False Advertising Claims Survive 12(b)(6) In U.S. Component of Global Steel Dispute

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By Anandashankar Mazumdar

False advertising claims against a Korean steel manufacturer alleged to have engaged in an international program of industrial espionage and bribery were sufficiently pleaded, the U.S. District Court for the District of New Jersey ruled June 27 in a decision designated as not for publication (Nippon Steel and Sumitomo Metal Corp. v. Posco, D.N.J., No. 2:12-cv-02429-DMC-MF, 6/27/13, unpub.).

Denying a defendant's motion to dismiss, the court determined that Dastar and Baden Sports did not apply at the complaint stage of the proceeding.

Steel Rival Accused of Espionage
Nippon Steel and Sumitomo Metal Corp. of Tokyo is a steel, engineering, chemicals, and materials manufacturer formed in October 2012 by the merger of Nippon Steel Corp. (founded in 1901 as Yawata Steel Works) and Sumitomo Metal Industries Ltd. (founded in 1897 as the Sumitomo Copper Plant). Rival steelmaker Posco was founded as the Pohang Iron and Steel Co. in 1968 in Pohang, South Korea. It operates in the United States through its subsidiary Posco America Corp., based in Fort Lee, N.J.

Nippon Steel produces grain-oriented electrical steel, which is designed for use in power and distribution transformers, and aids in improving efficiency of electrical power distribution. Nippon Steel holds several patents in the United States, Korea, and other countries related to this technology.

In the late 1980s, Posco sought to license some of Nippon Steel's patents on grain-oriented electrical steel, but no agreement was reached. However, by 2007, Nippon Steel noted Posco's improvements in Posco's product and uncovered what it alleged was an extensive program of corporate espionage, theft, and bribery. Nippon Steel's complaint alleged:

Frustrated by Nippon Steel's refusal to license this critical technology, [Posco] implemented a long-running program whereby it obtained and copied Nippon Steel's technology by illicit means. Using bribery and pay-offs to former Nippon Steel employees in the form of “technical consulting,” [Posco] obtained scores of internal Nippon Steel technical documents that detailed [grain-oriented electrical steel] specifications, strategic plans, and manufacturing techniques for Nippon Steel's advanced, patented, proprietary grain-oriented electrical steel.

Investigation by Korean law enforcement authorities eventually resulted in conviction of two former Posco employees on charges of misappropriation of Nippon Steel's trade secrets. However, the Korean court presiding over the case found no patent infringement.

Nippon Steel then filed a complaint in the United States, alleging patent infringement, as well as false advertising under Section 43(a) of the Lanham Act of 1946, 15 U.S.C. §1125(a)(1)(B), unfair competition under New Jersey state common law, and violation of the New Jersey Fair Trade Act, N.J. Stat. Ann. §56:4-1.

Posco moved for dismissal of the false advertising and unfair competition claims under federal and state law pursuant to Fed. R. Civ. P. 12(b)(6), for failure to state a claim for which relief is available under the law.

Judge Dennis M. Cavanaugh first determined that Nippon Steel had adequately established a prima facie case for false advertising under the federal statute.

Specifically, Nippon Steel had alleged that Posco had violated Section 43(a) by making statements to customers and potential customers that the quality of its grain-oriented electrical steel was the result of its own innovation. This constituted a misrepresentation, according to Nippon Steel, because the quality was the result of Posco's theft of Nippon Steel trade secrets and infringement of its patents.

The court rejected Posco's invocation of Dastar Corp. v. Twentieth Century Fox Film Corp., 539 U.S. 23, 66 U.S.P.Q.2d 1641 (2003) (106 PTD, 6/3/03), and Baden Sports Inc. v. Molten USA Inc., 556 F.3d 1300, 89 U.S.P.Q.2d 1878 (Fed. Cir. 2009) (31 PTD, 2/19/09).

Dastar barred Section 43(a) claims in relation to a communicative work whose copyright protection had expired. Baden Sports barred a false advertising claim based on a defendant's statement that a basketball design had been “innovative.”

Dastar was inapplicable, the court said, because it had been in the context of summary judgment, rather than Rule 12(b)(6), so there had been some development of a factual record. Furthermore, Dastar had ruled on a false statement of origin claim under Section 43(a)(1)(A), not a false advertising claim under Section 43(a)(1)(B).

More relevant was the fact that Dastar disallowed a claim of false designation based on an allegation of copying a work. The claim here was different, the court said, specifically, that Posco had “falsely promoted its products as the customer choice based on false statements of uniquely superior characteristics and qualities.”

Baden Sports had also been decided following a full development of the evidentiary record, the court said, given that the context was post-trial motions. Furthermore, the issue there was false designation of authorship of the relevant innovation, rather than false advertising.

The state law claims survived dismissal under the same analysis and reasoning applied to the Lanham Act claim.

Nippon Steel was represented by Thomas R. Curtin of Graham Curtin, Morristown, N.J. Posco was represented by Jennifer A. Hradil of the Gibbons law firm, Newark, N.J.

By Anandashankar Mazumdar

Text is available at http://www.bloomberglaw.com/public/document/NIPPON_STEEL__SUMITOMO_METAL_CORPORATION_v_POSCO_et_al_Docket_No_.

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