Trademark Investigations Revisited

The use of investigations to uncover and evaluate potential infringement and unfair competition claims can be an extremely effective weapon for any trademark owner. Usually, a key to successful trademark investigations rests in having the mark owner's investigator pose as an ordinary consumer ' essentially misrepresenting his or her true identity or purpose to the potential infringer. This practice of attempting to gain information through the arguable use of deception or invented scenario is now commonly referred to as 'pretexting' and has led to controversy in the general corporate context. This article concludes that properly conducted and supervised pretext investigations remain in harmony with both the relevant case law and the policy goals of trademark and unfair competition law.

Considerations in Utilizing Pretext Investigations

Pretexting practices employed in trademark infringement investigations differ from other investigations in that they typically only seek to obtain information that would tend to be available to any ordinary customer of the infringer. Thus, the methods employed by trademark investigators tend to mimic consumer interactions by, inter alia, posing as a customer seeking the potential infringer's goods or services through telephone calls or visits to the infringer's business, or through the simple purchase of the products or services at issue. It is significant, therefore, that when a trademark owner employs such deception, the ultimate goal of the investigation is strictly in line with the same broad policy goals that underlie all trademark and unfair competition law ' namely, consumer welfare. The trademark owner can justify its investigative pretext as necessary to protect the consuming public from deception or confusion in the marketplace, protection that can only be accomplished by stepping into the shoes of the ordinary consumer.

Even so, prudent counsel conducting pretext investigations or employing others to do so must consider the ethical rules and legal precedent governing their behavior in such fact-finding, lest they face disciplinary action or other likely problems, including the exclusion of wrongfully obtained evidence and bad publicity for the client and/or the attorney's firm.

The Model Rules and Pretexting

Several of the ABA's Model Rules of Professional Conduct are arguably implicated in any consideration of pretexting related to trademark investigations. For example, read literally, such Model Rules as Rule 4.1(a) ('[i]n the course of representing a client, a lawyer shall not knowingly … make a false statement of material fact or law to a third person') and Rule 8.4(c) (it is 'professional misconduct' for a lawyer to 'engage in conduct involving dishonesty, fraud, deceit or misrepresentation') would seem to ex-clude all attempts to conduct pretext investigations. Model Rule 4.2 further states that, '[i]n representing a client, a lawyer shall not communicate about the subject of the representation with a person the lawyer knows to be represented by another lawyer in the matter … ' When applied to corporate clients, the commentary to this Rule prohibits contact with managerial employees of the corporate party or an employee 'whose act or mission in connection with the matter may be imputed to the organization' for liability. Moreover, Model Rule 5.3(c)(1) arguably extends contact restrictions to 'nonlawyer' investigators hired or directed by the attorney. Fortunately for the trademark attorney, however, the outlook is not quite so bleak or literal when those Rules are viewed through the interpretive lens of the few cases that have considered them in the context of trademark investigations.

Trademark-Related Pretexting Cases

In Apple Corps Ltd. v. Int'l Collectors Soc'y, 15 F. Supp. 2d 456 (D.N.J. 1998), a compliance investigation found that defendants were not abiding by the terms of an earlier consent decree forbidding them from selling certain collector stamps bearing images of the Beatles. Investigative calls to defendants' sales staff resulted in sales of the prohibited stamps. The callers made no misrepresentations other than as to their 'purpose in calling and their identities,' nor did they ask the sales personnel any questions about defendants' practices or policies. Id. at 474. In response to plaintiffs' subsequent contempt motion, defendants moved for sanctions asserting violations of New Jersey's ethics rules. The court found the investigation was properly conducted and supervised: 'the prevailing understanding in the legal profession is that a … lawyer's use of an undercover investigator to detect ongoing violations of the law is not ethically proscribed, especially where it would be difficult to discover the violations by other means.' Id. at 475. Further, disclosure of the callers' identity and true purpose 'would have been useless to determine [defendants'] day-to-day practices in the ordinary course of business.' Id. The court reasoned that to read the ethical rules so literally in that context 'would serve merely to immunize corporations from liability for unlawful activity, while not effectuating any of the purposes behind the rule.' Id.

A similar result was reached a year later in Gidatex, S.r.L. v. Campaniello Imports, Ltd., 82 F. Supp. 2d 119 (S.D.N.Y. 1999), where defendants tried to exclude evidence obtained in conversations between their sales clerks and plaintiff's investigators. Denying defendants' motion, the court noted that the investigators never 'tricked or duped' the sales clerks into making damaging admissions, nor 'cause[d] the sales clerks to make any statements they otherwise would not have made.' Id. at 122. The court then discussed the public policy interests underlying trademark and unfair competition law:

[the applicable] ethical rules should not govern situations where a party is legitimately investigating potential unfair business practices by … posing as a member of the general public engaging in ordinary business transactions with the target. To prevent this use of investigators might permit
targets to freely engage in unfair business practices which are harmful to both trademark owners and consumers in general. Id.

