Acme Pad Corporation v. Warm Products Inc

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
ACME PAD CORPORATION, 
Plaintiff-Appellee,
v.
WARM PRODUCTS, INCORPORATED,
d/b/a The Warm Company,
Defendant-Appellant,  No. 00-2319
and
MERCANTILE BANK; SUNTRUST BANK;
BANK OF AMERICA, NA; ALLFIRST
BANK,
Garnishees.

ACME PAD CORPORATION, 
Plaintiff-Appellant,
v.
WARM PRODUCTS, INCORPORATED,
d/b/a The Warm Company,
Defendant-Appellee,  No. 00-2372
and
MERCANTILE BANK; SUNTRUST BANK;
BANK OF AMERICA, NA; ALLFIRST
BANK,
Garnishees.

Appeals from the United States District Court
for the District of Maryland, at Baltimore.
Frederic N. Smalkin, Chief District Judge.
(CA-98-2830-S)
2 ACME PAD CORP. v. WARM PRODUCTS, INC.
Submitted: December 28, 2001
Decided: January 24, 2002
Before WILKINS, NIEMEYER, and MOTZ, Circuit Judges.
Affirmed in part, vacated in part, and remanded by unpublished per
curiam opinion.
COUNSEL
J. Stephen Simms, W. Charles Bailey, Jr., GREBER & SIMMS, Bal-
timore, Maryland, for Appellant. Benjamin Rosenberg, Timothy M.
Boucher, Shawn J. Sefret, Lynn E. Ricciardella, ROSENBERG,
PROUTT, FUNK & GREENBERG, L.L.P., Baltimore, Maryland, for
Appellee.
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
OPINION
PER CURIAM:
Warm Products (Warm) is a distributor of wholesale products,
including cotton batting marketed under the name "Warm & Natural"
that is used by quilt makers and in other craft applications. From 1991
until this litigation was initiated, Warm purchased the product it mar-
keted as Warm & Natural exclusively from Acme Pad (Acme). Dur-
ing this time, Warm’s demand for the product increased significantly,
from an initial volume of approximately 24,000 yards of product in
1991, to total orders of over one million yards in 1997. Warm became
concerned Acme was incapable of continuing to increase its manufac-
ACME PAD CORP. v. WARM PRODUCTS, INC. 3
turing capacity to meet the demand and began considering the pur-
chase of its own manufacturing facility. Warm’s President, Jim
Chumbley, and Acme’s President, Gary Cohen, discussed alternatives
to address this concern but never reached an agreement. In March
1998, Chumbley advised Cohen that Warm was seeking to establish
its own manufacturing capacity and forwarded a proposed transition
agreement that would compensate Acme over a three year period,
based upon the amount of cotton batting manufactured. This agree-
ment was never finalized.
On August 4, 1998, Chumbley informed Cohen that Warm had
decided to purchase a manufacturing facility in South Carolina, but
because the plant would not be ready for full production for at least
a year, Warm would continue to purchase product from Acme as
before. Chumbley also advised Cohen the proposed transition agree-
ment was still open and Cohen should consider it. After the phone
call, Cohen remarked Chumbley was going to become his biggest
competitor and decided to suspend shipments of product to Warm. At
that time, Warm had two pending purchase orders with Acme for over
220,000 yards of Warm & Natural and outstanding invoices totaling
over $350,000 it had not paid.
Subsequently, Cohen initiated discussions and plans to market the
product under Acme’s own brand name, "Perfect Cotton." As this liti-
gation was initiated and in its early stages, Acme placed advertise-
ments in quilting magazines and sent promotional materials to
prospective customers stating "[t]he exact material you’ve grown to
love as Warm & Natural by the Warm Company is now packaged by
Acme Pad Corporation as Perfect Cotton)." Several customers of
Warm received these advertisements and mailings. Acme also con-
tacted several of Warm’s customers and informed them that it now
manufactured the product sold by Warm as Warm & Natural, that
Acme no longer supplied the product to Warm, and that Warm might
not be able to supply Warm & Natural. These actions occurred during
the time of year when Warm’s sales of Warm & Natural would nor-
mally begin to significantly increase.
On August 14, 1998, Acme demanded that Warm provide assur-
ances of adequate security of payment of the outstanding invoices and
stated it was suspending shipments under the two pending purchase
4 ACME PAD CORP. v. WARM PRODUCTS, INC.
orders until those assurances were received. On August 17, 1998,
Acme filed the instant action, alleging breach of contract by Warm
and unjust enrichment based upon Warm’s failure to pay the outstand-
ing invoices. On September 11, 1998, Warm replied to Acme’s
demand for assurances, offering to bring all invoices current to sixty
days, which was the normal payment term on Acme’s invoices, but
stating that no other assurances were reasonably necessary in light of
the parties’ six year course of dealing. Acme stated Warm’s response
was inadequate and refused to ship the goods ordered under the two
purchase orders.
