Wednesday, April 16, 2014

The ASA on insufficiently close comparisons

The ASA found's ad misleading for claiming "FURNITURE DIRECT FROM THE MAKERS By the time the average sofa hits the high street it's been marked up by 500%. Agents, importers and wholesalers all add a little extra along the way. Our unique and award-winning concept cuts out the middle steps and passes the savings on to you." Though the ad explicitly stated the that the typical high street price was "based on closest equivalent products in design and functionality," that wasn't enough. Most consumers would understand that the "high street" prices were for equivalent, not identical, products, but consumers would expect the high street items to be "of a similar quality, in terms of finish, and the materials used, not just design." Since they weren't, the ad was misleading.

US advertisers don't always know how good they have it.

Tuesday, April 15, 2014

FDA has a standard, so no Lanham Act claim can be made

OraLabs, Inc. v. Kind Group LLC, 2014 WL 1395954, No. 13–cv–00170 (D. Colo. Apr. 10, 2014)

The court adopted the magistrate judge's recommendation to deny Kind leave to amend its counterclaims to add a Lanham Act false advertising claim. OraLabs filed a declaratory judgment seeking a ruling that it wasn't infringing Kind's design patent and trade dress rights by selling certain lip balm products. Now that OraLabs has begun selling a particular product, Lip Revo, in the US, Kind alleged that the labeling was false and misleading: while OraLabs advertised a net weight of 7 grams, Kind's test showed actual useable weight of less than 6 grams.

The magistrate found that amendment would be futile because the claim was preempted (precluded) by the FDCA. "When the Lanham Act and the FDCA overlap, any conduct that amounts to a violation of the FDCA is within the Food and Drug Administration’s jurisdiction." (Noting cert. grant in Pom which may change this a bit.) In particular, claims that require interpretation and application of the FDCA can't be recognized under the Lanham Act. Here, the FDCA requires that a product's net weight must be accurately disclosed on the label. Thus, determining whether the 7g representation was false or misleading required interpreting "accurately" in the FDCA. (The "thus" is where all the action is, and it's underanalyzed. Aren't there independent standards for figuring out whether 7g is false or misleading?) To figure out whether the representation was accurate enough, the court would need to know how "accurate" the FDA expects net weight statements to be.

Absolute literalism shouldn't be required; otherwise rounding to the nearest gram would violate the law. If the FDA requires accuracy within one tenth of a gram, the alleged difference could be false and misleading. But if the FDA requires only 1 1/2 grams, 1 gram of difference would be fine. Thus, resolving Kind's claim would require interpretation and application of the FDA’s definition of "accuracy." (Again, I don't see it. Application and interpretation aren't the same thing; if the FDA's rule were really this clear, resolving this particular issue should require no interpretation at all and thus no interference with the FDA's role, any more than a blatantly false claim of FDA approval when a product is in fact unapproved requires interpretation.) Because this was an attempt to enforce the FDCA's net quantity accuracy requirement, it was preempted (precluded).

Kind argued that its false advertising claim wouldn't require interpreting the FDCA, and that it could use surveys or other evidence. While surveys might aid in determining whether consumers "actually felt misled when purchasing 6g of Lip Revo while expecting 7g." ("Felt"? How about "were"?) But that didn't matter where a claim required direct interpretation and application of the FDCA. Thus, adding this claim would be futile.

conflict mineral disclosure unconstitutional, DC Circuit rules

National Association of Manufacturers v. Securities and Exchange Commission, No. 13-5252 (D.C. Cir. Apr. 14, 2014)

