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competition through litigation

Suits by businesses over their competitors’ advertising are a staple for us, but this one has a somewhat new wrinkle:

Quiznos, the toasted-sandwich chain, [invited] the public to submit homemade commercials in a contest intended to attack a top rival, Subway. The contest rules made it clear that the videos should depict Quiznos sandwiches as “superior” to Subway’s.

Subway promptly sued Quiznos and iFilm, the Web site owned by Viacom that ran the contest, saying that many of the homemade videos made false claims and depicted its brand in a derogatory way. Subway is also objecting to ads that Quiznos itself created, showing people on the street choosing Quiznos over Subway.

The dispute over an ad is fairly standard — companies often sue one another over advertising claims — but the video contest raises a novel legal question: Quiznos did not make the insulting submissions, so should it be held liable for user-generated content created at its behest? …

If Subway wins, advertisers and media companies may find themselves liable for false advertising claims made by consumers who participate in their contests.

(Louise Story, “Can a Sandwich Be Slandered?”, New York Times, Jan. 29).

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No matter how absurd a lawsuit is, the plaintiff usually has an elaborate, ingenuous theory to explain why he deserves to be compensated for injuries caused in some convoluted, indirect way by the nefarious defendant, and the obligatory disclaimer about the case “not being about the money” is usually tacked on. Usually. And then there’s James Schlimpert, president of Oklahoma-based Garage Storage Cabinets LLC.

When asked why he brought a suit against a competitor (Don Mitchell/MGCS) for misappropriation of trade secrets and tortious interference with his company’s dealer contracts, he explained, forthrightly:

When deposed, GSC President John Schlimpert testified that his company held no trade secrets, had no exclusive dealer contracts, and had filed the lawsuit for the sole purpose of putting MGCS out of business.

“I am amazed in some respects that the plaintiff said that, and he said it more than once, said his purpose was to put them out of business,” reads the court record issued by the District Court of Payne County, Honorable Larry Brooks, judge. “I think, under the plaintiff’s stated purpose, he was bringing it just to be vexatious to the defendants. I think it’s vexatious litigation.”

Wow. Still, for anybody who wasn’t already convinced by the Roy Pearson case, the history of the suit illustrates the difficulty courts have in protecting defendants from frivolous suits.

Because the complaint, on its face, seemingly stated legitimate causes of action, the only way for Mitchell to establish that the suit was frivolous was to conduct discovery and take the deposition of the plaintiff. Then Mitchell had to get lucky; if Schlimpert hadn’t foolishly admitted the fraudulent nature of his suit, the court would almost certainly treated the suit as legitimate. (Mitchell could still have won, but wouldn’t have gotten sanctions.) Once Mitchell got lucky, he had to make a motion to the court to have the case thrown out.

Then, after having the case thrown out, Mitchell had to make a separate application to the court for sanctions — he actually botched this procedure, but the court let the issue slide — and then had to participate in a hearing to try to establish how much those sanctions should be. All of that cost more money, more attorneys fees, with no guarantee that these costs would be recouped. Indeed, in this case Mitchell asked for $49,300, and the judge awarded only $31,500, because Schlimpert was successful in finding an expert witness to convince the judge that the lower number should have been sufficient to beat his frivolous case.

Moreover, the judge refused to penalize the plaintiff’s lawyer, finding that just because Schlimpert was acting in bad faith didn’t mean his lawyer was.

And then, after all that, Schlimpert appealed. Finally, this month, the appeals court upheld the trial court’s decision. And now Mitchell has to go back to the trial court, after having spent another $8,000 on the appeal, and has to hope the judge will make him whole.

P.S. In case you were wondering: this suit was filed in May 2003. It took 17 months from the time the suit was filed until the time the judge ruled in favor of Mitchell. It took another 17 months for the judge to award sanctions to Mitchell. After Schlimpert appealed, it took yet another 17 months for the appeals court to rule. In other words, more than four years elapsed. But — as mentioned — it’s still not over, because now Mitchell has to return to the trial court, to be awarded fees because of Schlimpert’s appeal.