In its second amended answer and counterclaims, Warm asserted
causes of action for breach of contract based upon Acme’s failure to
ship the product ordered under the two pending purchase orders, mis-
appropriation of trade secrets, federal unfair competition, federal
trademark infringement, state trademark infringement and unfair com-
petition, common law unfair competition, and tortious interference
with contracts.
The district court granted partial summary judgment on January 18,
2000. In its judgment, the court held that Acme could recover for the
goods it had delivered that were the subject of unpaid invoices and
that Warm was entitled to damages for Acme’s breach of contract on
the two outstanding purchase orders. The court also dismissed
Warm’s counterclaims of trademark infringement and federal unfair
competition.
At the beginning of trial, the district court dismissed Warm’s tor-
tious interference with contracts claim. After the court granted judg-
ment as a matter of law to Acme on Warm’s common law unfair
competition and misappropriation of trade secrets claims, the jury
determined that payment on the outstanding invoices was due sixty
days after the date of the invoice and that Warm sustained damages
from Acme’s failure to deliver in the amount of $445,462.06. The dis-
trict court offset this sum by the amount Warm owed Acme on the
outstanding invoices plus prejudgment interest and entered judgment
in favor of Warm in the amount of $48,483.34. Warm timely appealed
and Acme cross-appealed.
On joint motion of the parties, we have decided this case without
oral argument. After a review of the briefs and joint appendix, we find
ACME PAD CORP. v. WARM PRODUCTS, INC. 5
error in two rulings by the district court requiring us to vacate in part
and remand for further proceedings. We affirm all other aspects of the
court’s order.
First, the district court, in considering Warm’s motion for summary
judgment, sua sponte dismissed Warm’s trademark and unfair compe-
tition claims under Fed. R. Civ. P. 12(b)(6). Warm contends the court
failed to apply the proper legal standard when it evaluated Warm’s
trademark and unfair competition claims by assessing solely whether
Acme’s advertising for Perfect Cotton was literally true, without con-
sidering the confusing and misleading nature of Acme’s statements.
In ruling on the unfair competition claim, the district court held:
As to the unfair competition/trademark claims, however,
there is simply no issue for trial, as the statements made by
Acme in marketing Perfect Cotton were perfectly true and
not misleading, even if some customers might have been
confused by them. The fact of the matter is that Perfect Cot-
ton is exactly the same product that people have come to
know and love as Warm and Natural, and it is also literally
true that Acme now packages that material as Perfect Cot-
ton. It might well be said that some customers were con-
fused, despite the literalness and truthfulness of the
statements, but it is impossible to make a fool-proof state-
ment, even if true, that will not confuse somebody in the
consuming public. Thus, customers could not reasonably be
confused, and there simply was nothing false or misleading
or otherwise constituting any form of misrepresentation as
to the product. Without falsity, the Lanham Act is not vio-
lated.
(emphasis in original).
We review a district court’s dismissal under Rule 12(b)(6) de novo.
See Mylan Labs., Inc. v. Matkari, 7 F.3d 1130, 1134 (4th Cir. 1993).
The evidence is considered in the light most favorable to the nonmov-
ing party, and all well pleaded allegations are accepted as true. Id.The Supreme Court has held that "[t]he Lanham Act provides national
protection of trademarks in order to secure to the owner of the mark
6 ACME PAD CORP. v. WARM PRODUCTS, INC.
the goodwill of his business and to protect the ability of consumers
to distinguish among competing producers." Park ‘N Fly, Inc. v. Dol-
lar Park & Fly, Inc., 469 U.S. 189, 198 (1985). Subsequent decisions
have recognized that the protections of the Act go beyond registered
trademarks. See TrafFix Devices, Inc. v. Marketing Displays, Inc.,
532 U.S. 23, 121 S. Ct. 1255, 1259 (2001) (trade dress protected
under § 43); Wal-Mart Stores, Inc. v. Samara Bros., Inc., 529 U.S.
205, 216 (2000) (recognizing potential Lanham Act protection of
product design); Two Pesos, Inc. v. Taco Cabana, Inc., 505 U.S. 763,
774 (1992) (discussing broad coverage of § 43(a) protections). We
have held that "[i]t is well established that the test for unfair competi-
tion claims under section 43(a) of the Lanham Act is whether there
is a likelihood of confusion." Scotch Whisky Ass’n v. Majestic Distill-
ing Co., 958 F.2d 594, 597 (4th Cir. 1992).
