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Handsome Brook Farm, LLC. v. Humane Farm Animal Care, Inc.

United States District Court, E.D. Virginia, Alexandria Division

June 16, 2016

HANDSOME BROOK FARM, LLC, Plaintiff,
v.
HUMANE FARM ANIMAL CARE, INC., Defendant.

          MEMORANDUM OPINION

          JAMES C. CACHERIS UNITED STATES DISTRICT COURT JUDGE

         This matter is before the Court on Plaintiff Handsome Brook Farm, LLC’s motion for a preliminary injunction regarding an email sent by Defendant Humane Farm Animal Care, Inc. that allegedly is a commercial advertisement or promotion containing false information in violation of the Lanham Act, 15 U.S.C. § 1125(a)(1)(B) and Virginia common law. For the foregoing reasons, the Court will grant in part the motion.

         I. Background

         This case involves the market for ethically sourced eggs. What it means to be “ethically sourced” is a matter of contention, and at least five organizations have developed standards within the marketplace. (See Def.’s Ex. B [Dkt. 23-2] (listing standards).) Three of those standards are relevant to this proceeding. First, the United States Department of Agriculture (“USDA”) maintains the National Organic Program, which is administered by regional organizations. Egg producers certified under the USDA standard may market their eggs as “Certified Organic.” (Babcock Decl. [Dkt. 24-1] ¶ 5.) Second, the American Humane Association (“AMA”) maintains a standard for pasture-raised eggs. Eggs certified under this standard may be marketed as “American Humane Certified™” or “Pasture Raised.” (Babcock Decl. ¶ 7.) Defendant Humane Farm Animal Care, Inc. (“HFAC”) maintains a third standard. Eggs certified under Defendant’s standard may be marketed as “Certified Humane®.” (Douglass Decl. [Dkt. 23-1] ¶ 2.) Plaintiff Handsome Brook Farm, LLC (“Handsome Brook”) is a producer of eggs marketed with the USDA organic and AHA pasture-raised and humane labels. Plaintiff does not use Defendant’s “Certified Humane®” label. Some additional details about the parties will prove useful.

         Defendant HFAC is a non-profit organization headquartered in Herndon, Virginia. (Douglass Decl. ¶ 1.) HFAC describes its mission as “improv[ing] the lives of farm animals by creating humane standards for farm animals and certifying the animals [sic] humane treatment.” (Pl.’s Ex. H [Dkt. 24-10] at 1;[1] Douglass Decl. ¶ 1.) HFAC believes that the most effective way to accomplish that mission “is to utilize a certification process that audits producers, distributors, and retailers and informs the customer (by the presence of a certification seal appearing on packaging) which products meet HFAC’s standards.” (Douglass Decl. ¶ 2.) To become certified to use the Certified Humane® logo, an egg farmer, producer, or processor must pay an initial application fee between $75 and $300 dollars. (See Pl.’s Ex. Q [Dkt. 25-2] at 7.) After receiving the application, HFAC will send an inspector or auditor to the farm or production facility. The producer must pay between $600 and $700 a day for the inspection, but those costs may be split between multiple farms that are in close proximity. (Pl.’s Ex. Q at 7.) If the producer passes inspection, it may enter into a non-exclusive licensing agreement to place the Certified Humane® logo on its eggs. (See Pl.’s Ex. Q (containing a copy of the licensing agreement); Douglass Decl. ¶ 3.) The licensing agreement is good for one year and the same application and inspection fees must be paid annually to renew the agreement. (Pl.’s Ex. Q at 7.) If a producer enters into a licensing agreement with HFAC, it also must pay $.05 per case of thirty dozen eggs that the licensee sells under the Certified Humane® logo. (Pl.’s Ex. Q at 8.) HFAC also receives grants and donor contributions. (Douglass ¶ 1.)