If we needed an example of how the First Amendment can reinstate Lochner, this would be a good one.  Here we have a regulation, whose merits are debatable, which easily survives APA challenges because Congress is allowed to make rules even if the rules are dumb and the SEC just did what Congress told it to do.  But then a substantial chunk of it founders because the output of the regulation is a disclosure.  Argh.
In response to horrific human rights violations in the Congo, where war is financed by selling several minerals, Congress enacted a law requiring the SEC to issue regulations requiring firms using “conflict minerals” to investigate and disclose the origin of those minerals.  The required annual report to the SEC needs to disclose whether conflict minerals originated in the Congo or an adjoining country, describe the due diligence measures taken to establish the source and chain of custody of conflict minerals, and list  “the products manufactured or contracted to be manufactured that are not DRC conflict free.” A product is “DRC conflict free” if its necessary conflict minerals did not “directly or indirectly finance or benefit armed groups” in the covered countries.   There’s no exception for de minimis uses, or for issuers who only contract for the manufacture of products made with conflict minerals.
The SEC estimated that the rule would be expensive--$3-4 billion to begin with, then roughly $200-600 million annually thereafter.  It was unable to quantify the benefits of reduced violence in the Congo, because it couldn’t assess how effective the rule would be. Instead, the SEC relied on Congress’s judgment that supply-chain transparency would promote peace and stability by reducing the flow of money to armed groups, a judgment that undergirded the SEC’s discretionary choices in favor of greater transparency.
The court rejected the APA-based claims.  E.g., the SEC had the authority to create an exception for de minimis uses of conflict minerals, but given that Congress knew that conflict minerals are often used in very small quantities, the SEC was not arbitrary and capricious in determining that such an exception would conflict with Congress’s purpose.
The plaintiffs alleged that the SEC failed adequately to analyze the benefits of the final rule by failing to determine whether the rule would achieve its intended purpose.  But the plaintiffs were objecting to Congress’s purpose, not to the SEC’s process:
[W]e find it difficult to see what the Commission could have done better. The Commission determined that Congress intended the rule to achieve “compelling social benefits,” but it was “unable to readily quantify” those benefits because it lacked data about the rule’s effects.
That determination was reasonable. An agency is not required “to measure the immeasurable,” and need not conduct a “rigorous, quantitative economic analysis” unless the statute explicitly directs it to do so. . Here, the rule’s benefits would occur half-a-world away in the midst of an opaque conflict about which little reliable information exists, and concern a subject about which the Commission has no particular expertise. Even if one could estimate how many lives are saved or rapes prevented as a direct result of the final rule, doing so would be pointless because the costs of the rule—measured in dollars—would create an apples-to-bricks comparison.
Congress told the SEC to make a rule despite the lack of data.  The SEC could rely on Congress’s determination that the costs were necessary and appropriate in light of the goals. “Congress did conclude, as a general matter, that transparency and disclosure would benefit the Congo. the Commission invoked that general principle to justify each of its discretionary  choices. What the Commission did not do, despite many comments suggesting it, was question the basic premise that a disclosure regime would help promote peace and stability in the Congo.” The SEC was not supposed to second-guess Congress on this point; if it had found that disclosure wouldn’t work, it couldn’t have adopted any rule, and that would’ve been contrary to Congress’s explicit direction.
But wait!  There’s also a First Amendment claim based on the requirement that an issuer must describe certain products as not “DRC conflict free” in the report it files with the SEC and on its website.  The majority agreed that this was unconstitutionally compelled speech under Central Hudson.  (The plaintiff didn't challenge other disclosures required by the regulation.  What result if it did?)
The SEC argued that rational basis review was appropriate because the disclosure involved purely factual non-ideological information.  But Zauderer is limited to cases in which disclosure requirements are reasonably related to the prevention of deception, and this requirement isn’t.  (But see Am. Meat Inst. v. USDA, No. 13-5281, 2014 WL 1257959, at *4-7 (D.C. Cir. Mar. 28, 2014), vacated and en banc rehearing ordered, Order, No. 13-5281 (D.C. Cir. Apr. 4, 2014) (en banc).)
The factual nature of the disclosure is insufficient because speakers also have a right to avoid disclosing facts they don’t want to. Also, it was “far from clear” that “conflict free” was factual and non-ideological, since “[p]roducts and minerals do not fight conflicts.”  “Conflict free” was a “metaphor” that “conveys moral responsibility for the Congo war. It requires an issuer to tell consumers that its products are ethically tainted, even if they only indirectly finance armed groups.”   Issuers might disagree with that assessment of their moral responsibility, and convey that disagreement through silence.  “By compelling an issuer to confess blood on its hands, the statute interferes with that exercise of the freedom of speech under the First Amendment.”  (Compare the result in the tobacco RICO case, where statements that the defendants lied—something that is true, but that they don’t really want you to know—were upheld as reasonable corrective measures.  “Controversial” is not a good standard for disclosures, and this is why.)
Intervenor Amnesty International argued that SEC v. Wall Street Publishing Institute, Inc., 851 F.2d 365 (D.C. Cir. 1988), applied rational basis review to securities regulation.  That case allowed the SEC to seek an injunction requiring that a magazine disclose the consideration it received in exchange for stock recommendations, but the case didn’t hold that rational basis review governed securities regulation “as such,” but might be “roughly tantamount to the government’s more general power to regulate commercial speech.”  Anyway, that was a classic deception rationale governing inherently misleading speech.
To read Wall Street Publishing broadly would allow Congress to easily regulate otherwise protected speech using the guise of securities laws. Why, for example, could Congress not require issuers to disclose the labor conditions of their factories abroad or the political ideologies of their board members, as part of their annual reports? Those examples, obviously repugnant to the First Amendment, should not face relaxed review just because Congress used the “securities” label.
(WTF? Disclosure of labor conditions, at least, is the exact same thing as this regulation. Repeating it doesn't make it more obvious.)
Once rational basis was out of the picture, the regulation flunked even Central Hudson, since “narrower restrictions on expression would serve [the government’s] interest as well.”  Plaintiff suggested that issuers could use their own language to describe their products, or the government could compile its own list of products that it believes are affiliated with the Congo war, based on information the issuers submit to the Commission.  The SEC didn’t show that this would be less effective.  “[I]f issuers can determine the conflict status of their products from due diligence, then surely the Commission can use the same information to make the same determination. And a centralized list compiled by the Commission in one place may even  be  more  convenient  or  trustworthy  to  investors  and consumers.” These “intuitive” alternatives were sufficient to invalidate the rule.
The SEC argued that the rule’s impact was minimal because issuers could explain what “conflict free” meant in their own terms, but almost all compelled speech offers the possibility of explanation, and that’s inadequate to cure a First Amendment violation. Thus, the rule (and the statute) was unconstitutional to the extent that it (they) required regulated entities to report to the Commission and to state on their website that any of their products have “not been found to be ‘DRC conflict free.’”
The concurrence would’ve waited for the en banc review of the COOL regulations raising this exact issue under Zauderer, and stayed just that part of the SEC’s rule while allowing the rest to go into effect.

Monday, April 14, 2014

dig if you will the picture

Bold Rock bottle in green

Rolling Rock bottle

Rolling Rock and Bold Rock.  Too bold?

Standard false advertising case doesn't involve public benefit in Minn.

Select Comfort Corp. v. Tempur Sealy International, Inc., No. 13–2451, 2014 WL 1379082 (D. Minn. Apr. 8, 2014)

Select Comfort and Tempur Sealy compete to sell mattresses, with Select Comfort owning registered marks for Select Comfort and Sleep Number.  Defendant Mattress Firm is a large specialty retailer that sells a number of different brands, including Tempur-Pedic, though it no longer sells Select Comfort.  Select Comfort alleged that Mattress Firm engaged in false advertising about Select Comfort and trademark infringement through AdWords, manipulation of organic searches, and paid ads with third-party shopping sites.

Here, Mattress Firm sought to dismiss claims relating to violations of the Minnesota Unlawful Trade Practices Act (“MUTPA”), violations of the Minnesota False Statement in Advertising Act (“MFSAA”), and violations of the Minnesota Consumer Fraud Act (“MCFA”). Each requires that a private action have a public benefit. The court agreed that the claims should be dismissed.

While the public benefit requirement isn’t onerous, it is necessary.  Relevant factors: “the degree to which the defendants’ alleged misrepresentations affected the public; the form of the alleged misrepresentation; the kind of relief sought; and whether the alleged misrepresentations are ongoing.”  A public benefit is typically found when the primary relief sought by the plaintiff is aimed at altering the defendant’s conduct rather than at seeking remedies for past worngs.

