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

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

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

To prevail on a defense of unclean hands, a defendant must demonstrate by clear and convincing evidence: (1) “that the plaintiff’s conduct is inequitable;” and (2) “that the conduct relates to the subject matter of [the plaintiff’s] claims.” Even in such cases, unclean hands isn’t automatically a defense; the plaintiff’s wrongdoing must be balanced against the defendant’s, considering the substance of the plaintiff’s rights.

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

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

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

TM/False advertising issue of the day

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

search results labeled as results aren't confusing

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

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

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

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

Dr. Pepper gets an upset tummy: Court approves conjoint analysis/price premium model in ginger ale class action

Fitzhenry-Russell v. Dr. Pepper Snapple Group, Inc., 2018 WL 3126385, No. 17-cv-00564 (N.D. Cal. Jun. 26, 2018) (magistrate judge)

Canada Dry Ginger Ale allegedly deceived consumers with the phrase “Made From Real Ginger” when, in fact, Canada Dry does not contain the type of, or amount of, ginger consumers would expect (ginger root). Instead, Canada Dry contains a ginger derivative, ginger oleoresin. Plaintiffs alleged that Dr. Pepper was wrongfully able to charge a 4% price premium on Canada Dry as a result. The court certified a class and rejected challenges to plaintiffs’ expert declarations in support of class certification on the usual California claims.

Plaintiffs’ survey expert, Dr. Dennis, looked at consumer understanding of “Made from Real Ginger” and materiality/price premiums. Respondents were asked “what is your understanding of the statement ‘Made From Real Ginger’ on the Canada Dry Ginger Ale?” and provided options:

[1.] Ginger oil, which is extracted from the ginger root using steam

[2.] Ginger root, which is part of the ginger plant, not an extract

[3.] Ginger oleoresin, which is extracted from the ginger root using a solvent

[4.] None of these

78.5% of California Canada Dry consumers answered that the product was made from ginger root, while 4.8% of consumers picked ginger oleoresin and 8.6% picked ginger oil. (The truth is oleoresin.)

Before answering the materiality question, respondents were presented with the definitions of “ginger root” and “ginger oleoresin.” Ginger oleoresin was defined almost as above, but with the additional information that a solvent, such as ethanol, could be used to extract the ginger. In the survey, 92.4% of respondents preferred to purchase a version made with ginger root over one made with oleoresin.

For the price premium survey, Dennis used a choice-based conjoint survey, which asked respondents to express preferences by choosing from a set of product profiles (i.e., choosing a product from a group of products). The price premium survey was restricted to respondents who recently purchased ginger ale, and presented respondents with mixes of six attributes.  The results were fed into Bayesian models that allegedly allowed Dennis to calculate a price premium from “Made with Real Ginger” for the marginal consumer; he found a 4% price premium.

Plaintiffs’ expert Weir opined on whether it would be possible to determine damages on a class-wide basis using common evidence, and provided a framework for/estimate of damages to the California class. Weir multiplied the total California sales of Canada Dry in the class period by 4% to calculate damages, resulting in a figure of $10,778,477.

Dr. Pepper didn’t challenge the experts’ qualifications or the reliability of their methods.  Instead, it focused on the argument that Dennis didn’t properly apply the methodologies behind his consumer understanding survey and price premium analysis.

As to the consumer perception survey, “survey evidence should be admitted as long as it is conducted according to accepted principles and is relevant.” “[T]echnical inadequacies in a survey, including the format of the questions or the manner in which it was taken, bear on the weight of the evidence, not its admissibility.”  Dr. Pepper pointed to its rebuttal expert’s “vastly different results” in his replication survey of consumers. That expert recreated Dennis’s consumer understanding survey, but changed the descriptors of ginger oil, ginger oleoresin, and ginger root. But even where “simple language” was used to describe ginger oil, ginger oleoresin, and ginger root, 40.59% of respondents still believed “Made From Real Ginger” meant that Canada Dry was made using “ginger root” as its ginger ingredient. “This is still a legally significant percentage of people who would be misled.” 

The rebuttal expert also did a replication survey using “technical” descriptors of ginger oil, ginger oleoresin, and ginger root, but this different language proved the point that Dennis’s survey needed to go to a fact-finder, who could determine if plaintiffs’ survey was unduly biased. “This is because the replication survey using technical language seems to be designed to confuse respondents, and encourage them to answer that they ‘don’t know’ or are ‘unsure’ of what the ginger ingredient behind the ‘Made From Real Ginger’ claim is. After all, which layperson has ever heard of the ginger root powder they purchase in stores being referred to as ‘triturated ginger’ [defined in the survey as ‘a coarse powder obtained from the ginger root using a bleaching process’]?”  [I agree that the “not an extract” language in the original survey has some biasing potential; I also wonder about the “not sure/don’t know” option—but at the same time “triturated ginger” isn’t how I would think about ginger root powder either.]

The court found Dr. Pepper’s criticisms of the price premium survey and simulator to be more substantive.  Dr. Pepper argued that despite Dennis’s representation in his declaration that his survey only contained six features or attributes— brand, type, flavor, nutrition facts, description on front of the package, and price—he instead used 11 factors, because the description on the front of the Canada Dry packaging wasn’t one attribute but six: (1) “100% Natural Flavors,” (2) “The Original Ginger Soda,” (3) “Barrel-Aged,” (4) “Made with/from Real Ginger,” (5) “Caffeine Free,” and (6) “Since 1904/1873.” The more attributes in a conjoint survey, “the higher risk that it simply becomes too complex for respondents.” Also, it may be that the reason a person considered the descriptors on the product packaging was because he or she thought the “100% Natural Flavors” claim was important, rather than the “Made From Real Ginger” claim.  

