In Pepsico, the Court reasoned that: "[Section 43(a) applies] to those deceptive practices which, like trademark infringement, attempt to induce consumers to purchase an advertiser's goods by falsely passing them off as the same as, or better than those of a competitor. Such claims can best be analogized to causes of action sounding in fraud." 578 F. Supp. at 199. Only once has a Court in this Circuit rejected the fraud analogy in favor of a tortious injury to property analysis. See Construction Technology, Inc. v. Lockformer Company, Inc., 704 F. Supp. 1212, 1223 (S.D.N.Y. 1989). The PepsiCo analysis was recently reaffirmed in Gordon and Breach, 859 F. Supp. at 1529 and again in Calzaturificio Rangoni S.p.A. v. United States Shoe Corp., 868 F. Supp. 1414, 1420 (S.D.N.Y. 1994). Thus, almost without fail, courts have found that New York's common law fraud action resembles the policy behind the Lanham Act.
The Lanham Trademark Act is remedial and it should be broadly construed. PPX Enterprises, Inc. Audiofidelity, Inc., 746 F.2d 120, 125 (2d Cir. 1984); Allen v. National Video, Inc., 610 F. Supp. 612, 625 (S.D.N.Y. 1985). According to section 45 of the Lanham Act, Congress intended the Act "to regulate commerce within [its] control . . . by making actionable the deceptive and misleading use of [registered] marks in such commerce; . . . [and] to protect persons engaged in such commerce against unfair competition." 15 U.S.C. § 1127 (1982, Supp. 1994); PepsiCo, 578 F. Supp. at 199. Thus, the scope of the Act is not limited to protecting registered marks, but it also condemns misrepresentations regarding the origin of goods in commerce and other deceptive commercial practices. See PPX Enterprises, Inc., 818 F.2d at 271-72; 20th Century Wear, Inc. v. Sanmark-Stardust Inc., 747 F.2d 81, 91 n. 13 (2d Cir. 1984), cert. denied, 470 U.S. 1052, 84 L. Ed. 2d 818, 105 S. Ct. 1755 (1985).
Further, it is the Lanham Act's policy proscribing deceptive trade practices and its language condemning acts which mislead consumers that makes scienter or the intent to defraud relevant to a section 43(a) violation. For instance the Act proscribes "any false designation of origin, false or misleading description of fact or false or misleading representation of fact," which is likely to deceive a consumer as to the origin of the goods or services. See 15 U.S.C. 1125(a)(1)(A). This Court finds that the polices behind the Lanham Act most closely resemble New York common law fraud, and thus, the six-year statute of limitations will be applied.
Although the fraud analogy may not be a perfect fit, it has been resoundingly determined to be the "better fit" in this Circuit and elsewhere. Gordon and Breach, 859 F. Supp. at 1529; Vitale v. Marlborough Gallery, 1994 U.S. Dist. LEXIS 9006, No. 93-Civ-6276, 1994 WL 654494 * 6 (S.D.N.Y. July 5, 1994); see also Unlimited Screw Products, Inc. v. Malm, 781 F. Supp. 1121, 1125 (E.D.Va. 1991) (finding that Virginia's statute of limitations for fraud most closely resembled the federal policy reflected in the Lanham Act); Mylan Laboratories, Inc. v. Pharmaceutical Basics, Inc., 808 F. Supp. 446 (D.Md. 1992) (rejecting argument that libel is analogous to Lanham Act claims and adopting the statute of limitations applicable to fraud and other torts), rev'd on other grounds sub nom., Mylan Laboratories, Inc. v. Matkari, 7 F.3d 1130 (4th Cir. 1993), cert. denied sub. nom., American Home Products Corp. v. Mylan Laboratories, Inc., U.S. , 114 S. Ct. 1307, 127 L. Ed. 2d 658 (1994). Although this Court acknowledges the compelling questions raised in the Lockformer decision, supra, it may not ignore what appears to be the overwhelming law on this issue: a statute of limitations applicable in an action based on fraud is appropriate in Lanham Act claims.
