Antitrust Law Daily Wrap Up, ADVERTISING—SDCal: Children’s Tablet Computer Maker States Trade Secrets and Trademark Claims Against Toys “R” Us, But False Ad Claim Rejected , (Mar 5, 2013)

By Thomas Long, J.D.

Computer software and hardware company Fuhu, Inc. adequately stated claims that toy retailer Toys “R” Us, Inc. (“TRU”) infringed Fuhu’s trademarks and trade dress for its NABI Android tablet for children and that TRU’s TABEO tablet computer was developed and marketed using proprietary information misappropriated from Fuhu by TRU, the federal district court in San Diego has decided (Fuhu, Inc. v. Toys “R” Us, Inc., March 1, 2013, Hayes, W.). TRU’s motion to dismiss those claims was denied. A claim that TRU engaged in false advertising in violation of the Lanham Act was, however, dismissed without prejudice.

Fuhu asserted that it was “the creator of NABI, the world’s first full-featured Android tablet made especially for kids.” Fuhu allegedly met with TRU several times in September and October 2011 to discuss the marketing of the NABI product. On September 28, 2011, the parties signed a non-disclosure agreement. On October 29, 2011, the parties signed an exclusive distribution agreement, under which TRU would be the exclusive distributor of NABI. Under the terms of that agreement, TRU allegedly agreed to place orders for 10,000 NABI tablets by December 31, 2011 and to place orders for 500,000 more NABI tablets throughout 2012. In January 2012, Fuhu terminated the exclusive distribution agreement with TRU.

Fuhu alleged that, on September 10, 2012, TRU announced its own tablet for children, TABEO. According to Fuhu, the TABEO tablet adopted NABI’s trade dress, specifically the “butterfly” shape of a removable bumper that fit snugly around the outer edge of the tablet. TRU allegedly infringed Fuhu’s word marks on TRU’s www.toysrus.com website. In addition, marketing materials for the TABEO tablet allegedly bore a “striking and not coincidental similarity” to NABI and the collateral proprietary information that Fuhu had disclosed to TRU.

On October 19, 2012, the court denied Fuhu’s motion for a temporary restraining order (TRO). TRU filed a motion to dismiss Fuhu’s complaint for failure to state a claim upon which relief can be granted.

Trade secrets misappropriation. To state a claim for misappropriation of trade secrets under the California Uniform Trade Secret Act, Fuhu had to allege two elements: (1) the existence of a trade secret and (2) misappropriation of the trade secret. TRU contended that Fuhu failed to allege (1) which information was a trade secret and (2) how any trade secrets were used by TRU. TRU also argued that the court, in its order denying Fuhu’s motion for a TRO, found that the information alleged to be a trade secret did not fit within the legal definition of a trade secret, and this finding was the law of the case.

Fuhu alleged that Fuhu disclosed to TRU, “on a basis of strict confidentiality,” a detailed business plan and strategy related to the NABI table. Fuhu asserted that the plan had independent economic value because it was secret. The complaint further alleged that TRU improperly used Fuhu’s trade secrets relating to NABI in order to solicit customers and manufacturers and that TRU derived its advertising and promotional materials from the confidential business plan. The court found that the complaint adequately stated a claim for trade secrets misappropriation.

The court declined to apply the law of the case doctrine, or to otherwise grant the motion to dismiss based on the findings in the October 19, 2012 order. TRU failed to cite authority holding that the law of the case doctrine applies to findings by a court when ruling on a motion for temporary restraining order, the court said.

Trade dress infringement. TRU contended that Fuhu failed to, and could not, allege protectable trade dress based on NABI’s use of a bumper with reinforced or flared corners. According to TRU, a removable rubber bumper for a children’s computer tablet that had been reinforced against being dropped was inherently functional and nondistinctive. TRU also alleged that there were many other butterfly-shaped bumpers on the market and that Fuhu’s asserted trade dress was indistinct from those products. With regard to likelihood of confusion, TRU argued that its placement of the TABEO mark on the bumper clearly identified the source of the product and would dispel any mistaken belief that the tablet was produced by Fuhu.

Fuhu’s complaint alleged that the TABEO was confusingly similar to NABI’s “iconic” butterfly shape. The word “Nabi” meant “butterfly” in Korean, Fuhu noted. Fuhu asserted that the butterfly shape of NABI’s bumper was nonfunctional and had acquired secondary meaning. TRU’s conduct, according to Fuhu, created a likelihood that consumers would be confused as to the affiliation, connection, or association of TRU with Fuhu.

In the court’s view, the complaint adequately alleged the elements of a trade dress infringement claim. In the context of ruling on a motion to dismiss, the court declined to examine materials extrinsic to the complaint, such as photos and videos on Fuhu’s website, media articles, and Fuhu’s application to federally register its asserted trade dress.

Trademark infringement. TRU argued that Fuhu failed to state a Lanham Act claim for trademark infringement based on TRU’s advertising and promotional materials. According to TRU, Fuhu failed to allege (1) a false statement of fact about a product or (2) any basis for deception of consumers.

Fuhu alleged in its complaint that TRU used the NABI word mark in TRU’s advertising—especially in conjunction with pictures related to search results from the TRU website—in a manner that was likely to deceive consumers. TRU allegedly used the NABI mark to advertise the TABEO tablet and TABEO accessories. Searching for “nabi” on the www.toysrus.com website allegedly resulted in a page advertising TABEO and other tablets produced by third parties.

The court denied TRU’s motion to dismiss the trademark infringement claim. Fuhu’s allegations adequately stated that TRU’s use of the NABI mark was likely to cause confusion. At the motion to dismiss stage, the court deemed it inappropriate to weigh the fact-specific likelihood of confusion factors.

False advertising. Fuhu also contended that TRU’s conduct with regard to use of the NABI mark on the www.toysrus.com website constituted false advertising in violation of Sec. 43(a) of the Lanham Act. The complaint alleged that “[i]n connection with the promotion of its tablet product and third party tablet products, TRU has made a number of false or misleading representations of fact about its own products.” According to the complaint, “[t]hrough the behavior of TRU’s website at www.toysrus.com and through the display of affirmative search results when ‘nabi’ is searched for, including a reminder on the resulting page that ‘nabi’ was the search term, TRU is presenting false and/or misleading information.”

In the court’s view, Fuhu failed to specify the contents of the alleged false statements made by TRU in commercial advertising. The complaint did not adequately allege a “false statement of fact.” Therefore, the claim for false advertising was dismissed without prejudice.

The case is No. 012cv2308 WQH-WVG.

Attorneys: Charles T. Hoge (Kirby Noonan Lance and Hoge) for Fuhu, Inc. Clinton Judd McCord (Edwards Wildman Palmer LLP) for Toys “R” Us, Inc.

Companies: Fuhu, Inc.; Fuhu Holdings, Inc.; Toys “R” Us, Inc.; Toys “R” Us – Delaware, Inc.

Cases: Advertising CaliforniaNews