Scope of Lanham Act protection for sophisticated consumers

Permacel Kansas City, Inc. v. Soundwich, Inc., 2006 WL 1449979 (W.D.Mo.)

This patent case also involved false advertising claims. Defendant represented that its vibration damping material, a product used by auto makers, was “the same” as plaintiff’s even though its product was cheaper. Defendant sought summary judgment on the ground that its misrepresentations, if any, didn’t lead to purchases; instead, price and auto makers’ own appraisal of quality drove sales.

Part of the court’s concern was that the alleged misrepresentations were made in an informal, individualized sales presentation (as would be natural for a product with a small, specialized market). The ultimate purchaser (Ford) and its intermediate agent both testified that the cost savings from defendant’s product outweighed what they judged was a lower quality. Given that, the court found that any misrepresentation was not a cause of lost sales. The purchasers knew that the salesman’s claim was “atmospheric” and “somewhat exaggerated.”

How to express the basis for the decision in standard Lanham Act terms? Hard to say. There’s a footnote that mentions puffery. Materiality, another plausible candidate, usually is a question of whether a statement is of the type that influence decisions (as quality claims are) rather than whether the statement actually caused a particular purchase decision.

Should sophisticated buyers be held to a higher standard for distinguishing puffery from factual claims? My instinct is that they should not generally be treated as specially able to parse language, since expertise in a particular field does not translate to expertise in the tricks of the seller’s trade. Still, it matters that defendant’s customers only received the claim, and didn’t believe it. In a context with sophisticated buyers weighing fairly objective attributes, perhaps general statements like “the products are the same” should be treated as puffing, even though “sameness” may in other contexts be the type of objectively verifiable claim that can found a false advertising claim (e.g., the claim in JR Tobacco, Inc. v. Davidoff of Geneva (CT), Inc., 957 F. Supp. 426, 433-34 (S.D.N.Y. 1997) that the defendant manufactured identical copies of plaintiff’s premium cigars). The touchstone has to be whether this is the type of claim on which a reasonable consumer of the product at issue would rely.

That reasoning implies, however, that with a purchaser like Ford, almost any statement about the product would be puffing, since Ford apparently conducts independent inspections and tests before committing to buy; only the most unverifiable claims would fall under the Lanham Act. Perhaps that is as it should be; Ford is in a much better position to protect itself against false claims and punish unduly exaggerated sales talk (which at least leads it to waste time inspecting and testing) than an average consumer.

Are bad reviews necessary?

The NYT just ran a story on the decline in film screenings for movie critics. In fact, the story is really about the decline in studios' reliance on print advertising, with the suggestion being that traditional gatekeeper critics are no longer invited because their publications' ad rates aren't worth paying. But, whatever the reasons, people increasingly see movies on the strength of advertising and "buzz" alone, without reviewers' perspectives.

This challenges one of the economists' standard arguments about why fair use allows summarization and quotation in reviews, both positive and negative. If reviews were licensed and required to be positive, the argument goes, people wouldn't trust them, and overall social welfare would decrease; thus, a rational publisher would license all reviews, and transactions costs mean we should imply consent. But if movie studios can make lots of money -- more money, even -- by avoiding reviews, it seems that people are willing to watch even with only the obviously biased advertising as a guide. Because people don't discount information based on source bias as much as they should, licensed positive reviews would be trusted, and the publisher should want to decide who gets to review a work.

Implied consent isn't the right answer in fair use; it's not even the right question.

California unconscionability in brief

Paton v. Cingular Wireless, 2006 WL 1413537 (Cal.App. 1 Dist.)

The trial court denied Cingular’s motion to compel arbitration in this case alleging fraudulent overcharges, since arbitration was provided for under Cingular’s contract with plaintiffs. Relying on the California Supreme Court’s decision in Discover Bank, the trial court denied the motion and the court of appeal affirmed. This is a regular result under Discover Bank’s holding that prohibiting classwide arbitration in an adhesion contract, where fraud is alleged, is unconscionable. Briefly noted: Cingular reiterated its Federal Arbitration Act preemption arguments, though conceding they’d already been rejected in Discover Bank, to preserve them for anticipated U.S. Supreme Court review. And the court pointed out that the recent amendments to California’s consumer protection law take away with one hand (eliminating private attorney general actions by imposing a standing requirement) but give with the other (allowing class actions). The only ground of unconscionability the plaintiffs had was the prohibition of class arbitrations; thus, they will have to plead class allegations successfully for the case to survive after remand.

FDA Preamble preempts all failure to warn claims

Colacicco v. Apotex, Inc., -- F. Supp. 2d --, 2006 WL 1443357 (E.D. Pa.)

This decision against a plaintiff whose wife committed suicide after taking Paxil relies on the FDA's recent Preamble taking the position, contrary to some earlier statements, that state-law failure to warn tort claims are preempted by the FDCA. According to the argument advanced by the FDA and the defendants, FDA requirements provide both a floor and a ceiling, and extra warnings would cause the drug at issue to be misbranded.

The court also rejected specific state law claims, including a New York false advertising count, for various reasons. The court accepted the argument that, despite the existence of pervasive direct-to-consumer advertising, the learned intermediary doctrine precludes a prescription drug false advertising claim -- since only by fooling both doctor and patient can a drugmaker's false advertising succeed, and doctor-targeted ads aren't directed at consumers as the statute requires.

