Property, contract, and copyright

Chris Newman's excellent A License is Not a 'Contract Not to Sue': Disentangling Property and Contract in the Law of Copyright Licenses takes contract and property theory very seriously as applied to copyright.  I particularly like his emphasis on the deed-like functions of written transfers; a properly executed deed requires no consideration to be effective (and irrevocable, unless a power to revoke is reserved) with real property, and neither, he suggests, should a properly executed written copyright license, whether exclusive or not.

Copyright/contract and the traffic laws

It's a truism that a cop can stop any car, finding some sort of traffic violation within a few blocks of travel.  John Tehranian and others have argued that, though we mostly don't yet expect to be "pulled over" for ordinary uses, copyright is now in the same position.  This story (HT Zach Schrag) about the Obama campaign's violation of the stated restrictions on White House photos, which a spokesman then said weren't really restrictions, is a good example for that kind of claim.  Copyright doesn't actually apply to US government works, and there's no real consent to the "terms" of release, and yet in other circumstances I can easily imagine an enforcement attempt.  Many people don't worry about a bolt from the blue (or a visit from the boys in blue)--but if you're a member of a group that's targeted for other reasons, traffic and copyright laws both can be problems.

There's a fair use angle, right?

McSweeney's: Lines from The Princess Bride that Double as Comments on Freshman Composition Papers.

Lanham Act false advertising claims not subject to Rule 9(b) in First Circuit, district court says

McGrath & Co., LLC v. PCM Consulting, Inc., 2012 WL 503629 (D. Mass.)

The most broadly relevant bit of this case is the pleading standard issue.

McGrath sued its competitor PCM for state and federal false advertising, and PCM moved to dismiss.  The parties offer project management services for companies undertaking major construction projects.  The current presidents of McGrath (McGrath) and PCM (Lane) used to be partners at McLane Associates, performing the same kinds of services.  In 2007, McLane split up, and the partners agreed not to take on any new projects under its name; it finished providing services in early 2008. McGrath formed defendant McGrath, and Lane went back to PCM, a company he’d formed around 1999.

PCM bid to provide services to Intel, a former McLane customer.  Intel required PCM to prequalify, to ensure it had sufficient resources.  McGrath alleged that PCM submitted false information on its staffing resources and financial condition, combining its own numbers with McLane’s, so that it reported a headcount of 70 employees even though PCM employed fewer than ten people. Likewise, although PCM had only minimal cash on hand, it allegedly reported to Intel that it had in excess of $1.4 million dollars in cash, using McLane's bank account information. McGrath alleged that PCM got Intel jobs—75-80% of all of PCM’s income—based on this false information.

PCM also provided services to another previous McLane client, Wyeth, along with Advanced Micro Devices and the State of New York. McGrath alleged that PCM made similar false statements to them, as well as to other named potential clients, and made other false statements on its website to give the incorrect impression that PCM is a big company, such as that its “workforce is currently consulting on over three billion dollars of active capital construction work.”  McGrath alleged that this was literally false because it referred to past, not current, work performed by McLane, not PCM.  McGrath alleged the same was true of other website statements about PCM's history and capabilities.

In evaluating the Lanham Act claims, the court first looked at whether the statements were commercial advertising or promotion.  At a minimum, a defendant must target a class or category of purchasers, not merely particular individuals.  The court found that the allegations here sufficiently alleged this; the website promotes PCM to any consumer who sees it.  As to the statements to Intel et al., the complaint alleged that PCM made similar statements about its staffing and resources to other potential customers in order to get their business. “That these alleged false statements were made in direct communication with each company, and not in a traditional advertising campaign, does not exclude these communications from amounting to ‘commercial advertising or promotion’ under the Lanham Act.”

The court also found that McGrath plausibly alleged materiality, in that financial and staffing resources affect ability to manage large projects.  For similar reasons, the statements plausibly were false or had at least the tendency to deceive potential customers.

Moreover, at the pleading stage, the allegation that McGrath’s harm “includes but is not limited to, the loss of McGrath's right to fairly compete in the marketplace and the loss of jobs which it would have obtained but for PCM's false statements and misrepresentations” was sufficient to plead the necessary harm, since the parties are direct competitors for the same clients.

The court rejected the idea that Rule 9(b)’s heightened pleading requirements applied to Lanham Act claims; there was no First Circuit authority for the proposition, and the Lanham Act doesn’t establish a traditional fraud cause of action.

McGrath also pled violations of state consumer protection law.  Massachusetts false advertising law requires a plaintiff to show that she was injured by an ad containing “any assertion, representation or statement of fact which is untrue, deceptive or misleading” made by a person who “knew, or might on reasonable investigation have ascertained to be untrue, deceptive or misleading.”  The complaint satisfied this standard as well.

Mass. Gen. L. c. 93A also bars “unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce.”  A plaintiff must show a loss of money or property to sue, and competitors who are damaged have standing.  The Massachusetts AG has specifically provided in regulations that “[i]t is an unfair or deceptive act for a seller to make any material representations of fact in an advertisement if the seller knows or should know that the material representation is false or misleading or has the tendency or capacity to be misleading.”  So this claim survived too.

