Followup on YouTube/McCain interactions

EFF posts the letter YT sent in response, making a number of good points. Most notably, YT rejects the idea of giving certain channels more favorable treatment when responding to notices, agreeing that "U.S. Presidential election-related content is invaluable and worthy of the highest level of protection," but adding that "there is a lot of other content on our global site that our users around the world find to be equally important, including, by way of example only, political campaigns from around the globe at all levels of government, human rights movements, and other important voices."

As I expected, YT argues that it's the users who need to fight back: "You and our other content uploaders can play a critical role in helping us to address this difficult problem of takedown abuse. You are operating from the position of strength, with knowledge of exactly where the content in your videos comes from. You can file counter-notifications. You can seek retractions of abusive takedown notices. You can hold abusive claimants publicly accountable for their actions by publicizing their actions. You can hold claimants legally responsible for their actions by filing a lawsuit under 512(f)." While "position of strength" is a substantial overstatement, I do think that 512(f) and public debate over when takedown notices are appropriate will help facilitate what I hope is an inevitable recognition of the role of fair use in the DMCA process.

Finally, YT takes the opportunity to call for copyright reform: "we hope that as a content uploader you have gained a sense of some of the challenges we face everyday in operating YouTube. We look forward to working with Senator (or President) McCain on ways to combat abuse of the DMCA takedown process on YouTube, including, by way of example, strengthening the fair use doctrine, so that intermediaries like us can rely on this important doctrine with a measure of business certainty." I'd love to see more specific proposals from YT on this point.

Uncharmed: bitter litigation results in sanctions

Pandora Jewelry, LLC v. Chamilia, LLC, 2008 WL 4533902 (D. Md.)

The parties compete in the specialty jewelry market—they make charms that are designed to be strung together. Pandora sued Chamilia this time for false advertising, injurious falsehood, tortious interference, and unfair competition.

In 2006, Pandora sued Chamilia for patent infringement. Chamilia counterclaimed for tortious interference and antitrust violations. Pandora’s motion to bifurcate the trials and stay discovery on the counterclaims was granted, and thus Chamilia’s motion to quash a related subpoena for records was also granted.

Chamilia then sent a letter to a number of jewelry retailers, including many Pandora customers, misrepresenting (the court’s term) the granted motion to quash; it sent the same letter via email to a number of blind copy recipients. Pandora then filed the instant lawsuit. The court granted a TRO directing Chamilia to file a recipient list and issue a corrective notice. Months later, Chamilia sent another letter to jewelry retailers and email recipients about the PTO’s publication of a Chamilia patent application. This letter stated that the PTO’s publication acknowledged Chamilia’s “unique product offering” and indicated the patent would issue in 2007. Pandora amended its complaint to include this letter and moved for a preliminary injunction, which the court denied.

Then the court granted in part and denied in part Chamilia’s motion for claim construction, prompting yet another letter/email, and then an “anonymous” email that purported to come from a Pandora email account but was signed “The Chamilia Team”; both sides denied sending that email, but it was identical to the Chamilia email. And then an anonymous caller contacted at least six Pandora retailers and one Pandora sales representative to tell them that Pandora lost a patent lawsuit and that the retailers should remove Pandora ads from their stores or risk false advertising suits. Chamilia denied involvement. Chamilia also resisted discovery and failed to produce any relevant documents for some of the emails, maintaining that it had switched servers twice during the pendency of the litigation and that Pandora’s requests had been improper.

Despite these facts, Chamilia won summary judgment on the first letter/email, because Pandora couldn’t show any injury. Pandora couldn’t show a single diverted “or even disgruntled” retailer or any loss of reputation. This was telling because the first letter/email was the “most egregious” of the communications at issue, as evidenced by the court’s grant of a TRO and requirement of a corrective letter. (Jewelry retailers are hardy sorts, apparently.) Query whether the type of evidence deemed sufficient to sustain a multimillion-dollar award in the Payless case, testimony from marketing experts about inchoate harm to brand value and goodwill, would have changed the outcome here.

