Rebecca Tushnet

Fair Wind Sailing, Inc. v. Dempster, Nos. 13-3305 & 14-1572, — F.3d – (3d Cir. Sept. 4, 2014)

Fair Wind, a sailing school, sued Virgin Island Sailing School (VISS) and its co-founder Scott Dempster, alleging trade dress infringement and unjust enrichment from VISS’s alleged copying of aspects of Fair Wind’s business model.  The court of appeals upheld the dismissal of the claims, but reversed the award of fees to the extent that the award covered the Lanham Act claim; the district court didn’t determine whether this case was “exceptional.”

The allegations: Fair Wind’s St. Thomas school uses only catamarans, and hired Larry Bouffard as a captain and sailing instructor with a noncompete clause covering 20 miles/2 years.  Bouffard was popular; he introduced Dempster to Fair Wind as a potential instructor and captain. Fair Wind took him on for a 2-week probationary period, was dissatisfied, and didn’t hire him.  Bouffard swiftly resigned and opened a directly competing school, in violation of his noncompete agreement.

Fair Wind alleged that VISS copied its school in several ways: (1) the use of 45-foot catamaran; (2) the same teaching curriculum and itineraries; (3) the same procedures for student feedback; (4) the same website marketing; (5) a picture of a catamaran belonging to Fair Wind on the VISS website; (6) “student testimonials” on the website from students who took classes with Dempster while he worked for Fair Wind; and (7) the website mentions Bouffard’s experience teaching “[o]ver the last year,” presumably in reference to his time teaching at Fair Wind.  (When thinking about fees, compare what the 7^th Circuit said about the anticompetitive nature of suing a former employee for conduct that is actually legal.  Extraordinary?)

The district court found that Fair Wind failed to define its alleged trade dress, and that, to the extent that the features at issue could be trade dress, they weren’t alleged to be inherently distinctive or to have secondary meaning; moreover, the features were functional.  Nor did the complaint properly allege that VISS was enriched, for purposes of unjust enrichment.

The court of appeals first examined the trade dress claim.  Copying isn’t always barred; often it’s a good thing.  In an unregistered trade dress case, the plaintiff has the duty to “articulat[e] the specific elements which comprise its distinct dress.”  This ensures that the plaintiff isn’t seeking to protect an unprotectable style, theme or idea.  But even before assessing protectability, “a district court should scrutinize a plaintiff’s description of its trade dress to ensure itself that the plaintiff seeks protection of visual elements of its business.”  While any “thing” that dresses a good can be trade dress, it must “dress” the good.  “That is, the alleged trade dress must create some visual impression on consumers. Otherwise, there is simply no ‘dress’ to protect.” 

Comment: I understand what the court is trying to do, but the way it’s expressed it risks conflict with Qualitex’s condemnation of ontological distinctions/Two Pesos’ statement that trade dress “… involves the total image of a product and may include features such as size, shape, color or color combinations, texture, graphics, or even particular sales techniques.”  (If you track down the Two Pesos reference for “particular sales techniques,” however, it’s a case about protecting the Cabbage Patch Kids gimmick of including a “birth certificate” with each purchase.  I myself think that’s functional and suspect the case would come out differently today, but regardless it does still involve a technique that can be seen rather than, say, a sequencing of sales come-ons.)  

 Maybe the court means that smells and sounds can be trademarks, but they can’t be trade dress.  It might be better to say, instead of that trade dress must be visual, that it must be concrete or form a perceptible whole. And here I’ll speculate wildly: given standard human perception, it might be hard for us to unify a sound and a visual; when secondary meaning does develop in one, we may simply expect the other rather than require both in order to perceive an indicator of source–e.g., the NBC chimes and the NBC peacock, which travel together but are probably separate marks.  In any event, as it turns out, given how expansive our law is, explaining what’s wrong with Fair Wind’s claim is a bit difficult other than calling it an idea.