Dennis’s reply declaration didn’t assuage the court’s concerns: He argued that grouping the different product descriptions under one attribute “likely led to a dilution of the respondents’ attention (in contrast to showing only one product description for each product option), and therefore reducing possible risk from focalism bias.” If he hadn’t included the four product descriptions on the Canada Dry can on the price premium survey, the survey would have been criticized on that basis. The court understood that, but wasn’t convinced. Still, even if the survey overestimated the value consumers placed on “Made From Real Ginger,” it wasn’t excludable excludable. Dr. Pepper could attack it at trial.

Dr. Pepper argued that one of its other ginger ale products, Schweppes, didn’t have the ginger claim, and it sold in stores at either the same price or for less. Plaintiffs responded that legal authorities agree that using a side-by-side comparison is “bunk.” The court agreed that as a matter of common sense, such comparisons don’t account for any of the range of other possible reasons for these products to be priced so similarly. Even the possibility that another survey might have used side-by-side comparisons didn’t make this survey excludable.

Most substantively, Dennis considered willingness to pay in the conjoint survey, not a price premium; thus, Dr. Pepper argued, it couldn’t calculate restitution, which is the difference between what consumers paid and the true market price, which also takes into account supply-side factors. However, the study used past market prices, which reflect supply factors. The study can get insight into price premium by looking at the marginal consumer: the one who is indifferent between buying and not buying the infringing product. That consumer’s WTP is “equivalent to the price premium associated with the infringing level of the attribute; this marginal consumer can be identified by offering respondents a ‘no buy’ option.”  The model asks “At what price in that actual market in which [defendant] sold the offending products could [defendant] have sold the equivalent number of products without the false claim(s)?” The marginal consumer’s WTP discloses that price, tethered to the real market because the conjoint survey used actual market-clearing prices as the basis for the prices in its survey and actual competitor products.  Thus, the price premium study satisfied Daubert.

After that, the class certification discussion was lengthy, but largely foreordained.

Dr. Pepper argued that “Made From Real Ginger” couldn’t be material to consumer decisions because there was no common understanding of the term, as courts have ruled for “All Natural” and “100% Natural.” The court found the challenged phrase to be far less vague; almost 80% of people thought “Made From Real Ginger” meant that Canada Dry was made using ginger root. Plus, Dr. Pepper’s internal documents showed that Dr. Pepper thought the “Made From Real Ginger” claim was material. E.g., Dr. Pepper sought to capitalize on the alleged health halo ginger products have to consumers by encouraging people to believe that “Canada Dry Ginger Ale is a [carbonated soda drink] that fits into your healthy lifestyle because it is made from real ginger.” When respondents were asked their reasons for drinking Canada Dry five years later, the top five reasons were: (1) “I trust and respect the Canada Dry Brand (28%)”, (2) “Drinking Canada Dry makes me feel better by soothing my stomach (26%)”, (3) “Canada Dry is easy to find in stores (26%)”, (4) “Canada Dry tastes good with food (25%)”, and (5) “Canada Dry is made with real ginger (25%),” even though previously lots of people hadn’t believed that ginger ale had real ginger. Thus, “through its marketing, it orchestrated a change in consumer perceptions.” Another document claimed that the “Made From Real Ginger” program “is working: - New news - Strong POD and message relevant to target consumer - Consumer awareness and brand equity increased - Purchase frequency and volume growth escalated to +8.5%.” “Clearly, if a quarter of Canada Dry consumers were listing the ginger claim as a top five reason why they bought the product, the claim is material. Dr. Pepper cannot walk back evidence contained in its own documents.”

The most interesting argument Dr. Pepper presented against the price premium survey under predominance is that “it does not match [plaintiffs’] theory of liability. The survey purports to calculate a price premium associated with misleading consumers to believe the drink contains powdered or chopped ginger, but it does not do so—it calculates the premium associated with all possible meanings of the claim.” Canada Dry does contain traces of real ginger, in the form of ginger oleoresin. But the complaint still properly alleged that these traces weren’t “real ginger” as a reasonable consumer would understand it and that the flavorings contained none of the health benefits of real ginger.  Plaintiff’s rebuttal expert reported that the concentration in parts per million of 6-gingerol and 6-shaogal, which are ginger-derived compounds, in Canada Dry was far below what a person would be able to detect when drinking the ginger ale. Even if it is literally true that Canada Dry has ginger in it, the ginger is not what a reasonable consumer would expect.

The worth of the “Made From Real Ginger” claim would only matter in the future if a jury does find that the claim is misleading. Thus, plaintiffs’ damages model fit the theory of the case.

Direct competition + literally false advertising don't equal standing without more

Brave Law Firm, LLC v. Truck Accident Lawyers Gp., Inc., No. 17-1156-EFM-GEB, 2018 WL 3122172 (D. Kan. Jun. 26, 2018)

Brave sued its personal injury law firm rivals (TALG) under the Lanham Act and Kansas state law based on allegations of false and deceptive advertising. The court ruled that Brave hadn’t sufficiently alleged injury—furthering my suspicion that Lexmark reasoning has made it easier to proceed against disparagement and harder to proceed against false claims a defendant makes about itself, even though the latter was the core of what the Lanham Act false advertising provisions tried to cover.

Brave and TALG offer competing legal services in the same geographic area. An example of the allegedly false advertising is an ad depicting a woman holding a check with the words “$2.4 MILLION” displayed in bold text, with a disclaimer stating, in part: “Amounts are gross recovery before fees and expenses.” Brave alleged that this ad was false because the actual “gross recovery” before fees and expenses was $387,018, or 16% of what was advertised.

The court found that Article III wasn’t satisfied. The allegations of injury were conclusory, alleging mostly that the false advertising was intentional. The court declined to apply a presumption of injury to standing even if the advertising was literally false.  Brave failed to allege that it lost potential clients to TALG, that it lost revenue from the false ads, or that TALG strengthened its market position through the ads. The motion to dismiss on standing was granted with leave to amend.

