SATA GmbH & Co. KG v. Central Purchasing, LLC

• Court: District Court, C.D. California
• Decided: March 12, 2021
• Docket: 2:20-cv-02131
• Status: Unknown

Opinion

1 2 O 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 CENTRAL DISTRICT OF CALIFORNIA 10 11 SATA Gmbh & CO. KG, ) Case No. CV 20-02131 DDP (JPRx) ) 12 Plaintiff, ) ) ORDER DENYING DEFENDANT’S MOTION 13 v. ) TO DISMISS ) 14 CENTRAL PURCHASING LLC, ) [23, 30] ) 15 Defendants. ) ) 16 Presently before the court is Defendant Central Purchasing, 17 LLC (“Harbor Freight”)’s Motion to Dismiss. Having considered the 18 positions of the parties and heard oral argument, the court denies 19 the motion and adopts the following Order. 20 I. Background 21 Plaintiff SATA GmbH & Co. KG (“SATA”) manufactures, among 22 other things, paint spray guns. (Complaint ¶ 8.) SATA also owns a 23 design patent, U.S. D552,213 (“the Patent”) in an ornamental design 24 for a paint spray gun. (Id. ¶ 25.) Harbor Freight also sells 25 paint spray guns. (Id. ¶¶ 14, 16.) 26 In 1999, SATA brought suit against Harbor Freight, alleging 27 trade dress infringement and associated claims related to Harbor 28 Freight’s sale of paint spray guns. (Id. ¶ 14.) In 2000, the 1 parties settled all claims and entered into a Settlement Agreement 2 (“the Agreement”). (Id.) Under the Agreement, Harbor Freight 3 agreed “that it shall make no reference to SATA, SATA trademarks, 4 or SATA products, in any advertisements, product descriptions, or 5 any other materials generated in connections with the sale or 6 promotion of [Harbor Freight] paint spray guns or parts therefore.” 7 (Compl., Ex. A ¶ 14 (“Paragraph 14”).) Nevertheless, SATA alleges, 8 Harbor Freight’s advertisements mention SATA by name, in some cases 9 alongside images of SATA paint spray guns and in comparison to 10 Harbor Freight products. (Compl. ¶ 16, Ex. B.) SATA further 11 alleges that Harbor Freight’s “Black Widow” paint spray guns 12 infringe upon the Patent. 13 Harbor Freight now moves to dismiss the two causes of action 14 in the Complaint: breach of contract and design patent 15 infringement. 16 II. Legal Standard 17 A complaint will survive a motion to dismiss when it 18 “contain[s] sufficient factual matter, accepted as true, to state a 19 claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 20 556 U.S. 662, 678 (2009)(quoting Bell Atl. Corp. v. Twombly, 550 21 U.S. 544, 570 (2007)). When considering a Rule 12(b)(6) motion, a 22 court must “accept as true all allegations of material fact and 23 must construe those facts in the light most favorable to the 24 plaintiff.” Resnick v. Hayes, 213 F.3d 443, 447 (9th Cir. 2000). 25 Although a complaint need not include “detailed factual 26 allegations,” it must offer “more than an unadorned, 27 the-defendant-unlawfully-harmed-me accusation.” Iqbal,556 U.S. at 28 678. Conclusory allegations or allegations that are no more than a 1 statement of a legal conclusion “are not entitled to the assumption 2 of truth.” Id. at 679. In other words, a pleading that merely 3 offers “labels and conclusions,” a “formulaic recitation of the 4 elements,” or “naked assertions” will not be sufficient to state a 5 claim upon which relief can be granted. Id. at 678 (citations and 6 internal quotation marks omitted). 7 “When there are well-pleaded factual allegations, a court 8 should assume their veracity and then determine whether they 9 plausibly give rise to an entitlement of relief.” Id. at 1950. 10 Plaintiffs must allege “plausible grounds to infer” that their 11 claims rise “above the speculative level.” Twombly, 550 U.S. at 12 555-56. “Determining whether a complaint states a plausible claim 13 for relief” is “a context-specific task that requires the reviewing 14 court to draw on its judicial experience and common sense.” Iqbal, 15 556 U.S. at 679. 16 III. Discussion 17 A. Breach of Contract 18 Harbor Freight does not dispute that some of its 19 advertisements contain side-by-side comparisons of Harbor Freight 20 products and competitors’ products, including SATA’s spray guns. 21 (Motion at 3:5-11.) Harbor Freight contends, however, that any 22 provision in the Agreement barring such advertising is 23 unenforceable as contrary to public policy. (Mot. at 7:25-26.) 