Thursday, July 12, 2018

Unclean (but collagen rich) hands in a false advertising case

Certified Nutraceuticals, Inc. v. Avicenna Nutraceutical, LLC, 2018 WL 3361142, No. 16-cv-02810-BEN-BGS (C.D. Cal. Jul. 10, 2018)

A rare unclean hands victory in a false advertising case.  Certified alleged that Avicenna, its competitor in the market for collagen products used as ingredients in other products, falsely advertised its products as “patented” or processed using “patented formulas and production methods” while Avicenna never held any relevant patents.

To prevail on a defense of unclean hands, a defendant must demonstrate 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.” Even in such cases, unclean hands isn’t automatically a defense; the plaintiff’s wrongdoing must be balanced against the defendant’s, considering the substance of the plaintiff’s rights.

In the Ninth Circuit, “only a showing of wrongfulness, willfulness, bad faith, or gross negligence, proved by clear and convincing evidence, will establish sufficient culpability for invocation of the doctrine of unclean hands.”  Here, Avicenna established that Certified falsely claimed patent protection for its competing product, over a year before the PTO granted any Certified patent.  Certified argued that its product was covered by a different patent, but Certified wasn’t an owner, assignee, or licensee of that patent at that time or since, perhaps because of a permanent injunction against a Certified principal enjoining him from transferring, enforcing, or otherwise affecting the title to that patent.  Certified’s only other evidence that the statements weren’t false or misleading was a false statement that the principal was the assignee of a patent that was a continuation of the enjoined patent.  Thus, the court found that Certified knowingly made statements about the patented nature of its product—either because it knew the later patent hadn’t been issued, or because it knew it had no right to manufacture, distribute, offer for sale, or sell any goods under the continuation patent.  Avicenni showed Certified’s wrongfulness, willfulness, and bad faith in engaging in inequitable conduct with clear and convincing evidence. [I’m not sure courts would find that claiming patent protection when the patent was pending always meets this standard, though it would usually have to be knowing.]

Did this inequitable conduct relate to Avicenna’s false advertising claim? Unclean hands should only be applied “where some unconscionable act of one coming for relief has immediate and necessary relation to the equity that he seeks in respect of the matter in litigation,” which means that the plaintiff dirtied its hands “in acquiring the right” presently asserted or “the manner of dirtying renders inequitable the assertion of such rights against the defendants.” Even though the statements were now years old, there was still an immediate and necessary relationship to the equitable remedies sought, because they were about the patented status of the directly competing products.

Summary judgment on Lanham Act claims granted; coordinate state-law claims dismissed for want of supplemental jurisdiction.

TM/False advertising issue of the day

Seen on the street in NYC; the candies have no marijuana content--they're sold as "adult" candies, furthering the impression. My daughter also asked "Could the owners of Scooby Doo sue?" and then, because I have taught her well, corrected that to "Could the owners of Scooby Doo win?"

Monday, July 02, 2018

False designation damages require proximate cause, dooming $250 million jury award

ZeniMax Media Inc. v. Oculus VR LLC, No. 14-cv-01849 (N.D. Tex. Jun. 27, 2018)

After trial of this case, the jury returned a verdict, finding in relevant part that defendants were liable for false designation of origin, basically about the origins of Oculus’s technology with a lagniappe of use of ZeniMax’s trademarks in a Kickstarter promotion. The jury awarded actual damages of $250 million in total for the false designation of origin. The court granted judgment as a matter of law because the record lacked legally sufficient evidence of injury causation in that or any amount. [Pointing to another part of Dastar’s practical wisdom: it’s rare that false designation of origin of ideas makes a difference. The court was sensitized to the Dastar problem in that its analysis focuses on unauthorized use of ZeniMax’s marks, but the trial theory, and thus the jury’s award, seems to have focused on claiming credit for the technology. The mismatch between the allowable scope of §1125 and the theory is likely part of what accounts for the lack of evidence of damages.]

Under Lexmark, damages must be proximately caused by the act of the false designation: “[A] plaintiff suing under § 1125(a) ordinarily must show economic or reputational injury flowing directly from the deception wrought by the defendant’s [actions]. . . .”

