Bringing a false advertising claim with unclean hands leads to fee award

Certified Nutraceuticals, Inc. v. Avicenna Nutraceutical, LLC, 2018 WL 5840042, No. 16-cv-02810-BEN-BGS (S.D. Cal. Nov. 7, 2018)

The court awarded roughly $170,000 in fees in this Lanham Act false advertising case because the plaintiff engaged in the same conduct (falsely claiming that its product was patented) as its competitor in the market for collagen products, and still sued the competitor. The court previously granted summary judgment based on unclean hands; the briefing “brought to light filings by Certified that seemingly misrepresented the status” of one patent, leading the court to impose sanctions against Certified, its CEO, and its counsel.  (Basically, when Avicenna showed that Certified’s patent hadn’t issued before it advertised its “patented” status, Certified claimed that it was referring to another patent, but years before it had been enjoined from exercising that patent.)

Under Octane Fitness the exceptionality inquiry for fees requires a court to consider “factors, including frivolousness, motivation, objective reasonableness (both in the factual and legal components of the case) and the need in particular circumstances to advance considerations of compensation and deterrence.”

Frivolousness/unreasonability: “prior to filing its lawsuit, Certified knew or should have known that its unclean hands barred its Lanham Act claim and that it did not suffer any injury, barring its two state law claims.”  As for the California state law claims, Certified could only identify two customers it “lost” as a result of Avicenna’s statements, and those two customers’ decisions weren’t based on Avicenna’s false statements but on the customers’ beliefs in Avicenna’s product’s superior quality and consistency.  Even under more stringent older standards, there was no reasonable basis for bringing these claims.  Nor would the court refuse to award fees because Certified got Avicenna to stop making patent-related claims, in that Avicenna’s misrepresentation of its product as “patented” happened only twice, and Avicenna corrected both instances prior to Certified filing its lawsuit.

Objective reasonableness of litigation: the sanctions order provided the court’s basis for finding that litigation was conducted in an objectively unreasonable manner. Moreover, Certified’s decision to file a similar case in the district while the present case was pending additionally demonstrated objective unreasonability; that case was voluntarily dismissed after a motion to dismiss indicated that Certified didn’t own the second patent.

Deterrence: Certified has a history of litigation, including the lawsuit just mentioned (which targeted nearly a dozen competitors) and a case in which  the California Court of Appeal affirmed a sanctions award of $34,000 against Certified’s principal for advancing frivolous arguments in a lawsuit against another competitor. Certified also filed a second lawsuit alleging similar false advertising claims against Avicenna, but had yet to serve Avicenna with the lawsuit.  The court found that this conduct was relevant both for the Octane Fitness totality of the circumstances test and for the deterrence factor. Also, Certified failed to comply with the sanctions order by filing a notice that the sanctions were paid within three days of payment, which had been part of the order.  “To say the least, Certified’s brazen litigation tactics and utter disregard for this Court’s own order suggest a lack of respect for the rule of law that should be deterred.”

Avicenna could only recover for fees related to its work on the Lanham Act claim, not the two state law claims, but the claims here were “so inextricably intertwined that even an estimated adjustment [for the state law claims] would be meaningless.” They relied on the same factual allegations and had many of the same elements.

literal falsity still needs to be material, and court wants a survey or other direct evidence thereof

LivePerson, Inc. v. [24]7.AI, Inc., 2018 WL 5849025, No. 17-cv-01268-JST (N.D. Cal. Oct. 26, 2018)

LivePerson “provides online chat engagement services through a digital platform that it sells to website operators.” That is, it helps websites provide real-time text-based communications with website users directly on the website. Its platform tries to identify when initiating a chat with a particular user is most likely to produce a positive outcome, such as a sale, using rules based on variables such as the user’s navigation history.

[24]7 provides customer service agents to businesses, including customer service agents that participate in the type of online chats initiated through LivePerson’s chat platform. In 2006-2007, the parties agreed to market and provide services to mutual customers; at the time, [24]7 didn’t have its own chat platform, while LivePerson offered a chat platform, but did not have digital chat agents to staff that platform.  After the direct contractual relationship ended, the two companies continued to provide their services to mutual customers.

Then (curse your sudden but inevitable betrayal!) [24]7 introduced its own digital chat platform. It touted its platform, claiming that it was the “first smart chat” platform. Three mutual customers switched to using [24]7’s chat platform. Through these arrangements, [24]7 gained access to the rules and data developed for the customers, which LivePerson claimed as trade secrets in this action; the court denied summary judgment on the theory that LivePerson used improper means. I’ll focus on the false advertising claims.

The challenged statements touted [24]7 Assist as “the industry’s first smart chat that uses prediction and real-time decisioning with big data to drive customer experience,” “the first predictive, real-time customer assistance solution for chat,” and the “world’s first smart chat platform powered by prediction in real-time.”  The court declined to grant summary judgment on puffery, but did on materiality.

This wasn’t puffery because the implication of [24]7’s “first” claims was that LivePerson’s competing platform lacks some element of smart or predictive technology, or at the very least, had a less reliable version. Identifying whether the products possess certain technological features was specific enough to avoid puffery. Even if “smart” and “predictive” were vague in the abstract, in context,  [24]7’s statements introduced particular features as “smart” or “predictive.” “A reasonable consumer could understand [24]7’s ‘first’ statements as implying that other products available at the time lacked these features.” That’s falsifiable.

However, materiality wasn’t so easy. The court declined to presume materiality on the theory that [24]7’s statements were literally false; materiality is a separate requirement.

LivePerson offered a declaration from its Vice President stating that the claim of being “first” to develop a product is likely to influence purchasing decisions because “older technology that has been in the market longer is viewed as having had more time for refinement and development based on data collected over the years.” But “untested, generalized assumptions that a statement is likely to influence purchasing decisions” weren’t sufficient to demonstrate materiality.  In the continuing game of telephone courts have played with the relationship between falsity and materiality, we now hear that materiality “is ‘typically’ proven through consumer surveys,” which provide direct evidence of a statement’s impact. [Voiceover: materiality is not typically proven through consumer surveys. That's not to say the rule can't change--it may be changing through this process of doctrinal accretion--but materiality is quite often a matter of common sense where a claim is central to performance or related to health or safety, and that treatment makes plenty of sense.]

Here, there was no evidence of consumer reaction, and evidence that they didn’t simply take [24]7’s statements at face value in making purchasing decisions. The parties entering into multi-year contracts between companies; for example, Sears conducted an extensive head-to-head test before switching.

False patent marking claim fails in cannabis case despite clear falsity/motive to crush competition: mostly it didn't work

Kremerman v. Open Source Steel, LLC, 2018 WL 5785441, No. C17-953-BAT (W.D. Wash. Nov. 5, 2018)

This case involved cannabis distillation equipment. Kremerman sued OSS for design patent and trade dress infringement and related claims. OSS counterclaimed for false patent marking, false advertising under the Lanham Act, and violation of Washington’s Consumer Protection Act. After some claims were dismissed, Kremerman filed a motion to voluntarily dismiss the affirmative claims and submitted a terminal disclaimer to the PTO disclaiming the remaining term of his patents. (The court also says this disclaimer rendered his trade dress claims moot, which doesn’t seem right in itself.)  The court here dismisses the counterclaims.

OSS contends Kremerman claimed his distillation products were patented when they were not and that he falsely disparaged OSS and its owners with the intent to dissuade customers and suppliers from doing business with OSS and to put OSS out of business.  Basically, OSS had a Chinese manufacturer (along with some Kremerman suppliers) copy/reverse engineer the Kremerman distillation heads, which Kremerman found out about on social media: I kind of love that he found out by seeing an image of his distillation head on OSS’s Instagram page. One supplier’s employee testified that OSS told him Kremerman was a former employee of theirs and that OSS actually owned the rights in Kremerman’s designs.

Kremerman allegedly claimed on his website that his products were patented when there were merely pending applications, and in deposition he testified that he told a supplier that he had patents when in fact, the patents had not issued, because he felt he had to “protect himself.”  In addition, Kremerman allegedly claimed that he was in litigation with OSS before he filed suit, also to discourage others.  He made these kinds of claims in statements both to suppliers and potential customers, e.g., “I have 2 patents on distillation, and there is a reason why everyone tries to copy me!...Oh and we are involved in a federal lawsuit for counterfeiting because of them.” 

The statements were written from Summit Industrial’s email and posted on its webpage or were sent from Kremerman’s email and/or posted on his “Jonathan von Braun” Facebook page (he used several names to promote his products/communicate with customers and others in the industry). There was evidence he promoted his products on Facebook account, even though he maintained it was a private/friends-only acccount.

The court found that Kremerman’s statements specifically representing that he had patents on the distillation heads even though no patents issued until late December 2016 were clearly false as a matter of law. For example, “THIS GLASSWARE IS PATENTED” “is something that could easily have been proven false and is one that customers reading Summit Industrial’s webpage would rely upon due to Kremerman’s presence in the industry.”