(2) Sufficiency of the Evidence:
A. False Designation of Origin Claim
Plaintiffs seek a permanent injunction and $ 5,000,000.00 in damages for the alleged violations of the Lanham Act based on defendant's alleged false designation of the origin of East Side's products. The Lanham Act prescribes different standards depending upon the relief sought. In order to obtain injunctive relief "plaintiffs must demonstrate a likelihood of deception or confusion on the part of the buying public caused by the false description or representation." PPX Enterprises, 818 F.2d at 271 (emphasis added). Thus, plaintiffs must provide facts which tend to establish that (1) it is the buying public that was confused or deceived, and (2) the misleading statement of the origin of the goods was likely to confuse or deceive, (not necessarily actually confuse or deceive) the buying public. See Coach Leatherware Co., Inc. v. AnnTaylor, Inc., 933 F.2d 162, 170 (2d Cir. 1991).
In contrast, to state a claim for damages under section 43(a) plaintiffs "must establish actual consumer confusion or deception resulting from the violation." PPX Enterprises, 818 F.2d at 271 (emphasis added). Subsequent to deciding PPX Enterprises, however, the Second Circuit recognized that proving customer confusion was difficult, and held that if a plaintiff is able to demonstrate that a defendant has intentionally acted to deceive the public as to the origin of the products, plaintiff need not provide evidence of actual consumer confusion. Resource Developers, 926 F.2d at 139-140. Under this analysis upon a proper showing of such deliberate conduct, the burden shifts to the defendant to demonstrate the absence of customer confusion. Id. at 140; see also George Basch Co., Inc. v. Blue Coral, Inc., 968 F.2d 1532, 1537 (2d Cir. 1992) (such a showing gives rise to a rebuttable presumption of consumer confusion), cert. denied, U.S. , 113 S. Ct. 510, 121 L. Ed. 2d 445 (1992). Thus, if plaintiffs can show that defendant deliberately engaged in a deceptive commercial practice, this Court will presume that there was customer confusion unless defendant establishes otherwise.
A court is justified in presuming customer confusion particularly in the cases where a competitor had spent substantial funds in an effort to deceive customers and influence their purchasing decisions. Resource Developers, 926 F.2d at 140 (quoting U-Haul International, Inc. v. Jartran, Inc., 793 F.2d 1034, 1041 (9th Cir. 1986)); see also Jaret International, Inc. v. Promotion In Motion, Inc., 826 F. Supp. 69, 74 (E.D.N.Y 1993). Although the language of Resource Developers would appear to condemn all intentional acts to deceive the public, in practice courts consider only those acts, such as false designation of the origin of goods, that are aimed at deceiving the consuming public. See, e.g., id., 926 F.2d at 140 (stating that plaintiff "must demonstrate that Dettra set out to intentionally deceive flag purchasers"); see also Johnson & Johnson-Merck, 960 F.2d 294, 298 (2d Cir. 1992) (plaintiff must "demonstrate that a statistically significant part of the commercial audience holds the false belief allegedly communicated by the challenged advertisement, . . ."). Indeed, it is proper for courts to limit evidence of acts to meet the deliberate conduct requirement to those aimed at customers or potential customers where, after all, this showing is intended as a substitute for proving actual customer confusion in order to obtain damages.
In order to obtain summary judgment on the false designation of origin claims, defendant must establish that there are no issues of material fact which would tend to establish either the grounds for injunctive relief and/or damages.
Plaintiffs submit a sworn affidavit of Sam Lamaj, a building manager and previous customer of plaintiff, aimed at establishing that material issues of fact exist as to whether or not defendant set out to deceive its customers. According to Lamaj, Alvin Kirshner told him in 1990 that East Side was Northeast's Manhattan office and supply store and that Northeast's catalogue was also East Side's catalogue.
