Norix Group, Inc. v. Correctional Technologies, Inc. d/b/a Cortech USA et al
Filing
49
MEMORANDUM Opinion and Order Signed by the Honorable John Robert Blakey on 8/6/2018. Mailed notice(gel, )
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
NORIX GROUP, INC.,
Plaintiff,
Case No. 17-cv-07914
v.
CORRECTIONAL TECHNOLOGIES,
INC. d/b/a CORTECH USA, and VDL
INDUSTRIES, LLC, d/b/a AMERICAN
SHAMROCK,
Judge John Robert Blakey
Defendants.
MEMORANDUM OPINION AND ORDER
Plaintiff Norix Group, Inc. sued Defendants Correctional Technologies, Inc.,
d/b/a Cortech USA, and VDL Industries, LLC d/b/a American Shamrock, for patent
infringement, false marking, false advertising, consumer fraud, and deceptive trade
practices.
[31] ¶ 1.
Norix alleges that Cortech copied Norix’s products and
misrepresented the patent status of several Cortech products. Id. Cortech moved to
dismiss three counts of Norix’s second amended complaint for failure to state a claim:
false patent marking (Count II); violation of the Illinois Consumer Fraud and
Deceptive Trade Practices Act (Count IV); and violation of the Illinois Uniform
Deceptive Trade Practices Act (Count V). [35]. For the reasons explained below, this
Court partially grants and partially denies the motion.
I.
The Complaint’s Allegations
Norix
designs,
manufactures,
and
1
distributes
furniture
and
other
products. [31] ¶ 2.
Norix specializes in “intensive-use” furniture designed for
environments like prisons and psychiatric facilities, where inmates or patients may
use furniture to harm themselves, conceal contraband, or damage property. Id. ¶¶ 2,
8.
Cortech also sells intensive-use furniture, which American Shamrock
manufactures for Cortech. Id. ¶¶ 4, 30. Joseph Claffy owns and operates both
Cortech and American Shamrock. Id. ¶¶ 3, 4.
For over ten years, Claffy sold Norix’s products under a sales agreement
between Cortech and Norix. Id. ¶ 23. A few months after that agreement ended in
January 2008, Cortech started selling products similar to those it previously sold for
Norix. Id. ¶¶ 24, 25. For example, Cortech sells storage boxes, chairs, beds, shelves,
and tables that closely resemble Norix’s products. Id. ¶ 30.
Cortech’s advertising falsely claims that many of its products have “multiple
design and utility patents pending,” even though Cortech does not have patents
pending for those products. Id. ¶¶ 27, 28. Claffy attempted to file patents for two
Cortech products, but neither product currently has a patent. Id. ¶ 31. First, Claffy
applied for a patent covering Cortech’s “Barracuda Box” in October 2008. Id. ¶ 31,
33. The United States Patent and Trademark Office (USPTO) rejected this patent
and Claffy abandoned it in January 2011. Id. ¶¶ 31, 34. Second, Claffy applied for
a patent covering Cortech’s “EZ Bunk,” but the patent expired in July 2016 after
Cortech failed to pay a maintenance fee. Id. ¶ 31. Yet Cortech continues to falsely
represent that these products have patents pending. Id.
Aside from the two examples above, the USPTO has no published applications
2
or patents on record for Cortech’s products.
Id. ¶ 32.
At least twice, Cortech
advertised products using “patent pending” language without ever filing any
associated patent application. First, Cortech’s 2017 catalog states that the “Sabre
Chair,” a chair very similar to Norix’s “Mega Max” chair, has “multiple design and
utility patents pending.” Id. ¶ 41. Yet neither Cortech nor American Shamrock has
applied for patents covering the Sabre Chair. Id. ¶ 40. Second, in Cortech’s 2013 and
2017 catalogs and online product specification sheets, Cortech represented that
products in its “Endurance Series” of furniture had “multiple design and utility
patents pending.” Id. ¶ 48. But neither Cortech nor American Shamrock has applied
for patents covering the Endurance Series. Id. ¶ 52.