Did Kremerman act with an intent to deceive?  He testified that he corrected his website when he was “alerted to it by his attorneys” and he came to understand he had “mistakenly used the word ‘patented’ rather than ‘patent pending.’ ” He also testified that he “did not understand the process…. I believed that when your name is put on an application the patent is yours. …” One supplier testified that Kremerman accurately informed him of the status of his patent applications and, even though Kremerman referred to his products as “patented” in certain communications, he did not believe Kremerman ever intended to mislead him. A C&D letter sent and then posted on Kremerman’s webpage specifically stated that Kremerman’s patent applications were filed and patents were pending. Kremerman also testified that he did not understand the lawsuit process and was “under the assumption that once you begin the process of suing someone, it is the same thing whether or not you have filed in federal court.”

However, when he made the statements at issue, he knew he did not have issued patents. Even if he failed to appreciate the difference between pending patents and granted patents, he claimed he had “granted patents” before he had filed any patent application. Nor did his alleged failure to understand the difference preparing for a lawsuit and actually being in a lawsuit explain his statement “I have 4 of my own patents, and I have already won cases with my counterfeiters,” at a time when no lawsuits had been filed and nothing had been won. He made other statements inconsistent with his claims of lack of understanding, such as “I just released my third patent two weeks ago. And my fourth patent is under final review.”

However, the false patent marking statute applies only to “advertising,” not “promotion.” Thus, “the expression ‘uses in advertising’ cannot refer to any and all documents by which the word ‘patent’ is brought to the attention of the public; it can only refer to use of the word ‘patent’ in publications which are designed to promote the allegedly unpatented product, namely, advertisements.” “Advertising” is defined as “the action of calling something...to the attention of the public esp[ecially] by means of printed or broadcast paid announcements.” Most of the statements at issue were in one-on-one emails, not to the public, and not in paid announcements.

Still, there was a question of material fact about whether statements on the website, or on the Facebook page, were “advertising,” inasmuch as “it can hardly be disputed that companies (Kremerman’s included) use their websites to serve the function of advertising by targeting a specific market, trade, or class of customers seeking products in that marketplace.” But the court was not willing to conclude that a single email was “advertising” even when the relevant market was very small.   

Nonetheless, summary judgment against OSS was warranted because on the issue of whether it suffered a competitive injury, which requires “actual competitive harm.” OSS argued that direct competition allowed a general presumption of a competitive injury, but it didn’t show that anything Kremerman said “had a tendency to mislead consumers” [um, the false statements, which the court deemed plausible to consumers because of Kremerman’s market position?] and didn’t show loss of sales, goodwill or ability to market that was caused by the false marking. “This causation is a necessary element of … 35 U.S.C. § 292.”

OSS’s claim that “fielding inquiries from customers regarding the dispute with Kremerman has become a regular, and unfortunate, part of OSS’s business” was insufficient. “A party claiming ‘loss of goodwill’ must offer evidence of (1) the original value of its goodwill and (2) the scope and depth of the defendant’s harm to the plaintiff’s reputation.”  [Trademark owners might want to pay attention to this idea.] Part one can be done, for example, by considering “a plaintiff’s expenditures in building its reputation in order to estimate the harm to its reputation after a defendant’s bad acts.” But there was no evidence that fielding inquiries caused harm to OSS’s reputation in any appreciable manner.

Nor did OSS show lost business or profits, other than a failed attempt to establish a business relationship with an equipment dealer with whom Kremerman had an established relationship and to whom he said he didn’t want them dealing with OSS because they were “crooks” and “counterfeiters.” Though they began a relationship with OSS, the dealer soon told them, “As I [sic] result of pending litigation [we] will be removing your account from our active account base and suspending your account by end of business day.” However, there was no evidence that the dealer made any decision based on false or misleading information provided by Kremerman. Moreover, OSS acknowledged that it was able to secure an alternative supplier of the relevant equipment and didn’t quantify whether it made more or less money doing so.

Although a Lanham Act claim for injunctive relief may be viable even in the absence of proof of damages, OSS didn’t initially ask for injunctive relief, and such an “extraordinary” remedy wasn’t warranted, given that the last challenged statements were from 2016 and there was no evidence of a likely reoccurrence.

What about Lanham Act false advertising? “Courts may presume consumer deception and reliance if the defendant made an intentionally false statement regarding the defendants’ product, even if the statement entailed ‘little overt reference to plaintiff or plaintiff’s product.’” And a court may presume materiality for literally false statements. Here, the challenged statements were: (1) Kremerman’s premature and false statements that he had patents and was in a lawsuit against OSS; and (2) disparaging comments about OSS, its products, and its founders, also made in the same media as (1), e.g., “Pile of garbage counterfeit head”; “Boot the frauds. They are scammers”; “hide yo keys. Oss. Only stolen sh*t”; “…buyers beware, this is counterfeit glass and low quality….we have images of their glass imploding on customers as well as heads in our hands that are known not to work”; “Not to mention the class action suit building from other people they owe money to.” There were other comments about the conduct of OSS’s business; Kremerman in deposition later said that he “misspoke” about things like “We also have found out some dirt with investigators that they do not pay fed tax, or collect it, or give receipts. So the honest answer is they are f*cked. We filed a motion for a audit….”

Were these statements “commercial advertising or promotion”? Statements contained in a few emails to prospective customers weren’t “disseminated sufficiently to the relevant purchasing public”; there was no evidence that the market was small enough for that to be the case. What about the website/FB statements? They “arguably” reached a wider audience (and several were explicitly false), they weren’t widespread ads, and there wasn’t evidence about the size of the relevant market and their exposure to the statements.

“And most importantly, there is no evidence that OSS has or will suffer any injury from the false statements,” as the court discussed above. This also doomed the Washington state unfair business practices claim.

Wipe on, wipe off: after survey excluded, plaintiff wins jury verdict on false advertising windshield protector claim

Illinois Tool Works Inc. v. Rust-Oleum Corporation, 2018 WL 5810327, No. H-17-2084 (S.D. Tex. Jun. 21, 2018)

 ITW’s Rain-X and Rust-Oleum’s RainBrella water repellant product compete in the market for use on vehicle windshields. Rust-Oleum advertised that RainBrella lasted twice as long as Rain-X, as proved by use that lasted over 100 car washes.

The parties sought to exclude each other’s experts’ testimony.  ITW’s expert Berger offered a survey to show consumer perception of Rust-Oleum’s “Last Over 100 Car Washes” statement.  Respondents were qualified if they: (1) were eighteen years of age or older; (2) owned or leased a personal motor vehicle; and (3) had purchased in the past twelve months an automotive product to maintain or enhance the exterior of their vehicle. The test group was shown a static image of a modified RainBrella package from which the phrase “Lasts 2X Longer” had been digitally removed and in a perspective in which only certain portions of the package were viewable.

The test group was asked: “One of the claims on the package is that it ‘lasts over 100 car washes.’ Do you see this in the ad?” If they said yes, they were asked: “In terms of time (weeks, months, years), how long do you believe that the RainBrella product will last?” The test group respondents were given four answer choices: (1) between zero and fifty years; (2) between one and eleven months; (3) between zero and four weeks; and (4) “Don’t Know.” The average answer was 110.6 weeks. The respondents in the control group were shown the same image used in the test group, but also without “Lasts Over 100 Car Washes.” The average duration answer in that group was 19.8 weeks.

A survey validator fully screened seventy-seven of the 359 respondents with working numbers and found that thirty-seven of the seventy-seven screened respondents didn’t recall taking the survey.

Rust-Oleum hired Akron Rubber Development Laboratory, a third party independent laboratory facility, to test how long the RainBrella and Rain-X products lasted on an automotive windshield. ARDL applied the products to a clean windshield. ARDL mounted the windshield onto a test frame, turned on a water spray, and ran the wiper blades. It continued, checking every 10,000 cycles, until water droplets no longer beaded on approximately 50% of the wiper area. ARDL concluded that “RainBrella and its repellent properties last on average, at least two times longer versus the leading competitor ....”

An in-house ITW test also sought to measure the hydrophobicity (water repellency) of each product and concluded that RainBrella did not last twice as long as Rain-X. Rust-Oleum retained a mechanical engineer to review the parties’ test.

Rust-Oleum succeeded in excluding the survey.  First, the survey didn’t adequately replicate market conditions because it omitted the statement “Lasts 2X Longer” from the image of the RainBrella package, which was important to consumer’s perception.  [Interesting question why the control group didn’t control for this difference—I can see arguments either way.] Second, the universe was overinclusive, because it selected for people interested in protecting their car’s exterior, not the windshield in particular.  Third, the 48% validation failure rate strongly indicated the survey was unreliable.

The question form—suggestive of temporal terms, but not leading—was relevant to the issue in the case and thus didn’t “greatly” affect the survey’s reliability, nor did drawing respondents’ attention to specific language on the package. Still, the other flaws rendered the survey “fundamentally flawed and unreliable.”

ITW’s motion to exclude Rust-Oleum’s expert didn’t fare so well.  Although Dr. Brani was not a chemist and lacked experience testing hydrophobicity, he used lab coursework in his teaching and worked at an independent law where he “routinely draft[ed] scientifically based testing protocols and execute[d] this testing to provide greater insight for various clients including insurance adjusters, attorneys, manufacturers of products, and designers of products.”  Thus, his knowledge of and experience with laboratory testing enabled him to assist the trier of fact here.