Fair Wind asserted trade dress in “the combination of its choice to solely employ catamaran vessels” and its “unique teaching curriculum, student testimonials, and registered domain name,” which “all combine to identify Fair Wind’s uniquely configured business to the general public.”  (The complaint didn’t actually allege confusing similarity of VISS’s domain name to that of Fair Wind.  Thus similarity in domain names couldn’t play a part in the court’s analysis, and wouldn’t alter the court’s conclusion about Fair Wind’s failure to plead a cognizable trade dress even if it had been properly pleaded.)

“By its own terms, … Fair Wind’s ‘trade dress’ is simply a hodgepodge of unconnected pieces of its business, which together do not comprise any sort of composite visual effect.”  Several of the claimed elements, such as the curriculum, weren’t clearly visual aspects at all.  Copying a business does not give rise to a trade dress claim.  In a footnote, the court stated that a curriculum could be part of a trade dress “if part of, for example, an overall look of a schoolhouse or a website, could not be part of a business’s trade dress” (citing a menu case).  But the complaint didn’t allege that Fair Wind’s curriculum created any kind of visual impression. “It is not even clear from the complaint that Fair Wind’s curriculum is something that can be seen.”

Even as to its website, the complaint didn’t explain what specific elements of Fair Wind’s website comprised a distinctive trade dress or allege that its site had any distinctive ornamental features. It didn’t allege any facts at all about the substance of its own website.  The complaint alleged that VISS’s website had “a picture of a Fair Wind catamaran, as well as student feedback mechanisms, curriculum, and itineraries identical to those used by Fair Wind.” But the fact that VISS copied “aspects of Fair Wind’s business” and put them on its own website said nothing about the content or look of Fair Wind’s website.  The complaint failed to give VISS adequate notice of the overall look Fair Wind wished to protect.

Anyway, even if Fair Wind had adequately alleged an overall design, its alleged “trade dress” was clearly functional.  “Student feedback procedures, catamarans, teaching itineraries, and curriculum all affect the quality of Fair Wind’s business. They play a critical role in the consumer demand for Fair Wind’s services, rather than merely identifying Fair Wind as the source of the sailing instruction.”  Fair Wind cited cases holding that functional elements can sometimes be combined into a nonfunctional trade dress.  Comment: These cases are shaky to begin with, but to the extent that the claimed elements aren’t integrated but are just parts of the business, it’s hard to imagine that this result would ever be right.  Indeed, the court said, “Fair Wind has not explained how the identified functional elements achieve a nonfunctional ‘composite tapestry of visual effects.’”  So here’s the interaction with the visual again.  Fair Wind didn’t allege a distinctive appearance at all.

Then the court of appeals upheld the dismissal of Fair Wind’s unjust enrichment claim; Fair Wind didn’t properly plead that VISS had been enriched. Although allegations that VISS “accrued additional profits by poaching Fair Wind’s proprietary information and trade secrets” might have been enough to satisfy Rule 8, Fair Wind didn’t even allege that.

The district court awarded attorneys’ fees to VISS without attempting to segregate which fees were accrued defending the federal claim, and it also didn’t make a finding that the territorial and federal law claims couldn’t be segregated.  It should have done so, since Lanham Act fees can only be awarded in “extraordinary” cases, while Virgin Islands law allowed the award regardless.  (The court declined to decide now whether, if the claims were inextricably intertwined, an award covering the whole shebang would be appropriate, but it expressed some skepticism.  Usually courts have to make some effort to segregate claims even if the division won’t be perfect, and the court didn’t want to encourage time entries to be obfuscated.)

VISS argued that the claims here were exceptional.  Previous Third Circuit case law required a district court to find that the losing party engaged in culpable conduct relating either to the substantive violation (obviously only for losing defendants) or to the conduct of the litigation, such as willfulness or bad faith. If so, it then had to assess exceptionality.

Octane Fitness, LLC v. Icon Health & Fitness, Inc., 134 S.Ct. 1749 (2014), changed the analysis for the Patent Acte.  Octane explained that “an ‘exceptional’ case is simply one that stands out from others with respect to the substantive strength of a party’s litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated.”  Thus, culpability isn’t necessarily required; an “exceptionally meritless” claim might suffice even without “bad faith, fraud, malice, [or] knowing infringement.” Octane also noted that the Lanham Act fee provision is “identical” to the patent law fee provision, sending a “clear message” that its rule also applied to the Lanham Act.