The Eighth Circuit and a South Dakota district court seemed to take a different view in Midwest Motor Sports, Inc. v. Arctic Cat Sales, Inc., 347 F.3d 693 (8th Cir. 2003) and Midwest Motor Sports, Inc. v. Arctic Cat Sales, Inc., 144 F. Supp. 2d 1147 (D.S.D. 2001). In Midwest, the Eighth Circuit affirmed the lower court's sanctions excluding evidence that had been obtained by defendant's counsel in a pretext investigation for its snowmobile manufacturer/franchisor client, regarding two of the client's franchisees. Though these decisions at first appear to be at odds with those in Apple Corps and Gidatex, a careful reading of both Arctic Cat Sales cases shows that defendant's counsel went well beyond the 'usual consumer transactions' described in those earlier cases. The franchisor's attorneys instructed the investigator to determine whether the targets of the pretext would 'bad mouth' the other franchisee or admit that competitors' snowmobiles were better. Arctic Cat Sales, 144 F. Supp. 2d at 1151. Such direction made it clear that the purpose of the on-site visits was to gather useful admissions for conduct of the litigation itself rather than to merely obtain objective sales information.

Practice Tips

While no trademark-related decisions have issued since the most recent rash of corporate pretexting stories, the cases reviewed here indicate that courts appear willing to allow pretext evidence when that evidence has been obtained without loaded questions designed merely to gain beneficial admissions for the investigating party. The following practice guidelines are therefore advised to help steer clear of missteps in pretext investigations:

1) Be the Consumer. An investigator should adopt the pretext of a normal consumer in an ordinary transaction and should not try to act like an attorney in a deposition.

2) Do Ask and Do Tell. Attorneys should provide specific instructions to the investigator regarding what is and is not legally permissible in an investigation and make clear that the investigator is an agent of the client/firm and that her/his actions can be imputed to the client/firm.

3) Know Your Jurisdiction. As the decisions make clear, judicial precedent and interpretation of the applicable ethical rules vary from locale to locale and should be considered in developing a strategy for the use of pretexts.

4) Show Your Work. Attorney and investigator should both document the instructions for the investigation, and the investigator should keep good notes regarding the conduct of the investigation itself.

Conclusion

Despite recent headlines, it seems clear that limited and carefully supervised pretexting remains a valuable and acceptable method for uncovering objective evidence of a target's wrongdoing. Trademark practitioners may therefore take some comfort that reported decisions in this area of practice seem especially inclined to admit such properly uncovered evidence, given the strong consumer welfare policies at the foundation of trademark and unfair competition laws.

James H. (Jay) Sullivan is an associate at Kilpatrick Stockton LLP.

The use of investigations to uncover and evaluate potential infringement and unfair competition claims can be an extremely effective weapon for any trademark owner. Usually, a key to successful trademark investigations rests in having the mark owner's investigator pose as an ordinary consumer ' essentially misrepresenting his or her true identity or purpose to the potential infringer. This practice of attempting to gain information through the arguable use of deception or invented scenario is now commonly referred to as 'pretexting' and has led to controversy in the general corporate context. This article concludes that properly conducted and supervised pretext investigations remain in harmony with both the relevant case law and the policy goals of trademark and unfair competition law.

Considerations in Utilizing Pretext Investigations

Pretexting practices employed in trademark infringement investigations differ from other investigations in that they typically only seek to obtain information that would tend to be available to any ordinary customer of the infringer. Thus, the methods employed by trademark investigators tend to mimic consumer interactions by, inter alia, posing as a customer seeking the potential infringer's goods or services through telephone calls or visits to the infringer's business, or through the simple purchase of the products or services at issue. It is significant, therefore, that when a trademark owner employs such deception, the ultimate goal of the investigation is strictly in line with the same broad policy goals that underlie all trademark and unfair competition law ' namely, consumer welfare. The trademark owner can justify its investigative pretext as necessary to protect the consuming public from deception or confusion in the marketplace, protection that can only be accomplished by stepping into the shoes of the ordinary consumer.

Even so, prudent counsel conducting pretext investigations or employing others to do so must consider the ethical rules and legal precedent governing their behavior in such fact-finding, lest they face disciplinary action or other likely problems, including the exclusion of wrongfully obtained evidence and bad publicity for the client and/or the attorney's firm.

The Model Rules and Pretexting

Several of the ABA's Model Rules of Professional Conduct are arguably implicated in any consideration of pretexting related to trademark investigations. For example, read literally, such Model Rules as Rule 4.1(a) ('[i]n the course of representing a client, a lawyer shall not knowingly … make a false statement of material fact or law to a third person') and Rule 8.4(c) (it is 'professional misconduct' for a lawyer to 'engage in conduct involving dishonesty, fraud, deceit or misrepresentation') would seem to ex-clude all attempts to conduct pretext investigations. Model Rule 4.2 further states that, '[i]n representing a client, a lawyer shall not communicate about the subject of the representation with a person the lawyer knows to be represented by another lawyer in the matter … ' When applied to corporate clients, the commentary to this Rule prohibits contact with managerial employees of the corporate party or an employee 'whose act or mission in connection with the matter may be imputed to the organization' for liability. Moreover, Model Rule 5.3(c)(1) arguably extends contact restrictions to 'nonlawyer' investigators hired or directed by the attorney. Fortunately for the trademark attorney, however, the outlook is not quite so bleak or literal when those Rules are viewed through the interpretive lens of the few cases that have considered them in the context of trademark investigations.

