October 2009 Issue

Civil Cases

Rainbow Play Sys., Inc. v. Backyard Adventure, Inc.,
2009 WL 3150984 (D.S.D. Sept. 28, 2009)

ABSTRACT
The District of South Dakota granted defendants’ motion for summary judgment on plaintiff’s false-advertising claim based on the affirmative defense of unclean hands where plaintiff engaged in the same misconduct alleged against defendants.

CASE SUMMARY

FACTS
Plaintiff Rainbow Play Systems, Inc. (“Rainbow”) and Defendants Backyard Adventure, Inc. and Leisure Time Products offer competing wooden children’s play sets.  Both plaintiff and defendants advertised that their play sets were constructed of “cedar” lumber when they were, in fact, both constructed out of types of cypress falling in a separate scientific classification.  The evidence showed that Rainbow used both Thuja plicata and Calocedrus decurrens lumber, and defendants used Nunninghamia lanceolata, each of which are classified as types of cypress.  In its 2006 sales brochure, Rainbow stated that competing manufacturers were misleading consumers by mislabeling Nunninghamia lanceolata as “cedar” when it was actually a “fir.”  Rainbow brought suit against defendants seeking monetary and injunctive relief for alleged acts of false advertising and unfair competition under the Lanham Act and the South Dakota Unfair and Deceptive Trade Practices Act based on defendants’ advertisements for “cedar” play sets.  Defendants counterclaimed against Rainbow for both injunctive and monetary relief for alleged acts of false advertising, deceptive trade practices, and unfair competition, as well as for libel.  The parties filed cross-motions for summary judgment.

ANALYSIS
To establish a claim of false or deceptive advertising under Section 43(a) of the Lanham Act, a plaintiff must prove (1) that a defendant made a false statement of fact about its product in a commercial advertisement; (2) that the statement actually deceived or has a tendency to deceive a substantial segment of its audience; (3) that the deception is likely to influence the purchasing decision; (4) that the defendant caused the false statement to enter interstate commerce; and (5) that the plaintiff has been or is likely to be injured as a result. 

As an initial matter, the court considered whether advertising a category of “fir” as “cedar” would qualify as “false” within the meaning of the Act.  In doing so, the court examined an analogous U.S. Supreme Court case, Federal Trade Comm’n v. Algoma Lumber Co., 291 U.S. 67 (1934), holding that sales of yellow-pine products under the name “California white pine” constituted unfair competition, even where yellow pine was held to be as good as genuine white pine.  In Algoma, the Court observed that yellow pine was “not a white pine, whether the tests to be applied are those of botanical science or of commercial practice and understanding.”  Id. at 70.  Unlike in Algoma, where the answer to the “commercial practice and understanding” test was clear, the court noted the lack of clarity as to whether the different types of cypress used by the parties would be properly advertised as “cedar.”

In response, defendants argued that even if the court accepted Rainbow’s assertion that defendants’ advertisements contained false statements about the nature of the wood, defendants were still entitled to summary judgment based on the affirmative defense of unclean hands.  The unclean-hands doctrine may be asserted as an affirmative defense in Lanham Act cases.  To sustain an unclean-hands defense, a defendant must show that the plaintiff has engaged in inequitable conduct or bad faith which misconduct has a material relation to the equitable relief sought by the plaintiff.  A defendant need not be injured by the plaintiff’s misconduct to be able to successfully assert a defense of unclean hands. 

Defendants argued that since all three types of lumber used by Rainbow and defendants were cypress rather than cedar, Rainbow’s advertisements were just as false as those of defendants.  Further, defendants argued, if the court were to ultimately conclude that defendants’ reference to “cedar” was a violation of the law, so too was Rainbow’s reference to “cedar,” and the doctrine of unclean hands accordingly should bar all of Rainbow’s claims.

The court agreed with defendants, finding that if defendants had engaged in inequitable conduct by referring to its lumber as cedar despite its different scientific classification, Rainbow was guilty of the same inequitable conduct.  Finding that Rainbow’s conduct had a material relation to the equitable relief that it sought, the court granted summary judgment to defendants on Rainbow’s Lanham Act claims.

The court next analyzed whether defendants were entitled to summary judgment on Rainbow’s South Dakota Unfair and Deceptive Trade Practices Act claim.  The statute provides:  “It is a deceptive act or practice for any person to: knowingly and intentionally act, use or employ any deceptive act or practice, fraud, false pretense, false promises, or misrepresentation or to conceal, suppress, or omit any material fact in connection with the sale or advertisement of any merchandise, regardless of whether any person has in fact been mislead [sic], deceived, or damaged thereby.”  The statute, which provides for criminal prosecution, allows a civil action for damages only where the plaintiff can demonstrate both reliance and a causal connection between the alleged deceptive practice and the damages suffered.  Because Rainbow failed to produce evidence of its reliance on defendants’ alleged misrepresentation and did not establish the requisite causal connection, the court granted summary judgment to defendants on this claim as well.  

Finally, the court examined whether defendants were entitled to summary judgment on their counterclaims for violation of the Lanham Act and the South Dakota Unfair and Deceptive Trade Practices Act.  Defendants’ claims were based on Rainbow’s communication in its promotional materials that Nunninghamia lanceolata is not “cedar” but a “fir.”  Defendants argued that they were prejudiced and damaged by that communication.  In response, Rainbow argued that the statement was made with a  reasonable, good-faith basis based upon evidence demonstrating that Nunninghamia lanceolata was considered by some as belonging to the fir family at the time of the advertisement.  Rainbow subsequently changed these statements in its 2007 catalog.  In considering both parties’ evidence, the court concluded that genuine issues of material fact remained as to whether the statement was deceptive and material, and whether there was any reliance upon that statement, and, accordingly, denied defendants’ summary-judgment motion.

CONCLUSION
This decision underscores the importance of the affirmative defense of unclean hands in the context of Lanham Act false-advertising claims.  Where the misconduct alleged of defendant could also be attributed to plaintiff, and the parties’ conduct is equally culpable, the unclean-hands doctrine could bar plaintiff’s claims.