So, from now on, Octanegoverned the Lanham Act as well.  According to the Third Circuit: “[A] district court may find a case ‘exceptional,’ and therefore award fees to the prevailing party, when (a) there is an unusual discrepancy in the merits of the positions taken by the parties or (b) the losing party has litigated the case in an ‘unreasonable manner.’”  This is a case-by-case inquiry that considers the totality of the circumstances, with no culpability threshold although blameworthiness may well play a role. The district court should perform this inquiry on remand.

A great example of why trademark owners are nervous about facing eBay.

Wells Fargo and Co. v. ABD Insurance and Financial Services, Inc., 2014 WL 4312021, No. C 12–3856  (N.D. Cal. Aug. 28, 2014)

The district court previously denied Wells Fargo’s motion for preliminary injunction against ABD (since Wells Fargo absorbed another entity previously known as ABD, and then a bunch of former-ABD employees left to form new ABD) on the ground that Wells Fargo had probably abandoned the mark.  The Ninth Circuit reversed, finding that Wells Fargo continued to use the mark in customer presentations and solicitations.  Wells Fargo renewed its motion on remand, and this time the district court found likely success on the merits but no irreparable harm as per Herb Reed.

First, some housekeeping: the court denied a motion to exclude the report of one of ABD’s experts, who conducted a survey.  Wells Fargo made a number of meritorious arguments, the key one being that the survey improperly focused on the likelihood of confusion between the “ABD” brand and the “Wells Fargo” brand, instead of focusing on the likelihood of confusion between the two different uses of the “ABD” mark—one by ABD, and one by Wells Fargo. Plus, ABD didn’t adequately establish that the survey participants were, as claimed, “corporate executives that purchase or have influence over the purchase of corporate insurance or employee benefits plans for their company.” The survey expert apparently “relied on unverified self-reports from the participants regarding their role in purchasing corporate insurance or benefit plans, and given that survey participants were offered certain incentives for participating, the court finds reason to doubt the veracity of those self-reports.”  However, this went to weight rather than to admissibility.

Turning to the renewed motion for preliminary injunction, the court first found that the Ninth Circuit’s ruling on abandonment was dispositive, because it had found that “Wells Fargo continued its bona fide use of the mark in the ordinary course of business,” “most notably in customer presentations and solicitations.” This was in essence a finding of fact, and, because even a “single instance of use is sufficient against a claim of abandonment of a mark if such use is made in good faith,” the Ninth Circuit’s finding precluded an abandonment defense. [Only at the preliminary injunction stage? A jury usually finds facts. Or did the Ninth Circuit grant summary judgment on this point?]

Likely confusion: the ABD mark was conceptually strong and had “a ton of brand equity,” per the ABD defendants themselves.  While Wells Fargo did very little to maintain that, failing to promote the brand and merging the ABD company into Wells Fargo, “that non-maintenance of the mark did not completely deteriorate its commercial strength.”  Plus, the parties competed to offer the same services, and the similarity was high taking as the comparison “the mark of the ABD company purchased by Wells Fargo, and the mark used by the ABD defendants.”  Similar marketing channels also favored Wells Fargo, though the defendants contested the weight to be given to this.

However, “outside of the period immediately following ABD’s launch, Wells Fargo has failed to show any examples of confusion among the consumers of the insurance products both companies provide.” Wells Fargo argued that a March 8, 2014 email to defendants from a “potential client” asking “I am curious—are you part of the old ABD that merged with Wells or Woodruf—I can’t remember and then exited[?]”  ABD argued that this was from an accounting consultant, not a client (and anyway, it evinces an ability to make a distinction, not confusion).  Wells Fargo also pointed to an incident in June 2014, when “an insurer providing the workers’ compensation coverage for one of Wells Fargo’s accounts refused to provide loss information to Wells Fargo because the insurer’s records listed ABD as the broker of record.” But this wasn’t consumer confusion either. 