Plaintiffs’ damages expert testified only as to damages resulting from stolen trade secrets, not to reputational injury, or any defendant gains from false designation. For reputational damages, ZeniMax cited the testimony of Todd Hollenshead, former President of plaintiff id Software, that he was “concerned” about “the use of preleased software in any public demonstration that id Software was not controlling.” Without specifically noting that the existence of a risk isn’t evidence that the risk to reputation materialized, the court concluded that this wasn’t evidence of damage to reputation based on false designation. ZeniMax also pointed to three other items that supposedly showed reputational injury: (1) false representations Oculus made in the press about“collaborat[ion]” when “there was no actual affiliation between ZeniMax and Oculus”; (2) Oculus leading Mark Zuckerberg to believe that Oculus, not ZeniMax, “was miles ahead of everyone else” as to virtual reality technology; and (3) Zuckerberg’s testimony that ZeniMax “came out of the woodwork” when the Facebook purchase was announced. These were “even further from being evidence of reputational injury” than Hollenshead’s testimony.

ZeniMax pointed to excerpts from the damages expert’s testimony where he calculated a reasonable royalty for ZeniMax’s technology. But none of this testimony referenced false designation, let alone how the damages calculation he computed for trade secret violations also related to false designation and any resulting injury to ZeniMax. Defendant Carmack also wrote an email saying that “Oculus wouldn’t exist as a funded company if it weren’t for [Plaintiffs’] involvement.” That didn’t provide evidence that defendants “were massively and unjustly enriched” in relation to the false designation.

ZeniMax argued that defendants were unjustly enriched by their act of false designation when Facebook bought Oculus for approximately $2 billion. [Unjust enrichment of this type isn’t damages—it’s a disgorgement theory.]  Standing alone, the purchase price was legally insufficient evidence to prove damages from false designation. Facebook didn’t buy Oculus until 2014, almost two years after Oculus used promotional items containing ZeniMax’s marks without authorization in a Kickstarter video and investor materials. There was no causal evidence linking the two.

Even if there had been evidence of damages, plaintiffs failed to show proximate cause between those damages and the unauthorized use of their marks. Plaintiffs argued that the jury is vested with “broad latitude to infer proximate cause.” However, there was no evidence that Facebook believed the parties were somehow associated and that this led to the purchase. [Materiality as a proximate cause requirement….] Also, “[t]he time and intervening facts between these events alone makes the approximately $2 billion purchase price too remote to have been the proximate result of Defendants’ acts of false designation.” During those two years, millions of dollars were invested into Oculus by multiple investors, and others invested substantial time and effort, taking the Oculus Rift from a prototype device into a functioning device with market potential. That was the product that attracted Facebook to acquire Oculus. “There was simply no evidence presented that the purchase price Facebook paid for Oculus proves any of the harms against which Section 1225 protects.”

The only other evidence arguably proving proximate cause of harm flowing from the false designation was the money Oculus raised from investors in direct connection with the use of the promotional materials containing ZeniMax’s marks. However, there was no evidence about how much money was actually generated from these specific efforts using ZeniMax’s marks without permission. Also, the display of ZeniMax’s marks and the endorsement by Carmack, who was employed by ZeniMax at that time, was “merely a minor portion of the entire video.” By contrast, the video spent a substantial amount of time discussing the invention and technological improvements of the Oculus Rift without making any reference to ZeniMax or displaying of any of ZeniMax’s marks. The video also contained references to and endorsements from other companies and people in the industry unconnected to ZeniMax, such as USC’s MxR Lab, Epic Games, Unity, and Valve. The unauthorized use of ZeniMax’s marks was “diluted” by these endorsements of others as well as the support of ZeniMax’s competitors.