As my description indicates, I think the learned intermediary doctrine is ridiculous, especially in the age of DTC. The specific rationale is wrong, too: The ultimate intent of ads to doctors is to reach consumers. The consumer orientation requirement is designed to keep state false advertising laws from covering disputes between businesses and disuptes about individually negotiated contracts that don't affect anybody beyond the parties. It was not meant to provide a shield based on a particular business model -- especially when that business model now includes appeals to consumers, who usually get the drugs they ask for when they go to the doctor. (According to one study, 80% of consumers who saw a DTC ad and asked for the medicine received it.)

Though I'm not a preemption expert, what I really noticed about the opinion was its elucidation of the ways in which the FDA's position is a limit on the power of the federal courts to decide cases, not just on state law causes of action, as well as an enhancement of administrative/executive agency power. To what extent this fits into a larger administration strategy is a question for further debate.

Keywords revisited: goods versus services

Eric Goldman points to Judge Chin's denial of Merck's motion to reconsider in its trademark infringement case against Canadian internet pharmacies. (Previous 43(b)log discussion here.)

I agree with Prof. Goldman that keyword buys should be treated as noninfringing. I'm not sure that "use in commerce" is the right answer, because of the definition in 15 U.S.C. § 1127:

a mark shall be deemed to be in use in commerce—

(1) on goods when—

(A) it is placed in any manner on the goods or their containers or the displays associated therewith or on the tags or labels affixed thereto, ... and

(B) the goods are sold or transported in commerce, and

(2) on services when it is used or displayed in the sale or advertising of services and the services are rendered in commerce …

Judge Chin’s opinion, following 2d Circuit law, treats “use in commerce” the same for goods and services, yet it seems to me that keyword buys relating to services may well be “used or displayed in the … advertising of services,” even if the statutory definition excludes keyword buys from “use in commerce” of goods. The distinction is not accidental; it stems from lawmakers' desire to require a strong goods-mark connection and the inability to brand a service directly; a mark can only be used on the goods used to identify and advertise the service, such as uniforms and delivery vans. To date, the different definitions have rarely generated different results (except in special cases, as in extraterritorial uses), but internet advertising may be a big breaking point.

The 1-800 decision finesses the issue by treating "use" (or possibly
"place[ment]" -- it's not clear) as equivalent to "reproduction or display." If "use" is the same as "reproduction or display," then maybe you can treat goods and services the same. (Some of the Second Circuit's reasoning -- especially that WhenU was using a website address, .com included, and not the bare trademark -- wouldn't apply to the keyword situation, but the definition of "use" would, as Merck recognized.)

The benefit of "use in commerce" for those of us who consider keyword buys noninfringing/nondiluting is that it avoids (1) expensive and therefore suppressive fights over the confusion/dilution factors and (2) manipulation of those factors, especially by the surveyors' black arts. It also maintains good consumer expectations: As long as consumers regularly see competitors' ads when they enter keywords, just as they regularly see store brands shelved next to national brands, it will be less reasonable to be confused about the source of search engine-sponsored results. Is a quick doctrinal shortcut to allow this pro-competitivepractice worth a little hand-waving about the meaning of "use"? Maybe so.

False advertising of a connection without trademark infringement?

L. & J.G. Stickley, Inc. v. Cosser, 2006 WL 1390468 (N.D.N.Y.)

Plaintiff sued for false advertising under federal and state law based on defendants’ misrepresentations about its furniture polish, specifically that someone working at defendants’ shop had experience with plaintiff or another Stickley entity and that there is a connection between the furniture polish and plaintiff or another Stickley entity. (See ad here: “Ron Cosser's 100 Year Old Formula Furniture Polish Comes From The Cabinet Shop Of Gustav Stickley.” The description on the Cosser website now says the polish dates “from the time of Gustav Stickley.”)

The “another Stickley entity” indicates why this isn’t a straight-up trademark infringement case: The Stickley name has another meaning than designating plaintiff; it also designates the historical craftsman Gustav Stickley, whose trademark significance cannot be attributed to plaintiff given that plaintiff didn’t manufacture the Mission furniture for which Gustav was famous for over 60 years. The Second Circuit held as much in 1996; though its decision focused on the trade dress of Stickley reproductions, its emphasis on the distinction between plaintiff and Gustav Stickley applies equally to the descriptive use of the name.

According to a state decision ordering the defendants’ insurance company to defend them under their “advertising injury” coverage, they allegedly formed a partnership with a former Stickley employee with access to the Stickley furniture polish secret formula, then sold the polish themselves, then marketed the polish for two decades. This gave rise to false advertising, trade secret, and trademark claims, only the first of which was resolved by the recent federal decision. As it appears, plaintiff’s decision to seek summary judgment on the false advertising claims alone was a wise one.

The Judge Edward R. Becker Way

Judge Becker, for whom I had the extraordinary privilege of clerking, recently passed away. He was the model of a judge and a human being: devoted to family and to his work, passionate about getting the law right, and tireless in his endeavors both in individual cases and in improving judicial administration generally. The only time I ever heard him raise his voice was when a lawyer insisted on a highly technical and unnecessary interpretation of the law that would cut off apparently meritorious claims and the Judge asked, "Is that fair?" The case of In re Rachmones was always his starting point.

The block of downtown Philadelphia on which the Liberty Bell sits -- closed after 9/11 and reopened to the public after Judge Becker's dedicated lobbying efforts -- has been renamed for him, a fitting tribute to a man and a judge who constantly represented the best in politics, in law, and in humanity. Here is a picture of one of the new signs:

He will be sorely missed.

Acrimony over acronyms

GTFM, LLC v. Universal Studios, Inc., 2006 WL 1377048 (S.D.N.Y.)

