calling NBC's lawyers: gold company can claim #1 rank by Today Show, can't make additional misrepresentations

Express Gold Cash, Inc. v. Beyond 79, LLC, 2019 WL 4394567, No. 18-cv-00837 EAW (W.D.N.Y. Sept. 13, 2019)

The parties are two of the top competitors in the market for nationwide mail-in precious metals purchases. When a customer mails in items, they receive an offer; if the offer is declined, the items are returned free. “In 2010, the Today Show, a nationally televised morning show on the NBC network, aired a segment in which it ‘claimed to have compared the prices offered by ten different mail-in precious metals dealers by mailing a single item of gold to each one,’ and further claimed that it received the highest offer from Defendant, which ‘offered 90% of market value.’”

“Beginning in 2011 and continuing into the present,” defendant “published variations of an advertisement that it is ‘ranked [or rated] #1 on [or by] NBC’s Today Show.” This was allegedly misleading because it (1) concealed the date of the segment, (2) conveyed a false impression that Defendant is currently and actually “ranked #1” by Today, (3) falsely indicated Today and NBC’s current or former endorsement, (4) and falsely suggested that Today really evaluated the services overall rather than a single sale of gold.  [This last is a classic "false establishment claim" argument.]

Defendant’s website also used “the sound of three tones that are reasonably identical to the famous three tones used by NBC to identify its broadcasting service.” [It seems to me that contact with someone at NBC legal might be at least as effective as suing directly; I can’t imagine NBC loves these ads.] Separately, Express Gold alleged that “Defendant’s website displays stock photographs allegedly depicting its ‘latest payouts’ to customers,” and that these “stock photographs are false and misleading because they grossly exaggerate the kind, quality and quantity of recently purchased items[.]” The stock photographs in question have captions stating that “photos are illustrative and depict items of similar kind, quality and quantity to actual items purchased.”

Express Gold brought NY state and federal false advertising claims and claims for unjust enrichment.

Laches: The Second Circuit has held that for claims alleging unfair competition or false advertising under the Lanham Act, the analogous statute of limitations is New York State’s six-year statute of limitations for fraud. Laches couldn’t be resolved at the motion to dismiss stage; not only might the continuing wrong doctrine apply, it wasn’t clear when Express Gold knew of defendant’s conduct, and it wasn’t clear from the complaint that defendant suffered prejudice from the delay.

The Second Circuit has cautioned courts not to “permit overextension of the Lanham Act to intrude on First Amendment values,” ONY, Inc. v. Cornerstone Therapeutics, Inc., 720 F.3d 490, 496 (2d Cir. 2013) (quotation omitted), and “generally a false advertising claim will not lie where the defendant has done nothing more than accurately present a study’s conclusions, even if those conclusions are flawed.”  That’s not a Cornerstone quote, but the court’s phrasing of the case.  But Cornerstone is about reprints of studies, disseminated to doctors expert in the field capable of seeing the study’s weaknesses for themselves, not a situation in which an advertiser incorporates a third party’s non-scientific study into its advertising to the general public.  Rather than recognizing this limit, the court noted that it was possible to have liability if the defendant misstated and misrepresented the Today Show’s methodology and findings, which is also true but not the same thing (if the Today Show used an unreliable methodology, it couldn’t be liable for doing so, but the defendant shouldn’t be able to launder a bad study in its own advertising).

Anyway, based on Cornerstone, use of the statement “ranked #1 by NBC’s Today Show,” or variants thereof, wasn’t literally false, and also wasn’t a misrepresentation of the Today Show’s conclusions. Nor was it false to use the present tense even though the segment was eight years old. Board-Tech Elec. Co. v. Eaton Corp., 737 F. App’x 556 (2d Cir. 2018), affirmed a district court decision dismissing a Lanham Act false advertising claim in a similar arguably-stale-but-not-replaced-by-a-more-current-finding situation.  

Nor was the use of “ranked #1” and the accompanying use of NBC’s name and logo misleading.  This was an appropriate conclusion on a motion to dismiss because misleadingness was conclusorily pleaded: “[u]pon information and belief, based on online customer reviews, Defendant has lured consumers into sending their items by publishing the Today Segment and the Deceptive Advertising.” There was no detail about the “online customer reviews” or how they supported the misleadingness allegation; “information and belief” was only appropriate for facts particularly within the defendant’s possession and control, or where the belief is based on facts making an inference of culpability plausible.  Comment: can you imagine a court rejecting NBC’s false endorsement claim as implausible, even without anything about customer reviews?

However, there were some things beyond “ranked #1,” such as falsification of the Today Show’s broadcast date—a printout from its website stated a 2015 date; screenshots of a video description posted by defendant on YouTube allegedly falsely stating that the Today Show “investigated dozens of Cash for Gold companies” (it tested 10); and letters to customers stating that the Today Show “found that Sell Your Gold offered the highest payout of any competitor.” These statements were both false/plausibly false and plausibly material. “The Court cannot say, as a matter of law, that a reasonable consumer would not be influenced by the claim that Defendant offered the highest price of any competitor, or of ‘dozens’ of competitors. Similarly, a reasonable consumer could find it material whether Defendant had been found to offer the highest payouts in 2010 or 2015, because a reasonable consumer could conclude that a more recent ranking is more likely to be representative of the current status of Defendant’s services.”  These claims were neither mere opinion nor so exaggerated as to be unreliable.

Claims based on the “latest payout” photos failed. Express Gold didn’t allege any facts about “the actual kind, quality, or quantity of items that have recently been purchased by Defendant, and therefore provides no basis to conclude that the ‘latest payouts’ stock photographs are either literally false or likely to mislead consumers. Plaintiff cannot state a false advertising claim by picking a statement from Defendant’s website and alleging, with no factual support, that it is untrue.”

The same things happened to the NY GBL and unfair competition claims; unjust enrichment failed because the complaint didn’t plausibly allege that defendant was unjustly enriched by money taken from Express Gold. Specifically, it failed to allege any facts from which a fact-finder could conclude that, but for defendant’s deceptive conduct, consumers would have done business with Express Gold rather than with someone else.

Use of under 10% of photos in catalogue raisonné was fair use

De Fontbrune v. Wofsy, No. 5:13-cv-05957-EJD (N.D. Cal. Sept. 12, 2019)

De Fontbrune first sued defendants in France in the late 1990s for publishing a book, The Picasso Project, which reproduced photographs of Picasso’s works. (Defendants allegedly used over 1400 of 16,000 of these photos, which had been assembled into the Zervos Catalogue; it appears that rights are held in the catalogue rather than primarily in the individual photos.) In 2001, the French court issued an “astreinte,” which would subject defendants to damages for any further acts of infringement. “About ten years later, de Fontbrune discovered copies of The Picasso Project in a French bookstore and initiated legal proceedings in France to liquidate the astreinte.” An award of €2 million issued; de Fontbrune then sued in Alameda County seeking recognition of the judgment; it was duly removed.  Now the court, while rejecting other barriers to enforcement (at least for purposes of defendants’ summary judgment motion), finds that fair use protects the relevant conduct and thus the judgment is unenforceable in the US on public policy grounds.

Under the uniform recognition of judgments act, a court is not required to recognize a foreign judgment when “[t]he judgment or the cause of action or claim for relief on which the judgment is based is repugnant to the public policy of this state or of the United States.” This is a high bar: “[T]he public policy exception … does not apply unless a foreign-country judgment or the law on which it is based is so antagonistic to California or federal public policy interests as to preclude the extension of comity.”  First Amendment-based public policy counts, but only where there are “stark differences” between foreign and domestic law. Such direct conflicts are more likely to be found where foreign law directly targets speech/expression, rather than incidentally affecting it.  (By contrast, the SPEECH Act prevents recognition of defamation judgments unless they’d be ok under domestic law.) The court adopted the Second Circuit’s approach: identify the constitutional protections for the unauthorized use of the IP at issue, and then determine whether French intellectual property laws provide comparable protections

“It is well accepted that the fair use doctrine implicates the First Amendment.” If defendants’ use wouldn’t be fair, then enforcing the judgment would be no problem.  But it was fair.

First, defendants’ books were “reference works intended for libraries, academic institutions, art collectors and auction houses, and such institutions find it an attractive reference due to its price point.” The Picasso Project also “includes information about the photographed works, such as their titles, literary references, provenance, current ownership and sales information, that is generally not included in the Zervos Catalogue.”  Commerciality didn’t defeat the fact that this factor weighed strongly in favor of fair use (mentioning the preamble of §107, but not transformativeness).

