Friday, July 17, 2015

Cold Steel v. CRKT, Part II

DISCLAIMER: It is VERY early in the process, so any analysis at this point is really just trying tell you what to expect in the future.  There is a lot of things that still have to happen in the suit.  This is just a primer on the law and a brief look at what we know.  After checking with the right folks and doing some legal research, I think I am ready to analyze and comment on the merits of Cold Steel suit. As a reminder, I am a criminal lawyer and I do not practice civil or intellectual property law. The law is very specialized and complex, so my analysis here may be off base. If you practice intellectual property law or if you think I made some errors, as always, please comment (and for RD's sake as well as everyone elses, I NEVER delete a comment, even spammy ones, Blogger's spam filter may catch them, but I don't manually filter them at all).  Furthermore, I do not solicit or accept clients of any kind, criminal or civil. This is not legal advice, just analysis of a pending case.

Preliminary Matters

One thing that I think needs to be made clear that no commentator on CNN or MSNBC discloses--commentators are always at disadvantage because all we have are public records and filings. Virtually every commentator on CNN or MSNBC is in this same position when they are doing pretrial analysis, they just don't tell people. If legal commentators were privy to evidence held for trial, depositions, and interrogatories (pretrial spoken and written questions), the analysis would be better, but that stuff is usually confidential.

I reached out to both Cold Steel and their lawyer and asked for a comment.  I also invited their lawyer to come on to the podcast and talk about the suit.  In both instances the lawyer indicated that he had to check with Cold Steel first.  I think you need to know that Cold Steel's lawyer has been nothing but helpful and gracious.  Unfortunately, I have heard nothing back regarding a comment or a podcast guest.  I also reached out to CRKT and they told me:

"CRKT takes all legal issues seriously and our legal team is handling the case."

First some background. This is a federal suit with parallel state claims. The premise of the suit is that CRKT, through false advertising about the strength of its lock safeties, gained a competitive advantage over Cold Steel. This claim is filed pursuant to a federal statute governing false advertisement, among other things, called the Lanham Act. You can find the text of the statute here. You can find Cold Steel's complaint here.  The US Supreme Court has never address false advertisement under the Lanham Act directly and so the elements listed below are really culled from a variety of different federal district courts.  Until the US Supreme Court addresses Lanham Act litigation there is a large amount of inconsistency about how the elements are applied.  Finally, the elements themsevles, though cited in a wide range of cases, are not derived from the Lanham Act itself but from case law.   

Because the case is so early in the proceedings, a lot of this analysis is about telling you want to look out for in the future.  I split up each section into a bit of the law followed by attempt to figure out how the law is or will be applied in this case.  

Just so everyone is on the same page, there are a few legal terms I should define.  The moving party, or the party that initiated the suit (in this case, Cold Steel) is called the plaintiff.  The non-moving party, or the party being sued (in this case, CRKT) is called the defendant.  Damages is always measured in terms of money losses.  An injuction is a court order instructing a party to do something or refrain from doing something.  The fact finder is either the judge or the jury.  Elements are the parts of a claim that the moving party must prove in order to be successful.

There are quite a few hoops to jump through before you get to a trial in a federal civil case. These cases are monstrously expensive--billions of dollars are at stake some times. They are insanely complex and long--I know of one IP case that had over a million exhibits and took most of a decade to get to trial and will probably take another five years to finish the appeals. There are three main parts to the case--jurisdiction, summary judgment, and the merits. I will take them in turn, explaining what is happening procedurally and what it means for the case.

1. Jurisdiction and Venue

Before the case can start in earnest, in major cases, the parties fight over where the lawsuit is filed. There are two things to fight over--jurisdiction and venue. Jurisdiction is a necessary precondition for any legal cases--without it the case just dies. Venue is the proper place for a case to be heard. Think of it this way--in baseball you have to have a diamond to play the game, without it you aren't playing baseball. That's like jurisdiction. Also in baseball, by tradition, one team is the home team and the other is the away team. So in a game between the Red Sox and the Royals, it will be played either in Boston or Kansas City. It doesn't NECESSARILY have to be played there, but it will be because of tradition. Either Boston or Kansas City is the proper place for those two teams to play. That's like venue. There is a third placement of suit requirement, but it is so rarely used and the standard is so high, it isn't worth mentioning.