Select Comfort argued that its claims addressed false advertising to the general public and thus stated a public benefit.  But while courts have found a public benefit in similar false advertising cases, they haven’t found that there’s a per se rule; something more is needed. Collins v. Minn. Sch. of Bus., Inc., 655 N.W.2d 320 (Minn. 2003), found a public benefit where the plaintiffs challenged alleged false advertising of a school’s sports medicine program.  The Minnesota Supreme Court held that when the defendant aired television advertisements and made a number of sales presentations, along with the high enrollment in the school and the number of people that could enroll, the defendant had “presented its program to the public at large” and the plaintiff’s claims established a public benefit. But Select Comfort failed to allege that the false advertising alleged here reached or affected the public to the same extent and in the same way as in Collins.

Select Comfort’s allegations of confusion/deception weren’t enough to show public harm: the harm was “the potential of ending up with a product that is not a Select Comfort product.” That alone was insufficient.  What about interference with the public’s ability to make accurate purchasing decisions?  That wasn’t enough—ensuring that consumers could make the most accurate buying decisions was merely an “attenuated collateral benefit.” “The real harm alleged here is Select Comfort’s loss of sales, goodwill, and reputation.”  That’s not what the consumer protection statutes contemplated; the harm to the general public was not the same as the harm to Select Comfort.

Thursday, April 10, 2014

Phone resale not infringing even when reseller defaults

T–Mobile USA, Inc. v. Chong, 2014 WL 1350896, No. C13–29 (W.D. Wash. Apr. 4, 2014)

T-Mobile moved for the second time for default judgment; the court only granted it in part, though giving T-Mobile what it wanted in the form of a permanent injunction. Chong sold T-Mobile branded prepaid cellphones and SIM cards without T-Mobile’s permission.

T-Mobile sought default judgment for breach of its service contract binding those who activate its phones, and for violation of the Lanham Act (and coordinate state-law claims).  The court found that T-Mobile should get judgment and nominal damages on its breach of contract claim, but not on the Lanham Act claim.

T-Mobile sells phones below cost, hoping that customers will eventually buy additional months of service/airtime.  The phones come with SIM cards preloaded with airtime minutes.  Phones must be activated, often with the assistance of the authorized retailer-seller and sometimes through a T-Mobile website.

Default meant that only T-Mobile’s version of the facts was available.  According to the complaint: Chong (and people acting at his direction) bought prepaid phones without activating them. He then resold them domestically and overseas by unlocking the phones (disabling/modifying software or hardware designed to ensure that they’re only used on T-Mobile’s network). Plus, Chong resold extracted SIM cards, sometimes by honestly stating the number of minutes on each card, and other times overstating the amount or falsely stating that the cards permitted unlimited minutes.  Sometimes he used T-Mobile activation codes, and since purchasers are inevitably T-Mobile customers, some blame T-Mobile when they discover that their cards provide less airtime than advertised and contact T–Mobile to complain. 

The only information provided to the court about Chong’s sales practices was “a collection of hundreds of pages of ads from the Craigslist website.” T–Mobile failed to present the ads “in a way that allows the court to draw meaningful conclusions about the way in which Mr. Chong advertises the T–Mobile phones he resells.”

T-Mobile’s contract applies to anyone who activates T-Mobile service after buying a prepaid phone. It bars “Misuse of Service or Device,” including “reselling or rebilling [T–Mobile] service,” “reselling T–Mobile devices for profit, or tampering with, reprogramming or altering T–Mobile Devices for the purpose of reselling the T–Mobile device,” and more. It concludes with a declaration that “[i]f you purchase a T–Mobile Device that is sold for use on T–Mobile Prepaid Service, you agree that you intend it to be activated on our Service, and do not intend to, and will not, resell, modify and/or export the T–Mobile devices, or assist someone in these activities.”  The court found that the complaint plausibly alleged that Mr. Chong both breached these provisions and assisted or directed others in their breaches of these provisions.

T-Mobile also sought default judgment on the §43(a)(1)(A) (not false advertising) claim. The court found that T-Mobile hadn’t alleged conduct that violates the Lanham Act.  Rather than falsely designating the origin of his products, he touted them as T-Mobile products, which is generally allowed by the first sale doctrine. T-Mobile argued that it could take advantage of an exception for goods that have been significantly altered.  “The problem is that T–Mobile’s complaint does not allege significant alterations. It alleges instead that Mr. Chong resells its phones and SIM cards out of their original packaging, stripped of manuals, warranty information, and the like.”  Even assuming that this voided the warranties, the Lanham Act doesn’t bar resale under these circumstances. Some courts are willing to consider requiring the reseller to include a repackaging notice, but barring resale entirely is different.  Maybe T-Mobile could prove a violation of the Lanham Act, but its allegations didn’t get the job done.  “With no adversary to challenge T–Mobile’s view of the Lanham Act, the court is reluctant to create precedent (even non-binding precedent) suggesting that the mere repackaging of goods is a violation of the Act.”

The court did not award damages for T-Mobile’s claimed $20,000 in investigative costs, and it didn’t show how much it lost when a subsidized phone left the T-Mobile network, so the court awarded nominal damages of $1, and no attorney’s fees since T-Mobile didn’t prevail on its Lanham Act claim.

T-Mobile did show irreparable harm; typically, monetary harm isn’t irreparable, but “[w]thout investing considerable resources in tracking Mr. Chong’s resale activity, T–Mobile has no way to assess the ongoing financial harm his continuing sales would cause. Financial harm that cannot practically be remedied is irreparable harm.”  Banning Chong from selling or activating T–Mobile cellular phones and SIM cards and from inducing/assisting others with the same was sufficient.

Wednesday, April 09, 2014

Here to cheer on a mission from Garcia

This story about a Raiderette's lawsuit against the Raiders for violating employment law is interesting in itself, but an eagle-eyed correspondent points out that there is a very important word missing in the contract (attached to the complaint) post-Garcia.  Here is the relevant provision, "publicity":
I am willing to bet that Raiderettes are, in many cases, onscreen for longer than Garcia was.  Discuss!


Uber alles except unfair competition

I predict that Mark Lemley will not like this decision but that Mark McKenna will.

Boston Cab Dispatch, Inc. v. Uber Technologies, Inc., 2014 WL 1338148 No. 13–10769 (D. Mass. Mar. 27, 2014)

Plaintiffs sued Uber for false advertising, unfair competition, and violation of Boston taxicab ordinances for “providing a private car service that allows users to call taxicabs associated with Boston Cab and other dispatch services without complying with Boston taxicab regulations.”  (There were also tortious interference/RICO claims, though those were kicked out.)

