Linda Grubbs v. Sheakley Group, Inc.

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 15a0286p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
LINDA GRUBBS; TRI-SERVE, LTD.; TRI-SERVE #1, ┐
LLC; CAPITAL CONCEPTS, INC., │
Plaintiffs-Appellants, │
│ No. 15-3302
│
v. >
│
│
SHEAKLEY GROUP, INC., et al., │
Defendants-Appellees. │
┘
Appeal from the United States District Court
for the Southern District of Ohio at Cincinnati.
No. 1:13-cv-00246—Susan J. Dlott, District Judge.
Argued: October 6, 2015
Decided and Filed: December 7, 2015
Before: SILER, CLAY, and GIBBONS, Circuit Judges.
_________________
COUNSEL
ARGUED: Robert A. Winter, Jr., Fort Mitchell, Kentucky, for Appellants. Rachael A. Rowe,
KEATING MUETHING & KLEKAMP PPL, Cincinnati, Ohio, for Sheakley Appellees. ON
BRIEF: Robert A. Winter, Jr., Fort Mitchell, Kentucky, for Appellants. Rachael A. Rowe,
James E. Burke, Thomas F. Hankinson, Anthony M. Verticchio, KEATING MUETHING &
KLEKAMP PPL, Cincinnati, Ohio, for Sheakley Appellees. James Papakirk, FLAGEL &
PAPAKIRK, LLC, Cincinnati, Ohio, for Appellee First Financial Bank. Angela Strunk Zwick,
Hamilton, Ohio, pro se.
1
No. 15-3302 Grubbs, et al. v. Sheakley Group, et al. Page 2
_________________
OPINION
_________________
CLAY, Circuit Judge. Plaintiffs Linda Grubbs and the companies she owns, Tri-Serve,
Ltd.; TriServe #1, LLC; and Capital Concepts, Inc., appeal the order of the district court
dismissing Plaintiffs’ claims under the Lanham Act, 15 U.S.C. § 1125, and the Racketeer
Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1962, for failure to state a
claim, and dismissing all remaining state law claims over which the district court had pendent
jurisdiction. For the reasons that follow, we AFFIRM in part, and REVERSE in part, the order
of the district court, and remand for further proceedings consistent with this opinion.
BACKGROUND
Plaintiff Linda Grubbs is the owner of Plaintiff Capital Concepts, Inc., a financial
planning, wealth management, and tax preparation firm providing, among other things, 401(k)
planning. At all relevant times, she was also the owner of Plaintiffs Tri-Serve, Ltd. and TriServe
#1, LLC (“Tri-Serve”), the successors to four professional employment organizations (“PEOs”)
she purchased on October 13, 2008. A PEO is a type of Ohio regulated entity to which
employers may outsource certain administrative tasks, such as payroll, workers’ compensation,
and benefits. PEOs serve as co-employers with their clients and are contractually responsible for
those functions outsourced to them. Tri-Serve is based in Harrison, Ohio and provides PEO
services to the greater Cincinnati, Ohio market. It is unclear from the record whether Tri-Serve
had any clients outside of Ohio. After the purchase of Tri-Serve, Grubbs asked Defendant
Angelia Strunk-Zwick to manage the newly acquired companies because of her expertise with
PEOs. During her employment with Tri-Serve, Strunk-Zwick was subject to a non-competition
agreement.
Defendant Larry Sheakley owns and operates the Sheakley Group of Companies,
comprising at least fifteen entities, all named as defendants. According to their own marketing
material, the Sheakley Group of Companies (collectively, “Sheakley”) also provide “401(k)
No. 15-3302 Grubbs, et al. v. Sheakley Group, et al. Page 3
services, flexible benefit plans, workers’ compensation, payroll, [and] human resources
outsourcing solutions.” Sheakley is headquartered in Cincinnati, Ohio.
On February 25, 2009, the President of Defendant Sheakley HR Solutions e-mailed
Strunk-Zwick to ask for her assistance with Sheakley’s PEO division. During March and April
2009, Strunk-Zwick was paid by Sheakley on a consulting basis, and was sometimes absent from
the Tri-Serve office during business hours in order to provide services to Sheakley. On May 27,
2009, Strunk-Zwick met with employees of Sheakley to discuss moving Tri-Serve and its clients
to Sheakley. At a follow-up meeting on June 2, 2009, Defendant Larry Sheakley agreed that
Strunk-Zwick and two other Tri-Serve staff members would join Sheakley. Over the next
several weeks, Strunk-Zwick and various Sheakley employees planned and coordinated the
transfer of the Tri-Serve clients to Sheakley via e-mail and phone. Defendant Steve Wolf, acting
senior vice-president for Sheakley HR, LLC, suggested in an e-mail on June 21, 2009 to Strunk-
Zwick that she contact the Tri-Serve clients to inform them that “we are partnering with
Sheakley and that we may transition them over to give them better service etc.” (R. 87, Compl. ¶
971(h), Page ID 3221.) Strunk-Zwick’s first day at Sheakley was to be July 6, 2009.
On July 2, 2009, Strunk-Zwick sent an e-mail to a potential client stating, “[W]e will be
moving our offices over the weekend, so on Monday, my direct dial number will be
513.728.xxxx and my email will be astrunk@sheakleyhr.com.” (Id. ¶ 967(ba), Page ID 3215.)
The following day, Strunk-Zwick sent another e-mail to twenty-two Tri-Serve clients:
Customers:
We are moving! In order to better serve you, we are partnering with Sheakley HR
and moving our offices. As many of you know, we have partnered with Sheakley
over the years with regards to our workers compensation and unemployment
management. We have been blessed to have experienced tremendous growth over
the last 6 months. We find ourselves needing more office space and more
resources to ensure that our customer service level continues to meet your
expectations. By moving into Sheakley Group we will be able to provide you and
your employees with additional resources, services, and benefits, while continuing
to provide you with the service that you have grown accustomed to expect from
TriServe. Nothing will change from your standpoint. We will have new contact
information, but nothing else will change. You will begin to see the Sheakley HR
name and we will be introducing new benefits and new services to assist you with
growing your business. Our focus has always been and will continue to be
assisting you, the small business owner, with Rediscovering Your Passion. We
No. 15-3302 Grubbs, et al. v. Sheakley Group, et al. Page 4
appreciate your business over the years and look forward to continuing a long,
beneficial relationship with you and your employees. As always, if you have any
questions or concerns please feel free to call me.
Effective Monday, July 6, 2009 our Contact Information will be:
TriServe LTD c/o Sheakley HR Solutions
One Sheakley Way
Cincinnati, OH 45246
513-728-xxxx P
513-672-xxxx F
Payroll Time Submission via web: www.triservehr.com
Payroll Time Submission via fax: 513-672-xxxx
Payroll Time Submission via email: sfernbach@sheakleyhr.com
Angie Strunk Direct Dial: 513-728-xxxx
Email: astrunk@sheakleyhr.com
Susan Fernbach Direct Dial: 513-728-xxxx
Email: sfernbach@sheakleyhr.com
Kym Martin Direct Dial: 513-728-xxxx
Email: kmartin@sheakleyhr.com
Thanks,
Angie Strunk
(R. 87, Compl. ¶ 840, Page ID 3185–86.) That same day, she mailed a hard copy of the e-mail to
most of the same clients. Several Tri-Serve clients expressed dissatisfaction with the move, were
upset that they had received no notice, and worried that all of their information had been
transferred to Sheakley. On July 5, 2009, Strunk-Zwick sent notice of her resignation from
Capital Concepts by e-mail to Grubbs. Before leaving the Capital Concepts office, Strunk-
Zwick removed all files, including all customer files, and deleted computer files and e-mails.