         The significance of the certification fees has caused some dispute and is worth exploring in more detail. On June 9, 2016, HFAC’s Executive Director Douglass submitted an affidavit under penalty of perjury stating that “HFAC makes no money from the sale of eggs.” (Douglass Decl. ¶ 4 (emphasis in original).) She also stated that the certification fee “is not dependent on sales volume, and does not even come close to covering HFAC’s internal administrative costs.” (Id. ¶ 8 (emphasis in original).) In response to those statements, Plaintiff submitted a copy of an HFAC licensing agreement, including HFAC’s fee schedule. (See Pl.’s Exs. Q, R.) That agreement makes clear that HFAC does receive a fee based on the quantity of eggs its licensees sell under the Certified Humane® logo, in addition to the annual application and inspection fees. Plaintiff also submitted an email, in which HFAC’s Certification Program Coordinator states that “the fees are paid each month based on the number of eggs you sell during that month as Certified Humane®.” (Pl.’s Ex. R at 2.)

         After Plaintiff presented those exhibits, Defendant’s Executive Director Douglass submitted a corrective affidavit conceding that she made an inaccurate statement when she said “HFAC makes no money from the sale of eggs.” (Second Douglas Decl. [Dkt. 26-1] ¶ 1(c).) Douglass explained that HFAC does receive “five cents per thirty dozen eggs, based on the quantity of certified product sold, for the use of the Certified Humane®logo on product packaging.” (Id.) HFAC sends monthly “reminders” to its licensees about their fee obligations, but holds licensees to the “honor system” to calculate the fees owed and to remit the monthly payments. (Id.) Douglass explained that “[b]ecause the fee was for the use of the logo, and due to our current collection practices, I truly did not consider the Certification Fee as revenue ‘from the sale of eggs’ when I provided my prior Declaration.” (Id.)

         Across all product lines, [2] HFAC’s single largest source of revenue in 2013 and 2014 was the licensing fees paid based on the quantity of product sold with the HFAC logo. (See Pl.’s Exs. H, I (containing tax documents).) According to tax filings, HFAC had revenue of $739, 562 in 2014, of which $367, 121 came from licensing fees. (Pl.’s Ex. I [Dkt. 24-11] at 2, 11.) Donations accounted for $210, 099, and the remaining revenue came from application and inspection fees paid by licensees. (Pl.’s Ex. I. at 2.) Revenues for 2013 were comparable, with total revenue of $691, 375, licensing fees contributing $280, 785, donations making up $237, 947, and the remainder coming from application and inspection fees licensees pay. (Pl.’s Ex. H [Dkt. 24-10] at 2, 10.)

         Plaintiff Handsome Brook is a farmer and producer of ethically sourced eggs, but not of eggs bearing the Defendant’s Certified Humane® logo. Handsome Brook is based out of New York, but receives eggs from farmers in many states and sells those eggs to retailers nationwide under the Handsome Brook Farm label. Some of Handsome Brook’s eggs are packaged in Illinois at a facility called Phil’s Fresh Eggs. Most relevant to this proceeding, Phil’s Fresh Eggs packages eggs from three farms into Handsome Brook cartons. (See Pl.’s Ex. D [Dkt. 24-6].) The three farmers are Ruben Stoltzfus of Pennsylvania, John Byler of New York, and Ernest Girod of New York. (See Pl.’s Ex. B.) Each of the three farmers is currently certified under the USDA’s “Certified Organic” program. (See Pl.’s Ex. D.) Additionally, each of the three farms is certified through the AHA’s “American Humane Certified” program under the umbrella of Handsome Brook Farm. (Pl.’s Ex. B; Pl.’s Exs. N, O, P [Dkts. 24-16, 24-17, 24-18]; Cardmody Decl. [Dkt. 24-2] ¶ 4-5.) Handsome Brook is also certified under both programs. (See Pl.’s Exs. C, E [Dkts. 24-5, 24-7].) None of Handsome Brook’s eggs are certified through Defendant’s “Certified Humane” program, but Defendant does certify other farmers whose eggs are packaged at Phil’s Fresh Eggs.