Second, defendants argued that the photos were unoriginal and documentary in nature, but a French court found them creative because of “the deliberate choice of lighting, the lens, filters, framing or angle of view.”  As Eva Subotnik has written, this reasoning calls photos creative because of the technical features that make them photographs rather than some other kind of object or representation, and that’s not particularly well-justified.  But that didn’t turn out to be dispositive because the Zervos Catalogue itself was “documentary in nature. The Zervos Catalogue is a catalogue raisonné, and the purpose of a catalogue raisonné is to faithfully reproduce an artist’s work, not to showcase the original artistic expression of the photographer.” Disfavored fair use, but only slightly.

Amount and substantiality: The French court already found that The Picasso Project didn’t copy the “sequences and the specific representations which, coming from the personal choices of Mr. ZERVOS . . . cause [the Zervos Catalouge] to be [an] original work[].” Defendants copied less than ten percent of the photos, and there was no evidence that those photos were “the heart” of the work, so this favored fair use.

Market effect: “undoubtedly the single most important element of fair use,” and heavily favored fair use. The parties’ books didn’t compete. The Picasso Project cost about $150 per volume, or $2,780, $3,400, or $3,780 for all 28. The original Zervos Catalogue is only available second-hand, and a 2013

reprint is only available as a complete set for $20,000 (an original is a lot more). “The Picasso Project is intended for libraries, academic institutions, art collectors, and auction houses, whereas the Zervos Catalogue has a niche market due to its historic nature and high price.”

After The Picasso Project was published, the price of the Zervos Catalogue rose significantly, going for over $100,000 at no fewer than three auctions from 2007 to 2011, and for $74,200 at an auction in 2012; the later decline was apparently attributable to the 2013 reprint.  There was no evidence indicating that defendants’ use had “any effect—let alone a negative one” on the market for the Zervos Catalogue.  Unmentioned: derivative works rights—though it sounds like the Catalogue is valuable as a whole rather than in parts, so perhaps there’s no derivative market as such.

Although factor two slightly favored plaintiffs, the fair use doctrine “exists to promote criticism, teaching, scholarship, and research,” and defendants’ product, unlike the Zervos Catalogue, was “intended for a market serving those interests.” Thus, defendants’ use was fair.

Moreover, French law doesn’t have fair use. Thus, the French judgment was “at odds to the U.S. public policy promoting criticism, teaching, scholarship, and research” and repugnant to U.S. public policy. But the judgment wasn’t separately repugnant to public policy favoring the arts, given the French finding that the photographs are themselves original works of art, a finding the court wouldn’t revisit (though I think there’s justification for questioning it, especially given the finding about the Catalogue as a whole).

Not worth a hill of beans: can label showing mound of beans plausibly misleads

Beckman v. Arizona Canning Co., 2019 WL 4277393, No. 16-cv-02792-JAH-BLM (S.D. Cal. Sept. 9, 2019)

If the can shows lots of whole, plump beans, but the ingredients list puts water first, is there a plausible deception claim? The court here answers yes. “Unlike the image advertised on the principal display panel, consumers receive mostly water, with a portion of beans fully submerged and undetectable at first sight.” Plaintiffs brought the usual California claims.

can with beans

website showing can labels

 

Actual contents, per pleading

Arizona Canning argued that, of about 361 bean products listed by the USDA branded food products database, which contains information provided voluntarily by food producers, at least 15 bean products list water as a primary ingredient. But that couldn’t be taken to show the existence of an industry standard, which was a factual dispute.

“Based on an informal survey, Plaintiffs allege that when consumers were asked to look at a can of Defendant’s Sun Vista Beans, each consumer expressed a belief that the can was predominantly filled with beans.”  Arizona Canning argued that it was unreasonable to look at the picture to determine the ingredients, instead of the ingredients label. Williams v. Gerber Product Co., 552 F.3d 934 (9th Cir. 2008), is a problem for that argument, and plaintiffs alleged that because Sun Vista Beans are sold in opaque canned containers, consumers depend upon the product advertisement, label, and the fill of the can to conduct product comparisons and make purchasing decisions.

The court began with the proposition that “images can reasonably be interpreted to have various meanings.” Context, “judicial experience’ and “common sense” all play roles in whether a misleadingness claim is plausible. Here, the plausible meanings of the image of cooked beans is either: (1) identifying the type of bean being sold or (2) depicting the can’s contents. In this specific context, the dehydrated beans in the background and the placement of the bowl of hydrated beans in the forefront of the image supported (2), and so did comparing the image of this product with Arizona Canning’s other bean product - pinto beans with jalapenos - which showed chopped jalapenos sprinkled throughout the bowl of beans. 

Arizona Canning argued that the image was “a picture of beans as they are suggested for serving.” “While this interpretation seems reasonable, it is contrary to the detailed information offered within the nutrition fact panel, which indicates the primary ingredient is water. For this ‘suggestion’ to be accepted, consumers must drain more than half of the can’s contents – leaving the consumer with either a smaller serving size or significantly less servings than represented.”

Unlike the products in other image cases, “beans are not made up of various heterogenous ingredients.” Thus, a consumer “could reasonably believe that a can labeled ‘pinto beans,’ with no additional descriptor, is primarily filled with just that.”

Plaintiffs also alleged that the net weight, serving size, and number of servings per container were deceptive because, for example, a 29 oz. can of Sun Vista whole pinto beans advertised “about 6 servings.” The label also defined a serving as one half cup, or 4 oz., which a consumer would think meant that the can contained 24 oz. beans and 5 oz. water. But that contradicted the ingredient label. “It is not plausible that a reasonable consumer would believe the entire 4oz serving consisted of only one ingredient,” but—based on “common experience”—it was plausible that consumers would believe that one serving of cooked ready-to serve “pinto beans” “typically does not have the same consistency as soup.”  Thus, if the serving size x number of servings listed was relatively close to the can’s capacity, a consumer could reasonably believe that the can was filled nearly to capacity with the ingredient advertised and reflected in the name of that product—here, pinto beans.

Defying Williams, Arizona Canning argued that consumers should look at the ingredient list. But “most shoppers digest the information on the back after seeing the pretty picture on the front,” and the entirety of the advertising had to be considered. Consumers often look for whether specific ingredients are present or absent, but they are less likely to consider which ingredient is most predominant, “especially if it appears obvious from the name of the product or the label’s display panel.”

UCL unfairness: Under the balancing test (more often used in cases brought by consumers, like this one), “courts must examine the practice’s impact on its alleged victim, balanced against the reasons, justifications and motives of the alleged wrongdoer. In short, this balancing test must weigh ‘the utility of the defendant’s conduct against the gravity of the harm to the alleged victim.’” The harm was selling consumers a less-than-half-full product, depriving them of the benefit of the bargain. Arizona Canning argued that, if the case succeeded, food manufacturers would be “unnecessarily stifled from displaying their product on the label.” The Court didn’t agree. “Countless food manufactures have successfully displayed and marketed their product without consumer confusion or a likelihood of deception… [A]ny utility derived from Defendant’s practice and desire to display an image of a ‘suggested serving’ of beans, that omits or abates the predominant ingredient, is outweighed by the alleged negative impact on Plaintiffs and other putative class members.”

Under the competing tethering test (usually used when claims are brought by competitors, “unfair means conduct that threatens an incipient violation of an antitrust law or violates the policy or spirit of one of those laws because its effects are comparable to or the same as a violation of the law…”  Ignoring the antitrust part of this, plaintiffs alleged (and the court agreed) that they also satisfied the tethering test because defendants violated the spirit of the FDCA and the Sherman Food, Drug, and Cosmetic Law. Arizona Canning rejoined that, as a matter of public policy, it is common for food/beverage products to indicate items on the principal display panel that are not the predominant ingredient. That’s true, but even then, false advertising is not ok, and complying with the FDCA isn’t enough to preclude a false advertising claim. “It is quite possible to comply with FDA regulations and still violate the policy or spirit underlying those regulations.”

ownership/control of whole company isn't enough for individual liability under FTCA

F.T.C. v. Quincy Bioscience Holding Co., 389 F. Supp. 3d 211 (S.D.N.Y. 2019)

On remand from the Second Circuit, which fixed the mistaken earlier dismissal of this claim against a supplement seller, a principal gets off the hook (for now) but otherwise the case continues.