24 In California, a contract is unlawful and unenforceable if it 25 is “[c]ontrary to an express provision of law; [c]ontrary to the 26 policy of express law, though not expressly prohibited; or 27 [o]therwise contrary to good morals.” Kashani v. Tsann Kuen China 28 Enter. Co., 118 Cal. App. 4th 531, 541 (2004) (quoting Cal. Civil Code § 1667). Although not entirely clear, Harbor Freight appears to argue that Paragraph 14 is contrary to the policy of express 3] law, particularly the Sherman Antitrust Act, 15 U.S.C. § 1, and the 4] FTC Act, 15 U.S.C. § 45(a) (1). 5 Section 1 of the Sherman Antitrust Act prohibits contracts, 6|| combinations, and conspiracies that unreasonably restrain trade.’ 715 U.S.c. § 1; Brantley v. NBC Universal, Inc., 675 F.3d 1192, 1197 8H (9th Cir. 2012). Some restraints, typically horizontal agreements between competitors, are unreasonable per se. Ohio v. Am. Express Co., 138 S. Ct. 2274, 2284 (2018). All other restraints must be analyzed under the “rule of reason.” Id.; Brantley, 675 F.3d at 12/1197. To state a Section 1 claim under the rule of reason, a 13} plaintiff must allege (1) an agreement, conspiracy, or combination 14] between two or more entities that (2) the entities intend to harm or restrain trade and (3) actually injures competition with (4) resulting “antitrust injury” to the plaintiff. Brantley, 675 F.3d at 1197.; Auto. Sound Inc. v. Audiovox Elec. Corp., No. 12-762, 2012 WL 12892938, at *3 (C.D. Cal. Dec. 3, 2012). 19 Here, Harbor Freight’s opening brief does no more than assert 20] that Paragraph 14 violates antitrust law, with no citation to authority or explanation how a voluntary agreement not to refer to 22\|a competitor’s trademarks in advertising constitutes an illegal 23|) restraint of trade, whether under the rule of reason or per se. (Opp. at 8: 10-13.) In its reply, Harbor Freight asserts that 25 26 ' Federal cases interpreting the Sherman Act are also 27 applicable to claims under California’s Cartwright Act. See, e.g. Pecover v. Elecs. Arts Inc., 633 F. Supp. 2d 976, 984 (N.D. Cal. 28 2009); Marin Cty. Bd. of Realtors, Inc. v. Palsson, 16 Cal. 3d 920, 925 (1976).

Paragraph 14 constitutes a per se unreasonable restraint of trade, but cites no authority concerning an agreement not to conduct comparative advertising. Instead, Harbor Freight relies upon 4!) several out-of-context quotations from Sherman Act cases that are simply inapt. See, e.g., Nat’l Soc. of Prof’l Engineers v. United States, 435 U.S. 679 (1978) (discussing professional association’s ban on competitive bidding); Blackburn v. Sweeney, 53 F.3d 825, 828 (7th Cir. 1995) (discussing illegal agreement to allocate markets through reciprocal bans on all advertising within certain geographic areas). Nor does Harbor Freight so much as attempt to 11] show that Paragraph 14 constitutes an unreasonable restraint of trade under the rule of reason. Harbor Freight has not, therefore, demonstrated that Paragraph 14 violates the Sherman Act. 14 With respect to the FTC Act, Harbor Freight relies upon the FTC’s decision in In the Matter of 1-800 Contacts, Inc., Trade Reg. 16]/Rep. P 80586. There, various settlement agreements, as part of an 17] effort to prevent one party’s advertisements from appearing in response to a user’s search for a competitor, required sellers of contact lenses to refrain from using competitors’ trademarks as online advertising keywords. The Commission concluded, ina 21] lengthy decision following extensive factfinding, that the advertising restrictions in the settlement agreement made it more 23|| difficult for consumers to compare competing online sellers of contact lenses, and constituted unfair competition for purposes of the FTC Act.’ 26 20 . * Further, as Harbor Freight acknowledges, the FTC’ s decision in 1-800 Contacts is presently on appeal to the Second Circuit.