Norix claims that Cortech’s false advertising has caused Norix competitive
injury in the small market in which the two companies compete. Id. ¶¶ 72, 74. Often,
institutional customers require bidding furniture companies to: 1) show that their
products do not infringe any patents; and 2) indemnify customers against patent
infringement lawsuits. 1 Id. Because customers want to avoid patent infringement
allegations, Norix contends, customers are less likely to choose products that lack
“patent pending” assurances. Id. Thus, customers are less likely to choose Norix’s
products—many of which lack “patent pending” labels—than Cortech’s products,
which falsely represent that they have patents pending. Id. So, Norix alleges, “each
sale of Cortech’s products obtained by defendants’ false representations” likely means
Norix attached two documents to its complaint related to this allegation: 1) a purchase order from
one of Norix’s clients containing an agreement that the seller will indemnify the buyer against all suits
arising from intellectual property infringement; and 2) a bid solicitation form from one of Norix’s
customers containing a similar infringement and indemnity clause. [41, 42].
1
3
“a lost sale to Norix.” Id. ¶ 76.
II.
Legal Standard
To survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6),
a complaint must provide a “short and plain statement of the claim” showing that the
pleader merits relief, Fed. R. Civ. P. 8(a)(2), so the defendant has “fair notice” of the
claim “and the grounds upon which it rests,” Bell Atl. Corp. v. Twombly, 550 U.S. 544,
555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). A complaint must also
contain “sufficient factual matter” to state a facially plausible claim to relief—one
that “allows the court to draw the reasonable inference” that the defendant
committed the alleged misconduct.
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)
(quoting Twombly, 550 U.S. at 570). This plausibility standard “asks for more than
a sheer possibility that a defendant has acted unlawfully.” Williamson v. Curran,
714 F.3d 432, 436 (7th Cir. 2013).
In evaluating a complaint on a Rule 12(b)(6) motion, this Court accepts all wellpled allegations as true and draws all reasonable inferences in the plaintiff’s favor.
Iqbal, 556 U.S. at 678. This Court does not, however, accept legal conclusions as true.
Brooks v. Ross, 578 F.3d 574, 581 (7th Cir. 2009). On a motion to dismiss, this Court
may consider the complaint itself, documents attached to the complaint, documents
central to the complaint (to which the complaint refers), and information properly
subject to judicial notice. Williamson, 714 F.3d at 436.
Fraud claims must also meet Rule 9(b)’s heightened pleading requirements.
Camasta v. Jos. A. Bank Clothiers, Inc., 761 F.3d 732, 736 (7th Cir. 2014). Rule 9(b)
4
demands that claimants alleging fraud “state with particularity the circumstances
constituting fraud.” To satisfy Rule 9(b), a plaintiff “ordinarily must describe the
who, what, when, where, and how of the fraud.” Pirelli Armstrong Tire Corp. Retiree
Med. Benefits Trust v. Walgreen Co., 631 F.3d 436, 441–42 (7th Cir. 2011) (internal
quotation marks omitted).
III.
Analysis
A.
Count II: False Marking
Count II alleges that Cortech falsely advertised that some of its products have
patents pending, and that Cortech did so with the intent of deceiving the public. [31]
¶¶ 91–94. Count II also alleges that this false marking directly caused competitive
injury to Norix. Id. ¶¶ 95–102. Cortech 2 argues that Norix fails to adequately plead
a competitive injury and Cortech’s intent to deceive. [35] at 2–10.
To state a claim under the False Marking Statute, 35 U.S.C. § 292, a plaintiff
must allege that: 1) the defendant marked an unpatented article with patent
language; 2) the defendant intended to deceive the public; and 3) the plaintiff suffered
a competitive injury as a result. Two Moms & a Toy, LLC v. Int'l Playthings, LLC,
898 F. Supp. 2d 1213, 1216 (D. Colo. 2012). The second element sounds in fraud, so
a plaintiff must plead it with the requisite particularity under Rule 9(b).
See
Camasta, 761 F.3d at 736; In re BP Lubricants USA Inc., 637 F.3d 1307, 1311 (Fed.
Cir. 2011).