Defendants Underwood and Beaman are Quincy’s co-founders and two largest shareholders; Underwood is Quincy’s President and Mr. Beaman is its CEO and former President. Each is also a director of related companies.  Prevagen allegedly falsely advertises that “Prevagen improves memory,” that it “has been clinically shown to improve memory,” and so on, in defiance of a placebo-controlled test that showed no such effects (but was subsequently p-hacked to suggest improvements in specific subgroups on specific tasks). In addition, the FTC alleged that defendants’ claims about Prevagen rely on the theory that its dietary protein enters the human brain to supplement proteins that are lost during the aging process. But the FTC alleged that defendants’ studies show that it is rapidly digested in the stomach and broken down into amino acids and small peptides like any other dietary protein.

“An individual may be held liable under the FTCA for a corporation’s deceptive acts or practices if, with knowledge of the deceptive nature of the scheme, he either participate[s] directly in the practices or acts or ha[s] authority to control them.” And under the relevant state consumer protection laws, NY Exec. Law § 63(12) and NYGBL §§ 349 and 350, “Officers and directors of a corporation may be held liable for fraud if they participate in it or have actual knowledge of it.”

The complaint adequately alleged that Underwood had the requisite involvement. Along with the previously cited facts, he is allegedly “the final decision maker on advertising claims across all channels of distribution and media platforms” and participated in other ways in disseminating the relevant claims, including by appearing in ads. “The statements that Mr. Underwood made final decisions on advertising claims, wrote advertising materials, and appeared in Prevagen advertisements sufficiently allege that Mr. Underwood participated directly in the alleged false advertising of Prevagen.”  In addition, allegations that he directed the research, translated scientific data into marketing language, and wrote a user guide explaining the science behind Prevagen “support an inference that he knew what the research and studies concluded and thus had knowledge of the deceptive nature of the advertisements.” The standard is “actual knowledge of material misrepresentations, reckless indifference to the truth or falsity of such misrepresentations, or an awareness of a high probability of fraud along with an intentional avoidance of the truth,” and that was satisfied.

By contrast, despite Beaman’s alleged central ownership/control interests, the complaint merely alleged that Beaman “has given media interviews, signed research agreements, pre-approved research proposals, and reviewed Defendants’ advertising.” That was insufficient to allege that he “knew the results of the research or participated in the false advertising,” though the governments were granted leave to amend.

9th Circuit drives big hole through 230(c)(2) immunity

Enigma Software Group USA, LLC v. Malwarebytes, Inc., --- F.3d ----, 2019 WL 4315152, No. 17-17351 (9th Cir. Sept. 12, 2019)

Section 230(c)(2) “immunizes computer-software providers from liability for actions taken to help users block certain types of unwanted, online material,” including sex, violence, and material that is “otherwise objectionable.” “We have previously recognized that the provision establishes a subjective standard whereby internet users and software providers decide what online material is objectionable.”

The parties compete in the market for software that help internet users filter unwanted content from their computers. Enigma alleged that Malwarebytes violated the Lanham Act and New York state law by configuring its software to block users from accessing Enigma’s software in order to divert Enigma’s customers. The district court found this covered by 230(c)(2), but because the parties are competitors, the majority (over a dissent) disagreed.  “Otherwise objectionable” isn’t broad enough to encompass an anticompetitive motive.  Malwarebytes argued that its reasons were legitimate, but Enigma’s allegations of anticompetitive animus were sufficient to avoid a motion to dismiss.

Eric Goldman is gonna hate that.

The court also, correctly, held that just because the Lanham Act claim was a Lanham Act claim didn’t bring it within §230’s exception for “any law pertaining to intellectual property.” The Lanham Act covers trademarks and false advertising; the former fall within the IP exception and the latter doesn’t.

In its recitation of the legislative history and caselaw, the majority drops a line that is going to prove particularly destructive of (c)(2) immunity: “What is clear to us from the statutory language, history and case law is that the criteria for blocking online material must be based on the characteristics of the online material, i.e. its content, and not on the identity of the entity that produced it.”  (What happens when a provider says “this entity has produced objectionable content in the past and we are therefore going to screen material from this entity”?  Does the majority really mean that screening has to be applied on an item by item basis?  Does that mean you can’t block an entire website, perhaps even for things that are explicitly listed in (c)(2) like violent content, unless each page has objectionable content, since blocking an entire website focuses on the entity?  Honestly, I can see a case for that rule—but it seems like something we should talk about.)  Where the OSP at issue is a host, however, the identity of the identity that produced content is a classic publisher consideration and (c)(1) immunity should be unaffected.  Eric Goldman has identified a shift from §230(c)(2) to (c)(1) in many situations where (c)(2) could in theory apply; this language will only harden that shift.

Facts: Malwarebytes software searches for what it calls Potentially Unwanted Programs (PUPs), including software that contains “obtrusive, misleading, or deceptive advertisements, branding or search practices.” If the user tries to download a program that Malwarebytes has determined to be a PUP, a pop-up alert warns the user of a security risk and advises the user to stop the download and block the potentially threatening content. “In their first eight years as competitors, neither Enigma nor Malwarebytes flagged the other’s software as threatening or unwanted. In late 2016, however, Malwarebytes revised its PUP-detection criteria to include any program that, according to Malwarebytes, users did not seem to like…. Malwarebytes’s software immediately began flagging Enigma’s most popular programs—RegHunter and SpyHunter—as PUPs.” Enigma alleged that its programs are “legitimate”, “highly regarded”, and “pose no security threat,” and that it’s lost customers and goodwill from Malwarebytes’ deceptive practices.

Judge Fisher’s concurring opinion in the 9^th Circuit’s previous case considering §230(1)(c), Zango, warned that extending immunity beyond the facts of that case could “pose serious problems,” allowing a content provider to “block content for anticompetitive purposes or merely at its malicious whim.” District courts have disagreed on whether Malwarebytes can be sued for its blocking and how expansive Zango is. Allowing Malwarebytes to block based on “anticompetitive” motives would be “contrary to CDA’s history and purpose,” which included an express congressional aim “to preserve the vibrant and competitive free market that presently exists for the Internet and other interactive computer services” and to “remove disincentives for the development and utilization of blocking and filtering technologies.”

The point was to help consumers, who “must trust that the provider will block material consistent with that user’s desires. Users would not reasonably anticipate providers blocking valuable online content in order to stifle competition.” Immunizing anticompetitive blocking would therefore [?] also conflict with the express policy of “removing disincentives for the utilization of blocking and filtering technologies.”

However, “otherwise objectionable” was broader than the rest of the categories in the statutory list: “obscene, lewd, lascivious, filthy, excessively violent, harassing or otherwise objectionable.” Thus, the majority rejected Enigma’s argument that its software has no such content, and that Malwarebytes definitively couldn’t claim immunity for blocking it. Under ejusdem generis, when a generic term follows specific terms, “the generic term should be construed to reference subjects akin to those with the specific enumeration.” But the specific categories listed in § 230(c)(2) “vary greatly: Material that is lewd or lascivious is not necessarily similar to material that is violent, or material that is harassing. If the enumerated categories are not similar, they provide little or no assistance in interpreting the more general category.”  Anyway, even if ejusdem generis did apply, Enigma’s interpretation failed. Congress identified “harassing” as one of the problematic categories, and spam, malware and adware are close enough. [So if Malwarebytes  succeeds in showing that it reasonably categorized Enigma's software as such, that's enough to win.] But the majority wasn’t making a final ruling on the relationship between “otherwise objectionable” and the other listed categories. It’s merely that “if a provider’s basis for objecting to and seeking to block materials is because those materials benefit a competitor, the objection would not fall within any category listed in the statute and the immunity would not apply.” Key takeaway: now we fight about what else is like "anticompetitive" and thus not legitimately "otherwise objectionable," since the majority has left the issue open (except to the extent you think identity v. content is the holding).

Malwarebytes argued that it had legitimate reasons for its acts and that Enigma’s programs, SpyHunter and RegHunter, use “deceptive tactics” to scare users into believing that they have to download Enigma’s programs to prevent their computers from being infected. This is a factual dispute.

Judge Rawlinson dissented. The CDA is broadly worded; Congress hasn’t acted to clarify it; and the statute should be applied according to its provisions. “[N]othing in the statutory provisions or our majority opinion in Zango supports” limiting (c)(2) when the parties are competitors. “The majority’s real complaint is not that the district court construed the statute too broadly, but that the statute is written too broadly. However, that defect, if it is a defect, is one beyond our authority to correct.” The dissent pointed out that, although the parties in Zango weren’t direct competitors, the plaintiff asserted similar anti-competitive effects, but that didn’t matter there.