PCM argued that the complaint didn’t properly allege that the conduct occurred “substantially and primarily” in Massachusetts, as required.  The defendant bears the burden of showing that the relevant conduct took place outside the state.  The standard is the “center of gravity” of the circumstances giving rise to the claim. A court will look at where the defendant commits its act or practice, where the plaintiff receives or acts on it, and where the plaintiff sustains losses.  In this case, PCM’s HQ is in Andover.  It was reasonable to infer that PCM disseminated its allegedly false statements from and in Massachusetts through its website and direct communications with potential customers.  This was enough to put the “center of gravity” of McGrath’s claim “substantially and primarily” in Massachusetts.

The court refused to consider documentary evidence that McGrath knew about the false claims for a long time, triggering a statute of limitations bar, because that would require consideration of matters outside the complaint, even though McGrath didn’t dispute the authenticity of PCM’s document. Even if the court considered the evidence, the court noted that it went only to the statements on the website, not the allegedly false and misleading statements made to Intel and other companies, which PCM didn’t argue occurred outside the limitations period.

Hidden charges support pension funds's consumer protection claims

International Union of Operating Engineers, Stationary Engineers Local 39 Pension Trust Fund v. Bank of New York Mellon Corp., 2012 WL 476526 (N.D. Cal.)

The plaintiff is an employee benefit plan providing retirement and survivor benefits to approximately 17,000 members. Defendants provided custodial services on the Trust Fund’s behalf, which meant that it was a fiduciary whose responsibilities included delivering and accepting traded securities and collecting principal, interest, and dividend payments on securities. Over the last decade, the Trust Fund increasingly turned to overseas investments, which are bought and sold in foreign currencies.  Thus, the Trust Fund had to buy and sell those currencies, and BNY undertook the necessary foreign exchange transactions to facilitate the Trust Fund’s purchases of foreign securities and the resulting repatriation of interest and dividends.

You can guess what happens next, right?  I mean, this is a bank we’re talking about.  The Trust Fund used standing instructions to have BNY convert the necessary currency when the Trust Fund bought foreign securities or received interest.  The Trust Fund paid a flat annual fee for this, and could opt out of any particular trade by telling BNY that it wanted to negotiate with defendants’ traders directly.  BNY advertised that such standing instructions services were “free of charge,” aside from the flat fee, and that the transactions were done under “best execution standards” to “maximize the proceeds of each trade.”  The contract between the parties also guaranteed that the terms wouldn’t be less favorable to the Trust Fund than terms offered by BNY to unrelated parties in comparable arms’ length transactions, and specified methods for determining the rates for foreign exchange transactions.

The Trust Fund got monthly reports that summarized the transactions, but didn’t provide the time of trade execution, making it impossible to know the exact rate at which BNY traded.

The Trust Fund alleged a scheme dating back at least ten years.  Upon receiving a request for a purchase or sale of a foreign security, BNY would execute a trade at the exchange rate available close to the time of the request.  “They would then watch the market fluctuation on FX rates related to the transaction over the course of the day and charge plaintiff a rate less favorable to plaintiff than the one at which defendants actually traded. Defendants would then keep the difference between the true cost of the trade and the fictitious FX rate defendants claimed to have paid and charged plaintiff.”

Through careful recordkeeping, BNY was allegedly able to conceal this by reporting false rates with hidden markups, until whistleblowers exposed the scheme in 2011.  Moreover, not all standing instructions clients were treated identically; some could opt out and negotiate their prices every afternoon.  “Similarly, according to a pending action by the New York Attorney General's office, defendants reached secret agreements with at least 62 favored clients to set a pre-negotiated fixed markup, called ‘benchmark pricing,’ on all standing instructions trades rather than the larger markups made on plaintiff's trades. Some clients therefore received better standing instructions terms than plaintiff.”

The Trust Fund sued as a putative class plaintiff for all similarly situated employee benefit plans, alleging breach of contract and violations of California and New York false advertising/unfair practices laws.  The court found that the Trust Fund sufficiently pled breach of contract and breach of the implied covenant of good faith and fair dealing.

The court also held that the Trust Fund stated a claim under California’s UCL.  Unfair competition is assessed by asking (1) whether the conduct is tethered to a specific statutory provision; (2) how the utility of the conduct weighs against the gravity of the alleged victim's harm; and (3) whether there are possible countervailing benefits to consumers or competition. The court found unfairness under all three factors.  First, the requirement that trades not be less favorable to the plan than to others in arms’ length transactions was tethered to a relevant ERISA provision.  Second, “the harm to plaintiff and other class members of losing potentially millions of dollars in revenues was not outweighed by the financial gain accomplished by defendants.” Third, there were apparently no countervailing benefits to the consumer or to competition.  BNY argued that the putative class members received the benefit of convenience—they didn’t have to make trades themselves—yet “the extreme financial cost of doing so, along with the loss of trust between defendants and their clients, do not show defendants' conduct to be beneficial.”  (In other words, couldn’t they have received that benefit without getting cheated?)