Because of the leave to amend, the court addressed zone of interests/proximate causation under Lexmark as well. As with standing, Brave failed to sufficiently allege injury to a commercial interest in reputation or sales (zone of interests). Brave argued that it was seeking injunctive relief, so it didn’t have to show injury. But that’s not right. However, if Brave successfully amended to assert an injury to a commercial interest in reputation or sales, the proximate cause test would most likely be met, given that Brave’s scenario would fit into the “classic Lanham Act false-advertising claim.”

Finally, Brave’s pleadings didn’t satisfy FRCP 9(b) in identifying the when, where, and how: though it provided a screenshot of an alleged ad, it didn’t allege when or how the ad was disseminated, or when/how (in terms of medium) other ads were or who ran those or what those other ads specifically said.

Lie of Pablo: Churchillian tweet gets Kanye West in trouble

Baker-Rhett v. Aspiro AB, 2018 WL 3094921, No. 16-cv-5801-GHW (S.D.N.Y. Jun. 22, 2018)

“On February 15, 2016, Kanye West tweeted that his new album—The Life of Pablo—‘will never never never be on Apple. And it will never be for sale ... You can only get it on Tidal.’ Six weeks later, the album was on Apple, and was for sale on sites other than Tidal, the online streaming service operated by defendant Aspiro.”  [Should have left in some caveats for "honour and good sense," Churchill might have told him.] Aspiro launched in 2014, but struggled for survival despite its backing from its artist-owners such as West.  West’s 26 million Twitter followers were exposed to his tweet, and the official Tidal account also tweeted “It’s streaming exclusively on TIDAL.com.” Within the first ten days of the release of The Life of Pablo, Tidal’s subscription numbers tripled from 1 million to 3 million, and  West boasted to his Twitter followers about their impact.

Baker-Rhett allegedly relied on West’s tweet, and lost $9.99 as a result (he cancelled after learning that the album would be available on Spotify, to which he already subscribed).  He sued on behalf of a putative class. The court found that he lacked standing to assert NY GBL claims because the challenged transactions didn’t happen in New York (Baker-Rhett is Californian) and the NY choice of law provisions in the Tidal terms & conditions didn’t cover all aspects of his dealings with defendants, but that fraudulent inducement was plausibly pled.

Fraudulent inducement under New York law “requires a showing that ‘(1) the defendant made a material false representation, (2) the defendant intended to defraud the plaintiff thereby, (3) the plaintiff reasonably relied upon the representation, and (4) the plaintiff suffered damage as a result of such reliance.’ ”  West argued that his tweet was true, because the album was “updated and remixed numerous times, with different vocals, lyrics, and arrangements,” and that only those “ ‘newly updated, remixed and remastered version[s]’ of The Life of Pablo have been made available for purchase or streaming on platforms other than Tidal.” This “tenuous” argument certainly wasn’t enough on a motion to dismiss, given reasonable inferences about what an “album” is.  The complaint also plausibly alleged that West was Aspiro’s agent for these purposes.

For scienter, a plaintiff must “allege facts giving rise to ‘a strong inference of fraudulent intent,’ ” which requires either (a) alleging facts to show that the defendants had both motive and opportunity to commit fraud, or (b) alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness.  Here, the complaint satisfied (b) by describing in detail the dire financial condition of both Aspiro and West at the time of the album release of his album and the tangible benefits of an increase in Tidal’s subscriber base for both of them, and alleging that both knew at the time of the tweet that the album soon would be available elsewhere. Combined with the fact that the album was available elsewhere a “mere” six weeks later, that was strong circumstantial evidence of conscious misbehavior.

By contrast, Aspiro’s tweet and silence alone weren’t enough. Baker-Rhett pled reliance on West’s tweet, not on Tidal’s. The press stories touting the exclusivity of Tidal’s platform focused on the content of West’s Tweet; also the Tidal tweet didn’t contain an express commitment that the album would be available exclusively on Tidal in the future. Instead, Tidal made its exclusivity claim in the present tense, which was true at the time. A claim of fraudulent inducement can be based on a material omission as well as a material misstatement, but Baker-Rhett alleged no special relationship or fiduciary obligation requiring a duty of full and complete disclosure by Aspiro to its prospective customers.

false patent marking doesn't presumptively cause injury even in 2-player market

John Bean Technologies Corp. v. Morris & Assoc., Inc., No. 15-CV-02211, 2018 WL 3039734 (W.D. Ark. Jun. 19, 2018)

JBT’s predecessor asserted Patent Act false marking claims, Lanham Act false advertising claims, and various North Carolina and Arkansas State law claims against Morris, its sole competitor in selling auger chillers to poultry processors in the United States. An auger chiller takes chicken carcasses in the middle stages of the butchering process and cools them to prevent contamination.  Cold water runs from the far end to the receiving end and the auger slowly rotates on a shaft, driving the chickens against this current to the far end of the tank, where they enter the next stage of the processing line. These are expensive and durable machines; sales are therefore rare and lucrative.  

Morris uses vertical openings in the auger blades of its chiller to increase the flow of water (a desirable feature) and advertised its chiller as patented (the ’529 patent). JBT’s chiller also had openings for water in the blades, though its didn’t run to the edge of the blade as Morris’s did.

Morris’s website advertised that its auger chiller was patented. It also included caricatures of the parties’ chillers (JBT’s recognizable from the openings in the auger blades) and a statement that “In other systems, water circulates only around the shaft and through a narrow gap between the auger flights and the tank wall.” JBT alleged that the openings on the caricature were disproportionately small compared to their size on an actual JBT chiller, and that the image plus the statement about water flow in “other systems” were literally false comparative ads.

The false marking claims failed because JBT couldn’t show competitive injury, as is now required:

If an article that is within the public domain is falsely marked, potential competitors may be dissuaded from entering the same market. False marks may also deter scientific research when an inventor sees a mark and decides to forego continued research to avoid possible infringement. False marking can also cause unnecessary investment in design around or costs incurred to analyze the validity or enforceability of a patent whose number has been marked upon a product with which a competitor would like to compete.