Reading list: Cheating Pays

Emily Kadens, Cheating Pays, 119 Columbia Law Review 527 (2019)

Common private-ordering theories predict that merchants have an incentive to act honestly because if they do not, they will get a bad reputation and their future businesses will suffer. In these theories, cheating is cheating whether the cheat is big or small. But while reputa­tion-based private ordering may constrain the big cheat, it does not necessarily constrain the small cheat because of the difficulty in discover­ing certain types of low-level cheating and the consequent failure of the disciplining power of reputation. Yet the small cheat presents a signifi­cant challenge to modern contracting, both between businesses and in the contracts of adhesion imposed on consumers. To encourage private law scholars to address the unique governance challenges posed by low-level cheating, this Essay describes the conditions under which low-level cheating can flourish and become widespread. It demonstrates this so-called “Cheating Pays” scenario using a historical case study in which a seventeenth-century London grocer, trading under precisely those condi­tions that private-ordering theories predict will incentivize honesty, not only cheated extensively but also successfully remained in business after having been caught and publicly punished. Identifying the scenarios in which cheating pays has implications for how firms use contracts and how consumers might use the courts to try to reduce opportunistic behavior.

You know antitrust law is failing when ...

This ad runs:

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false patent marking and implicit claims of Nobel connection in a supplement case

ThermoLife Int’l, L.L.C. v. NeoGenis Labs, Inc., 2019 WL 4193968, No. 18-cv-2980-HRH (D. Ariz. Sept. 4, 2019) 

ThermoLife allegedly holds a number of patents related to dietary supplement/food ingredients, including those related to “the use of amino acids in combination with nitrates to increase performance.” It allegedly “licenses the use of its patented technology...to many of the largest dietary supplement companies” and “supplies the raw materials necessary to practice its patented inventions.”

NeoGenis “sells nitric oxide test strips and dietary supplements[,]” and was allegedly “a dominant force in the beet supplementation market.” NeoGenis products allegedly competed with products that use TL’s raw materials and products produced with its patented nitrate technology. TL doesn’t currently market oxide testing strips, though it’s trying to get into that market.

NG allegedly falsely advertised “that it has developed a ‘patent pending’ method to determine ‘if you are N-O [nitric-oxide] deficient’ and/or ‘if you’re getting enough dietary nitrate through the foods that you eat’: HumanN’s nitric oxide Indicator Strips.” But the patent, while applied for in 2013, was allegedly rejected in its entirety. In addition, NG allegedly falsely advertised that its strips “can determine whether an individual is nitric oxide deficient[.]” A one time saliva test allegedly can’t do that.  NG also allegedly engaged in false patent marking because the listed six (later three) patents weren’t practiced in the marked products (the patents allegedly required a nitrite salt not present in the products, and anyway they failed to include a sufficient quantity of nitrites of any sort to practice the listed patents). Similarly, NG allegedly falsely claimed that its “licensed patents protect ‘patented Nitric Oxide technology’” and that its research was “Nobel-Prize winning.”  Finally, NG allegedly falsely claimed that its products were foods or dietary supplements.

After dismissal for want of standing, TL filed an amended complaint.

False marking: “Title 35 section 292(a) prohibits, in part, ‘mark[ing] upon...in connection with any unpatented article, the word ‘patent’ or any word or number importing that the same is patented, for the purpose of deceiving the public.’ … Section 292(b) provides a private right of action to enforce § 292(a) to any ‘person who has suffered a competitive injury as a result of a violation of this section.’ ”

A “competitive injury” is “ ‘[a] wrongful economic loss caused by a commercial rival, such as the loss of sales due to unfair competition,’ ” but someone who’s attempted to enter the market (in intent and action) can have standing.  

TL alleged that, since at least October 2018, it had been working with someone on testing/monitoring nitric oxide over “several face-to-face meeting[s] and numerous phone conferences” and that “when the deal is reached, [it] will be in...direct competition with HumanN’s Nitric Oxide Test Strip[s].” This was too late, since TL sued in September 2018 and standing is measured at the time suit is filed and not later. [Is this correct where the issue is statutory “standing,” a la Lexmark, rather than Article III standing?]

As for the beet supplements, TL alleged that NG was still showing pictures of these products on the internet that list six patents on the products’ labels even though defendant removed three of the patents from the actual product labels, and also that that these products do not practice the three patents which are still listed on the products’ actual labels. As for the internet claims, NG argued that the claim wasn’t plausible because, when a product carries both proper and false patent markings, a plaintiff must show specifically that the falsely marked patents caused it harm, and that it definitely practiced one patent, the ‘999. However, it was still plausible injury “because a consumer might be more likely to purchase a product that lists several patents as opposed to a product that lists only one patent.”

As for the other patents: TL argued that some relevant patents required a ‘nitrite salt’ to practice the patented inventions, and alleged that the accused products didn’t contain a nitrite salt.  NG offered a Certificate of Analysis showing that the product being tested, “NEO Dry Blend BC Flavor w/ Vit C[,]” contained sodium nitrite, which it said was a nitrite salt. But even if the court took judicial notice of the certificate, it wasn’t clear that product was used in the accused products. Also, TL alleged that, regardless, it did lab tests on two of the products in two separate months and found insufficient nitrites to practice the patent. NG made a bunch of arguments about the proper chemicals and their measurement that weren’t appropriate for a motion to dismiss.  (But as for a product as to which TL didn’t allege tests, just alleged that the product didn’t practice the patents, that was too conclusory to be plausible yet.)

NG next argued that the complaint flunked Rule 9(b) because it wasn’t plausible that NG, a sophisticated business, would license patent rights from the University of Texas, presumably paying some royalties therefor, without even bothering to practice the patents. The court disagreed.

Lanham Act false advertising: There was the same problem with the N-O Indicator Strips. TL was not a competitor; a potential competitor didn’t have Lexmark standing.

Specific claims: it was plausible that claims that NG’s products use “patented Nitric Oxide technology” constituted false advertising, see above. NG argued that it never claimed it had won the Nobel Prize, just referred to the prize awarded to 1998 for discoveries concerning nitric oxide as a signaling molecule in the cardiovascular system, more than ten years before NG’s predecessor company was founded. You can see why this might be an implicit falsity claim—defendant allegedly used this website text:

[o]ur research on Nitric Oxide first began with the discovery of its unique impact on cardiovascular health. Its immense importance as a biological signaling molecule resulted in the awarding of the Nobel Prize in 1998. Realizing that the discovery of Nitric Oxide had immense potential, it didn’t take long for our interest in N-O to become our passion.

TL also alleged that NG asserted a connection to “Nobel Prize-winning research” and advertised that “the discovery of Nitric Oxide, the first gas to be identified as such, won the Nobel Prize in 1998. This discovery is what HumanN is built on.” This was sufficient to allege a false implication of connection to Nobel Prize winning research.

TL alleged that NG falsely advertised that it was “the only company that can practice ‘patented N-O platform technology.’ ” But the only alleged example didn’t say that; it said “ ‘there is not any product out there, despite dozens if not hundreds of...nitric oxide products on the market, food or supplement, that do[es] what our technology does.’ ” That’s not the same thing (and seems like puffery), so the claim was dismissed.

TL’s claim that defendant falsely advertised its products as foods or dietary supplements failed insofar as it was just alleging misbranding in violation of the FDCA, which doesn’t provide a private cause of action. It would be possible to plead a plausible claim that defendant was falsely advertising that its products were foods or dietary supplements, as those terms are defined by the FDA, but the allegations here were too conclusory.

State law claims fared exactly the same.

ex-employees with new company trigger false advertising dispute (and submarine patent invalidity argument)

AlterG, Inc. v. Boost Treadmills LLC, 2019 WL 4221599, No. 18-cv-07568-EMC (N.D. Cal. Sept. 5, 2019)

The wildest allegation here involves former AlterG employees (who founded defendant Boost), one of whom allegedly got a journalist to write an article disclosing a machine, which article was published more than a year before AlterG filed for a relevant patent, thus creating an invalidity problem, all allegedly in breach of his duty to AlterG/so defendants could claim invalidity if AlterG came after them. Submarine invalidity instead of submarine patents? I won’t otherwise discuss the patent infringement/breach of contract/trade secret parts of the case, but they exist.