BNY argued that its conduct wasn’t unfair because no reasonable consumer would have thought that defendants had agreed to provide rates for standing instructions trades that were comparable to trade-by-trade negotiated transactions, and because the Trust Fund could have opted out of the standing instructions option at any time. But the Trust Fund sufficiently alleged misrepresentation of the rates at which defendants were transacting on clients' behalf.  The Trust Fund would have had “no reason to believe—until whistleblowers came forward—that they were getting a deal far worse than was being reported.”

The California FAL claims (which require claims that are likely to mislead reasonable consumers) also survived, for similar reasons.  BNY allegedly didn’t provide “free of charge” trading or abide by “best execution standards.”  BNY argued that pension funds were less likely to be misled and that the reasonable consumer test shouldn’t apply, but the court found no authority for applying a “reasonable pension fund” standard, and anyway that’s for the trier of fact.

NY’s GBL Sec. 349 prohibits consumer-directed deceptive acts or practices that are materially misleading and cause injury.  The court found that the Trust Fund sufficiently alleged a violation.  The only serious argument was whether the services provided were “consumer-oriented,” since the typical violation of the law involves an individual buying for personal/household purposes.  However, NY’s highest court has held that Section 349 allows suits by pension funds against a bank.  The court asked whether the bank's practices had a broader impact on consumers at large and if the pension fund clients were treated “as any customer entering the bank” as opposed to entering into a private, unique contract.  Here, the standing instructions contract was “offered to any customer purchasing custodial services (except for favored clients), and defendants' practice of using hidden markups to earn profits affected all of these consumers.” Motion to dismiss denied.

Finally, the court found that the Trust Fund successfully pled around the statutes of limitations, because the discovery rule tolls them when an injury is difficult to detect, the defendant is in a far superior position to understand it, or the defendant has reason to believe that the plaintiff remained ignorant of the wrong.  The Trust Fund sufficiently pled that the information it received gave it little reason to suspect that the reported rates were false.

Don't make factual findings on a motion to dismiss

Ramchandani v. Sani, --- F.Supp.2d ----, 2012 WL 556198 (S.D.N.Y.)

Short and sweet opinion; if only more courts thought about standing like this!

The parties sell custom-tailored men's suits that are manufactured for them in Hong Kong to fill orders placed by customers attracted through newspaper advertising and whose measurements are taken by the parties in New York City and elsewhere.  Ramchandani alleged that Sani overstated the nature and quality grades of the fabrics used, producing a substantial competitive advantage by allowing Sani to charge extremely low prices for apparently high-quality goods.  Sani moved to dismiss, challenging Ramchandani’s standing on the ground that Ramchandani hadn’t suffered commercial or competitive injury, because there are so many Hong Kong tailors that he couldn’t have a reasonable basis for believing that Sani’s allegedly fraudulent activities would harm him.

The court pointed out that this was a factual argument, and inappropriate for a motion to dismiss.  “The allegations with respect to the Lanham Act claim are sufficient. Plaintiff's reasons for apprehension seem entirely reasonable to the Court, and that would be so even if there are others threatened with the same or similar harm.”

Likewise, the court rejected the alternate argument that no Lanham Act claim could lie because the alleged misrepresentations fell within the framework of the Wood [I think Wool] Products Labeling Act, which provides no private cause of action.  The court found this contention “entirely unconvincing,” since the point of Section 43(a) was to protect against consumer confusion.

Response to Worth a Thousand Words

Christina Spiesel has written a response to my article on images and copyright, which appears in the Harvard Law Review Forum.  I fully agree with Spiesel that text is rarely crystalline in meaning; it's just that lawyers are a lot more comfortable with text than with images and elevate text by comparison.  But epistemic humility would help a lot with interpreting text in copyright cases as well.

Copyright bullying as censorship

A good story at Salon about the use of meritless but terrifying copyright claims in service of the real agenda of silencing critics of a top Romney contributor and his supplement company (which also has faced trouble for some of its sales techniques, as detailed in the Salon piece).  Calling Public Citizen!

$3 million bond for corrective advertising in preliminary injunction

HT Eric Goldman, who recalled my earlier post on this case, which involved a preliminary injunction including corrective advertising.

Northern Star Industries, Inc. v. Douglas Dynamics, LLC, 2012 WL 507827 (E.D.Wis.)

The grant of an injunction is conditioned on posting security.  Damages caused by an erroneous preliminary injunction can’t exceed the amount of the bond, courts err on the high side, though they must give reasons for the figures chosen.

Defendant requested a $6.2 million bond, based on its engineering director’s estimate of costs for corrective advertising and replacement advertising at just under $120,000 each, and over $5.9 million in lost sales.  Northern Star disagreed.

First, the amounts claimed for creative work had to be eliminated since the court’s order would specify what the corrective ads must stay, which knocked $20,000 off.  Douglas also intended to shift away from safety to a new theme, possibly resulting in an entirely new production, but that wasn’t Northern Star’s problem, so the court allocated the cost of producing 45 seconds of replacement video to fix the false claims.