In very big suits, like the Apple v. Samsung suit, the parties jockey over jurisdiction and venue, trying to use legal arguments to get a case moved to a court that is seen as favorable to their side. Often times, these major lawsuits will end up in some small federal district court because that court's juries and/or judges are favorable to one side or the other. Juries in certain parts of the country just don't award big money damages. So tobacco companies want their suits heard there and they use jurisdiction and venue arguments to move the cases to those locations. These tactics also make it hard on small litigants, as they have to fly to remote places and pay for accommodations making the suit even more expensive than it would be. Moving cases around like this is called forum shopping.  It sounds like a lawyer trick (because it is), but among high end civil litigants its something to be expected and basically par for the course. 

What to Look For/What This Means in this Case  

Cold Steel filed the suit in the Central California Federal Court, which is their home court, as they are headquartered in Ventura, California. This could be because they don't want to play the forum shopping game or because they don't have enough money to play the forum shopping game.  We don't have access to Cold Steel's financial records, so any claim on my part related to motive would just be a guess.  

2. Summary Judgment Under 12(b)(6)

As a way to cut down on the cases that go to trial and to prevent the court from wasting time on frivolous claims, federal civil suits must pass through the filter of 12(b)(6), or Federal Rule of Civil Procedure 12(b)(6), full text here. This rule operates like a bouncer at a night club, it keeps out the riff raff. Often civil cases turn on what happens in a hearing on a motion for summary judgment filed pursuant to 12(b)(6). If the case survives, the non-moving party offers a better settlement. If the case doesn't survive, the non-moving party wins.

The standard for a motion for summary judgment is basically this--if no rational finder of fact could find in favor of the moving party, assuming all of the facts in its favor, the case is dismissed or thrown out of court. This standard is a bit complicated because it has two parts. First, the court has to assume all of the reasonable claims regarding facts made by the moving party (in this case Cold Steel) are true. Then, once it has done that, it needs to figure out if there is ANY POSSIBLE WAY the moving party could win. It sounds like a high standard and it is. The role of a jury is sacroscant in our court system and taking something away from a jury is something judges are very hesitant to do.

By the same token, anyone with a few hundred dollars can file a suit and so there has to be filter. For example, if someone filed a claim suing someone for damages and the non-moving party was dead at the time the suit alleged wrongdoing--that would be a situation in which, even if you assume all of the facts in the moving party's favor, no rational finder of fact could side with the moving party.

This is where all of the action is in federal civil cases. Summary judgment and the mandatory mediation resolve the VAST majority of cases. This is where lawyers put all of their effort. The strategic reasons are simple--for the moving party, surviving a 12(b)(6) challenge provides a huge amount of leverage and for the non-moving party, its an outright win.

What to look for:

Given that I would be tremendously surprised if CRKT didn't file a motion for summary judgment. Its almost an automatic move. So with that, let's look at the merits of the case.

3. On the Merits

After all of this legal maneuvering, the court will finally reach the merits of the claim itself. Jurisdictional challenges and motions for summary judgment are procedural preliminary matters. The merits are the actual substance of the claim (note, of course, that a summary judgment motion deals with the merits as well, but from a truncated point of view).

We now move on to the elements or parts of false advertising itself. In order to establish a claim under the Lanham Act for false advertising, Cold Steel must show the following:

1) the defendant made a false or misleading statement of fact in a commercial advertisement; 

2) the statement either deceived or had a capacity to deceive a substantial segment of potential consumers; 

3) the deception is material in that it is likely to influence a consumer's purchasing decision; 

4) the product is sold through interstate commerce; and 

5) the plaintiff has been or is likely to be injured by the statement.

These elements, though coming from historical cases, are used to decide matters pursuant to 15 USC 1125. Let's deal with these one at a time because, like all legal standards, they use regular words that are defined in a very particular way (or as lawyers call them--they are terms of art).

Element Four is not a big deal. It is a necessary precondition for federal involvement. Congress's powers to pass legislation are limited or enumerated by the Constitution and one of the ways Congress can act is if the matter involves interstate commerce, so the Lanham Act, like all legislation from Congress, needs to be born from one of the enumerated powers and here that power is the power to regulate interstate commerce. No one could dispute the fact that CRKT sells products nationwide and that is sufficient to show prove the interstate commerce element.

a. Element One

Here the analysis focuses on the statement itself and case law has broken statements down into two categories--literally false statements and true but misleading statements. They have different tests so they need to be explained separately.

A literally false statement, the target every false advertisement claim is aiming for for reasons I will explain in a second, is relatively rare. For example, in a sports car ad they claim that their car can go faster than the competition. This is something that could be a literally false statement. If you are marketing the new Hyundai two seater and you claim that it is faster than the Bugatti Veyron, well, that is something that be tested at the track. Literally false statements do not have the same problems with other elements that misleading statements do. For example, they do not, necessarily have to prove Element Three. This is almost always true when the literally false statement is made in the context of a named comparison, like the Hyundai v. Bugatti comparison. The courts assume materiality in these cases because one party is lying about the other party's product.

