Monday, July 31, 2006

Stolen kisses

Marty Schwimmer made the post about the NYT story on underground brands and their appropriation of others' IP so I don't have to. Instead, I bring you another NYT story, this one about a performance artist whose prior work involves digitally inserting herself into mainstream movies, like Woody Allen with a Macintosh:

The film on the flight was “Bandits” (2001), starring Mr. Thornton and Cate Blanchett. Ms. Mcdonald awoke in the dark to see the actors’ lips moving toward each other in slow motion. “I knew immediately and irreversibly that I should be kissing him instead of her,” she wrote later on her Billy Bob Web site. “I was in love.”

The result was “Me and Billy Bob” (2003), a video in which Ms. Mcdonald creates the tale of a doomed love affair by digitally inserting herself into clips from his films. Using scenes from “One False Move,” “The Man Who Wasn’t There,” “Monster’s Ball” and others, she charts the relationship from sappy first encounter to tearful farewell. In the final scene she re-enacts her deus ex machina “Bandits” moment: holding Mr. Thornton’s face in her hands, she slowly moves in for a final, despairing kiss.

.... Then came “Screen Kiss” (2005), now on view at the Sixtyseven Gallery in Chelsea. In it she splices herself into make-out scenes with other actors, including Ben Stiller, Ewan McGregor, Vincent Gallo and Johnny Depp, culled from movies like “Down With Love,” “Along Came Polly,” and “Before Night Falls.” “Dear Billy Bob,” explains the introduction, “I still love you the best but I can’t wait forever and there are a lot of other fish in the sea.”

After most of the kisses, Ms. Mcdonald turns and stares triumphantly at the camera. But the high point comes in a scene (taken from the campy movie “Original Sin” ) in which she locks lips with Mr. Thornton’s ex, Angelina Jolie. As she nears Ms. Jolie, Ms. Mcdonald’s lips and eyes quavering ridiculously with expectation, it becomes clear that the actress’s features are doing exactly the same thing.

What intrigues viewers of both videos is how Ms. Mcdonald manages to transform herself so completely into a variety of personas, and how cleverly she modulates her expressions and gazes to match — and thereby send up — those of her digital partners. Technologically, the works look surprisingly sophisticated; yet Ms. Mcdonald made them at home on a Macintosh, using editing and special-effects software that she mastered through Internet research.

There's no mention in the piece of possible copyright concerns, much less DMCA anticircumvention violations: How exactly did she get those clips? But assuming that she used a legal method, does she still have to claim fair use, or might clips of kisses be de minimis?

Sunday, July 30, 2006

Another ruling Kevin Trudeau doesn't want you to know about

Trudeau v. Federal Trade Commission, 2006 WL 2087122 (D.C. Cir.)

Previous discussion here. Trudeau sued over an FTC press release reporting the settlement of a deceptive advertising case the FTC brought against him. He argued that the press release itself is false and misleading, and that the FTC’s publication of it exceeded the FTC’s statutory authority and violated his First Amendment rights in that it was a retaliation against him for criticizing the agency.

After going through a number of issues of interest to hard-core federal jurisdiction and administrative law types, the DC Circuit held that Trudeau failed to state a claim on which relief could be granted.

The relevant FTC actions against Trudeau concerned his infomercials for two products, “Coral Calcium Supreme” (for cancer, multiple sclerosis, lupus, heart disease, and high blood pressure) and “Biotape” (“space age mylar” that “connects the broken circuits in the body,” for permanent relief from back pain and pain from arthritis, sciatica, and migraines). The FTC filed a complaint against him in federal district court, which included a motion to hold Trudeau in contempt for violating a 1998 court order that prohibited him from making unsubstantiated claims about consumer products. The parties agreed to a stipulated preliminary injunction barring the challenged representations, but Trudeau started advertising Coral Calcium Supreme again and the court granted the FTC’s motion to hold him in contempt.

The parties agreed to a permanent injunction and final judgment that resolved all pending FTC complaints against Trudeau and permanently enjoined him from “producing, disseminating, [or] making … any representation in an infomercial aired or played on any television or radio media.” There is an exception for books, newsletters, or other informational publications as long as they don’t refer to products or services promoted by Trudeau, aren’t ads for products or services, and aren’t promoted in conjunction with any product or service related to the content of the publication. The infomercials can’t misrepresent the content of the informational work. As the Salon story discussed in my first post shows, this is a loophole large enough to drive a Wells Fargo truck through, and Trudeau has loaded that truck full of money.

Anyway, the final order also awarded judgment against Trudeau for $2 million in equitable relief, but stated that this should not be “deemed a payment of any fine, penalty or punitive assessment,” and further noted that Trudeau “expressly den[ies] any wrongdoing or liability,” and that “there have been no findings or admissions of wrongdoing or liability ... other than the finding against Kevin Trudeau for contempt.”

Five days after the final order was entered, the FTC posted a press release, Kevin Trudeau Banned from Infomercials. The release describes the general contours of the settlement and quotes Lydia Parnes, Acting Director of the FTC's Bureau of Consumer Protection, which states: “This ban is meant to shut down an infomercial empire that has misled American consumers for years.... Other habitual false advertisers should take a lesson; mend your ways or face serious consequences.” The release ends with a disclaimer that the final order is for settlement purposes only and doesn’t mean the defendants admitted violating the law.

Trudeau claimed that the FTC exceeded its statutory authority. 15 U.S.C. § 46(f) provides that the FTC “shall ... have power” to “make public from time to time such portions of the information obtained by it ... as are in the public interest,” but Trudeau claimed that the FTC’s intentional and deliberate misrepresentation of the nature of the stipulated order in the press release was contrary to the “public interest.” Moreover, Trudeau claimed that the press release was issued in retaliation for expressing his negative opinions about the FTC, violating his First Amendment rights by falsely characterizing the stipulated order as containing a finding of wrongdoing or liability on his part.

Assuming that Trudeau had a cause of action based on the FTC exceeding its statutory authority, the court found that an essential element common to the statutory and constitutional claims was that the press release was false or misleading. Trudeau lacks privacy interests in avoiding dissemination of truthful, nonmisleading information about a “public-record document regarding a commercial matter.” Thus, even though a truthful FTC press release may substantially tarnish his reputation, that outcome is justified in the name of consumer protection.

Trudeau argued that the falsity or misleadingness of the press release couldn’t be determined on a motion to dismiss, and that he was entitled to introduce empirical evidence of how an average consumer would perceive the release. The court responded that Trudeau’s citations to Lanham Act and Fair Credit Reporting Act cases were inapposite. If no reasonable person could find the press release misleading, it could decide the issue on a motion to dismiss. I have to say, that sounds an awful lot like the summary judgment standard.

I also find the court’s rejection of the Lanham Act standard interesting because, although the situation is somewhat unusual, Trudeau’s claim does deal with false and misleading speech in a First Amendment context. Even the D.C. Circuit in Pearson v. Shalala said the FDA could regulate commercial speech with empirical evidence of misleadingness. Why isn’t a private party alleging a First Amendment violation entitled to do what the government defending a speech regulation could do? One could draw relevant distinctions, but the court doesn’t do so.