However, that was limited to his first set of opinions: conclusions regarding generally accepted methods of scientific testing, including qualitative and quantitative testing.  He also offered conclusions regarding the reliability of the ARDL Test and the ITW Test, and the ultimate conclusion that the ARDL Test substantiated Rust-Oleum’s claim that RainBrella “Lasts 2X Longer.”  At the Daubert hearing, he indicated that he couldn’t testify as to whether the ARDL Test procedures were superior to other test procedure, nullifying his written opinion that the ARDL Test was implemented in a reliable way and the ITW Test was not. His final conclusion that the ARDL test substantiated Rust-Oleum’s claim also conflicted with his testimony that he could not opine as to the actual implementation or execution of the ARDL Test, and Rust-Oleum’s counsel represented to the Court that he wouldn’t be testifying as to whether the ARDL Test results are proper. This discrepancy showed that his report’s conclusions on this point were unreliable.

Illinois Tool Works Inc. v. Rust-Oleum Corporation, --- F.Supp.3d ----, 2018 WL 5810326, No. H-17-2084 (S.D. Tex. Oct. 30, 2018)

The jury found in Rain-X’s favor even without the survey.

Here, the court granted a permanent injunction. “The potential for ongoing harm if a defendant continues to make similar false or misleading statements and the likely impossibility of quantifying the extent of harm suffered as a result of false or misleading statements weigh in favor of finding irreparable injury.” There was testimony that ITW’s reputation and brand were harmed as a result of the challenged claims, which supported a finding of irreparable injury.  The balance of hardships weighed in favor of an injunction, but not a recall; the public interest in truthful advertising also supported an injunction.

The jury was instructed that “can award ITW the profits Rust-Oleum earned as a result of its false advertising if [it] finds ITW has shown by a preponderance of the evidence that Rust-Oleum benefited from its false advertising” and that it “may award Rust-Oleum’s profits even if Rust-Oleum’s costs exceed its profits.” The jury awarded profits in the amount of $392,406, and also found Rust-Oleum “acted maliciously, fraudulently, deliberately, or willfully.”

There was no direct evidence of sales diversion, which weighed against a profit award, but there was a strong public interest in making false advertising unprofitable and there was no unreasonable delay in ITW asserting its rights. The court wouldn’t touch the jury award of profits.

The jury also awarded a bit over $925,000 for corrective advertising. Rust-Oleum argued that ITW didn’t engage in pretrial corrective advertising and there was no evidence ITW it would do so in the future. But there was no evidence that it wouldn’t, and the evidence showed Rust-Oleum spent $1,318,023 on advertising. Though the jury could award money for corrective advertising, the size here was punitive, and instead awarded 25% of Rust-Oleum’s ad expenditures, according to the principles of equity: a shade under $330,000.

In which I appear as a sideshow (but ABC gets the right result on TM/(c) claim based on news report)

Manigault v. ABC Inc., 17-CV-7375 (KNF), 2018 WL 5818101 (S.D.N.Y. Oct. 10, 2018)

I show up in this opinion because I wrote a blog post and the pro se plaintiff decided that I was some sort of publicist for ABC (I am not). Manigault sued ABC for trademark infringement/dilution, false advertising, and copyright infringement for running a news story displaying the logo of his software, KeyiCam, which takes a picture of a key and displays the “biting code” for the key.  ABC here won summary judgment.

Relevant uncontested facts: the news report at issue “examined a smartphone application for a key duplication service called KeyMe, explained how KeyMe works and showed several tests performed to assess how well KeyMe works with two positive and one negative result. The news report also showed materials published by KeyMe.” The reporter stated: “KeyMe isn’t the only game in town, though; there’s also Keys Duplicated and KeyiCam” and the report showed a screenshot from each business’s website for about one second. A text version included hyperlinks to the websites of each of the companies mentioned in the news report.

“ABC’s brief use of the KeyiCam mark in its news report did not suggest in any way that KeyiCam: (i) is affiliated, connected or associated with ABC; (ii) originates from ABC; or (iii) is sponsored or approved by ABC.” Likewise, there was no evidence that ABC engaged in materially misleading consumer-oriented conduct or commercial speech, dooming the false advertising claims. Nor was there dilution or tarnishment. The news report reported on KeyMe; no reasonable finder of fact could conclude that ABC used the KeyiCam logo “in an unwholesome or unsavory context likely to evoke unflattering thoughts about” KeyiCam’s services. [And even if the news report had been unflattering about KeyMe, it would be unconstitutional to bar nonfalse unflattering statements!]

The challenged use was fair. News reporting “is specifically exempted from copyright infringement by statute.”  Not exactly, but the court then quoted the more accurate rule that “there is a strong presumption that factor one [of the fair use factors] favors the defendant if the allegedly infringing work fits the description of uses described in section 107.” Nature of the work was neutral: creative, but already published. Amount: the extremely brief showing was “reasonable and consistent with the news report’s purpose, which was to inform viewers about the existence of key duplication services other than KeyMe.” Market effect favored fair use becaue a news report does not compete with and has no effect on any market for the KeyiCam logo.

And me?  I’m just irrelevant to the issues here.

Straight-up falsity can't get preliminary injunction where lost sales can be calcuated

Vault Cargo Management, LLC v. Rhino U.S.A., Inc., No. 18-cv-01517-H-LL, 2018 WL 5809516 (S.D. Cal. Nov. 6, 2018)

The parties compete to sell products, including a variety of vehicle straps. Rhino allegedly created the false impression that its products are made in the United States, even though import records show that the products are shipped from China. In response to a customer question on Amazon Marketplace, Rhino said that its products are manufactured overseas, but Vault also pled examples of Rhino explaining that its products are American made, “hundreds” of examples of Rhino republishing, approving, or endorsing customer reviews that state that its products are made in the United States; and one example of Rhino answering a consumer question on Amazon.com explaining that its products are made in Naperville, Illinois.

That looks pretty bad, but Vault didn’t show irreparable harm for preliminary injunction purposes.  Vault showed that its sales varied depending on Rhino’s market activity, e.g., when Rhino began selling ratchet straps, Vault’s sales declined by 50 percent and when Rhino’s ratchet strap listing is not active, Vault’s ratchet strap sales double. But those are “simply economic harms that may be recovered in the ordinary course of litigation.”  As to loss of goodwill and damage to reputation, Vault didn’t provide enough evidence that Rhino would enjoy brand loyalty built on the false statements even if Vault wins. A declaration from Vault’s CEO to this effect was insufficient without further evidence/explanation. In addition, Vault itself pled that there were “many different sellers of cargo and vehicle recovery accessories, offering varying levels of product quality across a wide array of price points[.]” There wasn’t enough evidence that customers concerned with the manufacturing origins of a product wouldn’t instead choose to purchase the product from one of the other “many different sellers” of similar products.

A watered-down finding of TM infringement: prevailing party gets $0 and no injunction, court tells it to go home

Evoqua Water Technologies LLC v. M.W. Watermark, LLC, No. 16-cv-14, 2018 WL 5784073 (W.D. Mich. Nov. 5, 2018)

Eric Goldman will probably appreciate the court’s takeaway here: “Plaintiff and Defendants are not only business competitors, but also stepchildren, in a way, fighting about the original business of a common corporate ancestor, JWI, Inc. Maybe the original family connections help explain why the parties appear locked in perpetual and mortal combat over what seems to outside observers—including most importantly, the jury—to be of limited economic value. In the Court’s view, both sides would be better served by ending their litigation and re-focusing their competitive energies in the marketplace.”

Evoqua sued Watermark for trademark infringement, false advertising, and copyright infringement (the last of which went out on summary judgment for failure to prove ownership). A jury held that Watermark was liable for trademark infringement, which caused damages of $0, and that the infringement was not willful; it also rejected the false advertising claim.

The parties compete in the de-watering business; they sell equipment such as sludge dryers and filter presses that makes waste easier and less expensive to manage. They also sell replacement parts for used de-watering equipment made and sold by themselves or by other companies.

Evoqua claimed that Watermark infringed Evoqua’s J-Mate trademark by selling sludge dryers named “DryMate” and by using the terms “J-Mate” and “JMate” on Watermark’s website. Evoqua inherited the J-Mate mark but its predecessor Siemens decided to “exit” the market for J-Mate sludge dryers. Evoqua continued this plan and told its sales representatives about it. As a result, Evoqua did not advertise or sell any J-Mate dryers in 2014 or 2015.

Watermark refurbished and sold used J-Mate dryers. Some of its customers complained that they could no longer purchase a new J-Mate dryer, so Watermark decided to develop and sell its own new sludge dryer that was similar to the J-Mate. Since it hadn’t settled on a name, its sales representatives used different names when pitching the dryer to customers; some called it a “DryMark,” others called it a “DryMate,” and others simply referred to it as a sludge dryer. Eventually, they settled on the name DryMate. Watermark received only six orders for new sludge dryer using that name, and in 2016 it changed the name to the “M.W. Watermark Continuous Sludge Dryer,” in response to concerns raised by Evoqua. Only the first dryer shipped to the customer under the DryMate label; the others shipped under the other name. Watermark sold that first dryer at a loss.

