Soilworks, LLC v. Midwest Indus. Supply, Inc.

575 F.Supp.2d 1118

SOILWORKS, LLC, an Arizona corporation, Plaintiff/Counterdefendant/Counterclaimant, v. MIDWEST INDUSTRIAL SUPPLY, INC., an Ohio corporation authorized to do business in Arizona, Defendant/Counterclaimant/Counterdefendant.

No. CV-06-2141-PHX-DGC.

United States District Court, D. Arizona.

August 7, 2008.

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E. Scott Dosek, Philip Ashley Overcash, Kutak Rock LLP, Scottsdale, AZ, John Patrick Passarelli, Kutak Rock LLP, Omaha, NE, for Plaintiff/Counterdefendant/Counterclaimant.

Craig A. Marvinney, Jill Anne Grinham, Brouse McDowell, Cleveland, OH, John M. Skeriotis, Brouse McDowell LPA, Akron, OH, Donald L. Myles, Jr., Jones Skelton & Hochuli PLC, George Chun Chen, Lawrence G.D. Scarborough, Bryan Cave LLP, Phoenix, AZ, for Defendant/Counterclaimant/Counterdefendant.

ORDER

DAVID G. CAMPBELL, District Judge.

Soilworks, LLC and Midwest Industrial Supply, Inc. ("Midwest") are competitors. Both companies distribute soil erosion and dust control products throughout the United States. Soilworks' products include Durasoil and Soiltac. Midwest's products include EK35, EnviroKleen, and Soil-Sement.

In July 2006, Midwest was issued two United States Patents, Nos. 7,074,266 ("`266 Patent") and 7,081,270 ("`270 Patent"), for EK35 and EnviroKleen. On June 8, 2006, prior to the issuance of the patents, Midwest sent Soilworks a letter informing it of the pending patent applications, expressing concern that Durasoil may infringe the patents when issued, and requesting that Soilworks review the claims in the patent applications in an effort to resolve any issues regarding the sale of Durasoil. Soilworks responded ten days later, stating that it was not aware of any reason why the sale of Durasoil would infringe Midwest's patent rights. On July 27, 2006, Midwest sent letters to one of Soilworks' customers, Polar Supply Company ("Polar"), regarding possible infringement of the '266 Patent ("Polar Letters"). Midwest also issued a press release in July 2006 regarding its patents ("Press Release").

Soilworks then commenced this action for injunctive relief and damages. Soilworks asserts the following claims: false representation under the Lanham Act, declaratory judgment for patent invalidity and noninfringement, misappropriation of goodwill, tortious interference with business relationship and expectancy, and common law unfair competition. Dkt. ## 1, 22. Midwest filed a counterclaim asserting declaratory judgment, Lanham Act, and state law claims. Specifically, Midwest asserts claims for trademark infringement, false designation of origin, unfair competition, and false advertising under the Lanham Act, declaratory judgment for patent validity and infringement, common law unfair competition, and unjust enrichment. Dkt. ## 16, 35.

The parties have tiled motions for summary judgment. Dkt. ## 78-79. Midwest seeks summary judgment on all of its claims except unjust enrichment and declaratory judgment for infringement, and on all of Soilworks' claims. Dkt. # 78 at 2-3 & n. 1. Soilworks seeks summary judgment on all of Midwest's claims. Dkt. #79 at 1. For reasons stated below, the Court will grant the motions in part and deny them in part.¹

I. Summary Judgment Standard.

A party seeking summary judgment "always bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of [the record] which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, All U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Summary judgment is appropriate if the evidence, viewed in the light most favorable to the nonmoving party, shows "that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). Only disputes over facts that might affect the outcome of the suit will preclude the entry of summary judgment, and the disputed evidence must be "such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., All U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

II. Soilworks' Lanham Act Claim for False Representation (Count I).

Soilworks asserts a claim for false representation under the Lanham Act, 15 U.S.C. § 1125(a). Dkt. # 1 ¶¶ 15-19. To prevail on such a claim, the plaintiff must show that (1) a false or misleading statement of fact was made about a product, (2) the statement was made in a commercial advertisement, (3) the statement actually deceived or had the tendency to deceive a substantial segment of its audience, (4) the deception was material, in that it was likely to influence purchasing decisions, (5) the defendant caused the statement to enter interstate commerce, and (6) the plaintiff has been or is likely to be injured as a result of the statement, either by direct loss of sales or by a lessening of the goodwill associated with its products. See 15 U.S.C. § 1125(a)(1)(B); Southland Sod Farms v. Stover Seed Co., 108 F.3d 1134, 1139 (9th Cir.1997); Newcal Indus., Inc. v. Ikon Office Solution, 513 F.3d 1038, 1052 (9th Cir.2008).