         In May 2016, Phil’s Fresh Eggs’ Vice President contacted HFAC to update its certification. (Douglass Aff. [Dkt. 24-9] at 2.) HFAC sent auditor Patti Deutsch to Phil’s to inspect the packaging facility. (See Pl.’s Ex. K [Dkt. 24-13] (containing Deutsch’s Report).) During this inspection, Deutsch noticed that one of Handsome Brook’s pallet’s was labeled as Certified Humane, even though Handsome Brook’s eggs at that facility are not certified under Defendant’s Certified Humane program. (Douglass Aff. at 2.) Upon further inspection, Deutsch learned that none of Handsome Brook’s eggs were actually packaged into cartons labeled Certified Humane, so Handsome Brook was not infringing on Defendant’s mark. (Douglass Aff. at 2; Pl.’s Ex. K at 3.) But Deutsch noted some perceived issues with Handsome Brook’s certifications on file at Phil’s Fresh Eggs. She observed that Handsome Brook’s USDA certification was from 2013 and an annual update was not on file. (Pl.’s Ex. K at 2.) She also reported that Handsome Brook had an AHA certification on file, but the three source farms did not. Deutsch stated that she could not verify that Handsome Brook’s eggs were “American Humane Certified” because the AHA had not inspected Phil’s Fresh Eggs. (Id.)

         Unbeknownst to Deutsch or Douglass, Handsome Brook and its three suppliers to Phil’s Fresh Eggs were appropriately certified under the USDA and AHA programs. Handsome Brook emailed the suppliers’ USDA certifications to Phil’s Fresh Eggs in December 2015, about five months before the audit. (See Pl.’s Ex. D.) Additionally, the AHA’s publicly viewable website listed Handsome Brook’s three suppliers as “currently considered certified under the umbrella of Handsome Brook Farm, LLC.” (Pl.’s Ex. B.) The farms’ individual AHA certifications, however, were not on file at Phil’s Fresh Eggs. Defendant’s auditor, Deutsch, did not search the AHA’s website for certification documentation; did not contact Plaintiff, its farmers, the AHA, or the USDA certifying organization; and did not discover the farms’ USDA certifications on file at Phil’s Fresh Eggs.

         For Douglass, the audit report confirmed a complaint she received about a month earlier about Handsome Brook mislabeling its eggs.[3] Believing the report to be accurate and not taking any independent steps to verify its accuracy, Douglas drafted an email on May 20, 2016, entitled “Unverified Pasture Raised Label Claims.” (See Pl.’s Ex. A [Dkt. 24-3].) The email began as follows:

I am writing you to share some potentially troubling news about one of your egg suppliers, Handsome Brook Farms. Based upon a whistleblower complaint we recently conducted a traceability inspection of a packaging plant that packs Certified Humane® eggs and also packs Handsome Brook Farm’s (HBF) eggs. It came to our attention that the “Pasture Raised” claims on the Handsome Brook cartons could not be verified. In fact, of the three producers whose eggs were being packed into HBF cartons, none were pasture raised. These eggs had tags that stated, “Certified Organic” but our auditors found that the organic certification was not current.

(Pl.’s Ex. A.)

         The email went on to note that the auditor found “there was no validation that the eggs going into HBF cartons were from [AHA] certified farms, ” that there was no update of Handsome Brook’s USDA certification on file at Phil’s Fresh Eggs, and that the “veracity” of Handsome Brook’s American Humane Certified labeling claim “could not be substantiated.” (Id.) In closing, Douglass wrote the following:

I hope you will reconsider changing suppliers. Producers who are Certified Humane® undergo traceability audits to verify that every egg that goes in every carton that has claims such as “free range” or “pasture raised” are verified by our inspectors to be exactly that. This in turn protects you.

(Id.)

         Douglass sent this email to 69 individuals employed at 39 companies, including the top 10 conventional grocery chains in the United States. (Babcock Decl. [Dkt. 24-1] ¶ 26; Pl.’s Ex. L (listing recipients).) The recipients included Whole Foods, Publix, Costco, Price Chopper, Target, Harris Teeter, Albertsons, Safeway, Wegmans, and many other major retailers. (Pl.’s Ex. L.) Douglass said that she selected those recipients because they were all “retailers who were thinking of switching from actual pasture-raised laying hens to the Handsome Brook eggs.” (Douglass Aff. at 3.)