Likewise, Pandora failed to show that the second letter/email did harm. The court noted that Pandora never got a recipient list out of Chamilia, but there was still no evidence of injury. Though three retailers contacted Pandora about the letter, their mere queries fell short of the necessary injury in a Lanham Act claim. This absence of sales diversion and lost goodwill also doomed the tortious interference and injurious falsehood claims.

And finally, Pandora failed on its unfair competition claim because there was insufficient evidence of retailer confusion—just one retailer asking if Pandora knew anything about Chamilia receiving a patent. Though actual damage is unnecessary for this tort, the evidence was insufficient to show that Chamilia even jeopardized Pandora’s business.

Pandora did win monetary sanctions because of Chamilia’s spoliation, though it didn’t convince the court to draw adverse inferences on the substantive claims as a sanction.

McCain/Palin: copyright mavericks

Larry Lessig says the campaign's response to repeated notice-and-takedown requests is great: they call on YouTube to engage in fair use review of takedown notices against political campaign channels. To me, it seems like mere bluster (further comment deleted), because the campaign's assertion that YT wouldn't put its DMCA eligibility at risk by examining such notices for substantive merit before acting on them is, at best, unsupported in present caselaw. It is indisputable that a delay in restoring video after a counternotification has been filed is a really bad thing, but that's encoded in the DMCA itself, and if I were YT I'd want to stick with full compliance, especially as the Viacom suit drags on. Here's the countersuggestion: if the campaign is really serious about its First Amendment rights to use footage and other people's songs, then it should do what the EFF and Stanford's Fair Use Project have been doing and sue the people sending the notices for abuse of the DMCA. They're the ones causing the problem, right?

It's a nice piece of political theater, dragging the intermediary into the matter from the notice recipient's side--usually it's the copyright owner who wishes to recruit the intermediary to do its policing. And if it succeeds, I'll be very impressed. But I'm not sure it's supposed to succeed.

A catfish by many other names

The NYT has a feature on the raising and marketing of catfish in a global market, touching on issues of false advertising (what is a catfish?), GIs (including the use of "Cajun" on fish not raised in the US, as well as country-of-origin labeling), and branding (including US growers' decision to switch to the name Delacata in an attempt to leave the catfish wars behind).

Limited warranty defeats fraud claim, not consumer protection claim

Koch v. Greenberg, 2008 WL 4450273 (S.D.N.Y.)

Koch sued Zachys Wine & Liquor Stores and other defendants for fraud, negligent misrepresentation and violations of New York consumer protection law. Koch bought nineteen bottles of wine from Zachys for a total of $3.7 million at two auctions in 2005 and 2004. He discovered that they were counterfeit in 2007 when he hired a noted wine expert to review his cellar.

Koch received auction catalogues describing the bottles and argued that the catalogues represented that the wine being auctioned was genuine and was accurately described. The catalogues contained a provision labeled “Conditions of Sales & Limited Warranty.” This explicitly disclaimed any warranty and said all sales were “as is.” In addition, the catalogues invited prospective buyers to examine the wine before bidding. Koch chose not to do so.

Reasonable reliance is required for both fraud and misrepresentation claims. A general, boilerplate disclaimer of representations can’t defeat a fraud claim. At the same time, a party can’t justifiably rely on a representation that has been explicitly and specifically disclaimed. Here, the disclaimer covered “correctness” of the catalog description, as well as the “description, size, quality, condition, rarity, importance, provenance, exhibition history, literature, previous storage conditions or historical relevance of any property.” Such disclaimers have been held sufficient to protect auctioneers in New York against similar claims.

There is an exception to the rule if the allegedly misrepresented facts are peculiarly within the defendant’s knowledge. Courts consider the buyer’s sophistication and the accessibility of the underlying information. Here, Koch is a serious collector of rare wines with access to noted wine experts. Moreover, he made no effort to examine the wine before bidding nearly $4 million. He argued that he was at a comparative disadvantage because he couldn’t taste the wine, but then neither could Zachys. He also argued that there was no evidence that a mere visual inspection would have sufficed, because it wouldn’t have revealed a key fact: that the collection from which it came had counterfeit wine. But there was no evidence Zachys knew about the previous inspections finding such counterfeits. Whatever observations led Koch to his present conclusions were equally available to him before the auction.