Plaintiffs GTFM and FUBU offer clothing and apparel under the successful "FUBU" mark ("For Us By Us") targeted at the "multicultural youth generation," and strive to maintain a positive image and fight stereotypes of multicultural youth. Universal made brief usage of the acronym "BUFU" (“By Us, F--- You”) in a 2001 marijuana-themed comedy starring two African-American youths, How High, in which – for reasons that don’t need explaining at this juncture – the two slacker-types find themselves at Harvard. According to the court, when one of the main characters is complimented on his clothing, he responds: “I designed it myself. I call it ‘BUFU’”; when another character comes under the sway of the main characters, he is asked why he changed his behavior and clothing, and responds: "It's phat. It's dope. It's cool. It's BUFU, man"; and one of the main characters asks, "What the hell are you wearing?" to which the other responds, "BUFU ... By Us F--- You."

You can tell how the rest of the story unfolds. Outraged, plaintiffs sued for trademark infringement and dilution et cetera (including defamation and breach of fiduciary duty). The court found that the film’s three brief references to "BUFU" were made “in the context of comedic dialogue between the film's outlandish characters,” poking fun at FUBU by using BUFU in reference to one of the main character’s fashion clothing line. Thus, the use was a protected parody under the First Amendment. As a result, the court did not analyze specific elements of plaintiffs’ causes of action, though it gave a bit attention to confusion, since it is well-established law that effective parodies are unlikely to cause consumer confusion.

The court emphasized that the FUBU marks appeared nowhere in the film and thus “plaintiffs have no claim that FUBU was used in a manner injurious to the mark and to its reputation and good will,” even if the parody was lewd or offensive. This holding, though perhaps limited to a First Amendment-protected expressive work, seems to impose a requirement that marks be identical before tarnishment can be found; however, the court did not specify how its analysis fit into standard dilution law. Without confusion or dilution, plaintiffs had no claims that could survive summary judgment – the case was “UFUB,” or “Utterly Frivolous Under Biopsy.”

What about the breach of fiduciary duty claim? Apparently Universal Music signed a cross-promotion agreement with FUBU Music undertaking, among other things, not to interfere with FUBU’s property rights. One can contract out of First Amendment rights; why did Universal not do so in this case? There is some reason to treat overreaching suits of this type summarily, to emphasize that they are unmeritorious and that trademark owners might be risking fee awards, even sanctions, for bringing them. Yet the contract in this case deserved some mention – if only to say that it didn’t contemplate parodies by Universal Films.

This case reminds us that transformation and critique can be used against outsiders as well as by them. Plaintiffs may well be right that the movie reinforces “the repugnant stereotype that multicultural youths require illegal drugs to empower themselves” and associates FUBU with that stereotype. But attempts to craft tests that give special favor to the critical speech of the disempowered have found no favor in the courts; critics of all stripes are instead the beneficiaries of free speech limits on intellectual property law.

Google grateful to Dead?

Larry Lessig points to Graham v. Dorling Kindersley (a recent Second Circuit case finding that copying a number of concert posters in a biography of the Grateful Dead was fair use) as good law. Certainly Google's lawyers must have cracked a bottle of champagne: The Second Circuit endorses Kelly v. Arriba Soft, not just in general but in multiple ways, and points to the fact that the copied images are small and are not given any special prominence in the book. On the third factor, use of the whole was okay because the images are small and are scattered widely among other images. On the fourth, just because the plaintiff had been paid for reproductions of its posters in books before didn't mean that it had lost money in a "traditional," as opposed to "transformative," market. And a key footnote, suggesting that a "peek" at the reduced-size poster would help the plaintiffs by enticing readers to buy full-size versions -- well, that's an argument we've heard a lot about in the Google context.

The next footnote takes a little bit back, suggesting that the licensing market in this case was not as well-developed as that in Texaco and specifically discussing the market for LEXIS and other online databases. The CCC, not LEXIS, is usually given prominence in discussions of Texaco; indeed, though the Second Circuit gives a broad cite to three pages of Texaco when it mentions LEXIS, the actual Texaco opinion discusses three non-electronic licensing markets (document delivery services; licenses from publishers; and the CCC, with the CCC the "primar[y]" source of the market). I thus suspect this reference is supposed to scatter some tea leaves suggesting that online uses are different. Even absent that footnote, whether this case's solicitousness for compilers will transfer to Google is, of course, far from certain.

Fan fiction and Mainstream Awards

The Tiptree Award is "an annual literary prize for science fiction or fantasy that expands or explores our understanding of gender." This year's longlist, which represents works that one or more of the awards panelists thought worthy of note, includes a work of fan fiction based on Harry Potter and CSI. Already, there's been much debate over whether an unauthorized derivative work should be considered for an award alongside professional/original works (you can take the scare quotes as read if you like). Naturally, whether the longlist is endorsing copyright infringement came up.

I'm not going to talk about the basic issue; I haven't changed my mind. But here's an interesting question: Assume that, rather than being on the longlist, the story won the award, and assume that the award carried a money prize. Would that convert the story from a noncommercial use to a commercial use? My instinct is no, but I'm not sure copyright law gives us much guidance. If I sell my fanzine at cost, or even below, or if I donate all proceeds to charity, those are all still commercial uses. But if someone walks up to me as I'm singing a satirical song to my child and says, "That's wonderful, here's ten dollars!" (in a non-hypothetical, the payment would certainly be to stop singing), I've made no effort to enter the stream of commerce. Precisely because so much counts as commercial use, it seems that one should have to take some volitional action to cross the line.