Watermark also used the terms “J-Mate” and “JMate” on its website in a few places, such as a blog post comparing the DryMate dryer to the J-Mate dryer. Another page discussing the DryMate dryer was titled, “Is it time to replace your sludge dryer?” and tagged with terms including J-Mate and JMate. Despite the obvious utility to consumers of such references, Watermark removed all references to J-Mate from its website before trial, in response to Evoqua’s concerns.

Watermark also sold replacement parts for Evoqua equipment. That equipment contains parts that are made by third-party manufacturers, such as a filter pump made by Haskel. When Watermark acquired replacement parts from the same third-party manufacturers who supplied the equivalent parts to Evoqua, Watermark sold those parts as “OEM parts” for Evoqua equipment. Evoqua argued that this was literally false and its employees expressed their opinions that, in the de-watering industry, the “OEM” is the manufacturer and seller of the equipment that uses the component parts, even though anyone can buy the same part directly from the third-party manufacturer and then resell it, as Watermark did.  Watermark’s witness testified to the contrary, and Evoqua own website advertised the sale of “OEM parts” for filter presses made by other entities.

The court declined to disturb the trademark infringement holding; the evidence allowed a reasonable jury to go either way. The finding of no willfulness was also reasonable, given that even Evoqua’s own sales reps thought that Evoqua was abandoning the business and directed customers interested in a J-Mate sludge dryer to Watermark. Also, Watermark “had reason to use J-Mate fairly and lawfully. It sold replacement parts for J-Mate dryers, as well as refurbished J-Mate dryers. It also sold a sludge dryer that was similar to the J-Mate dryer. The jury could have reasonably concluded that Watermark intended to use the term J-Mate to fairly describe or compare its own products and services, rather than to confuse customers.” Likewise, given the cost and lead time of a sludge dryer purcase, the jury could reasonably have found that customers were unlikely to be confused.  On the theory that DryMate infringed, the jury could reasonably have found that this was unintentional because Watermark “decided on this name through an informal process at a time when they believed Evoqua was abandoning the dryer business” and avoided any use of the “J-” prefix that is characteristic of Evoqua’s trademarks. Watermark’s discontinuance of its use soon after hearing from Evoqua could also support lack of willfulness.

Likewise, it was reasonable to find no damge. There was no concrete evidence of harm, and the jury wasn’t required to accept self-interested testimony that Watermark’s actions harmed Evoqua’s business and goodwill. For the use of DryMate, the jury could reasonably have found that Evoqua wasn’t entitled to any disgorgement, which was its only damages theory. Evoqua claimed it was entitled to Watermark’s gross revenue for all six dryers, but it was reasonable to limit any disgorgement to Watermark’s profits (or lack thereof) from the sale of the first sludge dryer, because that was the only dryer that shipped to a customer with a DryMate label. Evoqua argued that it should prevail on an initial interest confusion theory, but it presented no evidence of IIC, and the core question is the same anyway, consumer confusion: “A reasonable jury could conclude that customers ordering a sludge dryer would take particular care, and would not be misled about its source after receiving one with Watermark’s label on it.”

The false advertising claim “boiled down to a credibility contest”; the jury’s choice of Watermark’s testimony was reasonable, especially given Evoqua’s own uses of “OEM.”

Evoqua asked for the court to multiply the damages award according to the principles of equity, but three times $0 is still $0, so the statute does not permit enhancement here, even if equity supported an enhancement, which it did not.  

What about a permanent injunction? Though the court quoted old precedent that irreparable injury “ordinarily follows when a likelihood of confusion or possible risk to reputation appears” from trademark infringement, Watermark stopped using the term DryMate in 2016 and removed pages on its website referring to J-Mate. The two-year gap in any questionable conduct diminished the risk of future harm and obviated the need for an injunction to remedy past harm. Evoqua argued that Watermark was a repeat offender; the Watermark did enter into a settlement agreement and consent judgment with a predecessor in 2003, in which it agreed not to use marks containing a “J-” prefix. But that wasn’t the result of a court ruling; here too Watermark stopped the complained-of conduct when Evoqua complained. Thus, the court saw no need for an injunction.

The balance of hardships also disfavored an injunction, insofar as Evoqua sought to impose stringent restrictions on Watermark’s use of Evoqua’s trademarks, even where such use would not be confusing because it fairly describes products sold by Watermark, including replacement parts for the J-Mate dryer and refurbished J-Mate dryers. Likewise, “[t]he public would not be served by a judicial order hindering Watermark’s ability to fairly compete with Evoqua in the marketplace.”

Watermark couldn’t get its fees for the copyright claim. Although Evoqua failed to prove ownership of the copyrights, “its litigating position was not objectively unreasonable.” It acquired some IP from the previous owner of its business, even though it couldn’t show that it acquired the particular assets necessary to bring its copyright claim, a question resolved only after the court asked for further briefing. Nor was Evoqua’s motive “wholly improper.” “By its own admission, Watermark obtained many materials from former Siemens/Evoqua employees, and possessed a trove of manuals for Evoqua products that Watermark copied, rebranded, and sold to its own customers.” Even if Evoqua was in part seeking to squash a smaller competitor, it wasn’t unreasonable to view this particular conduct as a concern: “Even if Watermark is a mosquito to an Evoqua elephant, the elephant is entitled to swat the mosquito when it tries to bite.”

Nor could Watermark get its fees on the false advertising claim; the parties “simply disagreed about the definition of a term that could mean different things in different contexts,” and Evoqua survived summary judgment on the issue. Both sides presented only self-interested witnesses, not objective expert testimony or evidence. Evoqua couldn’t provide evidence of damages, but those aren’t always easy to prove, and so it wasn’t unreasonable to pursue injunctive relief even without concrete evidence of monetary harm.

Nor did Evoqua’s asserted anti-competitive purpose justify a fee shift.  Though Evoqua arguably made overbroad discovery requests, there wasn’t evidence that this meaningfully increased Watermark’s burden; it simply objected and didn’t comply. “There was definitely some evidence at trial suggesting that Evoqua thought that litigation was warranted simply because Evoqua could absorb the costs more easily than Watermark. But even if true, this does not detract from the good faith basis Evoqua had to pursue its claims.”

Rally 'round the difference between valid and merely descriptive: 8th Circuit gives claimants much to ponder

Sturgis Motorcycle Rally, Inc. v. Rushmore Photo & Gifts, Inc., --- F.3d ----, 2018 WL 5726690 2018 WL 5726690, No. 17-1762, No. 17-1869, No. 17-2712, No. 17-2731 (8th Cir. Nov. 2, 2018)

The court says some very interesting things about descriptiveness, the legitimacy of non-trademark claimants' use of descriptive terms for a well-known event, and the standard for finding infringement based only on visual inspection.

“Since 1938, a motorcycle rally has occurred almost every August in and around the City of Sturgis, South Dakota…. In 1986, Tom Monahan, a local artist and vendor, donated a composite mark for the rally to the Sturgis Area Chamber of Commerce, which had recently accepted a central role in promoting the rally ….” Next year, the Chamber began licensing the mark, which included the shape of a circle horizontally bisected by two motorcycles and the word “Sturgis.”  Other elements include the words “Black Hills Motor Classic,” “Rally & Races Black Hills S.D.,” ten stars, the head of a bird of prey in profile, six buffalo walking, and a couple of feathers.  [Nothing exceeds like excess!] The Chamber advertised that products displaying the mark could be called “officially licensed.” The Chamber registered the mark in 1996 and, in the 2000s, acquired two registered word marks from rally vendors: “Sturgis Bike Week” and “Take the Ride to Sturgis.” Vendors have used many names to associate their goods and services with the rally, which itself has been referred to by many names, including just “Sturgis.”  “The Sturgis motorcycle rally is now the largest such rally in the world, bringing several hundred thousand people and many millions of dollars into the region each year.” 

The Chamber’s marks are now licensed by plaintiff SMRI.  Read this description and guess what might happen to SMRI’s most expansive claims: SMRI’s sales pitch is that profits from the licensing support the City; the chamber “used that sales pitch for decades to convince vendors to buy a license to display the Monahan mark on their rally-related goods. Today, however, the licensing program seeks to control virtually all rally-related merchandise, asserting that if a vendor wants to sell an item using the geographic terms ‘Sturgis’ or ‘Black Hills’ in conjunction with the rally, he must first apply for and receive a license from SMRI that will cost him about eight percent of the wholesale price of each item sold.”

Rushmore Photo & Gifts, Inc., a souvenir provider in Rapid City, South Dakota, sold goods related to the rally, including some that it used to advertise were “officially licensed” even though they were not. Many of the products used the word “Sturgis” or the name “Sturgis Motor Classic.” In 2011, after it got a registration for the word mark “Sturgis” for goods and services related to the rally, SMRI sued Rushmore and other defendants.

A jury returned a verdict in favor of SMRI, awarding it $912,500 in damages, but the district court held that SMRI was estopped by laches and acquiescence from recovering damages from the remaining defendants. It also entered a permanent injunction and awarded SMRI costs, but not fees.