Citing the Federal Circuit's decision in Zenith Electronics Corp. v. Exzec, Inc., 182 F.3d 1340 (Fed.Cir.1999), the parties agree that because the alleged false representations were made by Midwest in support of its patent rights, Soilworks must also show bad faith on the part of Midwest. Dkt. ## 78-2 at 18, 89 at 12. Zenith added a bad faith requirement to Lanham Act claims asserted against patentees in order to "give effect both to the rights of patentees as protected by the patent laws under normal circumstances, and to the salutary purposes of the Lanham Act to promote fair competition in the marketplace." 182 F.3d at 1353-54. This Circuit recently has adopted the holding in Zenith. See Fisher Tool Co. v. Gillet Outillage, 530 F.3d 1063, 1068 (9th Cir.2008).

In seeking to eliminate the false representation claim by summary judgment, Midwest states that the claim is based on the two identical Polar Letters, one sent to Polar's president and the other to its sales manager. Dkt. ## 78-2 at 18, 80 ¶ 72, 91 at 10. The letters informed Polar of the issuance of the '266 Patent and that Midwest had "invented the category of synthetic organic dust control agents, more commonly known as EK35® and EnviroKleen®." Dkt. ## 80-14, 80-15. The letters then stated:

There are a number of imitators that claim to be synthetic organic dust control agents; however, none of those competitors can have the formulation or method as that of EK35® or EnviroKleen®. The granting of the U.S. Patent now allows Midwest to pursue those who make, use, sell, offer for sale and/or import knock-off or imitators of EK35® or EnviroKleen®.

Id.

According to Midwest, the letters simply advised Polar about the issuance of the '266 Patent and Midwest's ability to prosecute infringers. The letters do not constitute bad faith as a matter of law, Midwest contends, because they were "entirely consistent with [Midwest's] right to inform a potential infringer of the existence and scope of its patents[.]" Dkt. ## 78-2 at 19-20, 91 at 11. Midwest further contends that the statements made in the letters were not legally or factually inaccurate and that the letters were not published sufficiently to constitute a commercial advertisement for purposes of the false representation claim. Dkt. # 78-2.

Soilworks asserts that its claim is not based solely on the Polar Letters. Dkt. # 90 ¶ 72. Soilworks asserts that Midwest represented in its Press Release that competitors could not design around Midwest's patents and Midwest therefore was the exclusive source of synthetic organic dust control products. Soilworks argues that these statements are indicative of bad faith under Zenith, are false or misleading, and clearly were made in a commercial advertisement. Dkt. #89 at 11-15. Midwest does not address these arguments in its reply.

A. Bad Faith.

Zenith addressed two types of marketplace statements by patentees: those alleging infringement of the patent and those alleging that competitors cannot design around the patent. Zenith made clear that "[b]oth statements, if made in bad faith, are damaging to competition and are not the type of statements protected by the patent laws." 182 F.3d at 1354. The latter kind of statements—known as "exclusive source" statements—are "inherently suspect." Id. "They are suspect not only because with sufficient effort it is likely that most patents can be designed around, but also because such a statement appears nearly impossible to confirm a priori." Id.

Midwest's Press Release reasonably can be construed as making exclusive source statements. The heading of the publication announces the issuance of Midwest's patents and states that Midwest has gained "exclusive control" over the synthetic organic dust control category of products. Dkt. # 79-4 at 4. The fourth paragraph states that Midwest has "secured exclusive rights to the products and methods that define the [synthetic organic dust control] category" and that Midwest's patents "provide it with the exclusive right to manufacture and sell synthetic organic soil stabilization and dust suppressant technology[.]" Id. (emphasis added). The next paragraph suggests that competitors cannot design around the patents: "Midwest's competitors may claim to offer synthetic organic dust control technology, but only Midwest can offer the products and methods that define this technology. Those competitors are either not supplying synthetic organic dust control technology ... or they are infringing Midwest's patents." Id.

A patentee who "exaggerates the scope and validity of his patent, thus creating the false impression that the,[patentee] is the exclusive source of [a] product, may overstep the boundaries set in the Lanham Act."...