Tuesday, June 22, 2010

Manufacturer Not Liable for Seller's Alleged False Advertising of Products

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

Taiwanese bicycle component manufacturer Tien Hsin was not directly or vicariously liable under the Lanham Act or Washington law for allegedly false advertising by a separate corporation (FSA)—whose trademark was held by the manufacturer—that sold Tien Hsin's products to North American distributors and retailers, the federal district court in Seattle has ruled.

Direct Liability

A competing seller's direct liability theory was rejected because none of Tien Hsin's employees contributed to, commissioned, reviewed, or participated in the creation of FSA's advertisements. There was no evidence that Tien Hsin had knowledge of the advertisements, or more importantly of their falsity, the court found.

Vicarious Liability

The competitor asserted vicarious liability on grounds that FSA was Tien Hsin's alter ego and agent. The relationship between the two was akin to a subsidiary-parent relationship, the court said. At least at a high level, Tien Hsin had the power to control FSA because it supplied substantially all the products FSA sold and owned the FSA trademark. FSA was wholly owned by one of Tien Hsin's four shareholders who was related through marriage to the other three shareholders.

Parent/Subsidiary Relationship

However, a parent corporation generally is not liable for acts of its subsidiary, the court observed. There was no evidence that the corporate formalities were disregarded. The close relationship between the two firms was not grounds for an alter ego finding.

To hold a parent firm liable on an agency theory would require that the parent exercise total control over the subsidiary. The control that Tien Tsin was able to exercise because of trademark ownership, stock ownership, and near sole supplier status did not rise to the level of total domination that could justify holding it liable for torts committed by a separately incorporated entity, the court concluded.

The decision is Campagnolo S.R.L. v. Full Speed Ahead, Inc., CCH Advertising Law Guide ¶63,897.

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