She also took Tri-Serve’s tax returns for 2009. Sheakley continued to use the Tri-Serve name
thereafter, including in promotional materials.
No. 15-3302 Grubbs, et al. v. Sheakley Group, et al. Page 5
For the next several months, Grubbs had sporadic contact with Strunk-Zwick and
Sheakley as they tried to work out various issues with payroll, taxes, and similar matters for
2009. By August 2009, health insurers and workers’ compensation departments were still
sending third-quarter invoices to Tri-Serve at Grubbs’ office, but Sheakley, not Grubbs, received
the client payments. From August 26–28, 2009, Grubbs communicated at length with Defendant
Tom Pappas, a Sheakley employee, via e-mail regarding the location of various Tri-Serve files,
including Tri-Serve’s own tax documents. On August 30, Strunk-Zwick stated, in an e-mail to
Pappas to be forwarded to Grubbs, that she did not have the tax records in question. Through at
least November 2009, Ms. Grubbs continued receiving bills for Tri-Serve, which she paid from
her retirement account.
On April 15, 2013, Plaintiffs filed a complaint in the United States District Court for the
Southern District of Ohio against Strunk-Zwick, some fifteen Sheakley entities (“the Sheakley
Entity Defendants”), several other former Sheakley employees (collectively, the “Sheakley
Defendants,” a term Plaintiffs use to denote both the entities and the employees).1 Plaintiffs
twice amended their complaint, adding additional defendants not before this Court.2 The
nineteen-count complaint, some 1,018 paragraphs long, contained four claims arising under
federal law: trade name infringement and false designation of origin (against the Sheakley Entity
Defendants); false advertising (against the Sheakley Entity Defendants and Strunk-Zwick); and
substantive RICO and RICO conspiracy claims (against all Sheakley Defendants and Strunk-
Zwick). It also asserted fifteen additional state law claims over which it requested the court
exercise pendent jurisdiction.
The Sheakley Defendants, Strunk-Zwick, and other defendants moved separately to
dismiss for failure to state a claim. The case was referred to a magistrate judge, who issued a
1
Various individual employees of Sheakley are also named as defendants in this litigation. The “Sheakley
Defendants” consist of: Sheakley Group, Inc.; Sheakley Benefit Plans Agency, Inc.; Sheakley HR, LLC, Sheakley
Medical Management Resources, Inc.; Sheakley Enterprises, Inc.; Sheakley Resolution Systems, LLC; Matt
Sheakley; Steve Wolf; Bryan Bundy; Maureen Surkamp; Ken Weber; Susan Fernbach; Kimberly Martin; Heather
Fair; Thomas E. Pappas, Jr.; Sheakley-Uniservice, Inc.; Sheakley Unicomp, Inc.; Sheakley HR I, LLC; Sheakley HR
II, LLC; Sheakley HR III, LLC; Sheakley HR IV, LLC; Sheakley HR NG, LLC; Sheakley Retirement Plans, LLC;
Pay Systems of America, Inc.; Sheakley Retirement Plans, LLC; FBT Ohio, Inc.; and Larry Sheakley.
2
Also named in the final version of the complaint were James Allen; Frost Todd Brown, LLC; and U.S.
Bancorp, who did not file briefs in this appeal. Defendant First Financial Bank filed a short brief urging dismissal of
pendent state law claims.
No. 15-3302 Grubbs, et al. v. Sheakley Group, et al. Page 6
Report and Recommendation recommending that the false designation of origin, false
advertising, and RICO claims be dismissed and that the district court dismiss the remaining state-
law claims. The district court adopted the Report and Recommendation without changes and
entered an order dismissing the Lanham Act claims and the RICO claims for failure to state a
claim. The remaining state-law claims were dismissed without prejudice. Plaintiffs now appeal.
DISCUSSION
Standard of review
We review de novo the grant of a motion to dismiss for failure to state a claim. Casias v.
Wal-Mart Stores, Inc., 695 F.3d 428, 435 (6th Cir. 2012). In reviewing a motion to dismiss, we
are obliged to “accept all factual allegations as true,” construing the complaint “in the light most
favorable to the plaintiff.” Laborers’ Local 265 Pension Fund v. iShares Trust, 769 F.3d 399,
403 (6th Cir. 2014). To survive a motion to dismiss, plaintiffs must plead “sufficient factual
matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v.
Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)).
To do so, a plaintiff must plead “factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678.
Analysis
I. False designation of origin
Plaintiffs bring a claim for improper use of trade name and false designation of origin
under the Lanham Act against the Sheakley Entity Defendants on the basis of the e-mails and
mailings Strunk-Zwick sent to Tri-Serve clients.
The Lanham Act provides, in relevant part:
(1) Any person who, on or in connection with any goods or services, or any
container for goods, uses in commerce any word, term, name, symbol, or
device, or any combination thereof, or any false designation of origin, false or
misleading description of fact, or false or misleading representation of fact,
which--
(A) is likely to cause confusion, or to cause mistake, or to deceive as to the
affiliation, connection, or association of such person with another
No. 15-3302 Grubbs, et al. v. Sheakley Group, et al. Page 7
person, or as to the origin, sponsorship, or approval of his or her
goods, services, or commercial activities by another person . . .
shall be liable in a civil action by any person who believes that he or she is or is
likely to be damaged by such act.
15 U.S.C. § 1125(a). Plaintiffs contend that Strunk-Zwick was effectively in the service of
Sheakley and seek to impute her conduct to the Sheakley Entity Defendants. Because Plaintiffs
bring this claim only against the Sheakley Entity Defendants, we must address the issue of
whether Defendants may be held vicariously liable for the conduct of Strunk-Zwick.
A. Vicarious liability under the Lanham Act
This Circuit allows plaintiffs to hold defendants vicariously liable for trademark
infringement under the Lanham Act when the defendant and the infringer have an actual or
apparent partnership, have authority to bind one another in transactions, or exercise joint
ownership or control over the infringing product. Coach, Inc. v. Goodfellow, 717 F.3d 498, 502
(6th Cir. 2013) (adopting test of Fourth and Seventh Circuits articulated in Rosetta Stone Ltd. v.
Google, Inc., 676 F.3d 144, 165 (4th Cir. 2012), and Hard Rock Cafe Licensing Corp. v.
Concession Servs., Inc., 955 F.2d 1143, 1150 (7th Cir. 1992)). While Coach involved a claim
for trademark infringement under a different section of the Lanham Act, the Ninth Circuit, which
also uses this test, has extended it to false designation of origin claims brought under 15 U.S.C.
§ 1125(a). See Routt v. Amazon.com, Inc., 584 F. App’x 713, 716 (9th Cir. 2014) (quoting
Perfect 10, Inc. v. Visa Int'l Serv. Ass’n, 494 F.3d 788, 807 (9th Cir. 2007) (employing Hard
Rock Cafe test for false designation of origin claims)). We therefore use that test here.
Plaintiffs contend that they have stated a claim based on the text of the e-mail Strunk-
Zwick sent to twenty-two clients. The e-mail explicitly refers to the relationship of Tri-Serve
and Sheakley as a partnership: “We are partnering with Sheakley HR and moving our offices.
As many of you know, we have partnered with Sheakley over the years with regards to our
workers compensation and unemployment management.” (R. 87, Compl. ¶ 840, Page ID 3185.)