Misleading statements are different. Misleading statements are statements that are true in only the most minimal sense. For example, if a cereal ad said that the cereal contained "all of the necessary vitamins and minerals for a healthy diet" but in fact contained only tiny amounts of each vitamin and mineral, amounts so small they have no dietary impact it would be literally true but misleading. If the claim is one of misleading ads, the plaintiff needs to prove Elements Two and Three as well.

A few other things to note about Element One. First, the ad language is taken in context. Its not analyzed in a vacuum. For example, if an ad had two bottles of soda one with Coke's colors and the other with Pepsi's colors, but no words, that context could give rise to a "statement" under the Lanham Act. Second, language is given its everyday meaning. Words are defined as folks use them. For example, if a tax preparer says that it has "instant rebates" that means something different than "tax preparation loans" even if the small print and legal mumbo jumbo tells the consumer that these two things are the same thing. Third, puffery is not considered false advertisement. Puffery is the legal term for bragging about one's product without any specifics. For example, if one pizza chain says "Better Ingredients, Better Pizza" that's most likely puffery. However if they claimed their pizzas were "Better because they are 100% organic" that is something less likely to be deemed puffery. The terms are too vague to be defined sufficiently for comparison. They are also obviously marketing speak.

What to Look for

I don't think this is a case of a literally untrue statement because the wording is sufficiently imprecise to verify. I think the court will analyze this as a misleading statement.

In this case I think we need to start with the language itself--"virtual" and "fixed blade". I think that the word "virtual" here is important because it makes the ad language something less than a direct comparison or claim. Its a step away from "Better Ingredients." "Better" invites, by definition, a direct comparison between two things. "Virtual" means that something is like, but not exactly the same, as something else. It also does not describe how strong the relational similarities are. It sounds lawyerly, but I think, given the case law here, that "virtual" could be a big issue in deciding the case.

Second, I think that the Cold Steel suit and most online analysis of the case, assumes a specific definition of "fixed blade", namely something with a full tang or a knife designed with durability in mind. But that's not the right analysis. Fixed blade knives could many any number of things--a full tang knife, a stick tang knife, a decorative art knife that doesn't fold, anything...but I also think we, as knife nuts, have a specific conception of "fixed blade" knife that ordinary language does not have. "Fixed" generally means to hold in place, here the courts consult the dictionary to figure out ordinary meaning, and if that is the definition they find operative, then I think Cold Steel has real problems. A locking folder IS a fixed blade. The blade is "fixed" in an open position. There is nothing inherent in the language of "fixed blade" that describes strength or an essential property of resisting force. That's how Cold Steel differentiates between folders and fixed blades, but that is not necessarily how the majority of people, of which knife knuts are a small percentage, uses these terms. And even if the term "fixed blade" is given its knife knut meaning, its not clear to me what fixed blade they are talking about. I am sure there are fixed blade, stick tang knives that don't offer much advantage in the way of strength.

And finally, I am not sure that CRKT's language doesn't just constitute puffery--bragging. Its a lot more like "Better Ingredients" than it is HR Block's "Instant Refund" language. One is saying "We are awesome" and the other is outright tricking the consumer. And adding in the word "virtual" matters because it makes the comparison even less forceful than "Better Ingredients."

b. Elements Two and Three

These elements often collapse in on each other in most cases. They are treated as separate things because, in the case of literally untrue statements, materiality is assumed.

First, deception cannot be assumed. Just because the judge or jury finds the language tricky, that is not enough. The plaintiff must prove that someone was deceived or consumers are likely to be deceived and that deception influences purchasing decisions. Often, this is done by use of a survey.

Generally, survey data requires about 20% of surveyed consumers to be tricked. That's a lot of folks. Additionally, its not just that the consumers were tricked and that they bought the competition. In fact in the Better Ingredients case, the plaintiff (it was Pizza Hut v. Papa Johns) did have the 20% number, but the survey failed to distinguish between consumer reliance on the advertisement and prior consumer experience as motivation for the purchasing decision. The court reasoned that the survey failed because, well, consumers could have used their own experience to tell them Papa Johns was better.