Trudeau identified four false and misleading implications in the press release: (1) the release said Trudeau was banned entirely from infomercials; (2) the release implied that the settlement was a judicial finding that Trudeau was a habitual false advertiser; (3) the release implied the $2 million was a fine; and (4) there was no disclosure that the court hadn’t made a finding of false advertising.

(1) The release didn’t say Trudeau was completely banned; the first sentence mentions “truthful infomercials for informational publications” as an exception, as does the sixth paragraph. But Trudeau doesn’t like the word “ban,” which implies coercion. Yet the press release makes clear that Trudeau agreed to the settlement, and the meaning “ban” includes legal prohibitions, which are indeed coercive.

(2) The release made clear that an FTC official was offering the opinion that Trudeau’s infomercial empire had mislead American consumers for years, not that a court had so found.

(3) The release never calls the $2 million judgment a fine; it is indeed a judgment, even if reached voluntarily (something the release makes quite clear).

(4) Trudeau isn’t entitled to have the press release expressly state there’d been “no findings or admissions of wrongdoing or liability,” since no reasonable reader could construe the press release as suggesting there had been such a finding. In any event, the website contains a link to the final order, in bold at the top right corner, so any interested reader can take a look. “With the terms of the order just two mouseclicks away, any potential misreading of the release can easily be averted.” There’s a sentence that might be borrowed by many defendants! This particular link seems to meet the requirements suggested in the FTC’s Dot-Com Disclosures (obvious, appropriately labeled, near relevant information – though there’s no indication the FTC monitors click-through rates).

In the end, this isn’t a case where the text requires careful parsing to avoid deception. Rather, no reasonable person would misinterpret the press release as Trudeau suggests, so he fails to state a claim. It seems like Trudeau is just in this to harass the FTC; I’m glad the commission didn’t back down and change the information available on the website.

Welcome to Sunnyvale: Dueling Freecycles fight it out in California

FreecycleSunnyvale v. The Freecycle Network, Inc., 2006 WL 2060431 (N.D. Cal.)

For those of you following the dispute over the Arizona injunction forbidding criticism of the validity of the Freecycle Network’s trademark in FREECYCLE, this case may be of interest.

Plaintiff sought a declaratory judgment of non-infringement of trademark and tortious interference with business relations. Defendant is a nonprofit organizations that promote local recycling. Defendant alleges it owns distinctive and famous trademarks in FREECYCLE, THE FREECYCLE NETWORK, and its logo, which it’s been using since May 2003. The PTO has published defendant’s application to register the marks for opposition, and plaintiff has filed an opposition.

Defendant alleges that plaintiff has used the marks without permission, including founding a Yahoo! group with the name SunnyvaleFree that encourages others to use the marks without permission. Defendant maintains that plaintiff’s unauthorized use is likely to cause confusion about origin or sponsorship. Defendant thus counterclaims for direct and contributory trademark infringement under §§ 32(1) and 43(a) of the Lanham Act, unfair competition under the Lanham Act, and unfair competition under California law. The court took judicial notice of defendant’s Arizona lawsuit against Tim Oey, who’s associated with plaintiff.

Plaintiff correctly pointed out that defendant lacked standing under §32, since it had no registered marks. (Consistent with defendant’s rather aggressive view of its rights, defendant actually tried to fight this one.)

The counterclaims never state that plaintiff intentionally induced infringement, just inducement to “use” the marks. To amend the counterclaim to state a claim, therefore, defendant must – if it can do so truthfully – allege either intentional inducement to infringe or that plaintiff directly controls and monitors the instrumentality used by others to infringe.

Defendant didn’t specify whether its §43(a) unfair competition claims covered false association or false advertising. There’s ambiguity in the complaint over whether the parties are competitors. Because that’s an element of false advertising but not false association, the counterclaim needed to specify which theory defendant was using, and it didn’t, so it was dismissed with leave to amend. Interestingly, the court also ruled that, in order to provide plaintiff with fair notice, the counterclaim had to specify whether defendant’s claim relied on inherent or acquired distinctiveness.

Plaintiff also moved to strike the state law counterclaim as a strategic lawsuit against public participation (SLAPP). Anti-SLAPP protection applies to acts in furtherance of a person’s right of petition or free speech under the state or federal constitutions in connection with a public issue. Defendant submitted an email addressed to the Yahoo! group “freecyclenext,” which states:

The best way to keep freecycle in the public domain is for as many people and groups as possible to continue to use the term generically.

If you feel that the term freecycle is generic, you can let the USPTO know by sending a letter to:

Commissioner Of Trademarks

P.O. Box 1451

... Yahoo listens to its customers, so if folks complain about groups being deleted for use of the term 'freecycling' than [sic] members/moderators of those groups should complain to Yahoo at: http://

Another email message to the “freecyclesunnyvale” Yahoo! group and to one of defendant’s officials stated:

I have encouraged people to use the term freecycle as a generic term which would block [Defendant], and all others, from holding a trademark on the term in the area of freecycling services offered on the web.

On their face, the postings don’t appear to cover “a private commercial dispute,” but an expression of opinion about the marks’ protectability. Defendant’s own exhibits indicate the existence of magazine articles and discussion groups critical of defendant, and extensive Google results for “freecycle,” further persuading the court that defendant’s counterclaim arises out of speech acts in connection with an issue of public interest.

The defendant therefore had the burden to show a probability of success, here by demonstrating that plaintiff’s business practice was unlawful, unfair, or fraudulent. Defendant didn’t specify facts behind its allegation of “unauthorized and improper activities,” nor facts supporting its assertion that it has been harmed by loss of distinctiveness or fraud. Without specific allegations, and in view of the Arizona preliminary injunction against plaintiff’s principal Tim Oey, the court was reluctant to grant plaintiff’s motion to strike. Thus defendant was ordered to file amended pleadings specifying a legal basis for the state law claim and alleging facts sufficient to substantiate the underlying legal claim, at which point plaintiff can file a renewed motion to strike. Comment: given the point of the anti-SLAPP statute, which is to protect speakers against litigation unless and until the opposing party has specific facts showing likely success, this presumably puts defendant in jeopardy of paying fees and costs if it decides not to file an amended counterclaim. Also, the 9th Circuit stayed the highly suspect Arizona injunction, which might bear on the issue.

Wednesday, July 26, 2006

A better title for this post would trigger spam filters

The picture may or may not be a Photoshop creation, but CNN ran a story eight years ago about Viagra gelato. I've previously discussed with my classes the Champion Spark Plug-type problem of reconfigured goods as applied to food: What if my neighborhood scoop shop makes Spinach Heath Bar Crunch, and it's really, really bad? What if they use stale Heath Bars purchased from a third party?