Inducement with Opal Mehta

This contest offers rewards for the best appropriation of others' words. I really don't think it's plagiarism if one identifies one's sources -- but it might be infringement.

Inducement by the paper?

The Lanham Act and the Paris Convention

BP Chemicals Limited v. Jiangsu SOPO Corporation (Group) Limited, --- F.Supp.2d ----, 2006 WL 1134636 (E.D. Mo.)

Though the plaintiff won the jurisdictional battle, it lost the substantive war against allegedly unfair competition by a Chinese corporation that stole its trade secrets.

Plaintiff BP makes, among other things, acetic acid through a process known as methanol cabonylation. It licenses this process in many countries, and has taken extensive precautions to keep the process a trade secret. The Chinese defendant SOPO, which has significant ties to its local Communist Party, allegedly stole BP’s technology and disclosed its trade secrets to a number of US vendors, who used those trade secrets to make and provide components for SOPO’s acetic acid plant in China. The defendant argued for dismissal on the grounds of international comity (based on a case involving many of the same facts that BP filed recently in China) and forum non conveniens, and for a stay on the ground of international abstention. The court, respecting BP’s choice of forum and reasons for preferring the US, rejected all these arguments.

BP alleged that SOPO’s misappropriation of trade secrets was actionable under the Lanham Act because the Lanham Act implements the Paris Convention against unfair competition. The Lanham Act extends protection to foreign nationals whose countries of origin are parties to the Paris Convention “to the extent necessary to give effect” to the convention, “in addition to the rights to which any owner of a mark is otherwise entitled by this chapter.” 15 U.S.C. § 1126(b). Such persons are “entitled to effective protection against unfair competition, and the remedies provided in this chapter for infringement of marks shall be available so far as they may be appropriate in repressing acts of unfair competition.” 15 U.S.C. § 1126(h).

The court concluded that, while the Lanham Act incorporates the substantive law of the of Paris Convention, that convention does not create a general tort of unfair competition and therefore provides no rights against theft of trade secrets under the Lanham Act. But what about that “in addition to” language? The court ruled that this statutory provision creates the possibility that treaties or conventions would give foreign nationals more than regular rights under the Lanham Act. But the Paris Convention itself, the court held, does not create new rights. Nor does the Paris Convention federalize the state law of unfair competition. Rather, the Convention requires national treatment for foreign nationals; since the Lanham Act doesn’t give trade secret protection to US citizens, it doesn’t require more for foreign nationals. “Unfair competition,” a phrase that appears in the Paris Convention and in §1126(h), doesn’t specify what’s covered, and the Convention’s reference to “any act contrary to honest practices” is too general to include all possible torts of unfair competition under state common or statutory law.

SOPO also challenged BP’s trade secrets claim brought under Missouri statutory law, which only applies to misappropriation that began after August 28, 1995. Some of SOPO’s misappropriation began before that date, but BP argued that separate acts involving a second acetic acid plant occurred in 2000-2003. The court found that the improper acquisition of BP’s trade secrets occurred in 1994, and so using them to build a second plant wasn’t new wrongful conduct.

Myths of Copyright

A friend forwarded me an email advertising an event sponsored by the Cloud Foundation and the Massachusetts Volunteer Lawyers for the Arts. The VLA is great, but there's been a failure of communication with, at least, whoever prepared the email:

Subject: Your Art = Your Property: A Free Workshop for Teens on Copywrite Law in the Music Industry

Your Art = Your Intellectual Property: A Free Workshop for Teens on Intellectual Property Rights in the Music and Performance Industry

Spaces are filling quickly for this important workshop!

All youth workshops are FREE at Cloud Place! Monday May 15, 4-6pm Cloud Place 647 Boylston Street Boston MA 02116 617.262.2949

What do Usher, P. Diddy, and Daddy Yankee have in common? They all have their music, moves, and image copywritten. Boston-area teens and artist educators are invited to a fun seminar on laws that help artists stay in control of their intellectual property. Working with other young artists, learn about your rights within the music and performance industry from Boston's own, Volunteer Lawyers for the Arts.

I understand the derivation of "copywritten," which incidentally produces 375,000 hits on Google (though that includes Google's helpful insertion, after result 3, of some actual "copyright" results). But it's shameful for an organization claiming to explain the law to use this back-formed term.

There are other problems: since copyright now attaches at fixation, Usher, P. Diddy and the like are not special in having copyright protection. If anything, teen artists are more likely to own their own copyrights than famous artists signed to record labels. Worse is the idea that Usher et al.'s "moves" are protected by intellectual property law; this is unlikely at best. Choreography is covered by copyright if fixed (and a music video could possibly count, though it's like a picture of a sculpture in reducing a three-dimensional work of art to a two-dimensional view), but it's unlikely that an individual move would be protectable. As for "image," I presume the reference is to right of publicity law; individual pictures are owned by the photographer or the entity with whom the photographer contracts.

Copyright education is a good idea. But if the educators can't get the law right, how do we expect ordinary people to do so?

A great manipulator fails in its Lanham Act claims

Toni & Guy (USA) Limited v. Nature's Therapy, Inc., 2006 WL 1153354 (S.D.N.Y.)