Under New York General Business Law Sections 349 and 350, however, the analysis was different. Those sections ban “deceptive acts or practices” and “false advertising.” Explicit disclaimers don’t protect sellers against liability. Zachys argued that this case turned on a private contract dispute and didn’t involve conduct directed at consumers at large. GBL claims must involve “consumer-oriented” deceptive conduct; the acts need not be repetitive or recurring, but they must threaten a broad impact on consumers at large, which means they must have the potential to affect similarly situated consumers. Here, the auction wasn’t a private contract for a single-shot transaction. Instead, Koch alleged that Zachys offered counterfeit wine to the public at two separate auctions and widely disseminated catalogs making false claims. If the allegations of the complaint are true, then other people may well have been harmed.

Zachys also argued that Section 349 shouldn’t apply to a complex transaction involving knowledgeable and experienced parties and large sums. But just because he’s wealthy and sophisticated doesn’t deprive Koch of legal protection. Further, Zachys argued that the wine here was like securities—an investment product, which courts have excluded from Section 349’s coverage. But even very expensive wine is a consumable “good.”

5-Hour Energy survives preliminary injunction motion

Hansen Beverage Co. v. Innovation Ventures, LLC, 2008 WL 4492644 (S.D. Cal.)

Hansen makes Monster and other energy beverages. Innovation makes the “5-Hour Energy” 2-ounce “energy shot.” In four years, it has made over $150 million in profits. Monster comes in 16-ounce and larger sizes, but Hansen intends to release a small-size product to compete in the energy shot market. Hansen sued for false advertising based on the name “5-Hour Energy” and claims that the product gives “hours of energy now” with “no crash later.”

Hansen argued literal falsity; its expert declared that 5-Hour Energy didn’t, and couldn’t, produce any measurable amount of energy for five hours, with energy defined scientifically and not as an “energized feeling.” Hansen further argued that energy must mean physical, biomechanical energy because of the necessary implication of the picture on the bottle, a person running on top of a mountain, and other pictures in ads of people performing physical activities. Further, any energized feeling doesn’t last five hours. Defendant’s website has a graph purporting to show that only 57.7% of users reported five or more hours of energy. Moreover, 24% of users experienced some sort of “crash,” in contradiction to “no crash later.”

Defendant’s expert opined that a product can boost “energy” without calories, including by using caffeine, taurine, and vitamins as found in 5-Hour Energy. Consumers perceive that they are getting energy. Other products, including Hansen’s own Diet Red Energy product, are called “energy drinks” even without calories. According to one clinical study, the average energy boost experienced by users was 4.92 hours; the bottle warns that “individual results may vary.” Moreover, most users don’t experience a crash, defined as an energy dip below the energy level experienced prior to drinking the beverage.

Given the dispute over the definition of “energy” and related claims, the court found that Hansen hadn’t met its burden of showing literal falsity for purposes of a preliminary injunction. As a result, the other preliminary relief factors tilted against Hansen. The court also found that Hansen’s delay in bringing suit—the product’s been on the market for four years—weighed against preliminary relief. Hansen’s president indicated that he learned of the claims one month before filing suit. But Hansen’s awareness of the energy shot market, in which 5-Hour Energy is a market leader, “must have” predated the lawsuit by “at least several months.” Once again, big companies are not allowed to delay very long—weeks matter.

Killer sofa, tarnished Xbox?

Thanks to an eagle-eyed student, I present here an ad showing a classic couch potato: generic chips, generic soda, non-generic Xbox. Tarnishment? (Under state law, because there’s no use as a mark for the defendant’s own goods and services here, even aside from nominative fair use.) Maybe the use is justified because it’s simply too hard to mock up a recognizable “generic” gaming system, given that there may be no such thing.

