Opinion ID: 177623
Heading Depth: 1
Heading Rank: 3

Heading: Lanham Act Unfair Competition Claims

Text: Famous Horse also alleges that Appellees competed unfairly in violation of § 43(a) of the Lanham Act by selling counterfeit Rocawear jeans. [2] Appellees argue that Famous Horse cannot make an unfair competition claim based upon Appellees' misuse of the Rocawear trademark, which Famous Horse does not own. Famous Horse argues that it is injured in two ways by Appellees' misuse of the Rocawear mark: First, it loses sales of genuine Rocawear jeans to Appellees when customers purchase what they believe are also genuine Rocawear jeans from Appellees or from retailers who purchased from them. Second, customers will believe that Famous Horse is selling Rocawear jeans at an inflated price, devaluing V.I.M.'s alleged reputation as a discount purveyor of genuine brand-name jeans. We agree with Famous Horse that under the particular circumstances of this case, it has stated an unfair competition claim though it does not own the abused Rocawear mark. The Lanham Act's language is extremely broad, stating that any person who uses  any false designation of origin, false or misleading description of fact, or false or misleading representation of fact which is likely to cause confusion as to the origin or sponsorship of his or her goods or services shall be liable in a civil action by any person who believes that he or she is or is likely to be damaged by such act.  15 U.S.C. § 1125(a) (emphasis added). Read literally, this language would confer standing upon virtually any plaintiff who claims any sort of injury from a misleading use of a trademark without regard to ownership. Courts, however, have universally interpreted the phrase any person who believes that he or she is or is likely to be damaged by such act more narrowly. Courts have read the Act's purpose as exclusively to protect the interests of a purely commercial class against unscrupulous commercial conduct, and eliminated claims brought by consumers alleging unfair competition. Colligan v. Activities Club of New York, Ltd., 442 F.2d 686, 691-94 (2d Cir.1971) (emphasis added). With respect to commercial plaintiffs, in contrast, circuits have split on how to apply prudential standing limitations. None of the various tests employed, however, hold that only the owner of a trademark has standing. The strongest application is the categorical approach utilized by the Seventh, Ninth, and Tenth Circuits. Those courts require the commercial plaintiff bringing an unfair competition claim to be in competition with the alleged false advertiser. See, e.g., Stanfield v. Osborne Indus., Inc., 52 F.3d 867, 873 (10th Cir.1995); L.S. Heath & Son, Inc. v. AT & T Info. Sys., Inc., 9 F.3d 561, 575 (7th Cir.1993); Waits v. Frito-Lay, Inc., 978 F.2d 1093, 1108-09 (9th Cir.1992). The Third, Fifth, and Eleventh Circuits, in contrast, analyze the standing of commercial plaintiffs by applying a more flexible standard. Phoenix of Broward, Inc. v. McDonald's Corp., 489 F.3d 1156, 1162-64 (11th Cir.2007) (citing the standards for prudential standing established in Associated Gen. Contractors of California, Inc. v. California State Council of Carpenters, 459 U.S. 519, 538-44, 103 S.Ct. 897, 74 L.Ed.2d 723 (1983)); see also Procter & Gamble Co. v. Amway Corp., 242 F.3d 539, 562-63 (5th Cir.2001); Conte Bros. Auto., Inc. v. Quaker State-Slick 50, Inc., 165 F.3d 221, 234 (3d Cir. 1998). On at least one occasion, we have applied the strong categorical test that in order to have standing for a Lanham Act false advertising claim, the plaintiff must be a competitor of the defendant and allege a competitive injury. Telecom Int'l Am., Inc. v. AT & T Corp., 280 F.3d 175, 197 (2d Cir.2001) (alterations omitted), quoting Stanfield, 52 F.3d at 873, citing Heath, 9 F.3d at 575 & Waits, 978 F.2d at 1109. Referencing Telecom, at least one other circuit has understood us to have adopted the categorical approach. See Am. Ass'n of Orthodontists v. Yellow Book USA, Inc., 434 F.3d 1100, 1103-04 (8th Cir.2006). Furthermore, although Telecom is the only case in which we appear to have squarely utilized the categorical approach, we have frequently stressed the importance of competition between litigants in evaluating Lanham Act claims even if we have not explicitly required competition. For example, in Colligan, we cited as succinctly stat[ing] the import of § 43(a) a decision from the district court for the District of Columbia. Colligan, 442 F.2d at 692 n. 27, citing Gold Seal Co. v. Weeks, 129 F.Supp. 928 (D.D.C.1955), superseded on other grounds by statute, 15 U.S.C. § 1071(b)(1) (2000). That decision explained that § 43(a) means that wrongful diversion of trade resulting from false description of one's products invades that interest which an honest competitor has in fair business dealings.... In effect it says: