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General Steel Domestic Sales, LLC v. Chumley

United States District Court, D. Colorado

September 15, 2015

GENERAL STEEL DOMESTIC SALES, LLC, doing business as General Steel Corporation, Plaintiff,
v.
ETHAN DANIEL CHUMLEY; ATLANTIC BUILDING SYSTEMS, LLC, doing business as Armstrong Steel Corporation; GOTTFRID SWARTHOLM; and PRQ INTERNET KOMMANDITBOLAG (LIMITED PARTNERSHIP), doing business as PRQ Inet KB; Defendants,
v.
JEFFREY KNIGHT, Third-Party Defendant

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[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

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          For General Steel Domestic Sales, LLC, a Colorado limited liability company, doing business as General Steel Corporation, Plaintiff: Adam Ross Bialek, Wilson Elser Moskowitz Edelman & Dicker, LLP-New York, New York, NY; Henry L. Solano, Wilson Elser Moskowitz Edelman & Dicker, LLP-Denver, Denver, CO; Patrick Donald Frye, David Samuel Fein, Building Services Group, LLC, Corporate Legal Department, Littleton, CO.

         For Ethan Daniel Chumley, individually, Atlantic Building Systems, LLC, a Delaware corporation, doing business as Armstrong Steel Corporation, Defendants: Craig Ruvel May, Hugh Q. Gottschalk, Kenneth Edward Stalzer, Wheeler Trigg O'Donnell, LLP, Denver, CO; John Mark Baird, Baird Quinn, LLC, Denver, CO; Peter C. Lemire, Leyendecker & Lemire, LLC, Greenwood Village, CO.

         For Compass Bank, Movant: Bill E. Kyriagis, Otten, Johnson, Robinson, Neff & Ragonetti, P.C., Denver, CO.

         For Atlantic Building Systems, LLC, a Delaware corporation, Ethan Daniel Chumley, individually, ThirdParty Plaintiffs, Counter Claimants: Craig Ruvel May, Hugh Q. Gottschalk, Kenneth Edward Stalzer, Wheeler Trigg O'Donnell, LLP, Denver, CO; John Mark Baird, Baird Quinn, LLC, Denver, CO; Peter C. Lemire, Leyendecker & Lemire, LLC, Greenwood Village, CO.

         For General Steel Domestic Sales, LLC, a Colorado limited liability company, Counter Defendant: Adam Ross Bialek, Laura Adriana Alos, Wilson Elser Moskowitz Edelman & Dicker, LLP-New York, New York, NY; Henry L. Solano, Wilson Elser Moskowitz Edelman & Dicker, LLP-Denver, Denver, CO; Patrick Donald Frye, David Samuel Fein, Building Services Group, LLC, Corporate Legal Department, Littleton, CO.

         For Jeffrey Knight, ThirdParty Defendant: Adam Ross Bialek, Wilson Elser Moskowitz Edelman & Dicker, LLP-New York, New York, NY; Henry L. Solano, Wilson Elser Moskowitz Edelman & Dicker, LLP-Denver, Denver, CO.

         For Denver SEO, LLC, Interested Party: John Aaron Atkinson, Atkinson Boyle, PLLC, Littleton, CO.

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         OPINION AND ORDER GRANTING IN PART AND DENYING IN PART MOTIONS FOR SUMMARY JUDGMENT

         Marcia S. Krieger, Chief United States District Judge.

         THIS MATTER comes before the Court on the Objections of Defendants Atlantic Building Systems, Inc. and Mr. Chumley (collectively, " Armstrong" ) (# 336) to the Magistrate Judge's July 30, 2014 Minute Order (# 306) denying, in part, Armstrong's Motions to Compel (# 212, 226), the Plaintiff's (" General" ) response (# 365), and Armstrong's reply (# 372); General's Motion for Summary Judgment (# 486, 490), Armstrong's response (# 495, 498), and General's reply (# 507, 509); Armstrong's Motion for Summary Judgment (# 488), General's response (# 493), and Armstrong's reply (# 508); and General's Motion to Restrict Access (# 516).

         FACTS

         The Court briefly summarizes the pertinent facts here and elaborates as appropriate in its analysis.

         According to the Amended Complaint (# 101), General is a company engaged in the sale and distribution of prefabricated steel buildings. It briefly employed Defendant Ethan Chumley, but terminated his employment in July 2005. Mr. Chumley

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then founded Defendant Atlantic Building Systems, Inc., a business that also engages in the sale and distribution of prefabricated steel buildings in direct competition with General.

