allegedly perfidious salesman protected from passing off liability, but might have engaged in false advertising

Burton v. Label, LLC, No. 15-CV-5793 (VSB), 2018 WL 4759735
(S.D.N.Y. Sept. 30, 2018)
Label, founded by the Millers, sells bespoke and custom
men’s clothing throughout the United States. Schwartzman (for whom Burton is
the trustee) worked for Label as Vice President of Sales. While employed at
Label, he established his own bespoke tailoring and made-to-measure men’s
clothing company, named Trusgan, and thereafter provided his services to Label
as an employee of, and through, Trusgan. Label hired a company called ADP to
automate its employee payroll system, and began paying Trusgan for
Schwartzman’s services through ADP. Allegedly, as a result of an error, ADP
began paying Schwartzman’s salary twice through two payroll accounts, and
blamed him when it was discovered (after he told Label he was leaving). The
Label defendants allegedly began a “campaign of calumny” accusing Schwartzman
of fraud and embezzlement, and telling customers that Schwartzman’s claim that
he could offer Label’s products at a cheaper price is false because they’d
received commitments from their suppliers not to do business with Schwartzman.
Label counterclaimed, alleging various claims against
Schwartzman, including violation of the Lanham Act. The Millers allegedly began
receiving customer complaints about Schwartzman’s quality of service, and he
allegedly tried to steal customers for his own side business during Label work
hours and using Label resources. He allegedly surreptitiously contacted Label
clients, misrepresented that he was placing orders for them through Label, and
instead placed the orders through his own company. In one case, a supplier
asked whether the “orders were still under Label,” to which Schwartzman
replied, “all these orders are under me not Label,” and “I was only sending
them to you because I can’t risk them accidentally being sent through Label.” A
client allegedly complained to Label about the fit of the order, delivery
times, and customer service, believing that Label had been responsible.
Schwartzman allegedly told Label customers that he was opening up his own business
and that “he could continue to service these customers at this new business
where he would provide better customer service and pricing than Label, while
offering the same exact product.” The counterclaims told the alternate story in
which the salary double-dipping was indeed Schwartzman’s doing.
After Schwartzman left Label, Label allegedly discovered
that Schwartzman “represented … that he could easily handle former Label
clients through Trusgan, because Schwartzman had these Label clients’
measurements and other information regarding their previous orders from Label”
and that “he can beat LABEL’s pricing … by 20% to 30% while offering the
exact same product, from the same manufacturers and using the same fabrics.”
The Lanham Act counterclaims had two theories: first, while
employed by Label, Schwartzman sold what he represented to be Label products
but were not in fact Label products; second, after leaving Label, he told
customers that he could offer the same product, but cheaper. The court rejected
both claims on the pleadings.
False association: As an example, Schwartzman placed an
order with a Label supplier, explaining that the order was for Schwartzman, not
Label. Schwartzman’s client subsequently mistakenly complained to Label about
“the fit of the order, delivery times, and customer service.” Assuming that
Schwartzman was indeed using his position as a Label salesman to sell items
represented to be Label goods by placing orders with Label suppliers, “he was
simply unlawfully pocketing proceeds that belonged to his employer; he was not
falsely representing the origin of his own goods. Selling trademarked goods
under its trademarked name is not a violation of the Lanham Act.” Basically first sale, except not quite.
Label argued
that it offered not just clothes, but customer service, but that theory didn’t
work here. While “distribution of a product that does not meet the trademark
holder’s quality control standards” may result in devaluation of the mark and
thus not a genuine product, the trademark holder must allege that “(i) it has
established legitimate, substantial, and nonpretextual quality control
procedures, (ii) it abides by these procedures, and (iii) the non-conforming
sales will diminish the value of the mark.” Here, the quality-of-service
argument “makes no sense in light of the fact that Schwartzman was the Vice President
of Sales at Label, making the quality of service he provided one and the same
as the quality of service Label provided.” The complaint even alleged that
customer gripes about “the fit of the order, delivery times, and customer
service,” were of the type that “had become routine with respect to
Schwartzman’s work.” “Thus, there is no distinction between the goods
Schwartzman sold as Label goods and actual Label goods supplied under
Schwartzman’s watch.”
The false advertising claim had more purchase in theory, but
was inadquately pleaded. First, commercial advertising or promotion wasn’t
pled, merely “isolated disparaging statements” that “do not have redress under
the Lanham Act.” Label “makes no attempt to define the relevant market, but
claims to have over 750 clients,” and didn’t specify the number of the clients
Schwartzman allegedly contacted. 
Likewise, the allegations of falsity would need more specificity to
proceed; Label’s briefing indicated that it could replead to state that
Schwartzman lacked access to their fabrics and suit styles.

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