informal representations to competitor’s customers can violate Lanham Act

Display Works, LLC v. Pinnacle Exhibits, Inc., No.
WMN-15-2284, 2015 WL 7454084 (D. Md. Nov. 24, 2015)
The parties entered into a nondisclosure agreement in
connection with a potential acquisition by Pinnacle.  Pinnacle agreed that it would, among other
things, refrain from directly or indirectly soliciting for employment any
employee of Display Works for two years. Display Works alleged that Pinnacle
breached the agreement by hiring multiple employees during the two year period.
Further, Pinnacle allegedly falsely told Display Works’ customers that it was
reorganizing, portraying it as bankrupt or financially distressed in an attempt
to lure customers away.  
The court found that “hiring multiple employees of plaintiff
during the prohibition period,” does not, in and of itself, constitute a breach
of contract, since the contract didn’t outlaw hiring, only certain types of
solicitation.  Its terms explicitly
allowed Pinnacle to hire employees who contacted Pinnacle on their own
initiative; whose employment with Display Works was terminated for at least
three months; or who responded to an advertisement or general solicitation not
directed at employees of Display Works. The complaint failed to allege
solicitation outside those boundaries.
As for Lanham Act false advertising, Pinnacle argued that
the complaint didn’t allege “advertising or promotion,” because the complaint
alleged only that Pinnacle told certain Display Works customers that Display
Works was “reorganizing” to lure them away, and that Pinnacle disseminated
false rumors about Display Works. 
Informal representations to a competitor’s customers can constitute
“promotion,” depending on the size and structure of the market; further inquiry
was not appropriate on a motion to dismiss.
In Maryland, injurious falsehood requires: (1) a falsehood
which tended to disparage plaintiff’s title to its property, or its quality, or
to its business in general, or some element of its personal affairs; (2) actual
malice or with reckless disregard for the truth; and (3) the falsehood played a
material and substantial part in inducing others not to deal with the plaintiff,
and that as a result the plaintiff suffered special damage. Though Pinnacle
argued that Display Works failed to allege the precise content of the statement
or its context, the court found that the allegations were sufficient to put
Pinnacle on notice. However, the allegations of special damages weren’t pled
with sufficient particularity—Display Works needed to plead either particular
named lost customers or a general diminution of business and extrinsic facts
showing that such special damages were the natural and direct result of the
false publication, so the claim was dismissed.

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