In the affidavit of Richard Webb, an employee of Plumlee Custom Publishing Company, the company that published plaintiffs' catalogues, he states that defendant told him in 1985 that East Side was the Manhattan showroom for Northeast. This statement may not be admissible at trial, for Plumlee is clearly not a customer of either Northeast or East Side. On the other hand, for purposes of this motion, it raises the issue of the types of statements Alvin Kirshner was making to persons involved in the wholesale plumbing industry. Similarly, the statements regarding Plumlee and its employees which are made in plaintiffs Herbert Kirshner and Wayne Reed's affidavits may not be admissible at trial, but raise issues of fact which bar summary judgment.
Kirshner's and Reed's affidavits also state that defendant made similar misrepresentations to various customers including Anne Fox and Esat Skepi, and Robert Gaffney. These statements are, however, inapplicable in determining whether or not Alvin Kirshner engaged in the requisite deliberate conduct where plaintiffs failed to submit affidavits from Fox, Skepi or Gaffney. Thus, their statements are hearsay and may not be used to oppose a summary judgment motion. See Fed. R. Civ. P. 56(e); Jaret International, 826 F. Supp. at 72-73 (quoting, H. Sand & Co., Inc. v. Airtemp Corp., 934 F.2d 450, 454-55 (2d Cir. 1991)). Furthermore any statements by Gaffney may not be admissible at trial because by Kirshner's and Reed's own admissions, Gaffney, a computer consultant, was performing a service for H & R and like Webb and the Plumlee employees, Mr. Gaffney was not a customer of either H & R or East Side. Accordingly, the portions of Herbert Kirshner's and Reed's affidavits regarding Alvin Kirshner's statements to Fox, Skepi and Gaffney were not considered for purposes of this motion.
We are left then with the sworn statements of the one building manager, Sam Lamaj, and the Plumlee employee Richard Webb. A review of the relevant cases indicates that the conduct which has been deemed intentionally deceptive has been supported by evidence which is not provided here, and itself appeared more egregious. See, e.g., PPX Enterprises, 818 F.2d at 273 (allowing recovery of damages despite lack evidence of actual customer confusion where the products were "patently fraudulent, and the advertising accompanying those products was the vehicle employed to perpetrate the fraud"); cf. Johnson & Johnson-Merck, 960 F.2d at 299 (unwilling to extend the presumption of consumer confusion where evidence of deceptive intent in a false advertising claim was indirect and controverted). This Court advises plaintiffs that while this evidence may raise an issue of material fact, it is likely to be deemed insufficient to establish that defendant intended to deceive customers as required to obtain damages under the Lanham Act.
If plaintiffs fail to establish facts which satisfy its burden to show deliberate conduct, the Court will not presume that the consuming public has been confused as to the origin of East Side's goods. Therefore, it would be incumbent upon plaintiff to introduce evidence of actual customer confusion if it wants to make its case for damages. Johnson & Johnson-Merck at 299; Resource Developers, 926 F.2d at 140-41. It is apparent, however, that not even plaintiffs' affiant, Sam Lamaj, was confused by defendant's alleged statements, where he failed to aver that he bought any products from East Side as a result of being confused as to their origin. Webb was not a customer of plaintiff and therefore could not be confused, for purposes of the Lanham Act, as to the origin of the products. Furthermore, these facts also illustrate that injunctive relief may be inappropriate here, because facts refute the inference that there was a likelihood of confusion on the part of the buying public, where even plaintiffs affiant Lamaj was not confused.
Plaintiffs may face further difficulties, with regard to jurisdiction, if they intend to rely only upon the alleged statements made to Lamaj to establish their false designation of origin claims. It is understood that "the Lanham Act's reach, while long, does not extend to the full outer limits of the commerce power." Licata & Co., Inc. v. Goldberg, 812 F. Supp. 403, 409 (S.D.N.Y. 1993). Rather, "its plain meaning . . . reflects a legislative judgment that for the statute to apply, the questioned advertising or statements, and not merely the underlying commercial activity, must be disseminated in commerce." Id.; see also Arrow United Industries v. Hugh Richards, Inc., 678 F.2d 410, 413 n. (2d Cir. 1982) ("Congresses expressed intent in passing the Lanham Act was, inter alia, 'to regulate commerce within the control of Congress.'") Without evidence to the contrary, the Court may find that defendant's alleged statements to Lamaj, a Manhattan building manager, were made entirely within New York. Even if the parties engaged in interstate commerce, or their business activities affected interstate commerce, the statements may not have been disseminated in commerce. Thus, the Lanham Act may well not apply in this instance, but there appears to be enough to suggest that the motion for summary judgment should not be granted.