What about the big numbers?  Northern Star argued that lost profits was a more accurate measure of financial impact than lost revenue. But the court here was offered no profit margin information on the snow plow industry, so it stuck with lost revenue.  Still, Douglas had included estimated lost revenues for plows that it didn’t tout in the ad campaign the court found to be false.  This led to a total required bond of just under $4 million, erring on the high side.  (The court did not make clear how the lost sales figures had been calculated, but apparently the method was acceptable as applied to the advertised plows; while I have little sympathy for the defendants here, I do see an argument that corrective advertising might harm the entire brand, even the unadvertised models, though it would be hard to calculate how much.)

So, subject to the bond being posted, Douglas was enjoined not to republish various statements, and to edit the revised videos it had posted to include a court-required statement.  This statement had to be “recited by a narrator at a speed that is easily understood and consistent with the narrator's speech throughout the rest of the video … and while being read by the narrator, … displayed in print in clearly viewable black Myriad Pro 14 pt font on a white background.”  It was to say that the district court had granted a preliminary injunction, finding that, “subject to final determination of the merits of the  parties' claims, statements that ‘the BOSS Power V-XT v-blade cannot trip in the V or scoop mode’ and certain statements claiming or implying that users of blade-trip plows will be physically injured but users of Fisher/ Western edge-trip plows will not were literally false.  Accordingly, as preliminarily ordered by the Court, Douglas Dynamics withdraws those advertising claims.”  (Not the easiest statement to understand, I think.)

If, after editing, comparison tests or demonstrations were shown, the following should also be added: “The following series of comparison tests were conducted by Fisher/Western. The reliability of the test methodologies which included measuring speed with a speedometer without any type of calibration or verification and using of three different truck models although of a similar vehicle class have been called into question. Comparison tests should be as similar as possible with as many variables controlled as possible, and the variables in Dynamics' tests are not well controlled.”  Unless no test runs were shown, the video must include at least one test run showing Northern Star’s plow performing successfully.

Douglas also had to send a letter to all its dealers, post notices on its Facebook pages and Plowsite.com threads (which may go to show that competitor-plaintiffs know where consumers are getting their information) in the same font and size as other thread discussions, run full-page print ads publishing the corrective ads in a number of different specialty magazines.

Congratulations! Your ad isn't commercial speech

Jordan v. Jewel Food Stores, Inc., No. 1:10-cv-00340 (N.D. Ill. Feb. 15, 2012)

Michael Jordan was inducted into the Basketball Hall of Fame in 2009.  Sports Illustrated (whose publisher Time is a third-party defendant; interesting that Jordan didn’t try to bring it in) published a commemorative issue “devoted to celebrating his career.”  Time asked numerous businesses, including Jewel, to design a page for the issue “with some play on words or design that is specific to Michael Jordan.”  Jewel didn’t pay, but did agree to stock and sell the issue at special displays by the checkout counters of its grocery stores. 

Jewel’s ad features a pair of basketball shoes spotlighted on the hardwood floor of a

basketball court.  

23, the number Jordan wore for most of his tenure with the Chicago Bulls, appears on the tongue of each shoe, and the text reads: “A Shoe In!  After six NBA championships, scores of rewritten record books and numerous buzzer beaters, Michael Jordan’s elevation in the Basketball Hall of Fame was never in doubt!  Jewel-Osco salutes #23 on his many accomplishments as we honor a fellow Chicagoan who was ‘just around the corner’ for so many years.”

Underneath is Jewel’s logo and slogan, “Good things are just around the corner.” 

Jordan sued Jewel for state and federal trademark claims as well as violation of the Illinois right of publicity.  Jewel removed from state court and filed a third-party complaint against Time, seeking contribution and indemnification, at which point Time counterclaimed for breach of contract and indemnification.

The court ruled that the ad was noncommercial speech but declined to find that this was dispositive of all claims absent further briefing.

Procedurally, whether the speech was commercial was an issue of law, and the factors for the court to consider were also issues of law.  Jordan still argued that if relevant material facts were in dispute, the jury should be asked about them via special interrogatories.  The court disagreed.  The parties disputed not historical facts but legal consequences of those facts, and for SJ purposes it resolved all factual disputes in Jordan’s favor.

To determine whether speech is commercial, the 7^th Circuit asks whether it proposes a commercial transaction.  The court didn’t see this ad as doing so, since it was just congratulating Jordan.  “At the most basic level, … readers would be at a loss to explain what they have been invited to buy.”  Jordan invoked brand theory, arguing that the use of its TM and slogan “effectively propose a commercial transaction by inviting the reader to visit Jewel stores.”  Further, Jordan contended, the statement that he “was ‘just around the corner’ for so many years” explicitly linked him to Jewel’s ad campaign and thereby invited readers to enter into a commercial transaction.