JBT argued that competitive injury necessarily occurred from false marking in a two-player market because Morris’s auger chillers gained value from being marked as patented, causing the value of JBT’s chillers to decrease. In addition, JBT argued that its reputation and goodwill with a customer were injured when the customer declined to purchase a JBT auger chiller with openings because Morris’s auger chillers were marked as patented, but subsequently asked JBT to retrofit the auger chiller with openings.

The two-player market supported a rebuttable presumption of economic injury in false advertising cases where a two-player market necessarily makes ads comparative. But such a presumption was inappropriate for false marking, given that the Patent Act now affirmatively requires a plaintiff to demonstrate competitive injury as part of a false marking claim.

The evidence about the one customer who wanted a retrofit was just hearsay and speculation. (Even if it had been admissible, it tended to show that Morris’s past patent litigation practices led to the request, not false patent marking.)  Anyway, JBT made that sale, and additional sales to that customer, meaning that there wasn’t evidence of lost reputation or goodwill.  (It seems like retrofitting was likely to be more costly than initially manufacturing the auger with the openings, but I guess JBT didn’t say that?)  There was no other evidence of deterred market entry, deterred research, design-around investments, or costs incurred to analyze the validity or enforceability of the marked patent.

Likewise, there was insufficient evidence of harm on the false advertising claims. Again, even assuming the customer experience above were admissible, there was no evidence the customer was affected by Morris’s advertising.  The “two-player market” principle created a rebuttable presumption of economic injury, but such presumptions serve only “to control the result where there is an entire lack of competent evidence.” When sufficient proof has been offered to rebut a presumption, “it falls out of the case.” Even assuming that JBT was entitled to the presumption of injury, Morris rebutted it: “Multiple deponents familiar with selling auger chillers testified that whether equipment is advertised as patented is all but meaningless to customers seeking to purchase.”  There was also evidence that customers do not make equipment purchases based on websites. There was also evidence that Morris didn’t hurt JBT’s reputation or goodwill, and that any relevant decline happened because JBT’s predecessor was sold to JBT, whose sales remained strong nonetheless. All this rebutted any presumption of injury and of irreparable harm.

Morris won summary judgment on these claims; the coordinate state claims also failed.

When is a literally false statement claiming 35% savings immaterial?

SourceOne Dental, Inc. v. Patterson Cos., No. 15-cv-5440, 2018 WL 3038503 (E.D.N.Y. Jun. 19, 2018)

This is an interesting case to contrast to yesterday’s Seventh Circuit case finding that “monster” imagery making no specific health claims was false advertising. Here we have literal falsity, but the court finds that the gap between the truth and the falsehood wasn’t material, even though it was pretty big.  Perhaps these are the correct rules, insofar as they don’t incentivize advertisers to avoid specifics, but I feel nervous about this one. It’s also worth noting that the two materiality standards—the FTC’s “whether this is the kind of topic that affects purchasing decisions,” applied in many a Lanham Act case as well, and the standard applied here, “whether the difference between the truth and the claim about this topic would affect purchasing decisions,” is rarely articulated.

The parties compete in the market for dental supplies and equipment. SourceOne sells manufacturer-direct products directly to dentists. The key falsity issue: SourceOne sought endorsements by state dental associations (state-based trade organizations for dentists), making numerous statements that dentists’ savings were about 30-35%, either in general or on average; its attempts to gain endorsements were successful in some states.  The parties’ experts, however, calculated an average of 19-19.5% savings, making these claims literally false (under 6-10% of customers, depending on which expert you credit, saved 35% or more).

SourceOne argued that its claims could mean that such savings were possible, rather than that such savings were standard.  (The FTC has a lot to say about this, none of it in agreement with SourceOne.) “A reasonable purchaser reading the statement ‘save more than 35% on dental supplies’ would not read it to mean that the purchaser may, but is highly unlikely to, save 35% or more.”  The “average” savings claims were even more obviously literally false.  SourceOne apparently argued that it believed that its customers would save that amount in the future, but that did nothing to render the statement true or even ambiguous.  Also, it didn’t matter that the statements didn’t disclose methodology; “a reasonable consumer would have no basis to infer that the stated ‘average’ referred only to certain products.”  Given these facts, it was also literally false to say that SourceOne’s programs were “projected” to save dentists an average of more than 35%, and even to say that they were “projected” to save 35% (without the “average”).  The full statement necessarily implied that “more than a negligible number of members will save 35% or more.” 

However, SourceOne prevailed on materiality.  Patterson failed to show that average savings of 19-20% as opposed to SourceOne’s advertised savings of 35% would be likely to influence dentist consumers’ or organizations’ purchasing decisions. [I sense a counter-advertising campaign possibility: a federal court found they overstated the savings by nearly double…] [Another way of framing the issue: though courts impose a materiality requirement, material compared to what is the real question. Had SourceOne advertised itself without making savings claims at all, it seems inarguable that it would have made many fewer sales.  Usually, courts assessing materiality ask whether the presence of the false claim made a difference, implicitly assuming a null there.  Once you start positing alternative factual claims, things get a whole lot more difficult.]

Here, there was testimony that a discount of 5% to 10% could induce dentists to switch suppliers.  So the extra promised discounts were “just gravy.” The court continued:

[I]t is not sufficient for defendants to presume materiality simply on the basis that purchasers generally like to spend less instead of more. This is because price sensitivity turns on the marginal price difference and the nature of the product at issue. Purchasers who see a product that they have purchased advertised for 33% less, but who have received excellent customer service from their current seller, might be well inclined to take an “if it ain’t broke, don’t fix it,” approach. On the other hand, the same or other customers might also decide that it would be worth switching to a new distributor for even a 10-15% savings. 

Perhaps there is some level where materiality can be found as a matter of law – e.g., where customers were promised 90% savings over a competing product. But in the absence of that kind of obvious disparity, defendants were required to introduce some form of evidence – usually, although not necessarily, survey evidence or expert testimony based on it – to raise a factual question as to whether the differential between advertised and actual prices was material in this market.