B. Trade Disparagement Claim
Plaintiffs' trade disparagement claims rest on the memorandum concerning Wayne Reed in which plaintiffs allege that defendant commented and told H & R customers that Wayne Reed was engaging in improper commercial practices. In this regard, defendant's activities are said to amount to a violation of 15 U.S.C. § 1125(a)(1)(B). This section of the Lanham Act makes actionable "false or misleading representation of fact, which in commercial advertising or promotion, misrepresents the nature, characteristics, [or] qualities . . . of another persons good's, services or commercial activities, . . ." 15 U.S.C. § 1125(a)(1)(B) (emphasis added). In the complaint, plaintiffs contend that the statements in the memorandum amount to misrepresentations about plaintiffs' services and that they were made in the context of promoting defendant Alvin Kirshner.
As amended in 1988, the Lanham Act reaches false statements made about a plaintiff's products or services, i.e. "commercial defamation," which is broader than the pre-amendment version of the Act which applied only to false statements about defendant's products or services. National Artists Management Co., Inc. v. Weaving, 769 F. Supp. 1224, 1229 (S.D.N.Y. 1991). Indeed, prior to the amendments courts found trade disparagement activities non-actionable under 43(a). See. e.g., Vidal Sassoon Inc. v. Bristol-Myers Meyers Co., 661 F.2d 272, 278 (2d Cir. 1981); Zerpol Corp. v. DMP Corp., 561 F. Supp. 404, 415 (E.D. Pa. 1983) (rejecting plaintiff's claim based on alleged false statements and representations about plaintiffs product). Courts generally approached disparagement claims reluctantly, such as when the Zerpol court stated "under [plaintiff's] interpretation, every state law disparagement action could be converted into a claim for violation of the Lanham Act. . . . Congress did not intend § 43(a) to encompass every undesirable business practice." Id. The courts' longstanding reluctance is reflected in section 1125(a)(1)(B), for as the plain language of the Act makes clear, to be actionable the false statements must be made in the context of commercial advertising or promotion used in connection with goods or services, or commercial activities. Gordon & Breach, 859 F. Supp. at 1532-33; see also National Artists, 769 F. Supp. at 1229.
There are few decisions of other courts following the amendments which have defined commercial advertising or promotion under the under section 1125(a)(1)(B). It is generally understood, however, that section 1125(a)(1)(B) "'does not have boundless application . . . but is limited to false advertising as that term is generally understood.'" Gordon & Breach, 859 F. Supp. at 1532 (quoting Alfred Dunhill Ltd. v. Interstate Cigar Co., 499 F.2d 232, 237 (2d Cir. 1974)). When, as in the case here, the activity does not fall neatly into a paid advertising or promotional campaign category, courts have determined that statements which are alleged to be "advertising in effect" must be:
(1) commercial speech; (2) by a defendant who is in commercial competition with plaintiff; (3) for the purpose of influencing consumers to buy defendant's goods or services; . . . [and they] (4) must be disseminated sufficiently to the relevant purchasing public to constitute "advertising" or "promotion" within that industry.
Gordon & Breach, 859 F. Supp. at 1535-36 (summing up the "principles from the cases and legislative history").