1 FTC decisions, although not binding upon this Court, are entitled to great weight, as “the Commission has accumulated extensive experience and is therefore generally in a better position than the courts to determine when a practice is deceptive 5] within the meaning of the FTCA.”* Simeon Mgmt. Corp. v. F. T. C., 6] 579 F.2d 1137, 1145 (9th Cir. 1978). Here, however, at this stage 7] of proceedings, and without the extensive expert testimony and other evidence of the sort presented to the Commission in 1-800 Contacts, there is no basis upon which this Court could determine 10] that Paragraph 14 has anticompetitive effects similar to those 11] present in 1-800 Contacts.’ 12 The court acknowledges that the FTC has encouraged the use of some types of comparative advertising and recognized such 14] advertising as “a source of important information to consumers [that] assists them in making rational purchase decisions.” 16 16]/C.F.R. § 14.15(c). The regulation, in its entirety, states: 17 (a) Introduction. The Commission’s staff has conducted an investigation of industry trade associations and the 18 advertising media regarding their comparative advertising policies. In the course of this investigation, numerous 19 industry codes, statements of policy, interpretations and standards were examined. Many of the industry codes and 20 standards contain language that could be interpreted as discouraging the use of comparative advertising. This 21 Policy Statement enunciates the Commission’s position that 22 53 > The Simeon Management court made this observation in the context of a direct appeal of an FTC order. Simeon Mgmt. Corp., DA 579 F.2d at 1140; see also 15 U.S.C. § 45(c), (d). 25 “ Indeed, at this stage of proceedings, the agreements at issue in 1-800 Contacts seem distinguishable from the Agreement 26 here. Although the latter limits the content of certain Harbor Freight ads, the former appear, to some extent, to have operated to 27 keep the very existence of 1-800 Contacts’ competitors hidden from consumers, almost as if those competitors had been barred from 28 listing their services in the relevant section of a phone directory’s yellow pages.

1 industry self-regulation should not restrain the use by advertisers of truthful comparative advertising. 2 (b) Policy Statement. The Federal Trade Commission has determined that it would be of benefit to advertisers, 3 advertising agencies, broadcasters, and self-regulation entities to restate its current policy concerning 4 comparative advertising. Commission policy in the area of comparative advertising encourages the naming of, or 5 reference to competitors, but requires clarity, and, if necessary, disclosure to avoid deception of the consumer. 6 Additionally, the use of truthful comparative advertising should not be restrained by broadcasters or self-regulation 7 entities. (c) The Commission has supported the use of brand 8 comparisons where the bases of comparison are clearly identified. Comparative advertising, when truthful and 9 nondeceptive, is a source of important information to consumers and assists them in making rational purchase 10 decisions. Comparative advertising encourages product improvement and innovation, and can lead to lower prices in 11 the marketplace. For these reasons, the Commission will continue to scrutinize carefully restraints upon its use. 12 (1) Disparagement. Some industry codes which prohibit practices such as “disparagement,” “disparagement of 13 competitors,” “improper disparagement,” “unfairly attaching,” “discrediting,” may operate as a restriction on 14 comparative advertising. The Commission has previously held that disparaging advertising is permissible so long as it 15 is truthful and not deceptive. In Carter Products, Inc., 60 F.T.C. 782, modified, 323 F.2d 523 (5th Cir. 1963), the 16 Commission narrowed an order recommended by the hearing examiner which would have prohibited