But I hadn't considered the pharmaceutical angle. Is there a chance that consumers would expect the pharmaceutical Viagra in purple "Viagra" gelato? If not, this is a good case for plain vanilla dilution law.

Tuesday, July 25, 2006

FDA approval of medical device excises Lanham Act claim

Rita Medical Systems, Inc. v. Resect Medical, Inc., 2006 WL 2038328 (N.D. Cal.)

Plaintiff Rita makes ablation-technology products used to treat patients with tumors. Ablation involves the surgical excision of tissue. Defendant Resect also makes instruments for surgical resection using ablation. Resect was founded by Rita’s former director of product development. Rita brought a bunch of claims against Resect; this opinion just deals with the Lanham Act and cognate state law claims.

Some hospitals use Resect’s InLine Bipolar Coagulator together with Rita's radiofrequency ("RF") generators. Rita apparently discourages the use of the devices in tandem, contending that the compatibility of the two devices is uncertain and untested. Rita maintains that there have been several accidents involving the use of the devices together.

According to Rita, Resect has nevertheless made and continues to make purported misrepresentations touting the compatibility of the InLine with Rita's RF generators. Rita also argues that its reputation is being tarnished, as physicians believe Rita is responsible for the malfunctioning and incorrectly assume the InLine and the RF generators are produced by the same company.

The parties disagree over whether this is a false association or false advertising case; it sounds like both to me.

Resect submitted a §510(k) premarket notification to the FDA in order to be allowed to market the InLine. If the FDA determines that a device is substantially equivalent to a device on the market prior to 1976, the applicant is free to market the device. The §510(k) notification specifically stated that the InLine was designed for use with “a standard FDA cleared RF generator, the RITA System Model 1500 or 1500X.” The FDA determined that the InLine was substantially equivalent to legally marketed predicate devices and allowed Resect to sell the InLine.

According to the court, this “casts doubt on the viability of plaintiff’s Lanham Act claim,” because the Lanham Act can’t be used to challenge FDA determinations, and the FDA has comprehensive regulatory authority over medical devices. Only the FDA can enforce the FDCA. “The FDA authorized Resect to market the InLine as described – that is, configured with Rita’s RF generators.” Evaluating Rita’s Lanham Act claim that, contrary to Resect’s advertising, the InLine isn’t compatible with Rita’s generators, would be tantamount to a review of the FDA approval.

This analysis seems problematic to me, not least because the device at issue is a grandfathered one. When the FDA has found a new drug safe and effective, individual competitors can reasonably be precluded from challenging that determination via the Lanham Act. But when the FDA has just made a substantial equivalence finding that entitles the maker to skip the approval process, saying that the FDA’s hands-off means a Lanham Act hands-off seems risky and unnecessary. Moreover, as far as I can tell, the FDA didn’t evaluate the statement that the InLine was designed for use with the Rita generator. I’m not sure that evaluating its equivalence with an earlier device would include evaluating its compatibility with other devices.

Other FDA preemption cases have asked whether the claims at issue can be evaluated without interpreting FDA regulations; it seems as if the plaintiff’s claims here could be.

Even if the FDA doesn’t preempt the claim, the court found that its approval made Rita unlikely to succeed because it served as evidence Resect’s claims were true. Rita also didn’t have sufficient evidence of incompatibility to show a fair chance of success on its claims. Two failed surgeries weren’t enough, because it wasn’t clear why the failures occurred, and even two negative incidents aren’t “statistically significant enough to conclude that defendants made representations.” (NB: Apparent misuse of the concept of statistical significance.) Moreover, the evidence of the incidents was inadmissable hearsay from Rita employees, rather than testimony from the invovled physicians. Unlike the preemption argument, the failure of proof seems unproblematic.

In the end, Rita didn’t have enough reliable evidence that Resect’s product was incompatible, or that customers believe that Rita’s generators are responsible for the resultant machine failures, or that they wrongly believe that Rita makes the InLine devices.

What is a competitor? and other collegiate questions

CollegeNET, Inc. v. XAP Corporation, 2006 WL 2037457 (D. Or.)

Plaintiff CollegeNET provides online college admission application services to college-bound students and to the colleges and universities to which the students intend to apply. The colleges pay Plaintiff for these services.

Defendant XAP provides online college application and admission processing services to college-bound students through "Mentor" websites. Defendant's paying customers are state agencies, departments of education, and student-loan guarantee authorities (banks and other lenders). Defendant does not charge colleges directly for these online services.

Some of XAP’s Mentor websites include the statement: "Personal data entered by the User will not be released to third parties without the user's express consent and direction." In addition, some of the Mentor websites include "account set-up screens" that contain the following statement: "The information you enter will be kept private in accordance with your express consent and direction. Click here to view the Privacy Statement." Some of the Mentor websites also ask the following "opt-in question" of college applicants: "Are you interested in receiving information about student loans or financial aid?" The personal data of some applicants who answer "yes" to the opt-in question is shared with the commercial institutions that are XAP’s paying customers. As of last year, more than 1300 colleges participated in XAP’s Mentor system.

CollegeNET brought state and federal unfair competition claims, on the theory that XAP makes false representations to its customers about privacy, putting CollegeNET at a competitive disadvantage in the online application and admissions processing services market. Colleges have to pay for CollegeNET, but they can get XAP services for free because the financial aid institutions pay for XAP. CollegeNET further alleges that XAP misleads colleges about its privacy policies, giving colleges the false impression that XAP won’t sell or provide student data to third parties without a student’s express consent.

This case raises the same unusual, or at least formerly unusual, question as the Kinderstart case: If I make money by delivering eyeballs to my clients, is there a Lanham Act violation when I lie to get those eyeballs? My intuition is yes, at least for defendants like Google and XAP – but I’d have to draw the line at communicative products, like a newspaper with articles by Jayson Blair. I tried to distinguish the actual content of the site, which has full First Amendment protection, from the representations used to entice people to the site, which can be false commercial speech subject to the Lanham Act (just as courts have suggested about false claims that a biography is authorized). But didn’t the NYT represent, at least by necessary implication, that it was providing news, that is, true facts? Maybe we have to go further and distinguish ancillary facts – what the cost is to access this information (whether in price or in surrendering personal information), how the information was collected or selected – from the content of the site. Or maybe we sometimes want to include the content: If a website advertises “live nude girls” but only delivers images copied from a Sears catalogue, I’d say there had been consumer fraud. In any event, the situation here – alleged misrepresentation to get subscribers, when third parties pay based on the number of subscribers – seems much closer to classic commercial speech than to core First Amendment activity.

Anyway, XAP argued that CollegeNET lacked standing because they weren’t competitors, and that CollegeNET couldn’t vindicate the rights of third parties underthe Lanham Act. Each party offers different services to different customers. And XAP’s student customers are free to use CollegeNET’s online admission application forms even though they purchase other services through XAP.