In the Second Circuit, commercial speech is defined as "'speech proposing a commercial transaction.'" Gordon & Breach, 859 F. Supp. at 1537; White Plains Towing Corp. v. Patterson, 991 F.2d 1049, 1058 (2d Cir.), cert. denied, U.S. , 114 S. Ct. 185, 126 L. Ed. 2d 144 (1993). In recognition that bright line rules are often unhelpful, the definition has been broadened to include speech which is "expression related solely to the economic interests of the speaker and its audience." Gordon & Breach, 859 F. Supp. at 1537 (quoting City of Cincinnati v. Discovery Network, Inc, 503 U.S. 918, 112 S. Ct. 1290, 117 L. Ed. 2d 514 (1993) (citation omitted)). For instance, where a statement links a product with a public issue, the statement has been held to be commercial speech. Bolger v. Youngs Drug Products Corp., 463 U.S. 60, 77 L. Ed. 2d 469, 103 S. Ct. 2875 (1983) (pamphlets which discussed venereal disease and mentioned certain brands of condoms were commercial speech). Thus, there is no clear definition of commercial speech or promotion for purposes of the Lanham Act.
In an analogous case brought pursuant to section 1125(a) of the Lanham Act, National Artists, supra, the Court held that a series of telephone calls and statements made by defendants to plaintiff's clients amounted to false and misleading representations of fact concerning plaintiff's talent-booking services. 769 F. Supp. at 1235-36. In National Artists, defendants were a husband and wife, the wife having terminated her employment with plaintiffs. Both husband and wife admitted to contacting former customers and clients whom Mrs. Weaving served while in plaintiff's employ. The Court found that the calls were not only social, but also had commercial purposes where it was established that Mrs. Weaving and her husband had discussed alleged improprieties which forced her out of her job with plaintiff and the fact that she was planning to establish her own booking agency. Id. 769 F. Supp. at 1236.
In this regard, the memorandum could be considered to have a variety of purposes, some direct and others indirect, and still be deemed a form of trade disparagement under the Lanham Act. On its face, the memorandum accuses agents of Douglas Elliman, (a company to which Northeast sells products,) and Wayne Reed, of acting unscrupulously to determine whether or not they could sell products to a building. Only as an aside does the memorandum point out that Reed is the president of Northeast Plumbing Specialties. The memorandum makes no disparaging remarks directly towards Northeast nor does it even mention Northeast's services. Although it is not alleged by plaintiff, at best the memorandum accuses Douglas Elliman and Reed, and only by way of narrow association Northeast (H & R), of engaging in improper commercial practices.
On the other hand, where the law concerning commercial advertising or promotion in trade disparagement claims is not entirely clear, this Court may not say with any degree of certainty that no material issues of fact exist with regard to whether or not the alleged statements amount to promotion within the meaning of section 1125(a)(1)(B). It must be left to a jury to decide whether or not the alleged use of the memorandum constituted trade disparagement in this particular industry under the Lanham Act.
Defendant argues that plaintiffs' Lanham Act claims are barred by laches. A defendant will prevail on a defense of laches where (a) plaintiff's delay in bringing a claim is unreasonable and inexcusable; and (b) the delay has resulted in material prejudice to the defendant. Coleman v. Corning Glass Works, 619 F. Supp. 950, 953 (W.D.N.Y. 1985), aff'd, 818 F.2d 874 (Fed. Cir. 1987); Gasser Chair Co. Inc. v. Infanti Chair Manufacturing Corp., 1991 U.S. Dist. LEXIS 12515, 21 U.S.P.Q.2D (BNA) 1131, 1133 (E.D.N.Y. 1991), rev'd on other grounds, 60 F.3d 770, 1995 U.S. App. LEXIS 13476, 34 U.S.P.Q.2D (BNA) 1822 (Fed. Cir. June 1, 1995). The laches period commences when plaintiff discovers facts which form the basis of the claim. Dixon v. American Telephone & Telegraph Company, 159 F.2d 863, 864 (2d Cir.), cert. denied, 332 U.S. 764, 68 S. Ct. 69, 92 L. Ed. 350 (1947); Coleman, 619 F. Supp. at 953. This Court finds that the doctrine of laches does not bar plaintiffs' claims because the delay, if any, was not inexcusable, and defendant has not shown how he has been prejudiced by such a delay.
