Design Resources, Inc. v. Leather Industries of America
Docket: No. 1:10CV157
Court: District Court, M.D. North Carolina; September 28, 2012; Federal District Court
Pending before the court are two motions to dismiss: one by Ashley Furniture Industries, Inc. and Todd Wanek, targeting Counts II through V of the complaint, and another by Leather Industries of America and Dr. Nicholas J. Cory, seeking dismissal of all counts. The court has recognized that both motions address similar legal issues and intends to resolve them together. A previous ruling granted the plaintiff's motion to amend the complaint, rendering the motions to dismiss by Wanek and Cory moot due to lack of personal jurisdiction.
The remaining motions from Ashley Furniture and Leather Industries will be analyzed. Following the amendment, Ashley Furniture and Wanek contended that the complaint remained deficient, while Leather Industries and Dr. Cory did not respond. After supplemental briefs were submitted, the court decided to proceed with the motions to dismiss, which will be addressed with partial denial and deferral.
The plaintiff, Design Resources, Inc. (DRI), operates in the leather products sector, marketing bonded leather products under the NextLeather® brand. The defendants include Leather Industries, a trade association for leather tanners, Dr. Cory, its Technical Director, Ashley Furniture, one of the largest furniture manufacturers in the U.S., and its CEO, Todd Wanek. The lawsuit alleges false advertising, defamation, product disparagement, and misleading claims regarding DRI’s products, filed on February 26, 2010. The complaint includes various claims against all defendants, such as false advertising under the Lanham Act, defamation, unfair competition, tortious interference, and civil conspiracy, along with separate claims against LIA and Dr. Cory for negligence, fraudulent concealment, and breach of contract. A punitive damages claim is also asserted against all defendants.
Plaintiff claims jurisdiction for Count I under the Lanham Act via 15 U.S.C. § 1121 and 28 U.S.C. § 1331, while asserting diversity jurisdiction for state law claims under 28 U.S.C. § 1332 and supplemental jurisdiction under 28 U.S.C. § 1367. On April 27, 2010, Defendants Ashley Furniture and Mr. Wanek filed a joint motion to dismiss Counts II through V of the Complaint under Rule 12(b)(6), and Defendants LIA and Dr. Cory moved to dismiss all counts on the same grounds.
The legal standard for a Rule 12(b)(6) motion requires liberal construction of the complaint in favor of the nonmoving party, treating all allegations as true. A motion to dismiss evaluates the complaint's sufficiency without addressing factual disputes or defenses. To survive dismissal, a complaint must provide fair notice of the claims and sufficient factual matter to present a plausible claim for relief, meaning the facts must allow the court to reasonably infer liability. The standard does not demand a probability but requires more than mere possibility, necessitating more than general labels or conclusions. The court will disregard legal conclusions and assertions lacking factual support while accepting well-pleaded facts as true and construing them in the plaintiff's favor.
Defendant Leather Industries has filed a motion to dismiss Count I of the complaint, which alleges a violation of the Lanham Act, specifically 15 U.S.C. 1125(a) concerning false advertising. To succeed in such a claim, a plaintiff must prove five elements: (1) a false or misleading description or representation in commercial advertising; (2) materiality of the misrepresentation; (3) actual deception or tendency to deceive a substantial audience; (4) placement of the statement in interstate commerce; and (5) injury to the plaintiff from the misrepresentation, either through direct sales diversion or diminished goodwill.
The claims against Leather Industries stem from statements made by Dr. Cory, who, although dismissed from the case, is alleged to have acted as an agent for the company. The court notes that whether Dr. Cory's statements are attributable to Leather Industries is a factual issue to be determined later. The plaintiff identifies two sets of representations: one from a trade journal article in Furniture Today, where Dr. Cory expressed concerns about a new type of bonded leather, and another from comments made to Ashley Furniture.
The Furniture Today article, published on July 2, 2007, discusses Dr. Cory's apprehensions regarding the confusion caused by imitator products in the leather category. It characterizes him as advocating against misleading representations of bonded leather, which he argues is not genuine leather but rather a synthetic product. Dr. Cory is quoted as declaring that calling bonded leather "leather" is deceptive and fraudulent. Although the article does not mention DRI or its NextLeather® product directly, the plaintiff alleges that DRI was the first to market this product and claims the timing of the article's publication was strategically aligned with major furniture shows in High Point, North Carolina.
Plaintiff alleges that Dr. Cory's public statements aimed at discrediting DRI’s NextLeather® were driven by a desire to benefit the leather manufacturing industry members of LIA, harming DRI in the process. Dr. Cory is accused of informing Ashley Furniture and other competitors that DRI misrepresented its NextLeather® product, which supported Ashley's negative campaign against DRI. Additionally, Dr. Cory allegedly falsely claimed that DRI had fabricated email communications with him. On June 6, 2007, he received a material swatch from Ashley Furniture and advised against marketing it as “bonded leather,” asserting it would mislead consumers. He recommended emphasizing its differences from bonded leather instead, which Plaintiff claims deprived DRI of a significant market opportunity.
In Count I, Plaintiff asserts that the actions of LIA, Dr. Cory, Ashley, and Todd Wanek constitute false advertising under Section 43(a) of the Lanham Act, seeking joint and several damages and injunctive relief. The court expresses skepticism about the joint and several liability claim but does not challenge it at this stage. Leather Industries argues for dismissal, claiming that Plaintiff did not allege a false statement under the Lanham Act, asserting that the statements were literally true, not commercial advertising, and not materially influential on purchasing decisions. The court finds the complaint sufficient to withstand the motion to dismiss concerning Count I, affirming that the first element of a Lanham Act claim requires a false or misleading representation in a commercial context, which may mislead consumers even if literally true.