Rocket man

A guy towed a 25-foot rocket labeled “Viva Viagra” through Manhattan last month, and got sued by Pfizer for doing it. He argues that he didn’t mean to cause confusion, he’s just a satisfied customer, but the fact that he was doing it to promote his ad agency—whose business plan is unclear, and whose website incorporates other people’s trademarks as if they were advertising with the agency—may give him trouble because it makes him into a commercial user. Query: what would be the best defense for a pure, noncommercial Pfizer fan who did the same thing?

Jilted consultant's false endorsement claim fails for want of standing

Ott v. Ingenix, Inc., 2008 WL 4459411 (E.D. Wash.)

Ingenix helps state agencies develop fee schedules. At one point, Ingenix employed Ott as its Director of Research and Database. Ott left amicably and served as a paid consultant. While he was consulting for Ingenix, the company submitted bids to several agencies, listing Ott as a consultant. Ott alleged that he allowed his name to be included in the bids only on the condition that he be hired when the bids were successful. Montana awarded a project to Ingenix, but Ingenix didn’t hire Ott for it.

Ott sued for false representation of sponsorship or approval under §43(a)(1)(A). Ingenix challenged his standing, invoking decisions on prudential standing from other circuits. But Ott wasn’t using §43(a)(1)(B) to allege a competitive injury; he was alleging false association. Thus, he needed only to allege commercial injury based on the deceptive use of a trademark or its equivalent, a less demanding standard. However, Ott failed even that standard, because he disclaimed any allegation that his professional identity was equivalent to a trademark or that there had been any harm to his reputation. Thus, he lacked standing.

Interestingly, this rationale suggests that parties alleging initial interest confusion lack standing unless they actually compete: the court reasoned that Ott wasn’t alleging actual harm to his reputation, quoting the Restatement (Third) of Unfair Competition for the proposition that false association can harm reputation or good will when a purchaser is dissatisfied with the advertiser’s goods or services. There couldn’t be actual harm because Ott didn’t participate in delivering the services, so dissatisfaction couldn’t hurt his reputation. Similarly, if confusion dissipates before purchase, a plaintiff’s goodwill couldn’t be at risk. Standing is now such a powerful weapon for defendants that I expect to see it migrate more aggressively into §43(a)(1)(A). If false advertising plaintiffs have to allege specific, concrete stories of harm, then reflexive invocation of harm by trademark plaintiffs seeking to apply virtually identical statutory language shouldn’t suffice either.

Phoenix of Broward standard claims another victim

Furniture "R" Us, Inc. v. Leath Furniture, LLC, 2008 WL 4444007 (S.D. Fla.)

Plaintiff, doing business as Furniture Power, sued defendants, which ran Modernage Furniture Store and Planned Furniture Promotions (PFP), which promotes furniture sales at struggling stores. Furniture Power alleged that defendants misled the public when it advertised a “going out of business” sale, for which new furniture was procured, and artificially hiked retail prices to deceive customers into believing they were getting a better deal. The ads used these phrases: "Going Out of Business," "It's a total liquidation!" "Prices Slashed," "Huge Savings," "No Reasonable Offer Refused!" "Wall-to-Wall Savings!" "Must Sell It All," and "Nothing Held Back! Everything Goes!"

PFP argued that plaintiff lacked standing against it because it isn’t a direct competitor. However, parties not in direct competition may still have standing under Phoenix of Broward. Though the court was skeptical of the complaint’s allegations that the false ads deceived consumers and diverted them to defendants’ stores, it found that they sufficed to allege Article III standing.

Prudential standing, however, was a separate issue. The Phoenix of Broward test asks:

(1) Is the injury of a type that Congress sought to redress in providing a private remedy for violations of the [Lanham Act]?

(2) How direct or indirect is the asserted injury?

(3) Is the plaintiff proximate to or remote from the allegedly harmful conduct?

(4) How speculative is the damage claim?

(5) What are the risks of duplicative damages or complexity in apportioning damages?

(1) focuses on the Lanham Act’s aim: protecting commercial interests that can be harmed by a competitor’s false advertising and preventing diversion of reputation and goodwill. The complaint properly alleged harm to a commercial interest by way of customer diversion under this factor.

