Dastar doesn’t bar allegedly false advertising about source of planned development services

LStar Development Gp., Inc. v. Vining, 2021 WL 4344891, No. 5:20-CV-184-FL
(E.D.N.C. Sept. 23, 2021)

LStar, which manages and sells development communities, sued
defendants for trademark infringement, false designation of origin, and false
advertising under the Lanham Act, as well as state law claims for unfair and
deceptive trade practices, common law unfair competition and infringement, bad
faith, breach of fiduciary duty and conflict of interest, misappropriation of
trade secrets, breach of contract, tortious interference with contract,
tortious interference with prospective economic advantage, constructive trust,
trespass to chattels, conversion and accounting, money had and received, unjust
enrichment, and civil conspiracy. Many of these claims are dismissed without
prejudice.

When LStar was founded, its lawyer (defendant Vining) allegedly
implemented a scheme to take advantage of the founder, Corkum, persuading him
to issue Vining twenty percent of plaintiff’s stock and appoint him as the
vice-present, secretary, treasurer, and director.  Other individual defendants were high-level
employees with employment agreements covering trade secrets. They allegedly wrongfully
ousted Corkum and, when he asserted his rights, incorporated Oak City to
continue the business, allegedly with LStar’s equipment, money, and
intellectual property. For example, defendants allegedly issued a development
proposal to the City of Glenwood Springs, stating that Oak City was well
capitalized and had developed three real estate developments, which were
actually capitalized and developed by LStar.

The proposal allegedly incorporated identical text and
pictures that LStar used to promote two other developments.

Defendants’ letter

allegedly copied text from LStar

Trademark infringement: LStar never specified what its
trademarks or service marks were. It argued that defendants copied, but didn’t
identify a particular word, name, or symbol, or combination thereof, within the
highlighted paragraphs, as the alleged trademark(s). Not every word on a label
or ad is a mark. LStar didn’t plead its own trademark use. Although “LStar
Ventures” on a website could qualify, there were no allegations that defendant
used that term.

False advertising: This one survived: By listing LStar
developments under the heading “Oak City Representative Developments,” “the
proposal necessarily implies that defendant Oak City developed those
properties.” This was unambiguous and literally false, and likely material
given its centrality. The court analyzed whether it was placed in interstate
commerce (yes), but not whether a single proposal constitutes “commercial
advertising or promotion,” which seems like a much bigger problem for the
claim.

Indeed, the proposal was submitted on behalf of Oak City in
partnership with another entity, and included biographies of the individual
defendants, which even “suggests a plausible inference of defendants’ knowing
or intentional participation in drafting and submitting the proposal, which is
sufficient to state a claim for contributory false advertising.”

What about injury?  “[H]ere
it can be reasonably inferred that defendants’ alleged false statement, taking
credit for the development of plaintiff’s projects in order to obtain the
business of a prospective client, is likely to harm plaintiff, either by direct
diversion of sales, a lessening of goodwill, or both.”

False designation of origin: 
Failed to state a passing off claim, but Dastar didn’t bar a
reverse passing off claim. “Thus, the plaintiff in a reverse passing off case
must plead and prove only that the work ‘originated with’ him—not that he used
the work (which may or may not be associated with a mark) in U.S. commerce.” [“Work”
is such a seriously problematic word to use here—not the court’s fault, it’s
quoting Belmora—because it implies that the Lanham Act should regularly
be involved in copyright-related claims.] LStar alleged that it financed and
developed the relevant projects, “allowing the inference that it is the origin
of these real estate development services.” [Some service/product confusion
also going on here.] “Moreover, by indicating that defendant Oak City developed
the real estate projects, defendants allegedly falsely designated the origin of
real estate development services.” And LStar plausibly alleged confusion and
harm: if there really is reverse passing off, then confusion about origin is
inherently likely, and it deprives the originator of the advertising value/goodwill
of the product.

However, Dastar precluded any claim based upon
defendants’ alleged plagiarism of plaintiff’s texts and pictures.

For similar reasons, the state unfair and deceptive trade
practices claim survived, though trade secret/tortious interference claims were
dismissed without prejudice.

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