Legal in Phoenix, liable in Central Islip

Originally posted 2009-01-21 18:24:42. Republished by Blog Post Promoter

UPDATE: All the below is still very relevant, very important and very significant — except as to the final judgment, which has been vacated by consent and replaced with this Agreed Injunction and Order.

D'Amato Federal courthouse EDNYMy client S&L Vitamins and I just suffered a devastating loss in its Eastern District of New York litigation against Australian Gold (now owned by a holding company called New Sunshine, LLC) after a five-day jury trial on claims by AG for tortious interference with contract and trademark infringement.  I posted both sides’ trial briefs here.  The jury instructions in the Australian Gold case are here.  I will post more documents later.

Before sharing the verdict and recounting some extraordinary highlights of the trial, here’s some background.  I am focusing on the contrast between this outcome and the mirror-image rulings on virtually identical operative facts in the Designer Skin case, discussed below, also involving my client — not because it must be the case that the court in Designer Skin was right and the court in Australian Gold was wrong, but to point out the utter inconsistency of these rulings and the impossibility of doing business in such a legal environment:

  • S&L sells tanning lotions on the Internet.  It has had various litigation battles with a number of manufacturers — all  of which are now owned by New Sunshine, a company with revenues of over $100 million a year — but two are of particular interest for purposes of this post:  Australian Gold, and Designer Skin.
  • In October of 2007, Judge Joanna Seybert of the Eastern District of New York granted S&L summary judgment on the majority of claims made against it by Australian Gold.  The court dismissed AG’s claims for copyright infringement, most of its trademark claims, its claim for civil conspiracy, its claim for tortious interference with prospective economic advantage, and a number of other claims.  I wrote about that decision and linked to it here.  The court left open AG’s claims as described above, however, in a decision discussed by a number of learned observers linked to at the last link.
  • Last July we went to trial in the Designer Skin case on a series of claims that began essentially as the same pleadings against S&L as the ones in the Australian Gold case.  That trial proceeded after Judge James Teilborg dismissed Designer Skin’s federal trademark and tortious interference claims but rejected the fair use ruling of Judge Seybert as to copyright.  At trial, the court went on to dismiss Designer Skin’s state law unfair competition claim as well as its evidence of damages, as reported here. Significantly, the Arizona court ruled as follows regarding the unfair competition claims (reported here):

It is clear that the beef, if you may, on the part of the plaintiffs is the selling of product by S & L . . .

[N]ow having heard the evidence and seen the evidence and seen the website presentations, it is clear to me that the portraying of Designer Skin’s product images on the website next to the S & L logo cannot cause any confusion that somehow S & L is associated with Designer Skin or is a so-called authorized distributor.

And again, we must remind ourselves that S & L — though much to the chagrin of Designer — S & L had a perfect right to sell this product, and the mere fact the S & L logo is next to the product does not and I believe could not result in any bases for confusion. In my judgment, this is no different than if this product had been sold on the Macy’s or Nordstrom’s website with Nordstrom’s and Macy’s logos sprinkled throughout. That would not be the basis for a claim of confusion. And obviously, retailers and Internet purveyors of products are doing this regularly and it cannot and should not be actionable. . . .

  • Today in Central Islip, the Eastern District of New York directed a jury as to essentially the exact opposite conclusions of law, and opposite ones as well from those issued in the Arizona court’s earlier summary judgment opinion on the Lanham Act claims of Designer Skin (here), in S&L’s case against Australian Gold.
  • In its instructions, the jury was told that (1) placement of Australian Gold products on the S&L website was trademark infringement if the jury — absent survey evidence of a likelihood of confusion or more than two claimed (second-hand) instances of actual confusion (as to one trademark only), and those only with respect to one of the trademarks — thought the website could give consumers the impression of “Australian Gold’s approval of S&L’s commercial activities, relating to the sale of AG products on the Internet”; and (2)  it was free to use the gross revenues of S&L shown in its tax returns as a measure of trademark infringement damages to Australian Gold.  The jury did so, found infringement of five marks and awarded AG $3 million in damages presumably based on those figures.
  • The Arizona court had also tossed out, on summary judgment, the claims by Designer Skin for tortious interference with contract, ruling, in a decision reported at 560 F. Supp. 2d 811 (D. Ariz. 2008), as follows on what I will represent to you are materially identical facts and what appear to be identical legal standards according to the controlling decisional law of both New York and Arizona (and it is the legal conclusion I am reporting here):

S & L Vitamins argues that Designer Skin has failed to present any evidence that S & L Vitamins has induced or caused a breach of the distributorship agreement. Specifically, S & L Vitamins argues that it ould not have caused a breach of this agreement because it has never purchased Designer Skin products directly from a distributor.

Designer Skin responds in two ways. First, Designer Skin disputes S & L Vitamins’ claim that it has never purchased Designer Skin products directly from distributors. And second, even assuming that S & L Vitamins has never purchased the products directly from distributors, Designer Skin maintains that the tanning salons that sell Designer Skin products to S & L Vitamins are acting as agents of S & L Vitamins when they purchase those products from the distributors. The Court finds insufficient evidence to support either of Designer Skin’s theories. . . .