AlterG is a medical device company that is the “leading provider of impact reduction treadmills,” also known as “Anti-Gravity Treadmills,” that are used for orthopedic rehabilitation and training. It allegedly devoted substantial resources to develop “a lower cost, bare bones AlterG machine” but ultimately decided not to “immediately commercialize” or sell any products from this project.  You won’t be surprised that two of the former employees worked on this project.

AlterG alleged that defendants falsely claimed superiority to AlterG products “at a fraction of the cost,” and otherwise denigrated AlterG, for example claiming that AlterG was going out of business and was in poor financial health and thus consumers wouldn’t be able to get AlterG treadmills any more.

For deception/harm, it was sufficient to allege that, by falsely representing the capabilities of the Boost One treadmill relative to AlterG products, defendants succeeded in selling “over 20 [Boost] units to date to customers considering an AlterG unit.” The “where” was on defendant’s website and on another website that was allegedly an “affiliate and sales partner” of Boost, from which it could be reasonably inferred that Boost is responsible for the statements about Boost products on the website.  However, the “who” was still problematic. AlterG alleged that “Defendants, either individually or collectively” made the statements, but that wasn’t enough.  However, recognizing that there’s no need to plead the identity of the people acting for the corporation if the statements on the websites were made by “Boost” in the sense that agency law requires, the court granted AlterG leave to amend the claim “by specifying that only Boost was responsible for the false advertising.”

Trade libel was sufficiently pled because it detailed an instance: “[I]n or around May 2018, sales representatives of the Boost One treadmill falsely told the University of Tennessee that Woodway would stop selling treadmill [sic] to AlterG.” It was enough to allege that AlterG lost two sales to that client “at least in part” due to the misrepresentation; trade libel doesn’t require the misrepresentation to be the sole cause of the harm.

California UCL “unlawful” claims survived because of the survival of the predicate trade secret misappropriation and breach of fiduciary claims.

even more corn syrup

MillerCoors, LLC v. Anheuser-Busch Cos., No. 19-cv-218-wmc (W.D. Wisc. Sept. 4, 2019)

My discussion of the prior opinion, in which the court preliminarily enjoined AB from suggesting that corn syrup is in Miller Lite and Coors Light, “including emphasizing that corn syrup is not in its Bud Light beer in light of a massive advertising campaign intended to suggest” that ML and CL contain corn syrup. At that time, the court didn’t rule on whether the injunction should cover BL’s packaging, which does not explicitly make comparative statements and instead says “No Corn Syrup.” Here, the court extended its injunction to cover packaging, but AB could sell products using the packaging it had on hand as of June 6, 2019, or until March 2, 2020, whichever occurs first.

For some additional context, perhaps, the court explains that the Bud Light website used to say “We believe you deserve to know what ingredients we put into our beer.” Given the existing injunction, it was changed to: “We believe you deserve to know what ingredients we use to brew our beer.”

 

old website

more old website

Add caption

new website

Current packaging says “no corn syrup” on the front and side panels, and has “see bottom panel” language on the side panels. The bottom panel states “find out what’s in your beer” (emphasis added) and “learn more at: budlight.com.”  Despite some quibbling by AB, it was pretty clear that Bud Light is displayed at retail locations alongside packages of Miller Lite and Coors Light. The three beers comprise 100% of the national premium light beer market. 

There was also testimony that packaging “is an effective way to drive purchasing decisions because it communicates claims about the product to consumers at the point-of-purchase.” MillerCoors also submitted a Neilsen report indicating that between 32-60% of consumers (varying by age) haven’t yet decided which brand of beer to purchase when they enter a store. AB submitted a 2018 consumer research report on beer and craft beer, finding that packaginging isn’t an important factor in deciding what beer to purchase for 91% of beer purchasers and for 94% of non-craft beer drinkers including drinkers of light beer.

AB also commissioned a survey showing consumers either the Bud Light packaging or a control that had the “no corn syrup” language and icon removed. After reviewing the front image for 10 seconds and the side image for 10 seconds, participants were asked a series of open ended questions, including: “In your own words, what as the main message, if any, on the package you just saw?” Zero respondents in either group mentioned Miller Lite or Coors Light; the majority identified Bud Light’s ingredients as the main message. If respondents correctly identified Bud Light or Budweiser as the brand, they were then asked, “Did the package say or suggest OR did the package not say or suggest something about any other brand or brands of beer?” 28% of the test group and 23% of the control group answered that the packaging did say or suggest something about other brands, but only one respondent in the test group identified Miller Lite or Coors Light in the followup to that question.  When asked what the packaging says or suggests about other brands, 3% of the test respondents who reported receiving any message about other brands of beer mentioned having or using corn syrup.

AB also submitted evidence that its printed but as yet unused packaging for BL containing the “no corn syrup” icon and language had a value of $27 million, which amounts to 69 million packages. AB also has 1.3 million finished cases that have been packaged into secondary containers but that have not yet left A-B’s breweries or warehouses with a value of $5 million.  AB represented that its quality control policy requires secondary packaging be used within 270 days. MillerCoors suggested that stickers could be used instead of destroying the packaging; AB said this would cost $1.10 per package—three times the cost of the packaging itself, or $76 million.  “This strikes the court as an absurdly high estimation,” but the decision didn’t turn on that.

The court applied the pre-eBay presumption that false advertising injuries are presumed to be irreparable, “even if the plaintiff fails to demonstrate a business loss.”

AB argued that its packaging was noncomparative and nonactionable.  Neither of these things are necessarily true (citing a case about highly concentrated markets). “Viewed in context of the full advertising campaign, a reasonable jury could find that the implicit message of the packaging is that other beers contain corn syrup. Moreover, in light of the limited number of beers in the light beer market, with Bud Light, Miller Lite and Coors Light accounting for almost 100% of sales, that same jury could also find a substantial segment of consumers would infer that Bud Light’s principal competitors contain corn syrup, especially after a hundred million dollar television and print campaign misleadingly suggesting the same thing.”  It was reasonable to consider the overall campaign because of the unity of message.

As for defendant’s survey, the court thought that a reasonable jury might accept some of MillerCoors’ criticisms, though it was skeptical of the argument that the survey also should’ve shown them the bottom of the package “at least absent some evidence that a substantial segment of beer purchasers examine the bottom of packaging in deciding which beer to purchase (or at least that retailers regularly stack product to display the bottom of packaging).” But the more intuitive objection, that the survey should’ve been conducted in a retail setting next to Miller Lite and Coors Light packaging, might well convince a jury, and “the limited time (ten seconds per image) respondents had to examine an image of the packaging cuts against the weight of the survey findings.” There were also issues with how the open-ended questions were coded. There was at least “some likelihood of success in proving to a reasonable jury that the Bud Light packaging’s continued use of the now-well-known tag lines ‘no corn syrup’ and ‘find out what is in your beer’ when on display next to Miller Lite and Coors Lite packaging is likely to be misleading, at least viewed in the context of defendant’s full advertising campaign.”

Although previously the court didn’t want to rely on intent, it pointed out that AB spent “tens of millions of dollars on special packaging closely attuned to its larger advertising effort,” which implicitly made AB’s argument that packaging wasn’t material to consumer decisions somewhat less credible.  Moreover, AB’s argument that consumers wouldn’t tolerate stickering on packages contradicted its immateriality argument. And AB’s evidence about lack of reliance on “label / packaging design” focused on the relevance of cosmetic issues such as choice of font, color or layout of the packaging, not on “substantive concerns about nutritional value.” MillerCoors’ contrary evidence was sufficient for a reasonable factfinder to find materiality (and implicitly, it was likely to prevail on this issue).

The court balanced the equities by giving AB the opportunity to use up all its existing packaging as of June 6, 2019, or to use the packaging until March 2, 2020 (270 days from June 6, 2019), whichever occurs first. The court was open to modifying the injunction if MillerCoors could either show that a sticker was feasible or that it was practical to get replacement packaging without interrupting AB’s ability to offer Bud Light for sale.

Even more cocaine

Genus Lifesciences Inc. v. Lannett Company, Inc., 2019 WL 4168958, No. 18-cv-07603-WHO (N.D. Cal. Sept. 3, 2019)

Pleading survey evidence of misleadingness can be pretty helpful, but it can't help you past theories that target the wrong defendant.

