patent misrepresentations to prospective dealer could be false advertising under Dastar/Lexmark

Three very similar
cases involving the same plaintiff.

Roof Maxx Technol., LLC
v. Holsinger,
2021 WL 3617153, No. 2:20-cv-03154
(S.D. Ohio Aug. 16, 2021)

Roof Maxx distributes “a
soy-based liquid product that is sprayed on asphalt shingle roofs to extend the
life of the shingles.” It enters into dealership agreements, often geographically
exclusive, around the country. It did so with Holsinger (Shingle Savers) and
included a noncompete. Shingle Savers ultimately terminated the agreement,
alleging misrepresentations by Roof Maxx; RM denied any misrepresentations and
sued, seeking declaratory judgment of the validity of the noncompete clause.

Shingle Savers
counterclaimed, alleging, among other things, false advertising under the
Lanham Act and violation of the Ohio Deceptive Trade Practices Act. It alleged
that RM enticed Holsinger to sign the agreement by falsely representing that
two generations of the product were patented, when it knew the patent lapsed in
2014 due to failure to pay maintenance fees.

The resulting
fraudulent inducement counterclaims were pled with sufficient particularity
under Rule 9(b). They also required justifiable reliance:  

Here, the circumstances involved in the agreement show that Mr.
Holsinger had no reason to doubt the veracity of Roof Maxx’s representation
that the Product was subject to a valid patent. The Feazels have a long history
of starting roofing companies, and Roof Maxx (his most recent roofing company)
is a national distributor of roofing products. Mr. Holsinger, on the other
hand, is a layperson with no previous experience in the roofing industry.
Indeed, Shingle Savers alleges that Roof Maxx and the Feazels specifically
targeted individuals with no roofing or business background for the purpose of
entering into exclusive dealer agreements. Moreover, the alleged
misrepresentations concerned the nature of Roof Maxx’s own roofing Product and
were presented in official marketing material and conversations. Given Mr.
Holsinger’s relative inexperience and the formality in which the
representations were made, it was not unreasonable for Mr. Holsinger to trust
them and rely upon them when he signed the agreement.

RM argued that reliance
wasn’t justifiable because patents are a matter of public record, but the court
declined to extend real estate cases to cover this situation. “[T]he
transaction at issue here revolved around forming a dealership relationship,
and the patent representations constituted an inducement to enter the
dealership agreement. Under these facts, a person ‘is under a duty to
reasonably investigate’ only if he was ‘put on notice as to any doubt about the
truth of representation.’” Because the facts in the counterclaim didn’t suggest
that Holsinger should have known he was being deceived, “he was not obligated
to verify the patent status by independently checking the USPTO website.”

Lanham Act/ODTPA
claims: First, the court declined to hold that Rule 9(b) applied to Lanham Act
false advertising claims, which don’t require fraud.

Did RM misrepresent “the
nature, characteristics, or quality” of its product? Its Prospective Dealer
Guide represented that “Roof Maxx has worked closely with our strategic
partners … to develop an optimal formula….The product formula is patented.” In
a sales pitch:

In 2016, Roof Maxx entered into a worldwide exclusive licensing
agreement … for the rights to the patent covering the Roof Maxx product. … Click
HERE to review the patent.

In an effort to continually bring value to our Dealers and their
customers (property owners), Roof Maxx has entered into another worldwide
exclusive licensing agreement … for a new and improved Roof Maxx formulation. This
formulation is the subject of a separate patent filed in 2017
and is
currently in the final phases of testing. [patent application number]

Despite Roof Maxx’s best efforts to provide superior products
which are covered by various patents
, the business opportunity should be
evaluated on the basis of the underlying value of the Roof Maxx product, Roof
Maxx’s world-class Onboarding and Success teams and resources, national brand
recognition, and the other systems and resources provided to the Dealer as part
of the Roof Maxx opportunity.

However, RM petitioned
the PTO to accept a late payment of the maintenance fee and was rejected, and
thus was allegedly “keenly aware” that the original patent lapsed at the end of
2014, and the PTO rejected the patent application for this second-generation
Product numerous times.

The court thought that
patent status was part of the covered “nature, characteristics,
qualities, or geographic origin” of the product. Dastar doesn’t exclude
coverage. The defendant in Dastar was in fact the origin of the products
it sold, so there was no misrepresentation of origin. Thus, the Lanham Act does
not protect a company against a rival that “steal[s] its product ideas to
manufacture a rival, facsimile product,” but Dastar didn’t cover “misrepresentations
that its Product was subject to an active, valid patent,” which weren’t the
same thing as claims about who originated or authored a product. Filing for a
patent isn’t a Lanham Act-covered act, but falsely representing patent coverage
on marketing materials and in meetings with prospective dealers” is.
This allegedly created the impression that RM was the exclusive source of the
product and that exclusive dealers would face little or no direct competition. “As
such, these statements go directly to the Products’ nature, characteristics,
and qualities.” More generally, Section 43(a) of the Lanham Act “does reach a
seller who, by exaggerating the scope of a patent, creates a false impression
that he is the exclusive source of the product.”

Was this commercial
advertising or promotion? RM argued that it wasn’t in competition with Lexmark,
but most of the cases it cited preceded Lexmark, which removed any
competition requirement, and the others failed to grapple with Lexmark. Without
discussing whether Shingle Savers should be treated as a customer of RM—who is
not within the Lanham Act’s zone of interests—the court found that Shingle
Savers sufficiently pled “damages to its commercial interest in sales and
business reputation.” Individual RM officers were also sufficiently alleged to
be personally liable given that they allegedly were aware that the patent
lapsed and participated in making the challenged marketing materials.

Roof Maxx Technol., LLC
v. Tabbert,
2021 WL 3617158, No. 2:20-cv-03156
(S.D. Ohio Aug. 16, 2021); Roof Maxx Technol., LLC v. Rourk, 2021 WL 3617154,
No. 2:20-cv-03151 (S.D. Ohio Aug. 16, 2021)

In addition to the claims discussed above, defendants/counterclaimants
also alleged that RM breached the parties’ agreement by publishing disparaging
statements. The agreement said, inter alia:

The parties jointly
agree to not post for public consumption, any disparaging remarks, comments,
accounts, or other relationship detail.
Such disagreements shall be
first submitted to a licensed Mediator/Arbitrator for informal
adjudication….Any violation of this paragraph is a material breach, and
breaching party will remove, caused to be removed, or authorize removal, of
such offending public statements.

RM told a group of RM
Certified Dealers:

Recently, there have been some questions regarding why certain
Roof Maxx dealers terminated their dealerships. Roof Maxx and these dealers
have disagreements regarding various practical and legal matters pertaining to
those dealerships and their related activities.

Roof Maxx and those dealers engaged in good faith attempts to
informally resolve these issues. Initial discussions failed to resolve the matter.
In the meantime, Roof Maxx has filed lawsuits in Franklin County, Ohio,
pursuant to the terms of the respective EDAs, to have these matters adjudicated
according to law.

Roof Maxx has filed these actions to preserve the integrity of the
industry and brand that all our dedicated dealers have built (and continue to
build), as well as ensure that the time, dedication, and resources that you
have committed your success to are not diluted….

Roof Maxx respects the legal process and will not comment on or discuss
pending litigation.

The counterclaimants
argued that this amounted to an assertion that they were a threat to the integrity
of the industry and brand. [I find this statement innocuous, unlike the other
alleged activity.] The court disagreed: it didn’t specify them as one of the
dealers, and thus didn’t disclose details in contravention of the agreement.

from Blogger

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