         In June 2011, Mr. Chumley purchased the internet domain name generalsteelscam.com , and began hosting a website on it that, General contends, contained false and defamatory material directed at General and its employees. (The website is registered overseas through Defendants PRQ and its principal, Mr. Swartholm, although General contends that Mr. Chumley maintains control over it.) General filed a complaint with the international agency that oversees domain name disputes and was successful in securing a ruling that required Mr. Chumley to turn over the generalsteelscam.com site to General. Mr. Chumley then registered a new domain, steelbuildingcomplaints.com , which General contends repeats the defamatory content that the predecessor website did.

         Mr. Chumley promotes steelbuildingcomplaints.com through a process known as " back-linking." In essence, he (or, more accurately, his agents) creates hundreds or thousands of placeholder websites that consist primarily of links containing variations on the name " General Steel," all of which link back to steelbuildingcomplaints.com or to web pages belonging to Armstrong. The practice of back-linking is designed to manipulate the page-ranking algorithms of search websites such as Google and Bing in order to increase the prominence that the steelbuildingcomplaints.com website will have in search results when a user searches using the terms " General Steel" or its variants. (The practice is also known as " Search Engine Optimization" or " SEO." ) General contends that the prominent placement of steelbuildingcomplaints.com in search results for " General Steel" operates to discourage potential General customers. Mr. Chumley also allegedly purchases advertising space from search companies, so that user searches for " General Steel" or its variants result in the display of ads for Armstrong.

         In December 2012, Mr. Chumley allegedly began calling General's customers, purporting to be an investigator with the Colorado Attorney General's Office, inviting the customers to file complaints against General. Mr. Chumley also allegedly sent letters to General's customers from the " Consumer Advocacy Alliance -- General Steel Investigation Unit," a fictitious entity, inviting customers to file claims or complaints against General.

         Based on these allegations, General asserts six claims: (i) false advertising under the Lanham Act, 15 U.S.C. § 1125(a)(1)(B) against the Defendants; (ii) violation of the Anti-Cybersquatting Consumer Protection Act, 15 U.S.C. § 1125(d), against Armstrong, relating to the registration and use of the generalsteelscam.com website; (iii) common-law libel against Armstrong; (iv) unjust enrichment against Armstrong; (v) civil conspiracy against Armstrong; and (vi) misappropriation of trade secrets, in violation of C.R.S. § 7-4-101 et seq. against Armstrong, relating to these Defendants acquiring and using General's " valuable customer information" and " customer lists and/or databases."

         Armstrong filed an Answer (# 117) in which it asserted counterclaims against General and third-party claims against Jeffrey Knight, General's principal. Armstrong alleges that General maintains a network of websites containing " blatantly false and misleading advertisements, stories, testimonials" and other materials promoting General, including false representations that General (and its subsidiaries) actually manufacture steel buildings, that General was founded in 1928 (rather than in 1995, as Armstrong contends), that it

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manufactures and supplies steel to the U.S. military and auto industry, and so on. (Armstrong contends that, in doing so, General is appropriating the history and corporate identity of General Steel Industries, Inc., a longstanding-but-unrelated entity.) Armstrong contends that, through these false representations, General induces customers to patronize it instead of its competitors. Armstrong also alleges that General's own website contains false or misleading promotional information, including references to it repeatedly receiving " Best In the Industry Awards" that do not actually exist, or falsely identifying prominent companies as being General's customers.

         Armstrong also alleges that General has misappropriated Armstrong's trademarked logo. In certain electronic brochures, General includes a modified version of Armstrong's logo, replacing the phrase " Armstrong Steel" with the phrase " Fraudulent Steel." Armstrong contends that General also uses Armstrong's mark on its various affiliated websites, such as in advertisements displaying Armstrong's logo and reading " buy an Armstrong Steel building!" ; in actuality, these advertisements, when clicked, redirect the user to General's website. (Armstrong also alleges that it also holds a copyright on the logo, and that General's use of the logo also constitutes copyright infringement.)

         Armstrong asserts two claims: (i) copyright infringement, in violation of 17 U.S.C. § 501 et seq., against both General and Mr. Knight; and (ii) false advertising, in violation of 15 U.S.C. § 1125(a)(1)(B), against both General and Mr. Knight.

         General (# 486) and Armstrong (# 488) both seek summary judgment on the claims asserted against them. The Court will address the specific arguments raised in those motions more completely below. Separately, there appears to be an outstanding discovery dispute, in which Armstrong filed Objections (# 336) pursuant to Fed.R.Civ.P. 72(a) to an order by the Magistrate Judge denying Armstrong's motions to compel (# 212, 213, 226) responses to certain interrogatories.