Discussion of previous opinion. Genus alleged that its competitors in the market for cocaine hydrochloride nasal spray, defendants Lannett and Cody (Lannett’s wholly owned subsidiary), falsely advertised their unapproved product. Genus also sued First Databank, a pharmaceutical pricing list company. The court previously found that some of Genus’s claims against Lannett and Cody were plausibly stated but that none of its claims against First Databank were; Genus filed an amended complaint and a motion for reconsideration, neither of which changed the basic situation.

Additional allegations in the amended complaint: Genus conducted a survey of Lannett’s customers, which showed that 73.4% of them falsely believe that C-Topical is FDA approved and that 70.4% falsely believe that Lannett only sells FDA approved products. It also alleged new survey data related to whether C-Topical’s unapproved status is material.  Genus added new false advertising allegations based on Lannett ads describing C-Topical as a “pre-1998” drug and Lannett’s product catalog identification of C-Topical as generic, as well as other allegations that don’t turn out to matter.

The previous order held, among many other things, that Genus could plead false advertising based on the false implication that C-Topical is FDA-approved using survey data that 91% of pharmacists believe that all products pharmacists dispense are FDA approved, but statements in SEC filings and investor calls that C-Topical is “grandfathered” or sold under a “preliminary new drug application” couldn’t support a Lanham Act claim without specific allegations that they were made for the purpose of influencing customers of cocaine hydrochloride solutions to buy C-Topical, or were disseminated sufficiently to the relevant purchasing public (pharmacists, hospitals, and doctors) to constitute “advertising” or “promotion” within the pharmaceutical industry.  Finally, the appearance and content of C-Topical’s labeling and packaging didn’t support a Lanham Act claim because they weren’t literally false and Genus failed to allege that they actually conveyed the implied message that C-Topical was FDA approved to a significant number of consumers.

  

Genus now argued that its claim wasn’t based on the statements in SEC filings or investor calls alone, but rather in combination with the advertisements describing C-Topical as a “pre-1938” product, which would render the statements contained in the SEC filings and investor calls actionable. But “Lanham Act claims must be evaluated on a statement-by-statement basis.”  Factfinders must analyze the message conveyed in context, but courts “may not assume context” and shouldn’t necessarily assume that consumers would be exposed to every ad in a campaign. “There is no indication that consumers would have observed the SEC filings and statements in the investor calls along with the pre-1938 ads.” Thus, the SEC filings/investor calls remained outside the scope of the Lanham Act.

As for the “pre-1938” statement itself, Lannett disclosed that “Cocaine HCL is a pre-1938 drug that has not been approved by the FDA” and ENT Journal ads stated that Cocaine HCL “has not been proven safe and effective by the FDA.”  The court agreed that the complaint sufficiently alleged meaning: Genus alleged “that the only reason Lannett would advertise C-Topical as ‘pre-1938,’ or that they had submitted an NDA, would be to convince consumers that C-Topical is an unapproved ‘grandfathered’ drug product or otherwise authorized by FDA.”

(Separately, Genus argued that “C-Topical is a pre-1938 drug” and “Cocaine HCL has not been proven safe and effective by FDA” were literally false because the approval of its competing Goprelto product shows that Cocaine HCL has been proven safe and effective by the FDA. Those claims survived.)

Genus argued that Lannett’s immateriality argument based on its disclaimers failed, because a “pre-1938” drug, or one that has a submitted NDA, is FDA-authorized even though it is not FDA approved, so Lannett’s ads still falsely suggested FDA authorization. And on materiality, Genus alleged that the FDA approval status of a prescription drug is material to customers “since approved drugs provide customers assurance concerning the quality of the product not afforded to unapproved prescription drugs.” Genus also pointed to its survey evidence allegedly showing that the majority of Lannett’s customers would not buy C-Topical if they knew it was unapproved. However, that didn’t show that consumers care whether the FDA authorizes a manufacturer to sell an unapproved drug (though presumably they would be less likely to buy it anyway if they understood that it was unapproved). Just because consumers care about FDA approval doesn’t mean they care about FDA authorization. Anyway, the claim based on the pre-1938 ads was dismissed with leave to amend for failure to allege materiality.

On C-Topical’s labeling and packaging: Genus previously alleged that there were misleading similarities between it and the labeling and packaging of an FDA approved drug. Genus now pled that it conducted a survey of Lannett’s customers and alleged that 73.4% of them falsely believed that C-Topical was FDA approved after reviewing its packaging. Lannett argued that this allegation was still insufficient because Genus didn’t allege that specific information on the label or package was false.  Using Mead Johnson, Lannett argued that Genus was at best alleging misunderstanding, and that a survey can’t be used to ascribe a “misleading” meaning to an otherwise accurate statement. Further, it argued that it was required by federal law to include the various statements on the packaging and label.

The court found that it was sufficient to allege that the overall combination of C-Topical’s packaging misled consumers to believe that it is an FDA approved product. Mead Johnson was inapposite. “Genus is not using survey data to parse a particular phrase and establish that it is misleading.” And the alleged federal requirements weren’t controlling.  Lannett’s “supposed dilemma could be remedied by including a statement that C-Topical is not FDA-approved without running afoul of FDA labelling requirements.”

This time, Genus successfully pled that general statements on Lannett’s website that it complied with FDA regulatory requirements were misleading because they conveyed the implied message that C-Topical was grandfathered or sold with FDA approval and deceived a significant portion of recipients. Genus pled that survey evidence showed that after reviewing Lannett’s homepage for its www.lannett.com website, 70.4% of Lannett’s customers falsely believed that Lannett sells only drugs that are FDA approved.  (Verbatims to “What makes you say Lannett sells only drugs that are FDA approved?” included “Website mentions generic medications, giving impression that they are selling already FDA approved pharmaceuticals” and “based on the first page, it is a generic drug manufacturer. Generic drugs still require FDA approval.”)

Statements in Lannett’s catalog characterizing C-Topical as “generic,” however, made until 2016, couldn’t have harmed Genus because Genus didn’t enter the market until after the catalogs were distributed. Thus, without pleading more of an explanation of harm, the catalogs didn’t plausibly proximately cause “an injury to a commercial interest in sales or business reputation[.]” Genus argued that was able to find Lannett’s 2016 catalog as late as April 2019 and that Lannett hadn’t produced more recent marketing materials.  But that didn’t successfully plead that the catalogs were currently used in advertising or promotion.

The court also got rid of Sherman Act claims based on alleged false advertising. For reasons that, whatever their formal justification, clearly depend on the treble damages available in antitrust claims, antitrust law generally refuses to consider false advertising to constitute an antitrust violation. Thus, in antitrust cases, false advertising is presumed to have a de minimis effect on competitition. To implicate antitrust law, false advertising must be explicitly false, clearly material, clearly reliance-inducing, directed at buyers who don’t know the subject matter, long-lasting, and not subject to neutralization (perhaps by counteradvertising) or other measures by competitors.  Thus, Genus had to explain why it couldn’t have engaged in its own advertising promoting its product as the only FDA approved cocaine hydrochloride product and telling customers that C-Topical is unapproved or that its route of administration is misleading.  Genus argued that coutneradvertising wouldn’t work because the false and misleading statements were being presented to the market through third-party price lists that appeared to provide objective and unbiased information. The court disagreed. The main previous case invoking the third party principle involved a third party, a swimming coach, who disparaged the quality of the plaintiff’s swim gear.  But here there was no disparagement of Genus’s product, only allegedly false description of C-Topical.  So it would be easier to rebut.  Nor did it successfully plead that expending time and money on neutralizing the false advertising would be a disproportionate burden. And its own pleadings on materiality suggested that an ad campaign on this theme would be effective, given that roughly 60% of Lannett customers thought that approval would influence a purchasing decision.

Genus’s amendments to its complaint also didn’t save its claims against First Databank because there was still no sufficient allegation that First Databank was engaging in commercial speech when it listed C-Topical.  There was still no facts supporting a finding that First Databank had any monetary interest in whether customers of cocaine hydrochloride choose to buy C-Topical rather than Goprelto.

Genus alleged that First Databank falsely advertised that its database is “reliable” and “accurate.” But that was puffery, and anyway there was no causal link plausibly alleged between those general statements and Genus’s alleged injuries sufficient to confer standing on Genus.

