Wednesday, March 20, 2019

court, while uncomfy with some Amazon techniques, declines to grant PI

Comphy Co. v., Inc., NO. C18-1460RSM (W.D. Wash. Mar. 12, 2019)

The Comphy Company markets itself as a luxury company, historically supplying its linens to luxury spas. Ultimately, Plaintiff decided to start retailing its products online through its own website, though it doesn’t market directly to customers and instead relies upon word of mouth and first-hand exposure at hotels, spas, and bed and breakfasts utilizing its products.

Amazon solicited Comphy several times to sell its products on Amazon’s platforms, but Comphy declined based on its luxury strategy. Nonetheless, Amazon bought keyword advertising utilizing keywords including COMPHY from several search engines, resulting in ads for, e.g., “Comfy Sheets Queen”; “Shop Comfy Sheets” “Comphy Co Sheets”; and “Comphy Company Sheets at Amazon.” Likewise, if consumers use Amazon’s own-site search and start typing “comph,” Amazon’s search bar provides possible searches including for “comphy sheets,” “comphy company sheets,” and “comphysheets” along with seven other unrelated possible searches. Because Comphy’s products are not available through Amazon, a search for “comphy sheets” provides products similar to Plaintiff’s products, including bedding offered for sale by “Comfy.” On one product advertised in response to a search for “comphy sheets,” Amazon prominently displayed “Amazon’s Choice for ‘comphy sheets,’” though Amazon represented that it had stopped doing that specifically (but didn’t agree to an injunction requiring that cessation).

Comphy projected a significant increase in its online sales in 2018 but hadn’t met that growth rate. It requested an injunction against Amazon’s allowing third parties’ unauthorized use of COMPHY or highly similar terms such as COMFY to promote bedding, sheets, pillows and related products; selling merchandise under the COMPHY COMPANY, COMPHY SHEETS or COMFY SHEETS storefront in connection with those products; using “Comphy Company Sheets”, “Comphy” (either alone or with other words), or “Comfy” applied to allegedly infringing products (either alone or with other words) to display “infringing and unlabeled third-party sheets”; autosuggesting searches for “Comphy”, “Comphy Sheets”, “Comphy Company” and “Comfy Sheets” when users begin to type the first few letters; using “Comphy” on product search result pages in phrases like “Amazon’s Choice for Comphy Sheets”; and using COMPHY or COMFY SHEETS as keywords with online advertising networks. The breadth of Comphy’s claims and its failure to segregate particularly disturbing uses from the other behavior it challenged doomed its request for injunctive relief.

Comphy’s failure to disaggregate Amazon’s uses made it unlikely to succeed on the merits overall.

First, it wasn’t clear whether or to what extent Comphy had a valid mark in “Comphy” alone. Its registrations were for stylized versions of its name. The presumptive validity of the registration was rebutted for these purposes because, first, the registration was for goods other than those at issue here, specifically: “Linens and bedding for health spas, namely, towels, pads in the nature of bed pads, mattress pads and table pads, sheets, duvets, comforters, pillow cases, pillow shams, and table skirts.” That didn’t cover the consumer bedding at issue here; Amazon wasn’t alleged to infringe on the spa market. Second, the registration didn’t cover the “bare” word mark, which matters because “comphy” is a mere misspelling of the descriptive-for-linens term “comfy.” Comphy itself testified that it consistently used the design/logo.

The registered marks

Comphy didn’t succeed in establishing rights in “comphy” as a text mark. Plaintiff may not “remove a common descriptive word from the public domain by investing his goods with an additional quality, thus gaining the exclusive right to call his wine ‘rose,’ his whisky ‘blended,’ or his bread ‘white.’” “Similarly, Plaintiff does not have the exclusive right to call its goods ‘comfy.’” Comphy didn’t establish commercial strength; it argued that it was the “brand standard” for luxury hotels, spas, and bed and breakfasts and that it has “expended extensive sums annually since 2003 on advertising to promote its Comphy brand and branded products, via trade shows and other advertising and marketing in industry publications targeting bed and breakfasts.” But that all involved use of the stylized “C” mark, “which lends distinctiveness to the mark.” Nor did strength in the luxury spa market indicate strength in the consumer retail market, especially since Comphy doesn’t market to consumers but relies on personal exposure and word of mouth.

Nor was Amazon’s use clearly confusingly similar. Whether the use was confusingly similar depended, in part, on the strength of the mark. Network Automation thought that having an inherently distinctive mark could lead to an inference that a consumer who uses the mark is searching only for that particular source (an assumption that is itself often unwarranted), but that reasoning didn’t apply here. Amazon argued that COMPHY is a common misspelling of “comfy”: within Amazon reviews, COMPHY is used in reference to bedding only 9% of the time and used in reference to Comphy’s goods only slightly more than 1% of the time. The court agreed that use of “comphy” as a search term didn’t necessarily indicate an intent to search for Comphy’s products, even when it was used in reference to bedding. Amazon’s survey also determined that 13% of consumers regarded COMPHY as referring to a particular source for bedding, but that more than 12% of those consumers also regarded “comfort”—a non-existent control—as also referring to a particular source for bedding. [Clever control, since there are “comfort + other word” marks out there.]

Proximity of goods and similarity of marks did weigh in Comphy’s favor. In a footnote, the court indicated that its analysis might differ “profoundly” if Comphy had focused only on Amazon’s search engine ads for “Comphy Co Sheets” at Amazon, which makes sense to me, or on Amazon’s use of the search term “comphy sheets” within its own website to offer consumers “comfy” brand sheets or other sheets marketed as comfy or comfortable, which as stated doesn’t—if the sheets are plausibly comfy, then descriptive use should be just fine. (Though admittedly that isn’t easy to show in the Ninth Circuit, given its defiance of the Supreme Court’s view in KP Permanent.) Anyway, Comphy “elected to lump the contexts and uses together, and the Court declines the invitation to scour the limited record to craft a legally defensible injunction.” In particular, only uses of “comphy” by an Amazon customer who perceived that word as a mark but who confusedly bought “comfy” sheets instead would involve confusion; other scenarios involved no confusion at all, or at most diversion. “And, the Court can only determine whether a customer knows of Plaintiff’s sheets based upon the strength of the mark.”

There was evidence of actual confusion, including Amazon reviews referring to Comphy and a declaration from an Amazon consumer who intended to purchase Comphy sheets, bought “Comfy Sheets” on Amazon, realized his mistake when the sheets arrived, and returned the Comfy Sheets. The court found the evidence of actual confusion “often compelling,” but this was only a small percentage, and Amazon pointed out that people who pick descriptive terms invite a certain amount of confusion. “The Court agrees that some actual confusion may exist even if a reasonably prudent consumer would not be confused.”

Marketing channels: favored Comphy. Degree of care: Comphy’s self-positioning as a luxury company meant its consumers weren’t “wholly unsophisticated”; neutral.

Amazon’s intent: Amazon’s prior solicitation of Comphy’s business didn’t indicate a bad intent; there was no evidence that the prior business inquiries were related to Amazon’s current actions. Intent was “essentially neutral.”

Balancing the factors, there wasn’t a likelihood of success on the merits.

Separately, Comphy didn’t show irreparable harm. Sales growth short of Comphy’s ambitions wasn’t irreparable harm, nor did Comphy adequately tie its lower-than-desired rate of increase to Amazon’s actions. Nor would money damages be inadequate to remedy this “mainly financial” harm.

Lost control over reputation: “misuse of a trademark no longer results in a presumption of irreparable harm.” Comphy showed evidence of consumer confusion and dissatisfaction, but dissatisfaction with Amazon’s offerings in the absence of confusion wasn’t relevant. Only if dissatisfaction were attributed to Comphy would there be harm to its brand, and there wasn’t evidence of that. Nor did Comphy explain why final remedies wouldn’t be adequate. “Indeed, this case appears quite distinct from prior cases where interaction with confused consumers cannot be remedied because those consumers are unknown to the parties. Here, there seems to be a much higher chance that, if liable, Defendant could contact almost every purchaser of the allegedly inferior products and seek to repair any damage that may have been done to Plaintiff’s brand.”

In conclusion, the court suggested that Amazon was very close to (and perhaps even over) the legal line in some of its acts (“Comphy Co.” in keyword-triggered ad text!), but still declined to grant relief on this record.