Strunk-Zwick apparently used the language about “partnering” at the suggestion of Defendant
Larry Wolf, who suggested in an e-mail to Strunk-Zwick on June 21, 2009 that she contact Tri-
Serve clients to inform them that “we are partnering with Sheakley and that we may transition
them over to give them better service etc.” (Id. ¶ 971(h), Page ID 3221.) The intent to create an
No. 15-3302 Grubbs, et al. v. Sheakley Group, et al. Page 8
apparent partnership in the eyes of the Tri-Serve clients is self-evident from this language, and
we therefore proceed to the merits of the claim for improper use of trade name and false
designation of origin brought against the Sheakley Entity Defendants.
B. Use in a “trademark way”
In some cases, a threshold question exists as to whether the challenged use of a trademark
identifies the source of goods; if not, that use is in a “non-trademark way” outside the protections
of trademark law. Interactive Products Corp. v. a2z Mobile Office Solutions, Inc., 326 F.3d 687,
695 (6th Cir. 2003). This finding may be dispositive: plaintiffs cannot succeed on a trademark
claim where trademark law does not apply. If, however, a plaintiff shows that a defendant is
“‘using the challenged mark in a way that identifies the source of their goods,’” which we
consider use in a trademark way, we proceed to the remainder of our analysis. Hensley Mfg. v.
ProPride, Inc., 579 F.3d 603, 610 (6th Cir. 2009) (citation omitted).
The district court held that the e-mail and flyer used Tri-Serve’s mark in a non-trademark
way “as a source of comparison between the two organizations,” and ended its analysis there.
Grubbs v. Sheakley Grp., No. 1:13cv246, 2015 WL 1321126, at *6 (S.D. Ohio Mar. 18, 2015).
Relying on Hensley, the Sheakley Defendants ask us to affirm the district court’s ruling that
Strunk-Zwick used the Tri-Serve name in the e-mails in a non-trademark way. See 579 F.3d at
611. Plaintiffs contend that Strunk-Zwick used the Tri-Serve name in a trademark way in the e-
mails and mailings, and that Defendants’ reliance on Hensley is mistaken. They urge us instead
to follow Johnson v. Jones, 149 F.3d 494 (6th Cir. 1998), in which we affirmed a grant of
summary judgment to the plaintiff on a false designation of origin claim where an architect had
erased another architect’s name and mark on a set of plans and replaced them with his own.
Hensley concerned an inventor of RV hitches, Jim Hensley, who had left the company
bearing his name, Hensley Manufacturing, and licensed a new design to Hensley
Manufacturing’s rival, ProPride, Inc. 579 F.3d at 607. Hensley Manufacturing owned the
trademark to “Hensley.” Id. at 606. ProPride’s promotional material mentioned Jim Hensley’s
history of designing hitches and that he had designed a new hitch, the 3P Hitch, for ProPride. Id.
at 608. Three pieces of promotional material contained a disclaimer that Jim Hensley was no
longer affiliated with Hensley Manufacturing; another described his history at Hensley
No. 15-3302 Grubbs, et al. v. Sheakley Group, et al. Page 9
Manufacturing and then with ProPride. Id. at 607–08. Hensley affirmed the district court’s
dismissal for failure to state a claim, holding that ProPride was clearly the source of the
3P Hitch, and that ProPride’s use of “Hensley” always in the context of the inventor’s full name,
Jim Hensley, was not used in a trademark way and therefore created no likelihood of consumer
confusion as to the source of the product. Id. at 611.
We believe that the Sheakley Defendants’ reliance on Hensley is misplaced, and that the
court below erred in holding that the e-mail and flyer used the Tri-Serve name in a non-
trademark way. The e-mail to existing Tri-Serve clients, which provided a new address of
TriServe LTD c/o Sheakley HR Solutions at One Sheakley Way, thus designated the geographic
source of the PEO services—and implied that those services would be originating from both Tri-
Serve and Sheakley HR. The payroll submission link to www.triservehr.com suggested that Tri-
Serve would still be the source of payroll services, as before. This Circuit has held for years that
domain names, such as www.triservehr.com, “can and do communicate information as to the
source or sponsor of the web site.” PACCAR Inc. v. TeleScan Technologies, L.L.C., 319 F.3d
243, 250 (6th Cir. 2003), abrogated on other grounds by KP Permanent Make-Up, Inc. v.
Lasting Impression I, Inc., 543 U.S. 111, 125 (2004). Thus, we consider Strunk-Zwick to have
used the Tri-Serve name in a trademark way.
C. Likelihood of confusion
Because the e-mails and mailings used the Tri-Serve name in a trademark way, we must
now evaluate whether the plaintiff has “allege[d] facts establishing that: (1) it owns the registered
trademark; (2) the defendant used the mark in commerce; and (3) the use was likely to cause
confusion.” Hensley, 579 F.3d at 609; see also Johnson, 149 F.3d at 502 (“(1) the false
designation must have a substantial economic effect on interstate commerce; and (2) the false
designation must create a likelihood of confusion”). “Whether a likelihood of confusion exists is
a mixed question of law and fact subject to de novo review.” Leelanau Wine Cellars, Ltd. v.
Black & Red, Inc., 502 F.3d 504, 515 (6th Cir. 2007). The parties do not dispute Plaintiff’s
ownership of the Tri-Serve name, or Strunk-Zwick’s use of the Tri-Serve name in commerce.
They do, however, dispute whether the use of the Tri-Serve name created a likelihood of
confusion.
No. 15-3302 Grubbs, et al. v. Sheakley Group, et al. Page 10
Eight factors guide our analysis in determining whether a likelihood of confusion exists:
“(1) strength of plaintiff’s mark; (2) relatedness of the goods; (3) similarity of the marks;
(4) evidence of actual confusion; (5) marketing of channels used; (6) degree of purchaser care;
(7) defendant’s intent in selecting the mark; and (8) likelihood of expansion in selecting the
mark.” Audi AG v. D’Amato, 469 F.3d 534, 542–43 (6th Cir. 2006) (citation omitted) (noting
that these factors are common to our analysis of trademark infringement, unfair competition, and
false designation of origin claims). We recognize that “[e]ach case presents its own complex set
of circumstances and not all of these factors may be particularly helpful in any given case.”
Homeowners Grp., Inc. v. Home Mktg. Specialists, Inc., 931 F.2d 1100, 1107 (6th Cir. 1991). In
a few cases, such as Johnson v. Jones, we have eschewed this analysis. 149 F.3d at 503 (where a
defendant placed his own mark on “plaintiff’s product and has represented it to be his own work”
we deemed it “difficult to imagine how a designation of origin of a product could be more false,
or could be more likely to cause confusion”). Nevertheless, the “ultimate question remains
whether relevant consumers are likely to believe that the products or services offered by the
parties are affiliated in some way.” Homeowners Grp., 931 F.2d at 1107. Keeping in mind the
importance of a “thorough and analytical treatment,” id., we turn to the eight factors.
