We have progress

A first response in the cashmere conflict: a motion to dismiss (PDF) three of the seven counts in the complaint, filed on behalf of the U.S. defendants only. (In other words, VVG, Designer Yarns, and Debbie Bliss are not part of this motion, but if the moving defendants are successful this may benefit them as well.)

These defendants are asking the court to dismiss the counts of explicitly false advertising contrary to the Lanham Act, injury to business and property under RICO, and conspiracy to cause injury to business and property under RICO. If these counts are dismissed, the defendants argue that this court should no longer exercise jurisdiction over the remaining claims, because they do not have an independent basis in federal jurisdiction (the remaining causes of action would therefore belong in state court).

The arguments against the Lanham Act claim are based on TKW’s standing to obtain relief under that act. (I’m not summarizing this at this point; go ahead, read it if you wish.) But with regard to the RICO counts, the defendants argue that the claims are time-barred because TKW should have discovered its alleged injury in 2001, which makes it too late to bring an action in 2008. (TKW alleged RICO-related activities by the defendants through 2006, but the defendants here argue that they are not separate and distinct acts.)

The heart of the argument is this:

The Wool Products Labeling Act of 1939, 15 U.S.C. ‘ 68 et seq., makes unlawful the manufacture, importation, sale, distribution, or advertisement of any wool product which is misbranded. 15 U.S.C. ‘ 68a. Misbranding is specifically defined and includes failing to properly identify the fiber content of wool products. 15 U.S.C. ‘ 68a. Importantly for the present case, the Act imposes liability for misbranding on any person who shall manufacture or deliver for shipment or ship or sell or offer for sale in commerce, any … wool product which is misbranded. 15 U.S.C. ‘ 68a. In other words, every person in the chain of commerce, from importer, to wholesaler, to retailer, has an independent responsibility under the Act to ensure that the yarn products they sell are properly labeled, including as to fiber content. Id.

In the present case, The Knit With was under a duty of inquiry as to the fiber content of the yarn products they purchased from KFI, not because of storm warnings of culpable activity, but because of its obligations under the Wool Products Labeling Act. As a retailer of wool products, The Knit With had an obligation under the Act to take reasonable steps to avoid selling misbranded goods. Wherever inquiry is a duty, the party bound to make it is affected with knowledge of all which he would have discovered had he performed the duty. In re Hackett, Hoff & Thiermann, 70 F.2d 815, 818 (7th Cir. 1934) (quoting Cordova v. Hood, 17 Wall. 1, 8 (21 L.Ed. 587). In the face of this duty, however, it appears from the complaint that The Knit With failed to take any discernible actions whatsoever from 2001, when it began purchasing the allegedly mislabeled yarn products, until 2006, when it alleges to have submitted yarn samples for testing (Id.66 38-41). Having failed utterly to discharge its duty under the Act, the exercise of which, presumably, would have detected the alleged injury many years ago, The Knit With cannot now maintain that was not on inquiry notice of its injuries prior to 2004. As a result, The Knit Withs RICO claims accrued prior to 2004 and, therefore, are timebarred.

There is often a time limit within which lawsuits must be commenced, which varies according to the type of injury and the governing law; the clock usually starts running from the time the plaintiff knew or ought to have known of the harm done. Here, the defendants say the time limit is four years, and that TKW should have known about the harm it had suffered prior to 2004.

And why should TKW have known about all this prior to 2004? The argument is that because TKW (like other people in the distribution chain) is liable for misbranding wool products, it follows that TKW had a duty to inquire into the fiber content of the yarn products it had purchased from KFI since 2001, and should have taken reasonable steps to avoid selling mislabelled yarn back then.

This is interesting — just what is the nature of the duty of the craft yarn retailer? Section 68b(a)(2) of The Wool Products Labeling Act says (emphasis added):

(2) If a stamp, tag, label, or other means of identification, or substitute therefor under section 68c of this title, is not on or affixed to the wool product and does not show -
   (A) the percentage of the total fiber weight of the wool product, exclusive of ornamentation not exceeding 5 per centum of said total fiber weight, of (1) wool; (2) recycled wool; (3) each fiber other than wool if said percentage by weight of such fiber is 5 per centum or more; and (4) the aggregate of all other fibers: Provided, That deviation of the fiber contents of the wool product from percentages stated on the stamp, tag, label, or other means of identification, shall not be misbranding under this section if the person charged with misbranding proves such deviation resulted from unavoidable variations in manufacture and despite the exercise of due care to make accurate the statements on such stamp, tag, label, or other means of identification.