respondents from 17 disparaging competing products through the use of false or misleading pictures, depictions, or demonstrations, “or 18 otherwise” disparaging such products. In explaining why it eliminated “or otherwise” from the final order, the 19 Commission observed that the phrase would have prevented: respondents from making truthful and non-deceptive 20 statements that a product has certain desirable properties or qualities which a competing product or products do not 21 possess. Such a comparison may have the effect of disparaging the competing product, but we know of no rule 22 of law which prevents a seller from honestly informing the public of the advantages of its products as opposed to 23 those of competing products. 60 F.T.C. at 796. Industry codes which restrain comparative advertising in 24 this manner are subject to challenge by the Federal Trade Commission. 25 (2) Substantiation. On occasion, a higher standard of substantiation by advertisers using comparative advertising 26 has been required by self-regulation entities. The Commission evaluates comparative advertising in the same 27 manner as it evaluates all other advertising techniques. The ultimate question is whether or not the advertising has 28 a tendency or capacity to be false or deceptive. This is a 1 factual issue to be determined on a case-by-case basis. However, industry codes and interpretations that impose a 2 higher standard of substantiation for comparative claims than for unilateral claims are inappropriate and should be 3 revised. 4 16 C.F.R. § 14.15 5 Notably, the regulation does not preclude prohibitions on 6 comparative advertising, or even suggest that all comparative 7 advertising is pro-competitive. Rather, the regulation emphasizes 8 the value of truthful, non-deceptive comparative advertising. 9 Where, however, a party engages in other types of comparative 10 advertising, or other allegedly wrongful or misleading conduct, 11 voluntary restrictions on subsequent advertising might be 12 beneficial, or at least innocuous. Furthermore, the regulation’s 13 careful scrutinization of restraints on the use of comparative 14 advertising focuses not on specific agreements between direct 15 competitors, but rather on broadcasters and self-regulatory 16 entities. In other words, the regulation’s emphasis on broad, 17 industry-wide codes of silence has little bearing on particularized 18 agreements between two competitors, such as the Agreement here. 19 For these reasons, and in the absence of any authority 20 supporting Harbor Freight’s argument, this court cannot conclude 21 that, as a matter of law, Paragraph 14 violates the FTC Act, or any 22 public policy favoring comparative advertising. 23 B. Patent Infringement 24 “[A]” design patent, unlike a utility patent, limits 25 protection to the ornamental design of the article.” Richardson v. 26 Stanley Works, Inc., 597 F.3d 1288, 1293 (Fed. Cir. 2010) In 27 determining whether an accused product infringes a patented design, 28 courts apply the “ordinary observer” test, which asks whether “in 2\| the eye of the ordinary observer, giving such attention as a 31} purchaser usually gives, two designs are substantially the same. . 4 ., inducing him to purchase one supposing it to be the other. . 5]}..” Hall v. Bed Bath & Beyond, Inc., 705 F.3d 1357, 1362 (Fed. Cir. 2013) (citing Gorham Co. v. White, 81 U.S. (14 Wall.) 511, 528 71 (1871)). ™“[I]nfringement of a design patent is based on the design 8|}/as a whole, not on any ‘points of novelty.’” Id. (citing Egyptian Goddess, Inc. v. Swisa, Inc., 543 F.3d 665 (Fed. Cir. 2008) (en 10] banc))}). Differences must be “evaluated in the context of the claimed design as a whole, and not in the context of separate elements in isolation.” Ethicon Endo-Surgery, Inc. v. Covidien, 13}}Inc., 796 F.3d 1312, 1335 (Fed. Cir. 2015) (citing Richardson, 597 F.3d at 1295). 