taking customer list as conversion; false claims of official investigation as false advertising

Yeti Enters. Inc. v. Tang, 2017 WL 3478484, No. 13-cv-01203
(D. Or. Aug. 14, 2017)
This is a tangled story that illustrates how false
advertising claims can arise from failed business agreements.  Plaintiff NPK sued Nicholas Jackson and
Jessica Lilga for conspiring with Jim Heagle to eliminate NPK from the
distribution market for frequency-water products.  NPK contracted with Yeti to market and
distribute Yeti’s product known as frequency water, which appears to be sold as
a better way of preventing plant mildew/mold than regular water.  NPK created three plant washes, Mighty Wash,
Power Wash, and PM Wash, all of which contained and were marketed as containing
frequency water.
Jackson is a part owner of NPK, though his relationship with
NPK was bad for a while.  Lilga initially
took over Jackson’s responsibilities as VP of sales when Jackson was
incarcerated, though that relationship was also difficult and ended after three
weeks.  As Jackson continued to negotiate
his exit from NPK, he sent Heagle a draft copy of a proposed NPK ad that
depicted a new series of products: “They’ve been lying to you. I mean, sitting
there telling you they weren’t going to do other products. They already did….
They’ve got their whole nutrient line….” Heagle moved to terminate Yeti’s
distribution agreement with NPK; the termination letter said that the “last
straw” was the draft ad.  Yeti and NPK
worked out an agreement for continued supply for a year, in exchange for which NPK
would turn over to Yeti certain frequency-water-related trademarks that NPK had
registered in its name.  This agreement
didn’t work out; the parties sued each other in state court.  NPK also sued Jackson in state court; Jackson
countersued.
By this time, NPK’s distribution agreement with Yeti had ended
and NPK had relaunched its product line without Yeti’s frequency water. Jackson
began working with Left Coast, a former distributor of NPK’s products, to
launch a competitive product line using Yeti’s frequency water. Jackson
promised to supply Left Coast with a list of 1300 Sunlight stores; Sunlight was
a major NPK customer.  Left Coast then
sent emails to NPK’s customers stating that it had “decided to discontinue
distributing products from NPK industries” because NPK’s new plant-wash line,
which no longer contained frequency water, was susceptible to molding.  It also stated that Left Coast would now
“provide the original frequency altered formulations and will be marketing
under the trade names Mega Wash, White Wash, and Freq Wash….” The emails,
plus the new Left Coast product line, halved NPK’s sales, which had already
been halved earlier in the year due to the loss of Yeti’s frequency-water
products.  
In this litigation, NPK sued Jackson for fraudulent
misrepresentation, violations of the Lanham Act, common law trade libel,
conversion, and breach of the parties’ nondisclosure agreement.
Fraudulent misrepresentation requires showing, by clear and
convincing evidence: (1) a material misrepresentation that was (2) false, (3)
made with knowledge of its falsity or with ignorance of its truth, (4) with the
intention that it be acted upon by the party claiming fraud, and (4) that the
acting party in fact justifiably relied on the material misrepresentation, (5)
suffering an injury as a result. Typically, “mere silence is not fraud,” but
“[w]here the law imposes a duty on one party to disclose all material facts known
to him and not known to the other, silence or concealment in violation of this
duty with intent to deceive will amount to fraud….” NPK argued that Jackson
“had a special relationship with [NPK] which included the duty to disclose to
[NPK] all information which could damage its business,” including his
assistance in bringing competitive products to the market and assistance in
cutting NPK out of the plant-wash distribution market.
The court disagreed. 
Members of an LLC who aren’t managers, as Jackson wasn’t once he was
incarcerated, owe no duty to disclose information that could damage its
business.  As for fraudulent
misrepresentation through active concealment, the evidence didn’t show active
concealment—“Jackson repeatedly attempted to leave NPK and made his intentions
to do so quite clear.” His failure to disclose private business negotiations was
distinct from active concealment, which requires the fraudster to take steps
that eliminate an opportunity to discover the truth, leading the victim to rely
on the falsity.
Lanham Act claim: Jackson allegedly told NPK’s customers that
NPK’s plant-wash products were susceptible to molding; that their products no
longer contained frequency water; that frequency-water products would no longer
be distributed by NPK; that Lest Coast and other wholesalers discontinued
distribution of NPK’s products; and that Yeti was releasing a “new and improved
product line….” Further, Jackson allegedly aided in distributing e-mails
falsely claiming NPK was being investigated and going to be shut down by the