2
Defendants use “Cortech” to mean both Cortech and American Shamrock; this Court does the same.
5
1.
Marking an Unpatented Article
Norix alleges that Cortech has used the phrase “patent pending” or its
equivalent when advertising several products that do not have patents pending. [31]
¶¶ 92–93. To support these claims, Norix attached samples of Cortech’s advertising
materials to its complaint, including: Cortech’s 2011, 2013, and 2017 catalogs with
several items marked “multiple design and utility patents pending”; Cortech’s
advertisement in a 2017 issue of Correctional News claiming that the Master Box had
“multiple design and utility patents pending”; and a 2014 product specification sheet
from Cortech’s website that claims, “The Endurance Bed and the manufacturing
process to produce them has [sic] multiple design and utility patents pending.” [312, 31-3, 31-5, 31-6, 31-8]. Cortech does not contest this element. In fact, Cortech
acknowledged in open court during a June 19, 2018 motion hearing that it made
misstatements about patents in its advertising materials, although it characterized
the misstatements as unintentional.
2.
Intent to Deceive the Public
During an April 11, 2018 hearing, Norix argued that the explicit nature of the
“patent pending” language itself demonstrated intent to deceive, especially because
Cortech never even attempted to patent many of the falsely marked products. Norix
also alleges that this Court could infer intent to deceive from the fact that Claffy has
owned and operated Cortech and American Shamrock for several years and presides
over day-to-day operations for both small companies. [31] ¶¶ 3, 22, 31–36. Cortech
argues that Norix’s allegations fail to show that Claffy knew about the false
6
statements in Cortech’s advertising. [35] at 8–9.
To plead intent to deceive in a false marking claim, the plaintiff “must provide
some objective indication to reasonably infer” that the defendant knew of the falsity
of the marking. BP Lubricants, 637 F.3d at 1311. In this context, a complaint can
satisfy Rule 9(b) by alleging: 1) a misrepresentation; and 2) that the party making
the misrepresentation knew it was false. Clontech Labs., Inc. v. Invitrogen Corp., 406
F.3d 1347, 1352 (Fed. Cir. 2005); see also Fasteners for Retail, Inc. v. Andersen, No.
11 C 2164, 2011 WL 5130445, at *4 (N.D. Ill. Oct. 28, 2011) (finding a “plausible
inference” of deceptive intent where the complaint alleged that the defendant’s
marketing department knew which products had patents and which did not).
Pleading deceptive intent usually proves easier when the marked product in question
never had a patent at all (as opposed to an expired patent). Compare Simonian v.
MeadWestvaco Corp., 812 F. Supp. 2d 925, 931 (N.D. Ill. 2011) (holding that evidence
of a single marking revision after the expiration of a valid patent insufficiently
alleged deceptive intent), with U.S. Gypsum Co. v. Pac. Award Metals, Inc., 438 F.
Supp. 2d 1101, 1106 (N.D. Cal. 2006) (“[I]f a party states that an article marked with
a patent is covered by the patent when it knows it is not, one can infer that an intent
to deceive existed for purposes of a false patent marking claim.”).
Because Norix alleges that Claffy knew about Cortech’s false marking and
oversaw Cortech’s day-to-day activities (including applying for patents, and
ostensibly authorizing marketing materials), this Court can reasonably infer
deceptive intent. In Fasteners, the court found that a marketing department’s alleged
7
involvement in patent-related advertising, combined with the department’s alleged
knowledge about its products’ patent status (or lack thereof), sufficiently pled intent
to deceive the public. 2011 WL 5130445, at *4. Similarly, Norix’s allegations that
Cortech blatantly mismarked products for which no patents had ever been pending,
combined with its allegations that Claffy personally participated in daily operations
like advertising, sufficiently plead intent to deceive the public.
And the fact that most of Cortech’s allegedly mismarked products were never
subject to any patent applications indicates that Cortech understood the falsity of its
representations and intended to deceive the public.
See Sadler-Cisar, Inc. v.