Nor did the court reconsider its conclusions on Genus’s contributory false advertising claim. Genus argued that, under VHT, Inc. v. Zillow Group, Inc., 918 F.3d 723 (9th Cir. 2019), all that was required for contributory liability was “material contribution” to the legal violation. Under that standard, First Databank allegedly controlled the means of dissemination and was a main channel for Lannett’s false claims. But the court rejected the copyright treatment. “To do so would open up a vast and currently non-existent scope of liability for all publishers of non-commercial information.”  [It’s all right for copyright owners, though!] 

Does Rogers v. Grimaldi apply to false advertising claims?

Dickinson v. Ryan Seacrest Enterprises, Inc., No. CV 18-2544-GW(JPRx), 2019 WL 3035090 (C.D. Cal. Mar. 26, 2019)

This dispute over alleged supermodel Janice Dickinson’s appearance in a reality show is going up to the 9^th Circuit.  Here, the district court kicked out Lanham Act claims for false endorsement, false advertising, and trademark dilution and declined to exercise supplemental jurisdiction over the related state law claims.

Dickinson has been a producer, judge, contestant, and/or guest star in America’s Next Top Model, The Janice Dickinson Agency, I’m a Celebrity ... Get Me Out of Here!, Celebrity Rehab with Dr. Drew, and Celebrity Big Brother. She allegedly attends charity runway shows and photoshoots without a fee for the dual purpose of serving charity and “maintaining and building goodwill in her mark and brand,” and doesn’t voluntarily appear on reality television shows pro bono.

Rosette is a designer and the founder of Art Hearts Fashion, a charitable organization that produces runway shows during fashion events. Dickinson appeared as a runway model pro bono during Los Angeles Fashion Week for Rosette each year between 2010 and 2016, and Rosette allegedly knew that she wouldn’t do this if she knew that Rosette was planning to exploit her “celebrity” without her consent to facilitate a reality television show. In 2016, that’s allegedly what happened: Dickinson’s appearance at the fashion show became part of an episode of the Shahs of Sunset series that allegedly made it look like she “intentionally stole or bullied her way into wearing a romper that had supposedly been previously selected for Golnesa Gharachedaghi, a lead character.”  The episode was allegedly scripted so that Gharacedaghi would falsely act as though she was experiencing “trauma and consternation,” and Gharachedaghi would “intentionally, maliciously and falsely disparage” Dickinson on camera.  Adding to the intrigue, defendants apparently say they have a signed release, but Dickinson alleged that she didn’t sign any release (and thus that defendants faked the release to reassure others in the corporate hierarchy/insurers; she alleged that the purported signature doesn’t match her own), or that if she did, it was as a result of deception leaving her unaware that she was signing anything at all or that she was signing a release. Alleged fraud in the factum!

Defendants allegedly falsely advertised that the series was an “unscripted” “docuseries” rather than a largely scripted or fictional series, and traded off Dickinson’s fame to promote the series.  The use of “True Entertainment” as the name of a credited production entity associated with the series was also allegedly false, and “[f]eaturing this credit on the screen at the end of the programming is intended to make viewers believe that the Series tells ‘true stories.’” [OK, I’m not a huge fan of Twiqbal, but how do we feel about the plausibility of this allegation?]  

The promotional material allegedly falsely portrayed her as a “fashion runway ‘thief’ ” who stole Gharachedaghi’s outfit, causing negative public reaction, including in YouTube comments. [Is there anything a woman can do that won’t cause negative YouTube comments?] Two of the marketing clips for the relevant episode on Bravo TV’s website allegedly used Dickinson’s mark [her name] to make false statements about the content of the episode to encourage consumers to “commercially engage with” the episode.

One clip includes the statement: “Did Janice Dickinson Just Steal GG’s Look?! Evidently she took the outfit GG was supposed to wear on the runway, and GG is pissed .... ”  [The alleged falsity of this statement is based on the allegation that Dickinson didn’t “steal” the look; First Amendment doctrine (outside of TM) generally protects advertising about the content of noncommercial speech to the same extent as the content of the underlying noncommercial speech, and thus you can’t usually turn your defamation claim into a false advertising claim by challenging the advertising of the noncommercial speech.] Another clip says: “Did we mention Janice Dickinson makes an appearance?” Dickinson alleged that, given her fame, fans would believe that she would only “appear” on the series voluntarily, and that as such, she endorsed the show. [Showing the importance of Rogers v. Grimaldi as a speech-protective test!]  Similar “interstitial” ads ran during the episode itself to “tease viewers about upcoming content,” which allegedly “explicitly” falsely “impl[ied] that if consumers continue to tune in they will be shown documentary footage of a controversy between Plaintiff and Gharachedaghi.” In one clip, a cast member says “It’s about to go down,” but the episode never shows any confrontation  and none occurred.

False endorsement: From an earlier ruling: Rogers v. Grimaldi applies. The use of Dickinson’s persona was artistically relevant.  And the use wasn’t explicitly misleading.  Dickinson unsurprisingly cited Gordon v. Drape to say that there was a factual issue about that, but even Gordon talks about TV programs as being different from greeting cards.  The Ninth Circuit has already found that the following allegations don’t suffice as evidence of explicit falsity:  “mere use of the plaintiff’s likeness,” “a consumer data survey showing confusion,” and written materials accompanying the work that didn’t explicitly mislead.  The complaint didn’t allege any “explicit indication, overt claim, or explicit misstatement” relating to endorsement.  The beginning credits list cast members, producers, and companies behind the episode, and Dickinson’s not on that list. And nothing else “suggest[s]” that Dickinson, the nemesis in one scene of one episode, endorsed or backed the episode.  “Though the Episode’s allegedly false narrative portraying Plaintiff as ‘stealing’ the romper may be unethical or violate some other law, that narrative does not sustain the Rogers explicitly misleading prong as to Plaintiff’s Lanham Act claims.”  Nor were there any statements outside the episode that Dickinson was behind the episode. And many of the statements Dickinson cited were outside of defendants’ control.

False advertising: Under Lexmark, Dickinson needed to “allege an injury to a commercial interest in reputation or sales.” In the light most favorable to her, she did so, alleging harm to her reputation, thereby diminishing the “desirability of Dickinson’s appearance on other media projects, and her $75,000 appearance fee value.” Did the economic or reputational injury flow directly from the deception wrought by the advertising? The court found this a “closer call.” Dickinson alleged that the episode’s “false narrative” deceived consumers into believing that she was unprofessional, and thus diminished the value of her celebrity brand.  But that was about the content of the episode, rather than about the alleged falsity of the “unscripted” advertising claim. Thus, she didn’t properly allege that the advertising was the proximate cause of her injury.

Also, false advertising is only actionable under the Lanham Act when it’s in “commercial advertising or promotion.”  But there are special rules for commercial speech where ads promote expressive works. Under governing law, “[f]or private actions, such as tort suits, advertisements that are ‘adjunct’ to a protected work are entitled to the same immunity from as the underlying work.” All the ads that Dickinson cited were clips from the episode itself, a few with short descriptions. They were noncommercial speech for Lanham Act purposes.  Thus, the court applied Rogers to the false advertising claim.  [Note that this step is entirely unnecessary if you agree with the idea that the episode promos aren’t “commercial speech”; the inquiry is over for §43(a)(1)(B) purposes at this point. That’s unlike §43(a)(1)(A), which courts have held applicable to noncommercial speech, which was the reason they needed to invent Rogers in the first place. The court thus expressed some uncertainty about how to apply Rogers to false advertising about the content of an expressive work, but that’s a self-created difficulty.]

In a footnote, the court declined to find that Gordon counseled in favor of finding a factual issue here.  This isn’t a “minimally expressive” work like a greeting card. [Sigh.]  Gordon contrasted use “in the creation of a song, photograph, video game, or television show” with “just past[ing]” a mark into greeting cards, which could be explicitly misleading. Here, the use of Dickinson’s likeness, image, and name in the episode, and concomitant promotional materials obviously had artistic relevance above zero.

Explicit misleadingness: Dickinson alleged that the “docuseries” advertising misled as to content because the show was scripted, but that wasn’t enough under Rogers because Rogers requires the use of the mark to be explicitly misleading. “Plaintiff’s mark has no bearing on whether or not Bravo advertises their show as a scripted series or reality television.” [Which is why proximate cause might be the better move here if you insist on going further than “not commercial speech.”]