The core of the complaint is that Uber gained an unfair competitive advantage over traditional taxicab dispatch services and license-holders “because it avoids the costs and burdens of complying with extensive regulations designed to ensure that residents of Boston have access to fairly priced and safe transportation options throughout the city and yet reaps the benefits of others’ compliance with those regulations.” The Boston Police Commissioner requires all taxi drivers to have a medallion, maintain a properly equipped and functioning taxicab, refrain from cell phone use while operating a taxicab and belong to an approved dispatch service or “radio association.” Such associations must provide 24–hour dispatch capability, two-way radio service and discount reimbursements for the elderly; keep records; and use specific approved colors and markings. Plaintiffs each contract with several hundred medallion owners to manage them.

Uber allows users to request private vehicles for hire.  At the time of the motion to dismiss, Uber offered both unmarked vehicles and “Uber Taxis,” operated by Boston taxicab drivers. Uber-affiliated drivers can’t accept cash or non-Uber-associated credit cards.  Uber taxi drivers “have agreed to be available for hire through Uber while they are working shifts and subject to dispatch by their radio associations.” While their fees are calculated based on the flat rate applicable to all Boston taxicab drivers, Uber adds a $1 “fee” and a 20% ”gratuity” and therefore the final charge exceeds the maximum that taxicabs are permitted to charge under the Police Commissioner’s rule.  Though Uber says that 20% is “for the driver,” drivers only get 10% and Uber keeps the rest.  (Boo!)  Unmarked vehicles don’t comply with the rules about 1) membership in approved associations or dispatch services, 2) regular inspections, 3) partitions between drivers and passengers, 4) panic buttons and GPS tracking to allow customers to alert police when they are in danger, 5) criminal background checks of drivers, 6) non-discrimination with respect to passengers with handicaps or 7) use of mobile telephones. 

Somewhat puzzlingly, the court says there’s no evidence in the record (on this motion to dismiss) that Boston Cab suffered any harm due to members on the clock picking up passengers through Uber rather than through its dispatch services.  But plaintiffs argued that, by falsely portraying taxis as one choice Uber offers, “Uber diverts fares that would go to licensed Boston taxis if Uber did not falsely claim taxis were part of its affiliated businesses.” They contended that this diversion decreased demand for their cabs, smaller numbers of leased cabs, and lost revenue.

Plaintiffs alleged that Uber misrepresented that it was affiliated with Boston Cab.  The court found that, regardless, they failed to plead harm caused by the alleged misrepresentation—the “use” of Boston Cab colors and markings.  There was no connection between the allegedly poorer quality of the unmarked Uber cars and the use of Boston Cab colors/markings on Uber taxis.  No reasonable inference could be drawn that a consumer would hold the unmarked cars’ lack of safety features against plaintiffs.  (In other words, mere affiliation confusion does not plausibly harm goodwill or reputation!  Mark McKenna, take note.)

Second, the magistrate judge who recommended keeping this claim alive reasoned that plaintiffs could be harmed because the Police Commissioner’s rule forbids mobile phone use by drivers, but Uber drivers must use mobile phones.  Even if this use increases accident potential, it still wasn’t plausible that plaintiffs were harmed by that risk “as a result of consumers possibly mistaking the relationship between plaintiffs and Uber. Even if Uber’s service resulted in an increase in accidents involving taxis bearing the Boston Cab markings, any harm to Boston Cab’s reputation would not be the result of customer confusion about the relationship between Uber and Boston Cab.”

Plus, plaintiffs alleged that they were harmed by lost revenues from the unmarked cars, but that doesn’t have anything to do with confusion about the relationship between Uber and Boston Cab either.

Likewise, the Chapter 93A unfair competition by misrepresentation claims were also dismissed.  Uber’s alleged misrepresentations of affiliation with medallion owners/radio associations, and misrepresentations that Uber only collects $1 and pays the 20% gratuity to taxi drivers, lacked the requisite causal connection to plaintiffs’ harm, as described above.  As for alleged misrepresentations that Uber’s service was lawful under the Boston rules, and that the unmarked cars didn’t need to be licensed and regulated as taxis, plaintiff didn’t identify a representation by Uber that said these things either expressly or by necessary implication.  Uber’s just acting and leaving Boston to catch up, if it can.

However, plaintiffs also alleged that Uber violated Chapter 93A through unfairly competing by “operating” its service without incurring the expense of compliance with Massachusetts law and Boston ordinances. Uber argued that it couldn’t be violating the law because it doesn’t own any cars, medallions, or radio associations and does not employ drivers. This was based on an “unduly narrow conception” of the term “operating.” There was sufficient evidence that Uber exercised control over vehicles for hire that competed with plaintiffs.  Uber’s preclusion argument also failed; the regulations didn’t occupy the field to the exclusion of Chapter 93A.  Nor did Uber succeed in shifting all responsibility for unlawful conduct to drivers (like Airbnb and others of these types of services, Uber said it was the drivers’ responsibility to follow local law and not Uber’s fault if they didn’t; Uber drivers take note).  Uber sets policy for the drivers, such as requiring mobile phone use.

This also preserved the common-law unfair competition claim.

predictions of future events aren't actionable false advertising

Duty Free Americas, Inc. v. Estée Lauder Cos., 2014 WL 1329359, No. 12–60741 (S.D. Fla. Mar. 31, 2014)

This is mostly an antitrust case; the antitrust claims are all dismissed because no one wins antitrust cases.  DFA operates duty-free stores in airports, with beauty products a major category.  ELC supplies many duty-free stores with beauty products, but no longer deals with DFA.  DFA sued for attempted monopolization, tortious interference with prospective business relationships with three airports, and contributory false advertising.  The dismissal was with prejudice for everything but the contributory false advertising claim, but the court cautioned that DFA shouldn’t try again without keeping Rule 11 in mind, since there’d already been amended complaints and extensive discovery.

