Business Litigation Update

Pennsylvania Federal Business Decisions

By Bridget M. Gillespie and Henry M. Sneath [Originally published in the Spring 2005 edition of the Pennsylvania Bar Association's Civil Litigation Update]

Ride the Ducks, L.L.C.'s Attempt at Silencing the Quack of Competitor By Preliminary Injunction Fails

Judge Legrome of the Eastern District of Pennsylvania denied the preliminary injunction requested by a land-sea Philadelphia tour operator in order to sink its competition. In Ride the Ducks, L.L.C. v. Duck Boat Tours, Inc., 2005 U.S. Dist. LEXIS 4422 (E.D. Pa. 2005), Ride the Ducks sought a preliminary injunction alleging that Duck Boat Tours infringed and diluted its trademark for duck calls and toy noisemakers and its service mark for quacking noises. Ride the Ducks also alleged an employee it fired violated the restrictive covenant he signed by going to work for Duck Boat Tours. Both entities operate land-sea tours of historical Philadelphia and engage in making quacking noises along with their customers during the tours. Ride the Ducks began operation approximately one year before Duck Boat Tours and obtained a service mark for quacking noises made by tour operators and participants.

In denying the preliminary injunction with respect to the Lanham Act claims, the Court held that the mark is not inherently distinctive and thus Ride the Ducks was required to show that the noise produced by its Wacky Quackers had gained secondary meaning. Ride the Ducks failed to do so because it had not been operating in the Philadelphia area long enough, its advertising was focused on the quacker rather than the sound made by the quacker and other evidence presented showed that the public may associate the quacker with Ride the Ducks, but not the sound that the quacker makes. Because Ride the Ducks could not establish distinctiveness, it likewise could not establish famousness for purposes of its dilution claims.

The Court also held that Ride the Ducks was unlikely to prevail on its claim for breach of the restrictive covenant. To be valid and enforceable, a restrictive covenant must, inter alia, be reasonably designed to safeguard a legitimate business interest. "A non-competition agreement that seeks to eliminate competition or to prevent the employee from competing merely to give the employer an economic advantage is generally not enforceable." Id. at *37 (citation omitted). The employee at issue had many of the specialized skills claimed to be proprietary before he went to work for Ride the Ducks. He held a Coast Guard license and had driven in the trucking industry at a time before a commercial driver's license was required. The Court did not consider the training specific to operating the Ride the Ducks vehicle (changing operation from land to sea) to constitute the requisite specialized training to enforce a restrictive covenant. The Court also noted that the historical information about Philadelphia is not confidential or protectible and Ride the Ducks' combination of entertainment, historical information and riding on land and water is disclosed to the public and competitors alike during the operation of every tour. Thus, the information imparted during training cannot be considered confidential.

Injunction Against Threatening Third Parties With Suit During Pendency of Copyright Infringement Litigation Upheld

The Court of Appeals for the Third Circuit upheld the imposition of an injunction which forbade the plaintiff from communicating with the defendant's business partners and product users regarding the status or subject matter of the litigation. Liveware Publishing Inc. v. Best Software Inc., 2005 U.S. App. LEXIS 3896 (3d Cir. 2005). The plaintiff and defendant entered into a licensing agreement which allowed the defendant to incorporate the plaintiff's software program into its software product, Abra Suite. The plaintiff sued for violation of the agreement and alleged copyright infringement. The district court had warned the plaintiff several times not to threaten the defendant's business partners and end-users with infringement litigation. Despite this, the plaintiff sued one of the defendant's business partners and sent threatening emails to others. The court thereafter entered an injunction barring the plaintiff from communicating with the defendant's business partners and end-users regarding the status or subject matter of the litigation. After an arbitration ended mostly in favor of the plaintiff, the plaintiff moved for reconsideration of the injunction then issued a press release and web-posting that violated the injunction. The district court then issued an order continuing the injunction and imposing sanctions. The Third Circuit affirmed the issuance of the injunction, holding irreparable injury was shown for which monetary damages would be inadequate. The Third Circuit's decision is replete with comments on the fact that not only was the defendant affected by the plaintiff's conduct, but so was the court and the injunction was imposed as much to protect the defendant as to enforce the court's prior orders:

The [District] Court also found that Liveware's actions caused irreparable harm to Best's business relationships with its business partners and end-users and "rattled the chain of business end-users [in[ an effort to upset the status quo and to disturb the orderly resolution of the dispute," despite repeated warnings by the Court. Based on these determinations, we believe that the District Court did not err in concluding that Liveware's actions would cause immediate irreparable injury both to Best and to the administration of justice if injunctive relief were not granted.

Id. at *9-10. The best lesson to learn from this case may be that if the court warns a party not to use the litigation as a business sword with non-parties, don't be surprised if an injunction is issued when the party disregards the court's warnings.