Here’s the Dastar hook: “The invention and technology of the Oculus Rift was a major issue in dispute in this matter” but those issues “play no role in a proximate cause analysis as to the false designation claims because the Lanham Act is intended to protect from harm related to the improper use of a mark and not intended to protect inventor’s rights.” The invention issues “add nothing to further a finding of proximate cause of a harm related to the money raised by this Kickstarter video.”

the perils of default judgments against speech: showing up late can prove onerous

Lokosky v. Gass, No. 1 CA-SA 18-0101, 2018 WL 3150499 (Az. Ct. App. Jun. 28, 2018)

Respondents (not Gass, who’s the judge, named for procedural reasons) sued Lokosky for false advertising and related claims seeking to compel Lokosky to "remove from the internet all material pertaining to Respondents and their business,” and obtained a default judgment. Next, they compelled the transfer of ownership of Lokosky’s website to themselves. Lokosky then applied for a restraining order seeking to have ownership of her website returned to her and moved to vacate or set aside the judgment. The superior court granted the TRO and ordered Lokosky to “remove any and all material and/or references pertaining to each Plaintiff” on her website and “refrain from publishing or republishing on the Internet any and all materials and/or references pertaining to each Plaintiff.” Well, that’s incredibly overbroad. Then:

In March 2017, the superior court held the first day of an evidentiary hearing on Lokosky’s motion to vacate judgment. During the month in between hearing days the superior court placed both parties under an order forbidding the parties from engaging in speech regarding each other, counsel, and the instant lawsuit. ... In April 2017, the superior court held the second day of the evidentiary hearing and vacated the default judgment against Lokosky. 

Lokosky filed a motion to dissolve the TRO because there was no longer a default judgment to justify the restraint on her speech. In a sequence of events that would have fit well in Jarndyce v. Jarndyce, the superior court declined to act, waiting on the result of respondents’ pending appeal of the vacation of the default judgment. So Lokosky filed a separate notice of appeal about the superior court’s decision not to decide the motion to set aside the TRO; the court of appeals determined that it lacked jurisdiction. Lokosky then requested that the court of appeals dissolve the TRO by way of a filing in respondents’ appeal. The court of appeals denied the motion because the request was more appropriately raised as a special action. Lokosky then filed a special action petition, and finally her claim was heard on the merits. [Eugene Volokh could use this as a cautionary tale about granting speech restraints in default judgments. They can be very hard to reverse, as it turns out!]

The TRO was a prior restraint on speech and violated the First Amendment. Before any TRO against future speech can issue, the court has to determine that the future speech is unprotected by the First Amendment. “Although the superior court indicated its intent to prevent the parties from engaging in speech which might later increase their own liability in this litigation, the record is devoid of any support for the notion that Lokosky’s speech is not protected.” Respondents argued that they competed with Lokosky and that her speech was commercial (allowing prior restraint). Even assuming that, her speech hadn’t been determined to be misleading and thus couldn’t be restrained, even temporarily.

search results labeled as results aren't confusing

Carter v. Oath Holdings, Inc., No. 17-cv-07086-BLF (N.D. Cal. Jun. 21, 2018)

Carter allegedly owns a trademark registration for “The House of Figurine” Defendant is Yahoo!, which runs a search engine.  The complaint alleged that Yahoo! uses “two active counterfeit marks identical to Plaintiff[’s] genuine mark” titled “The House of Figurine Sculptures - Image Result” and “More The House of Figurine Sculptures Images”:

Carter alleged that he has no connection to “those goods and services sold” and that Yahoo!’s “counterfeit marks misrepresent [the] designation of origin” of the goods and services. The court dismissed the trademark infringement, false designation of origin, and counterfeiting claims. First, the complaint failed to sufficiently plead “use” of the mark. “Courts have held that an online provider does not ‘use’ a mark under the meaning of the Lanham Act when its search engine returns a search result based on an input of a consumer. As such, merely returning search results to purportedly display a trademark does not show that Defendant is liable under the Lanham Act.”

Second, the complaint failed to sufficiently allege a likelihood of confusion. Mere allegations that Yahoo!’s “counterfeit marks misrepresent [the] designation of origin” and that their “counterfeit marks [are] deceptive, confusing, and is likely to cause mistake on the part of [the] consuming public” were conclusory and insufficient. [Note that if more plausible facts were alleged leading up to this (e.g., that defendant was selling identical goods/services in direct competition with plaintiff, using the same mark), the very same allegations would not be treated as conclusory but as plausible inferences from the other alleged facts.]