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A maddening folly

Feature Articles

Cite as: July 2014 88 (07) LIJ, p.48

Make unchecked suggestions about a competitor and its products and post them on Facebook and you run the risk of being sued. 

By Sharon Givoni

Sometimes flattery does not get you everywhere. Such a case was Seafolly Pty Ltd v Madden1 which dealt with trade practices law, intellectual property and the tort of injurious falsehood. One thing is certain: it established that lawyers need to remind their clients to think before they type. The case demonstrates the power of social media, particularly when comments made off the cuff without investigation turn out to be incorrect and affect someone else’s reputation along the way.

The facts of the case established that while Seafolly’s swimwear designs may be flattering, false comments that they copied another garment label are certainly not.

It began when Leah Madden, the owner of Australian swimwear label White Sands, saw a copy of Gold Coast Panache magazine which featured model Samantha Harris, who at the time was the ambassador of the Seafolly swimwear label.

Significantly, Ms Madden’s “immediate thought” (at [4]), was that Harris was wearing one of her White Sands bikinis only to realise later it was a Seafolly design.

Apparently, Ms Madden had also recalled a Seafolly buyer viewing her range at an international swimwear show in the US.

On the day she saw the Gold Coast magazine, Ms Madden posted on her personal Facebook page an album of photos with the heading “The most sincere form of flattery?” (at [51]). The album juxtaposed photographs of Seafolly’s garments with her own (having reproduced the Seafolly photos from its website and catalogues) with a caption saying that allowing buyers to take photos of your range at a trade show is a bad idea.

The public response

The reaction from the public was significant and included comments such as:

“Nasty! Shame on ’em! Won’t be buying Seafolly. WHITESANDS all the way. X”

“Seafolly own everything! sunburn, miraclesuit and gottex and they used to own jets but sold it recently! and unfortunately they do rip off everyone, they have copied a design 2 chillies has been doing for years! a little frilly triangle, its so bad!”

“Disgusting! How people look at themselves in the mirror is beyond me.” (at [10]).

Out to the media

Ms Madden also followed with emails to media outlets such as The Sunday Telegraph, Ragtrader magazine, the Gold Coast Bulletin and the like using the same words, “The most sincere form of flattery?” in the subject line of each email.

These emails led to more media commentary. Responses from readers included:

“This sort of thing is happening ALL the time. Large corporations no longer have ‘designers’ but ‘product developers’ that source indie designs, copy and mass produce them.”

“Yeah right Seafolly – you really expect us to believe this garbage? . . .”

“. . . WHY did they continue in the same direction upon discovering that White Sands had released an almost identical line. A rat isn’t all I smell.”

“. . . Quite embarrassing on Seafolly’s behalf I think.” (at [51]).

Seafolly’s comeback

Not ready to “drown” in the face of criticism, Seafolly immediately issued a press release denying the allegations of copying, stating: “Seafolly notes that many of the designs which Ms Madden claims Seafolly has copied were released into the marketplace by Seafolly before White Sands Swimwear released its relevant swimwear garment” (at [19]).

Even though White Sands responded via Facebook stating that it had never specifically accused Seafolly of “plagiarism” (as had been stated by the media), from Seafolly’s perspective, the allegation of copying was clearly implied.

It needed to set the matter straight. A second press release followed which reminded people that Seafolly’s designs had been “substantially progressed” at the time that Ms Madden alleged the copying.

Legal proceedings

Seafolly also instituted legal proceedings in the Federal Court of Australia alleging:

  • misleading and deceptive conduct (in relation to Ms Madden’s emails to the press);
  • injurious falsehood (namely, that Madden’s comments and posts had caused damage to Seafolly’s reputation and thus economic loss); and
  • copyright infringement (for reproducing photos from Seafolly’s catalogue).

Madden cross-claimed for defamation and misleading or deceptive conduct based on the content of Seafolly’s press release.

She alleged that the heading was merely suggestive, being an “opinion” rather than a statement of fact as readers were left to draw their own conclusions.

However Tracey J disagreed, stating that Madden should have adopted a more cautious approach and reminded us that consumers include “. . . the astute and the gullible, the intelligent and the not so intelligent, and the well educated and the poorly educated” (at [27]).

Madden further alleged that she was not making the comments in “trade and commerce” so therefore the misleading or deceptive conduct provisions did not apply.

Again, the judge disagreed on the basis that the setting was clearly within a competitive context and found that Madden’s comments were “a serious assault on Seafolly’s business integrity” (at [96]).

Seafolly’s CEO also had a word to say, commenting that in “this day of the internet, where things go viral” once things are released into the “public space, no amount of logical reasoning actually matters any more”. He said: “I couldn’t win. Once she put that up there, I was finished anyway . . . the damage had been done.” (at [86]).

Often defamatory or disparaging comments have the potential to do far greater damage in the online environment because they often reach well beyond the intended audience and have great potential to get misinterpreted as users of social media post their own comments and interpretations.

In trade or commerce

Madden contended that none of the statements had been made “in trade or commerce”, this being a necessary element for liability to arise under the Trade Practice Act (and the new Australian consumer law embodied in Schedule 2 to the Competition and Consumer Act 2010 (Cth)). Her comments were more of a personal nature.

However, given that White Sands is in direct competition with Seafolly, and Madden had in the words of the judge sought to “influence the attitudes of customers and potential customers of Seafolly” (at [83]), her argument failed.

What was held

Ultimately, Seafolly succeeded in its arguments about misleading and deceptive conduct.

