Opinion ID: 380310
Heading Depth: 2
Heading Rank: 1

Heading: New Jersey Law of Unfair Competition

Text: 22 Both parties assume, and we agree, that New Jersey law is the appropriate reference for the state law unfair competition claim alleged in Count II. Under that law there are two relevant torts of unfair competition, passing off one's goods or services as those of another, and unprivileged imitation. E. g., Squeezit Corp. v. Plastic Dispensers, Inc., 31 N.J.Super. 217, 221-22, 106 A.2d 322, 325 (App.Div.1954); French Amer. Reeds Mfg. Co. v. Park Plastics Co., 20 N.J.Super. 325, 329, 90 A.2d 50, 52 (App.Div.1952) (quoting Restatement); Press Pub. Co. v. Atlantic County Advert., Inc., 108 N.J.Super. 75, 81, 260 A.2d 6, 9 (Ch.Div.1969), aff'd, 59 N.J. 356, 283 A.2d 102 (1971); see Smith, Kline & French Labs. v. Clark & Clark, 157 F.2d 725, 730-31 (3d Cir.), cert. denied, 329 U.S. 796, 67 S.Ct. 482, 91 L.Ed. 681 (1946); Columbia Broadcasting Sys., Inc. v. Melody Recordings, Inc., 134 N.J.Super. 368, 341 A.2d 348, 352 (App.Div.1975). The New Jersey cases define these two torts in roughly the same manner as did the First Restatement of Torts. The Restatement formulation is 23 (o)ne who 24 (a) fraudulently markets his goods or services as those of another, or 25 (c) markets goods with an unprivileged imitation of the physical appearance of another's goods is liable to the other for the relief appropriate under (the ensuing Restatement rules with regard to calculation of damages). 26 Restatement of Torts § 711 (1938). The section 711(a) tort of passing off is further defined in section 713: 27 One fraudulently markets his goods as those of another if, though making no misrepresentation himself, he intentionally induces his purchasers so to market them. 28 In illustration of section 713 the Restatement uses this example, derived from the Supreme Court case of William R. Warner & Co. v. Eli Lilly & Co., 265 U.S. 526, 44 S.Ct. 615, 68 L.Ed. 1161 (1924): 29 A manufactures a compound of cocoa and quinine for sale. B also manufactures a compound of cocoa and quinine and urges druggists to buy this product, which he offers at a lesser price, and to sell it for A's compound when that is called for by customers. B is subject to liability to A. 30 Restatement of Torts § 713, Illustration 1 (1938). Moreover, it has been held that it is actionable conduct under New Jersey law for a drug manufacturer to put a product in the hands of a pharmacist in a form in which the manufacturer can reasonably anticipate that it may be passed off as another product even if the manufacturer does nothing else to encourage passing off. Merrell-National Labs., Inc. v. Zenith Labs., Inc., 194 U.S.P.Q. 157, 159-60 (D.N.J.1977), aff'd, 579 F.2d 786 (3d Cir. 1978); see Ives Labs., Inc. v. Darby Drug Co., 601 F.2d 631, 641 (2d Cir. 1979). The law in other states is similar in this respect. E. g., Pennwalt Corp. v. Zenith Labs., Inc., 472 F.Supp. 413, 418-19 (E.D.Mich.1979) (Michigan law; finding likelihood of establishing unfair competition without evidence of direct passing off); Norwich Pharmacal Co. v. Sterling Drug, Inc., 271 F.2d 569, 570 (2d Cir. 1959) (applying New York law), cert. denied, 362 U.S. 919, 80 S.Ct. 671, 4 L.Ed.2d 739 (1960); see Union Carbide Corp. v. Ever-Ready, Inc., 531 F.2d 366, 384 (7th Cir.) (placing means of deception in another's hands is actionable under Lanham Act), cert. denied, 429 U.S. 830, 97 S.Ct. 91, 50 L.Ed.2d 94 (1976); Stewart Paint Mfg. Co. v. United Hardware Distrib. Co., 253 F.2d 568, 575 (8th Cir. 1958) (same); Stix Prod., Inc. v. United Merchants & Mfrs., Inc., 295 F.Supp. 479, 496 (S.D.N.Y.1968) (same). 31 The section 711(c) tort of unprivileged imitation is defined in section 741 of the Restatement as: 32 One who markets goods, the physical appearance of which is a copy or imitation of the physical appearance of the goods of which another is the initial distributor, markets them with an unprivileged imitation, under the rule stated in § 711, if his goods are of the same class as those of the other and are sold in a market in which the other's interest is protected, and 33 (b) the copied or imitated feature has acquired generally in the market a special significance identifying the other's goods, and 34 (i) the copy or imitation is likely to cause prospective purchasers to regard his goods as those of the other, and 35 (ii) the copied or imitated feature is nonfunctional, or, if it is functional, he does not take reasonable steps to inform prospective purchasers that the goods which he markets are not those of the other. 