The court found genuine issues of material fact on this issue, and also that the record needed development to see whether CollegeNET could act as a private attorney general on behalf of deceived students. I would have said they’re obviously competitors, just a seller of Product X who offers Product Y as a “free gift” is a competitor of other sellers of Y. See Telebrands Corp. v. Media Group, Inc, No. 97 Civ. 6768(RPP), 1997 WL 790576, at *3 (S.D.N.Y. Dec. 24, 1997). I also would have thought that the students’ claim could only arise under state law, since they don’t have Lanham Act standing, and that this would necessarily raise significant choice of law issues. I don’t know what the factual record has to do with this legal question.

XAP further maintained that its privacy policies weren’t commercial advertising or promotion, which requires (1) commercial speech (2) by a competitor (3) for purposes of influencing consumers to buy (4) disseminated sufficiently to the consuming public. The parties agreed on (1), and the court had already held that (2) was in dispute.

As for (3), XAP maintained that its consumers were the financial institutions that buy its services, whereas the privacy policy statements are directed to colleges and students who pay nothing and are thus not influenced to buy anything. CollegeNET responded that XAP’s business success depends on signing up colleges and students. The court found genuine issues of material fact. The ultimate purchasers may be influenced by the number of colleges and students that rely on XAP’s privacy policy statements. This seems like a stretch – there’s no doubt that the banks etc. rely on the overall numbers of colleges and students, but I can’t imagine they distinguish the incremental contribution of the privacy policy, even if the policy is material. Still, I’m sympathetic to the outcome, for the reasons discussed above. On (4), XAP argued that its privacy policy wasn’t widely disseminated, and especially not to banks and other financial institutions, and the court reached the same result.

XAP argued that there was nothing false about its statements: Students understand that when they say “yes” to a question about whether they want to get information about student loans or financial aid, their information will be shared with businesses that provide loans or aid. Moreover, the privacy statements did not involve material facts about the services it sells, because they relate to how XAP handles information, not to the services themselves.

The court denied summary judgment on the issues of falsity and materiality. Given the importance of identity theft and privacy policies to consumers, privacy policies can be fundamental to a consumer’s choice of business. Falsity also remained to be assessed.

The Internet and the Future of Consumer Protection, part 3

Panel 3 was made up of current and former FTC commissioners and directors, and featured a lively dialogue. The sharpest divergence among panelists was whether the FTC would be much aided by the power to impose monetary penalties for unfair practices. CNet report: FTC Wants Beefed-Up Powers Against Net Scammers. I have rearranged and summarized the discussion, which was pretty wide-ranging. If you want reliable records, check out the transcript when it appears, or the video available now.

Jon Leibowitz, FTC Commissioner, argued that ad companies should be held responsible for enabling nuisance adware. They are responsible for ads placed downstream.

The FTC didn’t seek fines in its recent spyware cases because it has no authority for fines for first-time violations of §5; the FTC may also forfeit its right to seek fines in order to proceed ex parte and move fast, which is a Hobson’s choice. The FTC can do consumer redress, but you can’t use that to compensate consumers for the injuries they suffer to browsing convenience and loss of privacy. Civil penalties under §5 that the FTC could pursue without going through the Justice Department – the way the SEC has autonomy – are the crucial need. Liebovitz also mentioned the possibility of reviving the synopsis method, whereby the FTC litigates one case against one business and then serves notice on other entities doing the same thing.

Every decade, the same issues come up: what’s the penalty? If it’s just a cease and desist order, the CEO of a company will always say, “Let’s keep doing it until they tell us to cut it out.” That is why the remedy is key.

A separate problem is that legal anomalies prevent the FTC from giving confidential information to sister agencies in other countries (and receiving it from them, since it would then be FOIAable). This ought to be fixed, and there is proposed legislation.

J. Thomas Rosch, Commissioner and former Director of the Bureau of Consumer Protection: We are seeing the return of an unfairness theory. Breach of privacy cases particularly don’t necessarily involve deception, though they often do. The nature of “unfairness” has changed. With kidvid, the principal complaint was host selling. Today, kids’ ads are interactive, viral, maybe more persuasive and dangerous. The class of vulnerable consumers has also changed; it used to be the elderly and kids. Now there’s a huge universe of unsophisticated internet consumers.

What are the barriers to enforcement? Section 5(n) is a big constraint on the FTC’s ability to go after unfair conduct. The FTC has also taken the position that a pure omission isn’t deceptive, which is another constraint, as is the First Amendment. Politically, the bad burns FTC received on kidvid in the 1970s also curtail action. Kidvid crippled the agency, maybe forever. The tools for dealing with violators are also too limited; we need civil penalties. The final barrier is that the international community has less of a consensus on consumer protection than on antitrust.

We don’t have the ability to deal with things like advergames and buzz marketing (this was in response to a specific question about these things). If the FTC challenged viral marketing, it could expect the same political backlash as with kidvid, even though today’s tactics are more effective than host selling. Proceeding by synopsis or commission rule won’t be enough, though rulemaking might be a good idea for discrete topics like phishing. Kids are being hired as affiliates to carry out various schemes; without civil penalties, we’re just telling them to go to their rooms (where, by the way, they have wireless).

Robert Pitofsky, former Chair: Pitofsky emphasized that both traditional fraud and new privacy issues were everywhere on the internet, and that all FTC’s activity had First Amendment overtones, especially when the FTC starts talking about violence, porn and other bad content. The goal should be to protect the internet as an efficient market without high barriers to entry and as a reliable source of information.

A change he identified from the past is that important private players like eBay and Microsoft are now seeking more regulation. Best practices: mileage standards and Green Guides have worked well even though the car companies know they won’t be prosecuted for violating the mileage standards. Best practices work best with a discrete universe of sellers; they may not work when you’re dealing with the world.

Though the private sector has an important role in detecting abuse, the FTC needs to stand behind self-regulation with a stick. Until penalties are sufficient to make investment in fraud unwise, consumer education will be insufficient to solve the problem. We also need legislation mandating notice and consent for use of personal information. Advertisers know how to get messages across and they can figure out how to get people to pay attention to privacy information.

The FTC can also enact Magnusson-Moss rules to deal with phishing and spam. Civil penalties would apply once the rules were in place. They’d be enforced by the Justice Department, and rulemaking is cumbersome, but it can happen.

Howard Beales, former director, Bureau of Consumer Protection: Privacy is not the real issue for consumers. Anonymity is the core of the problem – on the Internet, no one knows you’re a dog. (The attendees were polite enough to laugh at that.) It’s not just a problem for consumers, since credit card losses are twenty times higher on the internet than offline, which is also a function of anonymity in transactions. Successful internet businesses invest in credibility through branding, like Amazon, or screening, like eBay. Without secure authentication of identity, we will only be able to trust the biggest players.

Notice is a failed promise for privacy – who reads GLB notices? People have other things to do. We should deal with the consequences of information use instead of notice, which has no value in itself. Relatedly, if Congress had acted on spyware four years ago, it might have made automatic updates illegal, even though that’s a great way to protect your computer. Legislation is dangerous!