The Ninth Circuit had reversed in part because “a motion for preliminary injunction normally occurs early in litigation,” and “at that point parties rarely have amassed significant evidence of actual confusion.” But this was an atypical case, including its pendency for over two years and the fact that Wells Fargo “issued subpoenas to over 150 of the ABD defendants’ clients, resulting in over 28,000 documents produced through discovery.”  Wells Fargo had ample opportunity to find confusion; given that all confusion occurred in July-August 2012 and that ABD took measures to remedy it, the court found that the actual confusion factor favored ABD.

But that’s just one of the factors.  The degree of care also favored ABD: “The evidence shows that defendants’ customers are highly sophisticated, and made purchasing decisions based on their relationships with individual brokers, not based solely on the name ‘ABD.’” For example, when a Wells Fargo customer (a VP at Pixar) learned that a Wells Fargo broker left to join a new company, she sent an unsolicited email to his personal email address, explaining that she had learned of his departure and would “love to talk with [him] to hear about the new organization” and his “interest in remaining a consultant to Pixar.” She made clear that Pixar “value[d]” him and another broker who left to join ABD “much more as individuals than as Wells Fargo employees.”  Defendants provided declarations from two other customers explaining that they moved their business to ABD based on the individuals involved, not on the name.  This factor favored defendants.

However, intent favored Wells Fargo, in that ABD “chose the mark to signal some sort of link with the original ABD company.” Likely expansion of product lines is a factor designed to apply when there’s not already direct competition; it was neutral.

The court found that Wells Fargo had shown likely confusion despite the lack of actual confusion and the high degree of care exercised by purchasers.  “[T]he fact that the marks and the goods are identical—not just similar—combined with defendants’ intent in selecting the mark, tip the balance towards Wells Fargo.”

Because of this finding, the court didn’t spend much time on Wells Fargo’s false affiliation claim (which the court said was “similar to a trademark infringement claim, but does not require proof of a valid trademark,” language that I’m sure will never come back to haunt legitimate competition).  As for false advertising, the court assumed that ABD’s statements about the “relaunch” of ABD were false statements of fact.  The court didn’t find any actual deception, but given its finding of likely confusion it also found “a tendency to deceive.” But Wells Fargo provided no evidence of materiality, given the sophistication of the customers and their reliance on relationships with individual brokers. Thus, Wells Fargo didn’t show likely success on the merits of its false advertising claim. (Another reason we need materiality for trademark.)

But it wasn’t over.  In its order remanding the case, the court of appeals quoted Herb Reed, holding that “[e]vidence of loss of control over business reputation and damage to goodwill could constitute irreparable harm.” So, what constitutes “evidence”?  The Herb Reed court found that the district court improperly relied on “unsupported and conclusory statements regarding harm” in granting the injunction, and that its analysis was “cursory and conclusory, rather than being grounded in any evidence or showing.”  While evidence of loss of control over reputation and damage to goodwill could be enough, the district court’s ruling there was “grounded in platitudes rather than evidence.”  The closest evidence in the record was “an email from a potential customer complaining to [defendant’s] booking agent that the customer wanted Herb Reed’s band rather than another tribute band.” But the Ninth Circuit found that such evidence “simply underscores customer confusion, not irreparable harm.”

Here, Wells Fargo’s arguments were the same as those rejected in Herb Reed.  It submitted a declaration from Krista Holt purporting to provide evidence of irreparable harm.  That declaration stated that “it would be difficult to fully capture the amount of economic damages caused by the defendants in this case.” It further stated that “[b]y attempting to subvert the ABD brand for its own purposes, the defendants are diminishing the value that this brand conveys to Wells Fargo.” Moreover, the declaration continued, “[t]he association Wells Fargo forged with this valuable mark has been undermined by the existence of a competing company with the same name and will likely cause severe and irreversible damage to the consumer perception of the ABD mark and, by extension, to Wells Fargo.” ABD’s description of itself as the reincarnation of the former ABD, Holt said, “devalues the Wells Fargo ABD mark and makes it seem inauthentic.” And Holt said that defendants’ use of the ABD name “does not just attempt to associate the defendants with the valuable ABD brand, but taints Wells Fargo’s association with the mark.” “Through promoting itself as the ‘authentic’ ABD, the defendants have disassociated the mark from its rightful owner, which directly diminishes the trademark’s value to Wells Fargo.” Finally, the declaration says, “defendants weakened the association of the [ABD] mark to Wells Fargo, diminishing the value of the brand and making it less instructive to potential clients who rely on Wells Fargo’s reputation for quality service.”