On (2), directness counsels in favor of standing when false advertising influences customers to choose defendant’s product over plaintiff’s. The court found the causal chain more attenuated here, because plaintiff alleged (1) false claims about liquidation, (2) false claims about price discounts, and (3) lost sales. But there was no “but for” allegation that the ads diverted consumers from plaintiff as opposed to from one of the many other furniture stores in the area. (Really? This doesn’t seem any more attenuated than any other false advertising claim in a market not dominated by a duopoly.) Thus, the second factor counseled against prudential standing.

Here, we see modern standing doctrine turning the false advertising provisions on their head: they were originally understood to cover statements about the advertiser’s own product, and false statements about competitors weren’t covered in some circuits, such that amendment was required to confirm the availability of that type of claim. But under this new interpretation of standing, it’s much, much harder to proceed against a false statement about the advertiser’s own product. Also of note: the court pointed out that this factor is similar to materiality. Except that the materiality of these allegedly false claims shouldn’t be judged as a matter of law on a motion to dismiss. In fact, materiality is often the type of thing one would want some evidence about; moreover, price claims are generally considered material, and the FTC considers the specific claims at issue here actionable if false. (For a suggestion to the contrary, see here.)

For (3), proximity, the question is whether there’s some other damaged group with a competitive interest that would be better positioned and likely to sue. This factor favored standing.

For (4), speculative damages—well, this one’s almost always going to favor the defendant, especially when we’re talking about a general consumer product rather than a small, concentrated market where single purchases have large dollar values (that is, cases in which the Lanham Act is a lot more useful than a tortious interference claim). And so it did here. Plaintiff’s allegations of lost profits were too speculative to help it here. Though lost profits are available under the Lanham Act, a jury would have to speculate to figure out how many customers chose not to shop at plaintiff’s store because of these ads, as opposed to choosing not to shop there for other reasons. (The court spoke of speculation about whether customers would have gone to still other furniture stores, but that can’t be right: it doesn’t make sense to assume that defendants’ ads would have diverted customers from plaintiff’s store to a third store. For purposes of analyzing plaintiff’s lost profits, non-party stores are irrelevant.) Likewise, plaintiff’s claim for defendants’ profits would also require speculation, because it would be hard to determine what revenues derived from false advertising and what were legitimate.

Again, we can see how the so-called standing test is really about kicking plaintiffs out of court. Except in the rare cases in which there’s a duopoly and every single advertising claim of note is false, these factors always favor defendants, requiring specificity at the pleading stage that is virtually impossible to provide even after a trial on the merits. There’s a reason that profit recovery generally involves burden-shifting when plaintiffs show an entitlement to profits; infringing defendants have the burden of showing what profits didn’t derive from their unlawful acts. But using standing to kick cases out means that defendants never have to face that rule in the first place.

Finally, because every competitor in the market could sue, there was a risk of duplicative damages and apportionment would be complex.

The court considered this a close call, but similar to Phoenix of Broward, which found no standing.

NYT on new food origin labeling regulations

Compliance is, it appears, spotty, at least for now, and the story highlights the law's limitations as well as the market forces that induce greater compliance by certain businesses whose consumers are attentive to country of origin.

Politics and publicity

Found on fivethirtyeight.com, this ad for John McCain has an explicitly misleading endorsement. I guess it's a good thing for the campaign that political speech is very hard to regulate, even when IP enters the picture.

Grouping prevails in multistate consumer class action

In re Pharmaceutical Industry Average Wholesale Price Litigation, --- F.Supp.2d ----, 2008 WL 4368945 (D. Mass.)

A rare victory for consumer protection class actions, accepting subclasses. Here’s the opinion from the benchmark bench trial finding liability under Massachusetts consumer protection law. (It seems quite obvious that the court’s initial finding of liability is important in certifying the class; the court is convinced that there is a wrong here, and denying a remedy is harder under those circumstances.) Here’s the FAQ from a website dedicated to the litigation. Here’s an AstraZeneca website about the related consumer settlement over Zoladex.