you may not conduct your business in a way that unnecessarily or unfairly interferes with and injures that of another; you may not destroy the basis of genuine competition by destroying the buyer's opportunity to judge fairly between rival commodities by introducing such factors as falsely descriptive trade-marks which are capable of misinforming as to the true qualities of the competitive products. Gold Seal, 129 F.Supp. at 940. Similarly, Colligan also cited a concurrence by Judge Jerome Frank as a learned discussion of the historical-legal relationship between protection of commercial interests and consumer interests under the rubric of unfair competition, which relationship comprises the background against which Congress enacted § 43(a). Colligan, 442 F.2d at 692 n. 26. In that concurrence, explaining the Lanham Act's focus on commercial interests rather than consumer interests, Judge Frank clarified: The harm, if any, is to the plaintiff, and is said to be this: The defendant's product may be so inferior as to create ill-will among consumers directed against the supposed common maker of both products, with the consequence that the good will of the plaintiff, as maker of the first product, will be impaired. Standard Brands v. Smidler, 151 F.2d 34, 42-43 (2d Cir.1945) (Frank, J., concurring). While stressing the importance of whether the plaintiff and defendant are in competition, our cases, with the exception of Telecom, have not treated this factor as a sine qua non of standing. Rather, we have said that competition is a factor that strongly favors standing, not that competition is an absolute requirement for standing. Our test for standing has been called the reasonable interest approach. Under this rubric, in order to establish standing under the Lanham Act, a plaintiff must demonstrate (1) a reasonable interest to be protected against the alleged false advertising and (2) a reasonable basis for believing that the interest is likely to be damaged by the alleged false advertising. See Ortho Pharm. Corp. v. Cosprophar, Inc., 32 F.3d 690, 694 (2d Cir. 1994). We have not required that litigants be in competition, but instead have viewed competition as a strong indication of why the plaintiff has a reasonable basis for believing that its interest will be damaged by the alleged false advertising. In Ortho Pharmaceutical, for example, we noted that although the proof required to show injury and causation varies by circumstances, we have tended to require a more substantial showing where the plaintiff's products are not obviously in competition with defendant's products, or the defendant's advertisements do not draw direct comparisons between the two. Id. (emphasis added). In another case, assessing the likelihood of damages alleged by one shampoo company against another, we noted that the two shampoos compete in the same market, and it is quite likely that the apparently effective suggestions of competitive superiority, if repeatedly communicated to consumers, would eventually result in loss of sales to [the appellant]. Vidal Sassoon, Inc. v. Bristol-Myers Co., 661 F.2d 272, 278 (2d Cir.1981). In a case in which Johnson & Johnson alleged that the sale of a hair depilatory product with baby oil had engaged in false advertising by suggesting to consumers that the depilatory could replace Johnson & Johnson's baby oil, we held that the correct standard for proof of damages under the Lanham Act is whether it is likely that [the defendant's] advertising has caused or will cause a loss of Johnson sales. Johnson & Johnson v. Carter-Wallace, Inc., 631 F.2d 186, 190 (2d Cir. 1980). In any event, here Famous Horse and Appellees are in essence competitors. We therefore need not address whether Telecom indicates a shift in our approach to unfair competition claims: Famous Horse has standing whether we apply the reasonable interest test or the stronger categorical requirement. Famous Horse, which sells genuine Rocawear jeans, is clearly in competition with Appellees, who sell counterfeit Rocawear jeans. The injuries alleged by Famous Horselost sales to the lower-priced counterfeit jeansconstitute the competitive injury required for Lanham Act standing under Telecom. See 280 F.3d at 197. Although Famous Horse sells at retail, and Appellees primarily sell at wholesale, the goods they sell are in direct competition in the marketplace, and Appellees' products are supplied to retailers in direct competition with Famous Horse. Cf. Info. Res., Inc. v. Dun & Bradstreet, 294 F.3d 447, 450 (2d Cir.2002) (noting in antitrust context that dealers have standing to allege anticompetitive activity by retailer even though they do not compete at same market level); Trans Sport, Inc. v. Starter Sportswear, Inc., 964 F.2d 186, 189 (2d Cir.1992) (holding that sports jacket dealer's requirement that buyers not resell jackets at wholesale impedes