1. Strength of the senior mark
“[T]he strength of a mark is a factual determination of the mark’s distinctiveness. The
more distinct a mark, the more likely is the confusion resulting from its infringement, and
therefore the more protection it is due.” Audi, 469 F.3d at 543. “A mark is ‘strong and
distinctive when the public readily accepts it as the hallmark of a particular source;’ such
acceptance can occur when the mark is unique, when it has received intensive advertisement, or
both.” Daddy’s Junky Music Stores, Inc. v. Big Daddy’s Family Music Ctr., 109 F.3d 275, 280
(6th Cir. 1997) (quoting Frisch’s Restaurant, Inc. v. Shoney’s Inc., 759 F.2d 1261, 1264 (6th
Cir.1985)). Marks fall on a “spectrum” that ranges, in order of increasing strength, from
“(1) generic or common descriptive and (2) merely descriptive to (3) suggestive and (4) arbitrary
or fanciful.” Champions Golf Club, Inc. v. The Champions Golf Club, Inc., 78 F.3d 1111, 1116–
17 (6th Cir. 1996) (quoting Induct-O-Matic Corp. v. Inductotherm Corp., 747 F.2d 358, 362 (6th
Cir. 1984)). The Tri-Serve name fits best into the category of suggestive marks, which
No. 15-3302 Grubbs, et al. v. Sheakley Group, et al. Page 11
“suggest[] rather than describe[] an ingredient or characteristic of the goods and requires the
observer or listener to use imagination and perception to determine the nature of the goods.” Id.
at 1117. The Tri-Serve name suggests attentive customer service, possibly in the tri-state area
that comprises greater Cincinnati, Ohio; as a suggestive mark, it falls toward the stronger end of
the spectrum we have devised. Plaintiffs do not allege that the Tri-Serve name was known to the
public at large in the Cincinnati area or nationally; however, Tri-Serve customers were perfectly
acquainted with the name.
2. Relatedness of the goods or services
We next look to whether Plaintiffs’ and Defendants’ goods or services are related. We
have developed three analytic categories for Lanham Act cases such as this one: “[f]irst, if the
parties compete directly, confusion is likely if the marks are sufficiently similar; second, if the
goods and services are somewhat related, but not competitive, then the likelihood of confusion
will turn on other factors; finally, if the products are unrelated, confusion is highly unlikely.
Kellogg Co. v. Toucan Golf, Inc., 337 F.3d 616, 624 (6th Cir. 2003). The object of this inquiry is
to “focus[] on whether goods or services with comparable marks that are similarly marketed and
appeal to common customers are likely to lead consumers to believe that they come from the
same source, or are somehow connected with or sponsored by a common company.” AutoZone,
Inc. v. Tandy Corp., 373 F.3d 786, 797 (6th Cir. 2004) (quoting Therma-Scan, Inc. v.
Thermoscan, Inc., 295 F.3d 623, 633 (6th Cir. 2002)). While we note that this factor is best
suited to cases involving two distinct but similar marks, the facts of this case fit most neatly into
the first of these three categories. Both Sheakley and and Tri-Serve were in the PEO business,
and Strunk-Zwick brought Tri-Serve’s clients to a competitor business by using the Tri-Serve
name in her e-mails to tell clients that their business was moving to Sheakley. As discussed
further below, the purpose of this e-mail was to lead the Tri-Serve customers to believe that Tri-
Serve was indeed partnering with Sheakley. Thus, this factor weighs strongly in favor of
potential consumer confusion.
3. Similarity of the marks
Unlike many Lanham Act cases, this case involves not two similar but distinct marks, but
a defendant who has adopted Plaintiffs’ mark wholesale. In her e-mail of July 3, 2009, Strunk-
No. 15-3302 Grubbs, et al. v. Sheakley Group, et al. Page 12
Zwick used the Tri-Serve name when identifying the new address as “TriServe LTD c/o
Sheakley HR Solutions” and www.triservehr.com as the site for payroll time submission.3 In
cases where, as here, a defendant has taken a plaintiff’s “actual trademark,” this factor supports a
finding of consumer confusion. See Audi, 469 F.3d at 543.
4. Evidence of actual confusion
“Evidence of actual confusion is undoubtedly the best evidence of likelihood of
confusion.” AutoZone, 373 F.3d at 798 (quoting Wynn Oil Co. v. Thomas, 839 F.2d 1183, 1188
(6th Cir.1988)). Several Tri-Serve clients apparently expressed dissatisfaction with the move,
were upset that they had received no notice, and worried that all their information had been
transferred to Sheakley. Moreover, because the Tri-Serve clients started sending their payments
to Sheakley by August at the latest, they appear to have been duped by the e-mail.
5. Marketing channels used
This factor requires us to consider “how and to whom the respective goods or services of
the parties are sold.” Homeowners Grp., 931 F.2d at 1110. In essence, this part of the test asks
us to evaluate the similarity in the customers for the goods and services as well as in the
“marketing efforts” employed by each party. See Wynn Oil, 839 F.2d at 1188. While Plaintiffs
do not make any refer to the marketing approaches of either Tri-Serve or Sheakley beyond
passing references to promotional material, their potential customer base was the same: small
businesses in greater Cincinnati seeking PEO services. The move of some twenty-three clients
from Tri-Serve to Sheakley further supports the overlap in customer base.
6. Degree of customer care
The degree of customer care—i.e., how carefully a consumer selects a particular good or
service—may also affect the possibility of consumer confusion. In most cases, customers are
held to the standard of a “typical buyer exercising ordinary caution”; confusion is less likely in
cases involving expensive or unusual services or unusually skilled buyers. Homeowners Grp.,
3
Plaintiffs spell the name of “Tri-Serve, Ltd.” with a hyphen in the Complaint, but we do not believe that
the lack of a hyphen rendered the use of the Tri-Serve name anything other than misleading to its existing
customers. We have held that where “differences in lettering and hyphenating are very slight,” they are “likely to
cause confusion.” Induct-O-Matic, 747 F.2d at 361.
No. 15-3302 Grubbs, et al. v. Sheakley Group, et al. Page 13
931 F.2d at 1111. There is no evidence that business owners purchasing HR services from Tri-
Serve or Sheakley should be held to this higher standard. The question for our ultimate analysis,
then, is whether a typical buyer exercising ordinary caution receiving Strunk-Zwick’s e-mail
could be confused as whether the HR services were coming from Sheakley or Tri-Serve.
7. The intent of defendant in selecting the mark
We have held that “[i]f a party chooses a mark with the intent of causing confusion, that
fact alone may be sufficient to justify an inference of confusing similarity.” AutoZone, 373 F.3d
at 799 (quoting Homeowners Grp., 931 F.2d at 1111). Moreover, where the copying is
deliberate, even if the intent to confuse is not, “purposeful copying indicates that the alleged
infringer. . . believes that his copying may divert some business from the senior user.” Daddy’s
Junky Music Stores, 109 F.3d at 286 (citing Little Caesar Enterprises, Inc. v. Pizza Caesar, Inc.,
834 F.2d 568, 572 (6th Cir. 1987)). There is no doubt that the use of the Tri-Serve name in the
e-mail was intentional: Strunk-Zwick and Sheakley employees planned the move of the Tri-
Serve clients to Sheakley over the course of weeks. A Sheakley employee suggested the
language about “partnering” to Strunk-Zwick. The use of the Tri-Serve name cannot have been
anything other than purposeful; we therefore read Strunk-Zwick’s e-mail as calculated to mislead
the Tri-Serve clients into diverting their business to Sheakley.
8. Likelihood of expansion of the product lines
The possibility that a product line will be expanded weighs in favor of a finding of
infringement. Homeowners Grp., 931 F.2d at 1112. Because Plaintiffs do not appear to intend
to expand their product lines, this factor is not relevant to our analysis.