Plaintiffs moved to certify two nationwide classes under more than thirty state consumer protection laws. The basic claim, in extremely simplified form: drugmakers AstraZeneca and BMS “grossly inflated” the prices of certain doctor-administered drugs by misstating their Average Wholesale Prices (AWPs) in industry publications. Because insurance and Medicare reimbursement was based on AWPs, doctors could make a lot of money by prescribing the right drugs, pocketing the difference between the AWP and what they actually paid. Drug companies therefore manipulated and “marketed the spread” to influence doctors’ decisions, while successfully insisting that their contracts with doctors remain confidential. Doctors apparently sometimes said that AWP stood for “ain’t what’s paid.”

Not only did this stiff the reimbursers, it meant that doctors had distorted incentives in making what one might think ought to have been purely medical decisions, and the drug companies knew it. Given the serious conditions treated by the drugs at issue, including cancer, patients were unlikely to ask for different drugs or to switch doctors based on copayment costs, further reducing price-based competition. Even once reimbursers eventually learned that AWPs bore little relationship to actual prices, regulations and laws specifying use of AWP took time to change, meaning that the distorted payments continued for a while.

Though the published AWPs were fictitious, most knowledgeable insiders knew this. Some spread was generally considered tolerable as compensation for underpayments to physicians for other services. Plaintiffs’ expert at the bellwether trial concluded that a spread of more than 30% was unreasonable, and a number of the drugs at issue exceeded that spread—one BMS spread was over 1100%.

The two classes at issue were (1) the Third-Party Payor MediGap Supplemental Insurance Class (the “Medigap Class”), under 31 states’ laws; and (2) the Consumer and Third-Party Payor Class for Medicare Part B Drugs Outside of the Medicare Context (the “Non-Medicare Class”) under 39 state’s laws. The court certified (1) and certified (2) for claims under statutes that didn’t require proof of reliance. This corresponded with the Massachusetts classes certified for the bellwether trial, which resulted in victory for plaintiffs (on appeal).

At the bellwether trial, the court found that AstraZeneca’s published AWP for Zoladex was inflated by from 40-169%, and that this was unfair and deceptive. Similarly, it found liability for BMS for five drugs (out of six at issue). The “mega-spreads” of several hundred percent and more were “shocking” and on their own showed unfairness and deception sufficient to impose liability under Massachusetts law. The court found scienter: defendants knew that third-party payors and the government didn’t understand the extent of the mega-spreads between AWPs and true costs, and they also knew that laws and contracts locked the payors into an AWP-based payment scheme. Further, they knew the “devastating impact” the mega-spreads had on “old and sick patients required to make co-payments they could ill afford.” They helped some needy patients with subsidies. But they didn’t give a damn about the spiraling drug costs to the third-party payors and the government.

Class certification requires (1) numerosity; (2) common questions of law or fact; (3) typicality; (4) adequate representation. Rule 23(b)(3) certification further requires the court to find that common questions predominate and that a class action is superior to the alternatives. Courts are encouraged to conduct rigorous inquiries into these issues, as the court did in conducting the bellwether trial—along with presiding for seven years over this multi-district litigation. It was thus in a good position to predict how key issues would play out.

Defendants argued that (1) differences in state consumer protection statutes would make managing a class action overwhelmingly difficult; (2) these same differences prevent a finding of predominance; and (3) the claims involve individualized determinations on scienter, reliance, causation and damages.

Plaintiffs proposed to create a common denominator standard for the various state laws, a sort of Esperanto: an intent to deceive jury instruction requiring plaintiffs to prove fraud, which they argued would constitute a violation of most, if not all, state unfair trade practice standards. The fate of Esperanto was the fate of this proposal (minus William Shatner).

The court agreed that garden-variety fraud would violate most state consumer protection laws, and found it a tempting idea. But defendants argued that this would violate the due process rights of absent class members who could recover under less stringent standards. (Yeah, I’m sure defendants are really concerned about those absent class members. And I’m sure it’s really a plausible alternative to have thousands of individual lawsuits.) The court agreed that due process required attention to varying state standards. This is not an academic dispute, because in the bellwether trial plaintiffs proved deception only in some years, while prevailing more broadly under the unfairness standard.