Because of a past dispute on pricing, DFA stopped carrying ELC products and ELC refused to deal with DFA when DFA changed its mind.  Various people said they thought DFA misrepresented its ability to sell ELC products during bidding on airport contracts.  For example, one person connected to ELC wrote that “DFA does not have authority to offer our product lines in their operations” and “DFA is not authorized to represent that it has ability to sell Estée Lauder Companies/ brands in its stores.” DFA alleged that these statements were untrue because it still had ELC products in inventory, though DFA didn’t allege that ELC knew or had reason to know DFA’s inventory. For one airport contract, another bidder accused DFA of misrepresentations of its ability to carry ELC products.

ELC didn’t unjustifiedly interfere with business relations because it acted to safeguard its own financial interests and didn’t employ improper means in doing so.  The representations that ELC made itself, as opposed to the representations that other duty-free operators made about the ELC-DFA relationship, were truthful.  And ELC promoted its own financial interest by telling airports about the duty-free operators it dealt with and that it didn’t deal with DFA: doing so increased the likelihood that the airport would select an operator who sold ELC.  Similarly, it wasn’t improper to tell other duty-free operators that ELC didn’t do business with DFA.  And DFA didn’t allege facts that would allow the court to impute allegedly false representations by duty-free operators to ELC.  The other operators were separate companies, and there was no allegation of conspiracy.  The other operators did claim that because DFA didn’t carry ELC, its financial terms offered to airports were unrealistic—but ELC never said that.

Lanham Act contributory false advertising: DFA failed to allege a plausible claim of underlying direct liability.  The statements that DFA alleged were false were “merely predictions about sales prospects,” and thus were opinions.  The statements: “Given that Estée Lauder brands account for 20% of cosmetic and fragrance sales, at least in Orlando, and cosmetic and fragrance sales constitute one of the largest sources of revenue for duty free stores, a lack of access to Estée Lauder brands would cast doubt on the validity of DFA’s projected revenue streams”; “[W]e strongly believe that Estée Lauder is a product which you have to sell, also, to domestic passengers”; “DFA sales projects are deemed to be unreasonable and not sustainable in light of the history”; “[F]ailure to offer the Estée Lauder product line will negatively impact duty free and duty paid sales revenue for both international and domestic travelers.”  These were all “predictions that do not lend themselves to empirical verification.”  They used language signaling a prediction, and they were about future commercial events.  (Presumably the court uses “commercial” because some predictions—like “this drug reduces complications 35%”—are empirically verifiable because probabilistic.)

The exception to the opinion rule is where the speaker knows facts that make the opinion false/not held in good faith.  But DFA didn’t allege that the operators here knew their statements to be false or lacked a good faith basis for believing them. It was (more) plausible that they genuinely believed the statements. After all, they put up with onerous ELC conditions (described in the antitrust section), and it was unreasonable to assume that operators would do so if they didn’t believe that selling ELC products was an advantage.

using metatags/buying AdWords isn't trademark use

Radiancy, Inc. v. Viatek Consumer Products Group, Inc., 2014 WL 1318374, No. 13–cv–3767 (S.D.N.Y. Apr. 1, 2014)

And now for a different result on the pleading standards for affirmative defenses!  Among the many arguments in this case, Viatek raised unclean hands as an affirmative defense.  Here, Radiancy alleged that Viatek used Radiancy’s trademark in its website metadata, directed Google search results to Viatek’s product, and falsely advertised that its hair removal devices caused hair growth to stop. Viatek alleged that Radiancy was also using Viatek’s trademark in Radiancy’s website metadata; trying to influence Google searches; and advertising that its hair removal devices could stop hair growth.  But pleading “unclean hands” without more isn’t enough.  Radiancy would be prejudiced by not striking a bare unclean hands defense because additional discovery would be required.

Here, the court found that Viatek wasn’t sufficiently clear about the false advertising aspects of the defense. However, the trademark-related claims were sufficiently clear that the defense survived with respect to them.

As for Viatek’s unfair competition counterclaim, at the pleading stage, “there must at least be allegations of the goods allegedly misappropriated or marketed to the public, how such goods competed with those of the counterclaim-plaintiff, the basis upon which the consuming public would be confused, and the damages sustained.”  Viatek couldn’t base its claim on allegations of bad faith litigation, because that doesn’t give rise to an unfair competition claim under NY law.

What about the metatag/keyword buys claims?  Somewhat puzzlingly, the court relied on 1–800 Contacts v. When U.Com, Inc., 414 F.3d 400 (2d Cir. 2005), rather than Rescuecom v. Google. Since internal use of a mark as a keyword isn’t use of a mark in a trademark sense, and since Radiancy didn’t place the mark on any goods, displays, etc. or use the mark in any way that indicated source or origin, Viatek didn’t state a claim for unfair competition under the Lanham Act. It is odd that Google is “using” the mark in the Second Circuit but, according to this case, Google’s advertisers aren’t—and yet I can’t find any great sadness in me for this result, since neither metatags nor keyword buys in themselves indicate anything about likely confusion.

Twiqbal doesn't apply to unclean hands defense

Newborn Bros. Co. v. Albion Engineering Co., No. 12–2999, 2014 WL 1272109 (D.N.J. Mar. 27, 2014)

Newborn sued its competitor Albion for allegedly falsely advertising its dispensing guns (used to apply sealants and adhesives) as made in the US when Albion knew they were made in Taiwan.  Late in the game, Newborn moved to strike Albion’s late-pled unclean hands defense (apparently that Newborn’s products were also falsely advertised as made in the US).  First, the court found that affirmative defenses aren’t required to be pled with the specificity required by Iqbal/Twombly.  Newborn also argued that Rule 9(b) applied to the extent that the counterclaim was fraud-like; the court was sympathetic, and indicated that it likely would have granted a Rule 9(b) motion with leave to amend if the issue had been raised before discovery. But given the timing, the court wasn’t going to let Newborn use 9(b) as a sword, “when it was designed to act as a shield against frivolous or unclear allegations of fraud.”  At this point, Newborn had adequate notice of the factual basis for the defense and opportunity to rebut it.

The court confirmed that unclean hands is a viable defense to Lanham Act claims.  If there was no factual support for the defense, Newborn had other remedies at the appropriate stage of litigation.