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The costs of litigation

by Ted Frank on June 21, 2007

Sun General Counsel Mike Dillon, writing about litigation, repeats something I’ve long said:

Litigation is costly. Incredibly costly. But it is not the expense that is the real issue, it’s the diversion of resources. Time employees spend reviewing e-mails and documents, educating lawyers and preparing for depositions is time away from the business. That’s the real cost of litigation.

Note that these costs are not included even in PRI’s $865-billion/year estimate of the expense of jackpot justice, much less the trial-lawyer critiques of the PRI study, which is why that number, even with its problems, may well be an underestimate of the true expense.

While Sun’s strategy of keeping quiet while litigation was pending may have made sense in this particular competitor-to-competitor litigation, I think it is a very large mistake in the context of trial lawyers and activists targeting companies.

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Updates – June 20

by David Nieporent on June 20, 2007

Updating a few earlier stories we’ve discussed here…

  • Two weeks ago we noted that a new online attorney rating site, Avvo.com, was being threatened with a lawsuit by John Henry Browne, a disgruntled Seattle criminal defense attorney. (Jun. 10). Well, whatever the merits or weaknesses of Browne as an attorney, one thing you can say about him is that he doesn’t make idle threats; last week, he filed suit against Avvo. The suit, designated a class action, contends that Avvo’s ratings are flawed. From all accounts, that’s almost certainly true, but as I mentioned in my previous post, it’s not clear that this presents a valid cause of action; Avvo is entitled to rank lawyers differently than John Henry Browne wants them to. In an attempt to get around this problem, the complaint trots out various “consumer protection” arguments using notoriously vague and broad statutes that don’t require that the plaintiffs identify any consumers who have been harmed. (Illustrating perfectly the phenomenon Ted discussed on Jun. 18).

    Oh yes, and Browne also claims in the complaint that “at least two clients” of his fired him (in less than a week!) because of his “average” rating on Avvo. Let’s just say I’m rather skeptical of Mr. Browne’s ability to prove such a claim.

    The law firm handling this class action case? Overlawyered multiple repeat offender Hagens Berman. (Many links.)

  • Remember that lawsuit where Illinois Chief Justice Robert Thomas sued the Kane County Chronicle for defamation? (Apr. 2, Nov. 2006) Well, when last we heard, the libel award — originally an absurd $7 million — had been reduced to $4 million by the trial judge. Not surprisingly, the Chronicle still is unsatisfied, and does not feel it can get a fair shake from the very Illinois court system headed by Thomas; it has now filed a federal lawsuit claiming its constitutional rights have been violated. Named in the suit are Thomas, the trial judge who heard the case, and the rest of Thomas’s colleagues on the state Supreme Court.
  • Kellogg’s bows to threats of frivolous litigation coming from the Center for “Science” in the “Public Interest”; agrees to limit advertising of its cereals to children.

    Of course, this is portrayed as an issue of advertising, but as Michael Jacobson of CSPI admits, this litigation strategy is simply an attempt to drive products he disapproves of from the market. And now that Kellogg’s has capitulated, certain politicians are trying to force other companies to do the same.

    Originally: Jan. 2006.

  • We had previously reported (May 17) that the unfair competition lawsuit between Equal and Splenda had settled. Turns out that the two sides are still fighting, with each side accusing the other of reneging on the deal. (LI)

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Updates – May 17

by David Nieporent on May 17, 2007

Updating a few of the earlier stories covered around here:

  • Maybe it’s not so gay after all: Rebekah Rice, the California high school student who sued her school after they disciplined her for saying “That’s so gay,” has lost her lawsuit.

    “All of us have probably felt at some time that we were unfairly punished by a callous teacher, or picked on and teased by boorish and uncaring bullies. Unfortunately, this is part of what teenagers endure in becoming adults,” the judge wrote in a 20-page ruling. “The law, with all its majesty and might, is simply too crude and imprecise an instrument to satisfactorily soothe deeply hurt feelings.”

    Moreover, the judge picked up on the same irony we noted when we first covered the story:

    “If the Rice family had not told everyone that Rebekah had been given a referral for saying ‘That’s so gay’ then no one else would have know it either, and she would not have been referred to as the ‘That’s so gay girl,'” the judge wrote.