In this posture, the court accepted Jordan’s “factual description of the role played” by the slogan.  But the conclusion—that use of the logo and slogan, and reference to the slogan in the congratulatory text, proposed a commercial transaction—did not follow given the context. 

The court then proceeded to offer several reasons that this was a special case, many of which will doubtless be seized on by plaintiffs’ counsel.  Initially, this issue was no ordinary Sports Illustrated.  It was a “special commemorative issue expressly designed as a paean to Jordan, a fact confirmed by its title, ‘Jordan[:] Celebrating a Hall of Fame Career.’”  Jewel’s ad embraced the issue’s theme, “focusing not on Jewel or its particular products and services, but on Jordan.”

True, the ad used Jewel’s logo, but that was the most effective way to identify Jewel as the speaker; Jewel wasn’t required to use the harder-to-identify corporate name, which might have caused “a moment’s hesitation or confusion.”

Likewise, the use of the slogan “was simply a play on words, a cheeky way to ensure that the congratulatory message sounded like it was coming from Jewel and not any from other person or entity.”  The court hypothesized Arnold Schwarzenegger congratulating the LA Lakers for winning the championship.  If he said, “Congratulations to our Lakers for ‘terminating’ the Orlando Magic and bringing home yet another NBA title, and to Kobe Bryant for winning the Finals MVP.  Let me join all Angelenos in saying that Kobe and the team surely will ‘be back’ in the 2010!,” the references to Terminator would personalize the congratulatory message.  “Who other than Schwarzenegger would congratulate the Lakers and Bryant in precisely that way?  The ‘Terminator’ references thus are deployed to make the congratulatory message more effective, not to tie the Lakers and Bryant to the ‘Terminator’ franchise in an effort to encourage readers to buy Terminator DVDs and video games and thereby enhance Schwarzenegger’s royalty checks.”  (The theoretical and practical criticisms of “trademark use” are powerful, but judges sure do like to reinvent the idea when it suits them.)

Jewel’s use of its slogan also personalized the message and reinforced the idea that Jordan was Jewel’s “fellow Chicagoan” and therefore a source of pride for Jewel and all other Chicagoans. “It is highly unlikely that the slogan’s presence would lead a reasonable reader to conclude that Jewel was linking itself to Jordan in order to propose a commercial transaction.”  Anyway, even if the slogan introduced a minimal amount of commercialism, “that element is intertwined with and overwhelmed by the message’s noncommercial aspects, rendering the page noncommercial as a whole.”

The court contrasted the Abdul-Jabbar case, where the ad at issue linked Lew Alcindor’s performance with that of Oldsmobile’s car.  “GM touted Alcindor’s accomplishments as a means to propose commercial transactions—sales of a particular Oldsmobile model—not as a means to congratulate him on honors he earned a quarter century before the spot aired.  The opposite is true of Jewel’s page.”

Even setting the “proposes a commercial transaction” test aside, the three factors the Supreme Court has identified as relevant to defining commercial speech also favored Jewel.  The factors: whether (1) the speech is an advertisement; (2) the speech refers to a specific product or service; and (3) the speaker has an economic motivation for the speech.  No single factor is necessary or sufficient on its own.

Jewel’s ad wasn’t a conventional ad, as the court already concluded, even though it used Jewel’s logo and slogan.  Jewel and Time used the term “ad,” but that was “convenient shorthand; there is no equivalently precise and pithy term for the kind of page that Jewel and others placed.”  Indeed, family friends of Jordan placed a page that was also called an “ad” by relevant parties, but it was not a conventional ad either.

Furthermore, Jewel didn’t pay money to run the page; it only agreed to stock copies in its store.  (I’m guessing barter doesn’t take an ad out of the “commercial speech” category without more, though.)  Nor did the ad focus on or praise any product or service.  It was timed to praise Jordan, not to any Jewel promotion.

The court also drew attention to the fact that Dominick’s Finer Foods, a defendant in a separate case filed by Jordan, placed an ad in the same issue. “The fact that Jewel and Dominick’s, fierce competitors in the Chicago grocery market, both placed pages in the commemorative issue is significant because anybody inclined to be swayed by Jordan’s appearance in an advertisement knows that he does not play on two or more sides of the same fence, commercially speaking. Jordan is Hanes, not Jockey or Fruit of the Loom; Nike, not Adidas or Reebok; Chevrolet, not Ford or Chrysler; McDonald’s, not Burger King or Wendy’s. A reader who purchased the commemorative issue and saw the Jewel and Dominick’s pages would know, instinctively, that the Jewel page was not an advertisement.”  The court noted that the Dominick’s page shows a steak and offers a coupon; “if somebody were to view one of the pages as an advertisement, it would be the Dominick’s page….  The reader would see the Jewel page for precisely what it is—a tribute by an established Chicago business to Chicago’s most accomplished athlete.”  (Given what the court says later, I’m pretty sure that the court is trying to make this prediction nondispositive to its analysis.)