Tuesday, April 08, 2014

Statements about quality care were puffing despite standard of care

Intermountain Stroke Center, Inc. v. Intermountain Health Care, Inc., No. 2:13–cv–00909, 2014 WL 1320281 (D. Utah Mar. 31, 2014)

ISC sued IHC for violations of the Lanham Act and Utah’s Truth in Advertising Act and intentional interference with actual/prospective economic relations. The court dismissed the Lanham Act claims and declined to exercise jurisdiction over the state law claims.  IHC offers insurance plans and operates hospitals and clinics. ISC treated strokes and transient ischemic attacks (TIA)until it closed, allegedly as a result of IHC’s conduct. 

Though the standard of care for stroke and TIA allegedly requires that the patient either be immediately hospitalized or be seen within forty-eight hours at a same-day, urgent-care stroke clinic, plaintiffs alleged that IHC frequently saw stroke and TIA patients in IHC emergency rooms, failed to hospitalize such patients, and refused to refer them to the Stroke Center—the only same-day, urgent-care stroke clinic in Utah.  Treatment at the Stroke Center was not covered by IHC insurance, so many stroke and TIA patients were allegedly forced to settle for IHC’s allegedly sub-standard treatment.  IHC allegedly misled consumers about their care, misrepresenting that ICH provided high quality care with the best medical practices.  IHC’s advertising allegedly misled consumers to believe that IHC employs many specialists in stroke/TIA treatment when it has almost no one in those categories, and to believe that IHC carefully complies with federal laws that ban rewarding doctors for referrals even though IHC recently settled with DoJ for violations of those laws.

The court found that the complaint didn’t state a plausible claim for relief; many of the challenged statements weren’t statements of fact and the rest weren’t adequately alleged to be misleading or give rise to a competitive injury.

Non-fact: IHC’s claim to provide “high quality care,” “the best possible care,” “excellent care of the highest quality at an affordable cost,” and that it employs “best medical practices” were puffery as a matter of law.  These were “vague generalities that no reasonable person would rely on as assertions of particular facts.” Plaintiffs argued that these statements were objectively false because IHC fell below the standard of care for stroke and TIA patients. But literal falsity isn’t dispositive; the question is whether any reasonable person would rely on the assertions.  As a well-worn old case says, puffery is “a seller’s privilege to lie his head off, so long as he says nothing specific, on the theory that no reasonable man would believe him, or that no reasonable man would be influenced by such talk.”  (Raising as always the question of why advertisers use it.)  “Claims as to high quality and low cost—even if linked to a particular product or service and even if false—are paradigmatic examples of puffery upon which no reasonable person would be expected to rely.”

Plaintiffs argued that “best medical practices” had a specific referent, the standard of care.  (Example statement: “all three Intermountain divisions—Health Services, SelectHealth, and the Intermountain Medical Group—contribute in essential ways to the sharing of best medical practices, and raising the standards of clinical excellence.”)  But this statement wasn’t made in the context of any particular product or service.  Even if the claims were made about stroke and TIA services in particular, they still would be too vague.  If IHC specifically stated that its practice of refusing to either hospitalize stroke and TIA patients or to refer such patients to a same day stroke or TIA clinic is in accord with the best medical practices, plaintiffs could state a claim, but IHC wasn’t alleged to have done that.  Also, the “best medical practices” statements were phrased to suggest puffery, without defining the term.  “Whatever exactly it means to ‘contribute in essential ways to the sharing of best medical practices,’ no reasonable consumer would rely on the claim in choosing IHC as its stroke and TIA treatment provider.”

Plaintiffs also alleged that IHC misled patients and consumers to believe that it employs more specialists in stroke and TIA treatment than it in fact does.  The court found its statements true and not misleading.  Stroke care isn’t its own category on the IHC website.  It’s listed under “Heart and Vascular Services.” IHC’s “Find a Doctor” link from its stroke care page provides a list of heart and vascular surgeons, but not vascular neurologists or stroke specialists. Plaintiffs argued that these features induced consumers to falsely believe that the heart and vascular physicians employed by IHC specialize in stoke and TIA treatment.

The court found that implausible. Next to each doctor’s name is his or her primary area of specialization, and clicking on the name gives more information, including additional areas of specialization, practice areas, and board certifications. None of the information says they specialize in stroke or TIA treatment.  “The fact that the list is accessible from the stroke care portion of IHC’s website may suggest that some of the physicians listed are competent to provide stroke and TIA treatment.”  But plaintiffs didn’t allege that such an implication was false, only that they weren’t specialists.  “Given the extensive information regarding the physicians’ areas of focus and specialization, there is no reason to believe that patients or consumers would infer that some or all of those physicians specialize in—and do not merely have competence with respect to—the treatment of stroke.” The Lanham Act didn’t require an affirmative warning here.

Similarly, IHC’s advertising for its Neuroscience Institute—advertised as offering stroke patients with resources for “ongoing medical needs after hospitalization” and employing “subspecialists including epileptologists, general neurologists, physical medicine and rehabilitation physicians, and neuropsychologists”—wouldn’t mean anything more to consumers than what it says; consumers wouldn’t likely receive the message that these providers are subspecialists in treating stroke.

As for IHC’s statements about its code of ethics/anti-kickback practices, IHC’s claims were true and not misleading.  IHC said it

carefully review[s] financial relationships with physicians and other health care practitioners for compliance with the anti-kickback and Stark laws. All financial arrangements and contracts with physicians and physician groups must have legal Department review. Intermountain will not improperly induce or reward referrals of patients or services as prohibited under these laws and regulations.

Plaintiffs alleged that IHC’s refusal to refer patients to the Stroke Center or provide insurance coverage for treatment inappropriately created revenue for IHC, and that ICH recently settled claims with DoJ over a compensation arrangement that improperly rewarded physicians for referrals in violation of federal law.

The court held that this statement didn’t suggest that IHC or its employees uniformly meet the ethical standards outlined in the Code of Ethics, which set out disciplinary action for violations and told everyone to report suspected violations.  “In recognizing a potential violation of one of its ethical standards, reporting that violation, and accepting the consequences [with DoJ, IHC acted in exactly the way contemplated by the Code of Ethics.” Likewise, IHC’s standard regarding the avoidance of “actions that inappropriately create revenues” didn’t make its decision not to do business with the Intermountain Stroke Center false advertising.

