'Bait and Switch' Advertising and the Lanham Act

'Bait and Switch' Advertising and the Lanham Act Milton Springut

A recent Eastern District of New York decision, Sussman-Automatic Corp. v. Spa World Corp., —F.Supp.2d.—, 2014 WL 1651953 (E.D.N.Y. 2014), holds that use of a trademark in “bait and switch” advertising does not constitute trademark infringement (although it might constitute false advertising). In dismissing the plaintiff’s trademark infringement complaint, the decision appears to have unduly narrowed the scope of Lanham Act actionable “confusion.” We analyze this case and discuss why its reasoning is flawed and inconsistent with the Second Circuit interpretation of the Lanham Act.

Actionable Confusion

The linchpin of any trademark infringement case is “likelihood of confusion,” which the statutory language states more expansively as “likely to cause confusion, or to cause mistake, or to deceive.” 15 USC §1114(1). Although historically such confusion was limited to confusion as to the source of the product, in 1962 Congress amended Section 32 of the Lanham Act to remove any such limitation. Under Second Circuit law, an action for trademark infringement can be maintained on confusion, mistake or deception “of any kind.” Syntex Laboratories v. Norwich Pharmacal, 437 F.2d 566 (2d Cir. 1971). Among the “kinds” of actionable confusion recognized over the years have been post-sale confusion, initial interest confusion and confusion as to sponsorship or approval.

Initial interest confusion occurs where “potential consumers initially are attracted to the junior user’s mark by virtue of its similarity to the senior user’s mark, even though these consumers are not actually confused at the time of purchase.” The U.S. Court of Appeals for the Second Circuit recognizes this form of confusion as actionable trademark infringement. See Mobil Oil Corp. v. Pegasus Petroleum Corp., 818 F.2d 254, 260 (2d Cir. 1987); Grotrian, Helfferich, Schulz, Th. Steinweg Nachf v. Steinway & Sons, 365 F.Supp. 707, 717 (S.D.N.Y. 1973), aff’d 523 F.2d 1331, 1342 (2d Cir. 1975).

Bait and Switch

Some courts have likened initial interest confusion to “bait and switch” tactics, long condemned as a deceptive advertising practice. See Dorr-Oliver v. Fluid-Quip, 94 F.3d 376, 382 (7th Cir. 1996). But the classic bait-and-switch tactic differs somewhat from trademark infringement.

In the classic initial interest confusion case, the defendant adopts a mark that is similar to plaintiff’s mark. The defendant’s similar mark is used to attract potential customers. Although eventually the customers realize with whom they are dealing, the use of the mark to create an initial attraction to the defendant through the mistaken belief that the defendant is in fact the plaintiff constitutes trademark infringement. Thus, where a defendant in the oil business adopted the mark Pegasus, that was held to infringe upon Mobil Oil’s winged-horse logo. See Mobil Oil Corp. v. Pegasus Petroleum Corp., 818 F.2d at 260.

The court affirmed a finding of likelihood of confusion “not in the fact that a third party would do business with Pegasus Petroleum believing it related to Mobil, but rather in the likelihood that Pegasus Petroleum would gain crucial credibility during the initial phases of a deal.” Id.

A classic bait-and-switch situation involves a retailer advertising a highly desired product at a very favorable sales price, with the retail store having only very “limited quantities” of the product. When a customer comes into the store, he is told that the store is out of stock of the sale item, but that the store has other (generally more expensive) products that the store will sell him instead. The “bait” in such cases is the low-priced sale item; the “switch” is to more expensive models.

A bait-and-switch variant uses brand popularity, as opposed to low price, as the “bait.” Where a popular branded item is in heavy demand, a store advertises that it carries the item. When customers come in, they are told that the store ran out of the item (or it is not really that good), but that other, better brands of the same or similar product are available for sale. We can call this variant “branding bait and switch.”

Branding bait and switch was involved in the seminal New York case on bait-and-switch tactics, Electrolux Corp. v. Val-Worth, 6 N.Y.2d 556 (1959). There, the court found actionable as common law unfair competition the use of the Electrolux mark on rebuilt vacuum cleaners as part of a bait and switch scheme to gain access to potential customers’ homes, and then divert them to competing brands by disparaging the rebuilt Electrolux vacuum cleaners. Id., 6 N.Y. 2d at 566-70.