Commercial Sales Network, Inc., 786 F. Supp. 1287, 1296 (N.D. Ohio 1991) (a
corporation’s use of the phrase “patent pending” on products where no application
was pending “could not have been solely the result of inadvertence” and showed an
intent to deceive); DP Wagner Mfg. Inc. v. Pro Patch Sys., Inc., 434 F. Supp. 2d 445,
456 (S.D. Tex. 2006) (a company acted with intent to deceive when it marked products
with patent language despite “full knowledge” that the patents at issue “did not
include any claims that covered the marked products”). Just as the blatantly false
nature of the patent representations created an inference of intentional deception in
those cases, the blatant nature of Cortech’s mismarking creates a plausible inference
of intent to deceive here.
Although “no court has held that naming a specific individual is all a claimant
must do to establish intent to deceive,” Linear Grp. Servs., LLC v. Attica Automation,
Inc., No. 213CV10108GADMKM, 2013 WL 12184248, at *2 (E.D. Mich. Sept. 4, 2013),
8
and allegations of a company’s “sophistication” do not—by themselves—show intent
to deceive, BP Lubricants, 637 F.3d at 1312, Norix goes beyond those basic allegations
here. Norix both singles out an individual (Claffy) and alleges that Claffy oversaw
Cortech and involved himself in the company’s daily operations, such as applying for
(and abandoning) certain patents. Combined with the allegation that Cortech falsely
marked products that never had patents pending (or even patent applications), the
allegations about Claffy adequately plead intent to deceive.
3.
Competitive Injury
Norix alleges that Cortech’s false marking caused Norix competitive injury
because Norix and Cortech directly compete in the market for intensive-use furniture
and often submit competing bids (for confusingly similar products) to the same
customers. [31] ¶¶ 96–97. Norix also alleges that its customers value avoiding patent
liability, so Cortech’s false patent assurances make customers more likely to choose
Cortech’s falsely marked products over Norix’s products. Id. ¶¶ 99–100. Cortech
argues that Norix fails to plead facts, such as specific examples of lost sales, that
demonstrate any competitive injury. [35] at 3.
In 2011, Congress amended the False Marking Statute by passing the America
Invents Act (AIA), which required private parties bringing false marking claims to
allege facts showing that they suffered a “competitive injury” because of the false
marking. See Stauffer v. Brooks Bros. Grp., Inc., 758 F.3d 1314, 1316 (Fed. Cir. 2014).
Congress added the competitive-injury requirement to eliminate qui tam false
marking suits brought by “unrelated, private third parties” not involved in the
9
relevant market. See Sukumar v. Nautilus, Inc., 785 F.3d 1396, 1401 (Fed. Cir. 2015)
(reviewing the AIA’s plain text and legislative history). A competitive injury means
a “wrongful economic loss caused by a commercial rival, such as the loss of sales due
to unfair competition,” or “a disadvantage in a plaintiff's ability to compete with a
defendant, caused by the defendant's unfair competition.”
Id. at 1400 (quoting
Black’s Law Dictionary (9th ed. 2009)).
Pleading a competitive injury requires alleging an actual injury, not merely a
hypothetical or potential future injury. Two Moms & a Toy, 898 F. Supp. 2d at 1218;
see also Sukumar, 785 F.3d at 1402 (recognizing that “potential competitors” might
suffer competitive injuries if false marking actually prevents them from entering a
market, but rejecting as “too speculative” the argument that the AIA confers standing
“upon any entity that claims a subjective intent to compete”). For example, in WeFlex, the plaintiff alleged that the defendant’s false marking reduced the plaintiff’s
goodwill by making it harder for the plaintiff to distinguish its own patented products
in a competitive market, and that the defendant gained a competitive advantage by
claiming a patented status for its products without spending money to secure patents.
We-Flex, LLC v. NBSP, Inc., No. H-11-1078, 2012 WL 1440439, at *1 (S.D. Tex. Apr.
25, 2012). The court deemed those allegations speculative because the plaintiff failed
to offer specific examples of lost sales or otherwise allege facts showing that it
suffered a cognizable injury. Id. at *6–7 (noting that “competitive injury” in the AIA
“is amenable to a plain reading” as “supported by the legislative history”). Likewise,
in Cot’n Wash, the counterclaimants alleged that they competed with the plaintiffs in
10
the small market for laundry products and that the plaintiffs’ patent infringement
caused them to suffer “lost sales, loss of market share, loss of business opportunities,
and loss of good will,” but otherwise failed to specific instances of competitive injury.