Plaintiff, a hair care company, uses the mark TIGI generally and “Catwalk Root Boost” mousse and “Bed Head Manipulator” pomade on two of its products. Defendant attempted to create lower cost versions of those products. Catwalk is packaged in an 8-ounce metal canister with a white top and a translucent cap, as is defendant’s Professionäl Lift and Texture Root Boost, though both prominently display their distinctive marks. Below the house mark and “Lift & Texture Root Boost,” defendant’s package states, “TIGI’s Catwalk Root Boost is a competing product,” and there’s a tiny disclaimer on the back of the canister. Defendant took similar steps with its Professionäl Extreme Molding Crème.

Along with its trademark claims, plaintiff asserted false advertising based on the “competing product” claim. As part of the trademark claims, plaintiff argued unconvincingly that defendant’s use wasn’t comparative advertising because it didn’t identify any measurable attributes of the parties’ products and that comparative advertising didn’t allow use of a competing brand name directly on packaging or on the product itself. The court found confusion unlikely based on a thorough analysis of the usual factors.

One of the factors allegedly distinguishing the products was that plaintiff attempts to limit distribution to salons, though its product does “occasionally” show up in pharmacies and stores like Wal-Mart. I’ve seen plaintiff’s products in lots of places, including the CVS a block away; I would have considered them direct competitors using overlapping channels of trade. For whatever reason, distribution contracts in the hair care product market don’t seem well-enforced at all; salon products end up everywhere, and not just in pharmacies in New York City.

The court also found that the level of care likely to be exercised by consumers was high, since they pay attention to the products they apply to their hair. It’s good to see a court recognizing a high level of care with respect to a relatively cheap purchase, since it’s not always the money that matters. The court did misstep, though, by relying on the greater sophistication of plaintiff’s consumers, who buy more expensive products in salons; the key is defendant’s consumers, who could easily be aware of plaintiff’s product (and, in other circumstances, might have perceived a grocery-store version of a salon product as a product line extension).

Plaintiff’s dilution claim fared similarly, despite its argument that only true and fair comparative advertising is exempt from dilution liability. Under Second Circuit precedent, comparative advertising does not dilute. I’m inclined to agree with Judge Kozinski’s reasoning in Mattel v. MCA that, like parody, comparative advertising does dilute (whatever that means) but is excepted from liability on policy grounds. Either way, defendant wins.

Plaintiff argued that defendant’s comparative advertising is false because defendant argued to the court that the products were not in direct competitive proximity. The court found the claim not literally false because the products are “somewhat similar and are sometimes sold in the same stores.” Without evidence that consumers were misled, plaintiff couldn’t prevail.

How not to analyze a false advertising claim

Sunlight Saunas, Inc. v. Sundance Sauna, Inc., -- F.Supp.2d --, 2006 WL 1005172 (D. Kan.)

This case involves a vicious battle between Sunlight and Sundance (and related companies), both sellers of saunas over the internet; former employees of one are principals of the other, which explains some of the bitterness with which they said nasty things about one another. The nastiness included claims on both sides that the other was intentionally lying to customers about the parties’ respective products, along with a briefly live Sunlight criticism site, sunlightsaunas-exposed.com, operated by a Sundance employee. The result was a complaint with everything but the kitchen sauna in it: tortious interference, trademark infringement, trademark dilution, defamation, injurious falsehood, civil conspiracy, prima facie tort, unfair business practices under California law, false advertising under California law, false advertising under the Lanham Act, cybersquatting, and violation of the Sherman Act. If I’d seen this case before I wrote my advertising law exam, I probably would have used it.

Defendant’ summary judgment motion took some unusual tacks, such as contesting the false advertising allegations on the grounds that their speech was noncommercial – a classic “gripe site” -- and that Sunlight couldn’t prove damages. Unsurprisingly, the court refused to find as a matter of law that the website, including the domain name, was noncommercial speech.

The alleged falsehoods offer some interesting lessons, even if you’re not looking to buy a sauna. The defendants’ website included the claim, “Lie # 1: True Ceramic Heaters. Sunlight Sauna's heaters are made from steel rods and aluminum casing with pink paint. Aluminum can be incredibly toxic inside the body.”

Indeed, Sunlight had advertised its heaters as 100% ceramic. Though it described itself as a “manufacturer,” it did not make saunas but bought them from a number of third parties; until Sunlight saw a photo of the heater on a competitor’s website, it didn’t know that its heater was not completely ceramic. Sunlight made the (totally ridiculous) claim that by saying the heaters were 100% ceramic, it meant that the ceramic in the heaters was 100% pure. The court found that the “Lie #1” claim would proceed to trial, since the defendants had no evidence that the ceramic was not pure, and a reasonable jury could believe that Sunlight did not “lie” when it advertised its heaters as "100% pure ceramic heaters."

Where to start? The court misplaced the burden of proof – there’s no mention of Sunlight’s burden of showing falsity. The purity claim is laughable, since no reasonable consumer would understand that as the meaning of “100% pure ceramic,” and the heater itself is concededly not pure ceramic. Whether Sunlight “lied,” as opposed to the actual composition of the heaters, is an opinion; while it might be actionable under the Lanham Act if it implied specific facts about Sunlight’s bad faith, the traditional defamation and injurious falsehood torts seem more appropriate. Sunlight’s claim about the heaters is false, even if it’s not a lie. The aluminum toxicity bit might have some legs, if Sunlight had offered some evidence of falsity, of which there’s no mention in the opinion.

“Lie # 2: Veneer Free Construction. Sunlight Saunas would have you believe that each of their saunas were 100% veneer free.”