Apple's misleading use of "episode" to describe promo clips could lead to liability (w/o its contract)

Zaragoza v. Apple Inc., 2019 WL 1171161, No. 18-cv-06139-PJH (N.D. Cal. Mar. 13, 2019)

Plaintiffs sued Apple for how it sells TV seasons on its iTunes store. The home page for each season “provides general information about the season and three purchasing options,” which include buying individual episodes, buying an existing full season, and buying all current and future episodes of an as-yet-to-be-completed season (Season Pass). Apple represents the number of “Episodes” available in a season on each season’s home page, with individual video clips in a horizontally scrolling list along the bottom, with cost information and text along with a thumbnail image.

Plaintiffs alleged that Apple delivers fewer than the advertised number of episodes with its “Buy Season” or “Season Pass” options, because Apple counts both promotional videos and what consumers allegedly understand the word “episode” to mean—plot-based episodes of a television show—in its advertised number of episodes. Plaintiffs thus received fewer episodes than they believed they were purchasing, and also received a smaller discount by buying the entire season than they believed they were getting compared to buying individual episodes. For example, plaintiff Zaragoza purchased a season of “Genius: Edison” that advertised “13 Episodes” at the time of purchase, but only six of those 13 were plot-based episodes, and seven were promotional videos. By season’s end, Zaragoza received only four more plot-based episodes and iTunes was advertising “22 Episodes,” which included ten plot-based episodes and 12 promotional videos. Likewise, iTunes ultimately advertised “17 Episodes” for the first season of “Killing Eve,” but only eight of those videos were actually “episodes,” as plaintiffs allegedly understood the term.

Each “episode” can also be selected, which then presents more detail about it, including a title, the “episode number,” the length of the video clip, its individual price, and a written description.

Apple argued that plaintiffs’ interpretation of “episode” was implausible and that a reasonable consumer had to understand that “episode” includes advertisements, trailers, promotional videos, and other videos that are not part of the show’s narrative. Apple contended that its scrollable list of videos appearing immediately below the word “Episode” provided context that necessarily dispels any belief to the contrary.

This was not the “rare situation” where plaintiffs’ alleged understanding of the word “Episodes” was implausible as a matter of law. “It is plausible that consumers understand the word ‘Episode’—particularly in the context of a description of a season of a television series—to mean an episode that is part of the television show’s season, and not a commercial for the show or another type of promotional or behind-the-scenes video. Reviewing the word’s definition in readily-available dictionaries confirms that plaintiffs’ alleged understanding could be found reasonable by a trier of fact.” [Notably, those dictionary definitions didn’t suggest that Apple’s interpretation was also reasonable.] Though context does matter, the court wasn’t willing to hold that, as a matter of law, a reasonable consumer must scroll through the list of videos in sufficient detail to view the curative information. Moreover, there was a factual issue about what consumers of the Season Pass feature would be able to view in the list of videos when making their purchases. “The Apple TV appears to make no representation about how many future episodes there will be, but rather reports only on the total number of video clips associated with a show’s season at the time the consumer views that season’s home page.” If it said there were 10 episodes at the time of purchase and there were 5 narrative episodes and 5 promo videos at the time, a reasonable consumer might expect that 10 episodes was the total number of narrative episodes in the season. Moreover, there were factual questions “concerning how much a consumer would have to investigate into the Apple TV menu structures to be exposed to much of the allegedly-curative information Apple describes.”

Apple also argued that it didn’t sell “goods or services” within the meaning of the CLRA, but only licenses to view content. The CLRA definitions say “(a) “Goods” means tangible chattels bought or leased for use primarily for personal, family, or household purposes, ... (b) “Services” means work, labor, and services for other than a commercial or business use….” And it provides that it “shall be liberally construed and applied to promote its underlying purposes, which are to protect consumers against unfair and deceptive business practices and to provide efficient and economical procedures to secure such protection.” The complaint alleged that the “Season Pass” was a service, including a promise to offer current and future episodes for viewing on an ongoing basis as the season progresses. The court refused to take judicial notice of the alleged contract between the parties. Though these purchases weren’t “tangible chattels,” plaintiffs plausibly alleged a purchase of services and there was at least a factual dispute. [We call VOD a service, even if it inherently involves “licenses” as well.]

Warranty claims survived for similar reasons, though the California U.C.C. applies only to contracts for the sale of “goods.” Unlike under the CLRA, goods are “all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale[.]” Courts look to the “essence of the agreement” and “have generally found that ‘mass-produced, standardized, or generally available software, even with modifications and ancillary services included in the agreement, is a good that is covered by the UCC.’ ” Plaintiffs adequately alleged that the essence of the agreement concerned the sale of the episodes. (See also the “Buy Now” button and this very helpful article by Aaron Perzanowski & Chris Jay Hoofnagle.) “Episode” could be an affirmation of fact or promise relating to the goods sold and therefore a warranty.

Lanham Act claim based on patent threats fails even with invalidation of the patent

American Fireglass v. Moderustic, Inc., --- F.Supp.3d ----, 2019 WL 1227963, No. 15-CV-2866 JLS (BGS) (S.D. Cal. Mar. 15, 2019)

The parties compete in the market for pieces of broken tempered glass for use in fireplaces and fire pits (Moderustic also sells “fireglass” for use in aquariums), where it apparently gives an appealing visual effect (fire on ice). Moderustic obtained a patent for a method of creating tumbled tempered glass and began contacting American Fireglass, its dealers, and other glass sellers alleging infringement. In a newspaper article, its principal stated that “he hopes to shut down competition and bring his annual sales up.”

American Fireglass originally tumbled many of its products, but by November 2014 it had completely “stopped tumbling the tempered glass fragments that it sold because tumbling slowed production and caused the glass fragments to become scratched and dull and less desirable.” It “began removing references to tumbling its fireglass from its advertising and promotional material, including its web site.” However, it “mistakenly overlooked some products that appeared on its website” but “removed these remaining references to tumbling ... immediately after it was brought to [Plaintiff’s] attention in August 2016.”

American Fireglass sued Moderustic to invalidate the patent and for its patent-related threats; Moderustic counterclaimed for false advertising about tumbling. The court invalidated the Moderustic patent as obvious. Its remaining counterclaim, false advertising, survived summary judgment because the claims on the website were literally false as to some products, and there is no “de minimis damage” exception to the Lanham Act. [The real issue here sounds like it might be materiality.] “[A]n inability to show actual damages does not alone preclude [ ] recovery” under the Lanham Act, but the real issue was American Fireglass’s lack of evidence on lack of harm.

Moderustic sought summary judgment on the patent-based Lanham Act/UCL claims. In the Ninth Circuit, “where Lanham Act claims ... are based on a defendant’s representation that someone infringed his patent, plaintiff must show that defendant’s representation was made in bad faith.” Moderustic’s statements in letters that it had been issued patents covering its methods weren’t literally false—it had an issued patent at the time, and while the PTO had rejected a different patent, “it was technically being reconsidered by the Federal Circuit at that time the letters were sent” and the letter clearly indicated its status. Thus, no reasonable jury could find the statements misleading, especially since the second patent was duplicative of the first.

Nor was there evidence of bad faith. “Without a showing that Defendant had some malicious intent, rather than simply asserting its rights as the patentholder, the Court cannot find bad faith present here.” The same result obtained under California’s UCL.

commercial speech requirement defeats Lanham Act claim against competing news channel

Tang v. Guo, No. 17 Civ. 9031 (JFK), 2019 WL 1207859 (S.D.N.Y. Mar. 14, 2019)

Plaintiff Tang is a political activist, author, and “one of the leading Chinese political dissidents.” He currently runs two pro-democracy nonprofit organizations and co-founded the online, independent media outlet “Conscience Media,” which are supported with donations. Tang also “conducts and host[s] conferences and fundraising events.”

In early to mid-2017, defendant Kwok, “a Chinese multi-billionaire and real estate mogul,” began to market a YouTube series, “Everything Is Just Beginning.” Tang alleged that the real purpose of “Everything Is Just Beginning” “was to compete with Mr. Tang personally and socially, as well as professionally, in the online media business.” Kwok allegedly “began to contact Tang’s potential donors” to dissuade them “from doing business with or contributing to ... Tang or his online media outlet, Conscience Media.” Kwok also began posting “taunting material and defamatory statements” about Tang and his wife Jing on YouTube and Twitter, accusing them of being spies and accusing Tang of defrauding donors and of being a “swindler” and convicted rapist. As a result, many individuals allegedly cancelled their upcoming trips to Tang’s Democratic Revolutionary Conference and Tang lost donors to his organizations and website.

Tang sued for violation of the Lanham Act and brought various state law claims for slander, tortious interference, and the like. The court dismissed the Lanham Act claim for want of commercial speech, and declined to retain jurisdiction over the pendent state claims.

