Antitrust Law Daily Wrap Up, ADVERTISING—N.D. Tex.: Competitors barred from misrepresenting associations with ADT, (Oct 29, 2015)

By Jody Coultas, J.D.

The federal district court in Dallas, Texas granted electronic security services company ADT, LLC a preliminary injunction, barring competitors from engaging in any activity that suggested endorsement by, sponsorship by, or affiliation with ADT (ADT, LLC v. Capital Connect, Inc., October 28, 2015, Fish, A.).

ADT alleged that Capital Connect, Inc., four other alarm-service sale companies, and five individual alarm-service sales persons sold alarm systems in unannounced door-to-door sales visits and confused homeowners into believing they were affiliated with ADT. After receiving customer complaints of false sales tactics by Capital Connect’s sales force, ADT sought an injunction to bar Capital Connect from continuing to “confuse ADT’s customers in its marketing of alarm services.”

To obtain a preliminary injunction, a movant must show: (1) a substantial likelihood of success on the merits; (2) a substantial threat that the movant will suffer irreparable injury absent an injunction; (3) that the threatened injury to the movant outweighs whatever damage the proposed injunction may cause the opposing party; and (4) that the public interest favors an injunction.

Preliminary evidentiary issues. Capital Connect argued that the court should not consider ADT’s customer declarations because the declarations contained hearsay. The court may rely upon otherwise inadmissible evidence when considering a preliminary injunction. Also, contrary to Capital Connect’s assertion, most of the declarations were not hearsay. Capital Connect also argued that the court should not grant ADT’s motion because it disputed the facts alleged by ADT and the credibility of ADT’s declarations. However, Capital Connect’s omission of declarations to contradict ADT’s declarants’ reports was fatal to its argument that it had presented a factual dispute.

Likelihood of confusion. ADT offered sufficient evidence of actual confusion, among other indicia of confusion, in the relevant market, according to the court. ADT argued that Capital Connect’s sales tactics were likely to cause confusion among consumers as to the source, affiliation, or sponsorship of Capital Connect’s products or services. ADT presented, among other evidence, 55 declarations, four local news reports, and an employee affidavit regarding 269 complaints processed in 2015. Capital Connect argued the affidavits were not reliable because they are received by “interested sources” and there was no opportunity to cross-examine the confused individuals. Reliance on customer complaints in declarations on a motion for preliminary injunction was appropriate, however. The affidavits showed actual confusion about what entity the sales associate at the door represented, with what entity the sales associate was affiliated, how the sales associate came to arrive at the door, and the purpose for which he/she was at the door. Capital Connect argued that if customers were confused, they were not reasonably prudent purchasers and ADT was not likely succeed on the merits. Despite protective measures Capital Connect claims to have implemented, customers were actually confused by Capital Connect’s sales tactics. For the purposes of the motion for a preliminary injunction, ADT had sufficiently shown actual confusion of reasonably prudent purchasers.

The court concluded that ADT produced sufficient evidence that Capital Connect’s false sales pitches actually confused customers into thinking there was some affiliation with ADT or that ADT’s equipment was faulty. The initial interest confusion doctrine applies when “the Lanham Act forbids a competitor from luring potential customers away from a producer by initially passing off its goods as those of the producer’s, even if confusion as to the source of the goods is dispelled by the time any sales are consummated.” Most often, the initial interest doctrine is used in Lanham Act disputes based on Internet browsing, metatags, and how well websites are labeled when a user is moving from one website to another. ADT’s consumers’ “initial interest confusion” was relevant to the court’s determination of a likelihood of confusion, and the doctrine was still relevant.

ADT presented sufficient evidence of actual confusion resulting from Capital Connect’s use of the terms “upgrade” and “update” in the context of door-to-door sales pitches to warrant the suspension of the practice pending a resolution of the case on the merits, according to the court. Showing a knowledge of the pre-existing security alarm system and referencing the alarm system as needing an upgrade could lead a rational person to conclude that the salesperson was in some way affiliated with the pre-existing alarm service provider. ADT provided dozens of affidavits of customers confused by the use of the terms “upgrade” and “update,” as well as four news reports citing the misleading statements.

Irreparable harm. Regardless of whether the Fifth Circuit recognizes the presumption of irreparable harm upon a showing of likelihood of confusion, the court found ADT sufficiently alleged and proved imminent irreparable harm that could not be remedied through monetary damages alone. ADT alleged that Capital Connect’s disparagement of the quality of ADT’s equipment/service and misleading of customers into thinking Capital Connected was associated with ADT caused harm that flowed “directly from the audience’s belief” in the denigrations and misrepresentations. Capital Connect countered that ADT failed to show proof of any damage to ADT’s reputation or goodwill. Even where products or services continue to enjoy strong reputations in the market, those products or services will suffer irreparable harm in the absence of an injunction preventing a competitor from continuing to make disputed advertising claims challenged as false under the Lanham Act. Damage caused by this sort of Lanham Act violation was difficult to quantify. Regardless of the safeguards Capital Connect claimed to have implemented, its sale force caused irreparable harm to ADT through its misrepresentations.

Remaining factors. The balance of harms and public interest factors weighed in favor of an injunction, according to the court. ADT’s interest in obtaining this preliminary injunction far outweighed Capital Connect’s interest in continuing to violate the Lanham Act. The narrow scope of the injunction prevented Capital Connect from continuing to violate the Lanham Act and continuing to compete unfairly, which reduced the impact of any lawful interests Capital Connect may have through the issuance of the injunction. Also, the public had an interest in not being deceived.

Agency. Capital Connect could be held liable for the actions of its sales associates, who were its agents, operating within the scope of that agency, according to the court. Capital Connect argued that it could not be held liable for “the unauthorized conduct of independent contractors” unless ADT proved that Capital Connect authorized its independent contractors to act in the manner ADT alleged. There was sufficient evidence that Capital Connect exerted sufficient control over its sales force so as to be liable for misrepresentations made by its associates. Anything that occurred during the sales pitch of the sales associate was clearly within the scope of the agency, as it was the central purpose of the principal-agency relationship here.

The case is No. 3:15-CV-2252-G.

Attorneys: Robert N. LeMay (Kane Russell Coleman & Logan PC) for ADT LLC and ADT US Holdings Inc. Andres Correa (Lynn Tillotson Pinker & Cox LLP) for Capital Connect Inc. Lorin M. Subar (The Willis Law Group) for Power Home Technologies LLC. Greg K. Winslett (Quilling Selander Lownds Winslett & Moser) for Security Investments LLC. Jeffrey Daniel Shelton (Holden & Carr) for Alliance Security Inc.

Companies: ADT, LLC; Capital Connect, Inc.

Cases: Advertising TexasNews