Kudos to the court here for thinking about the issue, but this approach seems to create real problems when there aren’t specific numbers involved.  Consider, for example, how one could possibly judge the “materiality gap” in the rBST monster case using the standards applied here.  The FDA has said that rBST doesn’t affect human health/safety, but lingering questions remain about compositional differences in the milk, not to mention effects on the treated cows.  How would you measure exactly how scary the monster claims were, and how would you reliably measure whether they’d affect purchase intentions more than the more nuanced truth?  With respect to non-numerical claims, the obvious comparator seems to be “no claim about the issue at all,” with the likely effect of making materiality easier to find when claims are vaguer.  Maybe this is the right approach, but it seems to me we could use some more thinking about it.

Remaining claims had even less success: Patterson argued that SourceOne’s claims about “leveraging” buying power of dentists’ associations to create savings were untrue because SourceOne didn’t have contractually volume-based pricing agreements. But these were ambiguous claims.  SourceOne’s prices on its websites branded for state dental associations were approximately 5% lower than the prices it charged for the same products on its publicly available website. SourceOne argued that its suppliers agreed to provide this additional discount for members of state dental associations based on the suppliers’ expectation that their sales would increase through SourceOne’s affiliation with state dental associations. Thus, the prices were “leveraged” based on the predicted increased sales volume of association members. It was also ambiguous whether the leveraging statement was a cause-and-effect statement about lower prices; without evidence of deception, Patterson couldn’t win.

Patterson also challenged statements (1) that a particular person was “VP [of] Product Sourcing and Supplier Relations” of SourceOne, when that hire was contemplated but never happened; and (2) that SourceOne has 14 full-time support personnel and 10 part-time support personnel, when it had only between six and three employees in 2013-2014 and added two more by 2017. These were literal falsities, but Patterson didn’t show materiality for (1) and there was a genuine fact issue on (2) based on testimony about contractors. 

Still, the (2) statements weren’t “commercial advertising or promotion” within the meaning of the Lanham Act: they weren’t sufficiently disseminated, but made only to a single person representing a single state dental association.  “[M]aking a statement to one of fifty potential customers does not qualify as widespread dissemination.” Even if it were, Patterson again didn’t show materiality. Though the representative asked about employees “[t]o make sure that they had the infrastructure in place to be able to take orders [and] deliver products as promised,” none of the materials ultimately considered by the assocation’s board mentioned the number of employees as a consideration.  Instead, they mentioned things like the royalty rate the association would receive on gross receipts from the platform, SourceOne’s projected savings for dentists, and which other dental associations had endorsed SourceOne.

slicing and dicing claims about unapproved drugs, court allows challenge to some under Lanham Act

G&W Laboratories, Inc. v. Laser Pharmaceuticals, LLC, No. 17-cv-3974-BRM-DEA, 2018 WL 3031943 (D.N.J. Jun. 19, 2018)

G&W sells Anucort, a prescription drug for use in treatment of hemorrhoids. G&W alleged that its formulation delivers 25 mg of the active ingredient “in a reasonable amount of time.” Anucort isn’t FDA approved, and G&W has been “actively working” with the FDA to obtain an approved New Drug Application (NDA) for Anucort. G&W submitted an Investigational New Drug (IND) application, spending “millions of dollars conducting clinical studies of the safety and efficacy of Anucort for treating symptomatic internal hemorrhoids.” Despite its lack of approval, Anucort has been on the market for about thirty years, because the FDA has exercised enforcement discretion as to it.  Anucort is allegedly a leading prescription product for the treatment of hemorrhoids, selling one million units a year.

Laser sells Hemmorex as a competing product, but G&W alleged that “[l]aboratory testing shows that Hemmorex releases less than 20%—that is, less than 5 mg—of the 25 mg labeled amount of hydrocortisone acetate active ingredient into a two-hour period.” Laser markets Hemmorex to generic buyers at drug wholesalers and retailers as an “equivalent to and substitute for Anucort.” Laser also tells databases that Hemmorex is equivalent to Anucort and requests that the databases link Hemmorex to Anucort, communicating to subscribers that the products are equivalent and may be substituted for each other. G&W alleged that many wholesalers, retailers, and pharmaceutical chains purchase, stock, and dispense only one brand of hydrocortisone acetate 25 mg suppository, basing their purchasing decisions on price as between linked products; thus, G&W alleged that it lost sales to Laser.

Because G&W’s dissolution testing determined that Hemmorex doesn’t release its labeled active ingredient to the patient in the same amount of time, G&W argued that Hemmorex isn’t equivalent to or substitutable for Anucort. Laser also advertised “that the FDA allows Hemmorex to be marketed and sold as a ‘DESI drug’ – that is, a drug covered by an ongoing Drug Efficacy Study Implementation (‘DESI’) program.” G&W alleged that this was false. Laser also claimed that it has submitted a Pre-IND application to the FDA for Hemmorex, and that it is the only manufacturer of a 25 mg hydrocortisone acetate suppository to have done so. G&W alleged that Laser hadn’t “participated in a Pre-IND meeting with the FDA, nor has it submitted an IND application to the FDA for Hemmorex, nor has it done any predicate clinical toxicology or animal testing.” G&W is also currently working with the FDA to obtain NDA approval and submitted an IND application, making Laser’s statement false.

G&W also alleged that InvaDerm, which manufactured Hemmorex for Laser, knew about the falsity and continued to supply the product.

The court said some things about primary jurisdiction, which is essentially a discretionary doctrine that pauses a case for regulatory action, but really treated this as a preclusion case.  We know that the FDCA and Lanham Act can both apply to drugs.  But “where a claim requires interpretation of a matter that is exclusively within the jurisdiction and expertise of the FDA and FDCA, plaintiffs cannot use the Lanham Act as a run around to private enforcement.”