As to the second factor, whether the ad refers to a specific product, Jordan argued that Jewel’s slogan and logo effectively referred to all of Jewel’s products and services.  The court disagreed.  “The name and slogan of any business will evoke that business’s products or services in general—McDonald’s, fast food; IKEA, affordable furniture; Mercedes, luxury transportation; Apple, stylish technology.  But the Jewel page does not refer to a specific product or service, which is the relevant inquiry.”  Even without a reference to a specific product, an ad might be commercial: “If Jewel’s page pictured a fully set Thanksgiving table, but no food or other products sold at Jewel stores, the page still might have been commercial.  But there is nothing in Jewel’s page even remotely as evocative of its products and services” (citation omitted).

The court accepted that Jewel had an economic motivation for placing the page, to bolster its reputation as a good Chicago citizen.  “To say that a for-profit corporation like Jewel has an ‘economic motivation’ for taking any particular action is to state a truism.”  But the Supreme Court has clearly rejected the idea that it follows that all corporate speech is commercial.  There must be something more, and that more was missing here.

The court then “recognize[d] that this conclusion rests in part on judgments regarding how reasonable readers would view the page.”  But such judgments had to be made, and the precedent said they had to be made as a matter of law.  Because judges aren’t experts in consumer perception, it was possible that consumer surveys could show whether people actually consider particular speech to have proposed a commercial transaction.  For this, the court cited the Supreme Court’s consideration of survey evidence for the second prong of Central Hudson (whether there’s a substantial government interest in regulating the speech that’s already been determined to be commercial), which I don’t think is quite on point, but ok.  (Note, however, that the 9^th Circuit has rejected surveying audiences about what counts as transformativeness for copyright fair use purposes, and that fair use serves a similar speech-protective role.  One reason not to ask consumers is that such a question might not be particularly meaningful to them: “does this page propose a commercial transaction?” is a weird thing to ask. At the very least we might need to train consumers with things that do and don’t propose commercial transactions first, as with genericity surveys.)

Anyway, it didn’t matter here because neither side submitted a survey.

The court held that it couldn’t yet decide the full implications of the noncommercial speech holding for Jordan’s claims.  Each side provided perfunctory arguments, so the court asked for further briefing.

CMI and state anti-piracy statutes

Thought of the day: There's an interesting paper to be written about state requirements to put the publisher/manufacturer on every CD & DVD, and the DMCA's CMI provisions, in contrast with the early history of English licensing, including requirements that publishers be identified.  The aim of that rule was to make it easier to identify and control seditious libel, but making identification a separate requirement simplified enforcement: someone who doesn't put a name on a book was violating the rule regardless of content.  The DMCA requires facilitation of infringement, but state regimes generally don't; still, it's hard to explain what those state laws are doing that isn't preempted, which is not to say that courts haven't tried.

Brought to you by Licentious Gotham, which also discusses publisher-disclosure requirements as ways to control the production of obscenity (compare also the current federal record-keeping requirements for producers of pornography).

Sure, we blew up the economy, but not with consumer-oriented conduct

M & T Bank Corp. v. LaSalle Bank Nat. Ass'n, 2012 WL 432890 (W.D.N.Y.)

M&T alleged that the defendants violated the law by failing to make interest payments owed to M&T on a $50 million note.  The court granted defendants’ motion to dismiss.

The Cairn defendants, Cairn Ltd. and Cairn Inc., co-issued $960 million in collateralized debt obligations, CDOs, based on subprime mortgages.  Greenwich, a registered broker-dealer, bought the notes for resale to investors.  It provided M&T with a Preliminary Offering Memorandum summarizing and describing the Cairn notes and the payment stream they (purported to) represent.  There were 13 classes of notes, each with a different level of priority.

M&T bought $50 million in Class A2A notes in 2007.  Only Class A1-VF notes had higher priority.  Greenwich allegedly owns all of those notes.  Cairn made defendant LaSalle the trustee responsible for making principal and interest distributions to note holders.  About a year after M&T bought, LaSalle notified M&T that there’d been a default event—quelle surprise, as Yves Smith might say.  LaSalle then explained that the underlying collateral earned a bit over $8 million in available interest proceeds, a little under $1.6 million of which was distributed to pay fees (because the servicer gets paid first, another charmingly disastrous incentive) and to pay the Class A1-VF notes.  Instead of getting paid out to the second priority noteholders, the remainder went into a Reserve Account for the benefit of Greenwich as Class A1-VF noteholder, as LaSalle interpreted the agreement it had with Cairn to require.  (So basically, the first tranche had to be paid in full before anyone else got paid a penny.  Well, I’m sure that will happen any day now!)

M&T, understandably chafed, brought suit.  The court first ruled that the terms of the CDO comported with LaSalle’s interpretation, thus getting rid of all claims against LaSalle and leaving only claims against Greenwich and the Cairn defendants for material misrepresentations in the offering memorandum, a violation of GBL sec. 349 as well as of the common law.

