Can a company violate Chapter 75 simply by investigating potential trademark infringement?

When a company investigates potential trademark infringement, what tactics can the company use without the investigation running afoul of North Carolina’s Unfair and Deceptive Trade Practices Act?

The Fourth Circuit Court of Appeals recently explored this question in Exclaim Marketing, LLC v. DirecTV, LLC.

Tracking down a potential infringer

DirecTV provides television service via satellite (DirecTV is now affiliated with AT&T).  DirecTV sometimes contracts with retailers to sell DirecTV’s service.  DirecTV’s agreements with retailers generally prohibit retailers from contracting with third parties that DirecTV has not authorized.

Exclaim Marketing provides customer leads. Exclaim owns telephone numbers throughout the United States.  Consumers may place orders for different types of goods and services through those numbers. Although not authorized by DirecTV, Exclaim contracted to provide leads to several DirecTV retailers.

To generate leads, Exclaim would buy listings for its phone numbers in conventional telephone directories (Yellow Pages ads, for instance). Exclaim’s listings did not identify the company by name. Instead, Exclaim’s listings usually only included a generic term such as “satellite television.” Exclaim did include “DirecTV,” or a variant, in a small number of its listings.

When a prospective satellite TV customer called one of Exclaim’s listings, the call would be routed to Exclaim’s call center. A telemarketer would determine if the customer was calling about satellite TV and, if so, forward the potential customer’s call to a satellite TV retailer.

In time, DirecTV discovered Exclaim’s directory listings. DirecTV viewed the inclusion of its name in some listings as a trademark violation, as well as a potential violation of its retailer contracts. DirecTV launched an investigation to determine who owned the listings.

As part of its search, DirecTV’s investigators called the numbers in Exclaim’s directory listings. On occasion, DirecTV’s investigators would provide false names to Exclaim’s telemarketers.  The telemarketers sometimes hung up if an investigator identified as working for DirecTV.

DirecTV ultimately identified Exclaim as the owner of the infringing listings. When confronted, Exclaim removed some of the listings, but DirecTV continued to discover infringing listings for several years after identifying Exclaim.  In turn, DirecTV continued to place calls, to both infringing and “generic” listings, over several years.  DirecTV continued to make calls both to investigate whether Exclaim was continuing to infringe and whether DirecTV’s retailers were still continuing to conduct business with Exclaim.

Exclaim brings to trial claims that DirecTV’s calls were unfair and deceptive

Exclaim ultimately sued DirecTV. Exclaim alleged that DirecTV wrongfully threatened retailers to induce them to not work with Exclaim. Exclaim further contended that DirecTV’s ongoing phoning of Exclaim’s listings was malicious and not for any legitimate business purpose. 

Exclaim asserted claims for tortious interference of contract and defamation. Exclaim also asserted that DirecTV’s multiple calls over repeated years violated N.C. Gen. Stat. § 75-1.1. Exclaim alleged that DirecTV’s actions were both unfair and deceptive.  Although not designated as such, Exclaim 75-1.1’s claims sounded both in direct unfairness and deception.

DirecTV counterclaimed for trademark infringement under the Lanham Act.

Although its other claims were dismissed, Exclaim’s 75-1.1 claim survived both a 12(b)(6) motion and a motion for summary judgment

Three years after Exclaim filed the original complaint, Exclaim’s 75-1.1 claim and DirecTV’s Lanham Act claim went to trial in the United States District Court for the Eastern District of North Carolina. At trial, Exclaim alleged that multiple practices by DirecTV violated 75-1.1. The jury, however, expressly found that DirecTV engaged in only one wrongful practice:  DirecTV telephoned Exclaim’s “call center over 175 times over a six year period, at times using false names.”  The jury found that DirecTV’s conduct caused proximate harm to Exclaim and that Exclaim was entitled to $760,000.00 in damages (before trebling).

The jury also found that Exclaim had infringed on DirecTV’s trademark and awarded DIRECTV $25,000.00.

Post-verdict, DirecTV moved for judgment as a matter of law. United States District Court Judge Louise Flanagan granted the motion, ruling that the jury’s finding did not support a 75-1.1 claim. She concluded that the phone calls to Exclaim were not “in or affecting commerce,” nor did they constitute an unfair or a deceptive practice.

On the other hand, the district court increased the jury’s award to DirecTV to $610,560.00 for disgorgement of Exclaim’s profits from the infringing activity.

The Fourth Circuit Affirms on Appeal

Exclaim appealed Judge Flanagan’s decision.  In a per curiam opinion after oral argument, the Fourth Circuit wholly affirmed the district court.

With respect to Exclaim’s 75-1.1 claim, the appellate court analyzed whether DirecTV’s call history met the definition of either an unfair or deceptive practice.

First, the court analyzed whether DirecTV’s conduct was statutorily unfair. As to the direct-unfairness claim, the court broadly defined an unfair practice to include conduct (1) that “a court of equity would consider it to be unfair” and (2) that “offends established public policy as well as when the practice is immoral, unethical, oppressive, unscrupulous, or substantially injurious to consumers.”

The court expressed doubt that the placing of telephone calls to publicly disseminated telephone listings could ever be an unfair practice. The court also opined that DirecTV’s ongoing infringement investigation was a “legitimate business purpose” for placing calls. The court determined that DirecTV’s actions were fair especially because DirecTV continued to find infringing listings for years after Exclaim was initially identified as the source.

The court also did not consider DirecTV’s conduct to be deceptive. The court did not find inherent deception in the jury’s finding that DirecTV placed the calls to Exclaim.  The court was not troubled even though DirecTV’s investigators falsely posed as potential customers and gave false names to Exclaim’s telemarketers.

DirecTV’s investigators testified that Exclaim’s telemarketers would stonewall or hang up on them if they identified themselves as DirecTV’s agents.  The court found DirecTV’s use of false names was therefore “intrinsically linked” to investigating the source of infringing listings.

Because the Fourth Circuit found that Exclaim’s claim failed to meet the definition of either an unfair or a deceptive practice, the court declined to address the district court’s determination that DirecTV’s conduct was not in or affecting commerce.

A win, but a cautionary tale

The Fourth Circuit’s decision appears to broadly protect a company’s investigatory activities linked to a “legitimate” business purpose, but section 75-1.1 still serves potentially to chill such activity.  In DirecTV’s case, even though the company prevailed on appeal, 75-1.1 liability remained a constant threat throughout years of litigation. Likewise, even in the course of broadly insulating DirecTV’s conduct, the Fourth Circuit reiterated a broad standard for direct unfairness claims. A company that undertakes an investigation into the activities of another company should remain aware of these risks.

Note: Ellis & Winters represents DirecTV, LLC, but did not represent the company in the Exclaim case.

Author: George Sanderson

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