Laser argued that Anucort was unapproved, and thus couldn’t be a reference drug against which Hemmorex could be compared; thus no equivalency claim could be falsified.  Moreover, “the variety of very specific data-driven and medical-scientific determinations attendant to demonstrating ‘equivalence’” counseled in favor of letting the FDA act.  But the court agreed with G&W. The issue was whether advertising Hemmorex as “equivalent to or substitutable” for Anucort when the drugs allegedly didn’t contain the same active ingredients was false or misleading. G&W “is not relying on either explicit or implicit FDA enforcement or terms that only the FDA can define.”

However, G&W couldn’t argue that the label, stating that Hemmorex contains 25 mg of hydrocortisone acetate, was literally false because Hemmorex released less than 20% of its active ingredient in two hours, whereas Anucort releases 90% in the same time period.  Whether this was false or misleading was better left to the FDA; there was no standard for how much of a suppository’s active ingredient had to be released.  By contrast, had G&W alleged that Hemmorex didn’t produce or contain 25 mg of hydrocortisone acetate at all, that would be actionable, “assuming science could determine such an answer.”

Similarly, whether Hemmorex is a DESI drug was a question for the FDA, since answering it would require the court to determine whether Hemmorex is similar to a drug listed in a drug efficacy notice without permitting the FDA to do so first. The FDA leaves it to a manufacturer, in the first instance, to determine whether it is DESI approved as being “similar” to a product that was specifically reviewed. Under federal regulations, a determination as to whether a drug is identical, related, or similar can be made by “an individual who is knowledgeable about drugs and their indications for use,” but “[w]here the relationships are more subtle and not readily recognized, the purchasing agent may request an opinion by writing to the [FDCA].”

The court then turned to Laser’s alleged statements that it has submitted a Pre-IND application to the FDA for Hemmorex, and that it is the only manufacturer of 25 mg hydrocortisone acetate suppositories to have done so.  Laser, ridiculously in my opinion, argued that this couldn’t be material because INDs are confidential and so no reasonable purchaser would rely on a statement that an IND application had been submitted.  Among other things, why did Laser (allegedly) say this, if not to win consumers?  Also, people rely on credence claims all the time, and it should not be rule that consumers have to expect drug companies to outright lie to them.

Nonetheless, the court found that G&W sufficiently pled falsity on the “only” part of the statement, but not for the “Laser submitted a pre-IND application” part, because those allegations were conclusory. G&W failed to plead why it believed Laser “has not participated in a Pre-IND meeting with the FDA, nor has it submitted an IND application, nor has it done any predicate clinical toxicology or animal testing,” especially given that IND applications are confidential.

The court also rejected Laser’s unclean hands defense predicated on the argument that Anucort was currently unapproved, and shouldn’t be able to challenge the market presence of a competing unapproved drug product. “The unclean hands doctrine should not bar Lanham Act claims when the doctrine is premised on allegations of non-compliance with the FDCA because such a use of the doctrine would essentially permit a private enforcement action—a power reserved for the FDA.” Whether Anucort was on the market illegally was a matter for the FDA, and anyway Laser failed to allege or demonstrate how it was injured “as a result of [G&W’s] misconduct.”

The actual manufacturer, InvaDerm, argued that there was no basis for aiding and abetting liability under the Lanham Act, and the court agreed, but contributory infringement [for which read false advertising] was an available theory and was sufficiently pled.

seeking monetary damages can undercut irreparable harm claim

Rush v. Hillside Buffalo, LLC, --- F.Supp.3d ----, 2018 WL 2999905, No. 18-CV-00653 EAW (W.D.N.Y. Jun. 15, 2018)

Rush, pro se, alleged that he owned a registered trademark for “Crash-a-Rama,” an event “featuring men and women running old junk cars in exciting and entertaining events.” He alleged that he operated Crash-A-Rama at the Holland International Speedway for eighteen years. Hillside Buffalo recently acquired the Speedway, and offered their own “Crash-O-Rama” event. The court declined to issue a TRO enjoining it (it was scheduled for the day after the opinion issued) but allowed claims to proceed.

Irreparable harm: conclusory statements about irreparable harm aren’t enough without proof that monetary damages wouldn’t be a sufficient remedy.  It is true that “[i]rreparable harm ‘exists in a trademark case when the party seeking the injunction shows that it will lose control over the reputation of its trademark pending trial,’ because loss of control over one’s reputation is neither ‘calculable nor precisely compensable.’”  Still,  “conclusory statements of loss of reputation will not justify an irreparable harm finding.” Notably, Rush sought damages as compensation.  When there’s only been one event, it was unclear why money damages couldn’t be assessed based upon the number and price of the tickets and concessions sold, the number of patrons diverted, or any other revenue.

use of about half a publicly available photo was fair use

Brammer v. Violent Hues Prods., LLC, No. 1-17-cv-01009, 2018 BL 206017 (E.D. Va.

June 11, 2018)

Brammer took a time-lapse photo of the Adams Morgan neighborhood of Washington, D.C., at night, then posted it on image-sharing websites as well as his personal website. Violet Hues created a website intended to be used as a reference guide providing information about the local area for filmmakers and other attendees of a festival it ran and used a cropped version of Brammer’s photo on its website. Violent Hues removed the photo after receiving a C&D.

 

here's a blurry screengrab: the accused use is the middle

Brammer sued for copyright infringement and for removal and alteration of CMI under 17 U.S.C. § 1202, though he abandoned the latter claim. The court found that the use was fair. First, the use was transformative in function and purpose: Brammer’s purpose was promotional and expressive, while Violent Hues’ purpose was informational. The use was also noncommercial, because it wasn’t done to advertise a product or generate revenue. It was also in good faith: Violent Hues’ owner found the photo online “and saw no indication that it was copyrighted.”

