Brand Enforcement / 11.18.2019

One Shot: Claim Preclusion in Brand Enforcement Litigation

By David Posteraro

claim preclusionThis is a case where a second bite of the apple proved poisonous.

A California Court recently ruled that Factory Direct Wholesale can move forward with its trademark infringement and false advertising claims against iTouchless for allegedly making changes to Factory Direct’s product advertisements and listings on Amazon that the company didn’t authorize. But the court dismissed Factory Direct’s tortious interference, as well as California’s Unfair Competition Law claims with prejudice, because those claims could have been litigated in an earlier case.

Factory Direct Wholesale, LLC and iTouchless Housewares & Products, Inc. are competing sellers of houseware products on Amazon. Amazon sellers are subject to the platform’s established rules and policies that govern their product listings. The Amazon Seller Agreement, for example, requires sellers to represent and warrant that, “any information provided . . . to Amazon . . . is at all times accurate and complete.” On top of that, the Amazon Code of Conduct requires that sellers, “not engage in any ‘unfair behavior’ or activities that (a) intentionally damage another seller, including its listings or ratings, or (b) manipulate or game the Amazon.com selling or buying process, including Amazon’s search results or sales rankings.” Amazon sellers are also prohibited from contributing false, misleading or inauthentic content.

In 2018, Factory Direct learned that unauthorized changes were being made to its product advertisements and listings on Amazon, including changes to product descriptions, ASIN numbers and the product’s listing from Amazon’s Home & Kitchen category. Factory Direct found evidence that these changes were made by iTouchless in breach of its Amazon agreements and to Factory Direct’s detriment.

Factory Direct sued iTouchless in the Northern District of Georgia, asserting claims for false advertising and trademark infringement under the Lanham (i.e., Trademark) Act, tortious interference with business under Georgia common law, and violations of Georgia’s Uniform Deceptive Trade Practices and Fair Business Practices Acts. Factory Direct claimed that iTouchless requested unauthorized changes to Factory Direct’s ASINs but failed to allege that any of the changes were deceptive or misleading. Because the complaint failed to allege that the changes resulted in some misrepresentation to the consuming public, or that iTouchless had misrepresented itself to Amazon, or that the changes were false or deceptive, the Georgia court granted iTouchless’s motion to dismiss all claims with prejudice.

In March of 2019, Factory Direct filed a complaint in the Northern District of California which included additional detail about Amazon’s rules and policies, more specific allegations about iTouchless’s purported actions and how the changes to Factory Direct’s listings “falsely advertised” or misrepresented Factory Direct’s products as products “manufactured and branded by iTouchless.”

For example, Factory Direct alleged that iTouchless requested that Amazon make changes to Factory Direct’s products and listings to falsely advertise Factory Direct’s 4ZB4 product, “as a product manufactured and branded by iTouchless.” According to Factory Direct, iTouchless had, “falsely represented to Amazon that the 4ZB4 Listing was a duplicate listing that should be merged into [iTouchless’s] Listing.” As a result, Amazon merged the two listings such that the 4ZB4 Listing, “no longer appeared in customer searches on” Amazon. “All of the changes requested by [iTouchless] in February 2019 to [Factory Direct’s 4ZB4] product listing . . . were knowingly false and deceptive because they were not authored by [Factory Direct]; they falsely advertised iTouchless’s products; and they misrepresented inherent and material qualities and characteristics of [Factory Direct’s] products to the consuming public, including the product title, image, brand, manufacturer, and description of the 13-gallon trash can.”

Additionally, Factory Direct claimed that starting in February 2019, iTouchless also “attempted to falsely and deceptively” merge Factory Direct’s FQWE and JYK7 listings (both of which were unrelated to the 4ZB4 listing) but Factory Direct did not allege that iTouchless’s efforts were successful.

In all, Factory Direct’s California complaint alleged six causes of action against iTouchless: (1) false advertising under the Lanham Act; (2) intentional interference with contract; (3) intentional interference with prospective economic advantage; (4) negligent interference with prospective economic advantage; (5) violations of California’s Unfair Competition Law (UCL); and (6) trademark infringement under the Lanham Act. For the first five causes of action, Factory Direct purported to only seek recovery for conduct occurring after the conclusion of the Georgia case. With respect to the trademark infringement, Factory Direct alleged that iTouchless was infringing Factory Direct’s registered BESTOFFICE trademark to advertise a 13-gallon trash can.

iTouchless sought to dismiss all of Factory Direct’s claims as having been disposed of in the earlier Georgia case on the legal basis of claim and/or issue preclusion. Also called res judicata and collateral estoppel, these legal defenses bar claims that have or could have been litigated (claims preclusion) and issues (issue preclusion) that have been litigated from being litigated again.