EPA, IRS, DEQ, and other agencies.
NPK easily showed harm from these statements, and the court
was convinced that Jackson participated in their distribution.  However, NPK could only show falsity for two
statements.  (That conclusion would seem
to require a re-evaluation of the harm question—can NPK show harm flowing from
the false statements specifically?)  It
was true that NPK’s products no longer contained Yeti’s frequency water at the
time the statement was made; it was true that Left Coast and others
discontinued distribution of NPK’s products; it was true that Yeti was
releasing a new-and-improved product line.
The statements that NPK was being investigated by the EPA,
IRS, DEQ, and other agencies were not literally false—NPK’s witness testified that
NPK was being investigated, though its position was that Jackson and Left Coast
had prompted their investigations by providing false information.  However, the statements “were likely to, and
in fact did, mislead or confuse consumers, as these statements implied the
agencies were going to shut down the company.” The “susceptible to molding” claim
was also rebutted at trial, and thus proved false.  These statements were also material: molding would
indicate that the products didn’t work as intended, and false statements that
NPK would be shut down for regulatory noncompliance “certainly raised the
presumption that its products or business was operating improperly or outside
the law.”  Thus, NPK proved a Lanham Act
violation.
Common law trade libel: the court found that NPK didn’t prove
that Jackson made or aided in the distribution of the two false statements
maliciously or with knowledge that they were false. In fact, he appears to have
believed his own claims (drunk his own frequency water?) that molding would be
a risk without frequency water.  This belief
also meant he didn’t act with malice.  Though
he did “demonstrate a complete disdain for NPK,” that contempt isn’t malice.  The same was true for statements involving
agency investigations into NPK.
Jackson was also liable for conversion for getting Lilga to download
NPK’s customer database. The court doesn’t address tangible/intangible property
as the subject of conversion, instead holding that Jackson’s “exercise of
control over [the property] constituted a serious interference because it
severely impacted the economic value of the database.” But NPK didn’t provide an
accurate assessment of the market value of any of the information converted.  However, “if the property has no market value
at the time and place of conversion, either because of its limited product, or
because it is of such a nature that there can be no general demand for it, and
it is more particularly value to the owner than any one else, then it may be
estimated with reference to its value to him.” As secret information, the database
could be evaluated in this way.  (I
believe that some states wouldn’t allow trade secret liability standards to be
circumvented in this way, though it sounds as if this information might well
have constituted a trade secret as well.) 
The customer database, while valuable, was only part of the results of
NPK’s marketing campaign and couldn’t represent the entire value of NPK’s
goodwill, which included other elements such as name recognition. Still, its
customer relationships were “clearly an integral part of the value of its
goodwill.” Thus, the court would factor the conversion into the damages award.
NPK also argued that Jackson breached the parties’
nondisclosure agreement by distributing the customer lists.  There was no question that he breached the
express terms of the contract by disclosing NPK’s database of customer lists
and by disclosing a proposed ad.  Jackson
didn’t show that NPK failed to substantially perform any part of the its side
of the agreement. And NPK suffered ascertainable damages that were foreseeable
by the parties at the time they entered into this agreement, so Jackson was
also liable for this breach.
Civil conspiracy and aiding and abetting: because NPK didn’t
show any other torts beyond conversion and violation of the Lanham Act, and
because Jackson was already liable for those, he couldn’t be independently liable
on those claims.

Damages: “[I]f the plaintiff proves with the requisite
degree of certainty that the defendant’s violative actions have resulted in
damage, the actual amount of damages need not be proved with exact certainty.”  That was the case here.  “NPK went from sales of $3 million in 2012
and a profit of around $125,000 to virtually no revenues and strictly losses in
the years since.” Likewise, NPK could recover for lost goodwill, even though
“such damages are not capable of exact ascertainment.”  The court found damages of a little under
$166,000. However, the end of Yeti’s distribution agreement was also
responsible for NPK’s lost goodwill, and so the court cut the damages in half,
for which Jackson’s liability was partly shared with Lilga.  

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