In considering whether a likelihood of confusion exists, we have
noted this is "an ‘inherently factual’ issue," and prescribed a seven
factor test for use by district courts. See Lone Star Steakhouse &
Saloon, Inc. v. Alpha of Virginia, Inc., 43 F.3d 922 (4th Cir. 1995).
As Warm correctly notes, the district court did not explicitly discuss
any of the factors. Moreover, while the court’s statement that "it is
impossible to make a fool-proof statement, even if true, that will not
confuse somebody in the consuming public," is correct, we conclude
this statement affords inadequate weight to the purposes that animate
§ 43(a) of the Lanham Act. Warm submitted uncontroverted evidence
of actual confusion, not just of "somebody in the consuming public,"
but of its customers. See Tools USA & Equip. Co. v. Champ Frame
Straightening Equip., Inc., 87 F.3d 654, 660 (4th Cir. 1996)
("evidence of actual customer confusion ‘is patently the best evidence
of likelihood of confusion’"). Moreover, the district court explicitly
found Acme acted in bad faith, evincing an intent to punish Warm,
from which an intent to deceive the public in capturing market share
can be presumed. See Shakespeare Co. v. Silstar Corp. of Am., 110
F.3d 234, 239-41 (4th Cir. 1997). Finally, the district court’s opinion
fails to address Warm’s claim of trade dress infringement, or consider
that Acme’s statements, while true, arguably attempt to appropriate
the goodwill Warm had established through its Warm and Natural
product by associating Acme’s new Perfect Cotton with that product.
We therefore conclude the court improperly dismissed Warm’s fed-
ACME PAD CORP. v. WARM PRODUCTS, INC. 7
eral unfair competition claim under Rule 12(b)(6), vacate this aspect
of the court’s order, and remand for further proceedings.
Second, the court dismissed Warm’s counterclaim that alleged the
tort of interference with contract because the claim was not included
in the pretrial order. A pretrial order "should be construed liberally ‘to
cover any of the legal or factual theories that might be embraced by
[its] language.’" Shetterly v. Raymark Indus., Inc., 117 F.3d 776, 784
(4th Cir. 1997). Under this standard, we find Warm included language
asserting a claim of tortious interference with contract. The following
appears in Warm’s statement of facts in support of its counterclaims:
Acme has further represented to potential customers at
trade shows and in telephone conversations that it is the only
manufacturer in the world capable of making Warm & Nat-
ural® and that Warm would be unable to provide the prod-
uct at some point in the future.
Acme also used the customer and pricing lists provided
by Warm to contact vendors and customers to take business
that those vendors and customers have previously done with
Warm and to interfere with Warm’s contracts with those
customers.
While Warm did not specifically include tortious interference with
contract among its counterclaims listed in the pretrial order, the order
stated that "Acme’s misleading discussions with purchasers of Warm
& Natural and its representations that Warm would be unable to pro-
vide the product constitute tortious interference with contract," in the
discussion of the legal theories in support of Warm’s counterclaims.
We conclude the pretrial order included sufficient language to
embrace a theory of tortious interference with contract.
We also conclude this error is not harmless. On the present record,
it is not possible to forecast what evidence Warm may have produced
at trial if the district court had not precluded its presentation of evi-
dence on this claim. The record in this appeal includes only portions
of deposition testimony and a very limited portion of the documentary
evidence produced in discovery. That evidence, however, included
declarations of Warm’s customers who were contacted by Acme as
8 ACME PAD CORP. v. WARM PRODUCTS, INC.
prospective purchasers of Acme’s competing product. These declara-
tions are primarily focused on the alleged misleading nature of
Acme’s communications and do not discuss any contracts between
the customers and Warm. It cannot be said, however, that such evi-
dence did not exist, and Warm should have been allowed the opportu-
nity to present that evidence to the jury. We therefore vacate this
aspect of the district court’s order and remand for further proceedings.
We have carefully considered the parties’ remaining assertions of
error and find them to be without merit. Accordingly, we deny
Acme’s motion for sanctions, vacate the district court’s order dismiss-
ing Warm’s federal unfair competition counterclaim under Fed. R.
Civ. P. 12(b)(6), vacate the district court’s dismissal of Warm’s tor-
tious interference with contracts claim, and remand these claims for
further consideration. We affirm the judgment of the district court in
all other respects.
AFFIRMED IN PART, VACATED IN PART,
AND REMANDED