Nature of the work: “[I]f the disputed use of the copyrighted work ‘is not related to its mode of expression but rather to its historical facts,’ then the creative nature of the work is mitigated.”  The photo had creative elements, but was also “a factual depiction of a real-world location,” and was used purely for its factual content. And the work was previously published, favoring fair use.

Amount and substantiality of the portion used: it was cropped about in half, which was no more of the photo than was necessary to convey the photo’s factual content and serve Violent Hues’ informational purpose, also weighing in favor of fair use.

Market effect: there was no evidence of an effect on the potential market. Brammer was compensated for the photo six times, including three physical print sales and three usage licenses; at least two sales occurred after the challenged use began.  Brammer testified that he currently made no effort to market the photo. A transformative and non-commercial use is unlikely to cause market harm; Violent Hues didn’t sell copies of the photo or generate any revenue from it. It didn’t provide a market substitute for the photo, especially since it only used approximately half of the photo.

Descriptive fair use and "use in a trademark way"

Sazerac Brands, LLC v. Peristyle, LLC, --- F.3d ---- , 2018 WL 2975995, Nos. 17-5933 & 17-5997 (6th Cir. Jun. 14, 2018)

Filed 7 days after argument, which is interesting given that the panel creates a bit of a mess—essentially disagreeing with circuit precedent on use as a mark, but not going en banc on it.  This is going to be a pain for district courts; I take it that the best response for them will be to apply un-overruled precedent and leave it to the court of appeals to go en banc if they’re so unhappy with current precedent.

Colonel Edmund Haynes Taylor, Jr., “the most remarkable man to enter the whiskey industry during the post-Civil War years,” built the Old Taylor Distillery in 1887. Once the “most magnificent plant of its kind in Kentucky,” the distillery fell into disrepair after the Colonel’s death, and production ceased there in 1972. In 2014, Peristyle bought the property, renovated it, and eventually resumed bourbon production there. Peristyle regularly referred to its location at “the Former Old Taylor Distillery” or “Old Taylor” during the renovation period, though the property has since been renamed “Castle & Key.” Sazerac, however, acquired the trademark rights to “Old Taylor” and “Colonel E.H. Taylor” for bourbon in 2009. The court of appeals affirmed the finding of descriptive fair use.

Descriptive fair use “tolerate[s] some degree of confusion.” Here, Peristyle used the Old Taylor name in a descriptive and geographic manner: “to pinpoint the historic location where Peristyle planned to make a new bourbon, not to brand that bourbon.” In four years, when that bourbon hits the shelves, Peristyle didn’t plan to put “Old Taylor” on the bottle.  Its uses included a flyer titled “The Historic Site of The Old Taylor Distillery,” whicht notes that “We are busy making history and restoring this bourbon ICON, the Historic Site of The Old Taylor Distillery.” A social media post invited followers to the “VIP Mailing List for the Former Old Taylor Distillery.” Another promotes barrel storage services at “the distillery formerly known as: Old Taylor.” These were uses of Old Taylor descriptively to identify a geographic location, the Old Taylor Distillery. As the district court correctly ruled, “Peristyle is not attempting to trade off the goodwill of Sazerac. Instead, Peristyle is enjoying the goodwill already ingrained in the property it purchased and is advertising itself for what it is: a distillery first built by Colonel Taylor, subsequently abandoned, but once again purchased, renovated, and restored to life as Castle & Key.”

Peristyle also acted in good faith: “One reason why Peristyle referred to the distillery by name so often was that it had yet to settle on a brand name for itself. That process was extensive, lasting over a year, in part because ‘the reverence for [Old Taylor] is tremendous ... and to find a name that would justify the spirit and architecture and history of this place was a really tall order.’” Once it decided on a name, Peristyle’s fliers featured that name.  Even though it didn’t always use “former” or “historic” to precede Old Taylor, but context still indicated references to the physical distillery in a descriptive manner, e.g., “We’re saving a seat for you at ... Old Taylor Distillery.”

Sazerac objected to a four-hundred foot “Old Taylor Distillery” sign on the distillery’s barrel storage warehouse and a twenty-foot “The Old Taylor Distillery Company” sign above the entrance to its main building. “But both signs adorned the building before Peristyle purchased it confirming that the company did not put them there or otherwise use them in bad faith.” Peristyle used the signs only to identify the location of a site that’s on the National Register of Historic Places as the “Old Taylor Distillery.”

Peristyle plans to put up a Castle & Key sign next to the historic signs; “[t]rademark law demands no more.” Peristyle’s commercial activities at the distillery, including hosting events and renting barrel-aging warehouse space to third parties, didn’t constitute use of Old Taylor as a trademark; they were use of Old Taylor as a place. “One way to make sure that people get to an event is to describe the location accurately.”

Sazerac spent a lot of time challenging the Sixth Circuit’s threshold “trademark use” test, requiring the plaintiff to show that the defendant is using a mark “in a ‘[ ]trademark’ way” that “identifies the source of their goods” before any confusion (or descriptive fair use) inquiry takes place. This panel seemed to agree with the critics.  But those critics exaggerated the consequences of the test, since trademark use “resembles in nearly every particular the fair use defense that we just applied.”  There might nonetheless be fact patterns where it would make a difference because of burden-shifting or because of an absence of inquiry into whether the non-trademark use was made “fairly and in good faith.”  However, the court of appeals decided just to affirm the district court not on its trademark use holding (which the panel specifically noted was faithful to circuit precedent) but by finding that Peristyle made descriptive fair use, which was supported by the record.

[Query whether this maneuvering is consistent with saying that the trademark use test doesn’t consider good faith—of course, if you don’t really have a distinct idea of what good faith is other than non-trademark, descriptive use, then this result becomes a lot simpler. Also, to the extent that the Sixth Circuit requirement also deals with nominative fair use, this characterization doesn't work; part of the temptation to talk about "use as a mark for one's own goods/services" is that you don't have to spend time parsing that kind of distinction.]