SMRI argued that Rushmore’s prior licensing of the Monahan mark from the Chamber should estop it from challenging the validity of the marks. But Rushmore licensed only the Monahan mark, not the terms whose validity as marks it challenged. The license’s preamble claimed rights in “the protected language ‘Black Hills Motor Classic’, ‘Sturgis Rally & Races’ and ‘Black Hills Motorcycle Rally & Races.’” But estoppel at most covers only the mark that the licensee has agreed “to use,” and even then the assumption that licensing recognizes validity is “problematic because there are many reasons someone might seek to license a property the validity of which he doubts: It may, for example, be more economically efficient to agree to a license in the short term than to litigate the mark’s validity immediately.” (Citing Campbell v. Acuff-Rose.) “It would be antithetical in any event to the pro-competitive purposes of trademark law to allow a licensor to lay claim to marks that its licensees have not used by inserting superfluous language into its licensing agreements.”

The jury found that the defendants as a whole infringed five of SMRI’s marks: its federally registered “Sturgis” and “Sturgis Bike Week” word marks, its federally registered Monahan mark, and its unregistered “Sturgis Motorcycle Rally” and “Sturgis Rally & Races” marks.  The Sturgis mark was registered under §2(f), which operated as a concession that the mark wasn’t inherently distinctive; nor was the registration incontestable.  The registration provided a rebuttable presumption of validity, but not as against a purported infringer who started to infringe before the registration date (2011); here infringement was alleged at least as early as 2006.  The court of appeals thus found that there was insufficient evidence to allow a reasonable jury to find that the Sturgis mark was valid.

SMRI did not present any direct evidence of secondary meaning such as consumer testimony and surveys. SMRI argued that it and the Chamber had used the mark in relation to the rally since 1987; and that consumers associate the mark with the rally, which the Chamber “hosted.” Many of the historical uses to which SMRI pointed “cannot reasonably be viewed as uses of the word as its mark.” SMRI presumed that any use of the word “Sturgis” to refer to either the rally or the City of Sturgis was use as a mark. “But if the word was being used descriptively (e.g., to refer to ‘Sturgis’ the city or ‘Sturgis’ the rally), it was not being used primarily to identify a specific source of rally-related products and services.” SMRI’s own testimony was that it wasn’t until around 2000 that the Chamber decided that Sturgis was the “magic” word behind all its marks.  Given that fact, “we do not see how the jury could reasonably infer from any earlier uses of the word ‘Sturgis’ that consumers had started to associate it with one of the many sources of ‘Sturgis’ goods and services existing at the time.”

SMRI pointed to use of the word “Sturgis” in its other marks, including the Monahan and “Sturgis Bike Week” marks. But that was apparently a descriptive component of those marks, referring to either the rally or the city, not Sturgis the brand, and SMRI didn’t explain why consumers would “view those uses of the word inside of another mark as a distinct mark.”

Nor could SMRI tack all uses of “Sturgis” on rally-related goods or services by someone who subsequently became its licensee, as it tried to do. For example, one vendor made yearly patches using “Sturgis” and the date on his souvenirs since the late 1970s, but he didn’t take a license until 2001. That license didn’t retroactively turn all of his pre-2001 uses into (1) uses as a mark or (2) uses as SMRI’s mark. “The very fact that McNenny had independently used the word ‘Sturgis’ on his own rally-related goods for decades indicates that consumers had no reason to think that the word’s presence on such goods indicated that they all came from a single source.” Indeed, that vendor’s reasons for taking a license for “Sturgis” showed why the jury couldn’t infer validity from licensing. Like other vendors, including the primary licensee, he said they were licensees “because they like giving back to their community and selling customers on the idea that their purchases also give back to it.  But in that case, “the jury had no basis to infer from their licenses and sales that consumers associate SMRI’s marks with a single source of rally-related goods and services.”

Though the Chamber’s then-president submitted an affidavit in 2001 claiming “continuous and substantially exclusive” use of the mark “in connection with the marketing and promotion of the Rally since ... July 1, 1987,” the evidence showed that he “purposely and categorically excluded from his assessment relevant third-party uses of the mark” by defining only Chamber-approved uses as uses in connection with the rally. This logic “was so incoherent and self-serving that no reasonable jury could accept it. If there were two shirts that said ‘Sturgis 2000,’ but only one of them was produced through the Chamber, there were still two rally-related shirts displaying the word ‘Sturgis.’”  Whether the unaffiliated product was using “Sturgis” as a mark or descriptively, either way it prevented the Chamber/SMRI from claiming substantially exclusive use.

Since the jury could not reasonably have found that the Chamber/SMRI were substantially exclusive users of the “Sturgis” mark for the rally or rally-related products and services, there was no way the jury could have found that the mark had “become so associated in the public mind with [the Chamber’s and SMRI’s] goods that the mark serves to identify the source of the goods and to distinguish them from those of others.” Without evidence of the effect on consumers, the jury could not have found secondary meaning on this record.

Nor was “Sturgis” distinctive because consumers associate it with the rally. “Everyone could know of the rally as ‘Sturgis’ and find that the City is now synonymous with the rally without also associating the word ‘Sturgis’ with only one of the many sources of rally-related products and services.”  [This is one of the points we made in our Honey Badger amicus, too.  The Statue of Liberty is famous; it’s not famous as a mark for something else.] Indeed, even if the record had showed that SMRI had a valid service mark for the word “Sturgis” in relation to the organizing and conducting of the rally (which it did not), it would still have needed to show that the word operated as its mark in other contexts. Owners of a mark “have no right in gross.”   

As a result, the court reversed the jury’s finding of dilution of the “Sturgis” mark and vacated its holding that the defendants engaged in cybersquatting; this claim was submitted to the jury based in part on the theory that “Sturgis” was a valid mark.

What about the unregistered marks “Sturgis Motorcycle Rally” and “Sturgis Rally & Races”? They had the same problems of proof of validity. The evidence indicated that these were names used to describe the rally in the 70s, but that weighed against validity as marks. “Evidence indicating that one of the marks had acquired secondary meaning does not necessarily show that any other mark had acquired it as well.” The ads in the record “rarely use the words in the unregistered marks as a mark. They instead use ‘Sturgis Motorcycle Rally’ mostly to refer to the rally itself and only use ‘Rally & Races’ as part of the Monahan mark, the federal registration for which disclaims the exclusive right to use ‘Motor Classic’ or ‘Rally & Races.’” Most of the products in the record likewise didn’t use the purported marks as standalone marks, but rather as part of a more elaborate name or mark. The jury could not reasonably infer from such uses “that consumers had latched onto those words and now associate them primarily with a specific source of rally-related goods and services.”  Nor was there any direct evidence of consumer perception, and without that, the fact that these terms were common names for the rally itself precluded protection. “If consumers view SMRI’s marks simply as indicating ‘an association with’ the rally, then they are not viewing them as identifying a specific ‘brand’ of rally-related things and thus are not viewing them as a mark.” [This is an example of “association” which is not trademark association—again the Statue of Liberty provides a good example for most goods and services.]

At some point, SMRI/the Chamber used “Sturgis Motorcycle Rally” and “Sturgis Rally & Races” on hangtags with ownership claims. At some point, the Chamber also distributed shopping bags to vendors that told consumers to “Look for the Tag!” But the evidence about the scope of these programs was minimal, and didn’t indicate any effect on actual consumer perceptions.

Then, the court turned to SMRI’s six federal registrations for “Sturgis Bike Week,” none of which were registered under 2(f); SMRI was thus entitled to a presumption that the mark was valid even if the alleged infringement began before the mark’s date of registration.  That seems weird and the defendants contested it, but the registrations “constituted prima facie evidence of the mark’s validity” and the evidence that “Sturgis Bike Week” was a common name for the rally was not overwhelming. The evidence supported a finding that the first registrant used the phrase as a mark for t-shirts for decades and ultimately assigned it to SMRI. Nor did the defendants prove genericity so strongly that no reasonable jury could refuse to accept that conclusion; at most they showed descriptiveness.

The defendants accepted the validity of the Monahan composite mark, but challenged the sufficiency of the evidence of infringement/counterfeiting. It was certainly not the case that any uses of “Sturgis,” “Sturgis Rally,” or “Sturgis Motor Classic” on a product could reasonably have been found to infringe. The dominance of “Sturgis” in the marks/terms didn’t make them all similar, especially given the descriptiveness of the word for the rally. Only one product that did more was identified: a shot glass with the words “Genuine Article-Accept No Substitutes” on the top, with “Quality” below on the far left and “Brand” on the far right. In the middle was a broad horseshoe on which “Sturgis Motor Classic™” is written in an arc. “Within the horseshoe is a bird of prey facing right in three-quarter view in front of a billowing U.S. flag on which ten stars can be seen. Under the bird and the flag, right between the horseshoe’s heels, is a motorcycle. A feather-shaped leaf rises next to each heel.” “1938” was under the motorcycle, and then “South Dakota.” The bottom left said “Founder ‘Pappy’ Hoel,” and on its bottom right, “Oldest & The Biggest.”

In some cases, “visual inspection, without any corroboration from consumer surveys or examples of actual confusion,” can prove likelihood of confusion: “If, for example, the purportedly infringing mark appears confusing or deceptive on its face, and relevant consumers do not bring to their purchasing decisions atypical or specialized knowledge, a visual inspection might represent a bare-bones way of proving likely confusion. Otherwise, it would appear beyond the ken of a jury to deduce from a visual examination that has not been informed by direct evidence of consumer associations that a challenged use would likely confuse or deceive the ordinary, prudent consumer” (emphasis added).