The relevant factors all point toward a finding of likely consumer confusion. We further
recall that the ultimate inquiry is “whether relevant consumers are likely to believe that the
products or services offered by the parties are affiliated in some way.” Daddy’s Junky Music
Stores, 109 F.3d at 280 (quoting Homeowners Grp., 931 F.2d at 1107) (emphasis added); see
also 15 U.S.C. 1125 (a)(1)(A) (imposing liability where defendants confuse or deceive
consumers into believing goods or services are affiliated). The July 3, 2009 e-mail and mailing
to customers stated that “we are partnering with Sheakley HR,” and that they were “moving into
No. 15-3302 Grubbs, et al. v. Sheakley Group, et al. Page 14
Sheakley Group.” Taking the facts in the light most favorable to Plaintiffs, as we must, we read
the frequent use of the first person plural throughout the e-mail to mean Tri-Serve, not simply
Strunk-Zwick and the other Tri-Serve staff members who were entering Sheakley’s employ;
according to the e-mail, all of Tri-Serve was moving, and was partnering with Sheakley. The
text of the e-mail is full of ambiguous references to the source of the PEO services: an address of
“TriServe LTD c/o Sheakley HR Solutions” at One Sheakley Way; a payroll URL at
triservehr.com; and e-mail contact information at sheakleyhr.com. Taken together, these
representations could not only sow confusion as the source of the PEO services, but also strongly
imply affiliation—an affiliation not endorsed by Grubbs, the actual owner of Tri-Serve.
Plaintiffs have therefore stated a claim for improper use of trade name and false
designation of origin for which the Sheakley Entity Defendants may be held vicariously liable.
II. False advertising
Plaintiffs also assert that the e-mail to twenty-two Tri-Serve customers also constituted
false advertising by Strunk-Zwick and the Sheakley Entity Defendants. The Lanham Act also
establishes liability for:
(1) Any person who, on or in connection with any goods or services, or any
container for goods, uses in commerce any word, term, name, symbol, or
device, or any combination thereof, or any false designation of origin, false or
misleading description of fact, or false or misleading representation of fact,
which . . .
(B) in commercial advertising or promotion, misrepresents the nature,
characteristics, qualities, or geographic origin of his or her or another
person’s goods, services, or commercial activities.
15 U.S.C. § 1125(a).
A. Relevant Test
This Court has established a five-part test for establishing a false advertising claim:
1) the defendant has made false or misleading statements of fact concerning his
own product or another’s; 2) the statement actually deceives or tends to deceive a
substantial portion of the intended audience; 3) the statement is material in that it
will likely influence the deceived consumer’s purchasing decisions; 4) the
No. 15-3302 Grubbs, et al. v. Sheakley Group, et al. Page 15
advertisements were introduced into interstate commerce; 5) there is some causal
link between the challenged statements and harm to the plaintiff.
Am. Council of Certified Podiatric Physicians & Surgeons v. Am. Bd. of Podiatric Surgery, Inc.,
185 F.3d 606, 613 (6th Cir. 1999). The statements need not have appeared in a format
resembling traditional advertising. See, e.g., Semco, Inc. v. Amcast, Inc., 52 F.3d 108, 112–14
(6th Cir. 1995) (holding misstatements in trade journal article actionable as false advertising).
B. The Gordon & Breach Test
While repeating the test above, the court below used a different test first developed by the
Southern District of New York in Gordon & Breach Sci. Publishers S.A. v. Am. Inst. of Physics,
859 F. Supp. 1521, 1536 (S.D.N.Y. 1994), which is employed in many other circuits to
determine whether a statement is made in “commercial advertising or promotion.” The
statement must be:
(1) commercial speech; (2) by a defendant who is in commercial competition with
the plaintiff; (3) for the purpose of influencing customers to buy the defendant’s
goods or services; (4) that is disseminated sufficiently to the relevant purchasing
public to constitute advertising or promotion within that industry.4
Grubbs v. Sheakley Grp., No. 1:13cv246, 2015 WL 1321126, at *7 (S.D. Ohio Mar. 18, 2015)
(emphasis added). The court below treated discussion of the Gordon & Breach test by this Court
in LidoChem v. Stoller Enterprises, Inc., 500 F. App’x 373, 379 (6th Cir. 2012), as though it
were the established law of this Circuit. The court below went on to find that the e-mails to
twenty-three recipients were not widely disseminated enough as to constitute advertising or
promotion in the PEO industry. The Sheakley Defendants and Strunk-Zwick urge us to affirm
on this ground, while Plaintiffs assert that they have stated a claim for false advertising under the
Podiatric Physicians test. In essence, the parties dispute the reach of the Lanham Act with
respect to false advertising claims, which we now examine.
4
Many circuits have adopted this test wholesale. See, e.g., Suntree Tech., Inc. v. Ecosense Int’l, Inc.,
693 F.3d 1338, 1349 (11th Cir. 2012); Podiatrist Ass’n, Inc. v. La Cruz Azul De Puerto Rico, Inc., 332 F.3d 6, 19
(1st Cir. 2003); Proctor & Gamble Co. v. Haugen, 222 F.3d 1262, 1273–74 (10th Cir. 2000); Coastal Abstract
Serv., Inc. v. First Am. Title Ins. Co., 173 F.3d 725, 735 (9th Cir. 1999); Seven–Up Co. v. Coca–Cola Co., 86 F.3d
1379, 1384 (5th Cir. 1996). Other circuits have adopted aspects of the four-part test. See Porous Media Corp. v.
Pall Corp., 173 F.3d 1109, 1120 (8th Cir. 1999) (adopting the test but defining advertising as communication that
“propose[s] a commercial transaction”).
No. 15-3302 Grubbs, et al. v. Sheakley Group, et al. Page 16
LidoChem concerned rival chemical corporations producing competing agricultural
chemicals for the Western Michigan market. 500 F. App’x at 374–75. At issue were a falsified
lab report that the defendant corporation provided to a large soybean grower whose plants
became yellow after being sprayed with the plaintiff’s product, and subsequent false statements
of fact in letters to the soybean grower’s attorney. Id. at 375–77. Faced with a situation in which
it was unsure whether certain statements were made in “commercial advertising or promotion,”
as the statute requires, the LidoChem court turned to the Gordon & Breach test, and decided that
they were. See LidoChem, 500 F. App’x at 379–81. LidoChem, we note, was an unpublished
decision that is not binding on subsequent panels of this Court but may be considered for its
persuasive authority. See, e.g., United States v. Webber, 208 F.3d 545, 551 n. 3 (6th Cir. 2000).
LidoChem in no way disavowed Podiatric Physicians, and indeed recognized it as the law of this
Circuit. 500 F. App’x at 380. At the same time, the LidoChem decision instructs us how the
Podiatric Physicians test is itself not always instructive: under Podiatric Physicians, plaintiffs
state a claim for false advertising when they plead, among other things, that an advertisement
containing false or misleading statement of fact entered interstate commerce. As LidoChem
tacitly acknowledged, Podiatric Physicians is silent as to what constitutes advertising (and, in its
most frequently cited formulation, does not mention promotion at all). Podiatric Physicians thus
advanced a test that does not define its own scope.
In some cases, it may be obvious whether statements were made in “advertising or
promotion.” Yet, as noted above, communications need not necessarily resemble traditional
television, radio, print, or Internet advertisements to fall within the purview of the Lanham Act.
