Ousted by Applebee’s, Baker Can Sue Rival

(CN) - Sweet Street Desserts can pursue claims against a Canadian competitor that allegedly persuaded Applebee's to stop selling its apple turnovers, a federal judge ruled.

Sweet Street Desserts Inc., a Reading, Penn.-based maker of frozen bakery products, created an apple turnover for the Applebee's restaurant chain in July 2010.

With an aim toward outsourcing production of the pastry, Sweet Street and Canadian vendor Chudleigh's Ltd. signed a mutual nondisclosure agreement in September.

The next month, however, Sweet Street - unimpressed by samples of Chudleigh's proposed product - decided to instead produce the turnovers in its own facilities.

Sweet Street said it then provided a quote for a dough-folding machine specifically tailored to make the turnovers, but that Forms & Frys, the American subsidiary of a Danish pastry-folding company, declined to make the machine because it felt "pressured" by Chudleigh's.

Eventually, Sweet Street created its own in-house production process, and Applebee's began selling the apple turnover on its menu in August 2011.

Within about 10 days, however, Chudleigh's attorneys sent Applebee's a letter demanding that it cease selling the product, which they said looked "strikingly similar" to Chudleigh's well-known, trademarked blossom design.

Though the letter made no mention of Sweet Street, it accused Applebee's of trademark infringement, unfair competition, false designation of origin, and an unfair and deceptive trade practice under federal, state and common law.

Once Applebee's stopped selling the turnover, Sweet Street filed a nine-count federal complaint against Chudleigh's in June 2012, asking the court to declare the trademark invalid, since the blossom shape is a "generic configuration" incapable of distinguishing it from other products.

The complaint alleges that Chudleigh's tortiously interfered with Sweet Street's contractual relations with Applebee's and Forms & Frys, violated Pennsylvania's Unfair Trade Practices and Consumer Protection Law, and breached the nondisclosure agreement.

Earlier this month, Senior U.S. District Judge Michael Baylson found that Sweet Street has plausibly pleaded that Chudleigh's sent its demand letter in bad faith.

"First, the fact that the exhibits show an obvious visual difference between defendant's registered design and plaintiff's product lends plausibility to plaintiff's allegation that defendant 'was aware' at the time it sent the demand letter that plaintiff's product 'did not look like the configuration registered by defendant,'" Baylson wrote. "Second, plaintiff alleges that defendant had expressed no trademark concerns with plaintiff's proposed apple product during the parties' brief exploratory business relationship in the fall of 2010. Third, plaintiff has alleged a pattern of 'scare-the-customer-and-run' tactics that have long been the hallmark of those seeking to use 'judicial process' as an 'anticompetitive weapon.' Specifically, plaintiff alleges that defendant only issued threats to third parties which had little incentive to litigate (i.e., Forms & Frys and Applebee's), rather than to plaintiff directly. Accordingly, defendant's reluctance to directly threaten plaintiff (the party with an incentive to litigate) suggests a lack of confidence in the merits of its legal assertions. Taken together, plaintiff's allegations satisfy the subjective prong of the sham litigation exception."

Baylson nevertheless dismissed Sweet Street's state law claims, because "visual comparisons reveal obvious differences between defendant's trademarked design and the actual apple products that plaintiff and defendant have commercially produced." (Emphasis in original.)

Baylson later added: "Whereas the trademarked design connects each 'petal' through a continuous dough-folding pattern that causes each petal to uniformly point in a clockwise direction, the two commercially produced products separate the petals through gaps in the dough that enable the petals to fold over the pie center without a noticeable clockwise tilt. The obviousness of this difference lends plausibility to plaintiff's allegation that 'there has been and is no likelihood of confusion between any protected element of [defendant's registered design] and the Sweet Street apple turnover product.'"

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