    (Update to the update: Matthew Heller has the opinion.)

  • Contrary to what we had speculated, it appears that Pants Judge Roy Pearson still has a job and may continue to do so. According to an unnamed D.C. official, and exemplifying the attitude with which the tort reform movement is fighting, “I don’t think it’s appropriate not to reappoint someone just because they file a lawsuit. You can’t retaliate against someone for exercising their constitutional, First Amendment right to file a lawsuit to vindicate their rights.” (No, but you can retaliate against someone for filing a frivolous lawsuit.) Meanwhile, as a face-saving publicity stunt, the American Trial Lawyers Association filed an ethics complaint against Pearson; really, Pearson isn’t doing anything that ATLA doesn’t endorse in other situations.
  • Remember Ted and Mary Roberts, the husband-and-wife team of San Antonio lawyers who hatched a blackmail scheme in which the wife had sex with married men and the husband threatened to sue them unless they paid him to keep quiet? (Ted’s been convicted; Mary is awaiting trial.) The bankruptcy trustee, acting on behalf of their estate, had sued the local San Antonio Express News for violating their privacy by reporting on their scheme; Howard Bashman reports that the Fifth Circuit affirmed dismissal of the lawsuit by a lower court. So the newspaper won a complete legal victory — but truthfully reporting on a criminal scheme by prominent lawyers nevertheless must have cost them six figures’ worth of legal expenses.
  • O.J. Simpson will not be suing the Kentucky steakhouse that wouldn’t serve him. His lawyer — the one who rushed to announce that O.J. was a victim and that the steakhouse “screwed with the wrong guy” — now tries to blame the owner for “using the episode for publicity.” (Originally, May 10.)
  • The bogus Equal vs. Splenda unfair competition lawsuit (Mar. 8) over Splenda’s “Made From Sugar, So It Tastes Like Sugar” slogan settled on undisclosed terms, moments before a jury announced its verdict. Although we don’t know the terms of the settlement, it shouldn’t be too hard to figure out the non-monetary part: just check whether Splenda changes its advertising.

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Sellers of used CDs

by Walter Olson on May 9, 2007

New burdens are being heaped on them by state legislators who appear intent on protecting the interests of the original music providers:

In Florida, the new legislation requires all stores buying second-hand merchandise for resale to apply for a permit and file security in the form of a $10,000 bond with the Department of Agriculture and Consumer Services. In addition, stores would be required to thumb-print customers selling used CDs, and acquire a copy of state-issued identity documents such as a driver’s license. Furthermore, stores could issue only store credit — not cash — in exchange for traded CDs, and would be required to hold discs for 30 days before reselling them.

(Ed Christman, “New laws create second-hand woes for CD retailers”, Reuters/Billboard, May 4; Ars Technica, May 7). According to HardOCP, used game CDs are affected by the rules as well. (May 8).

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Swiss confectioner Lindt has filed for an injunction against the Austrian company Hauswirth, claiming that chocolate bunnies in gold foil are a Lindt trademark. Hauswirth says it has been producing such bunnies in Austria since 1962, and that Lindt previously lost a similar lawsuit against German rival Riegelein. (AFP, Apr. 8).

Monsanto vs. free speech

by Walter Olson on September 17, 2003

The giant chemical and agribusiness company is suing the Oakhurst Dairy in Maine “for promoting its products as containing milk from cows who are not treated with artificial growth hormones. Monsanto, which makes the leading artificial hormone for cows, said the marketing implies that there’s something wrong with milk from treated cows, even though studies show the milk is no different than milk from untreated cows.” (Edward D. Murphy, “On the front lines of free speech”, Portland Press Herald, Aug. 31; Kristen Philipkosky, “Sour Grapes over Milk Labeling”, Wired News, Sept. 16). As the Press-Herald’s Murphy suggests, this kind of suit can work very similarly to one like Nike v. Kasky in chilling controversial business speech, the difference being that in this case one business is doing it to another.

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