The court observed: “It is easy to understand the natural outrage which would be experienced by the management of a reputable firm upon learning that its name and mark have been employed in a disreputable scheme to gain admission to people’s homes. Aside from the pain caused by possible exposure to the ire of those of the public who would feel cheated as soon as the salesman revealed his true purpose, there is the pain of having one’s good will employed as a weapon in direct competition against one’s self.” Updated to the age of the Internet, those observations seem apt today as well.

Does the trademark owner for the brand used as “bait” have cause to complain under federal law if its trademark is involved? To illustrate, suppose Fred’s Discount Toy Store advertises that it has a quantity of the latest hot toy (think Rainbow Loom, or Olaf the Snowman stuffed dolls) available for sale, at a time when the toys are in hot demand and in fact the store did not have any in stock. When customers come in, the store then tries to switch the customers’ interest to other brands of similar type items. Would brand owners have a claim for trademark infringement under the Lanham Act against Fred’s Discount Toy Store?

Sussman-Automatic Decision

Sussman-Automatic Corp. deals with just such a branding-bait-and-switch situation. The plaintiff owned the mark Mr. Steam for steam shower and spa equipment and sold them in both commercial and residential markets. The defendant, named Spa World, operated a commercial website named the Steam Sauna Depot. Spa World allegedly offered Mr. Steam brand products for sale on its website, but in fact had no inventory of such products.

When a potential customer expressed an interest in such products, either over the phone or through a website order, the customer would be told that the item was “temporarily out of stock.” Spa World would attempt to divert the customer to other brands, with a pitch including disparaging Mr. Steam products and praising competitor’s products.

The district court recognized that initial interest confusion was a viable theory in the Second Circuit. However, it held that there must be a similarity between the plaintiff’s and defendant’s mark. “To state an ‘initial interest confusion’ theory of relief, the plaintiff must not only allege the defendant’s unauthorized use of the plaintiff’s trademark, or something resembling that mark, but also a similarity between the parties’ respective marks.” Sussman-Automatic Corp., 2014 WL 1651953 at *7.

Since the brand names of the other products to which the defendant was trying to divert customers were quite different from plaintiff’s Mr. Steam mark, and in fact the plaintiff alleged that Spa World disparaged Mr. Steam products as part of the effort to divert customers to other brands, there was little chance that any customer would be confused as to the source of the products. Accordingly, the trademark infringement allegations were dismissed.

Criticism of Decision

There are several difficulties with the Sussman-Automatic decision.

First, the district court focused entirely on the marks on competitor products used by the defendant —other brands of steam and spa equipment. As to that, the opinion appears correct that no one was confused as to the source of those other-brand products. But what the court failed to appreciate is that there can be actionable confusion as to the store services offered by the defendant.

The Lanham Act recognizes trademark rights in both goods and services. A retail store (whether in the bricks-and-mortar world or online) can own a service mark in its house brand—the Patent and Trademark Office routinely registers services marks for “retail store services.” Famous store names—Wal-Mart, Target, Macy’s—are all registered as service marks for “retail store services” or minor variations thereof.

The wrong alleged in the Sussman-Automatic case concerned the online store services rendered by Spa World. It operated a website carrying several brands of spa products—a cyberstore. The alleged deception concerned the activities of the cyberstore—that it carried Mr. Spa products—not about the source of competitive products.

Second, the district court seemed to be under the misimpression that to be actionable, a trademark infringement allegation has to be directed to the “defendant’s trademark” meaning one that the defendant has adopted as its own. But that is not the law. Another kind of actionable confusion—confusion as to affiliation or approval—involves use of two types of marks, the defendant’s primary mark and the plaintiff’s mark.

For example, if a store uses a brand trademark to indicate or imply that it is an authorized dealer or service provider, that is actionable confusion as to sponsorship. See Harley-Davidson v. Grottanelli, 164 F.3d 806, 812-13 (2d Cir. 1999) (a motorcycle repair shop’s use of famous motorcycle manufacturer’s logo held actionable because it falsely implied an affiliation). Or, to use another example, if a dealer falsely uses the trademark of a customer to imply approval—a false “satisfied customer” claim—then that is actionable under the Lanham Act. See Famous Horse v. 5th Ave. Photo, 624 F.3d 106, 109 (2d Cir. 2010); Courtenay Comms. Corp. v. Hall, 334 F.3d 210, 214 n.1 (2d Cir. 2003) (use by defendant of plaintiff’s mark to falsely imply endorsement of its services held actionable).