M&T’s position was that, if LaSalle’s interpretation of the agreement was right, then Greenwich and the Cairn defendants misled it about its priority.  The offering memorandum said that, “Following an Event of Default and acceleration of the maturity of the Secured Notes, payments of interest on the Secured Notes shall continue to be made in accordance with the Priority of Payments. As a result, interest on Subordinate Classes of Secured Notes (as well as other amounts set forth in the Priority of Payments) may continue to be paid prior to the payment in full of the principal amount of the Senior Classes of Notes.”

Bill Clinton ought to be so proud of the defendants’ arguments here, which the court proceeds to accept, except for the argument that the Martin Act (NY’s securities law) preempts common law and GBL claims.  The NY Court of Appeals just rejected that argument, concluding that the purpose of the Martin Act, “combating fraud and deception in securities transactions,” isn’t impaired by other causes of action with independent legal bases because such actions further the same goal of fighting fraud.  (Compare the 9^th Circuit’s analysis in the recent Honda case, which gave more weight to a state’s calibration of just how much fraud it wanted to tolerate.)

However, M&T’s claims failed on the pleadings.  Negligent misrepresentation requires:  (1) awareness by the maker of a statement that the statement is to be used for a particular purpose; (2) reliance by a known party on the statement in furtherance of that purpose; and (3) some conduct by the maker of the statement linking it to the relying party and evincing its understanding of that reliance. There’s only a cause of action if there’s a special relationship of trust or confidence between the parties, closer than in an ordinary business relationship.  In a business relationship, the necessary degree of dominance/reliance must exist prior to the problematic transaction, not as a result of it.

M&T argued that, as a broker-dealer, Greenwich had a duty to provide it with accurate information and disclose all material information relative to the transaction at issue. But M&T didn’t allege that Greenwich acted as its broker.  M&T further pointed to defendants’ expertise and unique and specialized knowledge of the collateral underlying the notes and its risk level, along with the structure of the CDO.  But, the court ruled, even assuming defendants understood the risks of subprime mortgages better than M&T, that didn’t make their expertise unique in the financial industry, as would be required to “engender the requisite high degree of dominance and reliance in a complex transaction among sophisticated parties.”

Furthermore, M&T didn’t allege actual reliance.  Even assuming that it had, defendants argued that reliance was impossible as a matter of law due to the disclaimers in the memo.  The memo said that it described only “certain provisions of the Secured Notes and that the Indenture,” did “not purport to be complete,” and was “subject to, and qualified in its entirety by reference to, the provisions of the Indenture.”  (Though especially those first two seem irrelevant: the statement about who had priority after default was in there, it just didn’t reflect reality.)  Moreover, the memo said that each note purchaser was “deemed to acknowledge, represent to and agree ... [it] has such knowledge and experience in financial and business matters that [it] is capable of evaluating the merits and risks ... of its prospective investment ... is financially able to bear such risk, ... is not relying on the advice or recommendations of [Defendants and specified others] ... and has had acecss [sic] to such financial and other information concerning the ... Notes as it has deemed necessary to make its own independent decision to purchase notes.”

The court was persuaded: when a plaintiff has been told that it has incomplete information, or needs to look elsewhere for more information, then it has willingly assumed the business risk that the facts may be different.  “It is well settled that a plaintiff cannot establish justifiable reliance when ‘by the exercise of ordinary intelligence’ it could have learned of the information it asserts was withheld.”  M&T didn’t allege that it requested a copy of the actual terms before proceeding, nor that it sought to add protective language to the agreement. Thus, its purported reliance on the memo was unreasonable as a matter of law.

Finally, the court also accepted the alternative argument that the alleged misrepresentation was more an opinion about how the CDO would work than a material fact.  The statement was found in a portion of the memo called “Risk Factors,” prefaced by a stated expectation “that prospective investors interested in participating in this offering are willing and able to conduct an independent investigation of the risks posed by an investment in the Notes.”  The fact that the summary of terms was a different section supported the conclusion that the risk factor discussion was opinion.

So did the content.  The use of the statement that subordinate tranches “may” continue to be paid prior to full payment of the senior tranche was indefinite, thus confirming that it was a statement of opinion. 

Except: if the junior tranches could not be paid before the senior was paid off by the explicit terms of the CDO, as the court just concluded, then it’s not indefinite in a way that matters; if you said that I “may” flap my wings and fly to the moon, you’d just be wrong.  Given the order of the statements—“payments of interest … shall continue to be made in accordance with the Priority of Payments” and then “Subordinate Classes … may continue to be paid prior to payment in full of the principal amount of [the senior tranche],” I would find it reasonable to conclude that “may” here means “it’s possible depending on how many people are paying off their crappy subprime loans” rather than “depending on what the CDO really means, you may get zip.” One of these, of course, is rather more in the control of the CDO creator than the other (though of course plenty of CDOs were deliberately packed full of crappy subprime loans, so I don’t want to say there’s too much of a distinction).

But the court thought it was just opinion, “or, at best, an expression of expectations as to the general impact a possible future event might have on multiple classes of notes.”  (Note that the “future event” in the court’s analysis must necessarily be a determination of the legal meaning of the CDO terms, rather than the housing market collapse, and indeed the court cited several cases about how statements about legal liability are opinion.)