Tang argued that Kwok’s web postings were commercial speech because he made them to divert viewers and donors from Tang’s media platform to “Everything Is Just Beginning.” In addition, Kwok allegedly presented links to his real estate properties alongside his videos. The court found that Tang failed to adequately allege economic motivation from his communications on YouTube, Twitter, and to individual donors. Though Kwok allegedly sought to gain viewers, they didn’t allege that he intended to profit from that increase by, for example, ad revenue or donations. As to links to Kwok’s Chinese properties, there were no allegations that Kwok’s communications were made with the intent of gaining potential customers to his real estate ventures. As the court noted, the subject matter of the videos didn’t relate to Kwok’s hotel business.

Tuesday, March 19, 2019

Expedia's "sold out" labels and diversionary phone numbers for hotels lead to class certification

Buckeye Tree Lodge & Sequoia Village Inn, LLC v. Expedia, Inc., No. 16-cv-04721-VC, 2019 WL 1170489 (N.D. Cal. Mar. 13, 2019)

Really interesting false advertising class action, with a smaller-than-plaintiffs-wanted class of hotels certified against Expedia, which offers hotel bookings on its websites. The plaintiffs own hotels that are not available through Expedia. Apparently, the information of a hotel that hasn’t contracted with Expedia sometimes “finds its way onto one of the numerous websites Expedia operates, including,,, and”  When customers search for their hotels on Google or within one of Expedia’s websites, Expedia allegedly falsely suggests that these hotels can generally be booked on the websites, but that they are “sold out” for the period that the customer wants to book them. Expedia then allegedly steers customers to similar hotels that are, in fact, available on its websites.  I’m interested in what Eric Goldman will think—he generally doesn’t like holding websites liable for design features, but “sold out” sure seems likely to mislead consumers. The Lanham Act is strict liability, and it may make sense to require advertisers to bear the costs of mistakes like this one--as this case indicates, they lack nonlegal incentives to fix the problem on their own.

An ad on Google may offer a customer the chance to book a room at the searched hotel through Expedia’s websites. When the customer clicks on the ad and navigates to the “infosite” page for that hotel on Expedia’s sites, they will see a picture of the hotel, a map of where it’s located, a star rating, and details about the property’s amenities, like parking, wifi, and breakfast. Sounds pretty standard for a website that can provide bookings, but … “Next to the hotel’s name and information, the website will communicate some variation of the message: ‘We are sold out.’” The same basic thing happens to a customer who starts searching on an Expedia site and picks a specific not-carried hotel from the list of search results.

Expedia also lists a phone number with each hotel, both on the infosite and search results pages. But “[t]he numbers simply connect to the Expedia call center,” and call center employees are trained on how to handle “customers [who] think they are calling the hotel directly,” “[b]ecause ... the placement of our phone numbers within the hotel search results or on the hotel details page of the website[ leads] some customers [to] think they are calling the hotel directly.” The employees are instructed to encourage callers to book at hotels that have booking agreements with Expedia.  (Okay, even I think an initial interest confusion claim passes the laugh test here.)

For named plaintiff Buckeye Tree Lodge, from January 2015 through August 2016, 149 people landed on the Buckeye infosite page on Expedia; four of those people subsequently made a reservation with another hotel during the same visit to the website.  Only one of the named plaintiffs was able to get itself removed from Expedia before joining the lawsuit; the others weren’t until they sued/joined the suit.

To certify a Rule 23(b)(2) class to pursue injunctive relief, the plaintiffs needed to show standing, including a likelihood of future injury for the class. Expedia argued that the named plaintiffs lacked standing because they weren’t listed on the websites anymore. But defendants can’t “rob a court of jurisdiction by taking strategic unilateral action to moot a plaintiff’s claims before the plaintiff has had the opportunity to seek class certification.” Expedia’s reform wasn’t “genuine, irrefutably demonstrated, and comprehensive”: there was no evidence that it had “made a meaningful attempt to ensure that its website will stop suggesting that hotels it cannot book are sold out.” Indeed, the court thought that the named plaintiffs themselves could end up on Expedia’s websites again because Expedia hadn’t taken measures to stop that.

Rule 23(a)’s numerosity, commonality, typicality, and adequacy of representation requirements were satisfied, as was Rule 23(b)(2)’s condition that the plaintiffs seek “uniform relief from a practice applicable” to the whole class, but only for a specific class: “owners of hotels that do not have booking agreements with Expedia and are not capable of being booked through Expedia, but appear on Expedia’s websites.”  Commonality was the only serious question, and proceeding as a class would generate common answers to the false advertising requirements given the facts above. Did the phone numbers mislead consumers? Did “We are sold out” mislead the reasonable consumer to think that the hotels are fully booked? If so, were the hotels likely to lose business due to Expedia’s conduct? Classwide evidence could be provided, including through surveys.

Expedia argued that it used different language during the class period, including “We have no rooms available for your selected dates ...”, “No rooms available on our site for the selected dates ...”, or “Sorry, the [hotel name] is not available on for your travel dates. You may choose alternative travel dates OR select from the hotels below.” It didn’t track which unavailability messages were displayed to which customers. However, three of the websites used the same unavailability message on their search results page throughout the class period: “We are sold out.” Further, the messages weren’t so different or so numerous that they couldn’t be evaluated through common proof. And because a class was being certified only for injunctive relief, the plaintiffs might only need to evaluate the current messages.

Expedia also argued that typicality was defeated by the myriad unique ways through which the plaintiffs’ information landed on the websites. For example, named plaintiff Buckeye had begun the onboarding process to create an account with Expedia, but ultimately did not go through with the agreement. Plaintiff Mansion’s information got to Expedia because the hotel had contracted to share its information with a third party, TravelClick, that itself disseminated the information to three distribution systems, which in turn gave the information to Expedia. When the Mansion ended its relationship with TravelClick, two of the distribution systems failed to tell Expedia that it would no longer be providing the Mansion’s data, and the other named plaintiffs had similarly complicated stories of data-sharing.

But the plaintiffs were all not capable of being booked through Expedia, which made the Lanham Act question of deception uniform.  Other common questions included: “Given the automated-but-disorganized nature of the online travel industry, does the Lanham Act impose on Expedia an affirmative obligation to institute controls to ensure that its systems are not causing customers to be misled about availability at unaffiliated hotels? And if so, is Expedia satisfying this affirmative obligation?”

And injunctive relief would uniformly benefit the class members. “Expedia could also be required to clearly indicate when listed phone numbers connect directly to its call centers. It could be enjoined to ensure that Google ads pertaining to unbookable hotels clearly say as much. And … Expedia could be ordered to take measures to better comb its system to ensure that unaffiliated hotels are not being listed in the first place.”

The court declined, however, to certify a Rule 23(b)(3) class to seek disgorgement Expedia’s profits for want of predominance. Plaintiffs “failed to proffer a model or a legitimate theory for how those damages would be estimated, let alone disseminated among class members.” They couldn’t explain how they’d prove sales related to Expedia’s false advertising. An earlier model estimated the percentage of all hotels in Expedia’s inventory that were actually unaffiliated and were marked, like the plaintiffs’ hotels were, as “sold out.” Plaintiffs’ counsel previously proposed that their disgorgement award should be that percentage of Expedia’s total revenue, but that percentage wasn’t logically connected to consumers’ reaction to the false advertising here.  Nor would the court certify a limited class action to decide common issues of liability under Rule 23(c)(4) class, because that wouldn’t advance the disposition of the litigation as a whole.

consumer successfully pleads falsity for "weight management" supplement

Nathan v. Vitamin Shoppe, Inc., 2019 WL 1200554, No. 17-cv-01590-BEN-KSC (S.D. Cal. Mar. 12, 2019)

Vitamin Shoppe sells Garcinia Cambogia Extract with a label promising “Weight Management” and “Appetite Control.” Nathan alleged that this was false and misleading, since GCE (also known as HCA) can’t deliver those benefits over placebo. Dismissing a previous complaint, the court emphasized a distinction between “Weight Management” and “Appetite Control” and the alleged misrepresentations about weight loss, which the court thought was completely different. (Given the reasons most, perhaps all, people take supplements to manage their weight and control their appetites, I consider that exactly the kind of legalistic distinction that consumer protection law is supposed to protect consumers against.)

In the amended complaint, Nathan added references to more studies and alleged misrepresentations about weight management and appetite control specifically.  