Trademark-Related Pretexting Cases

In Apple Corps Ltd. v. Int'l Collectors Soc'y , 15 F. Supp. 2d 456 (D.N.J. 1998), a compliance investigation found that defendants were not abiding by the terms of an earlier consent decree forbidding them from selling certain collector stamps bearing images of the Beatles. Investigative calls to defendants' sales staff resulted in sales of the prohibited stamps. The callers made no misrepresentations other than as to their 'purpose in calling and their identities,' nor did they ask the sales personnel any questions about defendants' practices or policies. Id. at 474. In response to plaintiffs' subsequent contempt motion, defendants moved for sanctions asserting violations of New Jersey's ethics rules. The court found the investigation was properly conducted and supervised: 'the prevailing understanding in the legal profession is that a … lawyer's use of an undercover investigator to detect ongoing violations of the law is not ethically proscribed, especially where it would be difficult to discover the violations by other means.' Id. at 475. Further, disclosure of the callers' identity and true purpose 'would have been useless to determine [defendants'] day-to-day practices in the ordinary course of business.' Id. The court reasoned that to read the ethical rules so literally in that context 'would serve merely to immunize corporations from liability for unlawful activity, while not effectuating any of the purposes behind the rule.' Id.

A similar result was reached a year later in Gidatex, S.r.L. v. Campaniello Imports, Ltd ., 82 F. Supp. 2d 119 (S.D.N.Y. 1999), where defendants tried to exclude evidence obtained in conversations between their sales clerks and plaintiff's investigators. Denying defendants' motion, the court noted that the investigators never 'tricked or duped' the sales clerks into making damaging admissions, nor 'cause[d] the sales clerks to make any statements they otherwise would not have made.' Id. at 122. The court then discussed the public policy interests underlying trademark and unfair competition law:

[the applicable] ethical rules should not govern situations where a party is legitimately investigating potential unfair business practices by … posing as a member of the general public engaging in ordinary business transactions with the target. To prevent this use of investigators might permit
targets to freely engage in unfair business practices which are harmful to both trademark owners and consumers in general. Id.

The Eighth Circuit and a South Dakota district court seemed to take a different view in Midwest Motor Sports, Inc. v. Arctic Cat Sales, Inc ., 347 F.3d 693 (8th Cir. 2003) and Midwest Motor Sports, Inc. v. Arctic Cat Sales, Inc ., 144 F. Supp. 2d 1147 (D.S.D. 2001). In Midwest, the Eighth Circuit affirmed the lower court's sanctions excluding evidence that had been obtained by defendant's counsel in a pretext investigation for its snowmobile manufacturer/franchisor client, regarding two of the client's franchisees. Though these decisions at first appear to be at odds with those in Apple Corps and Gidatex, a careful reading of both Arctic Cat Sales cases shows that defendant's counsel went well beyond the 'usual consumer transactions' described in those earlier cases. The franchisor's attorneys instructed the investigator to determine whether the targets of the pretext would 'bad mouth' the other franchisee or admit that competitors' snowmobiles were better. Arctic Cat Sales, 144 F. Supp. 2d at 1151. Such direction made it clear that the purpose of the on-site visits was to gather useful admissions for conduct of the litigation itself rather than to merely obtain objective sales information.

Practice Tips

While no trademark-related decisions have issued since the most recent rash of corporate pretexting stories, the cases reviewed here indicate that courts appear willing to allow pretext evidence when that evidence has been obtained without loaded questions designed merely to gain beneficial admissions for the investigating party. The following practice guidelines are therefore advised to help steer clear of missteps in pretext investigations:

1) Be the Consumer. An investigator should adopt the pretext of a normal consumer in an ordinary transaction and should not try to act like an attorney in a deposition.

2) Do Ask and Do Tell. Attorneys should provide specific instructions to the investigator regarding what is and is not legally permissible in an investigation and make clear that the investigator is an agent of the client/firm and that her/his actions can be imputed to the client/firm.

3) Know Your Jurisdiction. As the decisions make clear, judicial precedent and interpretation of the applicable ethical rules vary from locale to locale and should be considered in developing a strategy for the use of pretexts.

4) Show Your Work. Attorney and investigator should both document the instructions for the investigation, and the investigator should keep good notes regarding the conduct of the investigation itself.

Conclusion

Despite recent headlines, it seems clear that limited and carefully supervised pretexting remains a valuable and acceptable method for uncovering objective evidence of a target's wrongdoing. Trademark practitioners may therefore take some comfort that reported decisions in this area of practice seem especially inclined to admit such properly uncovered evidence, given the strong consumer welfare policies at the foundation of trademark and unfair competition laws.

James H. (Jay) Sullivan is an associate at Kilpatrick Stockton LLP.