Claim Preclusion

The legal concept of claim preclusion (or res judicata) restricts a party in successive litigation from pursuing claims that were raised or could have been raised in a prior action. The key question for the California Court, therefore, was whether Factory Direct’s claims in its California case accrued (or came into existence or arose), and thus could have been sued upon before Factory Direct filed the Georgia action. Answering that question, the court found that Factory Direct’s false advertising and trademark infringement claims were not barred, but its California Unfair Competition Law (UCL) and tortious interference claims were.

Regarding trademark infringement, claim preclusion was the only basis iTouchless raised for dismissal of this claim. The court acknowledged that the Georgia action and Factory Direct’s Lanham Act trademark infringement claim broadly arose out of “advertising on Amazon’s website.” However, the earlier-filed action centered on iTouchless’s misrepresentations to Amazon, which supposedly led Amazon to merge Factory Direct’s listings into iTouchless’s listings even though the products were distinct. In the present case, Factory Direct’s trademark infringement claim was predicated on iTouchless’s alleged use of Factory Direct’s registered trademark without authorization. Thus, claim preclusion did not bar Factory Direct’s trademark infringement claim.

Factory Direct conceded that its false advertising claims arose out of “a continuing course of conduct that provided the basis for the earlier claim,” but maintained that its claims did not accrue until February 2019, well after the filing of the Georgia action. ITouchless argued that in the Georgia action, “Factory Direct sought forward-looking, injunctive relief for the very conduct alleged in this action” such that, “Factory Direct cannot avoid the operation of the res judicata doctrine.” Siding with Factory Direct, the court denied iTouchless’s motion to dismiss Factory Direct’s Lanham Act false advertising claim on the ground of claim preclusion holding that iTouchless’s February 2019 conduct created new causes of action that were not barred.

However, the court found that Factory Direct’s UCL and California tortious interference claims were barred by claim preclusion. Factory Direct conceded that these claims arose out of “a continuing course of conduct that provided the basis for the earlier claim,” but appeared to rely on a theory of continuous accrual. Regarding its tortious interference claims, Factory Direct failed to cite—and the court did not find—any case that applied the continuous accrual doctrine to California tortious interference claims. Regarding UCL claims, California courts have largely confined the application of the continuing accrual theory to, “a limited category of cases, including installment contracts, leases with periodic rental payments, and other types of periodic contracts that involve no fixed or total payment amount,” the court said. The court found no reason to apply the continuous accrual doctrine in this case.

Issue Preclusion

The court next addressed iTouchless’s argument that issue preclusion required dismissal of Factory Direct’s Lanham Act false advertising claim. Unlike claim preclusion, issue preclusion requires that an issue must have been actually and necessarily determined by a court to be conclusive in a subsequent suit. Here, the parties only disputed whether Factory Direct’s allegations that iTouchless made false and misleading statements were actually litigated in the Georgia action. The court answered this question in the negative.

The Georgia court had dismissed Factory Direct’s Lanham Act false advertising claims because the only action alleged by Factory Direct was iTouchless’s request to Amazon to change Factory Direct’s product information. The Georgia court had also found that Factory Direct did not allege “improper conduct or wrongful actions by the defendant.” The California court agreed that Factory Direct’s complaint in the Georgia action was “threadbare.”

In this case, by contrast, Factory Direct’ s amended complaint had provided specific allegations about iTouchless’s purported false and deceptive actions and how the changes to Factory Direct’ s 4ZB4 Listing “falsely advertised” or misrepresented Factory Direct’s products as products “manufactured and branded by iTouchless.” iTouchless also allegedly attempted to merge Factory Direct’s FQWE and JYK7 Listings on Amazon by falsely claiming that the FQWE and JYK7 products were the same product when they were in fact different. Because the allegations regarding iTouchless’s false and misleading statements as to Factory Direct’s listings were not present in the Georgia action, the Georgia court could not have actually decided those issues, the court said. The court denied iTouchless’s motion to dismiss Factory Direct’s Lanham Act claim on the basis of issue preclusion.

Conclusion

The order illustrates the need for careful and thoughtful drafting by counsel in connection with Lanham Act and unfair competition claims. Merely asserting a claim without an allegation of how the claim has harmed the plaintiff may result in a dismissal of those claims.

If you have any questions or would like to discuss further, please reach out to David Posteraro at drp@kjk.com or 216.736.7218, or contact any of our Brand Enforcement professionals.

 

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