First, this wasn’t a pure lack of substantiation claim.  “[A]n advertising claim is false if it has ‘actually been disproved,’ that is, if the plaintiff can point to evidence that directly conflicts with the claim.” Nathan did so here because her cited studies tested, among other things, whether the supplement might affect body weight regulation by inducing satiety and reducing food intake, and found no statistically significant difference from placebo, showing that it was ineffective “with respect to satiety and energy intake.”  The study measured variables relevant to “Appetite Control” and “Weight Management” (e.g., hunger, appetite, anticipated food intake, desire to eat, fullness, satiety, and thirst) and reached a conclusion contradicting the label claims.

Nathan further alleged that, “for a supplement to be effective in aiding weight management, it must help users either (1) lower their energy intake, (2) increase their energy output, or (3) otherwise alter the manner in which the body processes the energy they consume.” As pled, her cited studies indicated that the supplement did none of these things: the supplement didn’t change calorie intake, metabolism or energy expenditure, or fat oxidation (the only relevant mechanism for (3)).  The court declined to parse the studies further on a motion to dismiss.

Vitamin Shoppe argued that no reasonable consumer would be deceived because the label didn’t include words like “weight loss” or “appetite reduction,” and provided a disclaimer: that its “statements have not been evaluated by the Food and Drug Administration,” and it “is not intended to diagnose, treat, cure or prevent any disease.” Nonetheless, it was still plausible that a consumer would be misled by “weight management” and “appetite control.” Nor would the disclaimer (which of course doesn’t actually disclaim any of the allegedly false/misleading parts of the statement, even if it goes indirectly to the level of proof behind them) suffice on a motion to dismiss.

Vitamin Shoppe argued, as the awful and now-rejected-in-the-9th-Circuit In re GNC case did, that “the mere existence of scientific support and an acknowledgement that the issue is not settled are fatal to Plaintiffs claims.” That was a weighing of the evidence inappropriate on a motion to dismiss.

The court also declined to stay the case under the primary jurisdiction doctrine. This was “a typical false advertising case well within the province of the courts,” and there was no evidence that the FDA had any level of interest in regulating GCE products in this context.

Under settled law, though, Nathan couldn’t assert claims for injunctive relief because she alleged the product was worthless, so she’d have no reason to buy it if the labels were trustworthy.

Rule 9(b): it was enough to allege that in approximately “February 2017 in San Diego,” she “purchased a 180-caplet bottle of [the Product] for approximately $20 from Vitamin Shoppe” without identifying the exact address, date of purchase, purchase price, or whether she paid cash or credit. Nor was she required to allege that she consumed the product, that she took it as directed, or her weight and exercise habits, none of which were relevant to the alleged mislabeling.

For the reasons discussed above, she also properly alleged a breach of express warranty claim: these were plausibly affirmations of fact or promise, not “merely indications of use for the Product.” So too with the implied warranty of merchantability; her claims plausibly indicated that the product was “not ‘fit for the ordinary purposes for which such goods are used’ or fails to ‘conform to the promises or affirmations of fact made on the container or label.’” She wasn’t required to try the product to bring these claims.

mere market participation insufficient to allege standing in noncomparative advertising case

AAVN, Inc. v. Westpoint Home, Inc., 2019 WL 1168102, No. 17-CV-8329 (N.D. Ill. Mar. 13, 2019)

AAVN sells woven textile fabrics, including fabrics made from a cotton-polyester blend. AAVN’s president owns patents that teach a method of manufacturing a cotton-polyester blended textile to successfully achieve high thread counts. WestPoint sells bed sheets it advertises as 1,200 thread count sheets, but that allegedly have a 257 or 236 thread count according to a third-party laboratory test of two samples.

The court found that AAVN lacked standing.  AAVN didn’t allege that it markets or sells high thread count sheets, and it didn’t connect how the alleged false advertising on WestPoint’s sheet packaging harms AAVN. Nor did it allege how deception of WestPoint customers would harm AAVN’s reputation for purposes of proximate cause.  [Lexmark has the potential to contract standing in non-concentrated markets, which this may well be.]  Even if AAVN had a subsidiary selling high thread count textiles, that didn’t conver standing on the parent corporation, and even if it could sue on behalf of a subsidiary, there was still no link alleged between WestPoint’s alleged false advertising and its own sales or reputation. “Although under some circumstances a plaintiff may present a viable complaint without alleging specific damages, AAVN’s failure to allege how influence of WestPoint’s customers actually impacts AAVN’s business proves fatal.”

Then, and quite unnecessarily, the court said that AAVN “fails to assert any specifics regarding the process by which Vartest determined that WestPoint’s sheets had a lower thread count than advertised.” That doesn't seem required by Twiqbal.

misrepresentation that OSHA rules required certain tools was literally false

Louisiana-Pacific Corp. v. James Hardie Building Products Inc., 2018 WL 7272047, No. 18-cv-00447-JPM (M.D. Tenn. Dec. 20, 2018)

“This is an unfair trade practices action between two fierce competitors in the residential and multi-family home siding market.” Defendant JH is the dominant producer of cement board (Hardie Board), though the court redacted details about its percentage in that category. LP is the industry leader for OBS, “a type of engineered wood siding and a product which is synonymous with its brand.” It uses agents such third party defendants The Kruse Brothers to provide training seminars across the U.S. that compare LP’s products with others in the industry including JH.

The court granted a preliminary injunction against one LP sales sheet but not against the other claims challenged by JH (both parties were challenging each other’s ads).  Respirable crystalline silica (RCS) is a potentially dangerous dust byproduct from cutting fiber cement, and OSHA standards explain when levels of RCS require additional safety measures. An Action Level (25 micrograms per cubic meter of air averaged over an 8-hour work day) triggers a specific standard, which includes a suggested table of safety measures meant to assess and limit exposure.  Some of the options include not using a circular saw, warning other people nearby, and, in certain circumstances, using a respirator.

LP and The Kruse Brothers made statements in English and Spanish that circular saws are now prohibited and respirators are a requirement when cutting fiber cement. LP’s OSHA sale sheet included a summary of the requirements of new OSHA Regulations and included a heading “Special Tools Now Required For Cutting Fiber Cement,” under which it listed specific anti-dust features for saws and respirators. JH argued literal falsity because those measures don’t apply if RCS does not rise to the Action Level or if the employer assess and limits exposure below the permissible level. The court agreed. “LP’s language conveys that a worker cannot comply with OSHA regulations without following each of the bulleted requirements. Labeling those bullets points as requirements is literally false” because an employer can do other things to limit exposure (though the court doesn’t explain how likely that is to be possible).  Without qualifications such as “if an employer chooses to follow the Table 1 safe harbor they may be required to...” the bulleted statements “would be understood as categorical.”

An LP rep sent an email to various third parties, customers, and potential customers after the new OSHA silica rule came out likewise claiming that “OSHA regulations prohibit the utilization of a standard circular saw for cutting fiber cement siding. Doing so, could result in an OSHA imposed citation,” though he later acknowledged that a circular saw could be used with a dust collection system to cut fiber cement siding.  OSHA gives specific recommendations as to how circular saws can be used within the Table 1 safe harbor provisions; his statement was literally false, though the statement that using a standard circular saw “could result in an OSHA imposed citation” was neither literally false nor misleading.

Similar, but more disputed, claims were allegedly made by the Kruse Brothers at LP training sessions.  If phrased as absolutes, they’d be literally false, but statements that workers might have to warn neighbors or use respirators wouldn’t be literally false or misleading, and it was hard to say because the people listening didn’t necessarily take exact notes.  [Interesting question: how does the court know that statements about what might be necessary aren’t misleading, absent more information about probabilities/the circumstances under which such measures would be necessary?  More interesting question: assume that they said “might,” but many people—like the witnesses here—took away “must.”  Why isn’t that misleading?  I think there’s a possible answer having to do with the cost-benefit analysis of providing useful information to people even if some misunderstand that information, but more is needed than just assuming that the modality of the verb is dispositive.]

The court also found that it wasn’t literally false or misleading to emphasize that no respirator was required to work with LP products; nothing about that suggested that a respirator was required to install other materials.

JH also challenged various social media statements:
• We are definitely making Hardie nervous (in response to one of its contractor’s statements that OSHA is cracking down on the Silica dust created from cutting James Hardie Fiber Cement Siding)
• Use of a circular saw could result in an OSHA imposed citation
• Moral of the story. Don’t want to be stung by OSHA. Use LP Smartside as your exterior cladding of choice (made when forwarding an article stating that silica citations hit 116 in 6 months, allegedly implying that those citations were issued to siding contractors using fiber cement products)

But these weren’t shown to be literally false. “Making Hardie nervous” was an opinion. And it was true that a circular saw could result in an OSHA imposed citation if it is not used according to the Table 1 safe harbors and the exposure limit was exceeded. Likewise with the 116 citations—that was a factual assertion not disputed by JH, and LP didn’t itself claim that the citations were issued for siding.