In Arizona, “[a]n agency relationship can derive from either actual or apparent authority.” Ruesga v. Kindred Nursing Ctrs., L.L.C., 161 P.3d 1253, 1261 (Ariz. Ct. App. 2007) (citing Restatement (Third) of Agency §§ 2.01, 2.03 (2006)). “Actual authority is an agent’s power to affect the principal’s legal relations in accord with the agent’s reasonable understanding, at the time the agent acts, of the principal’s manifestations to the agent.” Restatement (Third) of Agency § 2.02 cmt. c. Apparent authority, in contrast, “exists when ‘the principal has intentionally or inadvertently induced third persons to believe that . . . a person was its agent although no actual or express authority was conferred on him as agent.’” Ruesga, 161 P.3d at 1261 (quoting Premium Cigars Int’l, Ltd. v. Farmer-Butler-Leavitt Ins. Agency, 96 P.3d 555, 565 (Ariz. Ct. App. 2004)). The burden of proving the existence of an agency relationship is on the party asserting it. Brown v. Arizona Dep’t of Real Estate, 890 P.2d 615, 621 (Ariz. Ct. App. 1995).

Because Designer Skin concedes that its distributors did not believe they were selling products to S & L Vitamins’ agents, the only possible basis for finding that an agency relationship existed between a tanning salon and S & L Vitamins is actual authority. And although actual authority “may be, and frequently is, implied from the words and conduct of the parties and the circumstances of the particular case,” Canyon State Canners, Inc. v. Hooks, 243 P.2d 1023, 1024 (Ariz. 1952), such “implied” actual authority must be based on facts that would “naturally lead another to believe” an agency relationship exists . . .

The evidence in this case is insufficient to support such a finding. The undisputed facts are as follows: S & L Vitamins orders Designer Skin products from tanning salons. The tanning salons then order the products from a Designer Skin distributor. When the products arrive, S & L Vitamins picks up the products and invoice from the tanning salon, reviews the invoice, and then returns the invoice with its payment at the previously agreed upon price, which, depending on the product, is 10-20% greater than the invoice price. The natural implication to be drawn from these facts is not that S & L Vitamins had the right to control the tanning salons’ transactions with the distributors, see Brown, 890 P.2d at 621 (stating that an agency relationship cannot exist unless the alleged principal “has the right to control the transaction”), but rather that S & L Vitamins and the tanning salons entered into arms-length transactions, with each entity acting out of its own self-interest. A reasonable jury could not conclude otherwise. Therefore, Designer Skin’s agency theory fails as a matter of law.

  • In contrast, in the Eastern District of New York, the Court  (1) refused to require Australian Gold to prove agency and, despite our request, refused to charge the jury with the elements of agency; (2) instructed the jury, over our objection, that “S&L Vitamins may be liable for tortious interference with contracts if you find S&L intentionally caused third parties to purchase Australian Gold products from Australian Gold distributors or subdistributors in breach of the agreements between [them] and AG” with AG was tortious interference with contract; and (3) refused to charge the jury with the language from the most recent New York Court of Appeals case on tortious interference with contract (White Plains Coat & Apron Co., Inc. v. Cintas Corp) that “Sending regular advertising and soliciting business in the normal course does not constitute inducement of breach of contract” or even the next sentence, stating, “A competitor’s ultimate liability will depend on a showing that the inducement exceeded “a minimum level of ethical behavior in the marketplace.” Not surprisingly, the jury found tortious interference.
  • Finally in Arizona the court struck the testimony proffered by Designer Skin as damages  for copyright infringement — a different claim, but an essentially identical theory of damages as the evidence accepted regarding both the trademark and the tortious interference damages claimed by Australian Gold in New York.  The Arizona court ruled as follows (the whole transcript is here):

[W]e’ve heard evidence in terms of how much money Designer has spent in their product development, how much they’ve spent in their product image, the money they’ve spent in their diversion program, and it would appear that is all directed at seeking out product distributors such as S & L. But even if one could assume that somehow it is to seek out and take action against a copyright infringement of its images, there is no basis for this jury or any reasonable jury to attempt to connect how much of those expenditures are connected to the images themselves as opposed to the product distribution issues.

Likewise, the references to S & L’s profits are simply, again, gross references to revenues and ultimately to profits without any reasonable basis to differentiate how much of that is attributable to the copyright infringement as opposed to the product sales. . .

So again, the only issue in front of this jury and before this Court is that narrow issue of the electronic image being lifted and pasted on the website, and there’s been simply no connection between that and any ascertainable damages.

  • Permitted over our objection to consider precisely evidence of this nature in the Australian Gold case, the Eastern District of New York jury returned a damages award for tortious interference with contract for another $3 million.
  • Judge Seybert will also issue an injunction — presumably one making it against the law for S&L Vitamins to sell any Australian Gold products in any manner.

Who is right — Arizona or New York?