         The email had the intended effect. According to Handsome Brook’s co-founder and co-CEO, Betsy Babcock, the email has caused Handsome Brook to suffer losses of customers and goodwill. One large group of supermarket retailers, Wakefern, has indefinitely pulled Handsome Brook products from its stores. (Babcock Decl. ¶ 17.) Whole Foods temporarily pulled Handsome Brook eggs from the shelves of its northeast regional stores while investigating Douglass’s allegations of mislabeling. (Babcock Decl. ¶ 18.) A prospective customer, H-E-B, has indefinitely delayed plans to launch Handsome Brook eggs in its stores this summer. (Babcock Decl. ¶ 19.) Babcock estimates that the lost revenue from just one supplier suspending its relationship with Handsome Brook farms is likely to exceed $2 million per year. (Babcock Decl. ¶ 27.)

         On May 27, 2016, Plaintiff filed the present lawsuit seeking injunctive relief and damages pursuant to the Lanham Act, 15 U.S.C. § 1125(a)(1)(B), and several Virginia common law claims, including tortious interference with economic expectancy, tortious interference with contract, and trade libel. Plaintiff also filed an emergency motion for a temporary restraining order. On June 2, 2016, the Court heard argument and evidence from both parties. After careful consideration, the Court granted a temporary injunction restraining Defendant from further disseminating the May 20, 2016 email and ordering Defendant to produce a list of individuals to whom the email was sent. Parties are now before the Court on Plaintiff’s Motion to impose a preliminary injunction pending the resolution of this lawsuit. This matter has been fully briefed and argued and is now ripe for disposition.

         II. Standard of Review

         The party seeking a preliminary injunction must demonstrate that (1) it is likely to succeed on the merits; (2) it is likely to suffer irreparable harm; (3) the balance of hardships tips in its favor; and (4) the injunction is in the public interest. Pashby v. Delia, 709 F.3d 307, 320 (4th Cir. 2013) (citing Winter v. Natural Resources Defense Council, Inc., 555 U.S. 7 (2008)). All four factors must be satisfied for plaintiff to receive preliminary injunctive relief. Id.

         In cases where the request for preliminary relief encompasses both an injunction to maintain the status quo and to provide mandatory relief, the two requests must be reviewed separately, with the request for mandatory relief being subjected to a more exacting review. Audio-Video Group, LLC v. Green, No. 1:14-cv-169, 2014 WL 793535, at *2 (E.D. Va. Feb. 26, 2014). A mandatory preliminary injunction “is disfavored, and warranted only in the most extraordinary circumstances.” Taylor v. Freeman, 34 F.3d 266, 270 n.2 (4th Cir. 1994). When mandatory relief is sought “a strong showing of irreparable injury must be made, since relief changing the status quo is not favored unless the facts and law clearly support the moving party.” Tiffany v. Forbes Custom Boats, Inc., 959 F.2d 232 (table), 1992 WL 67358, at *6 (4th Cir. 1992) (quoting Doe v. New York Univ., 666 F.2d 761, 773 (2d Cir. 1981)).

         A mandatory injunction is one that goes beyond maintaining the status quo and preventing irreparable harm while a lawsuit remains pending. See Wetzel v. Edwards, 635 F.2d 283, 286 (4th Cir. 1980). The “status quo” for purposes of classifying the nature of an injunction is the “last uncontested status between the parties which preceded the controversy.” Aggarao v. MOL Ship Mgmt. Co., 675 F.3d 355, 378 (4th Cir. 2012). The last uncontested status between the present litigants was before Defendant sent the email. At that time, Defendant was not making any known marketing communications regarding Plaintiff. The present motion seeks to maintain that status quo by enjoining Defendant from disseminating the email regarding its certification practices or any similar email. The present motion also seeks affirmative relief going beyond the status quo, such as requiring Defendant to make a retraction statement through email and a posting on its website. Those forms of relief are properly viewed as mandatory injunctions going beyond the mere return to the absence of communication. See Mazur v. Szporer, Civ. 03-00042, 2004 WL 1944849, at *7 (D.D.C. June 1, 2004) (characterizing a corrective statement as mandatory). Accordingly, those two claims for relief must receive a more exacting review. The Court will now apply the above standards to Plaintiff’s motion for injunctive relief.

         III. ...


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