the ability of authorized retailers... to enter the wholesale market and thereby reduces the aggregate number of dealersretail and wholesalecompeting to sell Starter jackets and that [r]estrictions on intrabrand competition invariably reduce competition). In this setting, it is clear that Famous Horse alleges that Appellees' conduct directly undermines its competitive standing in the marketplace. We thus turn to application of the reasonable interest approach and ask whether Famous Horse sufficiently alleged a reasonable interest to be protected against the advertiser's false or misleading claims. Ortho Pharm., 32 F.3d at 694 (internal quotation marks omitted). Famous Horse asserts a specific interest because it has a particular market niche that is especially likely to be harmed by counterfeit sales. The V.I.M. chain of stores, according to Famous Horse, is known for selling genuine name-brand clothing at very low prices. Famous Horse thus alleges that it was uniquely affected by Appellees' sale of counterfeit Rocawear jeans in two ways: first, its reputation as a discount store was harmed because consumers believed that it sold Rocawear jeans at inflated prices compared to counterfeit jeans supplied by Appellees; and second, consumers who learn of counterfeit Rocawear jeans on the market will believe that V.I.M. similarly peddles counterfeit clothes. We faced a similar Lanham Act claim in PPX Enters., Inc. v. Audiofidelity, Inc., 746 F.2d 120 (2d Cir. 1984). In that case, a group of corporations that held royalty interests in selected recordings of the guitarist Jimi Hendrix sued Audiofidelity, which they alleged was falsely advertising recordings as featuring Hendrix when Hendrix actually appeared only as a background performer. Id. at 121-22. We held: In the present case plaintiffs claim to have straight-forward commercial interests that could reasonably be affected by misleadingly packaged Jimi Hendrix recordings. Plaintiffs are in the business of making money by acquiring royalty interests in the sale of record albums and singles. Their interests in promoting sales are direct, and hardly less immediate than the interests of those who actually distribute the records. Every time a record in which they have a royalty interest is sold, they earn money; every time a sale is lost to a competitor, they lose a potential profit. Moreover, if consumers buy defendants' Jimi Hendrix albums and find that they have, in fact, been misled, then it is not unlikely that they will be reluctant to buy other Hendrix recordings, including those in which plaintiffs have their interests. Because of their royalty interests, plaintiffs have a pecuniary stake in sales of Hendrix recordings that makes them genuine business competitors of the defendants. We stress that there is nothing novel about awarding standing under the Lanham Act to one who has a direct pecuniary interest at stake. Id. at 125. Here, Famous Horse alleged both lost sales and a unique harm to the specific reputation of V.I.M. stores. This allegation of unique harm makes them similar to the PPX plaintiffs. Like those plaintiffs, who claimed that defendants undermined their business by making misleading statements about the genuineness of their Hendrix recordings, Famous Horse alleges that it has a particular interest in selling genuine Rocawear jeans at a discount price point, and in customers' perception that its jeans, though discounted, are indeed genuine. The facts that the defendants' alleged misstatements concern Hendrix, in the one case, and Rocawear, in the other, rather than the plaintiffs, and that any misleading statements about the origins of the products sold do not attempt to associate those products with the plaintiffs, do not undermine the plaintiffs' claims that defendants' presentation of counterfeit goods undermines the plaintiffs' ability to market genuine products. We thus hold that Famous Horse has alleged a reasonable interest to be protected against Appellees' alleged false advertising as well as a reasonable basis for believing that this interest will be damaged by the alleged false advertising, and has properly stated a false advertising claim under the Lanham Act. [3] We note that this claim may well be difficult to prove at trial. While it may be plausible that Famous Horse can in principle be harmed by counterfeiters of Rocawear products, proof of actual losses will be difficult given that plaintiff's V.I.M. stores operate in a large market that includes luxury retailers selling name brands at full price, discounters of various stripes, and numerous counterfeiters selling fake versions of name brands. The alleged harm to Famous Horse depends upon the idea that its sales are specifically affected by Appellees' behavior. Famous Horse has alleged sufficiently plausible claims, however, to overcome a motion to dismiss under Rule 12(b)(6).