In each of these cases, the defendant had its own, very different mark to identify its own services. Yet in each of these cases, the court found actionable confusion as to affiliation or sponsorship through additional (and allegedly confusing) use of another mark. To return to our above example, if Fred’s Discount Toy Store used the Rainbow Loom trademark to falsely advertise that it was an authorized dealer of that company, then that would clearly be actionable under the Lanham Act. Why should it make a difference if, rather, it uses that mark to falsely advertise that it carries Rainbow Loom products?

Third, although the district court acknowledged that there was some kind of confusion alleged, it sought to limit initial interest confusion to what was found in prior cases—similar marks both used to identify competing products.

To be sure, the Plaintiff alleges tangible confusion on the part of consumers who may have been under the false impression that the Defendant maintained a regular inventory of the “Mr. Steam” products; that the Plaintiff approved of and endorsed the Defendants’ “resale” of the Plaintiff’s products; and that the Defendants effectively traded on the goodwill of the Plaintiff’s products. However, the confusion at issue did not result from uncertainty regarding the source of a product, either prior to or at the point-of-sale.

But, as noted, the Second Circuit has long held that Section 32 covers confusion, mistake or deception of any kind. As recently as 2010 in the Famous Horse case, the Second Circuit again noted that Section 32 makes actionable use of a registered mark that causes confusion “without defining the types of confusion that might be caused.” 624 F.3d at 109.

Granted that the confusion asserted in the Sussman-Automatic case varies somewhat from the classic “initial interest confusion” case, but why should that matter? The statute makes confusion, mistake or deception “of any kind” actionable. Whether the confusion alleged in that case fits exactly into the kinds previously found actionable is beside the point. The confusion alleged can be viewed as simply a variant on initial interest confusion or some new kind of confusion (we like the term “branding-bait-and-switch”). Either way, if the allegations in that case are true, then the defendant used the plaintiff’s mark to create confusion and deception about its online store.

In fact, there is authority that similar bait and switch tactics violate the Lanham Act. One of the most famous initial interest confusion cases is the Ninth Circuit’s decision in Brookfield Communications v. West Coast Entertainment, 174 F.3d 1036 (9th Cir. 1999), which, somewhat controversially, applied that doctrine to use of trademarks in website metatags. In that opinion, the Ninth Circuit observed:

Using another’s trademark in one’s metatags is much like posting a sign with another’s trademark in front of one’s store. Suppose West Coast’s competitor [in the video rental business] (let’s call it “Blockbuster”) puts up a billboard on a highway reading—”West Coast Video: 2 miles ahead at Exit 7″—where West Coast is really located at Exit 8 but Blockbuster is located at Exit 7. Customers looking for West Coast’s store will pull off at Exit 7 and drive around looking for it. Unable to locate West Coast, but seeing the Blockbuster store right by the highway entrance, they may simply rent there. Even consumers who prefer West Coast may find it not worth the trouble to continue searching for West Coast since there is a Blockbuster right there. Customers are not confused in the narrow sense: they are fully aware that they are purchasing from Blockbuster and they have no reason to believe that Blockbuster is related to, or in any way sponsored by, West Coast. Nevertheless, the fact that there is only initial consumer confusion does not alter the fact that Blockbuster would be misappropriating West Coast’s acquired goodwill.

Id. at 1064. The same can be said of Spa World’s use of the Mr. Steam mark to attract potential customers to its spa-related cyberstore—it was an attempt to misappropriate customer interest in products of that brand and use that customer interest to make sales of other brands.

Conclusion

Deception, including consumer deception, comes in many flavors. Using a trademark as part of “bait and switch” tactics harms both consumers (who are deceived) and trademark owners (whose goodwill is being used to attract and then divert consumer interest). Given that Section 32 of the Lanham Act broadly covers confusion, mistake or deception “of any kind,” there is no reason the Lanham Act should not be construed to cover bait and switch tactics that use trademarks as the “bait.”

Milton Springut is a partner at Springut Law. Tal S. Benschar, a partner at the firm, assisted in the preparation of this article.

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