15 Generally, a patent plaintiff need only plead, in addition to basic information such as the name of the defendant and the patent owned by the plaintiff, “the means by which the defendant allegedly infringes” and “the sections of the patent law invoked.” Hall, 705 19] F.3d at 1362. Infringement itself is a question of fact. Catalina 20} Lighting, Inc. v. Lamps Plus, Inc., 295 F.3d 1277, 1287 (Fed. Cir. 21} 2002); see also Richardson, 597 F.3d at 1295; OddzOn Products, Inc. 22\|v. Just Toys, Inc., 122 F.3d 1396, 1405 (Fed. Cir. 1997). 23|| Nevertheless, “[i]n some instances, the claimed design and the accused design will be sufficiently distinct that it will be clear without more that the patentee has not met its burden of proving the two designs would appear ‘substantially the same’ to the 27} ordinary observer.” Egyptian Goddess, 543 F.3d at 678. Thus, at the pleading stage, dismissal for lack of infringement is only

1] appropriate if “the claimed design and accused product are so 2 plainly dissimilar that it is implausible that an ordinary observer would confuse them.” Enerlites, Inc. v. Century Prod. Inc., No. 4|| SACV18839JVSKESX, 2018 WL 4859947, at *3 (C.D. Cal. Aug. 13, 2018) Si (collecting cases). 6 Harbor Freight relies heavily upon Egyptian Goddess to argue 71 that the claimed and accused designs here are not substantially similar. Harbor Freight’s argument focuses on the fact that the test for infringement is applied “through the eyes of an observer 10] familiar with the prior art.” Egyptian Goddess, 543 F.3d at 677. Indeed, an “ordinary observer” analysis “will benefit from a comparison of the claimed and accused designs with the prior art . .” Id. at 678. Such a comparison, however, is only necessary 14] and applicable “[i]n [] instances[] when the claimed and accused designs are not plainly dissimilar.” Id. (emphasis added). In other words, “the ‘ordinary observer’ test involves a two tiered approach. The threshold question is whether, without review of the prior art, the claimed and accused designs are sufficiently similar[.] [][I]f£ so, the next level entail[s] a comparison to the prior art.” Performance Designed Prod. LLC v. Mad Catz, Inc., No. L6CV629-GPC (RBB), 2016 WL 3552063, at *2 (S.D. Cal. June 29, 2016). 22\|| Here, Harbor Freight conflates these two tiers, arguing that a 23|| comparison of the claimed design to the prior art reveals that the claimed and accused designs are dissimilar. This is not the proper analysis. See Ethicon, 796 F.3d at 1337 (“C]omparing the claimed 26 27 28 10

1} and accused designs with the prior art is beneficial only when the 2|| claimed and accused designs are not plainly dissimilar.”).° 3 Looking solely at the accused and claimed designs, this Court cannot conclude, nor does Harbor Freight argue, that the two 5} designs are plainly dissimilar. Dismissal at the pleading stage therefore, not appropriate.°® 7] IV. Conclusion 8 For the reasons stated above, Harbor Freight’s Motion to Dismiss is DENIED. 10 11 12 13 14 IT IS SO ORDERED. 15 16 Dated: March 12,2021 DEAN D. PREGERSON 18 United States District Judge 19 20 ||. ——_———_ ° The Ethicon court, like the district court, found a lack of substantial similarity on summary judgment, after claim 29 construction. Ethicon, 796 F.3d at 1335. 23 ° Although the Performance Digital Products court did dismiss at the pleading stage, it (1) recognized that such dismissal was 24 “not necessarily common,” and (2) only conducted a comparative prior art analysis in the alternative, after having already 25 concluded that the two designs at issue were plainly dissimilar. Performance Designed Prod., 2016 WL 3552063, at *5-7 (quoting MSA 2 Products, Inc. v. Nifty Home Products, Inc., No. llicv5261 (WJM), 2012 WL 2132464, *3-4 (D.N.J. June 12, 2012)). The latter 27 determination clearly supported dismissal at the pleading stage. Egyptian Goddess, 543 F.3d at 678; Enerlites, 2018 WL 4859947, at *3, 28 11