Also, our problem was always finding solvent fraudsters, not getting authorization to seek civil penalties. Note, too, that as part of setting statutory penalties under the current law, a court must consider preserving the company’s ability to continue in business, which is not what we want with phishers.

The law (deception and unfairness) is broad, but the tradeoff is that it’s often not clear you violated the law until after the fact.

Liebowitz: But we can give good guidance to businesses. And, as with the issue of settlements that keep generic drugs off the market, we can go for penalties the second time, when people should know better, not the first time.

Rosch: Maybe the key is, as Beales says, to reduce anonymity and require notice of who the seller is. But Rosch has antitrust misgivings about creating reputational barriers to entry. Also, without international coordination, there’s no way to solve anonymity problems, since even phone calls can come from anywhere and look like they’re local with VOIP.

Pitofsky: There’s been some political climate change, but the FTC still can’t go after an entire market sector alone. It needs Congress. On privacy: Pitofsky hates to leave the burden on consumers, but, though notice has failed in some contexts, warnings on cigarettes have worked, and we shouldn’t give up. Inducing internet stakeholders to come to consumers’ aid might be better than global notice requirements or reductions in anonymity.

Unfairness as a basis for civil penalties barely survived a constitutional challenge on vagueness grounds before; he is not sanguine about using civil penalties in this fashion.

Liebovitz: We could diminish the risks of unconstitutional vagueness by specifying best practices.

Beales: With respect to advergames, marketers don’t yet know whether they work. If problems develop, advertisers may change their practices. The FTC can address misinformation if it develops. The Commission doesn’t and shouldn’t have authority to address the broader issue of the commercialization of society. (My comment: Why not? Why shouldn’t government do things that individuals alone can’t coordinate?)

Beales on privacy/anonymity: Building security into software is a good solution to the anonymity problem. If you can’t get into my computer, everything’s fine.

Rosch: That eventually chills some of the wonders of the internet. Civil penalties would help: Start imposing them, and we’d get good notices for adware. Fairly legitimate companies are involved in the business and would be scared by the risk fo fines.

Beales: Talk about chill! Which components of WordPerfect would have to be separately disclosed? Someone asked Beales: What about when you can’t uninstall software? Isn’t that obviously bad? Beales responded that some Windows software resists uninstallation. (Not sure that’s responsive to some significant fraction of the audience.)

Liebowitz, responding to Beales on anonymity: The genius of the internet is that you can get started without anyone’s permission. Liebowitz is concerned that incumbents could use consumer protection law to keep new entrants out.

Beales: I don’t want licensing, but I do want to know with whom I’m transacting.

Question: Are there gaps in the FTC’s jurisdiction? Consensus answer: The common carrier exception, but that’s narrow and eroding. Given media convergence, repealing the exception would make sense, but Brand X limited its effect. Liebowitz also pointed to the jurisdictional hurdle to the FTC going after nonprofits on its own (Justice can pursue them in court). Faux nonprofits often hide behind that fa├žade to thwart the FTC.

Question: What have we learned from CAN-SPAM? Beales: I haven’t seen anything systematic. It clarified the rules for legitimate players, which is often the effect of consumer protection legislation: the good comply, and the bad give us another reason they’re bad. The ISP private right of action is useful. Once again, the real problem here is authentication. Liebowitz: CAN-SPAM is good because fines are allowed and because it’s strict liability for certain acts.

Question: What’s the one issue you’d put on the forthcoming hearings’ agenda? Beales: Authenticity and anonymity. Rosch: Civil penalties. Pitofsky: Civil penalties and legislation to require notice and consent. Liebowitz: All of the above.

New blog

Andrew Chin of the UNC Law School has a new blog, intriguingly titled Voiceless. He describes it as "An examination of the legal and technological structures that keep almost all of us voiceless," and he's been posting about topics like Microsoft's competition principles and various versions of what's been termed The Long Tail. (Chris Anderson sent many bloggers, including me, a review copy based on a promise to blog about the book; I hope to get to that in August. I hope we won't be memed out by then.)

The Internet and the Future of Consumer Protection, part 2

Panel discussion on industry and consumer perspectives: Susan Grant, VP for public policy at the National Consumers League, noted that internet scams vary in impact, not in nature, from other scams. They can expose existing problems of consumer knowledge – fake check scams, for example, rely on the fact that consumers have no idea what their liability is for checks they deposit to their accounts that later bounce. Grant also emphasized the damage that phishing can do to brand equity; she wished companies would spend less time on internet trademark infringement claims and more on stopping spoofed sites.

Jules Polonetsky, VP of integrity assurance for AOL (presentation here): Responsibilities similar to those of TV network standards and practices groups are coalescing around chief privacy officers.

The trouble is that small businesses now survive by doing business with the elephants – placing banner ads, using paid search results, affiliating with larger partners. is partners with AOL, Wal-Mart, and others. Google has more than 400,000 advertisers and serves more than 200,000 websites. Yahoo! is at the same scale, and others are smaller but still huge. The vast majority of the sites are legitimate, but scammers take advantage too. Search engines refuse to sell high-risk terms; advertisers don’t want their ads on inappropriate websites – the result is pressure on intermediaries.

One possibility is third-party review, which Google, Yahoo!, AOL and others now use for pharmacy websites. PharmacyChecker charges pharmacies a fee to verify that they meet FDA standards, require prescriptions, etc.; only approved pharmacies can buy sponsored links. Similarly, the TRUSTe trusted downloads program is designed to control problem adware, so that advertisers don’t have to worry about their partners’ partners and their partners’ partners’ partners’ (it’s like STDs!). Small companies don’t know what AOL means by “adware” and “spyware”; they’re run by nice guys, but AOL doesn’t want them deciding with whom to affiliate. AOL et al. can use TRUSTe as a business-to-business model to ensure their partners are only using approved distribution methods.

Polonetsky advocated what he called a middle ground, avoiding extreme regulation (elephants and mice in cages) and the law of the jungle through market anarchy. My reaction: Um, isn’t he describing the law of the jungle – the elephant makes the rules? I’m not sure how his model differs, except insofar as he wants legal help stomping on the mice. He suggested that specific standards and best practices codes, or even litigation, is useful because AOL needs to be able to point to something external to tell affiliates what not to do. (He also wants third-party standards because adware companies and the like tend to call up gatekeepers like AOL and yell and threaten to sue when AOL says they’re bad.)

Ari Schwartz, deputy director of the Center for Democracy & Technology (presentation here), recapped the debate over privacy law by taking issue with some of Eileen Harrington’s statements (she’s Deputy Director, FTC Bureau of Consumer Protection). Schwartz thinks the FTC’s focus on harm is a good thing, but privacy legislation shouldn’t follow that path because financially oriented harm isn’t the only damage that privacy violations do. Moreover, Harrington suggested that overall privacy legislation was a bad idea since we don’t know how the market will evolve. Schwartz responded that we now have about 40 different standards depending on the area; this is confusing for businesses and consumers alike. There’s a constant issue of lack of trust.