While Ms Madden had in all likelihood convinced herself that Seafolly had copied her designs when first making the Facebook statements, the judge cited the principle that it is not a question of whether the person making these representations would be acting honestly or reasonably, but rather whether potential members of the relevant class would be at serious risk of being misled or deceived (at [27]). This latter question was answered in the affirmative.

Madden had acted precipitately without taking prudent steps to check the accuracy of her accusations. The judge observed that:

“Before posting her views she failed to take a number of steps which would have elicited facts inconsistent with the notion that any copying of her garments had occurred. She could, for example, have made enquiries of retailers to establish when the Seafolly garments were placed on the market. She could have attended a retail outlet and examined some, at least, of the Seafolly garments. She could have made enquiries of Seafolly with a view to ascertaining when the costumes which she considered had been copied had been designed and released to the market” (at [68]).

Had even some of these steps been taken, he said, Ms Madden would have become aware that some of Seafolly’s costumes had been on the market before hers. She was “reckless in giving public expression” to opinions for which she had “no adequate foundation” (at [72]).

Copyright claim

As an aside, Seafolly also claimed that by reproducing several of its photographs online, White Sands had infringed copyright.

Naturally, Seafolly could succeed in its claim only if it could demonstrate ownership. As it turned out, the photographer had not assigned copyright to Seafolly at the time Ms Madden published the photographs and sent out emails. While he had assigned the right to sue for past infringements, it was held that this would only entitle Seafolly to sue for copyright infringements suffered by the photographer himself, but not entitle the label itself to pursue a damages claim for copyright infringement.

Thus, the timing of the assignment had been critical.

Injurious falsehood

Seafolly also sought to establish a cause of action against Ms Madden for injurious falsehood, which is similar to defamation to the extent that it involves a harmful imputation (at [111]). Defamation protects one’s personal reputation while injurious falsehood protects interests in the disposability of a person’s property, products or business, the latter requiring proof of actual damage generally in the form of economic loss (at [110]). Malice on the part of the defendant is also required (at [111]).

“The [plaintiff] was not entitled to general damages for loss of reputation or the hurt felt by its officers. Actual damage, in the form of pecuniary loss, was necessary, although this could include damage such as a general downturn in profits, if that were established by evidence” (at [113]).

While Seafolly’s reputation had suffered as a result of the statements made by Ms Madden, as it had not been able to point to any actual pecuniary loss arising from her acts the claim was unsubstantiated.

Order for damages

Even though the postings were effectively up for 30 hours, and the emails Ms Madden sent went no further than to “raise questions and invite the reader to form his or her own conclusions” (at [36]), Ms Madden was ordered to pay Seafolly damages of $25,000.2 In addition to injunctive and declarative relief, she was also ordered to pay her competitor’s costs of the application for a trial that went over a number of days.

Finally, the Court imposed restraining orders in relation to her conduct of reproducing Seafolly’s photographs and making the representations she had made.

Who won?

There was no real winner.

When this type of case goes to court it is publicly on the record and the media get hold of it. The public airing of their “catfight” consequently led to both companies attracting negative publicity.

Media headlines included, “Swimwear designer ‘malicious’ against rival” and, “Court slams small designer for falsely accusing bikini maker Seafolly of ripping her off”.

The decision has been appealed.3

Lessons

The line between statements of fact and statements of opinion is often difficult to draw and it is not the subjective purpose or motivation of the party making the statement that counts, but instead the reader’s perception.

Being reckless in making a statement online can result in liability.4 Companies need to have procedures and protocols in place to ensure their employees do the right thing.

Since the uniform defamation laws came into effect in 2006, companies with less than 10 employees have been unable to prosecute proceedings for defamation and this case illustrates the drawbacks confronted when commercial reputations are challenged (as noted by the judge).

Similarly, for a claim of injurious falsehood to be made out, all four elements need to succeed: a false statement in relation to the goods or business and publication of same, malice on the part of the person making the statement and proof of actual damage such as loss of business.

Businesses should, as a matter of course, seek to have copyright assigned to them when works are created by an independent contractor, particularly when those works (whether photographs, logos or something else) play an important role in the marketing and promotion of the business, its products or services.

Specifically, for fashion businesses, design registration should be considered for unique garment designs




Sharon Givoni is principal solicitor at Sharon Givoni Consulting. She has been practising intellectual property and commercial law for 13 years.

The numbers in square brackets in the text refer to the paragraph numbers in the judgment.

1. Seafolly Pty Ltd v Madden [2012] FCA 1346.

2. On 9 April 2013 (VID 764 of 2010), the Federal Court of Australia ordered that the enforcement of the costs order made against the respondent on 29 November 2012 be stayed until the hearing and determination of the appeal (VID 1108 of 2012) without prejudice to the applicant’s rights to apply for taxation of those costs pursuant to Division 40.2 of the Federal Court Rules 2011 (Cth).

3. Seafolly Pty Ltd v Madden [2013] FCA 316 (VID 1108 of 2012).

4. Nextra Australia Pty Limited v Fletcher [2014] FCA 399 is another recent case concerning misleading statements made online. In this case, the Federal Court ruled that a blog post which claimed that Nextra, a retail chain operating in the newsagency environment, had used fear tactics to generate interest in its company, amounted to misleading and deceptive conduct in trade or commerce. Significantly, while the Court acknowledged that the author of the post, Mark Fletcher, had a “genuine interest and aim” to promote discussion in the newsagency community on relevant topics through his “Australian Newsagency Blog”, it also found that he had used the blog at times to promote his own commercial interests, thus bringing his conduct into the realm of trade or commerce [34]-[35].

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