Dastar doesn't bar allegedly false advertising about source of planned development services

LStar Development Gp., Inc. v. Vining, 2021 WL 4344891, No. 5:20-CV-184-FL (E.D.N.C. Sept. 23, 2021)

LStar, which manages and sells development communities, sued defendants for trademark infringement, false designation of origin, and false advertising under the Lanham Act, as well as state law claims for unfair and deceptive trade practices, common law unfair competition and infringement, bad faith, breach of fiduciary duty and conflict of interest, misappropriation of trade secrets, breach of contract, tortious interference with contract, tortious interference with prospective economic advantage, constructive trust, trespass to chattels, conversion and accounting, money had and received, unjust enrichment, and civil conspiracy. Many of these claims are dismissed without prejudice.

When LStar was founded, its lawyer (defendant Vining) allegedly implemented a scheme to take advantage of the founder, Corkum, persuading him to issue Vining twenty percent of plaintiff’s stock and appoint him as the vice-present, secretary, treasurer, and director.  Other individual defendants were high-level employees with employment agreements covering trade secrets. They allegedly wrongfully ousted Corkum and, when he asserted his rights, incorporated Oak City to continue the business, allegedly with LStar’s equipment, money, and intellectual property. For example, defendants allegedly issued a development proposal to the City of Glenwood Springs, stating that Oak City was well capitalized and had developed three real estate developments, which were actually capitalized and developed by LStar.

The proposal allegedly incorporated identical text and pictures that LStar used to promote two other developments.

Defendants' letter

allegedly copied text from LStar

Trademark infringement: LStar never specified what its trademarks or service marks were. It argued that defendants copied, but didn’t identify a particular word, name, or symbol, or combination thereof, within the highlighted paragraphs, as the alleged trademark(s). Not every word on a label or ad is a mark. LStar didn’t plead its own trademark use. Although “LStar Ventures” on a website could qualify, there were no allegations that defendant used that term.

False advertising: This one survived: By listing LStar developments under the heading “Oak City Representative Developments,” “the proposal necessarily implies that defendant Oak City developed those properties.” This was unambiguous and literally false, and likely material given its centrality. The court analyzed whether it was placed in interstate commerce (yes), but not whether a single proposal constitutes “commercial advertising or promotion,” which seems like a much bigger problem for the claim.

Indeed, the proposal was submitted on behalf of Oak City in partnership with another entity, and included biographies of the individual defendants, which even “suggests a plausible inference of defendants’ knowing or intentional participation in drafting and submitting the proposal, which is sufficient to state a claim for contributory false advertising.”

What about injury?  “[H]ere it can be reasonably inferred that defendants’ alleged false statement, taking credit for the development of plaintiff’s projects in order to obtain the business of a prospective client, is likely to harm plaintiff, either by direct diversion of sales, a lessening of goodwill, or both.”

False designation of origin:  Failed to state a passing off claim, but Dastar didn’t bar a reverse passing off claim. “Thus, the plaintiff in a reverse passing off case must plead and prove only that the work ‘originated with’ him—not that he used the work (which may or may not be associated with a mark) in U.S. commerce.” [“Work” is such a seriously problematic word to use here—not the court’s fault, it’s quoting Belmora—because it implies that the Lanham Act should regularly be involved in copyright-related claims.] LStar alleged that it financed and developed the relevant projects, “allowing the inference that it is the origin of these real estate development services.” [Some service/product confusion also going on here.] “Moreover, by indicating that defendant Oak City developed the real estate projects, defendants allegedly falsely designated the origin of real estate development services.” And LStar plausibly alleged confusion and harm: if there really is reverse passing off, then confusion about origin is inherently likely, and it deprives the originator of the advertising value/goodwill of the product.

However, Dastar precluded any claim based upon defendants’ alleged plagiarism of plaintiff’s texts and pictures.

For similar reasons, the state unfair and deceptive trade practices claim survived, though trade secret/tortious interference claims were dismissed without prejudice.