Nonetheless, the jury found not just infringement, but willful and intentional infringement. The definition used by the jury for “willful” required “the conscious intent to benefit from the goodwill or reputation of SMRI’s trademark.” This would also necessarily be intentional. And the evidence supported the finding that the defendants’ infringement of the composite mark on the shot glass was willful and intentional. The Monahan mark was widely used in connection with the rally since the mid-1980s and some consider it, whether rightly or wrongly, the “official” logo of the rally; Rushmore knew about the mark, as evidenced by its 1999 license to use the mark for a year on postcards. “The many similarities between the dominant design on the shot glass and the longstanding Monahan mark also provided the jury with a reason to conclude that Rushmore had consciously intended its glass to benefit from the goodwill that consumers may associate with the Chamber’s and now SMRI’s civic-minded mission statements.” Along with the image similarities, the use of the words “Genuine Article-Accept No Substitutes” allowed the jury to infer that Rushmore consciously intended consumers to confuse the dominant design on the glass with the closely similar “official” Monahan mark.

Was this also counterfeiting? “A counterfeit is thus far more similar to the registered mark than a mark that barely infringes it, and so an infringing mark is not necessarily also a counterfeit.” The shotglass was the only item infringing the Monahan mark, and (this will warm Mark McKenna’s heart) nothing on it “could be reasonably viewed as substantially indistinguishable from the Monahan mark.” The words on top were different, in different fonts, and the images showed different animals in different configurations. The differences were too obvious to allow the jury to find counterfeiting.

The court turned to the related claims for deceptive trade practices, false advertising, and unfair competition. South Dakota allowed SMRI to recover only actual damages suffered as a result of deceptive acts and practices. The record clearly supported a finding of such actual damages, because rom around 2006 to 2011 Rushmore advertised that its rally-related goods were “Officially Licensed Sturgis,” and there was evidence that Rushmore put that slogan on its products’ hangtags alongside the phrase, “Look For The Tag!,” mimicking the Chamber’s ad campaign. Rushmore’s co-owner admitted that their goods were neither official nor licensed, and that no one other than SMRI and Rushmore had designated its rally-related products as officially licensed. At least one person was misled: the manager of the apparel department at a local Wal-Mart called SMRI’s licensing agent to ask whether Rushmore’s products were actually “official Sturgis Motorcycle Rally products.” That was the first year that the record showed Wal-Mart carrying Rushmore products, and the jury could have inferred that SMRI lost those sales to Rushmore.

Nor did the invalidity of most of the marks above matter to this conclusion, which didn’t depend on the validity of the marks.

However, after the jury’s verdict, the district court ruled on defendants’ equitable defenses, finding that SMRI was estopped by laches and by its acquiescence from recovering damages. SMRI argued that it had a Seventh Amendment right to have a jury decide those defenses, but it didn’t.  SMRI also argued that the jury’s finding of willful infringement constituted unclean hands, precluding equitable relief.  To bind the court’s equity powers, a jury’s findings have to be on a common issue; otherwise the findings are merely advisory.  But willfulness “is a multifarious concept like causation or intent: The definition of willfulness that the district court gave the jury was only one of the many that courts have used.” The equitable and statutory definitions of willfulness can vary even though they use the same word.  The district court found that the defendants used “Sturgis” in the good faith belief that SMRI’s “Sturgis” word mark was invalid. This isn’t necessarily in conflict with the jury’s finding that the defendants’ use of the word was willful in the sense that they had acted with “the conscious intent to benefit from the goodwill or reputation” associated with that word. “A defendant … can intend to benefit from the goodwill associated with a word—'Sturgis,’ for example, as a fun and memorable motorcycle rally—without intending to infringe a valid mark based on the word.” Thus, some courts have held that, when a party “uses an intellectual property in the face of disputed title,” the party’s use of it, if in good faith, does not constitute “willful infringement.”

Anyway, even if willfulness was a common issue, the district court’s findings still might not have conflicted with the jury’s finding of willful infringement of the Monahan mark and the “Sturgis Bike Week” mark. First, the district court still has discretion over the application of the unclean hands doctrine. For unclean hands, it “might not be sufficient that the wrongdoing was willful if it was not also substantial to an appropriate degree…. Equity demands flexibility and eschews mechanical rules.”  Second, though the district court largely denied defendants’ motion for judgment as a matter of law, it later held that SMRI did not carry “its burden of proving that [defendants] subjectively and knowingly intended to use [their marks] for purpose of deriving benefit from [SMRI’s] goodwill,” which might be a finding about the record.  Though the record supported the jury’s finding that the defendants willfully infringed the Monahan mark, the court of appeals didn’t opine on “Sturgis Bike Week.”

Remand was appropriate here, however, because the district court’s order granting the equitable defenses relied in part on its findings that Rushmore had sold rally-related products bearing the word “Sturgis” to both the Chamber and its agents, so they knew about the conduct at issue. But since rally-related products using the word “Sturgis” were not infringing (even though SMRI argued that they were), it was no longer clear whether acquiescence and laches would apply. On remand, if the district court still thought so, it should clearly say which claims were covered (not just the Lanham Act claims) and why.

The injunctive relief would also have to be revisited.  SMRI wanted the defendants enjoined from selling anything that uses the word “Sturgis,” “including presumably a state map,” but that’s not going to happen. Instead, a revised order would have to account for the invalidations above. 

Quite a specimen: trademark-filing firms' legal battle continues, in part

LegalForce RAPC Worldwide P.C. v. Trademark Engine LLC, 2018 WL 5734621, No. 17-cv-07303-MMC (N.D. Cal. Oct. 31, 2018)

RAPC, a law firm, alleged that its competitor TME “operates website TrademarkEngine.com to advertise, promote and provide trademark related services” and used false or misleading statements in Google ads and on its website, as well as engaging in the unauthorized practice of law, in violation of the Lanham Act and Cal. Bus. & Prof. Code § 17200 et seq.

Two TME ads allegedly contained the word “professional,” which allegedly was a misrepresentation that TME’s services were “lawful”; TME allegedly violated customers’ privacy rights, submitted fraudulent specimens to the PTO, and engaged in the unauthorized practice of law.  One ad, displayed in response to a search for “trademark filing,” said “Let the Professionals File Your Trademark Today!” while the website touted “Professional Preparation of your federal trademark application.” The court found that this was puffery, without specific actionable representations.

RAPC also alleged that TME misdescribed its “Identity Protection Program.” TME’s website stated that when a trademark applicant submits an application directly to the USPTO, the applicant’s “email and phone number will be available for all to see,” including “[s]pammers, solicitors and anyone else,” but that, for a monthly fee of $5, TME would provide its email and phone number to the USPTO. TME argued that RAPC hadn’t shown injury from these statements, but where there’s direct competition, “a misrepresentation will give rise to a presumed commercial injury that is sufficient to establish standing.” RAPC also pled falsity by alleging that, “regardless of whether a customer purchased the $5/month privacy protection program or not, [TME] always lists each of its customer’s contact information, including emails and phone numbers, on [the] USPTO’s trademark application forms” and that such customer information is “publically [sic] available on [the] USPTO’s website.” RAPC also sufficiently pled proximate cause by alleging it “lost customers” to TME and that its “market share” has “decline[d]” from “nearly 2.4%” to “approximately 1.8%,” and that it had to reduce its prices from “$499 to $199 and sometimes lower to match the unfair competition of [TME].” This was enough at the pleading stage.

§ 17200 prohibits any “unlawful, unfair or fraudulent business act or practice.” RAPC alleged four kinds of practices. First, violation of the right to privacy set forth in the California Constitution by “(1) waiving clients’ rights to cancel the filing or refund the government fee; (2) waiving clients’ rights to privacy by allowing their names, phone numbers, emails and street addresses to be published publicly; and (3) permitting [the] USPTO to make clients’ information available for public search on [the] USPTO’s online databases and other databases.”  But RAPC failed to allege facts to support the requisite finding that it lost money or property as a result of any of TME’s clients having been deprived of their right of privacy. Nor did RAPC allege a legally protected privacy interest in a client’s “right to cancel the filing or refund the government fee” or “an egregious breach of social norms” in disseminating information to the PTO.

Submission of fraudulent specimens to the PTO: Though “knowingly and willfully” submitting a fraudulent specimen violates the law, RAPC didn’t allege facts sufficient to support a finding of such intent.  

Unauthorized practice of law: A law firm plaintiff has standing to contest this conduct if the firm “suffered losses in revenue and asset value and was required to pay increased advertising costs specifically because of the [allegedly unauthorized practice].” RAPC properly alleged these losses and their causation, and the facts alleged, if proven, were sufficient to support a finding that TME engaged in unauthorized practice of law under California and Texas law.

Violation of PTO regulations for “practitioners”: RAPC alleged violations of various PTO rules, but the complaint didn’t allege facts to support a finding that the individual defendant, Crabtree, did so.

