June 2010 Issue

Civil Cases

Campagnolo S.r.l. v. Full Speed Ahead, Inc.,
2010 WL 2079694 (W.D. Wash. May 20, 2010)

ABSTRACT
In evaluating whether a corporation was secondarily liable for false advertising, the district court held that even though the corporation was so closely related to the codefendant that it acted as the codefendant’s “parent” company, the corporation was not liable for the actions of the codefendant because there was no evidence that the parent company had knowledge of the advertisements or of their falsity, the parent company did not direct or control the advertisements or cause them to be false, and it did not exercise “complete domination” over the codefendant.

CASE SUMMARY

FACTS
Plaintiff Campagnolo S.r.l. (“Campagnolo”), an Italian manufacturer of bicycle components, brought a false advertising claim against defendant Full Speed Ahead, Inc. (“FSA”), alleging that advertisements published by FSA misrepresented the characteristics of FSA’s and Campagnolo’s bicycle cranksets. In addition, Campagnolo brought a false advertising claim against defendant Tien Hsin Industries Co., Ltd. (“Tien Hsin”), a Taiwanese company that manufactured FSA’s products, under theories of direct, contributory, and vicarious liability for FSA’s advertisements.

Tien Hsin’s bicycle components were sold under a variety of names, including FULL SPEED AHEAD and FSA.  Tien Hsin sold its FULL SPEED AHEAD− and FSA−branded products to FSA, which in turn sold the products to distributors and retailers in North America.  Tien Hsin owned rights to the mark FSA and had no written agreement with FSA regarding the licensing of this mark, but FSA’s sole shareholder claimed that FSA had an oral license to use the FSA mark.  Moreover, no written agreements of any kind formalized the relationship between Tien Hsin and FSA.

Tien Hsin was owned by Yudi Chiang and three other members of her family.  Chiang was also FSA’s sole shareholder.  FSA was managed by Matt Van Enkenvort, who made the day−to−day operating decisions for FSA, and who reported to Chiang at least once every quarter on FSA’s sales and financial data.  However, Chiang and Tien Hsin were not typically involved in FSA’s operations or advertising, and neither Chiang nor any Tien Hsin employee directed FSA’s advertising campaigns, controlled the content of advertisements, directed when advertisements should be published, or advised or commented on the advertisements.

Although Tien Hsin did not directly pay FSA to conduct advertising, Tien Hsin indirectly compensated FSA to conduct some advertising on its own behalf and for the benefit of Tien Hsin.  FSA purchased products from Tien Hsin at “a very aggressive price,” lower than the price other distributors would receive, that allowed FSA to be profitable reselling goods to other distributors “and also to engage in marketing.”  Any marketing conducted by FSA for its FSA−branded products benefitted Tien Hsin as well as FSA because the products originated from Tien Hsin and Tien Hsin owned the FSA trademark. When FSA met with its customers, distributors, and original equipment manufacturers, it acted on its own behalf.  However, as many of these customers conducted significant business in Asia, they often bought products directly from Tien Hsin.

If light of the above facts, Tien Hsin moved for summary judgment on the basis that it had no knowledge of or involvement with the allegedly false advertisements published by FSA, that it was a separate corporate entity from FSA, and that it was not liable for FSA’s actions.

ANALYSIS
The court first found that Tien Hsin was not directly liable for false advertising.  The evidence established that no Tien Hsin employees contributed to FSA’s advertisements, commissioned the advertisements, reviewed the advertisements, or participated in any way in their creation or dissemination.  The court also rejected the argument that direct liability could stem from FSA’s use of technical information on FSA−branded products obtained from Tien Hsin’s “Bike Solutions Guide,” noting the lack of any evidence that Tien Hsin intended the information in the Guide to be the basis for an FSA advertising campaign.

Similarly, the court found that Tien Hsin was not contributorily liable for false advertising by intentionally inducing FSA to create false advertisements.  Acknowledging that a defendant could be contributorily liable for false advertising for intentionally directing, approving, authorizing, drafting, and/or editing the advertisements in question, the court found no evidence of any inducement, as no Tien Hsin employees were involved with the advertisements.  Although Tien Hsin may have contemplated through its pricing arrangement that FSA would advertise, and that Tien Hsin would benefit as the owner of the FSA trademark, the court found that Tien Hsin did not direct or control the advertisements, nor induce FSA to render its advertisements false.