Semco, 52 F.3d at 112. Semco, decided prior both to Podiatric Physicians and to any Circuit’s
adoption of the Gordon & Breach test, declined to “divine the true meaning of ‘commercial
advertising and promotion.’” Id. Defendants facing false advertising claims, as here, may
understandably seek to evade liability by arguing that contested statements did not constitute
“commercial advertising or promotion” and are thus outside the ambit of the statute. That the
district courts of this Circuit have frequently looked to the Gordon & Breach test in the absence
of a definition of “commercial advertising or promotion” suggests a desire for additional clarity
beyond our existing precedent. See, e.g., Champion Labs., Inc. v. Parker-Hannifin Corp., 616 F.
Supp. 2d 684, 694 (E.D. Mich. 2009); White Mule Co. v. ATC Leasing Co. LLC, 540 F. Supp. 2d
No. 15-3302 Grubbs, et al. v. Sheakley Group, et al. Page 17
869, 897 (N.D. Ohio 2008); Kansas Bankers Sur. Co. v. Bahr Consultants, Inc., 69 F. Supp. 2d
1004, 1012 (E.D. Tenn. 1999) (all applying Gordon & Breach test).
The Gordon & Breach test represents but one attempt to make sense of the elusive phrase
“commercial advertising or promotion,” which is defined neither in statute nor in legislative
history. See Coastal Abstract Serv., Inc. v. First Am. Title Ins. Co., 173 F.3d 725, 734 (9th Cir.
1999) (quoting Seven–Up Co. v. Coca–Cola Co., 86 F.3d 1379, 1383 (5th Cir. 1996)).
Discussing the Gordon & Breach test, the Seventh Circuit expressed “serious doubts about the
wisdom of displacing the statutory text in favor of a judicial rewrite with no roots in the language
Congress enacted.” First Health Grp. Corp. v. BCE Emergis Corp., 269 F.3d 800, 803 (7th Cir.
2001). The court proceeded to define advertising, according to what it considered its common
usage, as “a form of promotion to anonymous recipients, as distinguished from face-to-face
communication” and “a subset of persuasion [that] refers to dissemination of prefabricated
promotional material.” Id. at 803–804.
The Second Circuit considered each part of the Gordon & Breach test separately. See
Fashion Boutique of Short Hills, Inc. v. Fendi USA, Inc., 314 F.3d 48, 56–58 (2d Cir. 2002). It
began with the common meanings of the words in the statute, and “easily accept[ed] the first and
third elements of the Gordon & Breach test that define the term ‘commercial’ as referring to
‘commercial speech’ that is made for the purpose of influencing the purchasing decisions of the
consuming public.” Id. at 56-57. Regarding Gordon & Breach’s dissemination requirement, it
stated:
The ordinary understanding of both “advertising” and “promotion” connotes
activity designed to disseminate information to the public. Thus, the touchstone of
whether a defendant’s actions may be considered “commercial advertising or
promotion” under the Lanham Act is that the contested representations are part of
an organized campaign to penetrate the relevant market. Proof of widespread
dissemination within the relevant industry is a normal concomitant of meeting this
requirement.
Id. at 57. Critical to the court’s adoption of the market penetration requirement was its
conclusion that, “[a]lthough the Lanham Act encompasses more than the traditional advertising
campaign, the language of the Act cannot be stretched so broadly as to encompass all
commercial speech.” Id. (citing Sports Unlimited, Inc. v. Lankford Enters., Inc., 275 F.3d 996,
No. 15-3302 Grubbs, et al. v. Sheakley Group, et al. Page 18
1005 (10th Cir. 2002) and First Health Grp., 269 F.3d at 803). The Second Circuit did not adopt
the requirement of the Gordon & Breach test that plaintiffs and defendants be in competition,
which it noted was not required by the statute itself. Id. at 58.
It is time to revisit Semco’s unwillingness to define the term “commercial advertising or
promotion.” Like the Second Circuit, we readily adopt the first and third requirements of the
Gordon & Breach test: namely, that “commercial advertising or promotion” must consist of
“‘commercial speech’ that is made for the purpose of influencing the purchasing decisions of the
consuming public.” Id. at 57. These criteria add only an intent requirement to the Podiatric
Physicians test, which requires plaintiffs to show that the supposed advertisements “will likely
influence the deceived consumer’s purchasing decisions.” 185 F.3d at 613.
We further agree with the Second Circuit that “the touchstone of whether a defendant’s
actions may be considered ‘commercial advertising or promotion’ under the Lanham Act is that
the contested representations are part of an organized campaign to penetrate the relevant
market.” Fashion Boutique, 314 F.3d at 57. However, such campaigns, especially those aimed
at previous customers, may not necessarily entail widespread, market-wide dissemination of any
given message or false statement as junk mail, newspaper advertisements, and television
commercials might; producers today employ data as never before to track our consumption
habits, especially on the Internet, and send out personalized promotional material accordingly.
We may see web advertisements based on our internet search history or use of social media sites
like Facebook, or receive e-mails from airlines regarding sales on routes we regularly travel or
flyers advertising “friends and family” sales for stores we patronize. Such targeted promotion
reflects a belief by advertisers that discrete segments of a much larger existing or potential
customer base may find specific messages most persuasive. In engaging in this sort of targeted
promotion, advertisers may undertake an organized campaign to penetrate a market without any
given message flooding that market. In other words, the most focused advertisements or
promotions may not be widely disseminated at all.
We believe that the requirement of “widespread dissemination” or “market penetration”
fails sufficiently to account for the types of sophisticated, tailored advertising in use today, and
that the plain meaning of the terms “commercial advertising” or “commercial promotion”
No. 15-3302 Grubbs, et al. v. Sheakley Group, et al. Page 19
accommodates targeted communications to a substantial portion of a company’s existing
customer or client base. At the same time, we recognize the concern of other courts in rendering
too much commercial speech actionable as false advertising. See Seven-Up, 86 F.3d at 1384
(discussing a district court’s concern that to “permit a single private correspondence” to fall
within this subsection of the Lanham Act “would sweep within the ambit of the Act any
disparaging comment made in the context of a commercial transaction”). We therefore define
“commercial advertising or promotion” as: (1) commercial speech; (2) for the purpose of
influencing customers to buy the defendant’s goods or services; (3) that is disseminated either
widely enough to the relevant purchasing public to constitute advertising or promotion within
that industry or to a substantial portion of the plaintiff’s or defendant’s existing customer or
client base.
We decline to adopt the requirement that the parties be in competition. Obviously,
defendants who are in direct competition with plaintiffs may falsely denigrate their competitors’
products or make equally false statements about the merits of their own, and are indeed the most
likely source of such false advertising. But, as the Second Circuit noted, because the statute
nowhere requires such a showing by plaintiffs, we will not impose one. See Fashion Boutique,
314 F.3d at 58.
Turning now to the facts of this case, we believe that the letter to all of Tri-Serve’s
clients, fits squarely within this definition of “commercial promotion.” The letter to the twenty-
two clients touted the many advantages of the purported “partnership” with Sheakley:
By moving into Sheakley Group we will be able to provide you and your
employees with additional resources, services, and benefits, while continuing to
provide you with the service that you have grown accustomed to expect from
TriServe . . . You will begin to see the Sheakley HR name and we will be
introducing new benefits and new services to assist you with growing your
business.
(R. 87, Compl. ¶ 840, Page ID 3185.) As Plaintiffs plead in their Complaint, this e-mail
represented the culmination of a plan to move the Tri-Serve clients to Sheakley, and intended to
induce them into transferring their business. With that in mind, we turn to the traditional
Podiatric Physicians factors.