Dr. Cory’s statement may be literally true, but it could also be misleading to consumers, which allows for a potential claim under Section 43(a) of the Lanham Act. The court finds that the plaintiff's allegations are plausible enough to satisfy the first element of a Lanham Act claim, as they have identified the statements in question and provided context supporting their claims of deception.
The defendant argues that Dr. Cory's statements do not qualify as "commercial advertisement or promotion" under the Lanham Act. While the Fourth Circuit has not defined "commercial advertisement," other circuits utilize a four-part test from Gordon v. Breach Scientific Publishers. This test requires that a statement must be: 1) commercial speech; 2) made by a competitor; 3) intended to influence consumer purchases; and 4) sufficiently disseminated to reach the relevant purchasing public.
The plaintiff asserts that Dr. Cory serves as Technical Director and Editor of the Leather Industries Association (LIA), which represents the leather industry and provides various services to its members. Furthermore, the LIA has opposed the use of the term "bonded leather" in advertising and sales, indicating its commitment to protecting the integrity of the leather market.
Plaintiff's ability to demonstrate all elements of the Gordon and Breach test will be more appropriately assessed during summary judgment or trial, although the allegations are sufficient to state a plausible claim at this stage. The Defendant asserts that Dr. Cory's statements may be protected under the First Amendment; however, false and misleading advertising is not protected. The determination of whether the statements are indeed false or misleading involves factual inquiries that are beyond the current motion's scope. The court notes that resolution of whether the statements constitute Free Speech or "commercial promotion" requires factual determinations reserved for summary judgment or trial.
Regarding materiality, Leather Industries argues that Plaintiff has not shown the false statements were significant enough to sway purchasing decisions. To succeed under the Lanham Act, the Plaintiff must demonstrate that the misrepresentation was likely to influence such decisions. Plaintiff claims damage to customer relationships, spending to mitigate reputational harm, and loss of sales and market share, which the court interprets as potentially indicating that Dr. Cory's statements influenced purchasing behavior. Consequently, the court denies Leather Industries' motion to dismiss the Lanham Act claim.
Both defendants moved to dismiss remaining state law claims, with Ashley Furniture accepting Plaintiff’s choice of North Carolina law, while Leather Industries argues for the application of Washington law based on where the injury occurred. Given the substantive dispute over the applicable law, the court defers the resolution of the motion to dismiss these claims until trial, exercising discretion under Rule 12(i) of the Federal Rules of Civil Procedure. The court finds that the sufficiency of the state law claims should be evaluated after factual development by the parties.
A more developed factual record is needed to assist the court in evaluating the choice of law issues. The court refrains from deciding whether the lex loci delicti test or the "most significant relationship" test will apply and does not make any factual determinations regarding the location of any injury. The court does not foresee that the survival of state law claims will significantly burden the discovery process, as all parties will need to conduct substantive discovery related to the Lanham Act claims, which overlap with the state law claims. Regarding Count III, the Washington Consumer Protection Act, the Plaintiff's request for dismissal acknowledges the potential application of North Carolina law, with the understanding that both cannot apply. The court will consider the Plaintiff's submission for dismissal but will not act on it immediately.
The court denies in part Defendant Leather Industries’ motion to dismiss, specifically the motion concerning the Lanham Act claim. Other motions to dismiss by Ashley Furniture Industries and Leather Industries of America are denied without prejudice, with a decision on the state law claims deferred to a later stage in litigation. Arguments made in the motions can be included in future summary judgment motions but should be explicitly presented rather than incorporated by reference. The Leather Research Laboratory, affiliated with the University of Cincinnati, is noted for its leather testing and research. Ashley Furniture is accused of violating the Lanham Act through disparaging advertising but has not moved to dismiss that count. The court will evaluate statements related to Ashley only as necessary. Lastly, at the 12(b)(6) stage, the court must view facts in favor of the plaintiff, as established in precedent.
The court assumes that Dr. Cory made the statements attributed to him in Ms. Gunin’s article, including paraphrased content. The plaintiff's complaint claims that Exhibit I is a test report prepared by Dr. Cory for Ashley, but the report does not reference DRI or NextLeather®. Instead, it describes the tested material as a "swatch" from Chris Ross of Ashley Furniture Industries. The court adheres to the Fourth Circuit's precedent that, in case of conflict, the exhibit takes precedence over the allegations in the complaint.
The court notes that the plaintiff's complaint lacks clarity regarding the basis for joint and several relief versus separate claims against each defendant. Allegations about Leather Research Laboratory and Leather Industries being closely associated and sharing legal counsel are deemed insufficient, as these claims lack substantive legal meaning and do not clearly indicate a joint venture. The court emphasizes that it is not obligated to draw unreasonable conclusions from the allegations and will only consider reasonable inferences.
The court clarifies that sharing legal counsel or a website does not inherently imply a conspiracy or joint venture. At this stage, the plaintiff must plausibly establish entitlement to relief, while the adequacy of evidence will be evaluated at summary judgment or trial. Although Leather Industries does not sell leather goods directly, it is alleged to provide marketing services for its members. The court concludes that the sufficiency of these services should be assessed at the summary judgment stage, referencing the Gordon and Breach test for legal and factual adequacy.