The court also rejected Campagnolo’s argument that, just as a company may be contributorily liable for trademark infringement if it continues to supply a product knowing that the recipient is using the product to engage in infringing activities, a defendant similarly may be subject to contributory liability for false advertising by continuing to sell a product knowing that it is being falsely advertised by the buyer. The court found no precedent for such a theory and determined that there was no evidence that Tien Hsin had knowledge of the advertisements or of their falsity.

Campagnolo also claimed that Tien Hsin was vicariously liable for false advertising based on Tien Hsin’s relationship with FSA.  First, Campagnolo argued that Tien Hsin and FSA were “intertwined” such that they acted as a single entity and FSA was Tien Hsin’s alter ego.  Second, Campagnolo argued that Tien Hsin was responsible for FSA’s actions because FSA was Tien Hsin’s agent.

In reviewing the facts, the court determined that FSA and Tien Hsin were closely related because
(1) FSA existed almost solely to distribute Tien Hsin’s products in North America; (2) Tien Hsin owned the FSA trademark, which it licensed to FSA without any written contract; (3) Tien Hsin sold its products to FSA at an aggressively low price with the understanding that FSA would use the profits to advertise; (4) the more FSA advertised, the more the value of the Tien Hsin−owned FSA brand increased, resulting in a higher number of products Tien Hsin could sell through FSA; and (5) FSA, at least on occasion, conducted negotiations on behalf of Tien Hsin.

The court held that the relationship between Tien Hsin and FSA was akin to a parent−subsidiary relationship, even though Tien Hsin did not own any of FSA’s stock directly.  Specifically, Tien Hsin had the power to control FSA because it owned the FSA mark and supplied substantially all of the products FSA sold.  Moreover, the court noted that FSA was wholly owned by one of Tien Hsin’s shareholders, who was related through marriage to Tien Hsin’s three other shareholders.  According to the court, this close family relationship allowed for the unusual business practice of an independent company to have the trademark for its own name owned by a completely unrelated company, particularly where there was no written agreement guaranteeing a continued license to that mark.

Ultimately, the court found that although FSA and Tien Hsin were “clearly related entities with aligned interests,” they were separately incorporated companies, and that “[i]t is a general principle of corporate law deeply ingrained in our economic and legal systems that a parent corporation . . . is not liable for the acts of its subsidiaries.”

Addressing Campagnolo’s “alter ego” theory, the court found no indication that Tien Hsin abused the corporate form to avoid a duty, and no evidence of fraud.  The evidence showed only that FSA and Tien Hsin had a close relationship and nearly perfectly aligned business interests.  Accordingly, Tien Hsin was not vicariously liable under an “alter ego” theory.

Finally, in addressing Campagnolo’s agency theory of liability, the court determined that to hold a parent liable on an agency theory requires that the parent exercise total control over the subsidiary, well beyond the normal control exercised by parents over subsidiaries, recognizing that a parent has no liability under an agency theory where it does not “direct[ ] and authorize[ ] the manner in which the subsidiary conduct[s] its business.”  The court found that Tien Hsin did not exercise “complete domination” over FSA.  Notwithstanding Chiang’s stock ownership, that Tien Hsin was nearly the sole supplier of FSA’s goods, and that Tien Hsin exercised some control over FSA owing to its ownership of the FSA trademark, the court determined that FSA was not a sham or a shell corporation, that Tien Hsin did not exercise any control over FSA’s day−to−day operations, and that there was no overlap between Tien Hsin’s and FSA’s employees.  Most importantly, the court found no evidence that Tien Hsin exercised any oversight over the content of FSA’s advertising campaigns.  Thus, Tien Hsin could not be held vicariously liable under an agency theory.

Accordingly, the court found no liability on the part of Tien Hsin and granted summary judgment in favor of Tien Hsin.

CONCLUSION
Even where a corporation is so closely related to another company that it takes on the role of a parent company, the corporation may not be liable for false advertising committed by the subsidiary under a direct or contributory infringement theory where the parent company has no knowledge of the advertisements or of their falsity, does not direct or control the advertisements or cause them to be false, and does not exercise complete control over the subsidiary.