Pretty much the same deal: Sunlight made some claims, which a consumer most likely would have interpreted as claims that the saunas were veneer-free: “veneer-free cabinetry” and “Some manufacturers use thin veneer sheets instead of the good stuff. At Sunlight, we employ beautiful tongue and groove wood to the entire sauna, including the ceiling, floor, back wall and benches.” Subsequently, Sunlight discovered that – whoops! – the saunas it sold did indeed contain veneers. In litigation, however, Sunlight mealy-mouthed that it never stated that each sauna was 100% veneer-free, and the court allowed its claim to proceed. This isn’t as outrageous as the result for “Lie #1,” but given that Sunlight removed both the ceramic and the veneer-free claims from its site, I find it difficult to see why this one survived summary judgment.

“Lie # 3: No Safety Warnings: Sunlight Saunas has no safety compliance.”

This one is a little better. Sunlight had safety certification, though not by any of the standard authorities such as Underwriters Laboratory. Though the website continued by listing the standard authorities whose certification was absent, the court found that this qualifying information did not tell the whole story, especially since Sunlight supplied a product manual with safety warnings and general safety information.

“Lie # 4: Lifetime Warranty” and “Sunlight Saunas would have you believe they are the manufacturer, yet another lie.”

Sunlight does offer a lifetime manufacturer’s warranty, though not a warranty of its own. A reasonable jury could believe that a manufacturer’s warranty was enough. No problem there, but the court goes on to buy Sunlight’s claim that “some organizations may consider Sunlight to be a manufacturer because it designs its own saunas” and “in any case, it never claimed to build its own saunas.” Again, I call shenanigans: there’s a reason why the words “manufacturer” and “designer” are different; by Sunlight’s standard, I’m a journal publisher. Is whether you’re a manufacturer material? Maybe, maybe not, but whether the claim to be a “manufacturer” is false doesn’t strike me as a close call. (The PTO has found FURNITURE MAKERS for a store that sells, but does not produce, furniture to be misleading and unregistrable.)

"Lie # 5: Sunlight Exclusives. Sunlight Saunas presents a list of 'exclusive' features. Claiming to be unique.... Sunlight Saunas doesn't even manufacture their own saunas. Other companies offer the same products without the fraudulent claims."

Sunlight had evidence that no other company offers the same exact product. A reasonable jury could find falsity. In addition, the repetition of “lies” could be a false statement about Sunlight’s intent. My reaction: fair enough. It’s possible that the defendants went too far in responding to Sunlight’s ads, though based on the facts in the court’s opinion it seems that they’ve got a strong set of counterclaims.

Defendants contested materiality, as it’s advisable to do these days. Under First Circuit precedent, market studies or consumer surveys aren’t required when a statement relates to an “inherent quality or characteristic” of the product, which essentially means a feature that’s likely to be material. Since the statements concerned safety, quality of construction, and warranties, they were probably material.

Sunlight also alleged false designation of origin because “Sunlight Saunas” was part of the sunlightsaunas-exposed (Exposed) domain name and an email address used on the site was sunlightsaunas@yahoo.com. Defendants argued, unsurprisingly, that confusion was unlikely. Defendants conceded that the similarity of the marks weighed in favor of Sunlight, which they probably shouldn’t have done: “exposed” is a difference, especially since it suggests criticism. Really, this is a nominative fair use case. The court saw it differently, though. A jury could find that defendants’ intent was to enhance their competitive positions at the expense of Sunlight. I don’t know what that has to do with an intent to confuse consumers about source, but apparently it counts against defendants because it’s “self-serving and not educational or disinterested.” The website was created to turn Sunlight into “burnt toast,” “take them down pretty hard,” etc., and it’s clear that defendants were angry, but angry and piratical are different.

Defendants also argued that the Exposed site didn’t sell goods or services, but for a time it did contain links to competitors, so the marketing channels could also favor the plaintiff. The court’s ultimate holding: Though consumers take a great deal of care with a sauna purchase, defendants didn’t establish that they were entitled to summary judgment. Even if consumers weren’t likely to be confused about the source of the saunas discussed on the website, sauna purchasers could reasonably have been confused about whether Sunlight sponsored or associated with the website and/or e-mail account.

Okay, if the false advertising portion of the decision was bad, this is 100% pure bad. Talk about missing the forest for the trees. Under what circumstances would Sunlight sponsor or associate with a website that called it a liar – actually, a LIAR? There are good reasons to criticize the nominative fair use defense – and certain applications of it would disallow the domain name at issue – but at its best it uses common sense where, as here, a mechanical application of the ordinary confusion factors would allow a jury to find likely confusion.

The court got closer on the ACPA claim, pointing out that “exposed” is somewhat less transparent in meaning than “sucks.” It may not immediately alert internet users that they’re at a gripe site. Given that, there was sufficient evidence to deny summary judgment on the issue of bad faith. Whatever you think about ACPA, it’s clearly a better claim than the false designation of origin claim, since it focuses on the domain name rather than the absolutely unconfusing website content.

Plaintiff’s California law claims alleged false advertising on the website and to a private investigator posing as a potential customer. Given plaintiff’s evidence of potential customers who didn’t buy because they saw the website, plaintiff showed enough injury to meet California’s new standing requirements.

The court did dismiss Sunlight’s tortious interference claims for failure to show defendants’ knowledge of either existing contracts or specific potential customers whose plans to contract with Sunlight were disrupted. So too the vague and inchoate claims of “prima facie tort” were dismissed.