In the alternative, plaintiffs proposed grouping to deal with state-law differences on particular matters. As the court noted, “[w]hile numerous courts have talked-the-talk that grouping of multiple state laws is lawful and possible, very few courts have walked the grouping walk.” It’s plaintiffs’ burden to show how grouping would work.

Here, the relevant laws are little FTC acts, which usually follow one of three statutory models: (1) a prohibition of unfair methods of competition and unfair/deceptive acts or practices; (2) a ban on “false, misleading, or deceptive acts or practices”; and (3) a list of specific trade practices deemed unlawful. Twenty-six states defer to FTC interpretations of the FTCA. Plaintiffs proposed eight groups of states. The court accepted three, and excluded some states with unique laws (Indiana and Wisconsin), but held open the possibility of certifying a separate statewide class and remanding to the appropriate district court.

Then, despite the similarity of language in the groups, defendants argued that state-by-state interpretive differences required rejection of the class. Reliance: many state laws require reliance, and third-party payors had different levels of knowledge and sophistication with respect to AWP. Thus, individual fact issues would predominate in states where plaintiffs are required to establish reliance. In fraud cases, many courts have rejected class actions on this ground. For the Medigap class, this was all beside the point, because the third-party payors were contractually required to pay all or part of a Medicare beneficiary’s copayment, which was statutorily based on the AWP: reliance is contractual and knowledge is irrelevant.

For the non-Medicare class, the reliance analysis is different. Based on the bellwether trial, the court found that the typical third-party payor didn’t know about the existence of the mega-spreads because manufacturers took careful steps to preserve the secrecy of the spreads. But information began to spread, and the typical third-party payor did know by 2001. Between then, knowledge varied significantly. Thus, the court declined to certify the non-Medicare class under the laws of states requiring reliance. (And only consumer members of the proposed class were allowed under Michigan and Missouri laws, because those states don’t cover purchases for business/commercial purposes; the same is true in Oregon, but Oregon consumers were also excluded because of that state’s reliance requirement.) The court identified a number of states where reliance is not required, including states in which a general showing that a reasonable consumer would have relied on the representation suffices without individualized showings of reliance. Because California law is in a state of flux, the court declined to certify the non-Medicare class under California law.

Defendants also argued that scienter requirements vary, implicating predominance and manageability. However, most of the variance centers around the scienter requirement for omissions. Plaintiffs have two theories: knowing and intentionally false misrepresentations of AWP, and unfair creation of mega-spreads. Thus, the varying standards do not pose insuperable management issues; the court can ask the jury specific questions.

Punitives: The standards have similar wording (and in fact are increasingly constitutionalized) and should not cause jury instruction problems.

Causation: Defendants argued that individualized fact issues predominate in causation analysis, given that many third-party payor learned that AWPs were false but nonetheless continued to use them as a benchmark. Blue Cross Blue Shield of Massachusetts, for example, continued to use AWP as its pricing benchmark even after Congress abandoned it for Medicare. It was worried that it would either lose network providers or push patients into more-expensive hospitals if it pressed for lower AWPs on doctor-administered drugs.

For the Medigap class, contractual obligation also removes individual factual issues on causation/knowledge. For the non-Medicare class, the argument had more force. However, the court concluded that defendants were conflating reliance with causation. The undisputed evidence was that, before 2005, third-party payors didn’t have access to the confidential pricing data necessary to calculate an alternative price even if they knew about the spread. Thus, knowledge wouldn’t have allowed them to change the price unilaterally. Medicare itself took 3 years to develop an alternative because of the complexity of simultaneously increasing prices for doctors’ services. If AWPs had been lower, plaintiffs in both classes would foreseeably have paid less. Thus, individualized fact issues on causation do not predominate.

Defendants argued that the states vary substantially in statutes of limitations, and their interpretations of the discovery rule, fraudulent concealment, equitable tolling, and equitable estoppel. This could be important because the most sophisticated third-party payors should have known about the pricing issues by 1997; the court looked at the effect on states with longer statutes of limitations than Massachusetts’ four years. The court agreed that separate trials would be necessary for third-party payors with special knowledge (those that operated an HMO or specialty pharmacy) in order to determine when the statue of limitations began running; such issues “took a huge amount of time and resources during the bellwether trial.” Thus, the court declined to certify classes for time periods beyond the relevant state statutes of limitations.

