic calibration" were "highly desirable within the small locksmith community." Gravelle’s general speculation was not enough to create a triable issue, according to the court.

Given the lack of concrete, non-speculative evidence of causation of an actual, competitive injury by Kaba’s false marking, the district court properly granted summary judgment for Kaba on all of Gravelle’s claims. Citing the Second Circuit’s 2014 decision in Merck Eprova AG v. Gnosis S.p.A., Gravelle argued that he was entitled to a presumption of injury under the Lanham Act because the parties were in direct competition. However, Merck explicitly limited its holding to scenarios involving a two-player-market, which Gravelle had not alleged, the court observed.

Attorney fees. The district court held that Kaba was entitled to attorney fees for all three of Gravelle’s causes of action. The Federal Circuit, however, was not in a position to determine whether the district court abused its discretion in awarding fees because the issue was not sufficiently developed by the parties on appeal and the record below did not necessarily support the district court’s conclusion that Gravelle’s claims were frivolous.

The assessment of frivolousness, for purposes of an attorney fee award, did not turn on the reasonableness of Gravelle’s alleged proximately-caused competitive injury, "but rather what a litigant could reasonably believe would constitute sufficient evidence to allow a reasonable inference of harm caused by the false marking," the court explained. Because it was not clear why the district court resolved this issue against Gravelle, the Federal Circuit concluded that the matter warranted further consideration. The fee order was vacated and the case remanded for further proceedings on this issue.

The case is No. 2016-2318.

Attorneys: Gordon Gravelle, pro se. Albert P. Allan (Allan Law Firm, PLLC) for Kaba Ilco Corp., Kaba AG and Kaba Holding AG.

Companies: Kaba Ilco Corp.; Kaba AG; Kaba Holding AG

Cases: Advertising FedCirNews