Rebecca Tushnet

Kehoe Component Sales Inc. v. Best Lighting Products, Inc.,
— F.3d —-, No. 14–3347, 2015 WL 4635824 (6th Cir. Aug. 5, 2015)

 

Best asked Kehoe (“Pace”) to make specialized
lighting products for Best.  After Pace
made enough units to fill Best’s product orders, it used the same molds to make
thousands of additional units of exactly the same products. Pace then sold
those “cloned” products under its own name to several of Best’s customers.  Unsurprisingly, a lawsuit resulted.  The district court found Pace liable to Best
for misappropriation of trade secrets under Ohio law, “reverse passing off” and
false advertising in violation of the Lanham Act, breach of contract, tortious
interference, conversion, and breach of warranties, and awarded compensatory
and punitive damages, attorneys’ fees, and injunctive relief.  The court of appeals overturned everything
but the breach of contract and tortious interference liability.

 

Before Best contracted with Pace, Pace had never
manufactured any emergency lighting products, so Best’s founder spent a
significant amount of effort instructing Pace on how to make the molds
necessary to make the specific products that Best sought.  At first, there was no contract barring Pace
from competing with Best. However, in 2004, he emailed Pace’s president
complaining that Pace not only had begun selling products that were identical
to the products that it made for Best, but also that Pace had begun selling
them to Best’s established customers.

 

In 2005, Best then complained that some products Pace made
for it were defective.  The parties
negotiated and Pace transferred some of the molds used to make the products in
question to Best.  In 2006, Best refused
to pay for a substantial number of products that Pace had delivered to it, and
Pace stopped shipments to Best. The parties then negotiated a one-year supply
agreement under which Best agreed to pay its outstanding debt to Pace and to
purchase a minimum of $7 million worth of products from Pace annually.  Pace agreed to a variety of provisions,
including to warrant the quality of the goods, not to “use any [molds] owned by
Best other than for the manufacture of products for sale to Best,” to “assign[
] to Best all designs and intellectual property … for products developed or
to be developed at or by Pace for Best,” and neither to “sell emergency lights
or exit signs nor ballasts, nor solicit sales of these items to any party in
North America without Best’s prior written consent.”

 

Pace received several purchase orders for “cloned” products
from North American companies before this agreement came into effect, and it
shipped products to fill these orders after the agreement came into effect.  Best continued to complain about the quality
of Pace products, and by 2008, Best told Pace that “we are at a point where we
both know we will not be doing any more business.” When the relationship ended,
Pace had all the molds that had been used to manufacture both Best’s products
and the cloned products, and Best owed Pace almost $900,000 for products
delivered but not yet paid for.

 

In 2008, Pace sued Best for breach of contract for failing
to pay. Best requested a setoff of damages for breach of warranty and
counterclaimed for breach of contract, tortious interference, misappropriation
of trade secrets, conversion, and fraud. The case was ongoing when, two years
later, Pace sued Best for misappropriation of trade secrets and tortious
interference.  Best counterclaimed with
its existing counterclaims and also counterclaims under the Lanham Act and for
patent infringement (the last of which was dropped).

 

After finding for Best (though finding it liable for breach
of contract), the district court awarded Best roughly $1.1 million in
compensatory damages, $200,000 in punitive damages, and $850,000 in attorneys’
fees, as well as an injunction barring Pace from making the cloned products and
from using or referencing products that “originated with Best” in its marketing
materials.

 

First, the court of appeals found that the trade secret
claims were time-barred. Ohio’s Uniform Trade Secrets Act (OUTSA) requires that
an action must be commenced within four years after the misappropriation is
discovered or by the exercise of reasonable diligence should have been
discovered. A continuing misappropriation constitutes a single claim.  Best learned of the sales to Best’s customers
in August 2004, but didn’t counterclaim under OUTSA until October 2008.  The district court held that Pace
misappropriated anew when it brought products to market after 2007.  But this was an improper “property-based
theory of trade-secret misappropriation, under which each successive use of a
trade secret is an additional wrong.” 
The limitations period runs from discovery/reasonable discovery, so the
claims were time-barred.

 

The district court also erred by finding that Pace engaged
in false designation of origin via reverse passing off, because of Dastar. 
The district court reasoned that Pace misrepresented its cloned products
by stating that they originated with Pace rather than with Best. But the cloned
products did originate with Pace. “Only
by denominating the cloned products as ‘Best’s products’ could the district
court find that Pace was misrepresenting someone else’s products as its own.”
But Dastar barred that interpretation
of “origin.” (Citing Mark P. McKenna, Dastar’s Next Stand, 19 J. Intell. Prop.
L. 357, 374 (2012) (“A trademark cannot be taken to indicate anything about the
origin of the intellectual creation embodied in that good.”)  “Thus, reselling goods that have been
manufactured by someone else carries different consequences than making your
own copies of those goods and marketing them under your own mark.”

 

Best argued that it “commissioned or assumed responsibility
for (‘stood behind’) production of the physical product,” Dastar.  But that assumed a
trademark owner who allowed the use of its mark on a product, and Best never
claimed to own a relevant trademark in the Pace-branded cloned products.  More fundamentally, Best neither
“commissioned” nor “assumed responsibility” for the cloned products. “As
tangible objects, the cloned products are in every respect Pace’s alone—Best
would much rather that they never have been produced at all.”  Even assuming that Best’s cited cases, which
allowed a reverse passing off claim when a defendant markets another’s product
that’s been only slightly modified and then relabeled, survived Dastar, that wasn’t the situation here.

 

And here’s some useful language, though it’s sad that this
needs to be said: “To the extent that the district court’s liability finding
stemmed from an intuition that the Lanham Act prohibits wholesale copying, that
intuition is misplaced. Protection against imitation and mimicry ordinarily is
found in patent and copyright law, not in the Lanham Act.” It doesn’t matter
whether Best created the market for these goods.

 

The false advertising claim failed for the same
reasons.  The district court found that
Pace’s use of “Best products” in Pace’s own catalogs was a misleading
representation of the products’ origin and thereby violated §43(a)(1)(B).  Even if false advertising were an appropriate
head of liability, we already know that “origin” only refers to the maker of
the tangible object under Dastar.  But regardless, §43(a)(1)(B) covers a false
“designation of origin” or other factual misrepresentation about “the nature,
characteristics, qualities, or geographic origin” of the goods or services. Geographic
origin wasn’t at issue, and a misrepresentation about the source of ideas
embodied in a tangible object “is not a misrepresentation about the nature,
characteristics, or qualities of the object.” 
The characteristics of the good itself—its properties or
capabilities—must be implicated.  The
only falsity here was the misrepresentation that Pace, rather than Best, was
the intellectual origin of the products, and that’s not enough.

 

However, the court of appeals affirmed the finding of breach
of contract, including breach of a noncompete clause.  Pace retained the molds pursuant to its valid
lien for unpaid deliveries of products, so it wasn’t liable for conversion. But
it was liable for tortious interference with established business relationships
and also tortious interference with business expectations.  Pace’s breach of confidence—coupled with the
breach of a specific contractual promise intended to shore up that confidence—was
a sufficiently “improper” means of competition to give rise to liability for
tortious interference.

 

Remand for this and an issue about the breach of warranty
counterclaims; the court of appeals emphasized that the district court was not
barred from awarding “the damages and fees (including punitive damages and
attorneys’ fees, to the extent that they are available) merited by the parties’
conduct.”