SLUSA Preempts Action Alleging Dissemination of Biased Investment Research Even Though Action Contained Breach of Contract Count

The Third Circuit applied case law under § 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 to interpret the Securities Litigation Uniform Standards Act of 1998's ("SLUSA") "in connection" requirement. Rowinski v. Salomon Smith Barney Inc., 398 F.3d 294 (3d Cir. 2005). In Rowinski, the plaintiffs filed a state class action complaint alleging breach of contract, unjust enrichment and violation of the Pennsylvania Unfair Trade Practices and Consumer Protection Law. The gravamen of the complaint was the allegation that Salomon Smith Barney disseminated biased investment research to the detriment of its brokerage clients. This allegation was incorporated into each count of the complaint. The District Court held, and the Third Circuit affirmed, that the entire action was preempted by SLUSA and dismissed the complaint. SLUSA provides, in part:

No covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging . . . a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security; or . . . that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security.

15 U.S.C. § 78bb(f)(1). The court held that the allegation of dissemination of biased investment research allegations satisfied the misrepresentation requirement and it was immaterial that misrepresentation was not a necessary element of a breach of contract claim because the alleged misrepresentation was a factual predicate of the claim. Rowinski, 398 F.3d at 300. Additionally, the Court held that the misrepresentation was in connection with the sale or purchase of securities based on the allegations and the requested relief which including recoupment of trading fees and commissions. In so holding, the Court adopted the following guideposts:

• Whether the class action alleges a "fraudulent scheme" that "coincides" with a securities transaction. 
•  Whether the action alleges "a material misrepresentation or omission 'disseminated to the public in a medium upon which a reasonable investor would rely.'"
• Whether the relationship of the parties is the type that involves the purchase and sale of securities.
• Whether the damages sought connect the claim to the purchase or sale of securities.

Id. at 302 (citations omitted). The Court further held that artful pleading cannot circumvent SLUSA preemption.

A Supreme Court Decision of Note, Appealed From the Ninth Circuit

U.S. Supreme Court Clarifies Interplay Between Consumer Confusion As Part of Prima Facie Case and Defense of Fair Use in Trademark Infringement Case

In KP Permanent Make-Up, Inc. v. Lasting Impression I, Inc., 125 S. Ct. 542, 160 L.Ed.2d 440, 2004 U.S. LEXIS 8170 (Dec. 8, 2004), a unanimous¹ Supreme Court held that a defendant raising the fair use defense is not required to negate consumer confusion. There, both parties were sellers of permanent makeup and claimed the right to use a version of the term "micro color." KP filed a declaratory judgment action seeking a declaration that its use of the term did not infringe any exclusive right of Lasting and Lasting counterclaimed, inter alia, for infringement of its "Micro Colors" trademark. Lasting had applied for the trademark in 1992, the mark was registered in 1993 and became incontestable in 1999. KP alleged that it had used a version of the term since 1990 or 1991 and used the term only descriptively. KP moved for summary judgment on its fair use affirmative defense which was granted, but the Court of Appeals for the Ninth Circuit reversed, holding possible consumer confusion needed to be addressed as part of the fair use defense. The Supreme Court granted certiorari "to address a disagreement among the Courts of Appeals on the significance of likely confusion for a fair use defense to a trademark infringement claim, and the obligation of a party defending on that ground to show that its use is unlikely to cause consumer confusion." 125 S. Ct. at 547, 160 L.Ed.2d at 448.

The Court relied on the language of the statute for what constitutes infringement versus what constitutes fair use. To prove infringement, the statute requires that the "use is likely to cause confusion, or to cause mistake, or to deceive." 15 U.S.C. § 114(1). But, the statute providing for the affirmative defense of fair use is available to one:

[whose] use of the name, term, or device charged to be an infringement is a use, otherwise than as a mark, . . . of a term or device which is descriptive of and used fairly and in good faith only to describe the goods or services of such party, or their geographic origin . . . .

15 U.S.C. §1115(b)(4). Thus, likelihood of confusion is part of a plaintiff's prima facie case in a trademark infringement action, but the burden to negate confusion is not part of the affirmative defense of fair use. 125 S. Ct. at 548, 160 L.Ed.2d at 449.

The Court noted the absurdity of giving a defendant the burden to disprove confusion when confusion is a necessary element of a plaintiff's case:

Put another way, it is only when a plaintiff has shown likely confusion by a preponderance of the evidence that a defendant could have any need of an affirmative defense, but under Lasting's theory the defense would be foreclosed in such a case. "[I]t defies logic to argue that a defense may not be asserted in the only situation where it even becomes relevant." Nor would it make sense to provide an affirmative defense of no confusion plus good faith, when merely rebutting the plaintiff's case on confusion would entitle the defendant to judgment, good faith or not.

125 S. Ct. at 549, 160 L.Ed.2d at 450.

Despite this holding and noting that some confusion is compatible with fair use, the Court nevertheless recognized "the relevance of the extent of any likely consumer confusion in assessing whether a defendant's use is objectively fair." 125 S. Ct. at 550, 160 L. Ed.2d at 452.

Justice Scalia joined the opinion except for footnotes 4 and 5 and Justice Breyer joined all but footnote 6. (return to text)