         ANALYSIS

         A. Discovery issue

         The Court begins with Armstrong's Objections to the Magistrate Judge's ruling. At issue are three interrogatories posed by Armstrong to General: (i) " Interrogatory 2," a request for the " names, home address, and home telephone and cell number" of " all individuals employed by General Steel in an administrative or sales position" from 2009 to 2013; (ii) " Interrogatory 10," a request for the names, address, and telephone number of " every customer who complained about alleged misrepresentations and/or deceptive or fraudulent advertising or practices by General Steel" from 2009 to 2013; and (iii) " Interrogatory 1," a request that " with respect to the screen shots disclosed by [Armstrong]" in Armstrong's own production, that General state whether the " such screen shot was authored and/or posted on the internet either by General Steel or its agents," that it " state . . . the identification of all letters, facsimiles, and emails between General Steel and its employees regarding such advertising, customer testimonials or blogs" ; that it " state . . . the identification" of the same information as between General and " third parties" ; that it " state . . . the identification of any false information or fabricated customer testimonials or blogs with regard to General Steel . . ., General Steel's charitable contributions, industry awards given to General Steel, and the number or identity of General Steel's current or former customers" ; and that it " state . . . the identification of all reports" concerning " the traffic and/or

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number of links from such advertising to [a list of specific websites]."

         General refused to answer the interrogatory concerning its employees on grounds of relevance, produced certain records of customer complaints incident to a prior ruling of the Court but opposed producing the remainder as irrelevant and overly burdensome, and opposed the third interrogatory as vague, overbroad, unduly burdensome, and compound.

         Armstrong moved to compel (# 212, 213, 226) responses to these interrogatories. The Magistrate Judge heard those motions, among many others, on July 30, 2014 (# 306). According to the transcript of that hearing (# 259), the Magistrate Judge denied the motions with regard to Interrogatory 1 without hearing any argument from the parties; she merely stated " I think it's way overbroad. I'm not going to have the plaintiffs going through 9,419 pages looking at stuff that's clearly irrelevant to respond to it. So that is - - that's denied on the fact that it's overbroad." Similarly, as to Interrogatories 2 and 10, the Magistrate Judge denied the motions without hearing argument, simply stating " General Steel's objections are sustained on all of the other issues that were raised. I think [these] interrogatories . . . are uniformly overbroad, irrelevant, and a blatant fishing expedition to obtain information about a competitor for purposes unrelated to the case." Armstrong then filed the instant Objections (# 336) to that ruling.

         Rulings on non-dispositive issues by a Magistrate Judge are reviewed by this Court pursuant to Fed.R.Civ.P. 72(a), and will be reversed only if they are " clearly erroneous or contrary to law." [1] 28 U.S.C. § 636(b)(1)(A); Hutchinson v. Pfeil, 105 F.3d 562, 566 (10th Cir. 1997); Ariza v. U.S. West Communications, Inc., 167 F.R.D. 131, 133 (D. Colo. 1996). Accordingly, Armstrong's Objections will be overruled unless the Court finds that the Magistrate Judge abused her discretion or, if after viewing the record as a whole, the Court is left with a " definite and firm conviction that a mistake has been made." Ariza, 167 F.R.D. at 133, citing Ocelot Oil Corp. v. Sparrow Indus., 847 F.2d 1458, 1464 (10th Cir. 1988).

         The Court finds no clear error or incorrect application of law in the Magistrate Judge's ruling. It agrees with the Magistrate Judge that Armstrong's request in Interrogatory 2 for the names, addresses, and phone numbers of all of General's sales and administrative employees is indeed overbroad and a " fishing expedition." Armstrong argues that it " could contact former employees informally to determine whether they had any knowledge or information about" General's allegedly false statements, or that it could use the list of employees " to refresh a deponent's mind[ ] about whether there were other employees that might have knowledge about the topics above." Armstrong is free to inquire of General's witnesses about the identities of other employees at General who might have knowledge of particular statements by General, but a wholesale request for the

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identities of all of General's employees in certain categories, simply in the hopes that interviewing them might lead to additional discoveries, is indeed an overbroad request properly characterized by the Magistrate Judge as a fishing expedition.[2]

         Interrogatory 10 presents a somewhat closer question. Armstrong requested information about customers who complained to General about " alleged misrepresentations and/or deceptive or fraudulent advertising or practices" by General over a certain time frame (along with certain subsidiary information relating to each complaint). Facially, this request might be pertinent to a claim by Armstrong that General has engaged in false advertising by representing on its website that it has a history of " 100% customer satisfaction" and " zero unresolved customer issues." However Interrogatory 10 is limited to specific types of complaints that it seeks - only complaints in which a customer has complained to General about " misrepresentations" or " fraudulent advertising" by General. In a previous discovery request, Armstrong already obtained discovery of all customers who complained about General increasing prices on customers after entering into a contract with them (and abandoned a request for discovery of more general customer complaints concerning the quality of General's products). See generally (# 179).