Schwartz singled out ISP standing to sue under CAN-SPAM as a useful innovation: because it’s not a regular consumer class action, it’s politically palatable and adds parties who are interested in enforcing the law. There are problems with FTC enforcement: though it’s good when it comes, there can be long lag times between a complete investigation and an enforcement action, and delay is especially damaging on the internet.

Schwartz also argued that the elephants and mice metaphor was incomplete. There are also Rodents of Unusual Size, very large entities like CoolWebSearch, which changes its code set every day. It uses a wide range of East European programmers and gets affiliates to spread its software; some say that its software is on half of PCs over 6 months old, especially those used by teens. ROUSs hide; just because you can’t see them doesn’t make them small. DirectRevenue is another example – they’re on the cover of BusinessWeek because they sought venture capital, but they were already a multimillion-dollar business. This is a business that had a Department of Dark Arts, dedicated to hiding the software on users’ computers and making it impossible to remove. Mice (or ROUSs) can become elephants.

Frank Torres, Consumer Affairs Director at Microsoft (presentation here), several times stated that Microsoft supports a comprehensive privacy law, in order to reassure consumers that privacy is protected (and perhaps create barriers to entry, eh?). The rhetoric of consumer choice pervaded his presentation: parents get choices to use the family settings on the Xbox, etc. His three principles for a consumer bill of rights: (1) my computers and devices only run programs I choose; (2) I can choose with whom to connect on the network; (3) I can manage my sharing of information with others. As the tone of my summary suggests, I’m skeptical about “choice” since we already are overwhelmed with choices and routinely ignore opt-outs and the like. He pointed out that, since consumers are still falling for the Nigerian scam, we’ve got our work cut out for us to educate people not to respond to the spam that still gets through.

Moderator Peter Swire wondered if we could get “open-source compliance,” people who go after scammers in their spare time. (See Lior Strahilevitz’s “How’s My Driving” For Everyone (and Everything?) for a variant on this.) Polonetsky responded that he reads a dozen spyware blogs that already do this – “the zealots are there” – fulltime. Susan Grant said that vigilante groups lack the capability to handle enforcement – we need more state and federal resources.

Future directions for research: Grant wants to know about mobile commerce – how do consumers learn the terms when they buy things from their cellphones; what rights do consumers have in mobile space? Polonetsky: Wants to know more about “appropriate content” policies on the content side, such as MySpace pages, and the extension of ratings systems to online space. Schwartz: International transparency – we need to know, when Taiwanese servers are bouncing queries from Utah, how that works and how to get the FTC to track it.

The Internet and the Future of Consumer Protection, part 1

I spent yesterday at the Center for American Progress conference on the Internet and the Future of Consumer Protection. Materials are available here, where a transcript will also be posted. The conference anticipates the FTC’s planned November hearings on consumer protection, the internet, and globalization.

In the first panel, Peter Swire offered a framework used by many panelists: elephants (large, politically powerful and well-defended, but also easy to regulate if the will exists) and mice (small, hard to corral and regulate) as the subjects of interest. With elephants, the difficult issues are substantive: whether a practice is deceptive or harmful. With mice, the difficult issues involve trapping them, which includes problems of crossborder enforcement. High-profile prosecutions of mice may deter other mice, but it’s riskier – elephants are paying more attention, and know they’re more likely to be the target of enforcement.

Swire identified three clusters of consumer protection issues: (1) connectivity, and problems of monopoly, as in the net neutrality debates; (2) personal information, including both intentional uses and security breaches; and (3) consumers as producers, who may now be subject to the same standards as traditional advertisers when they make claims about what they’re selling on eBay, and also have interests in their devices remaining relatively flexible and capable of generating new content – something Pam Samuelson has also been exploring. With respect to applying substantiation requirements and the like to individual sellers, Swire pointed out that, though exempting individuals and small businesses is a tempting way to limit red tape, individuals can now cause a lot more harm – something copyright owners have been saying for a while.

Monday, July 24, 2006

Fresh as paint or false as paint?

National Services Group, Inc. v. Painting & Decorating Contractors Of America, Inc., 2006 WL 2035465 (C.D. Cal.)

Defendant is a nonprofit trade organization of painters and decorators. Plaintiffs are (1) a group of companies that provide college students with internships managing painting companies in various states (College Works Painting or CWP), (2) a company that offers painting contractor services to Home Depot customers (New Image Painting or NIP), and (3) a company that’s the majority shareholder of (1) and (2).

In June 2006, defendant published two articles on its website. The first, "Dad, I'm Running a Paint Company ... for the Summer," ("CWP article") sets forth a fictional conversation between a father and his college-age daughter, Lindsey, who has just been accepted into CWP's internship program. The father expresses concern about the CWP entities' legitimacy and professionalism, and asks his daughter twenty fictional "questions and answers" about them. The second article, "New Image Painting, A Decision for Independent Painting and Decorating Contractors" ("NIP article"), characterizes NIP's practice of contracting with independent painting companies to provide services to Home Depot customers as an unsuccessful business model that "cannot produce a reasonable profit for any legitimate and qualified contractor."

Plaintiffs sued for state and federal false advertising, trade libel, and intentional interference with business advantage. Because the state section 17200 claim was predicated on a business practice in violation of another law, the court analyzed it in the same way as the Lanham Act claim.

Defendant PDCA argued that plaintiffs lacked standing under §43(a) because they’re not in commercial competition with defendant, which is a nonprofit trade organization. The court rejected this argument. Under 9th Circuit precedent, the issue is not direct competition but whether the plaintiffs have suffered a “competitive injury.” Even if the parties aren’t in the exact same business, if the statements tended to divert business from the plaintiffs to the defendant’s members, that’s good enough. The court also pointed out the sensible policy basis for this holding: A contrary result would allow trade groups to escape the Lanham Act on behalf of their members, tainting the market.

Next, defendant argued that the two articles weren’t “commercial advertising or promotion.” The Ninth Circuit follows the general four-part test requiring (1) commercial speech, (2) by a defendant who is a commercial competitor of the plaintiff, (3) for the purpose of inducing customers to buy defendant's goods or services, and (4) disseminated sufficiently to the relevant purchasing public to constitute "advertising" or "promotion" within the industry. Defendant fought over (1), claiming that its articles weren’t proposals to engage in commercial transactions, but statements by a nonprofit about services provided by nonmembers. However, the case law is clear that the Lanham Act applies to nonprofits, and defendant is a trade organization representing commercial interests.

The CWP article made repeated negative references to plaintiffs’ specific commercial services and positive references to defendant’s members’ services. For example, the fictional dad says he was “very impressed” by a painting job done by PDCA painters – the sort of thing you’d expect to find in a standard ad or testimonial. Thus, even though the article wasn’t a traditional ad format, the specific references and clear economic motive led the court to find commercial speech.

