distributor’s switch to direct sourcing leads to Lanham Act claim

Alpha Pro Tech, Inc. v. VWR Intern. LLC, No. 12–1615, 2013 WL 6179065 (E.D. Pa. Nov. 26, 2013)

One way to tell the story of this complaint: company decides to outsource production of a flagship product to China, gets burned when Chinese company appropriates its trade secrets, is now sad about that. Somehow I bet the Georgia workers who lost their work might have something to say about that.  I’ll skip the trade secret part of the case, but some of the trade secret-based claims do survive.

Plaintiff APT made Critical Cover protective apparel for use in scientific and medical settings; VWR was formerly its exclusive distributor.  Critical Cover’s protective coating was allegedly superior to competitors’, giving it a competitive advantage.  The distributorship agreement, among other things, licensed VWR to use the Critical Cover mark and bound it to identify APT as the manufacturer and warrantor of Critical Cover products.

In 2000, APT moved Critical Cover manufacturing from Georgia to China, where it entered into a relationship with another entity, XXPC, which became the manufacturer.  VWR allegedly induced XXPC to violate APT’s confidentiality restrictions and make similar coated products for VWR, at which point VWR terminated its relationship with APT.

VWR allegedly set out to market its new product lines as replacements for/continuations of Critical Cover product lines.  VWR allegedly got customers to believe that their well-liked Critical Cover products no longer existed and that they were “simply being transitioned into the same or similar products by another name.”  For example, VWR stated that “VWR Advanced and Maximum Protection apparel (the products formerly known under the VWR Critical Cover ComforTech™ and Microbreathe™ brands) will experience a change in raw materials,” but APT alleged that the products weren’t “formerly known” as Critical Cover, and also that this statement falsely led customers to believe that the products came from the same source.  The two types of false/misleading statements alleged were statements that caused consumers to believe that VWR’s products were Critical Cover products under another name (false because the manufacturer and the process had changed in that the process was no longer subject to APT’s quality control and warranties), and statements that misrepresented, at least by implication, that Critical Cover products had been discontinued.

The court first rejected VWR’s argument that APT wasn’t really the manufacturer of Critical Cover products; rather, XXPC was.  (You know what would really assist this discussion?  Dastar’s statement that “origin” can be stretched to the licensor.)  Just because APT partnered with XXPC didn’t mean that APT wasn’t also a manufacturer—the two weren’t mutually exclusive as manufacturers. 

Anyway, that argument missed the mark because APT also alleged that VWR’s statements caused consumers to believe that VWR’s products were Critical Cover products under another name.  Because Critical Cover is a valid mark, “any statements, even if true, that led customers to believe that VWR’s products were CRITICAL COVER® products would be actionable as false advertising.  Unless VWR were to concede it was infringing APT’s CRITICAL COVER® trademark—which, obviously, it does not do—the CRITICAL COVER® products are necessarily different from VWR’s own product line.”   

Also, APT alleged that the manufacturing process changed because APT’s quality controls and warranties were no longer present, and VWR’s trade secret argument seemed to suggest that VWR’s new line didn’t use the particulars of APT’s alleged trade secret.  VWR’s advertising allegedly convinced a substantial number of consumers that VWR’s products were Critical Cover products under a different brand name.  (Dastarprotects the right to copy, which means the right to offer the “same” product under a different brand name; the court is about to recognize this.)

However, the court pointed out, passing a motion to dismiss isn’t a guarantee of success.  “In fact, a large and potentially dispositive issue of fact may be whether VWR’s products were identical, or even superior, to APT’s CRITICAL COVER® products.”  If they were, then the false advertising claim would probably fail because, although VWR products wouldn’t “technically” be not Critical Cover products because APT owned the trademark, they’d in fact be identical.  Also, the difference would likely be immaterial, citing Pernod Ricard and McCarthy.  But for right now, the argument that customers wouldn’t pay APT’s higher prices for identical products and therefore there was no nexus between VWR’s ads and APT’s harm was not appropriate on a motion to dismiss.

For similar reasons, the false designation of origin claim survived, though it had different elements. (But why? This court, like others, says §43(a)(1)(A) and (B) are basically the same, then applies different standards: “Unlike a false advertising claim, a false designation of origin/passing off claim requires not proof of actual confusion, but rather proof of likely confusion,” even though the likelihood language of the statute is identical.)  Passing off can be either express or implied—implied is “when an enterprise uses a competitor’s advertising material, or a sample or photograph of the competitor’s product, to impliedly represent that the product it is selling was produced by the competitor.”  This can occur through initial interest confusion.  Anyway, §43(a) doesn’t have rigid boundaries and the liability test should be adapted to the circumstances at hand.

As a result, the court rejected VWR’s argument that it hadn’t used any designations falsely but rather fairly and referentially.  There was a potential false designation of origin based on the Critical Cover trademark, though that would fail if VWR’s product line was the same as or superior to Critical Cover.  But if the allegations were proven true, that would constitute false designation of origin by likely confusing consumers about whether VWR’s new products were simply Critical Cover products by another name.  Section 43(a) covers this conduct, “because otherwise a defendant could escape liability for passing off simply by using another’s mark—a false designation of origin—to establish the equivalency of the other’s mark and the defendant’s new mark, and then shift to using only its new mark.”  This couldn’t be resolved at the motion to dismiss stage, because the statements from VWR’s marketing materials could be read as misleading.  Likelihood of confusion would require using the multifactor infringement test.  Although APT’s allegations weren’t perfect, it did allege specific statements that could create confusion:

“It is also worth noting that we have not changed the manufacturer, manufacturing location, or the manufacturing process for 95% of the products in our new line. For the majority of the portfolio, only the brand name and part numbers will change, and we will continue to make available the previous line of VWR Critical Cover products for a minimum of 30 days during this transition.”

“VWR Advanced and Maximum Protection apparel (the products formerly known under the VWR Critical Cover ComforTech™ and Microbreathe™ brands) will experience a change in raw materials.”

“As you are aware, VWR is transitioning our VWR Critical Cover® apparel line to our new line of VWR Protection apparel…. [W]e are writing this letter to certify that for 95% of the products involved in this transition, there will be no change in the manufacturer, manufacturing location, or manufacturing process.” and

A table, preceded by the text, “In addition to the above certification, below is a list of VWR Protection apparel products that will not experience a change in raw materials,” in which “Old Brand Name” trademarks were aligned with “New Brand Name” product lines.

These are really interesting statements from a nominative fair use perspective given that VWR waslicensed to use the marks—apparently exclusively—but APT alleged that the products weren’t “formerly known” as Critical Cover.  Here’s an exercise: formulate statements that would be protected by nominative fair use in truthfully disclosing the situation.

VWR argued that buyer sophistication would preclude confusion, and that APT’s harm wasn’t related to the trademark but rather to its failure to retain other distributors.  Those might both be true, but not on a motion to dismiss, even though APT’s allegations seemed to establish that its customers were sophisticated, e.g., allegations that the process of qualifying protective apparel for use can take significant time and resources.  (From what I infer, then, VWR’s statements were designed to minimize any need for requalification.)
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