No. 15-3302 Grubbs, et al. v. Sheakley Group, et al. Page 20
C. Application of the Podiatric Physicians factors
1. False or misleading statements of fact
In the context of the allegations throughout the complaint that Strunk-Zwick did not own
Tri-Serve, had no authority to transfer its clients, and then allowed its entire client base to be
subsumed into Sheakley, the e-mails and mailings from Strunk-Zwick to customers contain
several false and misleading statements of fact concerning Tri-Serve’s product, PEO services.
The July 3, 2009 e-mail and mailing to customers stated that “we are partnering with Sheakley
HR,” and that Tri-Serve was “moving into Sheakley Group” because of “tremendous growth
over the last 6 months.” It also gave a future address of “TriServe LTD c/o Sheakley HR
Solutions.” Plaintiffs specifically assert that the references to “partnering” and the “move” are
false: Tri-Serve was not moving and the companies had no relationship whatsoever. The
supposed address of “TriServe LTD c/o Sheakley HR Solutions” at One Sheakley Way was also
a false representation of the geographic origin of the PEO services and could also have created a
further misimpression as to the relationship between the companies.
2. Deception of the intended audience
Plaintiffs seeking damages for false advertising must “present evidence that a ‘significant
portion’ of the consumer population was deceived.” Herman Miller, Inc. v. Palazzetti Imports &
Exports, Inc., 270 F.3d 298, 323 (6th Cir. 2001) (citing Podiatric Physicians, 185 F.3d at 616).
The e-mails and mailings appear to have deceived the Tri-Serve customers who received them.
By August 2009, health insurers and workers’ compensation departments were billing Tri-Serve
at Grubbs’ office, but clients were sending their payments to Sheakley, not Grubbs. Where false
advertising cases have involved only mass mailings—albeit several orders of magnitude more
than at issue here—this Court has treated the intended audience as the recipients of the letters.
See Balance Dynamics Corp. v. Schmitt Indus., Inc., 204 F.3d 683, 686 (6th Cir. 2000)
(successive mass mailings to 2,500 and 3,200 clients and potential clients); Podiatric Physicians,
185 F.3d at 611 (mass mailings of 6,000-8,000 letters).
No. 15-3302 Grubbs, et al. v. Sheakley Group, et al. Page 21
3. Causation
The third and fifth prongs of the test, which require a plaintiff to show that the statement
will likely influence the deceived consumer’s purchasing decisions and that the challenged
statements caused harm to the plaintiff, both address “causation generally.” Podiatric
Physicians, 185 F.3d at 613. The false address and statements about “partnering” would likely
cause a consumer, assuming it was still paying Tri-Serve, to send funds to Sheakley, which they
apparently did by August at the latest.
4. Interstate commerce nexus
Finally, Plaintiffs must show that the statements were introduced into interstate
commerce. Often, the very scope of a mass promotional campaign allows a court to gloss over
this element of the Podiatric Physicians test. For example, it would be easy for a court simply to
assume that some letters out of a mass mailing of thousands entered interstate commerce.
See Balance Dynamics, 204 F.3d at 687.
The Internet, which the Supreme Court has described as “an international network of
interconnected computers,” and which facilitates the constant flow of e-mail, enables interstate
commerce of many types to occur. See Reno v. Am. Civil Liberties Union, 521 U.S. 844, 849
(1997) (describing the history of the Internet and types of communication through its portals).
When e-mails or files attached to them cross state lines, they travel in interstate commerce. See,
e.g., United States v. Chambers, 441 F.3d 438, 449 (6th Cir. 2006). Plaintiffs do not allege in
their Complaint that the e-mail, or the mailed versions thereof, ever traveled outside Ohio.
Plaintiffs did not specify where the recipients of the e-mail were located, or where any of the
relevant e-mail servers might have been. The question is whether Plaintiffs nonetheless pled that
the e-mails were introduced into interstate commerce.
The most instructive discussions of whether e-mails necessarily travel in interstate
commerce arise in the criminal context. See, e.g., United States v. Lay, 612 F.3d 440, 447 (6th
Cir. 2010) (affirming wire fraud conviction where e-mails were sent between states). The recent
case of United States v. Napier, 787 F.3d 333, 346 (6th Cir. 2015), specifically rejected the
defendant’s argument that the government needed to establish where the recipient of an e-mail
No. 15-3302 Grubbs, et al. v. Sheakley Group, et al. Page 22
containing child pornography was located. The “relevant inquiry” for interstate commerce
purposes for a sufficiency of the evidence challenge by a criminal defendant was “whether there
is enough circumstantial evidence that these electronic communications were transmitted through
interstate wires. Given the omnipresent nature of the Internet, this is not a difficult burden for the
government to satisfy.” Id. Napier approvingly cited case law from other circuits to the effect
that no showing was necessary that transmissions had crossed state lines. Id. (collecting cases
from the First, Second, Third, Fourth, and Fifth Circuits). However, it stopped short of adopting
an unequivocal rule to that effect because of circumstantial evidence that the images had traveled
between different time zones. United States v. Mellies also discussed this body of law with
approval, but declined to hold that e-mail or Internet transmissions always move in interstate
commerce because the parties had not addressed the issue in their briefs. 329 F. App’x 592, 605
(6th Cir. 2009).
In light of this guidance, we hold that a civil plaintiff need not allege that an e-mail
crossed state lines to survive a motion to dismiss. Napier specifically stated that the
government—which, by the time of trial, would necessarily have concluded its investigation—
need not prove the location of an e-mail recipient to establish an interstate nexus, and we believe
it would be unfair to impose a more stringent burden on a plaintiff in a civil case who has not yet
had the benefit of discovery. To survive a motion to dismiss, a plaintiff must allege “factual
content that allows the court to draw the reasonable inference” that the supposed false
advertisements were introduced into interstate commerce. See Ashcroft v. Iqbal, 556 U.S. 662,
678 (2009). Stating that an e-mail was sent is enough. In so holding, we join the Seventh Circuit
that the very act of sending an e-mail creates the interstate commerce nexus necessary for federal
jurisdiction. See Doe v. Smith, 429 F.3d 706, 709–10 (7th Cir. 2005) (holding interstate
commerce nexus met and reversing grant of motion to dismiss for failure to state a claim under
the Wiretap Act where counsel stated at oral argument that defendant had e-mailed a video).
For these reasons, and because the Sheakley Entity Defendants may be held vicariously
liable for Strunk-Zwick’s e-mail as described above, Plaintiffs have stated a claim for false
advertising against Strunk-Zwick and the Sheakley Entity Defendants.
No. 15-3302 Grubbs, et al. v. Sheakley Group, et al. Page 23
III. RICO claims
Plaintiffs further allege that Strunk-Zwick and all Sheakley Defendants violated the
Racketeer Influenced and Corrupt Organizations Act (RICO) with their plan to steal Tri-Serve’s
client base. RICO prohibits
any person employed by or associated with any enterprise engaged in, or the
activities of which affect, interstate or foreign commerce, to conduct or
participate, directly or indirectly, in the conduct of such enterprise’s affairs
through a pattern of racketeering activity or collection of unlawful debt.
18 U.S.C. § 1962(c). Both individuals and corporate entities may be held liable under RICO; a
person “includes any individual or entity capable of holding a legal or beneficial interest in
property.” 18 U.S.C. § 1961(3). “Racketeering activity” encompasses many criminal acts,
including those indictable for mail or wire fraud.5 See 18 U.S.C. § 1961(1). Finally, the statute
requires at least two acts of racketeering activity within ten years to qualify as a “pattern of
racketeering activity.” 18 U.S.C. § 1961(5). The RICO statute allows a civil remedy to persons
injured by a violation of 18 U.S.C. § 1962(c). 18 U.S.C. § 1964(c).
