Monday, September 29, 2008

Established Manufacturer’s Comparative Ads Presumed to Cause Injury to New Entrant

This posting was written by William Zale, Editor of CCH Advertising Law Guide.

In light of unrefuted allegations that Oregon Cutting Systems Group—an established manufacturer of chainsaw components—engaged in deliberate, literally false, and material advertising that directly compared its chain to that of newly established competitor Trilink Saw Chain, a presumption arose under the Lanham Act that the advertising deceived the competitor's customers and caused it financial injury, the federal district court in Atlanta has ruled.

Oregon Cutting Systems (Oregon) was denied summary judgment on the Lanham Act claims because it failed to rebut the presumption of injury. In addition, there was an unresolved question of fact whether Trilink Saw Chain (Trilink) could recover "damage control costs" for testing it conducted in response to the allegedly false advertising.

Abstracts of Tests

In 2005, Oregon had an estimated 57 percent of the market share for saw chain sales. Nevertheless, it considered Trilink, which entered the market that year, a threat.

In March 2006, Oregon created one-page abstract, containing summaries of the results of internal tests Oregon performed on both companies’ chains. Oregon discussed the contents of the abstract with several customers and provided copies of the abstract at various times between March and November 2006.

During the summer of 2006, Oregon hired a third-party lab to conduct further tests, prepared a six-page memorandum on the results, and disseminated the memorandum to customers. It also prepared a brochure, “Eight Important Considerations In Choosing Your Partner for Saw Chain,” which it distributed to its customers.

False Advertising Claim

Trilink brought suite in 2007, alleging that the abstract, memorandum, and brochure contained literally false or misleading statements intending or having the capacity to deceive potential purchasers as to the “strength, performance, and safety” of its chain. The suit alleged that the statements violated Section 43(a) of the Lanham Act and the Georgia Uniform Deceptive Trade Practices Act and that Oregon committed trademark infringement and tortious interference with Trilink’s business relations.

Oregon filed several motions for summary judgment, including one attempting to strike the request for monetary damages, claiming that Trilink failed to establish that it was injured by the alleged false advertising.

Actual Harm v. Presumption of Harm

While a showing of false and deceptive advertising is sufficient to warrant injunctive relief, parties seeking monetary relief have often been required to establish actual harm to their businesses, the court observed. Since marketplace damages are difficult and expensive to prove, many courts—including the 11th Circuit—“routinely presume that literally false advertising actually deceives consumers.” In the context of a preliminary injunction, the 11th Circuit will presume irreparable harm when a false, comparative statement is made.

The district court concluded that a presumption of causation and harm should apply to claims for actual damages when a defendant disseminates a willfully deceptive comparative advertising.

In this case, Trilink alleged—and Oregon did not dispute—that Oregon engaged in deliberate, literally false, material advertising that directly compared Trilink’s chain to Oregon’s chain. Thus, Trilink was entitled to a presumption that the advertising deceived its customers, causing Trilink financial injury.

Profits Award

Trilink could pursue an award of profits, the court held. Where an established company specifically disparages a market newcomer through deliberately false advertisements, the newcomer would not be required to prove that the advertisements benefited the disseminator before being awarded an accounting of profits.

So long as the newcomer could provide evidence of the established manufacturer's gross sales, the newcomer would be eligible for a discretionary award of profits, the court said.

The September 12 decision in Trilink Saw Chain, LLC v. Blount, Inc. appears at CCH Advertising Law Guide ¶63,101.

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