patent misrepresentations to prospective dealer could be false advertising under Dastar/Lexmark

Three very similar cases involving the same plaintiff.

Roof Maxx Technol., LLC v. Holsinger, 2021 WL 3617153, No. 2:20-cv-03154 (S.D. Ohio Aug. 16, 2021)

Roof Maxx distributes “a soy-based liquid product that is sprayed on asphalt shingle roofs to extend the life of the shingles.” It enters into dealership agreements, often geographically exclusive, around the country. It did so with Holsinger (Shingle Savers) and included a noncompete. Shingle Savers ultimately terminated the agreement, alleging misrepresentations by Roof Maxx; RM denied any misrepresentations and sued, seeking declaratory judgment of the validity of the noncompete clause.

Shingle Savers counterclaimed, alleging, among other things, false advertising under the Lanham Act and violation of the Ohio Deceptive Trade Practices Act. It alleged that RM enticed Holsinger to sign the agreement by falsely representing that two generations of the product were patented, when it knew the patent lapsed in 2014 due to failure to pay maintenance fees.

The resulting fraudulent inducement counterclaims were pled with sufficient particularity under Rule 9(b). They also required justifiable reliance:  

Here, the circumstances involved in the agreement show that Mr. Holsinger had no reason to doubt the veracity of Roof Maxx’s representation that the Product was subject to a valid patent. The Feazels have a long history of starting roofing companies, and Roof Maxx (his most recent roofing company) is a national distributor of roofing products. Mr. Holsinger, on the other hand, is a layperson with no previous experience in the roofing industry. Indeed, Shingle Savers alleges that Roof Maxx and the Feazels specifically targeted individuals with no roofing or business background for the purpose of entering into exclusive dealer agreements. Moreover, the alleged misrepresentations concerned the nature of Roof Maxx’s own roofing Product and were presented in official marketing material and conversations. Given Mr. Holsinger’s relative inexperience and the formality in which the representations were made, it was not unreasonable for Mr. Holsinger to trust them and rely upon them when he signed the agreement.

RM argued that reliance wasn’t justifiable because patents are a matter of public record, but the court declined to extend real estate cases to cover this situation. “[T]he transaction at issue here revolved around forming a dealership relationship, and the patent representations constituted an inducement to enter the dealership agreement. Under these facts, a person ‘is under a duty to reasonably investigate’ only if he was ‘put on notice as to any doubt about the truth of representation.’” Because the facts in the counterclaim didn’t suggest that Holsinger should have known he was being deceived, “he was not obligated to verify the patent status by independently checking the USPTO website.”

Lanham Act/ODTPA claims: First, the court declined to hold that Rule 9(b) applied to Lanham Act false advertising claims, which don’t require fraud.

Did RM misrepresent “the nature, characteristics, or quality” of its product? Its Prospective Dealer Guide represented that “Roof Maxx has worked closely with our strategic partners … to develop an optimal formula....The product formula is patented.” In a sales pitch:

In 2016, Roof Maxx entered into a worldwide exclusive licensing agreement … for the rights to the patent covering the Roof Maxx product. … Click HERE to review the patent.

In an effort to continually bring value to our Dealers and their customers (property owners), Roof Maxx has entered into another worldwide exclusive licensing agreement … for a new and improved Roof Maxx formulation. This formulation is the subject of a separate patent filed in 2017 and is currently in the final phases of testing. [patent application number]

Despite Roof Maxx’s best efforts to provide superior products which are covered by various patents, the business opportunity should be evaluated on the basis of the underlying value of the Roof Maxx product, Roof Maxx’s world-class Onboarding and Success teams and resources, national brand recognition, and the other systems and resources provided to the Dealer as part of the Roof Maxx opportunity.

However, RM petitioned the PTO to accept a late payment of the maintenance fee and was rejected, and thus was allegedly “keenly aware” that the original patent lapsed at the end of 2014, and the PTO rejected the patent application for this second-generation Product numerous times.

The court thought that patent status was part of the covered “nature, characteristics, qualities, or geographic origin” of the product. Dastar doesn’t exclude coverage. The defendant in Dastar was in fact the origin of the products it sold, so there was no misrepresentation of origin. Thus, the Lanham Act does not protect a company against a rival that “steal[s] its product ideas to manufacture a rival, facsimile product,” but Dastar didn’t cover “misrepresentations that its Product was subject to an active, valid patent,” which weren’t the same thing as claims about who originated or authored a product. Filing for a patent isn’t a Lanham Act-covered act, but falsely representing patent coverage “on marketing materials and in meetings with prospective dealers” is. This allegedly created the impression that RM was the exclusive source of the product and that exclusive dealers would face little or no direct competition. “As such, these statements go directly to the Products’ nature, characteristics, and qualities.” More generally, Section 43(a) of the Lanham Act “does reach a seller who, by exaggerating the scope of a patent, creates a false impression that he is the exclusive source of the product.”

Was this commercial advertising or promotion? RM argued that it wasn’t in competition with Lexmark, but most of the cases it cited preceded Lexmark, which removed any competition requirement, and the others failed to grapple with Lexmark. Without discussing whether Shingle Savers should be treated as a customer of RM—who is not within the Lanham Act’s zone of interests—the court found that Shingle Savers sufficiently pled “damages to its commercial interest in sales and business reputation.” Individual RM officers were also sufficiently alleged to be personally liable given that they allegedly were aware that the patent lapsed and participated in making the challenged marketing materials. 

Roof Maxx Technol., LLC v. Tabbert, 2021 WL 3617158, No. 2:20-cv-03156 (S.D. Ohio Aug. 16, 2021); Roof Maxx Technol., LLC v. Rourk, 2021 WL 3617154, No. 2:20-cv-03151 (S.D. Ohio Aug. 16, 2021)

In addition to the claims discussed above, defendants/counterclaimants also alleged that RM breached the parties’ agreement by publishing disparaging statements. The agreement said, inter alia:

The parties jointly agree to not post for public consumption, any disparaging remarks, comments, accounts, or other relationship detail. Such disagreements shall be first submitted to a licensed Mediator/Arbitrator for informal adjudication....Any violation of this paragraph is a material breach, and breaching party will remove, caused to be removed, or authorize removal, of such offending public statements.

RM told a group of RM Certified Dealers:

Recently, there have been some questions regarding why certain Roof Maxx dealers terminated their dealerships. Roof Maxx and these dealers have disagreements regarding various practical and legal matters pertaining to those dealerships and their related activities.

Roof Maxx and those dealers engaged in good faith attempts to informally resolve these issues. Initial discussions failed to resolve the matter. In the meantime, Roof Maxx has filed lawsuits in Franklin County, Ohio, pursuant to the terms of the respective EDAs, to have these matters adjudicated according to law.

Roof Maxx has filed these actions to preserve the integrity of the industry and brand that all our dedicated dealers have built (and continue to build), as well as ensure that the time, dedication, and resources that you have committed your success to are not diluted....

Roof Maxx respects the legal process and will not comment on or discuss pending litigation.

The counterclaimants argued that this amounted to an assertion that they were a threat to the integrity of the industry and brand. [I find this statement innocuous, unlike the other alleged activity.] The court disagreed: it didn’t specify them as one of the dealers, and thus didn’t disclose details in contravention of the agreement.