Friday, May 06, 2016

Incarnadine: Pom's FTCA violation could've given it unclean hands against Coca-Cola

POM Wonderful LLC v. Coca Cola Co., No. CV 08-06237, 2016 WL 2587994 (C.D. Cal. Feb. 19, 2016)
After a trip to the Supreme Court, Pom’s false advertising case against Coca-Cola ended with a verdict in favor of Coca-Cola; here, the judge rejected Pom’s attempt to get rid of Coca-Cola’s unclean hands defense, in reasoning that may be of broader interest.  As you may recall, Pom sued Coca-Cola for selling a “Pomegranate Blueberry Flavored 100% Juice Blend” with very, very little pomegranate or blueberry juice in it.  Initially, Pom alleged that “[a] key element of P[om’s] marketing campaign has been its concentration on the health benefits associated with pomegranates and pomegranate juice....” According to Pom, this “investment of millions of dollars to research and promote the nutritional qualities and health benefits associated with pomegranate juice” enabled Pom to “largely create[ ] the burgeoning market for genuine pomegranate juice that exists today.”  The complaint accused Coca-Cola of cashing in on the Pom-created consumer association of pomegranate juice with nutritional benefits, misleading consumers into believing that they were getting “all natural pomegranate blueberry juice with all of its associated health benefits[] for a lower price, when in fact they are getting a very different product primarily containing apple juice and grape juice.”
Coca-Cola asserted the defense of unclean hands, not only from Pom’s use of other juices in its “Pomegranate Blueberry 100% Juice” and its use of terms suggesting that its juices were fresh-squeezed rather than from concentrate, but also from Pom’s unsupported claims of health benefits.  After the DC Circuit largely upheld the FTC’s ruling against Pom, Pom sought to amend its complaint to remove allegations regarding the purported health benefits of pomegranate juice and the importance of Pom’s health claims in creating consumer demand for its products.  The court denied leave to amend for lack of good cause shown.
Unclean hands is an equitable defense that bars claims for money damages as well as for equitable relief.  The defendant must show by clear and convincing evidence (1) “that the plaintiff’s conduct is inequitable;” and (2) “that the conduct relates to the subject matter of [the plaintiff’s] claims.” Although “precise similarity” between the plaintiff’s inequitable conduct and the plaintiff’s claims is not required, the misconduct “must be ‘relative to the matter in which [the plaintiff] seeks relief.’ ” Thus, “the relevant inquiry is ‘not [whether] the plaintiff’s hands are dirty, but [whether] [s]he dirtied them in acquiring the right [s]he now asserts, or [whether] the manner of dirtying renders inequitable the assertion of such rights against the defendants.’ ” Moreover, even after both prongs are satisfied, the factfinder must balance the parties’ wrongdoing.  Nor should the unclean hands defense be used to harm the public interest.
Pom argued that the misconduct identified by Coca-Cola wasn’t directly related to the Lanham Act claim of deception about juice content, and therefore couldn’t support an unclean hands defense.  Two previous cases addressed this issue with respect to Pom.  One case found that “from concentrate”-related claims weren’t directly related to Pom’s juice composition false advertising claims.  However, claims that Pom’s products contained undisclosed trace amounts of other juices weren’t too unrelated to Pom’s false advertising claims to support an unclean hands defense.  Another case interpreted unclean hands more broadly, allowing concentrate-related claims to stay in.  Neither case decided anything about Pom’s health-related statements.
Considering the standard to be whether the plaintiff dirtied its hands in acquiring the right it now asserted, health-related claims were sufficiently related.  Relation, not “direct relation,” was required, but even a direct relation requirement was satisfied, because Pom’s false advertising claims were premised on the perceived health benefits of pomegranate juice as compared to other fruit juices.  Pom alleged that it was Pom’s health claims that created the demand for pomegranate juice, and thus consumer desire for 100% pomegranate juice.  Pom tried to distinguish general “health benefits” of pomegranate juice from disease treatment/risk reduction claims, but Pom’s claims were not so limited—Pom’s ads claimed specific benefits relating to heart disease, prostate cancer, and erectile dysfunction.  Pom’s damages expert also opined that Pom’s publications of studies touting specific benefits of pomegranates made those fruits and their juice “must have” products for certain consumers.
Under that analysis, Pom’s misconduct clearly related directly to the present issue.  Pom alleged that consumers were confused into thinking they were getting healthy pomegranate-blueberry juice when they were really mostly getting “less healthy” apple and grape juices.  Coca-Cola responded that the health benefits were unsubstantiated; this was directly related to the conduct Pom alleged had harmed it.
Pom then argued that its conduct wasn’t egregious enough to warrant application of this “disfavored” defense, and that Coca-Cola failed to show actual falsity as opposed to mere lack of substantiation.  “Neither Supreme Court nor Ninth Circuit precedent requires that defendants prove that a plaintiff’s conduct was ‘egregious;’ if by ‘egregious,’ POM means that Coca–Cola must prove that POM’s health claims were literally false.”  A willful inequitable act is enough.
However, the party asserting the defense of unclean hands must ultimately prove by clear and convincing evidence “wrongfulness, willfulness, bad faith, or gross negligence” on the part of the plaintiff.  Coca-Cola presented enough evidence to avoid summary judgment on this point.  Coca-Cola pointed to the FTC’s finding of an FTCA violation.  Pom argued that this wasn’t sufficient because the FTC hadn’t shown actual falsity, as a Lanham Act plaintiff would have to.  “[N]either the Ninth Circuit nor any other authority located by the Court requires that a defendant prove that the plaintiff violated the same law or statute that it has accused the defendant of violating.”  Rather, the inequitable conduct must merely be sufficiently related to the subject matter of the plaintiff’s claims.
Further, “[w]ell-accepted general principles of equity support [the] contention that a statutory violation gives a party unclean hands.” Thus, “Coca–Cola need only prove that POM engaged in deceitful conduct to acquire the business and market share it alleges has been lost to Coca–Cola.”  The ALJ’s finding that Pom’s ads made deceptive claims about the health benefits of pomegranate juice was sufficient to create a genuine issue of material fact about whether Pom engaged in deceitful conduct in acquiring its customer base. Coca–Cola wasn’t alleging a violation of the FTCA on its own behalf, but instead offered Pom’s statutory violation as evidence that POM engaged in inequitable conduct. 
Pom also argued that the court couldn’t use the FTC’s proceeding to prove Pom’s misconduct because a court “may not take judicial notice of proceedings or records in another case so as to supply, without formal introduction of evidence, facts essential to support a contention in a case then before it.”  However, both the ALJ’s Initial Decision and the FTC Opinion were admissible under Federal Rule of Evidence 201(b) and Federal Rule of Evidence 803(8)(A)(iii). Findings about what Pom’s claims were, whether they were deceptive due to inadequate substantiation, and whether they were material were all findings of fact subject to judicial notice.
Even without the FTC’s rulings, the court would still find a genuine issue of fact on inequitable conduct, given Coca-Cola’s evidence that Pom knew that the studies it advertised, and related studies, reached “inconclusive, statistically insignificant, or even negative results.” 
The court did grant summary judgment to Pom on the “from concentrate” aspect of the unclean hands defense; Coca-Cola didn’t offer arguments on this point.  The court also denied summary judgment as to the unclean hands defense based on whether Pom misled consumers about the non-pomegranate juice content of its own juices, because Pom didn’t argue the elements.

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