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Lace Manufacturer Fails to Plead Claims Against Retailer for Breaching Settlement Agreement, Infringing Copyrights, or Engaging in False Advertising

By Thomas Long, J.D.
March 28, 2013
Wolters Kluwer Antitrust Law Daily Wrap Up

A designer and manufacturer of lace (Klauber Brothers, Inc., or "Klauber") failed to allege that a retailer (The Bon-Ton Stores, Inc.) breached a settlement agreement regarding copyrighted lace patterns for women's underwear, the federal district court in New York City has ruled (Klauber Brothers, Inc. v. Russell-Newman, Inc., March 26, 2013, Gardephe, P.). Klauber also failed to assert claims for copyright infringement and false advertising against Bon-Ton.

Klauber was a designer, manufacturer, and seller of original knit fabrics and had been in that business since 1859. In 1991, Klauber co-authored and published lace designs numbered 7087, 7088, and 7089. Copyrights to designs 7088 and 7089 were registered with the Copyright Office; design 7087 was purportedly a derivative work of designs 7088 and 7089.

Klauber originally filed suit against Bon-Ton and competing women's underwear manufacturer Russell-Newman, Inc. on August 14, 2009, alleging they were selling women's underwear that incorporated lace designs that infringed on Klauber's copyrights. That case was dismissed by stipulation in January 2010, after the parties reached a settlement agreement.

The agreement provided that Russell-Newman would make an initial payment to Klauber in the amount of $112,500. In addition, Russell-Newman agreed to guarantee to Klauber an additional $150,000 by purchasing or directing its manufacturing contractors to purchase lace from Klauber, with 5% of the purchase price to be credited toward this additional obligation. Klauber alleged that it had not received any payments from Russell-Newman or Bon-Ton.

Klauber filed a new complaint on July 20, 2011, alleging that the defendants had breached the settlement agreement, had engaged in new acts of copyright infringement, and had engaged in false advertising in violation of Sec. 43(a) of the Lanham Act.

Russell-Newman did not appear in the current case and apparently was defunct, according to the court. Bon-Ton filed a motion to dismiss Klauber's third amended complaint on April 30, 2012.

Breach of Contract

Klauber asserted that Bon-Ton was jointly and severally liable for the payments Russell-Newman agreed to make. However, the court said, the settlement agreement specifically assigned separate obligations to Russell-Newman and Bon-Ton. The plain language of the agreement did not impose any obligation on Bon-Ton to make payments to Klauber and provided that only Russell-Newman would be responsible for the payments. Therefore, the court granted Bon-Ton's motion to dismiss the breach of contract claim.

Copyright Infringement

Bon-Ton contended that Klauber's copyright infringement claim should be dismissed to the extent that it was based on alleged infringement of the 7087 lace pattern, because the design 7087 was not registered. Bon-Ton also argued that Klauber failed to allege copying and did not demonstrate substantial similarity.

Validity of copyright in design 7087. Klauber could maintain a copyright action based on the alleged unauthorized copying of the 7087 design because it was a derivative work of the 7088 design, the court said. The owner of a derivative work may maintain a copyright action against an infringer, based on any infringement of the pre-existing work from which the derivative work was derived.

The 7087 design was simply a section of the 7088 design, the court noted. All of the elements of the 7087 design were contained in the registered 7088 design. The court therefore denied Bon-Ton's motion to dismiss for failure to register the copyright for the 7087 design.

Allegation of copying. Klauber adequately pleaded copying, the court held. Klauber alleged that Bon-Ton became aware of Klauber's copyrights at least as early as August 14, 2009, when the first lawsuit was filed. The third amended complaint asserted that, after the settlement agreement was executed, Bon-Ton continued to infringe Klauber's copyrights. Accordingly, Klauber adequately alleged access, the court determined.

Although Klauber did not specifically plead that the accused works were "substantially or strikingly similar" to Klauber's copyrighted designs, Klauber did allege that Bon-Ton had made a copy of the designs. The complaint included a photocopy of the garment that Klauber contended was infringing. Klauber adequately pleaded substantial similarity, the court concluded.

Failure to show substantial similarity. Klauber failed, however, to show that Bon-Ton's products were, in fact, substantially similar to the asserted lace patterns, the court decided.

The court rejected Bon-Ton's argument that the court should apply the stricter "more discerning" test for substantial similarity applicable to works that contain both protectable and unprotectable elements. That test requires courts to eliminate unprotectable elements from its consideration and decide whether protectable elements, standing alone, were substantially similar. Although the asserted lace designs contained roses, leaves, and stems—which Bon-Ton asserted were unprotectable ideas—the court stated that the patterns were not simply the depiction of flowers as they would appear in nature, but were artistic renderings that had their own unique qualities. Therefore, the court decided to apply the standard "ordinary observer" test, under which the court considered whether an average lay observer would recognize the allegedly infringing design as having been appropriated from Klauber's works.

According to the court, under the "ordinary observer" test, the allegedly infringing design was not substantially similar to Klauber's 7088 and 7089 designs. The plant sprigs in Klauber's designs were much longer, featured many more leaves, and were more stylized than those in the allegedly infringing design. The "total concept and feel" of the parties' respective works were different.

The court noted that Klauber did not allege that the challenged design and the asserted works used a common color scheme, which had been an important factor in cases in which courts had found substantial similarity between fabric designs. In this case, a reasonable jury could not find that the works were substantially similar, the court concluded. The copyright infringement claim was dismissed.

False Advertising

Klauber contended that Bon-Ton engaged in false advertising by displaying on its website undergarments under Bon-Ton's RELATIVITY mark that prominently showed, as the waistband, a copy of Klauber's 7087 design. When consumers ordered from the website, they allegedly were sent a product with different lace in the waistband.

Klauber gave Bon-Ton adequate notice of the nature of its Lanham Act false advertising claim, the court said. Klauber's brief in opposition to the motion to dismiss made it clear that it was proceeding under a false advertising theory, rather than a false designation of origin theory. Klauber's allegations adequately described a "bait and switch" that would be actionable under Sec. 43(a)(1)(B), the court said.

The false advertising claims were not impermissibly based on a claim of false authorship, according to the court. Rather, Klauber alleged that Bon-Ton's advertising caused confusion among consumers as to the identity and source of the lace in Bon-Ton's product.

The court dismissed the false advertising claim, however, on the basis that Klauber lacked standing. Klauber failed to allege facts plausibly demonstrating that it had suffered a competitive injury as a result of Bon-Ton's advertising. Bon-Ton was not a direct competitor of Klauber. Any injury alleged by Klauber would have been sustained by consumers, rather than Klauber.

The case is No. 11 Civ. 4985 (PGG).

Attorneys: Philip Howard Gottfried (Amster, Rothstein & Ebenstein LLC) for Klauber Brothers, Inc.; Suzan Jo (Duane Morris, LLP) for The Bon-Ton Stories, Inc.

Companies: Klauber Brothers, Inc.; Russell-Newman, Inc.; The Bon-Ton Stores, Inc.

Source: This article was published in Wolters Kluwer Antitrust Law Daily Wrap Up, March 28, 2013. For more information visit www.antitrustlawdaily.com