36 In the New Jersey case law the elements of the section 741 protection are generally expressed as conjunctive requirements of secondary meaning and nonfunctionality. E. g., Squeezit Corp. v. Plastic Dispensers, Inc., 31 N.J.Super. at 221-22, 106 A.2d at 325; French Amer. Reeds Mfg. Co. v. Park Plastics Co., 20 N.J.Super. at 330-31, 90 A.2d at 54-55. Section 742 of the First Restatement of Torts defines functionality: 37 A feature of the the goods is functional, under the rule stated in 741, if it affects their purpose, action or performance, or the facility or economy of processing, handling or using them; it is non-functional if it does not have any of such effects. 38 The Comment accompanying that section observes further that 39 (a) feature is non-functional if, when omitted, nothing of substantial value in the goods is lost. A feature which merely associates goods with a particular source may be, like a trade-mark or trade name, a substantial factor in increasing the marketability of the goods. But if that is the entire significance of the feature, it is non-functional; for its value then lies only in the demand for goods associated with a particular source rather than for goods of a particular design. 40 Restatement of Torts § 742, Comment a (1938). Proof of nonfunctionality generally requires a showing that the element of the product serves no purpose other than identification. In the case of a drug, for example, the allegedly nonfunctional element must not enhance efficacy. See William R. Warner & Co. v. Eli Lilly & Co., 265 U.S. at 529, 44 S.Ct. at 617 (chocolate flavoring that gave distinctive flavor and color also acted as suspension medium, thus enhancing efficacy); Norwich Pharmacal Co. v. Sterling Drug, Inc., 271 F.2d at 572 (pink color of Pepto-Bismol may have functioned to soothe patient's suffering). 41 The record in this case made at the hearing on the motion for a preliminary injunction warranted a conclusion by the district court that SKF would be likely to succeed at final hearing in establishing that Premo committed both the tort of passing off and the tort of unprivileged imitation. 42 As to passing off, it is undisputed that the maroon and white color scheme of a virtually identical capsule container was adopted by Premo with the intention of associating its product, in the minds of users, physicians, and pharmacists, with DYAZIDE. It is nowhere suggested that Premo was unaware of the practice by some unscrupulous pharmacists of substituting less expensive generic drugs for the brand name drugs prescribed without informing their customers and without passing along the benefit of the lower price. It was reasonable for the district court to conclude that Premo's use of a practically identical trade dress would facilitate such passing off. The record shows, further, that in the short time that the Premo product was on the market an abbreviated survey established four instances of illegal undisclosed substitution. 43 As to unprivileged imitation, Premo contends that the record does not support the establishment of secondary meaning, while it does show that the color scheme is functional. Premo's own submissions tend to support the strong showing made by SKF that in the diuretic market the maroon and white color scheme is associated with DYAZIDE. That association by patients and physicians is the very reason given for the imitation in the affidavits of Stemple and Shafer submitted by Premo. The record shows that DYAZIDE is the only oral diuretic marketed in a maroon and white No. 3 hard gelatin capsule, and that it has been extensively advertised to the medical and pharmaceutical professions in that form. The adoption of that trade dress was arbitrary, having nothing to do with the purpose or performance of the drug, or with its processing. The only value of the trade dress was in identifying the goods with their source, and that value suffices in the New Jersey courts to establish secondary meaning. Premo argues in response that no one can acquire a protectable secondary meaning in a color. As long ago as 1899, however, Justice Holmes gave the appropriate response to that contention when he wrote, 44 It is true that a man cannot appropriate a geographical name; but neither can he a color, or any part of the English language, or even a proper name to the exclusion of others whose names are like his. Yet a color in connection with a sufficiently complex combination of other things may be recognized as saying so circumstantially that the defendant's goods are the plaintiff's as to pass the injunction line. 45 American Waltham Watch Co. v. United States Watch Co., 173 Mass. 85, 87, 53 N.E. 141, 142 (1899). 