The NIP article, by contrast, was non-commercial speech. It wasn’t a typical advertising format, but a discussion of issues affecting the painting industry. Specifically, it characterized NIP’s setup as an attempt to “roll up” a decentralized market full of family-owned firms into a concentrated, franchised market, and argued that this would be a money-losing proposition for NIP’s licensees. Unlike the CWP article, the NIP article didn’t promote specific services provided by PDCA members. It only mentioned the PDCA in promoting the PDCA itself as an organization qualified to tell the truth about the painting marketplace and to represent painting contractors’ interests. I would think that made the article commercial speech at least with respect to the contractor audience – since NIP doesn’t require its licensees to be accredited, either by PDCA or anyone else, NIP and PDCA seem somewhat competitive.

Nonetheless, the court found that the article was only indirectly economically motivated. Rather than promoting PDCA members’ services to end consumers, the article was directed at members and targeted their economic interests. The discussion of NIP is intertwined with discussion of an issue of public importance – an effort to concentrate the painting industry. Thus, the relevant factors counseled against treating the NIP article as commercial speech.

Only the CWP article was subject to Lanham Act analysis, but plaintiffs’ trade libel and libel per se claims still covered both. Falsity (and therefore some specific factual statement or implication) is a necessary element of all those claims. Except for a single statement that falsely implied that the CWP companies deliberately avoided operations in states that regulated and licensed painting contractors, the court found that the statements in both articles were either nonspecific opinions or that plaintiffs failed to offer evidence of falsity, because the plaintiffs’ affidavit was from a person without actual knowledge of the practices described. As for the false implication about licensing, the court found that plaintiffs were likely to succeed on their Lanham Act and defamation claims, because PDCA offered no basis for believing its statement to be true, and thus plaintiffs were likely to be able to show malice.

PDCA tried to call all of its CWP article statements “opinion” because “Lindsey” was plainly a callow youth and prefaced all her statements about her supposed job with “I think.” The court was somewhat sympathetic to the “callow youth” idea, suggesting that reasonable readers might not assume that Lindsey knew all the details of the business because she was just an intern.

This is a mistake. Consumers probably don’t think the actor touting the virtues of a detergent’s cleaning power knows the science behind it, but the actor stands for the company, as the FTC has long held. Here, Lindsey stands for the PDCA, and readers would understand that this is PDCA’s position, not that of a callow youth. The court seems to have forgotten that Lindsey is neither a real intern nor a real person.

The addition of “I think,” however, did not take Lindsey’s falsifiable claims out of the realm of factual representations; it never does. PDCA largely escaped liability because of a failure of proof, not because its statements about CWP were unprovable. By contrast, the court treated the statements about the painting business in the NIP article mostly as statements of opinion, perhaps because they were more general and market-based rather than addressing the capabilities of specific painting companies.

Of note: The father in the CWP article asked about safety, and his daughter reassured him that she gets a week of training. Plaintiffs alleged this was false because interns are also required to attend meetings every two weeks at which safety is always on the agenda. The court found that the difference between that and “one week of training” would not be material to a reasonable consumer, because the consumer’s overriding concern would be that interns only have one week of training (while traditional contractors have much more experience). The reason this is notable is that materiality has traditionally been assessed by type of claim, rather than claim magnitude: That is, a claim about safety is material because consumers care about safety.

Perhaps the court’s approach makes sense applied to negative statements about a competitor – and it’s consistent with libel law’s tolerance for statements that are basically true – but the traditional false advertising rule works better for statements about one’s own product. Consider whether plaintiffs would have been engaged in false advertising had they falsely represented that, along with initial training, contractors received safety refreshers every two weeks. I’d care that the contractors had been reminded of safety issues rather than just told once. But the issue is one of baseline. If, as the court suggested, consumers think of one week as a ridiculously short amount of training time, then refreshers wouldn’t be that important to defendant’s point. Still, if the plaintiffs used their refresher meetings as a selling point, I think such claims would be material. (It may also be significant that the court just eyeballed materiality, rather than looking for record evidence about what people in the market for painting services want.)

Plaintiffs secured a preliminary injunction requiring the removal of the licensing statement from the PDCA website, but nothing else. As far as I can tell, the PDCA has removed the entire CWP article for the moment, but an edited version might come back up – especially since plaintiffs blame the PDCA for an apparently significant slowing of their business growth since the article appeared.

The distributed sweatshop?

Katharine Mieszkowski’s Salon story, “I Make $1.45 a Week and I Love It,” provides a complication for Yochai Benkler’s theory of distributed peer production of information goods. On Amazon’s Mechanical Turk, people compete to provide answers, write blog posts, and even draw sheep for a few cents per job (paid only if the hiring party is satisfied with the work). There’s fierce competition for the available jobs. The Mechanical Turks don’t seem demotivated by the payments of a few cents. If anything, the small rewards seem to increase their ardor, at least as long as there are occasional big payoffs.

The article quotes critics who find this outsourcing of labor disturbing for workers. It also has implications for the robustness of peer production. Benkler posited that it’s difficult to get people to produce for micropayments. Money also crowds out nonmonetary incentives, as people start to feel less intrinsically motivated. As a result, social provisioning (Wikipedia, Folding@Home, etc.) works best if it’s done free. Mechanical Turk may prove a flash in the pan – the article includes complaints that there aren’t enough jobs for the takers there – but if it succeeds, commercialization will have invaded what I’d thought of as the core of internet social production, people’s desire to answer each other’s questions. Henry Farrell’s contribution to the seminar on Benkler’s recent book raises similar questions about the role and malleability of informal norms; the seminar as a whole is good reading.

Saturday, July 22, 2006

Corn syrup dressed as fruit okay under California law

Williams v. Gerber Products Co., 2006 WL 1993250 (S.D. Cal.)

This case concerns baby food, a subject never far from my mind at present. Plaintiffs challenged Gerber’s advertising for its Graduates for Toddlers Fruit Juice Snacks, alleging violations of California consumer protection law, negligent and intentional misrepresetnation, and breach of warranty.

The allegedly deceptive representations were: (1) the principal display panel features the words "Fruit Juice" and images of oranges, peaches, strawberries, cherries, pineapple, and other berries but the juice only contains "white grape juice from concentrate" and no juice from the fruits and berries displayed on the label; (2) the side panel features the words "made with real fruit juice and other all natural ingredients" but the product is mostly corn syrup and sugar; (3) the side panel states that Snacks is "one of a variety of nutritious Gerber Graduates foods and juices" but the product is not a nutritious food or juice; (4) the principal display panel describes the product as "Fruit Juice Snacks" but the product is mostly corn syrup and sugar and therefore a candy; (5) the descriptive phrase "Naturally Flavored" does not comply with applicable type size requirements.