What to Look For

Suffice to say, proving this element is a complex undertaking and at this point there is ZERO in the Cold Steel case to show that they have done anything like this.  Look for either survey information and/or financial data.  As I said before, we are not privy to all of the information and they may have survey data in their back pocket. For now though, we don't have it and analysis pretty much ends here.  If there is neither survey data nor financial data, the ballgame is over for Cold Steel.

c. Element Five

Here the court looks at actual data, unless, again, the statement is literally untrue and a named comparison. In that case, damage is assumed though the monetary components still have to be proven to recover actual cash.

A few points about damage. First, no court, ever, has held that the purpose of false advertising is to protect consumers. In fact, courts have ruled that consumers CANNOT sue for false advertising, only business competitors can. This goes directly to Mr. Thompson's statement about the motives for the suit. Caring about his customers fingers, from the perspective of the Lanham Act, might be good press but it is irrelevant. Courts also look at both monetary loss and damage to reputation. Finally, in rare instance of willful deception or extraordinary circumstances, which is exceedingly hard to prove, courts will award attorneys fees as well as damages, which is a huge thing, as the case could result in a complete windfall for the plaintiff. It is entirely possible for false advertising cases are resolved with just an injunction barring the use of the problematic ad and that no money is awarded.

What to Look For

This is not an named comparison nor do I believe it to be a literally untrue statement, so Cold Steel is going to have to show some financial data. Looking at the complaint again, we have nothing like this. As I said before, Cold Steel may have a bunch of stuff we don't know about, but they do not even reference actual monetary losses in the complaint. If they don't have financial data at all, like with the lack of proof of deception, the case will probably die.

3. Conclusion

At this point Cold Steel's pleadings are really insufficient to make out a claim of false advertising, but that is to be expected at this point in the proceedings. Its not that they couldn't make out such a claim in the future, but simply that what they have filed thus far does not match up with the elements even in the broadest sense. The complaint basically addresses only two of the elements, the first one (and only in a minimal fashion) and the fourth one, and does nothing at all with the other three.  If they want to avoid a 12(b)(6) judgment against them Cold Steel needs more. They may have all of the legal ammunition they need and they aren't releasing because of strategic reasons or filing deadlines specific to the court, but right now we don't have enough information.

Its important to note that this is very early in the process. The complaint is merely the mechanism to start the legal process. They don't HAVE to discuss all of the elements in the complaint, but it seems wise for them to do so if they can. If this is all we ever get, that's one thing, but as the case develops its possible that Cold Steel has both survey data and financial data ready to go. If they do and if they release it to the public, I'll revisit the issue.  For now this case is incomplete.  Maybe its just part of the publicity stunt angle that some businesses pursue or maybe they are waiting.  We'll have to see.


  1. Screw Cold Steel, I'll never buy any of their products as a result of this.

  2. Nice analysis, Tony. Needless to say, but it will be interesting to see how this plays out. I can only hope they considered the elements of the cause prior to filing suit (for their sake!).

  3. Agreed, fantastic job on the analysis, breakdown and the law school 101 stuff. This is a great public service for the knife community.

  4. Thanks for this - for some sick reason, I find this detail-oriented procedural stuff fascinating.

    It sure seems to me that elements 2 and 3 will be VERY hard to prove. If you surveyed knife owners, I think a huge majority would say that, from experience, they are not misled by the term "virtual fixed blade."

  5. Nice job. Cold Steel should pay you for giving their lawyers a framework to move forward with!

    They really don't have to plead the elements in the complaint? In my corner of civil, state court legal practice, if you want to survive a motion to dismiss, you'd better plead with specificity so the defending party is on notice of what the hell you're claiming.

    I thought Cold Steel was a novelty weapons maker before seeing their offerings on your site. I'd have never considered them for quality, after looking between their baseball bats apparently designed for maximum street beating carnage and their boomerang offerings.

  6. I'll ask the same devil's advocate question as last time: If Cold Steel presented at least a prima facie case, would it still be automatically "bad for everyone" for them to have filed it?

    1. I assumed in the first piece that they had made such a showing. So yes it would still be bad for everyone.

  7. Wow, thanks for this -- I hope the community appreciates what a labor of love it is for a lawyer to write up a lengthy legal analysis IN HIS SPARE TIME.

    Couple very quick thoughts. Everything I write is subject to the same disclaimers as Tony's post:

    1) A Rule 12(b)(6) motion to dismiss for failure to state a claim is a totally different thing from a Rule 56 motion for summary judgment.
    Motion to dismiss just challenges the face of the complaint: assuming that everything the complaint alleges turns out to be true, then is it plausible that the plaintiff would prevail? If the plaintiff survives the motion to dismiss, then the case proceeds to pretrial "discovery," which can be a long and expensive process: each side gets to subpoena documents from its opponents, conduct depositions of witnesses, and the like.
    After discovery, but before trial, is the normal time for filing a motion for summary judgment. Such a motion no longer asks merely what the complaint has alleged, but what it now looks like the parties might actually be able to PROVE at trial, on the basis of what the parties and the court have learned through the discovery process.
    The standard for summary judgment is that it is proper (or, to put it another way, a trial is improper) if the movant can show that no reasonable jury could find for the nonmovant party.