         The Court finds that the Magistrate Judge did not err in denying Armstrong's motion to compel the information requested in Interrogatory 10. Armstrong's request is predicated on General's advertising that it has a history of " 100% customer satisfaction" and " zero unresolved customer issues." The most reasonable readings of those advertising messages is that General is asserting that its customers are completely satisfied with the products and services that General provides, not a representation that General's customers are satisfied with General's advertising. (Arguably, there may be customers who purchased a particular product or service from General because of General's advertising, only to be dissatisfied with the result, but once again, that dissatisfaction would ultimately trace back to the quality of General's products or services.) Thus, the universe of customer complaints that would disprove General's promotion of complete customer satisfaction would be comprised primarily of customers who were dissatisfied with the products and services General delivered, not customers whose sole basis of complaint to General was about its advertising. In such circumstances, it would not be inappropriate for the Magistrate Judge to conclude that the probative value of customer complaints about advertising have relatively little probative value. The record as a whole reflects that General had previously established that complying with a request of this type would require it to search more than 2,000 customer files, most of which are kept solely in paper form. Under the circumstances, where the probative value of the requested information is fairly low and the burden of producing it was significant, it was not inappropriate for the Magistrate Judge to deny the motion to compel a response to such an interrogatory.

         Finally, the Court agrees with the Magistrate Judge that no response to Interrogatory 1 was required. Besides being

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clearly compound (requests for information about General's charitable contributions have no apparent connection to requests about General's web traffic data, which has no apparent connection to the identity of the author of various web pages, among others) and occasionally incomprehensible, the interrogatory is overbroad. It is apparently undisputed that the " screen shots" that the interrogatory inquires about consists of nearly 10,000 pages containing approximately 14,000 individual articles or blog posts. Although it may be appropriate for Armstrong to inquire about the authorship of particular documents that contain particular false representations allegedly made by or on behalf of General, it was appropriate for the Magistrate Judge to conclude that some 10,000 requests of this type were overbroad. For example, in Armstrong's reply in support of their Objections, it tenders a 7-page sample of the articles and blog posts that are the subject of Interrogatory 1. Of the six articles shown, four are highlighted to indicate that the primary objectionable content of the article is a reference to General being a " manufacturer" of steel buildings. If Armstrong's intention is to show that General falsely advertised itself as a " manufacturer" of steel buildings, it might be appropriate for it to select several examples of General doing so and inquire about the authorship, etc. of those exemplars; it is a different matter to require General to identify the author of more than 10,000 separate articles, many of which are likely to be effectively identical. Such a request is clearly overbroad. Although the Magistrate Judge could have exercised her discretion to require Armstrong to cull its request to a manageable size, her decision to deny the motion to compel outright on the grounds of overbreadth and burdensomeness was not an abuse of her discretion.

         Accordingly, the Court overrules Armstrong's Objections and affirms the Magistrate Judge's denial of its motions to compel.

         B. Summary judgment motions

         1. Standard of review

         Rule 56 of the Federal Rules of Civil Procedure facilitates the entry of a judgment only if no trial is necessary. See White v. York Intern. Corp., 45 F.3d 357, 360 (10th Cir. 1995). Summary adjudication is authorized when there is no genuine dispute as to any material fact and a party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a). Substantive law governs what facts are material and what issues must be determined. It also specifies the elements that must be proved for a given claim or defense, sets the standard of proof and identifies the party with the burden of proof. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Kaiser-Francis Oil Co. v. Producer's Gas Co., 870 F.2d 563, 565 (10th Cir. 1989). A factual dispute is " genuine" evidence presented in support of and opposition to the motion is so contradictory that, if presented at trial, a judgment could enter for either party. See Anderson, 477 U.S. at 248. When considering a summary judgment motion, a court views all evidence in the light most favorable to the non-moving party, thereby favoring the right to a trial. See Garrett v. Hewlett Packard Co., 305 F.3d 1210, 1213 (10th Cir. 2002).

         If the movant has the burden of proof on a claim or defense, the movant must establish every element of its claim or defense by sufficient, competent evidence. See Fed.R.Civ.P. 56(c)(1)(A). Once the moving party has met its burden, to avoid summary judgment the responding party must present sufficient, competent, contradictory evidence to establish a genuine factual dispute. See Bacchus Indus., Inc. v. Arvin Indus., Inc.,

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939 F.2d 887, 891 (10th Cir. 1991); Perry v. Woodward, 199 F.3d 1126, 1131 (10th Cir. 1999). If there is a genuine dispute as to a material fact, a trial is required. If there is no genuine dispute as to any material fact, no trial is required. The court then applies the law to the undisputed facts and enters judgment.