RAPC also alleged “unfair” and “unlawful” business practices from the submission of fraudulent specimens and the unauthorized practice of law. For competitor-plaintiffs, “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, or otherwise significantly threatens or harms competition.” The allegedly unlawful acts here didn’t qualify.

RAPC was entitled to seek injunctive relief for its remaining § 17200 claims, but not restitution—it never had an ownership interest in defendants’ allegedly wrongfully acquired money.

Post-parmesan: 100% grated parmesan still doesn't have to be 100% grated parmesan, court reiterates

In re 100% Grated Parmesan Cheese Marketing & Sales Practices Litig., 2018 WL 5717799 No. 16 C 5802, MDL 2705 (N.D. Ill. Nov. 1, 2018)

On an amended complaint, the court again dismisses the claims that a cheese product whose label touts it as “100% Grated Parmesan Cheese” isn’t false or misleading because, on shelf-stable products, the courtis of the opinion that a reasonable consumer shouldn’t have believed that name, even though plaintiffs this time around pled a survey, conducted in connection with this litigation, purporting to find that more than 85-90% of consumers stated that they believed that the products “are 100% cheese and fully grated.” Two expert reports by linguistics professors also opined that the phrase “100% Grated Parmesan Cheese” is “linguistically subject to only one plausible interpretation … that the Product contains nothing other than grated parmesan cheese.” Plaintiffs also cited a Kraft patent stating that fully cured parmesan cheese “keeps almost indefinitely.”  But the court disagreed, because of its greater understanding of reasonable consumers and exactly what they know about shelf-stable products (and what’s in that set of products).

Argh.  These aren’t cheese crackers or other cheesy products where a reasonable consumer would immediately understand a reference to an ingredient; they’re sold as cheese with which to top something else.  Not only is a consumer who reads that label as meaning “this is 100% cheese” incredibly reasonable, the court’s willingness to dismiss specifically pled facts worsens its prior decision by not allowing the plaintiff to resolve the so-called “ambiguity” of the label with further information, even though to date the idea of “ambiguity” has allowed plaintiffs to add more facts. Heads, the defendant wins; tails, the plaintiff loses.

Anyhow, the accused products with “100% Grated Parmesan Cheese” and similar labels in fact contained cellulose and other non-cheese ingredients. With the exception of Publix, the ingredient lists say that the cellulose was added to prevent caking, when in fact it also allegedly acted as filler. Some of the filler claims got a bit further, but not far.

Because “100% Grated Parmesan Cheese” was ambiguous, the ingredient label would dispel any confusion.  How do we know that ambiguity plus a back-panel label avoids deception?  It appears to be a rule of law, not a rule of fact.  And the court reiterated its conclusion that “ ‘100% Grated Parmesan Cheese’ … also might be an assertion that 100% of the cheese is parmesan cheese, or that the parmesan cheese is 100% grated.” The linguistics experts didn’t help because a reasonable consumer “does not approach or interpret language in the manner of a linguistics professor.” Instead, she apparently approaches language as a federal judge.  More seriously, this reasoning seems to misapprehend a big chunk of the profession of linguistics—the court cites a case holding that a “reasonable consumer need not be exceptionally acute and sophisticated,” and that “the reasonable consumer test focuses on the perspective of ordinary minds,” and this is true, but descriptive linguistics studies exactly how ordinary people interpret ordinary language, and if the experts are opining about that then they are opining about precisely the relevant question.

Still, the reports didn’t specify that they examined the phrase in the context of shelf-stable, unrefrigerated containers of cheese, which makes their opinions valueless. How do we know the context is so significant?  The court does, no matter what facts are pled, because reasonable consumers are “well aware that pure dairy products spoil, grow blue, green, or black fuzz, or otherwise become inedible if left unrefrigerated for an extended period of time.”  [Consider a pleading that reasonable consumers do not have strong ideas about the boundaries of shelf-stability for cheese even if they do for milk, and that reasonable consumers take their cues from labels.  Would that be implausible under Twiqbal?  I don’t see how it could be.  Brady v. Bayer Corp. has by far the better take: consumers should be able to rely on the name of a product from a reputable company, and they are likely to presume that the company understands the relevant technologies far better than they do; if the company presents a low-moisture cheese in a can, they can presume that it knew how to do that.]

The surveys were also irrelevant because a court, on its own, may “determine as a matter of law” that “an allegedly deceptive advertisement would not have misled a reasonable consumer.” [In a Lanham Act case, this wouldn't be true for an ambiguous representation--I'm not a fan of mashing up the two kinds of law, but I would prefer the rule that survey evidence is never required but often relevant for both bodies of law.] Also, because not every single survey respondent thought the product was 100% cheese, that proved ambiguity.  [I have some bad news about surveys and, in particular, survey respondents, for the court, though perhaps surveys’ inability to get 100% correct responses to any question would be good news to the court.]

As for the patent, there was no reason it would be familiar to a reasonable consumer “with an ordinary understanding of how dairy products generally fare when unrefrigerated.” Anyway, the patent necessarily implied that pure grated parmesan will not keep indefinitely if left unrefrigerated. [By the way, canned products don’t keep indefinitely either. The court’s certainty about consumer expectations shows one of the weaknesses of Twiqbal, especially with contrary evidence pled.] Thus, the court remained convinced that a reasonable consumer would not presume that a shelf-stable dairy product was 100% cheese or would disregard the “well-known fact[ ] of life” that pure dairy products spoil if left unrefrigerated.

The filler claims: Allegedly, grated parmesan “usually available in the marketplace” is cured and dried in such a way that there is “little problem of clumping or agglomeration,” so there is little need to ensure that grated parmesan does not clump or “cake.” The anticaking statement on the ingredients list was allegedly false or misleading because the products contain more cellulose than necessary to accomplish this “anticaking” purpose, and instead serve as cheaper filler. However, the Target/ICCO defendants got out of the claim because there wasn’t any allegation of how much cellulose was in the product, and thus plaintiffs couldn’t plausibly allege it was excessive.  Other percentages alleged for other defendants were 3.8% (Kraft), 8.8% (Albertsons/SuperValu), 7.8% (Wal-Mart/ICCO).

However, though falsity was pled, causation wasn’t, because plaintiffs alleged that they bought the products believing them to be “100% Grated Parmesan Cheese,” meaning that they didn’t consult or rely on the ingredient list [because they saw no need to do so given what they thought they were buying].  Thus the state law consumer protection claims all failed as to the anticaking misrepresentation.

Express warranty: certifying multistate or nationwide classes of this type is not categorically prohibited, though Connecticut and Michigan require privity (which didn’t exist with the manufacturer). New York requires reliance, which (as above) was missing.  Some implied warranty claims also survived, as did some unjust enrichment claims, all based on the anticaking part. 

Tactical question: drop the remaining claims and appeal, or continue to fight?

Roca Labs' weight loss claims are losers, and its gag clause fares no better

FTC v. Roca Labs, Inc., 2018 WL 5629875, No. 15-cv-2231-T-35TBM (M.D. Fla. Sept. 14, 2018)

The FTC sued Roca for its advertising and sale of weight-loss products and the use of contractual provisions barring purchasers from providing negative commentary, bringing in at least $20 million since 2010. Among other things, defendants used “Gastric Bypass No Surgery” or “Gastric Bypass alternative” and claimed that the products were safe for children as young as six years old. They described the forumula as “a medical innovation that creates a natural gastric bypass effect in the stomach.”  In the fine print, they stated that “[n]o clinical study has been performed on this product” but the main copy touted scientific proof, along with testimonials and third-party reviews. The testimonials were paid, but Roca didn’t disclose this. They, or someone working on their behalf, also posted testimonials etc. on third-party websites without disclosure. Nor did they disclose that they ran Gastricbypass.me, a website that discusses bariatric surgery and features a “Surgical Alternatives” page devoted to positive commentary on Roca Labs products and which sold the products.

Although they didn’t actually get insurer reimbursement, they advertised that the basic package cost $480 with “valid health insurance” or $640 without. Purchasers had to submit answers to a “Questionnaire” or “Health Application,” which included questions about psychological or emotional issues relating to weight, past weight-loss failures, depression, and binge eating.  Purchasers got a “Summary” document that stated the customers’ information would not be shared with anyone and a document warning that those who cancel or dispute installment payments may face legal action and $3,500 in charges. Roca also included a non-disparagement clause that prohibited customers from publishing disparaging comments about Roca Labs products, claiming that (at a minimum) the purchaser agreed to pay the full price of the product, $1,580, if the purchaser breached the gag clause; at some times the gag clause demanded $100,000 for talking “badly about the Formula,” while other versions demanded $3,500 and claimed that Roca could force purchasers to sign a notarized affidavit stating that the disparaging remarks were incorrect.

The FTC sued over all these things, including in its theories that the promise of confidentiality was false, and that the statement that purchasers agreed to pay the difference between the “full price” and the purported “discount” price if they post negative comments or reviews was a deceptive claim about the price.  It prevailed.