LP also used the slogan “the easiest way to operate safely with silica dust is don’t create it.” The court also thought that was fine: “LP is accurately describing one way of operating to avoid safety risks of silica dust,” and it wasn’t saying that was the only way.

Materiality: LP argued that its statements weren’t material because they didn’t specifically mention fiber cement or JH. That’s not necessary. Here, the evidence of deception also supported a finding of materiality; the OSHA sale sheet was created to convince people to use LP products, and its internal communications encouraged its sales team to distribute the LP OSHA sale sheet “as much as possible.”

The individual rep’s statements also produced evidence of actual deception; one person “informed JH that she intended to discontinue future work with JH because she believed from LP’s email that circular saws could not be used to cut fiber cement boards,” while another “forwarded the Rose email to other potential customers to inform them that circular saws are no longer an option when cutting fiber cement board.” That was evidence of materiality. This same evidence showed harm causation.

Thus, there was a limited likelihood of success on the Lanham Act claims, but not on the Tennessee Consumer Protection Act claims, since they required showing “an ascertainable loss of money or property under the TCPA.”  For this, “[s]tatements that customers said they were thinking about leaving but ended up staying with JH” were insufficient. Likewise, tortious interference claims require LP to know of specific relationships under Tennessee law, “and not a mere awareness of the plaintiff’s business dealings with others in general.” There wasn’t enough evidence of that here.

The court presumed irreparable harm from the risk to JH’s reputation from the OSHA sheet, specifically “due to an inability to quantify it and the difficulty in returning the injured party to the pre-injury position.” LP wouldn’t be prevented from talking about the OSHA standard, but only “from making specific statements that are false or misleading when made out of context.” Thus, an injunction wouldn’t unconstitutionally restrain its speech and the public interest weighed in favor of an injunction for the sale sheet. The court didn’t grant an injunction as to the rep’s email, which hadn’t been shown to be likely to be resent.

Monday, March 18, 2019

can a retailer be directly liable for false advertising on packages?

two cases (out of several involving this plaintiff)

Outlaw Laboratory, LP v. Shenoor Enterprise, Inc., 2019 WL 1040644, No. 18-CV-2299-B (N.D. Tex. Mar. 4, 2019)

Outlaw, which makes male dietary supplements, sued convenience stores because they “advertise and offer for sale” competing male dietary supplements, the Rhino products, that were allegedly falsely labeled “all natural” and state they contain “no harmful synthetic chemicals.” (The FDA has announced that certain products, including the Rhino products, contained potentially dangerous hidden drug ingredients.) The court found that displaying and selling the products weren’t enough for [direct] Lanham Act liability. [Secondary liability seems like a potential theory, though.]

Standing: the court expressed concerns about Article III standing—whether plaintiff’s injury was traceable to the defendants’ alleged conduct—as well as Lanham Act standing—whether the injury was proximately caused by that conduct. I’m pretty surprised by the former, without more discussion; if plaintiff allegedly lost sales when a consumer bought the products defendants stocked, then defendants’ conduct was at least a but-for cause of those losses. But the court disagrees: “it is difficult to see how merely placing products on display and selling them qualifies as conduct that caused Plaintiff’s injuries under Article III or the Lanham Act.”

Can a defendant “who merely sells a product at a retail outlet” be held liable for false advertising under the Lanham Act? Start with the text:

Any person who, on or in connection with any goods or services, or any container for goods, uses in commerce any...false or misleading description of fact, or false or misleading representation of fact, commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or geographic origin of his or her or another person’s goods, services, or commercial activities, shall be liable in a civil action by any person who believes that he or she is or is likely to be damaged by such act.

The test has been reframed as requiring “that the defendant made a false statement of fact about its product in a commercial advertisement.” The court didn’t believe that it had been alleged that defendants “made” a false statement of fact by offering the falsely labeled products for sale; only the nonparty manufacturer “made” statements in commercial advertising or promotion, even with allegations that defendants knew of the falsity.

Outlaw argued that selling the products necessarily involved the “use[ ] in commerce” of a “false or misleading description of fact, or...representation of fact” “in connection with any goods or services, or any container for goods[.]” [A trademark case would have zero hesitation concluding that defendants made a “use in commerce” of the Rhino mark, which was on the very same packages as are at issue here.] But false advertising also requires a misrepresentation “in commercial advertising or promotion.”

Outlaw didn’t cite binding caselaw supporting its claim.  [Basically, the court rejects trademark cases as inapplicable because in trademark cases it’s retailers’ “use” (which is to say placing on sale) of an infringing mark that causes confusion.  The court doesn’t discuss any policy basis for the divergent treatment, and if the retailers are “causing” confusion in those cases even though they don’t create the infringing goods or copy the infringing mark, then why aren’t they “causing” deception here?  But the court understandably returns to its conclusion that the defendants must have “made” false statements.]

Another case, JST Distrib. v. CNV, et al., 2:17-cv-06264 (C.D. Cal. Mar. 7, 2018), was factually similar to this one, where the defendant argued that it hadn’t made the allegedly falsely advertised products or the ads, but just posted them on its website and sold the products. The district court held that the website owner could still be held liable because the plaintiff alleged that the website owner “disseminated the false advertising through its website.” The court agreed that placing products on sale in a brick-and-mortar store isn’t “disseminating” false advertising.

The court found other nonbinding cases more persuasive. Cohn v. Kind, LLC, 2015 WL 9703527 (S.D.N.Y. Jan. 14, 2015) (under NY law, retailers’ sale of allegedly falsely labeled power bars wasn’t advertising); Optimum Technologies, Inc. v. Home Depot USA, Inc., 2005 WL 3307508 (N.D. Ga. Dec. 5, 2005) (displaying a competitor’s product under signs labeled with the plaintiff’s product name wasn’t commercial speech for Lanham Act purposes); and a number of state false advertising law cases that hold “that a defendant should not be liable, whatever the cause of action, for merely selling a product affixed with a false label, so long as the defendant had no role in creating the label.”  These were only minimally persuasive because of the different legal regimes, but still better than plaintiff’s cases.  Burger v. Lowe’s Home Centers, LLC, 2016 WL 1182266 (Cal. App. 4th Dist., 2016), reh’g denied (Apr. 26, 2016) (“The trial court agreed with [the retailer’s] argument a retailer cannot be held liable for the statements of others by merely placing the product on its shelves for resale. The court determined the false advertising claim was based solely on the product’s packaging, which was produced by the manufacturer or distributor and not [the retailer].”); In re Hydroxycut Mktg. & Sales Practices Litig., 801 F. Supp. 2d 993 (S.D. Cal. 2011) (“Plaintiffs suggest that the Defendant Retailers can be held liable under the consumer protection laws for placing the falsely advertised Products on the shelf and failing to disclaim the Manufacturer Defendants’ representations. However, none of the cases cited by Plaintiffs...supports this legal proposition.”); Fagan v. AmerisourceBergen Corp., 356 F. Supp. 2d 198 (E.D.N.Y. 2004) (drugstore was not liable for negligent misrepresentation for selling mislabeled drugs without evidence that it “itself, made any false statement or material misrepresentation” or that it “affixed the label, which contained the alleged misrepresentation”).

The court also analogized to Baldino’s Lock & Key Serv., Inc. v. Google, Inc., 88 F. Supp. 3d 543 (E.D. Va. 2015) (Google not liable for misrepresentations made by third parties in ads), aff’d, 624 F. App’x 81 (4th Cir. Dec. 4, 2015), and Lasoff v., Inc., 2017 WL 372948, at *8 (W.D. Wash. Jan. 26, 2017) (Amazon could not be held liable for “truthfully depict[ing]” products of third-party sellers that were labeled with false representations). Lasoff involved a party, Amazon, who was actually selling the third-party products, like the defendants here, though it was also a summary judgment case and might not have reached the same result if Amazon had actual knowledge of the falsity, as alleged here. [Which is why secondary liability is a better theory.] But Lasoff involved little or no record evidence, and the allegations of knowledge here were conclusory.

The court was more convinced by the policy implications: “Defendants undoubtedly sell many products—should they be responsible for scrutinizing and determining the veracity of every claim on every product label in their stores simply because they sell the product?”  [Who should be?  In a globalized economy, are we so sure that we can always grab the manufacturer?]  The court answered “no” for false advertising.  It’s not that retailers or sellers can never be held liable for false advertising, but they can’t be held liable based solely on display and sale of the Rhino products in their stores.
“[I]f these claims are permitted, the scope of the Lanham Act would be dramatically expanded. False-advertising cases like this one would turn retailers into the guarantors of manufacturers that falsely label their products. The Court declines to construe the Lanham Act so broadly.” [Note that it’s all right for some: contrast the trademark rule.]