Obviously I’m unhappy with these more recent rulings, and my clients are even more unhappy.  They don’t understand why a judge in Phoenix said that what they do is legal, and not even a jury question, and a few months later a judge in New York let them get socked for a $6 million verdict for the identical business practices in New York (there is no substantive difference in the law).  I don’t have a great explanation for them, and if I did I can’t imagine it will help.

Their lives are ruined, and I can hardly imagine this verdict is going to do wonders for my own week.

There will be post-trial motions, appeals, bankrupticies… in New York, anyway.  In Phoenix, it’s sunny and nice, but that won’t do much for S&L Vitamins this January.

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Author:Ron Coleman

I write this blog.

13 Responses to “Legal in Phoenix, liable in Central Islip”

  1. January 22, 2009 at 1:46 am #

    And I thought I was having a bad day. Prayers for you and your clients.

  2. January 22, 2009 at 12:14 pm #

    Sorry to hear about your loss. It is further evidence (in my small opinion) of tm holders expanding the entire concept of tm law to stamp out competition and preserve an artificially high price or limited distribution of their goods. While I have not followed this case, I wonder if the plaintiff ever attempted to pursue the salons who sold the product on to your client in the first place. I doubt it.

    The inherent problem, however, unless I have missed something in quickly reading your blog, does not seem like one of tm law but one more emphasizing the differences between applicable state law (tortious interference) as that appears to have been the basis upon which damages were awarded.

    As for likelihood of confusion, I empathize with you. However, the same argument goes on everyday in the domain world when a tm holder asserts a likelihood of confusion when faced with a typical PPC page and claims “infringement” because there exists either (a) the ability to conduct a search using a Google search box (which if gamed correctly results in a competitor showing up), or (b) a deep link in a general category that leads to a competitor. What consumer when faced with a PPC page is confused? I am not defending egregious cybersquatting here but rather a situation more akin to yours – say VisaCreditCardS.com which leads to an affiliate site wherein one or more licensees of VISA is in fact offering VISA cards. My example is even more troubling when you consider that VISA does not sell anything (they and MasterCard actually have terms and conditions stating they sell nothing to the customer) but rather depends on its licensees to sell services to the customer.

  3. Helen Sagarin
    January 22, 2009 at 4:15 pm #

    how do i set up a blog asking for donations so that you, ron can get paid. this case has to be important to any website selling product. even if every website contributes $10 or more so this case can be appealed. let me know thanks Larry’s mom
    i spoke with Total Health who was sued by standard process for selling those vitamins on the web and they won using first sale doctrine. still can’t understand why it didn’ work for you. marty at Total Health is incredulous, so am i. scott banks is now being sued by standard process for the same reason. thanks again, helen.

    • January 22, 2009 at 4:38 pm #

      God bless you, Helen, but I don’t need donations! I mainly need to see this decision overturned. And you and Larry and Steve and I are hardly the only ones — the implications for the rule of law this case stands for could be grave for a lot of people doing honest business on the Internet, and elsewhere.

      I would also like to know why the first sale doctrine didn’t work. Helen, it also didn’t work in Phoenix — we won on other grounds.

      That’s the point of this post: Not that one or another judge is necessarily wrong, but that it cannot be the law that what is legal as a matter of federal law in one state is illegal in another. And not by a little — by $6 million. (The state law claims were also based on identical state law doctrines too…)

      On the other hand, we do need to raise some funds for the transcript so we can get to work on the appeal…

  4. Anonymous (but in the know)
    January 28, 2009 at 1:13 am #

    I am very familiar with this bunch at ETS and Australian Gold. I honestly would not put it past them to have paid off the right people. This is not an accusation, only my opinion that it could have happened. They are a win at all cost people, even if it means bending the rules to favor them. Ron, I can tell that you are a good man and a good attorney. I think that you will get this overturned. You are writing the law as we speak. What about antitrust laws here. Doesn’t the fact that Australian Gold owns 80% of the indoor tanning lotion industry make them a monopoly? Anyway Ron the world needs more attorneys like you. Keep up the fight. The right will overcome.

    Thanks for your comments. I will publish your opinion that you “would not put it past them” to have done what you say, which of course is not a claim that they have done it. I have no reason to think that they did. — RDC

  5. January 28, 2009 at 1:56 pm #

    Ron Ron Ron Ron Ron

    You simply don’t understand. By hammering your client we, the right sort of folks, are actually protecting consumers. By forcing consumers to pay higher prices and not allowing them to buy a once sold product on the Internet we are protecting consumers from the horrendous dangers that can occur when sun tan lotion is dangerously allowed to enter the stream of commerce in an uncontrolled manner.

    What do you think the Second Circuit would have to say about this case?

  6. January 28, 2009 at 1:59 pm #

    Well, John, now that you’ve removed the UV scales from before my eyes, I am sure they would agree.

    I have my personal views, as you can imagine, but of course I cannot express them in this forum while the case is sub judice, as it is. I have just laid out the issues as already expressed in our earlier submissions in the blog post. If you think anything in those jury instructions strikes you as reversible error, by all means you are free to comment. And if not, I frankly need to know that too.

  7. January 25, 2011 at 9:31 pm #

    All laws and interpretations should be uniform across the board.

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