Cot'n Wash, Inc. v. Henkel Corp., 56 F. Supp. 3d 613, 624 (D. Del. 2014). This was
not enough. Even though a valid claim might be pled without alleging specific
instances of injury, the court found that such conclusory allegations failed to show “a
causal connection” between plaintiffs' alleged false marking and defendants' alleged
injury. Id.
Here, Norix’s speculative allegations of competitive injury fail to meet the
requisite standard. Norix alleges that it competes with Cortech in a small market
and that Cortech enjoys the advantage of not having to pay for patent applications
while falsely reaping the marketing benefits of patent protection, [31] ¶ 99, but Norix
fails to set forth any particular instances of competitive injuries or otherwise
establish a causal connection between, for example, lost sales and Cortech’s false
marking, see, e.g., Gravelle v. Kaba Ilco Corp., 684 F. App’x 974, 979 (Fed. Cir. 2017)
(identifying possible methods of demonstrating competitive injury) (citing Forest
Grp., Inc. v. Bon Tool Co., 590 F.3d 1295, 1302–03 (Fed. Cir. 2009)); Rogers v. Conair
Corp., No. CIV.A. 10-1497, 2012 WL 1443905, at *4 (E.D. Pa. Apr. 25, 2012) (the
plaintiff’s allegations that the defendant’s false marking led to “lost sales and
competitive disadvantage,” without more specifics, did not suffice to plead
competitive injury); Linear, 2013 WL 12184248, at *6 (the plaintiff merely alleged
that the defendant’s false marking gave the defendant a competitive advantage, and
11
thus failed to plead competitive injury); Fisher-Price, Inc. v. Kids II, Inc., No. 10-CV00988A F, 2011 WL 6409665, at *10 (W.D.N.Y. Dec. 21, 2011) (finding an insufficient
competitive injury pleading where the claimants only generally alleged that they had
been “competitively injured”).
At best, Norix alleges that customers “are less likely” to choose products not
marked as “patent pending,” meaning that “each sale of Cortech’s products obtained
by defendants’ false representations is likely a lost sale to Norix.” [31] ¶¶ 75–76
(emphasis added). Norix still fails to allege, however, that it actually lost sales, saw
profits drop, or experienced any other cognizable injury because of Cortech’s false
representations, so its pleading remains deficient in that regard. See Gravelle, 684
F. App’x at 979–80 (affirming summary judgment against a plaintiff who speculated
that the product features that the defendant falsely marked “could readily influence
a buyer’s purchasing decision,” but otherwise failed to show “that buyers actually
purchased the ‘patent pending’ machines over Gravelle’s machines”).
Norix has now had three chances to allege competitive injury, so its failure to
provide specifics—whether through specific lost sales, decreased profits, or another
avenue—shows its inability to establish any competitive-injury claim. As the court
noted in Fisher-Price, a party alleging its own competitive injuries does not need
access to extensive discovery or information from the opposing side.
2011 WL
6409665, at *10 (“[I]f Fisher–Price's alleged false marking of its cradle swing products
has discouraged or deterred Defendant from manufacturing or marketing competing
cradle swing products, Defendant would or should be in possession of such
12
information without resort to discovery from Plaintiffs.”).
Because Norix fails to provide specific allegations supporting an actual
competitive injury, this Court grants Cortech’s motion to dismiss Count II.
B.
Count IV: Illinois Consumer Fraud and Deceptive Trade
Practices Act
Cortech argues that this Court should also dismiss Count IV because, among
other reasons, Norix cannot show a competitive injury. [35] at 2. To state a claim
under the Illinois Consumer Fraud and Deceptive Trade Practices Act (ICFA), a
plaintiff must allege: (1) the defendant's deception; (2) the defendant intended that
the plaintiff rely on that deception; (3) the deception occurred in a commercial
transaction; (4) the plaintiff suffered actual damage; and (5) the deception
proximately caused the damage. Aliano v. Louisville Distilling Co., LLC, 115 F. Supp.