The court allowed leave to replead, but cautioned that “re-litigating the issues raised in the instant motions through future frivolous, repetitive filings will result in the imposition of sanctions, including dismissal, monetary sanctions, and restrictions on the ability to file pleadings in this court.”

Outlaw Laboratory, LP v. Trepco Imports & Distribution, Ltd., 2019 WL 1173347, No. 18-cv-00369-JAD-CWH (D. Nev. Mar. 11, 2019)

Outlaw sued two wholesalers and eight retailers of competing male-enhancement products for falsely advertising “all natural” composition while containing synthetic ingredients like sildenafil nitrate, aka Viagra.  The remaining defendants moved to dismiss on standing grounds. The court found standing, but also that Rule 9(b) hadn’t been satisfied, and dismissed the complaint without prejudice.

In the abstract, defendant-wholesaler Trepco could be sued under the Lanham Act even though it didn’t  manufacture or make packaging. Disseminating the false advertising on the products’ packaging could fall within the language of the Lanham Act (relying on Grant Airmass Corp. v. Gaymar Indus., Inc., 645 F. Supp. 1507, 1512 (S.D.N.Y. 1986) (finding that defendant who independently distributed and presented false report that it used against plaintiff competitor could still be liable for false advertising)), a contributory infringement case not cited by the other Outlaw opinion above.  Nonetheless, the specific allegations here weren’t enough; the complaint lumped the defendants together too much and didn’t specify which claims are made by which product or what products Trepco allegedly sold.

Claims against the retailer defendants failed for similar reasons, though the court also rejected their Article III standing argument. “In a false advertising suit, a plaintiff establishes Article III injury if some consumers who bought the defendant’s product under a mistaken belief fostered by the defendant would have otherwise bought the plaintiff’s product.” To do so, a plaintiff may “provide direct proof such as lost sales figures, or may rely on ‘probable market behavior’ by establishing a ‘chain of inferences showing how defendant’s false advertising could harm plaintiff’s business.’”  Outlaw’s allegations that the sales of the accused products hurt sales of its competing products sufficed, even without “solid data,” at the pleading stage.  It properly alleged that the retailer-defendants’ acts of putting the accused products out for sale harmed its own sales.  Likewise, Outlaw pled statutory standing, even though the parties aren’t direct competitors.  (Actually, it sounds like they are—Outlaw alleged that it both made and sold its products directly to consumers, which sounds like it’s in competition with anyone in the chain.)  The court accepted that, as manufacturer of these sexual performance supplements, Outlaw was in direct competition with “those who manufacture, sell, distribute[,] and market sexual performance enhancement products” and targeted the same customers, which allegations were enough for Lanham Act standing.

Outlaw, however, made insufficiently specific allegations about how it knew the retailer-defendants sold the products, when the retailers stocked them, or how they disseminated the allegedly false messages: “were the products merely on a shelf available for purchase, or did the retailers display them in some prominent way?” Rule 9(b) required more.

unauthorized use of model's photo for strip club wasn't false advertising or endorsement

Edmondson v. 2001 Live, Inc., 2019 WL 670201, No. 16-cv-03243-T-17AEP (M.D. Fla. Jan. 15, 2019)

Edmondson, a model and public figure, sued for the alleged commercial misappropriation of her image used on 2001 Live’s social media account promoting its “gentleman’s” club’s live feed of the stage and dressing room. Edmondson has appeared in various magazines and reality TV episodes, served as “Playmate of the Month,” and signed as an official model for swimwear and sports companies. She had 1.6 million Instagram followers, over 41,000 Facebook likes, and over 201,000 Twitter followers.  Defendants used a photo of her with the text:

Cyber-Monday was here, and we got a little sick of all the “check out this 1//2 price gadget” posts! We want to give someone something, specifically a FREE 30-day subscription to! All we need is at least 20 likes for this post by tomorrow morning!

Defendants had outside vendors for social media monitoring, and their corporate representative testified that he believed those vendors had the authority and consent to use Edmondson’s image.

The Lanham Act claims failed.  False advertising: The image of her was literally true/not false; it didn’t identify Edmondson and attribute statements to her, and it wasn’t altered. Edmondson argued that it necessarily implied her association with and endorsement and support of the defendants’ “business, the strip club lifestyle, and activities known to occur on Defendants’ premises.” The court disagreed; the image was ambiguous because “it provides no explanation or context for the relationship between the model, Defendants’ establishments, Defendants’ websites or any subscription service offered by Defendants.”  The image could be misleading, but not literally false. 

However, there was insufficient evidence of consumer deception. Edmondson submitted an expert report purporting to show confusion about her endorsement of defendants. Although the survey was admissible, it wasn’t good enough to show deception because it didn’t use a control group or have respondents who were actual patrons of defendants’ services. The group had attended a strip club in the last two months, but it wasn’t taken from defendants’ client list, e-mail list, or actual patrons in compiling his survey respondents.  Nor were there any individual statements from patrons or others who saw the ads and believed that Edmondson endorsed the club or would be present at any events. 

Separately, there was insufficient evidence of materiality. Ninety percent of survey respondents said they were more likely to consider the possibility of attending the club after viewing images with models than they were to consider it after viewing the same ads but without the models. But that wasn’t evidence of the materiality of this image because there was no control group or inclusion of patrons or potential patrons of this strip club.  Further, the court thought that an expression of likely interest wasn’t the same thing as actually being likely to visit.  [It’s not clear to me what would show materiality in a survey, then, unless the court didn’t like the wishy-washiness of the question and even then it’s hard to frame something that makes sense; “I definitely would go” is not a realistic response from a survey-taker.  The real problem is that the survey did nothing to show that Edmondson’s image mattered as compared to a properly licensed stock image of a beautiful woman.]

False endorsement also failed as a theory. Edmondson had standing for this theory because she had “an existing intent to commercialize an interest in identity.” [The court is quoting other cases but if it’s a trademark theory she shouldn’t be able to use it without more than intent; intent to use a mark is not enough to have a protectable mark in any other context. That said, her activities go beyond intent to active commercialization, so I don’t think it makes a difference here.]

In a celebrity false endorsement case the most relevant confusion factors include the strength of mark, the existence or extent of actual confusion, and defendants’ intent to misappropriate plaintiff’s goodwill.  Edmondson argued that she had a strong mark, but presented nothing specific about her degree of recognition among defendants’ consumers. The survey didn’t ask whether any respondents recognized her. Strength favored defendants.

The survey also didn’t show actual confusion; this favored defendants.

Intent: there was an issue of fact about who created and uploaded the social media posting and whether or not defendants knew that the use of the image was unauthorized, “which would belie any intent on their part. Thus, the Court finds that this factor is neutral.”

Comment: Intent to do what? This gets at a key problem with some kinds of false endorsement claims.  Probably defendants didn’t intend to use unauthorized images—but using stock images to which they had purchased rights would have sent the exact same message, or not, to consumers about whether the models therein had endorsed the advertised venues.  The FTC thinks that unidentified models in ads aren’t generally serving as endorsers, just as models, unless there is some extra reason to think that they’re doing endorsement work—that extra reason could include having enough of a reputation that would make them seem to be experts about the factual claims being made, like a racecar driver making claims about tires. But according to the FTC, even a well-known entertainer won’t be treated as an endorser under circumstances that indicate she’s not presenting her own views. 

Taken together, Edmondson’s claim couldn’t survive summary judgment.

occasional door-to-door false claims covered by state, but not federal, false advertising law

Vivint, Inc. v. Northstar Alarm Services, LLC, a Utah limited liability company, 2019 WL 1098986, No. 16-cv-00106-JNP-EJF (D. Utah Mar. 8, 2019)

The parties compete in the market for electronic home automation and security systems. They market themselves in various ways, but a majority of sales come from door-to-door or direct-to-home sales.. Vivint presented evidence of 216 individual Vivint customers who experienced deceptive sales practices by NorthStar representatives between 2012 and 2015.  It sued for deceptive trade practices in violation of the Utah Truth in Advertising Act; violation of the Lanham Act; unfair competition; and intentional interference with customer contracts.