Plaintiff’s defamation claims covered both the website and oral statements; there was a genuine issue of material fact on truthfulness, as discussed above. Defendants asserted qualified privilege in communicating information in which it and the recipients had an interest, but that defense does not extend to a publication to the general public, as on the internet. In contrast to injurious falsehood, defamation is about injury to reputation, not just sales, but Sunlight could use lost sales to justify a jury inference of reputational harm, so the claim would proced. Since Kansas has refused to recognize a tort of injurious falsehood, however, that claim was dismissed.

Musical Selection in Figure Skating

Lost in Translation: Musical Selection in Figure Skating is an interesting piece by Maria Tessa Sciarrino, describing another way in which copying and performance can create new meaning -- in this case, can often take potentially radical texts and domesticate them -- without doing anything the law would describe as "transformative."

ISO damages for false advertising and commercial disparagement

First Act Inc. v. Brook Mays Music Company, Inc., --- F.Supp.2d ----, 2006 WL 1134484 (D.Mass.)

Previous discussion of the jury verdict here.

Plaintiff First Act manufactures and sells band instruments, including trumpets, flutes, and clarinets. Defendant Brook Mays is a band instrument retailer. In 2003, Brook Mays published an “ISO Alert” warning buyers against buying “instrument shaped objects” sold at big box retail stores. First Act argued that this disparaged their products. In December, a jury awarded $20 million to First Act for violation of the Lanham Act, commercial disparagement, and tortious interference with an existing or prospective contractual relationship. On posttrial motions, the court upheld most of the jury verdict but granted remittitur of damages.

The defendant argued that the jury was improperly instructed on the standard of fault required for commercial disparagement (aka injurious falsehood or trade libel), since that tort requires actual malice and the jury was instructed that negligence was sufficient. Massachusetts law is unclear on this point, but the court found that, even if the defendant were right, the jury’s verdict revealed that any error was harmless.

Under earlier federal district court cases applying Massachusetts law, the standard of fault for commercial disparagement depends on whether the plaintiff is a private figure (negligence suffices) or public figure (actual malice required). This is in conflict with the Restatement (Second) of Torts, which sets forth a general rule requiring actual malice. The Restatement takes no position on whether liability can also be imposed if, instead of actual malice, the defendant had (a) ill will toward the plaintiff or (b) an intent to interfere in an unprivileged manner with the plaintiff’s interests; or on whether liability can be imposed with (a) or (b) plus negligence. Negligence alone, however, is not enough for the commercial disparagement tort. See Restatement §623A cmt. d. The Supreme Judicial Court of Massachusetts hasn’t reached the issue, though it has cited §623A favorably, as have lower courts.

The district court thought that the earlier federal cases were correctly decided, since the public/private figure dichotomy should apply to all injurious falsehood claims. It seems to me this makes the mistake of assuming that liability should go as far as the First Amendment allows – in fact, the cases the court cited were all about protecting speakers by raising the fault standard despite plaintiffs’ attempts to recharacterize their causes of action as non-defamation-based. By contrast, the common-law tort of injurious falsehood developed to require actual malice even in the absence of First Amendment constraints, and presumably there was a reason for this limit. However, with the Lanham Act imposing strict liability on competitors’ commercial speech, which the ISO Alert in this case clearly was, it’s hard to say that there’s something rotten with a negligence standard. (So why fight about commercial disparagement? Good question, especially given what comes next.)

Even if the court were mistaken about Massachusetts law, the jury found the defendant liable for Lanham Act violations, commercial disparagement, and tortious interference with existing or prospective business relationships. It assessed general damages for lost profits, expenses, and harm to First Act’s goodwill. The other two claims allow for the same damages awarded here, so the mistake wouldn’t affect the outcome.

Anyway, the court found any error harmless. The record showed that defendant acted in reckless disregard of the ISO Alert’s truth or falsity. Despite the ISO Alert’s claim to be based on a “careful examination,” the defendant never tested, played, or otherwise examined First Act's band instruments before disseminating the ISO Alert. In fact, defendant’s CEO and the authors of the ISO Alert admitted that they had never even seen a First Act band instrument before the alert was released. At most, defendants’ repair technicians repaired a limited number of First Act instruments shortly before the ISO Alert was released, but it couldn’t produce any witnesses to testify that the instruments had been “carefully examined.”

The court did order remittitur of reputation damages. Plaintiff’s expert witness testifed that plaintiff needed over $9 million to repair damage to its reputation by outreach to band instrument opinion leaders, marketing materials, corrective advertising, and endorsements. The jury awarded $5,125,000. Though valuing loss of reputation is inherently imprecise, the court found this amount irrationally high. In a typical case, a plaintiff acts quickly against a defendant’s false advertising and engages in its own corrective advertising; by the time a trial concludes, the plaintiff’s expenses can be used as a damages baseline. Here, by contrast, plaintiff sought to fund future corrective advertising, which has only been allowed as damages in a few cases.

More than two years have passed since the last dissemination of the disparaging statements. (Well, some copies are still floating around on the Internet, as I discussed last time. But not many.) The passage of time itself acts as a corrective, making affirmative expenditures less important. Moreover, the court pointed to First Act’s victory in the instant suit, and the press release announcing same that First Act immediately put on its website and has kept there to date, as important corrective information. Though the defendant has to bear the risk of the uncertainty created by its wrong, the award can’t be speculative or punitive, as this one was.

The bottom line: First Act can restore its reputation for far less than $5 million. Corrective advertising in trade and consumer press is justified, but the other measures proposed by plaintiff’s expert were unreasonable, unnecessary, and in some cases plainly futile – such as seminars to educate defendants’ sales reps and repair technicians about the quality of First Act instruments. The court was willing to allow $525,000 for reasonable future corrective advertising.