Defendants also asserted other possible affirmative defenses, but the court found them “poorly brief[ed].”

Defendants also argued that damages would be individualized, but the court considered that a “red herring,” because AWP was virtually universal. Atypical exceptions could be carved out individually if necessary; individuating damages is rarely determinative where liability is subject to common proof.

With all that out of the way, commonality and numerosity were easy (there are more than 11,000 third-party payors nationwide, plus consumers). Typicality and adequacy were also present, though the court did dismiss certain representatives on individual grounds. The court found that the common issues predominated, and that class treatment was superior to the alternatives. With respect to the “extent and nature” of the litigation, the court described this case as “the seven years’ war.” It’s “hard-fought, costly multidistric litigation” involving “a highly complex system for reimbursement for drugs and some of the finest lawyers in the country.” The court now has unique experience with “these Kafka-esque and opaque drug pricing issues.” A national class action is superior to dividing up this “monster” case and certifying thirty-plus separate class actions, which would require the same plaintiffs, defendants, experts and fact witnesses to traipse all over the country trying the same issues under substantially similar standards.

Another consideration was class members’ interests in individually controlling the prosecution of separate actions. The approximately 11,000 third-party payors include many small plans without the resources to litigate. There are some big third-party payors like Aetna, Cigna, and BC/BS, but in the court’s experience with this and other litigation, those third-party payors that prefer to control their own litigation tend to opt out and litigate or settle independently, leaving the smaller plaintiffs to fend for themselves.

Nonetheless, the court conceded that manageability will be difficult and that reasonable minds could differ about the carve-up-the-monster option, allowing individual federal judges to interpret the law of their host states. But, having closely studied the statutes and gained an understanding of the factual issues, the court still concluded that a multi-state class action was superior.

Finally, defendant AstraZeneca raised a 7^th Amendment challenge to the bellwether trial methodology, which the court adopted after denying without prejudice plaintiffs’ motion to certify national classes. AZ argued that if the national class were certifiable in 2005, then denying certification but conducting a bellwether trial “structurally infringed” on AZ’s right to have a jury’s factual determinations control the Massachusetts class action.

The court called this argument “fundamentally flawed.” Given that the Massachusetts law provides equitable relief, it’s well established that the judge can find facts. Moreover, the Manual for Complex Litigation supports the idea of bellwether trials.

Pa. consumer class action requires reliance

Hunt v. United States Tobacco Co., 538 F.3d 217 (3d Cir. 2008)

Hunt’s putative class action alleged that the defendant (Smokeless) engaged in anticompetitive behavior, artificially inflating the price of its smokeless tobacco by at least 7 cents a can more than an efficient market would have charged. The misconduct allegededly included theft and concealment of competitors’ distribution racks and ads (!) as well as disparaging and false statements about competitors’ products. In a lawsuit by a competitor, a jury found Smokeless liable for the underlying antitrust violations. Hunt claimed that consumers relied on a presumption that they were paying prices set by an efficient market.

The court of appeals held that a private plaintiff alleging deceptive, rather than fraudulent, conduct under Pennsylvania’s Uniform Trade Practices and Consumer Protection Law must prove justifiable reliance. Because Pennsylvania courts have consistently required justifiable reliance, not simply a causal connection between misrepresentation and harm, the court of appeals rejected the district court’s reasoning that the consumer protection law was to be construed liberally and should not require plaintiffs to prove all the elements of common-law fraud. Because Hunt’s complaint lacked such an allegation of justifiable reliance, the case was remanded for a ruling on leave to amend.

Daily dilution dose

While I was in New Orleans, I saw the sign for the Junior League of New Orleans’ thrift store, Bloomindeals. At least that’s how I read the sign. On the JLNO’s website, it’s typed Bloomin’DEALS, for what I expect are the obvious reasons, and the logo on the website puts a space between Bloomin and Deals. Sufficient to avoid dilution?

A different Bloomin’deals in North Carolina.