    2) The pleading standard for a plaintiff to survive an initial 12(b)(6) motion to dismiss in federal court has gotten stiffer in the last few years. It's no longer enough for a plaintiff to argue that there's "some" set of facts, consistent with his allegations, under which defendant would be liable. Rather, plaintiff has to show that (assuming everything he alleges is true) it is "plausible" that the plaintiff will be able to recover.

    3) I agree that standing is a likely weak point here. I am surprised that the complaint does not appear to include any factual allegations on this point; not even expressing a belief that Cold Steel has lost sales based on CRKT's representations.

    1. Thanks for the correction on the 12(b)(6) v. summary judgment thing. These are things us criminal guys just dream about being able to do.

    2. I was wondering how Cold Steel has standing while reading this post. Cases dealing with the Lanham Act are outside my knowledge, but all I could think was, isn't the whole point of marketing slogans to gain a competitive advantage? "Virtual fixed blade" makes no mention of superiority to the competition, does not reference Cold Steel in any way, and is, by its plain meaning, advertising like-fixed-blade (not literal fixed blade) performance. Like I said, I don't know much about the Lanham Act, but I just don't see why Cold Steel has standing.

  8. Am I the only one who thinks the branding change from "World's strongest, sharpest knives" to "anytime, anywhere" is suspect?

    1. Nope, you're not the only one. I think it's pretty clear why they made that change.

      I suspect if a knife company wanted to, they could sue Cold Steel for damages during the years they used the "Strongest, sharpest" branding. Not that I want that to happen, but just saying.

  9. I wouldn't say it's "suspect;" I'd say it probably reflects an effort at consistency with the position they're taking in the lawsuit.

    If one would have torn CS a new one for keeping the "strongest, sharpest" slogan while pursuing this suit, then it seems unreasonable to act like they were doing something shady by changing it.

    One addendum to my comment above:

    4) The OP says "The US Supreme Court has never addressed false advertisement under the Lanham Act directly." While I wouldn't necessarily say that's wrong (given the "directly"), the US Supreme Court did hand down a major decision last year on the standing requirement for Lanham Act false advertising claims, Lexmark Int'l, Inc. v. Static Control Components, Inc. (2014). I would expect CS's and CRKT's attorneys will be studying Lexmark closely. Here is the opinion (hopefully the single link won't land this comment in the spam filter):

    1. Well, this is just a matter of my legal research skills, when deprived of Lexis, being rusty. Human tagged searches are 1000% better than google. I looked through the Lexmark case and it has to do with standing, which in turn, has to do with proving damages. If anything, the Lexmark case makes it harder for Cold Steel. The case also settles, once and for all, that consumers cannot sue for false advertsing. In other words, the case does not change this analysis, but makes the standard for suing clearer.

  10. Thanks for this, Tony. Did you mean a "low threshold" here. Instead of "high"?:

    "Then, once it has done that, it needs to figure out if there is ANY POSSIBLE WAY the moving party could win. It sounds like a high standard and it is. The role of a jury is sacroscant in our court system and taking something away from a jury is something judges are very hesitant to do."

  11. This is a great summary. Thank you.

    If CS is successful, does this open the door for prostitutes to sue the “virtual” sex industry?

    I have a question regarding how damages could possibly calculated if the courts ultimately decided that CRKT was falsely advertising. How could CS possibly show that the misled customers would have been CS customers had it not been for the false claims? A pocket knife regardless of lock strength is not a direct substitute for a fixed blade. Assuming CRKT misled customers, how could CS prove that CRKT did not steal market share from other folding blade manufactures? I find it much more likely that CRKT wooed Kershaw customers over CS. Even if we assume that CRKT only stole market share from fixed blade makers, how would the courts assess CS losses?

    You can’t possibly assume that every customer “duped” by CRKT would have been a CS customer. If that’s the case, then you’d have to determine the total $ CRKT received as a part of their false advertising and multiply that by CS market share? How much could that possibly be?

    And to your point about the world “virtual”, I would love to see a polling of CRKTs customers to see if they in fact believed their folding blades were actually fixed.

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