The court granted summary judgment on the falsity/lack of substantiation of weight loss claims.  Such express claims, “which significantly involve health, are inherently material.” The websites etc. “intentionally contained medical images and terminology to bolster the credibility of Defendants’ claims and induce customers to believe that the claims were scientifically validated by the medical community.” And Roca lacked a reasonable basis for the claims because they weren’t supported by competent and reliable scientific evidence. The FTC’s expert, an expert in obesity treatment and weight loss, additionally opined that no competent and reliable scientific evidence for the claims existed: “experts in the field of obesity treatment and weight loss would require well-designed and properly conducted clinical trials.” A valid trial should be double-blind and placebo-controlled; it would have at least eighty participants and last at least three months; and it would test the substance, not the individual ingredients, because it is well established in the scientific community that the efficacy of individual ingredients is insufficient to establish the efficacy of those ingredients combined.

Roca argued that a randomized controlled test isn’t required to provide competent and reliable scientific evidence, citing a case that found that Bayer didn’t violate a consent decree by failing to provide a RCT for different claims. This wasn’t a consent decree, which requires violation by clear and convincing evidence.  “[T]he absence of the RCT is just one piece of evidence demonstrating the lack of competent and reliable evidence of the truth of the claims or their reasonableness.” The Center for Applied Health Sciences ran a clinical trial on the Roca products: seventeen adults used the products for twenty-eight days, and didn’t lose weight, though there was a “slight but statistically insignificant ‘trend’ that active users reported feeling less hungry three hours after taking the product.” The FTC’s expert found the trial design flawed, and opined that the scientific articles on dietary fibers relied on by Roca didn’t support Roca’s claims.  Roca’s witness, a board-certified surgeon, wasn’t shown to be a relevant professional or expert in the field of obesity treatment and weight loss.

Roca’s establishment claim that their products were scientifically proven to have a ninety-percent success rate in forcing users to eat half their usual food intake and cause substantial weight loss was also false. They provided no evidence supporting this claim, which was therefore false.

Roca’s failure to disclose its relationship to Gastricbypass.me and the paid testimonials also violated the FTCA. “Material misrepresentations or omissions on which a consumer would likely rely to decide whether to make a purchase constitute deceptive advertising.” One of Roca’s principals testified that he created Gastricbypass.me to “educate and scare people about” gastric bypass surgery, but he did not see any value in letting consumers know “[h]ey we are Roca Labs.” Purportedly satisfied customers depicted in the videos posted on RocaLabs.com were actually Roca employees, one of whom testified that she was directed to post positive comments monthly on Facebook. The defendants directed their employees to create fictitious reviews. Roca argued that “Roxie’s” testimony was valid because she lost weight before being hired by Roca, though her video was recorded afterwards. That missed the point: Rcoa failed to disclose the financial relationship with Roxie and others who gave testimonials.

The financial relationship with the testimonial-givers and ownership of Gastricbypass.me was material because they were deliberately used to entice prospective buyers and because they involved health matters, weight loss claims, and other information important to the consumer in deciding whether to purchase the products.

Likewise, the false representation of confidentiality for private health information violated the FTCA.  An express privacy promise is presumptively material.  Despite the promise, defendants published customers’ sensitive details and disclosed their personal information to payment processors in response to disputes. Roca argued that the information was necessary to disclose to resolve the disputes, and pointed to 2014 terms & conditions stating: “Your information will not be shared or sold for as long as you do not breach the Terms and we will have to use the information provided.” There was no evidence that  revealing this information was necessary to respond to disputes, and the terms and conditions postdated the purchases of some consumers who had their information revealed [also, not that it’s needed, fine print can’t take back express representations in the purchase process].

The “discount” claim also succeeded. Roca didn’t dispute its materiality, but argued that its statements weren’t deceptive because customers agreed to the discount and its requirements.  Defendants argued that customers were provided sufficient notice in the Terms and Conditions prior to purchase as well as in the documents being shipped.

Nope. First, Roca created an overall net impression that the price of the product was $480 without reference to a discount or any concessions as to publishing negative comments, including using that number in ads on Google, Bing, and Facebook touting “GASTRIC BYPASS NO SURGERY $480.”

Second, the Terms and Conditions did not dispel the net impression. “Although the Terms and Conditions were disclosed on a hyperlinked page, it was unlikely that consumers would have noticed or clicked on the link.”  Although they were required to check a box next to the statement “I have checked and do not have any medical reason that can prevent me from suing the Roca Labs Gastric Bypass Alternative procedures and I have read and agree to the terms, privacy and money back reward / return policy,” they were not actually required to read the T&C, and even if they did, the disclaimer about the discounted price and non-disparagement clause was “inconspicuous and buried among legal, contractual language.”

This misrepresentation was material and deceptive

because it is an express claim that involves important information to customers: the price of the product and limitations on what customers could say about the products or Defendants. A customer would likely be misled to believe that he or she had the option to purchase the product at “full” price and maintain the ability to post negative but truthful comments. Customers also would likely to be misled to believe that they had actually agreed to refrain from posting negative comments, when they had not agreed to do so, by paying the purportedly discounted price.

Relatedly, the gag clause practices were unfair. Roca argued that the clause wasn’t illegal and that they lacked fair notice that the FTC would interpret their practices as unfair. Although Roca cited a lot of cases about the enforceability of online “clickwrap” contracts, the enforceability of the contract wasn’t at issue. An act or practice is unfair if it “causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not out weighed by countervailing benefits to consumers or to competition.” The FTC presented evidence that restricting the flow of information, specifically truthful negative reviews, causes or is likely to cause substantial injury to consumers and to the marketplace. Indeed, one of Roca’s principals testified that he paid a company $40,000 to “make the false comments not show up up front” because false comments “create the wrong impression” and hurt Defendants’ sales by at least $40,000. Likewise, Roca’s threats to sue and filing of lawsuits caused or was likely to cause substantial injury. Roca threatened legal action against customers who complained or said they would complain to the Better Business Bureau or who said they had plans to post negative comments online.

Roca argued that there was no evidence of tangible harm, but the FTC is not required to provide such evidence. Though the legislative history says “Emotional impact and more subjective types of harm alone are not intended to make an injury unfair,” that doesn’t impose a requirement of proof of “tangible” harm; “the FTC Act contemplates the possibility that conduct can be unfair before actual injury occurs.” The court found these practices caused or were likely to cause substantial injury to consumers. “The record demonstrates that some consumers paid hundreds of dollars for the Roca Labs products and unsuccessfully sought refunds because of Defendants’ practice of issuing threats under the guise of enforcing the gag clause.”

Nor was this problem reasonably avoidable by consumers because prospective customers who searched for information about Roca Labs products would be prohibited from making an informed choice. Roca argued that consumers could have reasonably avoided injury by reading the gag clause or using another weight loss program, but that missed the point. The FTC argued that defendants’ gag clause practices were unfair, not the gag clause itself, and there was no way prospective customers could reasonably avoid a dearth of negative reviews, “which the Defendants assiduously prevented from being available.”

Nor were there countervailing benefits to competition or consumers that outweighs the injury caused or likely to be caused; Roca offered no evidence but asserted that there should be a cost-benefit calculation and that consumers benefited from the products by losing weight, increasing their confidence, and taking steps toward a healthier lifestyle. Roca’s claims of benefits ignored the question of whether the gag clause practices had any benefits, and no quantitative cost-benefit analysis is required by the law.

Roca argued that it had no fair notice of the FTC’s claim.  The fair notice doctrine prevents “deference [to the regulator] from validating the application of a regulation that fails to give fair warning of the conduct it prohibits or requires.” But this only applies in limited circumstances not present here.  Roca again whined that the harm it caused was “intangible” and it couldn’t have anticipated that this was unfair.  [By the way, what’s “intangible” about the suppression of reviews and the failure to pursue a refund for fear of being sued?  The former is tangible: it clearly changes the information actually available to consumers. The latter is also not just tangible but monetary.] The FTC’s policy statement distinguishes “trivial or merely speculative harms” from substantial injury, but also clarifies that an “injury may be sufficiently substantial … if it does a small harm to a large number of people, or if it raises a significant risk of concrete harm.” Nothing there excluded intangible injury, and there was no evidence that the FTC abruptly changed course in its enforcement guidelines or in its statutory provisions.

The court granted a permanent injunction. Roca’s principal testified that he has moved away from using the Roca Labs brand and is now using “gastric.care,” but “[t]he formula is the same formula.” He also told his Facebook boot camp customers: “I’m allowed to tell you anything I want; to do anything I want with you that would lead you to a healthy weight ...” and that he will show the customers “any images I want. I will do anything I want for them for as long as I lead them to achieve a healthy weight.” Given Roca’s extended history of deceptive and unfair practices and continued promotion of their products and comparisons to gastric bypass surgery, there was a cognizable danger of recurrent violation.

The FTC was also entitled to monetary relief under Section 13(b) for consumer redress, including disgorgement in the amount of net revenue (gross receipts minus refunds). Roca wanted to use the number of BBB complaints based on ineffectiveness, multiplied by 25 to account for customers who didn’t complain to the BBB.  The proper measure of disgorgement is unjust gain, not consumer loss, and the appropriate measure for unjust gains is net revenue. FTC has provided sufficient evidence as to the amount of gross sales revenues, which totaled $26.6 million during the relevant time period, but there was not enough evidence about refunds, so the record needed to be supplemented. Key principals were also individually liable: they knew of the deceptive acts and either participated directly in or had authority or control over the acts.