What constitutes a “reasonable step” or “due care”? Does this mean that all other yarn shops are not taking reasonable steps or due care when they purchase yarn from their suppliers, because they are not paying $400-500 for tests on every wool-containing yarn or obtaining guaranties from every distributor? Should they be suspicious and pay for tests whenever a distributor offers a luxury yarn at a good price?

If the defendants are successful here (and on appeal, if there is one), then this might mean an end to this particular lawsuit, but not necessarily an end to all possible claims against the defendants — at least, not in other courts.

Finally, for the idly curious: some non-binding staff opinions from the FTC to various manufactures about their cashmere products. The recipients have nothing to do with this lawsuit, but there are some familiar names…

Letter to Deanna Dee Inc. (PDF) about correct labelling of a cashmere/wool blend; the correspondence attaches a test report from K.D. Langley.

Letter to Amicale Industries’s counsel (PDF) observing that Amicale’s quality control practices seem exemplary, but declining to advise whether those practices constitute “due care” under The Wool Products Labeling Act. The correspondence sets out Amicale’s procedures in sourcing and testing cashmere; as part of the process, Amicale has its subsidiary W. Fein & Sons test the fibers. The manager of the Quality Control Laboratory at W. Fein & Sons is Julie Smith. Her CV (circa 2002) is at page 12 of the PDF.

Letter to May Department Stores (PDF) about an investigation into cashmere blend coats. The FTC’s letter says that their experts “tell us that although some wool fibers have been bred to be ultra fine – with the same diameter as some cashmere fibers – the difference between wool and cashmere can be discerned by a qualified expert using a microscope, based on differences in structure, appearance, and height of the scales on the fiber. I want to emphasize that we place great importance on regular testing by qualified and independent labs, to ensure accurage fiber content labeling. Garment manufacturers, importers, and distributors are responsible for ensuring the accuracy of fiber content labels on their garments.”

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4 Responses to We have progress

  1. j. says:

    The idea of requiring TNNA member suppliers to file continuing guarantees is an interesting idea, but that isn’t any use to a non-US supplier, is it? Non-US manufacturers wouldn’t be able to comply with this requirement, and there may not be an equivalent guarantee in their country.

  2. Ken Bridgewater says:

    Individual yarn stores do not have to incur the cost of testing the many yarns they sell, if they take advantage of FTC advice for how to comply with the Wool Products Labeling Act.

    First, they could ask their individual suppliers to issue a “guaranty of compliance” which should state “We guarantee that the wool products specified herein are not misbranded under the provisions of the Wool Products Labeling Act and rules and regulations thereunder”. The FTC states that a retailer who in good faith relies on such a guarantee will not be found in violation of the law if the goods are subsequently determined to be mislabeled. This is the route that TKW has now taken with its suppliers.

    These individual guarantees of compliance for each yarn sold to each retailer, however, place an administrative load on both retailers and their suppliers. Perhaps a better solution is for each supplier to file with the FTC a “continuing guarantee”, which covers all wool products sold by the guarantor. Such continuing guarantees remain in effect until canceled. Perhaps TNNA, our trade organization, should make supplier membership conditional on filing such continuing guarantees?

  3. Q says:

    Such motions are rountine in federal court. It’s what lawyers do.

    Attacking claims made under federal law ( false advertising and racketeering ) tests whether the claims are deficient. If not made sufficiently, the court usually allows the plaintiff to file an amended complaint to correct problems.

    A motion to dismiss points out problems the defendant has with the plaintiff’s complaint. Just because a defendant raises a problem does not mean it is a real problem though. A motion to dismiss is one-sided. Really can not decide whether the motion to dismiss has merits until you read the plaintiff’s response.

    Sometimes, motions to dismiss are filed for tactical reasons which are never apparent from the face of the papers. Sometimes the motion to dismiss is filed to just do something and thereby to be allowed to stall answering the complaint ( but this is highly frowned upon in federal court – attorney whoi files the motion must have a good faith basis for doing so but that alone does not mean the attorney will be found to be correct by the court.).

    Better to wait and see what the other party has to say … what the court has to say.

    It where the phrase ‘going through the motions’ comes from.

  4. j. says:

    Just to add a comment before anyone starts reading deeper meanings into this… as an observer, I don’t see anything deeply revealing about the fact that this motion addresses only three of the causes of action in this lawsuit, and not all of them, or the fact that the pleading is attacked on what you might term technical, rather than substantial, grounds. It is not at all unusual for a defendant to make this kind of motion before filing any kind of defence.

    The strategy is logical: if the defendants are right and these three counts alone are what keep this lawsuit alive in this court, there is no point mounting what might be a weaker attack against the other counts; why not bring the motion and at least narrow the issues in the action, if not get the action dismissed altogether?