There is a substantial factual dispute as to when and whether or not plaintiffs confronted Alvin Kirshner and demanded that he cease competing with H & R. Plaintiffs strongly contend that they spoke with Alvin Kirshner several times, and that each time he assured them that he was not using East Side to compete with H & R. Moreover, they argue, Alvin Kirshner was a member of the Board and Herbert Kirshner's brother, so they had reason to believe him. When prior notification in the form of warnings have been given to a suspected violator, courts have found that laches will not bar Lanham Act claims. For instance, in Tanning Research Laboratories, Inc. v. Worldwide Import & Export Corp., 803 F. Supp. 606, 609-10 (E.D.N.Y. 1992), the Court held that plaintiff's Lanham Act claims were not barred by laches where plaintiffs had sent letters to defendants notifying them of Lanham Act violations. Similarly, because there remain substantial issues of fact as to whether or not or when warnings were given to Alvin Kirshner, this Court may not adequately determine whether or not the length in time it took to file this action constitutes an inexcusable delay for laches purposes.
Furthermore, defendant only half-heartedly suggests that he has been prejudiced by plaintiffs' decision to wait until 1992 to file this case. His claim of prejudice, however, rests on the argument that East Side's business has since expanded. Normally, "the expansion of an infringer's business is the kind of prejudice which will support the defense of laches." Olympia Werke Aktiengesellschaft v. General Elec. Co., 545 F. Supp. 598, 614 (W.D.Va. 1982), aff'd, 712 F.2d 74 (4th Cir. 1983); Coleman, 619 F. Supp. at 955. In Olympia the court was presented with facts demonstrating "considerable prejudice" created by plaintiff's delays in bringing a patent infringement action where defendants had invested millions of dollars in research, development, equipment purchases, and marketing related to plaintiff's patented product. 545 F. Supp. at 614-15.
Defendant here merely states that while East Side's business had grown into a $ 1.2 million a year operation in 1991, sometime in the past plaintiff H & R had provided East Side with price lists and catalogs, and in between 1986 and 1989, plaintiff H & R sold East Side a total of $ 63,855 worth of plumbing supplies (and in 1989 only $ 1,696.00 worth of plumbing supplies) at cost. Thus, unlike in Olympia, here there was no great investment made by defendant that depended upon the assistance of H & R. See also Lukens Steel Co. v. American Locomotive Co., 197 F.2d 939, 941 (2d Cir. 1952) (laches defense available to patent infringer who "embarked on a costly expansion program").
As discussed above, plaintiffs initiated this action within the statute of limitations. Unlike the situation where a plaintiff fails to bring an action within the applicable limitations period, prejudice and delay are not presumed here. See Coleman, 619 F. Supp. at 953. Thus, where defendant has not met the burden to provide evidence of any prejudice, he has failed to establish a rebuttable presumption that plaintiffs are barred by laches from bringing this action.
Where issues of material fact exist as to plaintiffs' false designation of origin and trade disparagement claims, defendant's motion for summary judgment pursuant to the Lanham Act must be and is hereby denied.
(d) STATE LAW CLAIMS
Defendant moves for summary judgment on plaintiffs' State law claims sounding in unfair competition, breach of fiduciary duty, tortious interference with business relations, fraud and misrepresentation and defamation. Defendant also seeks summary judgment on plaintiffs' claims for punitive damages.
(1) Diversion of Corporate Opportunity
Plaintiffs claim that as part of defendant's plans to compete with Northeast Alvin Kirshner appropriated existing and prospective clients of plaintiffs. As part of this plan, defendant misappropriated plaintiffs' trade secrets and confidential materials without plaintiffs' consent. Defendant contends that the customer and price lists which are alleged to be trade secrets, are not trade secrets as a matter of law. In addition, defendant argues that this information was widely known among employees and/or easily accessible to anyone who was interested in the lists.
At this juncture, there remain various issues of material fact as to the nature of the alleged trade secrets, as well as how and when defendant acquired the information. In determining whether information constitutes a trade secret, the New York Courts have considered the following factors:
1) the extent to which the information is known outside of the business;
2) the extent to which it is known to employees and others involved in the business;