         If the moving party does not have the burden of proof at trial, it must point to an absence of sufficient evidence to establish the claim or defense that the non-movant is obligated to prove. If the respondent comes forward with sufficient competent evidence to establish a prima facie claim or defense, a trial is required. If the respondent fails to produce sufficient competent evidence to establish its claim or defense, then the movant is entitled to judgment as a matter of law. See Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).

         2. General's motion

         The Court begins with General's motion, which seeks summary judgment on Armstrong's counterclaims.[3]

         a. False advertising

         Armstrong's counterclaim against General for false advertising is asserted under the Lanham Act, 15 U.S.C. § 1125(a)(1)(B). That statute prohibits " any person who, on or in connection with any goods or services . . . uses in commerce any . . . false or misleading description of fact . . . which in commercial advertising of promotion misrepresents the nature, characteristics, qualities or geographic origin of his or her or another person's goods, services, or commercial activities." Armstrong contends that General made numerous false representations of fact in numerous contexts: (i) that it made thousands of " blog posts" or published content on internet web sites falsely representing that it was a " manufacturer" of steel buildings, that it has been in existence for more than 50 years, that it supplied steel to the U.S. military during World War II, and so on; (ii) that it sponsored " pay-per-click" advertisements on search engines that stated that it was a manufacturer of steel buildings; (iii) that it created internet " directory listings" that identify it as a manufacturer of steel buildings; (iv) that it made various false statements on its own website to the effect that it had a " history of 100% customer satisfaction" and " zero unresolved customer issues" and published customer testimonials containing false material; (v) that it published an electronic " brochure" entitled " Fraudulent Steel" that ....; and (vi) that its customer representatives made various false representations about General and Armstrong.[4]

         To establish a Lanham Act claim such as this, Armstrong must show: (i) that General made materially false or misleading representations of fact; (ii) in connection with its commercial advertising;

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(iii) in commerce; (iv) that such representations were likely to cause confusion or mistake as to the characteristics of its goods or services; and (v) that such use caused injury to Armstrong. World Wide Ass'n of Specialty Programs v. Pure, Inc., 450 F.3d 1132, 1140 (10th Cir. 2006).

         (i) Agency

         It is undisputed that the content comprising the allegedly false " blog posts" and " pay-per-click" ads were not created by General itself. Rather, General contracted with an entity called JEMSU (or sometimes " Denver SEO" ) by which JEMSU performed " search engine optimization" designed to heighten General's ranking in internet search engines like Google and Bing. " Search engine optimization" services generally involve creation of hundreds or thousands of websites, each containing numerous short pieces of written content, generally no more than a paragraph or two, that link back to the website being promoted. Here, JEMSU's employees (or contractors it hires) wrote the pieces, each containing one or more links that point back to General's website. The objective is for this network of websites to appear to the algorithms used by search engines to be legitimate, independent sources of content about General. In this case, it is undisputed that, among the thousands of articles published by JEMSU on General's behalf are many that make a variety of false statements about General - that it manufactures steel, steel buildings, and products like automobile rims (when, in actuality, it manufactures nothing and only serves as a seller of others' products), that it has storied history dating back more than 50 years (when, in fact, that history belongs to a different entity with a similar name), and so on.

         General argues that JEMSU operated as an independent contractor, creating and publishing the content without any control or direction from General. Thus, General argues, it cannot be held liable for any false representations contained in content published by JEMSU.

         As a general rule, a master is subject to liability for torts[5] committed by its servant if the servant is acting in the scope of its designated authority; by contrast, a master is not typically liable for tortious acts committed by its servant if the servant is acting outside the scope of authority. See Restatement (Second) of Agency, § 219. General argues that JEMSU was not its agent/ servant, but rather was an independent contractor. In determining whether a person or entity is a servant or independent contractor, the Court considers numerous factors, including: (i) the extent of control which the master may exercise over the work; (ii) whether the person performing the work is engaged in a distinct occupation; and (iii) whether the work is typically done under direction or completed independently, among several others. Restatement (Second) of Agency, § 220. The right of the master to control is the most important of these factors and is often determinative. Id. The Restatement explains that a right to control sufficient to create a master-servant relation can often appear attenuated, and may even arise where there is " an understanding that the employer shall not exercise control" over the other party. It uses the example ...


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