Plus, plaintiffs didn’t plausibly allege competitive injury from these statements. Their allegations of injury were conclusory, and the alleged misrepresentation wasn’t about IHC’s stroke care but about its business operations generally.  It wasn’t plausible that a consumer trying to decide about stroke treatment would be influenced by these statements in a Code of Ethics intended primarily for IHC employees. The Stroke Center may have suffered harm, but not from the alleged misrepresentation.

Finally, IHC’s pamphlet—“Life After a Stroke or TIA”—was also nonmisleading.  The pamphlet’s entry on “Aftercare” said that “[i]n the first few weeks after your discharge, you’ll need to see members of your medical team. Use the chart below to keep track of these important appointments.” The second entry on the included chart is for an appointment with a neurologist and provides that the appointment is “usually recommended 4 to 6 weeks after you leave to go home.” Plaintiffs argued that IHC’s pamphlet was likely to mislead TIA patients to believe that they can “safely wait 4 to 6 weeks before following up with a neurologist.”  Though plaintiffs alleged that the standard of care required either hospitalization or quick referral to a stroke/TIA clinic to see a neurologist, the pamphlet on its face was directed to patients who’d been admitted to, and were being discharged from, a hospital. Thus, it was unlikely that consumers would believe that the pamphlet was recommending something less than the standard of care regarding hospitalization.

Even if a TIA patient treated in an ER got the pamphlet, that still wasn’t false advertising about the “the nature, characteristics, [or] qualities” of IHC’s services. It provided only very general information about stroke; IHC’s name only appeared twice: once as an author and once as a resource for stroke rehab and support groups on the last page.

Statements to sellers of must-have component actionable under Lanham Act

TriStar Investors, Inc. v. American Tower Corp., No. 3:12–cv–0499, 2014 WL 1327663 (N.D. Tex. Apr. 3, 2014)

Cell towers are mostly owned and operated by tower companies, which rent wireless carriers the right to locate equipment on their towers.  Most towers are on property leased to tower companies.  TriStar is a tower company with about 650 tower locations (out of 135,000 in the US).  Defendant ATC operates about 22,800 tower sites. By mid-2013, TriStar had rights in land on which 594 cell towers currently or formerly operated by ATC, for about $50 million, or $85,000 per site. Its rights allow TriStar to operate cell towers on these sites when ATC’s current leases expire, in return for giving landowners a share of operating revenue; it’s already operating some of the towers.  ATC reported an 82% gross profit margin in 2012, while TriStar reported a gross profit margin of 55%. ATC alleged that TriStar’s agreements with two tower companies (SBA and Crown), in which TriStar agreed not to seek property rights in the land under towers owned or controlled by them, constituted an anticompetitive scheme to pay “supra-competitive” prices for property rights at ATC tower sites, “thus raising ATC’s costs to acquire future property rights, in the hopes that ATC would ultimately pay TriStar for a similar standstill agreement.” 

In response, ATC “began to be more proactive in seeking to acquire property interests for itself at its tower sites in order to control the use of the site after its current leases expired, and explored opportunities to move its towers or relocate its tower tenants to neighboring ATC towers.”  TriStar alleged that the results were false and misleading statements to landowners and sham litigation, allegedly securing future control at 2,944 sites where TriStar had made offers to landowners to acquire land rights under towers operated or formerly operated by ATC.

Nobody’s antitrust claims succeeded, because nobody’s antitrust claims do; the court found that ATC lacked standing to pursue a Sherman Act Section 1 counterclaim against TriStar, and that there was no dangerous probability of ATC successfully monopolizing the national market, given the competition from TriStar, Crown, and SBA (now allies of a sort—yay duopoly!).  ATC’s trade secret counterclaim based on its price terms survived, though barely; the court was dubious that price terms were actually trade secrets, but the parties didn’t submit enough evidence either way.  ATC’s tortious interference counterclaims also survived.  RICO claims against TriStar-related individuals were dismissed.

The Lanham Act piece: ATC argued that any allegedly false statements it made were in connection with efforts to get real property rights (easements/leases/etc.) rather than goods or services.  But ATC concededly provides services to landowners and wireless carriers; the statements to landowners were sufficiently connected to these services to support a Lanham Act claim. 

Still, ATC argued that its statements were made to suppliers—landowners supplying property—not purchasers, and thus couldn’t prompt a change in purchasing behavior.  Here, however, landowners could properly be characterized as consumers for these purposes.  TriStar’s evidence showed that ATC characterized landowners as its customers, for example in a mailing to a landowner, describing a commitment to being a “quality service provider for our customers and those companies and partners like you.”  The court found Health Care Compare Corp. v. United Payor & United Providers, Inc., No. 96–C–2518, 1998 WL 122900 (N.D.Ill. Mar. 13, 1998) persuasive. That case involved a middleman; the court found that statements to healthcare providers were actionable even though they were paid for services provided through the middleman’s network; the defendant’s business couldn’t succeed unless both payors and providers were convinced to use defendant’s services “with [defendant] providing each with access to the other.”

“Accordingly, where an entity is not a traditional ‘purchaser,’ statements to that entity may still be actionable under the Lanham Act if that entity is essential to the defendant’s ability to meet the needs of the entities that purchase its goods or services.”  Thus, the Lanham Act applied to ATC’s statements to landowners because ATC required property rights from them to do business with wireless carriers.  “[T]he importance of these property rights to ATC’s business relationship with wireless carriers places ATC’s statements to landowners properly within the bounds of a claim under the Lanham Act.”  Hmm.  Not sure this is consistent with Lexmark, but perhaps you can think of the “service” of managing the property and passing on revenues to the property owners as something that’s being advertised, and purchased with property rights instead of dollars?  Also, there is arguably an even stronger 1-to-1 correspondence between sales made to one and sales lost to another than in LexmarkGiven the need/desire of competitors to use the same land, there does seem to be a strong competitive interest at stake.

TriStar’s tortious interference claim likewise survived.