Monster imagery implies danger; no survey required to get preliminary injunction against it

Eli Lilly & Co. v. Arla Foods, Inc., No. 17-2252, 2018 WL 2998510, -- F.3d – (7th Cir. Jun. 15, 2018)

Arla launched a $30 million advertising campaign aimed at expanding its cheese sales in the US, using the theme “Live Unprocessed.”  The ads promise that Arla cheese contains no “weird stuff” or “ingredients that you can’t pronounce”—in particular, no milk from cows treated with recombinant bovine somato-tropin (rbST), an artificial growth hormone. “The flagship ad in the campaign features a vivid rhetorical flourish implying that milk from rbST-treated cows is unwholesome.” The ad opens with a caption: “Arla Cheese Asked Kids: What is r[b]ST?” A cartoon of a six-eyed monster and a fisherman appears and a seven-year-old girl named Leah narrates: “RbST has razor sharp horns. It’s so tall that it could eat clouds. You may want to pet it but the fur is electric.” The commercial then cuts to Leah enjoying a cheese sandwich, and an adult woman narrates: “Actually, rbST is an artificial growth hormone given to some cows, but not the cows that make Arla cheese. No added hormones. No weird stuff. Arla, live unprocessed.” A small written disclaimer appears for a few seconds toward the end of the commercial: “Made with milk from cows not treated with r[b]ST. No significant difference has been shown between milk derived from r[b]ST-treated and non r[b]ST-treated cows.”

 

the rBST monster has electric fur

And razor teeth

Arla defined “weird stuff” on its website:

No artificial additives. No ingredients that you can’t pronounce. No ingredients that sound confusing or in any way like a made-up word. No ingredients with names that sound like they may be aliens with nine arms, beasts with electric fur, gigantic robots[,] or bears in dis-guise. No artificial growth hormones like r[b]ST.* ... Nor anything else artificial[ ] because our cheese has always been made with simple ingredients and never anything weird.

The asterisk directs readers to another part of the website containing the same disclaimer that appears in small print in the television commercial.

Eli Lilly makes the only FDA-approved rbST supplement; it sued for false advertising, and won a preliminary injunction. The court of appeals affirmed, holding that “[c]onsumer surveys or other ‘hard’ evidence of actual consumer confusion are unnecessary at the preliminary-injunction stage.”  Its evidence of harm included confidential evidence that a major cheese producer chose to terminate its use of rbST partially in response to Arla’s ads. 

The trial judge found that milk from rbST-treated cows is equally safe and healthy for human consumption as other milk, something that Arla conceded for purposes of the appeal.  In a footnote, the court of appeals said that Arla would have trouble fighting on safety and health for humans anyway, since the FDA twice confirmed the safety of rbST-derived dairy products. A joint panel of the United Nations and World Health Organization also found “no evidence to suggest that the use of rbSTs would result in a higher risk to human health.” [But see International Dairy Foods Assoc. v. Boggs, finding that a ban on no-rbST claims violated the First Amendment and that there was evidence that milk from treated cows was compositionally inferior to milk from untreated cows.]

“A literally false statement will necessarily deceive consumers, so extrinsic evidence of actual consumer confusion is not required.” However, Arla’s ads didn’t make explicitly false claims about the composition or dangers of milk from rbST-treated cows. “Indeed, the explicit statements about rbST are factually accurate: RbST is an artificial growth hormone given to some cows, and Arla does not use milk from those cows.” Nonetheless, proof of actual deception isn’t required at the preliminary injunction stage.  “It’s not feasible to require a Lanham Act plaintiff to conduct full-blown consumer surveys in the truncated timeframe between filing suit and seeking a preliminary injunction.”  Eli Lilly’s evidence from the ads themselves, evidence about the quality of milk from treated cows, and evidence of decreased demand were enough to show likely success on the merits without a consumer survey.

“[T]he ad campaign centers on disparaging dairy products made from milk supplied by rbST-treated cows.…The use of monster imagery, ‘weird stuff’ language, and child actors combine to colorfully communicate the message that responsible consumers should be concerned about rbST-derived dairy products.” [Put that way, it sounds like another court could have found puffery.  I understand the impulse to protect against vague disparagement, but it is worth noting that the court doesn’t ask very much about what factual message exactly consumers will take away.]  It was reasonable to find these ads likely to mislead. 

The court of appeals also took comfort from FDA guidance warning that ads about rbST-free milk products “may be misleading if not placed ‘in proper context,’” including the disclaimer: “No significant difference has been shown between milk derived from rbST-treated and non-rbST-treated cows.” Arla’s ads put that disclaimer only in tiny print in the tv ad and in an “obscure location” on the webpage. “Neither disclaimer dispels the central message of these advertisements: that cheese made from milk supplied by rbST-treated cows is unwholesome.”

Evidence of decreased demand from a major cheese producer didn’t show actual confusion, but “given the cheese producer’s economic incentive to accurately predict consumer demand, its concern about the ad campaign’s impact on consumers supports the judge’s conclusion.”  This also made causation an easy question, since any false or misleading advertising regarding rbST that decreases demand for the supplement would necessarily harm Eli Lilly, the sole US supplier.

The court of appeals also approved of a modified injunction preventing Arla from disseminating any ad substantially similar to the accused ones that “claims, either directly or by implication,” that rbST is anything other than an artificial hormone that prolongs the lactation of dairy cows. That was specific enough, in the context of the rest of the order. The injunction also barred any ad that claims, “either directly or by implication,” that “consumers should not feel ‘good about eating’ or ‘serving to [their] friends and family’ dairy products made from milk of cows supplemented with rbST. That still allowed Arla to make claims about its own products; “[t]he prohibited negative inference can arise only if an Arla advertisement specifically mentions rbST … in a disparaging way.” [Nice to know that the Seventh Circuit is still really, really confident in its consumer-predicting prowess.]

Judge Rovner concurred, agreeing that no proof of confusion was required at this stage but declining to address the other merits of the Lanham Act claim.