My reaction: that’s a lot of sentences that say the same thing.  The court agreed.  First, an expert witness can’t give a legal conclusion, so Holt’s opinion on the ultimate issue of irreparable harm was inadmissible.  The rest of her statements about harm to Wells Fargo’s brand, reputation, and goodwill were the type of “unsupported and conclusory statements regarding harm” rejected in Herb Reed. Saying without evidence that ABD’s actions have “diminished,” “undermined,” “devalue[d],” and “taint[ed]” Wells Fargo’s association with the ABD brand was not enough:

In order to establish harm to its reputation or its goodwill, Wells Fargo must do more than simply submit a declaration insisting that its reputation and goodwill have been harmed. Ms. Holt’s assertions would apply in any case where a trademark holder had established a likelihood of success on a claim of infringement, and thus, do not constitute the type of evidence required by Herb Reed. The Herb Reed court acknowledged that it may be difficult for parties to obtain such evidence at the preliminary injunction stage of the case, which is why it made clear that “the rules of evidence do not apply strictly to preliminary injunction proceedings.” However, even under this relaxed evidentiary burden, Wells Fargo offers no evidence of any harm to its reputation, brand, or goodwill, and instead offers only “platitudes” of the type rejected in Herb Reed.

Herb Reedspecifically rejected a presumption of irreparable harm based on a strong case of infringement.  But “[i]f the court were to accept Wells Fargo’s conclusory assertions of harm to its reputation and goodwill, it would effectively re-insert that now-rejected presumption of irreparable harm. A plaintiff in a trademark infringement case cannot obtain an injunction simply by showing a likelihood of success on the merits of its claim, and then asserting (without evidence) that the alleged infringement ‘devalues’ and ‘taints’ the mark.”  Such a process would collapse likely success and irreparable harm, and would have the “practical effect” of resurrecting the presumption of irreparable harm.

Wells Fargo said it wasn’t seeking an automatic finding of irreparable harm, but proved unable to explain why its arguments wouldn’t always apply any time a plaintiff established likely confusion.  The court presented counsel with the proposition that, if there’s likely confusion, the trademark owner has “lost control” of the mark, and asked whether proof of lost control was sufficient to establish damage to goodwill.  Wells Fargo’s counsel said yes. Herb Reedrequires more: “evidence that the loss of control is likely to cause harm to the trademark holder” (emphasis added).

Wells Fargo also argued that it had lost  “scores of customers representing millions of dollars in lost revenue,” but didn’t show any connection between that lost business and defendants’ use of the ABD name. Defendants’ submissions showed customers who understood quite well what had happened—people who used to work for Wells Fargo moved to ABD.  This wasn’t dispositive; if Wells Fargo had found even one customer who had switched under the mistaken impression that ABD was associated with Wells Fargo (a weird proposition for an actual switch of an ongoing relationship), that would show harm even if many other customers weren’t confused.  But 150 subpoenas later, Wells Fargo hadn’t come up with such evidence.  Irreparable harm may be hard to show, but that doesn’t relieve Wells Fargo entirely of its burden to do so.  Anyway, expert testimony could quantify money damages, making them reparable.

Holt’s declaration also said that ABD’s use of the mark contributed to the loss of its brokers, causing a loss of Wells Fargo’s investment in its staff and forcing it to hire new brokers.  But Wells Fargo presented no evidence that ABD’s use of the ABD mark caused the brokers to leave Wells Fargo. Such costs were compensable by money damages anyway.