46 Premo attempted, through the Stemple and Shafer affidavits, to persuade the trial court that the bi-colored capsule was functional. There is no question but that shape and color of a product may, under New Jersey law, be so related to the product's intended use as to be functional and thus unprotectable. The catsup dispenser in the shape and color of a tomato, Squeezit Corp. v. Plastic Dispensers, Inc., 31 N.J.Super. 217, 222, 106 A.2d 322, 326 (App.Div.1954), and the traditional shape of a ukelele, French Amer. Reeds Mfg. Co. v. Park Plastics Co., 20 N.J.Super. 325, 90 A.2d 50 (App.Div.1952), are the classic examples in New Jersey. But in this case even the identical diuretic drug combination is successfully marketed in an orange tablet form, and there is ample evidence that neither the capsule form nor the color combination reflects any industry practice for the identifications of diuretics. 47 Premo urges, however, that even if the district court was correct in concluding that SKF would be likely to succeed at final hearing in establishing either passing off or unprivileged imitation under New Jersey law, the district court nevertheless should have denied relief because relief for those New Jersey torts has been foreclosed by the Supreme Court's decisions in Sears, Roebuck & Co. v. Stiffel Co., 376 U.S. 225, 84 S.Ct. 784, 11 L.Ed.2d 661 (1964) and Compco Corp. v. Day-Brite Lighting, Inc., 376 U.S. 234, 84 S.Ct. 779, 11 L.Ed.2d 669 (1964). Those cases establish that state laws of unfair competition must accommodate to the federal policies favoring competition embodied in the patent laws. They hold that a state may not impose liability upon a competitor for copying an unpatented product and thereby grant a perpetual state-protected design patent. Sears, Roebuck & Co. v. Stiffel Co., 376 U.S. at 231-32, 84 S.Ct. at 788-89; Compco Corp. v. Day-Brite Lighting, Inc., 376 U.S. at 237-38, 84 S.Ct. at 781-82. But the Court was careful to leave undisturbed state laws protecting against passing off and unprivileged copying of nonfunctional elements of trade dress. In Sears the Court wrote: 48 Doubtless a State may, in appropriate circumstances, require that goods, whether patented or unpatented, be labeled or that other precautionary steps be taken to prevent customers from being misled as to the source, just as it may protect businesses in the use of their trademarks, labels, or distinctive dress in the packaging of goods so as to prevent others, by imitating such markings, from misleading purchasers as to the source of the goods. 49 376 U.S. at 232, 84 S.Ct. at 789 (footnote omitted). The continued viability of the state law of unfair competition has been reconfirmed by the Court since the opinions in Sears and Compco. See Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 478-79, 94 S.Ct. 1879, 1884-1885, 40 L.Ed.2d 315 (1974) (state law can grant perpetual protection of trade secrets); Goldstein v. California, 412 U.S. 546, 571, 93 S.Ct. 2303, 2317, 37 L.Ed.2d 163 (1973) (state law can protect against the copying of an uncopyrighted performance). See also Zacchini v. Scripps-Howard Broadcasting Co., 433 U.S. 562, 576-77, 97 S.Ct. 2849, 2857-2858, 53 L.Ed.2d 965 (1977) (state law can protect right of publicity in uncopyrighted performance). Thus we agree with the conclusion reached by the Second and Eighth Circuits that the state law tort of unprivileged imitation survives Sears and Compco. See Ives Labs., Inc. v. Darby Drug Co., 601 F.2d 631, 642 (2d Cir. 1979) (Sears and Compco limited to precluding state unfair competition laws from granting patent-like protection to unpatented products); Truck Equipment Serv. Co. v. Fruehauf Corp., 536 F.2d 1210, 1214-15 (8th Cir.) (relying on distinctive purposes to be served by federal patent laws and state unfair competition laws), cert. denied, 429 U.S. 861, 97 S.Ct. 164, 50 L.Ed.2d 139 (1976). 50 The district court did not err, therefore, in concluding that SKF would be likely to succeed at final hearing in establishing Premo's violation of its rights as protected by state law.