The GBL claims also failed: they require (1) a “consumer-oriented” transaction, (2) deceptive acts or practices/false advertising, and (3) an injury caused thereby.  Most NY and federal district court cases haven’t allowed GBL claims in connection with securities transactions, because they aren’t normal consumer purchases and they’re already heavily regulated by other laws. Even without the great weight of authority, the court found other factors favored rejecting GBL claims.  Though M&T’s status as a business didn’t bar it from suing, the conduct at issue still needs to have a broad impact on consumers at large.  The court didn’t think this conduct was consumer-oriented just because of the “ripple effect” of another CDO implosion on the credit market.  More generally, the amount of money involved, along with the sophistication of the parties, were important factors.  The relevant sections of the GBL offer actual damages or discretionary treble damages up to $500/$10,000.  “The modest recovery available under these statutes weighs against their application to cases involving hundreds of thousands and perhaps millions of dollars and arising from complex transactions among sophisticated parties.”

Case dismissed with prejudice.

I wish I’d thought of the Gold Toe sock example in this Duetsblog discussion of why Louboutin’s red sole trademark registration, even if valid when applied to a shoe with a contrasting color on top, provides no rights against YSL’s monochrome shoes.  The blue Nike shoe v. the Keds blue mark is another good one.  Our brief talked about red jeans and the Levis red tab, which I think is the same thing, but Gold Toe is just a really clear example.

Empirics on qui tam relators as private AGs

Just read David Freeman Engstrom’s super-interesting empirical paper Harnessing the Private Attorney General: Evidence from Qui TamLitigation, which has implications for hiring private firms to assist AGs in consumer protection cases as well. The paper also revealed this tidbit: business competitors are quite successful in pursuing qui tam cases to a successful outcome but achieve small impositions (awards) when they do.  Engstrom suggests that this may lend credence to a concern that business competitors bring False Claims Act claims as part of a broader business dispute, perhaps along with other types of claims (such as antitrust), but with less focus on maximizing impositions.  Perhaps because the US government, for all its size, is rarely a key customer of the parties who tend to use the Lanham Act to sue each other, I haven't seen many Lanham Act-FCA claims (indeed none come to mind at the moment), but it would be interesting to collect a list of the full range of business-on-business claims these days.

Standing manages to screw up non-standing case

CHW Group, Inc. v. Better Business Bureau of New Jersey, Inc., 2012 WL 426292 (D.N.J.)

CHW sells home warranties, and objected to the BBB’s rating system, which was allegedly a two-tier pay-to-play system where “donating” to the BBB automatically improved a company’s ratings.  CHW also alleged that the BBB’s letter grading system unfairly evaluated companies, for example by counting a consumer-induced delay in dispute resolution as delay by CHW.  CHW has consistently had a BBB rating of D- or F, despite its appeals and its request to be unrated.  It alleged that the BBB told CHW that if CHW paid for accreditation, the letter grade “would dramatically improve.” It also alleged that the bad grades harmed its business.

It sued for Lanham Act and state law violations.  The court found that the BBB statements at issue didn’t appear in “commercial advertising or promotion” according to the widely adopted Gordon & Breach test: (1) commercial speech; (2) by a defendant who is in commercial competition with the plaintiff; (3) for the purpose of influencing consumers to buy defendant's goods or services; (4) disseminated sufficiently to the relevant purchasing public.

Though the Third Circuit hasn’t yet adopted the test, it’s quite popular.  CHW argued, quite correctly, that Gordon & Breach is inconsistent with Conte Bros. Automotive, Inc. v. Quaker State–Slick 50, Inc., 165 F.3d 221 (3d Cir. 1998), which explicitly holds out the possibility (though not the reality) that noncompetitors might have standing to allege false advertising under the Lanham Act, which would seem to imply that competition is not an element.  If Gordon & Breach applies plus Conte Bros., then Conte Bros. serves only to strip competitors of standing and to make analysis more difficult.  Of course, this just goes to show that Conte Bros. is wrong to apply antitrust standing tests to Lanham Act cases and that Gordon & Breach serves all the worthwhile plaintiff-limiting functions to be had from a standing test.  But the court here was having none of it, for the kind of bad reason endemic to Conte Bros. standing analysis: “Considering the Third Circuit's Lanham Act prudential standing test asks whether the parties are in commercial competition, it would likely endorse [the] second element of the Gordon & Breach test.”  Um, no.  Conte Bros. purports to be a balancing test, such that strength on one element can balance out weakness on another.  Gordon & Breach requires each factor to be satisfied.  Just because they’re both called “tests” doesn’t make them consistent.

At least the court’s error doesn’t get in the way of the right result here.  The parties aren’t competitors either for warranty services or business rating services.  Moreover, CHW didn’t allege that CHW’s bad grade was generated for the purpose of influencing CHW’s customers to buy the services of the BBB, as required for prong three of Gordon & Breach.

After dismissing the Lanham Act claim, the court declined to exercise its supplemental jurisdiction over the remaining state law claims.