"Unfair" consumer-oriented conduct under California law

Camacho v. Automobile Club of Southern California, --- Cal.Rptr.3d ----, 2006 WL 1163858 (Cal. App. 2 Dist.)

Camacho, an uninsured driver, rear-ended an insured driver. The insurer paid over $9000 to its insured, then sought to collect from Camacho, who paid $500, then filed a putative class action against the insurer and the entities to whom it assigned its claim. Camacho alleged that defendants’ collection practices were unfair because the collection letters misled recipients and did not conform to the Fair Debt Collection Practices Act.

The definition of unfairness under California law is somewhat murky. The California Supreme Court has concluded that, as applied to a competitor, any finding of unfairness has to be tethered to some impact on competition. Thus, “unfair” behavior towards a competitor is conduct that threatens an incipient antitrust violation or violates the policy or spirit of the law because its effects are like that of antitrust violations or otherwise significantly threaten or harm competition.

Obviously, the question is what this means for consumer actions. Though there’s a split in the lower courts, the Camacho court was of the opinion that the same defintion should apply to consumer claims. The problem with other definitions of “unfair” was that they were too amorphous, and that problem exists with both competitor and consumer suits. However, in a consumer case, a finding of unfairness need not be tethered to specific constitutional, statutory or regulatory provisions, as it must in a competitor case. Section 17200 is broad, and a practice can be unfair even if not unlawful, to compensate for the ingenuity of those who would exploit consumers. Further, anticompetitive conduct is best defined by reference to the policy and spirit of antitrust laws, but the universe of unfair or deceptive conduct towards consumers is larger and thus the field of relevant laws so large that it would be hard to figure out which ones were important.

Instead, the Camacho court turned to the FTC Act. Since 1980, the factors that define unfairness under section 5 of the FTC Act are: (1) the consumer injury must be substantial; (2) the injury must not be outweighed by any countervailing benefits to consumers or competition; and (3) it must be an injury that consumers themselves could not reasonably have avoided. Under that test, Camacho could not plead facts showing defendants’ practices are unfair, especially since he didn’t dispute that he was at fault in the accident and that he was uninsured. Since he was liable for the accident, it doesn’t violate his rights to attempt to collect on that liability. There’s a public interest in collecting from uninsured drivers, and he could have avoided the problem by getting insurance, so he flunks the last two prongs of the test as well.

Defendants’ collection practices may or may not violate the FDCPA; if they did, Camacho has remedies under that law.

Tags:

• unfairness

Syndication Fraud?

Crafts by Veronica v. Yahoo!, Inc., complaint filed May 1, 2006 (D.N.J.)

This putative class action alleges “syndication fraud” by Yahoo!, defined as delivering partners’ ads in low-quality places, such as typosquatting websites that offer only ads or spyware-delivered ads, contrary to representations that Yahoo! would place ads on high-quality sites with relevant information like product reviews. Along with breach of contract, civil conspiracy, and unjust enrichment, the complaint alleges violations of the New Jersey Consumer Fraud Act, claiming that Yahoo!’s practices were unfair and fraudulent.

Some thoughts: (1) The NJCFA is unlikely to cover a nationwide class; even statewide class certification in a consumer fraud case can be difficult, without the due process problems implicated by a nationwide class. California law (where Yahoo!’s based) might have been a better nationwide bet; California courts have accepted nationwide classes against California-based businesses before. If the gravamen of the complaint really is unfairness – and I haven’t looked into that under NJ law – then some of the usual problems with consumer protection class actions, like individual causation and reliance, may be less pressing, though the due process issue would remain for out-of-state class members.

(2) New Jersey requires consumer-oriented conduct; individually negotiated contracts don’t come within its consumer protection law. Are Yahoo!’s ad programs available to the “general consuming public”? See R.J. Longo Constr. Co. v. Transit America, Inc., 921 F. Supp. 1295, 1311 (D.N.J. 1996). If they’re mass-market contracts, maybe they’re covered.

(3) According to the complaint, the advertising is delivered on a pay per click, not pay per impression, basis. Thus, even if the ad sites are lower-quality than advertisers hoped, it seems to me that harm would depend on the proposition that people who actually click on ads at low-quality sites are less likely to do business with the advertiser than people who actually click on ads at high-quality sites. Can this be shown? (The lawsuit explicitly disclaims any reliance on click fraud, which is the subject of other litigation.)

(4) A separate potential source of harm, only hinted at in the complaint, is harm to the advertiser’s goodwill from being associated with typosquatting or spyware. This is much more speculative, but, with advertisers being sued for using spyware, it’s not outside the realm of possibility. What sort of evidence would be relevant to this claim of harm?

New article: My Library: Copyright and the Role of Institutions in a Peer-to-Peer World

53 UCLA L. Rev. 977 (2006) (pdf)

Today’s technology turns every computer—every hard drive—into a type of library. But the institutions traditionally known as libraries have been given special consideration under copyright law, even as commercial endeavors and filesharing programs have begun to emulate some of their functions. This Article explores how recent technological and legal trends are affecting public and school-affiliated libraries, which have special concerns that are not necessarily captured by an end-consumer-oriented analysis. Despite the promise that technology will empower individuals, we must recognize the crucial structural role of intermediaries that select and distribute copyrighted works. By exploring how traditional libraries are being affected by developments such as filesharing services, the iTunes Music Store, and Google’s massive digitization project, this Article examines the implications of legal and technological changes that are mainly not directed at libraries, but are nonetheless vital to their continued existence.