Interpreting the Utah Truth in Advertising Act, which lists a number of banned deceptive practices, the court found that “advertising” was not a threshold requirement of each banned practice. Rather, if the listed item didn’t include “advertising,” then it was banned even if it occurred in door-to-door solicitation and not “advertising.” A previous federal district court had disagreed because the UTAA’s purpose statement “effectively imposes an overarching requirement that otherwise actionable conduct constitute advertising.” In the absence of a state court ruling, the court here reexamined the issue and determined that “the plain language of the statute does not limit the covered conduct to advertising.” The purpose statement says:

The purpose of this chapter is to prevent deceptive, misleading, and false advertising practices and forms in Utah. This chapter is to be construed to accomplish that purpose and not to prohibit any particular form of advertising so long as it is truthful and not otherwise misleading or deceptive.

There’s also a definition of “advertisement” that excludes “any oral, in person, representation made by a sales representative to a prospective purchaser.” But in Utah, “a statement of purpose is generally ‘not a substantive part of the statute’ ” and “cannot override the clear terms of the law.” The substantive part of the law listed twenty-odd “deceptive trade practices,” some of which included the words “advertisement” or “advertising” and others didn’t. The definition of “advertising” applied only where the term was used to define the deceptive trade practice at issue. “If the Utah Legislature had intended that limitation to apply to the entire statute, it would have been listed not in the definitions section, but in the section … titled ‘Exemptions.’”  Here, the alleged violations didn’t require “advertising,” e.g., causing confusion “as to the source, sponsorship, approval, or certification of goods or services”; representing “that goods or services have sponsorship, approval, characteristics, ingredients, uses, benefits, or qualities that they do not have”; and “disparag[ing] the goods, services, or business of another by false or misleading representation of fact.”

However, the Lanham Act claim failed for want of sufficient “commercial advertising or promotion.”  False statements made by NorthStar’s door-to-door sales representatives to 216 Vivint customers were not “disseminated sufficiently to the relevant purchasing public” to constitute commercial advertising or promotion.  “[T]here must be some statistical analysis of the number of alleged incidents in comparison to the relevant market, “and given the millions of pitches, NorthStar argued that this was only 43 customers per year, “less than 0.5%” of NorthStar’s total door-to-door sales in any given year and a small percentage of Vivint’s customers (as the relevant market). Vivint argued that this was just the falsity it had identified and that there was other falsity that it hadn’t caught, but the court found that speculative.  If there was a script or other direction to sales reps encouraging them to make the allegedly false statements, it seems to me that Vivint’s argument ought to work, but this was a motion for summary judgment and Vivint apparently hadn’t developed evidence about that.

Compounder's claims of FDA approval/legality were literally false and material

Allergan USA, Inc. v. Prescribers Choice, Inc., No. 17-cv-01550-DOC-JDE, 2019 WL 650424 (C.D. Cal. Jan. 11, 2019)

Allergan “markets a portfolio of leading medical brands and products.” Prescriber’s Choice and Sincerus have common ownership and work together: “Sincerus produces drugs; Prescriber’s Choice markets Sincerus’s drugs and makes them available to physicians.” Sincerus registered with the FDA as an “outsourcing facility” under Section 503B of the FDCA in March 2016. “Through the FDCA and its exemptions, Congress allows outsourcing facilities to produce certain bulk drugs when the FDA determines there is a drug shortage or a clinical need.” The presence of either obviates the need for an individual prescription before the drug is produced. Sincerus formulated, compounded, distributed, and sold drugs from 700 different drug formulations, and Prescriber’s Choice marketed Sincerus’s to 3,000 customers in 30 states.

Compounding involves combining ingredients to create a bespoke drug, which can occur when, for example, a patient who has an allergy to a certain dye and needs a medication to be made without it.  It’s not illegal, but there are supposed to be restrictions on it. The varied drugs Sincerus and Prescriber’s Choice sold were intended to treat many conditions; only one drug appears on FDA’s drug shortage list. At the relevant time, the FDA hadn’t found a “clinical need” for outsourcing facilities to use any bulk drug substances, which would have let them be used under the Section 503B statutory exemption. Basically, and without trying to get the details right, Allergan argued that Sincerus was going beyond what the law allowed for a Section 503B facility, and falsely advertising legality.

Defendants promoted their business and drugs by representing to their customers that they comply with the law, that it is legal for Sincerus to compound in large quantities, and that the business meets federal regulatory guidelines. Customers—“including those who asked for reassurance or had questions about FDA compliance”—were told that “[t]o demonstrate compliance, Prescriber’s Choice and Sincerus FL tasked one of the top international law firms, Ropes & Gray, to analyze whether the business model comports with FDA regulations,” and “[t]he resulting written memorandum concludes that if your practice follows the model outlined, you are compliant.” Other claims were that that the Sincerus drugs are “prepared in the FDA facility, Sincerus, so you have the supreme reassurance that the quality of the medication is made under CGMP manufacturing standards with federal oversight.” Another rep told a customer that defendants “have had over 400 independent healthcare attorneys from many states review our whole platform and they all recommend our platform.” An internal e-mail said “I of course did explain to [the customer] that everything comes from our 503B facility and is FDA approved.”

Defendants also claimed that “[t]he unique combination of active and inactive ingredients has been selected to produce an outcome that is clinically superior and materially different to that which is commercially available.” The truth or falsity of this was a disputed fact.

“The FDA does not ‘accredit’ or ‘approve’ Section 503B outsourcing facilities or pharmaceutical ingredients, although the FDA does register and inspect such facilities,” including those of Sincerus, which hasn’t had an FDA objection.

Sales reps made statements about compliance with the law “because they knew that compliance with the law was an important issue to customers when they make a decision.” FDA-approved ingredients are also important because “dermatologists are seeking safe medication.” Prescriber’s Choice’s National Director told the sales team that Sincerus’s status as a “503B FDA Facility” would provide “even more assurance to patients due to the fact that they are generally familiar with the FDA.”

Allergan commissioned a survey of 202 dermatologists which revealed that 25 percent of physicians “worry about the legality and tediousness of in-office physician dispensing”; 27 percent of the respondents agreed with the statement “I worry about the legality of in-office dispensing”; 18% of the respondents said that “state regulation/restriction concerns” was a challenge with recommending or prescribing Prescriber’s Choice’s products; and 24 percent of dermatologists who had been visited by a Prescriber’s Choice sales representative indicated that they had received “Guidance with governmental regulations” from Prescriber’s Choice.

Allergan argued that “mass manufacturing and marketing unapproved new drugs” violated California’s Sherman Law, which incorporates the FDCA’s requirements (thus rendering defendants’ conduct a violation of California’s UCL under the “unlawful” prong and providing Allergan with a private cause of action). Defendants use bulk drug substances to produce their drugs, but only one of these drugs is on the FDA’s drug shortage list, and they also made drugs nominated for inclusion—but not yet included—on the clinical need list. (They also allegedly made drugs that weren’t even in this category.) FDA’s exercise of its enforcement discretion was not enough, Allergan argued, to convert this into legal conduct.

Sincerus argued that the FDA is encouraging 503B compounders to use substances on the FDA’s nomination list until the FDA finishes its clinical need list. The FDA issued an Interim Policy in January 2017, asking industry participants to nominate bulk substances for consideration under Section 503B and then creating three categories to determine which bulk drugs the FDA would allow for compounding while it worked on the multi-year process of preparing the clinical need list. Category 1 is nominations for the clinical need list; Category 3 comprises nominated substances that require more information, and defendants allegedly made substances from both categories. Defendants argued that because Sincerus holds a California Outsourcing Facility license and the FDA eventually placed all the relevant bulk drugs in Category 1, there could be no violation of California law.

The court wouldn’t rely on FDA’s exercise of its discretion to deem Sincerus’s actions legal, but nor would it ignore the Interim Policy, which seemed to encourage use of Category 1.  However, to the extent that Sincerus failed to comply with the Interim Policy, it would violate federal and thus state law. The undisputed facts showed that Sincerus began compounding and distributing drugs before they appeared on the FDA’s Category 1 list, which violated the law. It wasn’t clear that they were still making drugs in violation of Section 503B and the Interim Policy, creating a dispute of fact for the jury to resolve.

Lanham Act/California FAL/fraudulent prong of the UCL: Allergan argued that defendants made literally false statements about the lawfulness of their business:
• Statements about legal compliance because Defendants do not comply with Section 503B’s requirements.
• Statements about FDA “approval” because the FDA does not approve any of Sincerus’s drugs nor approve or accredit businesses or drug ingredients.
• Statements that Sincerus is an FDA lab merely because Sincerus is a registered 503B outsourcing facility, accomplished by “sending certain information to the FDA through an electronic registration system”; and
• Statements that “hundreds of lawyers” including the law firm Ropes & Gray LLP have opined that defendants’ business is lawful because defendants were not able to name any lawyers who made this conclusion and the Ropes & Gray memorandum assumed compliance.