In practice, two acts of racketeering activity within ten years will not generally give rise
to liability. Predicate acts of racketeering must be both continuous and related to “‘combine[] to
produce a pattern.’” Fleischhauer v. Feltner, 879 F.2d 1290, 1297 (6th Cir. 1989) (quoting
Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496, n. 14 (1985)). In assessing continuity and
relatedness, courts consider several factors: “the number and variety of predicate acts and the
length of time over which they were committed, the number of victims, the presence of separate
schemes and the occurrence of distinct injuries.” Fleischhauer, 879 F.2d at 1298. Continuity,
for RICO purposes, “is both a closed- and open-ended concept, referring either to a closed period
of repeated conduct, or to past conduct that by its nature projects into the future with a threat of
repetition.” Moon v. Harrison Piping Supply, 465 F.3d 719, 724 (6th Cir. 2006) (quoting H.J.,
Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 241 (1989)).
5
To establish RICO liability, predicate acts of mail or wire fraud must be pled with particularity pursuant to
Rule 9(b) of the Federal Rules of Civil Procedure. See Heinrich v. Waiting Angels Adoption Servs., Inc., 668 F.3d
393, 404 (6th Cir. 2012).
No. 15-3302 Grubbs, et al. v. Sheakley Group, et al. Page 24
The court below dismissed both the substantive RICO claim and the RICO conspiracy
claim on the ground that Plaintiffs failed to plead either closed- or open-ended continuity: the
alleged racketeering acts of mail and wire fraud occurred within an eight-month period in
pursuance of a single scheme with a single victim, and Plaintiffs pled no facts indicating that the
alleged acts of racketeering activity would continue into the future.
The Sheakley Defendants and Strunk-Zwick ask this court to affirm the ruling of the
court below finding lack of continuity. Plaintiffs, they argue, did not show that the conduct
lasted long enough to constitute a closed-ended RICO violation, and did not show enough
potential to continue into the future for open-ended liability. They rely principally on several
cases denying RICO claims where the alleged racketeering activity occurred over periods
ranging from six to seventeen months, and where plaintiffs had not shown any threat of future
conduct. See Moon, 465 F.3d at 725–26 (affirming dismissal of RICO complaint for lack of
continuity where predicate acts occurred over nine months); Vemco, Inc. v. Camardella, 23 F.3d
129, 134–35 (6th Cir. 1994) (seventeen months); Vild v. Visconsi, 956 F.2d 560, 569–70 (6th Cir.
1992) (six or seven months). The Sheakley Defendants also argue that the alleged activity was a
single, terminable scheme with only one victim that was, by nature, not open-ended. See Moon,
465 F.3d at 725 (no RICO liability where defendant had “single objective” and there were “no
facts suggesting that the scheme would continue beyond the [d]efendants accomplishing their
goal”); Vemco, 23 F.3d at 134 (no RICO liability where there was a “single victim and a single
scheme for a single purpose”).
Plaintiffs contend that their Complaint pled facts sufficient to support open-ended
continuity of racketeering activity because the acts, admittedly committed within eight months,
were “continuous in that they are capable of being continued into the future and pose that threat
of continuing for a lengthy period of time.” (Pls.’ Br. at 43.) One may indeed establish the
threat of continued criminal activity by showing that the predicate acts are part of the “‘regular
way of conducting [a] defendant’s ongoing legitimate business.’” Vild, 956 F.2d at 569 (quoting
H.J., 492 U.S. at 243). However, Plaintiffs have not done so with respect to Strunk-Zwick or
any of the Sheakley Defendants. They argue, with no citation to the record, that the “ends justify
the means [sic] management style” of Sheakley—in which Sheakley failed to respect the
No. 15-3302 Grubbs, et al. v. Sheakley Group, et al. Page 25
confidentiality of client lists—gives “no indication that their pattern of behavior would not
continue indefinitely into the future.” (Pls.’ Br. at 45–46.) As support for their position in favor
of open-ended liability, they cite United States v. Busacca, in which a RICO conviction was
upheld where a defendant embezzled pension funds from his union six times within two and a
half months to pay his own legal fees in a prior RICO case. 936 F.2d 232, 237–38 (6th Cir.
1991). In Busacca, we considered the defendant’s total control of the pension funds, disregard of
procedures, and repeated misstatements to the union board to have created an ongoing risk of
criminal activity at the time the acts were committed that was fortuitously interrupted by his
conviction. Id. at 238.
The facts in the Complaint, accepted as true, make this eight-month course of conduct
more analogous to the short-term, terminable schemes in Moon, Vemco, and Vild than the
unusual circumstances of control in Busacca, let alone the “long-term criminal conduct” the
RICO statute was enacted to combat. See H.J., 492 U.S. at 242 (citing legislative history).
According to the pleadings, the wire fraud began in the first half of 2009; the most recent alleged
act of wire fraud occurred on August 30, 2009, when Strunk-Zwick claimed not to have tax
documents. As noted, Plaintiffs alleged no further facts showing that Sheakley threatened future
criminal conduct. Thus, this single eight-month scheme to move the Tri-Serve clients to
Sheakley with the single victim of Grubbs cannot meet the standard for closed- or open-ended
RICO liability. We therefore affirm the district court’s dismissal of Plaintiffs’ substantive RICO
claim.
This result is fatal to the RICO conspiracy claim Plaintiffs seek to assert pursuant to
18 U.S.C. 1962(d). To state a claim for RICO conspiracy, one must “successfully allege all the
elements of a RICO violation, as well as . . . ‘the existence of an illicit agreement to violate the
substantive RICO provision.’” Heinrich v. Waiting Angels Adoption Servs., Inc., 668 F.3d 393,
411 (6th Cir. 2012) (quoting United States v. Sinito, 723 F.2d 1250, 1260 (6th Cir. 1983)).
While the facts, as pled, show ample evidence of agreement on the part of Strunk-Zwick and
various individual Sheakley Defendants to bring Tri-Serve to Sheakley, Plaintiffs’ RICO
conspiracy claim fails because Plaintiffs failed to allege a substantive RICO violation in the first
place.
No. 15-3302 Grubbs, et al. v. Sheakley Group, et al. Page 26
IV. State law claims
Plaintiffs ask this Court to reinstate their state-law claims if any of their Lanham Act or
RICO claims are reinstated. The decision to hear state-law claims over which a federal court has
pendent jurisdiction is within the discretion of the trial court. 28 U.S.C. 1367(a). We review the
decision of the district court to exercise supplemental jurisdiction for abuse of discretion. Moon
v. Harrison Piping Supply, 465 F.3d 719, 728 (6th Cir. 2006). The court below specifically
predicated the dismissal of the state law claims on the lack of any remaining federal law claims,
and we do not consider it to have abused its discretion in so ruling. However, the district court
on remand should re-examine whether to exercise its discretion to hear any of the remaining state
law claims.
CONCLUSION
For the foregoing reasons, we REVERSE the order of the district court dismissing
Plaintiffs’ Lanham Act claims for failure to state a claim and AFFIRM the order of the district
court dismissing Plaintiffs’ RICO claims. We REMAND this case for further proceedings, in
which the district court may, in its discretion, re-examine whether to reinstate any of Plaintiffs’
state law claims.