Second, Dickinson argued that the ads explicitly misled about the content of the episode by making her look bad/promising a fight. Not so.  The ads were all clips of the episode itself: “A clip of a television episode could not possibly mislead as to the content of the episode, as it is itself a portion of the content.” And the additional descriptive statement: “Did Janice Dickinson Just Steal GG’s Look?! Evidently she took the outfit GG was supposed to wear on the runway and GG is pissed ....” wasn’t explicitly misleading; it wasn’t even unequivocal. The short descriptions of the clips “both accurately preview the controversy portrayed on the Episode, whether the controversy itself was contrived by Defendants or not.”  “Did we mention Janice Dickinson makes an appearance?” is also not misleading, since she does.

Dilution: Not commercial speech, no claim.

fine print won't necessarily fix misleading comparison

Asurion, LLC v. SquareTrade, Inc., 2019 WL 4142154, No. 18-cv-01306 (M.D. Tenn. Aug. 30, 2019)

The parties compete to provide extended warranties for mobile phones. Typically, wireless carriers bundle Asurion’s insurance with an extended warranty and technical support and sell the combined “Carrier Protection Plan.” SquareTrade sells a “Protection Plan” that provides protection against defects and accidental damages for a variety of consumer products, including cell phones, but doesn’t cover theft or loss as Asurion’s plan does. In addition, the SquareTrade plan doesn’t include technical support, as does the carrier bundle.

Asurion challenged a mail ad:

And an online ad:

The fine print in both advertisements states: “… Price comparisons based on smart phone protection for the following providers: [a bunch of bundles]. Prices and terms are as of 08/01/2018 and may change. SquareTrade plans do not cover loss or theft. …”

Asurion alleged that the side-by-side comparison in the advertisements falsely and misleadingly implies that SquareTrade offers coverage equivalent to the bundles for a lower price and that using the name of its affiliate, Allstate, in the online advertisement misleadingly implies SquareTrade offers insurance (i.e. theft and loss protection). It alleged false advertising under the Lanham Act and the Tennessee Consumer Protection Act (TCPA). The court denied SquareTrade’s motion to dismiss.

Context matters; a disclaimer or clarifying language may defeat a claim of deception “if it renders an otherwise false statement true, so that consumers are not misled. To be effective, a disclaimer must actually be read by the consumer. Consequently, a disclaimer that is unlikely to be read because of its print size or location will not remedy a misleading claim.” 

Asurion alleged misleadingness. At this stage, it needed to plead facts that support a “plausible inference that the challenged advertisements in fact misled a significant number of reasonable customers.” The core of the complaint was the allegedly implied false equivalency between the SquareTrade plan and the bundles. For example, the mailer allegedly falsely suggested” that SquareTrade “offers insurance coverage by co-branding the advertisement with Allstate (an insurance company) and stating ‘Stop overpaying for phone insurance through your wireless carrier’ and ‘By switching to SquareTrade your family could save hundreds vs. carrier insurance.’ ” [It sounds a bit different to say “save on insurance by not paying for insurance.”] Asurion argues that the logical conclusion implied by the statements and by the comparison charts is that “a consumer could replace one of the Carrier Protection Plans with SquareTrade’s plan without any change in coverage.”

SquareTrade argued that the fine print disclaimer avoided misleadingness and that any reasonable consumer “would know that each plan offered by a different company at a different price likely has some differences in the services offered.” The court disagreed for purposes of a motion to dismiss. “Here, the side-by-side comparison suggests that the plans are, if not identical, at least comparable. The fine print disclaimer does not conclusively remedy the potentially misleading nature of the advertisement as a whole. Other than the notice that the SquareTrade plan does not cover loss or theft, the fine print does nothing to dispel any misleading comparisons between SquareTrade and the Carrier Protections Plans with which it is compared.”  Although people know that dog food isn’t made from people food, “SquareTrade’s Protection Plan is not so obviously different from the Carrier Protection plans that consumers would instinctively know they were not the same product.”  Plus, even the disclaimer didn’t explain that the other plans listed did cover theft or loss, so it didn’t dispel the perception that the plans listed had comparable coverage, the way the ingredient list on dog food explains what’s in it.

For similar reasons, the TCPA claim survived, after the court found that competitors had standing to bring such claims, given the statutory language that a claim may be brought by any person, including corporations, who “suffers an ascertainable loss” proximately caused by unfair or deceptive actions declared unlawful by the TCPA.

benefit of the bargain damages can be measured by cost of repair in car class action

Nguyen v. Nissan North America, Inc., 932 F.3d 811 (9th Cir. 2019)

Nguyen bought a new 2012 Nissan 370Z with an allegedly potentially catastrophic design defect hidden in the vehicle’s hydraulic clutch system. “After the clutch purportedly malfunctioned—and Plaintiff spent more than $700 replacing it—he filed a putative class action” asserting consumer protection and warranty claims. The court noted evidence supporting the idea of a general defect of which Nissan was aware since 2007 or so, such as a project engineer’s internal email: “This issue is great enough that it warrants a serious look by R&D as to how we can improve the feel, and function of the clutch system. ... Customers are universally dissatisfied with the feel and performance of the system even when it is performing as designed. ... Combine that with the frequent claims of clutch pedal sticking to floor and you’ve taken a dissatisfaction item and made it into a breakdown item.” Nguyen’s son experienced a scary instance of this when the clutch stopped working on the highway, though fortunately he was able to move to the shoulder without physical injury.

The district court denied class certification based on what it saw as inadequacies in Nguyen’s damages model based on the cost of repairing the clutch to fix the problem.  The district court reasoned that the benefit of the bargain would only equal the cost of replacing the defective clutch if consumers would’ve deemed the defective part valueless, which was implausible because even Nguyen drove the vehicle for nearly 27,000 miles before replacing the part.

The court of appeals reversed, finding that a benefit-of-the-bargain model as measured by the average cost of replacing the allegedly defective clutch system was appropriate to satisfy Rule 23(b)(3)’s predominance requirement. The Supreme Court has emphasized that “at the class-certification stage (as at trial), any model supporting a ‘plaintiff’s damages case must be consistent with its liability case.’ ”

Damages under the CLRA, the Song-Beverly Act (California’s warranty law), and the Magnuson-Moss Act could all be measured using a benefit of the bargain theory.  And that was consistent with Nguyen’s liability theory. “Plaintiff’s legal theory is not based on the performance of the allegedly defective clutch system, but instead the system itself, which he claims is defective. Had Plaintiff alleged that performance problems constituted the defect and caused his and the class members’ injuries, then the benefit of the bargain would not be the appropriate measure of damages because, as the district court noted, class members might have received varying levels of value based on if and when they experienced a sticky clutch problem.”  But under Nguyen’s theory, the defect exists whether or not the symptoms have manifested.  Further, he alleged, “a reasonable person would have considered [the fact of the alleged defect] to be important in deciding whether to purchase or lease Class Vehicles,” and thus that Plaintiff and class members “would not have purchased or leased Class Vehicles equipped with transmissions, or would have paid less for them.” Thus, “under both causes of action, the sale of the vehicle with the known defect is the liability-triggering event, not when the [defect] manifests.” It’s at that point that a consumer paid more than she would’ve paid had she known the truth. “[T]he focus is on the difference between what was paid and what a reasonable consumer would have paid at the time of purchase without the fraudulent or omitted information.”  Thus, it was incorrect to say that repair costs wouldn’t measure the harm unless consumers would’ve deemed the defective part valueless. 

Cases from other circuits have also found similar questions “amenable to classwide resolution,” explaining that “a manufacturer’s misrepresentation may allow it to command a price premium and to overcharge customers systematically. Even if an individual class member subjectively valued the vehicle equally with or without the accurate [information], she could have suffered a loss in negotiating leverage if a vehicle with perfect safety ratings is worth more on the open market.”  Technically, I can see why the cost-to-fix might not completely match up with the price drop in the overall negotiated price—though that’s how it works in buying a house, buying a car might be different—but the court noted that cost-to-fix “is a proxy for [his] overpayment of the vehicle at the point of sale.”  In reality, probably many people would’ve gone with a different car instead of one with a clutch so potentially nonfunctional it needed to be replaced, but since we can’t rewind that transaction the cost-to-fix seems like a decent proxy for what they would’ve demanded to take this car instead.

Anyway, Nguyen was seeking to vindicate “the right to take a product free from defect. The defect did not cause the plaintiffs’ injury; the defect was the injury.”  Damages for actual faulty performance would indeed require an individualized analysis that might defeat predominance. The faulty design, however, didn’t pose that problem for class treatment. Reversed and remanded.