ATC argued that TriStar hadn’t submitted sufficient evidence of damages. TriStar alleged that ATC made false statements about TriStar to landowners to discourage them from conveying to TriStar.  (E.g., an ATC representative described TriStar’s method of operation as “highway robbery” and that the company was a “dirty, rotten, stinking outfit,” and a landowner testified that ATC’s statements left him “no options” but to stop “entertaining the thought of anything else other than [ATC].”) TriStar claimed injury as to 278 of the 2944 sites where they competed; ATC argued that at most TriStar showed that it lost property to ATC or paid more to secure a property interest because of ATC’s actions at 28 sites.  TriStar’s expert claimed to extrapolate from those sites to the remaining 250; he observed that as the number of incidents of misconduct by ATC increased, TriStar’s close rate decreased, despite the fact that TriStar increased its marketing expenditures and made allegedly superior offers.  His regression analysis was sufficient to survive summary judgment, allowing a jury to conclude that TriStar was injured at 278 sites.

Is flexibility the same as unpredictability?

Thought on the anti-fair use meme being used, mostly, to oppose the introduction of fair use in other countries: the criticism is that fair use’s flexibility means that it’s inherently and undesirably unpredictable. (See, e.g., the Kernochan Center’s submission to the Australian copyright inquiry.) But those aren’t synonyms. My elbow is flexible, not unpredictable. Only if the overall system is in trouble is flexibility also unpredictability. As numerous scholars such as Pam Samuelson, Mike Madison, and Matt Sag have shown, there are strong patterns in fair use cases on which reasonable people can rely.

dispute over reliability of state of the art goes to trial

Nellcor Puritan Bennett LLC v. CAS Medical Systems, Inc., No. 2:11–cv–15697, 2014 WL 1304428 (E.D. Mich. Mar. 28, 2014)

The parties compete to sell cerebral oximeters, used by surgeons and anesthesiologists to monitor the oxygen saturation level of blood in a region of the brain.  Nellcor alleged that CAS falsely advertised that its oximeter was more accurate than Nellcor’s, in violation of the Lanham Act and state law.  CAS’s claim was based on studies that compared readings from competing cerebral oximeters to an estimate of the average oxygen saturation level of blood in the entire brain called “field saturation.” Nellcor’s main argument was that this was deceptive because field saturation is only a rough estimate about the entire brain, not a measurement of the saturation level of the relevant brain region.  Nellcor submitted “strong evidence” that field saturation differed from regional saturation, while CAS submitted evidence that field saturation was sufficiently accurate; though Nellcor’s evidence was stronger, the court found that there was still an issue of fact for trial.  The court did grant summary judgment (1) against CAS for its res judicata defense and (2) for CAS as to various smaller claims about the study’s unreliability, as well as claims about a page on CAS’s website that said it linked to summaries of recent studies involving CAS’s product when three of the ten studies were of Nellcor’s product.  (This last misdescription was changed soon after the lawsuit was filed.)

CAS’s claim was a “tests prove” or establishment claim. It can be falsified by showing (1) that the defendant’s test or study was not sufficiently reliable to permit one to conclude with reasonable certainty that it establishes the proposition for which it was cited, or (2) that the test, while sufficiently reliable, does not establish the proposition claimed in defendant’s advertising.  As noted above, Nellcor’s core argument was that field saturation wasn’t accurate or valid enough to compare the accuracy of cerebral oximeters; without a correct reference value, it’s impossible to do accurate comparative accuracy testing.  CAS argued that field saturation was the best available reference value, and that the FDA used it too.  Nellcor responded that the FDA accepted calculations using field saturation, but didn’t require or condone field saturation’s use as a reference.

The court found that a factfinder could find that field saturation is not an accepted or accurate reference value to compare the accuracy of cerebral oximeters; current measurements are just estimates, and in any event field saturation is different from regional saturation and oxygen levels may differ in different regions.  But a factfinder could also accept CAS’s evidence that, in healthy people, field saturation would be the same as regional saturation, and that the measurement was accurate enough to rely on.  CAS’s primary witness had a Ph.D. in electrical engineering, not medicine or physiology.  Another CAS witness published an article in 2012 that appeared to support Nellcor’s position; the court “look[ed] forward” to hearing him explain himself at trial and undergo cross-examination. Credibility determinations were for trial, though. (Or, hint hint, settlement.)

The court did reject several of Nellcorp’s criticisms of CAS-commissioned studies.  None of the alleged flaws made the studies unreliable.  It was not enough that the doctor running the study dropped some participants for unknown reasons, or that CAS provided draft abstracts and reviewed data calculations, when the doctor decided the final content.  Some issues of reliability could be explored at trial, such as whether studies on healthy patients could be extrapolated to the patients actually in need of oximeters.

As for the incorrect reference to studies on CAS’s webpage, the articles and their summaries all concluded that use of cerebral oximeters could improve patient outcomes; they weren’t comparative.  Nellcor didn’t show that the false attribution was material to a consumer’s purchasing decisions, “given the short amount of time the material was on the web site and the fact that articles only generally relate to cerebral oximetry.”

As for res judicata, CAS argued that the claims were barred because Nellcor filed and dismissed with prejudice an earlier false advertising case. The court disagreed: the claims were based on advertising after the case was dismissed, and thus could not have been brought earlier. Though one of the studies at issue was around earlier, it didn’t make the disputed “accuracy” statements (though CAS subsequently relied on it to do so). 

CAS also sought summary judgment on damages for lost profits.  CAS argued that its purchasers were sophisticated buyers who didn’t rely on marketing or advertising, but rather on their own evaluations in the field.  (Then why advertise?)  Taking the evidence in the light most favorable to Nellcor, Nellcor submitted sufficient circumstantial evidence of lost sales: it went from 100% of the market down to 80-85%, with 10-15% now CAS’s (and another company at 2-5%). Nellcor’s evidence was that CAS’s marketing strategy was to gain market share and get doctors’ and hospitals’ attention by making comparative accuracy claims as the key selling point.

Nellcor also sought corrective advertising damages. CAS argued that Nellcor should already have engaged in corrective advertising, because a plaintiff seeking such damages must timely counteradvertise unless financially incapable of doing so.  The Sixth Circuit hasn’t addressed the issue, but the Ninth Circuit hasn’t required counteradvertising around the time of the false advertising.  The Sixth Circuit has allowed separate recovery of counteradvertising expenses as reasonable business responses to false advertising.  Here, the court denied summary judgment.  If successful, “Nellcor is entitled to recover the amount of money necessary to engage in a corrective advertising campaign to correct for any damage to Nellcor’s goodwill proved to be caused by CAS’s false advertising.”