Allergan also argued that it was false to claim clinical/patient outcome superiority for their drugs without any basis for so claiming.

Defendants argued that no one could have been fooled because their customers were “a sophisticated group of licensed and board-certified dermatologists, not one of whom would believe that Defendants are operated by the FDA.”  They argued that “FDA approval” wasn’t false because every active ingredient was for a FDA-approved drug acquired from a FDA-registered source and each formula is submitted to the FDA for biannual review. They argued that their practices were reviewed by “countless medical practices (and their lawyers)” but that they did not “take a roll call” of their customers’ lawyers. For superiority, they argued that compounding clearly can improve patient outcome and that these weren’t falsifiable statements [classic legal strategy: both puffery and true!]. Finally, they argued that Allergan’s survey showed that most dermatologists didn’t care about these issues.

The court found that some of the challenged statements weren’t literally false. E.g., Sincerus was a 503B facility and 503B drugs don’t need an ANDA and can be compounded in large quantities. However, there’s a difference between describing the 503B exception and “representing to customers compliance with that exception or general FDA approval,” and Sincerus had been out of compliance. Moreover, even compliance wasn’t “FDA approval.” “It is literally false for a company to represent that a compounder is ‘FDA approved’ during this period of regulatory evaluation, especially when the compounder is not even complying with FDA’s interim guidance.”  FDA inspection isn’t approval either.

Despite Sincerus’s violation of the law, sales consultants represented that the medications “are FDA approved” and touted compliance, which just wasn’t true at least before July 2018 and maybe after. Further, FDA approval of ingredients didn’t change the analysis.  If FDA approval of ingredients were enough, there’d be no need for the FDA interim process determining whether such drugs should fall under the 503B exemption as a clinical necessity.

However, there was a factual dispute on the literal falsity of statements about drug superiority, “where the drugs may allow a patient relief where she cannot tolerate a more traditional prescription.”

Because of the literal falsity, the court used a rebuttable presumption of actual deception. Even without that, there was no factual issue on materiality: it was clear that compliance with the law was important to customers, who linked it to quality in numerous ways (as did sales reps).  Allergan’s survey didn’t show lack of materiality—to the contrary, it showed that dermatologists were very attentive to the perceived legality of Sincerus’s operations.

Sincerus counterclaimed about Allergan’s reps’ disparagement of Sincerus: an allegedly official policy to “spread doubt” about Prescriber’s Choice and Sincerus.  “[S]preading doubt about the legality of a company that is not complying with the FDA Interim Policy cannot give rise to a valid claim under the Lanham Act.” However, there was enough evidence that Allergan sales representatives went beyond that, working alongside competitors to “shut Prescriber’s Choice out of St. Louis.” Though it was close, a reasonable jury could determine that Allergan violated the UCL and Lanham Act.

Friday, March 15, 2019

supplement guide isn't "advertising or promotion" under the Lanham Act, even w/undisclosed affiliation

Ariix, LLC v. NutriSearch Corp., 2019 WL 1040135, No. 17CV320-LAB (BGS) (S.D. Cal. Mar. 5, 2019)

Previous iteration discussed here. Arrix competes fiercely with Usana in the nutritional supplement market.  NutriSearch publishes the NutriSearch Comparative Guide to Nutritional Supplements, a guide used by consumers and professionals that reviews various companies’ products, including both Ariix’s and Usana’s. It’s now in its sixth edition. In 2005, individual defendant/author MacWilliam was working directly as a sales representative for Usana and writing the Guide, which he had conceived as a way to promote Usana’s products. “At the time, the Guide could have been considered commercial advertising.” But after several editions, it no longer qualifies as such.

The fifth edition awarded the Gold Medal of Achievement designation to companies that meet particular standards; Ariix made a vigorous effort to qualify, but was denied while four other companies were given the award. NutriSearch allegedly admitted Ariix had met the standard, but refused to award the company the Gold Medal because it was reworking its criteria. The new sixth edition has bronze, silver, gold, diamond, and platinum award tiers. Usana was the only platinum medalist. Ariix didn’t allege that Usana didn’t meet the criteria for this award, or that Ariix or any other manufacturer did.

As in its previous order, the court held that  “the Lanham Act does not apply to reviews of consumer products. This is true even if they are alleged to be biased, inaccurate, or tainted by conflicts of interest.” However, self-labeling as a consumer product review isn’t all it takes to be protected. The ultimate question is whether a publication is a consumer product review or commercial advertising. This one is the former. Although “reviewers who have undisclosed conflicts of interest may be liable under other laws, such as the FTC Act or various states’ advertising or unfair competition laws,” Ariix could not bring a Lanham Act claim against them.

The Guide as a whole wasn’t advertising. It includes two major sections: a set of ratings of 1,500 different nutritional supplements sold by different companies, and general information about supplementation. “The only feature alleged to be commercial advertising are the Guide’s awards. But even if the awards were commercial advertising, this would not suffice to bring the entire book within the statute.”  Moreover, the sheer number of companies whose supplements were reviewed made it implausible that the purpose of the reviews was “merely” to urge consumers to buy Usana’s products. And the book was sold commercially as a guide to supplements, and “is regarded” as a standard guide on the subject, though the court doesn’t say by whom.

“The [fifth edition] Guide itself included a preliminary note, disclaiming any association between either MacWilliam or NutriSearch and any manufacturer or product the Guide reviewed.” This wasn’t a commercial ad because it was part of the Guide, even if it could be viewed by potential Guide buyers online.  And the removal of the statement from the sixth edition wasn’t an admission of falsity; it could be a nod to the fact of this litigation. Moreover, its omission made the sixth edition even less likely to be the basis of a valid claim.

After several companies won the Gold Medal award in 2008, Usana allegedly demanded that it be positioned ahead of its competitors; NutriSearch allegedly then created a new “Editor’s Choice” award and gave it to Usana. But Ariix didn’t allege what the criteria for that award were, or that defendants ever claimed objectivity; the name itself suggests subjectivity.  Then, for the sixth edition, NutriSearch allegedly failed to notify Ariix when its new criteria were finalized, preventing it from being listed as a medalist. But there were no factual allegations indicating Ariix had a right to be told about new criteria or prompted to submit an application, or that others were treated differently—and even if there were such allegations, that wouldn’t make a misrepresentation; Ariix was still just criticizing a product review. “[E]ven if Ariix thinks NutriSearch’s criteria were illegitimate, as a reviewer NutriSearch is entitled to decide what its criteria should be.”

Going further, the court’s broad latitude for product reviews made it hesitant to find that awards of this type are ever fully objective, even if they involve objective criteria.

Previously, the court held that the “cozy relationship” between NutriSearch and Usana wasn’t enough to make the Guide commercial advertising. There weren’t allegations plausibly suggesting that speaking fees or Usana’s purchases and recommendation of the Guide were “some kind of under-the-table payment for promoting Usana and its products.” The amended complaint’s new allegations were still conclusory. The only “payments” NutriSearch allegedly received were “Usana’s promotion of the Guide, its purchase of many copies of the Guide, and its use of the Guide to promote its products.” But this behavior was fully consistent with non-liability.  “A company whose products are favorably reviewed has every incentive to capitalize on those reviews by doing what Usana did, and the fact that it does so does not suggest it has entered into some kind of secret agreement with the reviewer.”

The amended complaint alleged that in 2009, after NutriSearch gave Usana the Editor’s Choice award, MacWilliam decided to cash in on it, asking Usana to send him on a speaking tour. Usana agreed, and paid him $90,000 that summer. But this occurred far too long before the fifth or sixth editions to count as payment in connection with them, and wasn’t alleged to reflect a previous understanding, only an “afterthought.”  “Furthermore, a recognized and knowledgeable author who has just favorably reviewed a company is a natural choice as that company’s promoter or spokesman.” The complaint alleged that Usana continued to pay MacWilliam to promote its products and to speak to its reps, but didn’t support the conclusion that these were payments for advertising in the Guide as opposed to payments for speaking as agreed.  “MacWilliam could be liable under the Lanham Act if, while speaking, he made misrepresentations of fact about Usana or Ariix. But the only allegations show expressions of opinion or value judgments, rather than facts.”

Assuming the truth of the allegations, MacWilliam could be criticized for an undisclosed bias or conflict of interest, but that wasn’t enough for a Lanham Act claim [where the result wasn’t a commercial advertisement].  It wasn’t enough to allege that defendants had a direct economic motive for their speech to make it commercial speech.

The complaint was dismissed, this time without leave to amend.