3d 921, 929–30 (N.D. Ill. 2015). Pleading an ICFA claim requires factual allegations
showing that harm resulted from the alleged deception. See id. at 931 (finding
sufficient pleading of actual damage in an ICFA claim where the plaintiff allegedly
made a money-losing purchase based on the defendant’s fraudulent statement);
Cocroft v. HSBC Bank USA, N.A., 796 F.3d 680, 687–88 (7th Cir. 2015) (finding
insufficient pleading of actual damage in an ICFA claim where borrowers received a
letter stating that a trustee could not locate the borrowers’ account, but did not allege
facts showing injury resulting from that letter).
In cases involving competing businesses, the “actual damage” element of an
ICFA claim can refer to competitive injuries. See Vulcan Golf, LLC v. Google Inc.,
552 F. Supp. 2d 752, 777 (N.D. Ill. 2008) (“Businesses have standing to sue under the
13
Illinois Consumer Fraud and Deceptive Trade Practices Act to redress competitive
injury they suffer when other businesses deceive customers.”) (quoting Pain
Prevention Lab, Inc. v. Elec. Waveform Labs, Inc. 657 F. Supp. 1486, 1493 (N.D. Ill
1987)).
Because the actual damage element of an ICFA claim encompasses
competitive injuries, and because pleading actual damage requires showing that the
alleged deception caused harm, the ICFA’s actual damage element equates to the
competitive injury element of a false marking claim in this case. As discussed above,
Norix fails to sufficiently plead competitive injury, so it has not alleged “actual
damage” either. Thus, this Court grants Cortech’s motion to dismiss Count IV.
C.
Count V: Illinois Uniform Deceptive Trade Practices Act
Finally, Cortech argues that this Court should dismiss Count V because Norix
cannot show a competitive injury and cannot plead deceptive intent. [35] at 2. To
state a claim under the Illinois Uniform Deceptive Trade Practices Act (UDTPA),
plaintiffs must allege both a deceptive trade practice and a “likelihood of confusion or
misunderstanding” on the part of customers. ATC Healthcare Servs., Inc. v. RCM
Techs., Inc., 192 F. Supp. 3d 943, 952 (N.D. Ill. 2016). A plaintiff may state a claim
under the UDTPA by alleging that a defendant published misleading or disparaging
statements about a plaintiff’s products, without separately alleging that harm
resulted from the misrepresentation. See, e.g., McGraw-Edison Co. v. Walt Disney
Prods., 787 F.2d 1163, 1174 (7th Cir. 1986); Fedders Corp. v. Elite Classics, 268 F.
Supp. 2d 1051, 1064 (S.D. Ill. 2003) (noting that the UDTPA “provides a remedy for
disparagement of a product”); All Star Championship Racing, Inc. v. O’Reilly Auto.
14
Stores, Inc., 940 F. Supp. 2d 850, 872 (C.D. Ill. 2013) (holding that proof of trademark
infringement establishes a UDTPA violation).
Thus, while pleading competitive injury in a false marking claim requires
alleging harm that resulted from a misrepresentation, pleading a likelihood of
customer confusion merely requires alleging that a party made a misleading
statement about a product. Given that distinction, Cortech’s assertion that Norix
failed to plead competitive injury falls short of the mark for Count V.
Beyond
Cortech’s bare (and incorrect) statement that UDTPA claims require pleading
competitive injury and deceptive intent, [35] at 2, Cortech does not address the
UDTPA elements or argue that Norix fails to allege a likelihood of confusion.
Accordingly, this Court denies Cortech’s motion to dismiss Count V.
IV.
Conclusion
For the reasons explained above, this Court partially grants and partially
denies Cortech’s motion to dismiss [35]. This Court grants the motion as to Counts
II and IV and denies it as to Count V. All dates and deadlines stand.
Dated: August 6, 2018
Entered:
____________________________________
John Robert Blakey
United States District Judge
15
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?