The court dismissed all plaintiffs’ claims. (1) In context, the label banner reads in full “Fruit Juice Snacks,” not “Fruit Juice.” The package includes both pictures of real fruit and fruit-like substances that appear to be fruit-flavored candy. The packaging truthfully identifies white grape juice as the third most prominent ingredient, following corn syrup and sugar. Plaintiffs argued that the package is deceptive because the Snacks don’t contain any of the fruit depicted on the packaging. But the court – quite wrongly – held that the depiction of fruit on the label is not a “specific affirmative representation” that the product contains those fruits. Now, it’s surely true that putting a cartoon zebra on a label isn’t a representation that the product contains a zebra. But fruit, a standard component of fruit products and something that is in products with which Gerber Graduates compete, is exactly the kind of ingredient a reasonable consumer would expect in the product if there’s a picture of it on the label.

The court was also seduced by the idea that, since there are fruit-like substances on the package that aren’t fruit, consumers wouldn’t think that the product was made of juice from the fruit-like substances – and therefore also wouldn’t think that the product was made of fruit juice. This is clever image-play on the part of Gerber’s lawyers, but deeply silly. In context, reasonable consumers would think that the fruit-like substances on the label are the snacks themselves, while the fruit represents the ingredients – another standard practice on packaging, as with gum or fruit roll-ups or Werther’s Candies, just to take the first three image searches I did.

Nonetheless, the court continued, no reasonable consumer who reviewed the package as a whole would conclude that the Snacks contained juice from the depicted fruits. Thus: “Where a consumer can readily and accurately determine the nutritional value and ingredients of a product, and the product packaging does not affirmatively mislead the consumer by means of specific representations, no reasonable consumer would be misled by the words ‘Fruit Juice Snack’ or deceived by depictions of fruit and fruit-like substances on the primary packaging label.” This ruling is inconsistent with the vast majority of cases that hold that small-print disclaimers can’t take away the deceptive impact of a main advertising claim, of which the name of the product would have to be the prime example. And it entirely skips over the issue of whether a reasonable consumer (that is, an average consumer) actually does read the ingredient list, or whether substantial numbers of reasonable consumers rely on the primary product description given in large type on the front of the package. It may well be the case that the existence of the label raises important questions about preemption, and perhaps even changes the standard of reasonableness, but the court doesn’t consider those nuances.

The court does continue, holding that the images aren’t deceptive because the fruit images indicate that the Snacks are fruit-flavored and the FDA authorizes this practice. Here would be the place to discuss the interaction between the FDCA and state consumer protection law, but we get nothing. I think this misses an important point – the product is “Fruit Juice Snacks,” not “Fruit Flavored Snacks.” Even if it’s okay to use a picture of a strawberry on your artificially strawberry-flavored product, the term “fruit juice” indicates that the flavor comes from, yes, the juice of a fruit, rather than something that has the flavor of a fruit. (Gerber apparently altered the package to make it less deceptive, but the court rightly refuses to take that into account.)

The other claims fared the same, for much the same reasons. For instance, emphasizing “made with real fruit juice and other all natural ingredients” is okay, because even though the product is mostly corn syrup and sugar, the Snacks do contain grape juice and other natural flavors, and it doesn’t say “only” or “all” “all-natural ingredients.” Again, the court’s view of what a reasonable consumer might think differs from mine.

Plaintiffs also argued that the “Naturally Flavored” part of the label didn’t conform with FDA regulations requiring it to be in a font at least half the size of “Fruit Juice Snacks.” The court found that “Naturally Flavored” was approximately half the size, and reasonable consumers wouldn’t notice the difference.

Given these conclusions, the consumer protection claims failed, as did the others – either because they weren’t false in context or because they were non-actionable puffery.

The funny thing is, even though I think the Gerber package was deceptive, I can't imagine these claims could be maintained as a class action with the new injury/reliance requirements for California law (though maybe there's something salvageable in the warranty claims).

Vaporware claim evaporates under Lanham Act scrutiny

Chapdelaine Corporate Securities & Co. v. The Depository Trust & Clearing Corporation, 2006 WL 2020950 (S.D.N.Y.)

Plaintiff Chapdelaine owns the software-based Fail Management System that enables licensees to track and confirm failed fixed-income securities trades, including mortgage-backed securities. Defendant DTCC facilitates post-trade clearance, settlement, and depository transactions. Among the other financial services Depository provides is automated trade comparison, which includes processing failed securities trades.

The parties began negotiating about licensing the Fail Management System. They entered into a nondisclosure agreement, pursuant to which DTCC allegedly forfeited its right to develop a competing software system. Nonetheless, after negotiations terminated, DTCC announced plans to develop its own software system to confirm failed trades for fixed-income securities. This announcement, made at a bond market industry conference, allegedly caused potential Fail Management System licensees to cease negotiations with Chapdelaine. Thus, according to Chapdelaine, the announcement was false and issued for the purpose of discouraging potential licensees from negotiating or entering into agreements with Chapdelaine.

Although the court refused to dismiss plaintiff’s Sherman Act claims, it did dismiss the Lanham Act claim, for multiple reasons. First Chapdelaine lacked standing, because DTCC was not yet a competitor; it only announced its intention to develop a product that doesn’t yet exist. Furthermore, the allegedly false statement was not material – it didn’t deal with the “nature, characteristics or qualities” of DTCC’s software, but rather to DTCC’s development plans. (This comes about because of the somewhat odd Second Circuit rule that “materiality” means dealing with “nature, characteristics or qualities.” If you ask whether the existence or nonexistence of a product would influence a reasonable consumer’s decision to buy it, I think most of us would consider that material. And, if you follow the Second Circuit rule, you could persuasively argue that “existence” is part of the nature or qualities of a product.) Finally, because DTCC’s statement only announced its intention to develop a product, it was not made in commercial advertising or commercial promotion. (This last is just weird. If a studio runs a trailer for a movie that’s just entered production, is it not an ad?)

If the court is correct, there is essentially no competitor remedy for deceptive claims about “vaporware,” except in antitrust law if there’s sufficient market power. Traditional defamation/trade libel won’t work, because there’s no claim made about the plaintiff’s products, and yet the defendant’s claims might have induced customers to wait for its product rather than purchase the plaintiff’s. Perhaps some state consumer protection statutes might offer a remedy.

Thursday, July 20, 2006

Keyword buys and use in commerce

Eric Goldman’s post on JR Cigar’s keyword advertising case and the still-unsettled state of the law got me to try to organize my own thoughts.

“Use in commerce,” under the Lanham Act, requires use on goods or in the sale or advertising of services. As I’ve said before, I find it plausible that selling a keyword to advertisers meets that requirement, though I wouldn’t fight you too hard on the opposite conclusion either. The way I’d frame the counterargument: A search engine selling a trademarked term is not using the mark in the “sale or advertising” of its services. The services themselves might include use of the mark in internal server operations, but we can distinguish that from normal use of the mark to identify or explain the services, the way standard trademark use and comparative advertising, respectively, work.

So far, so good. Then, infringement of a registered mark requires use in commerce of the mark “in connection with the sale, offering for sale, distribution, or advertising of any goods or services on or in connection with which such use is likely to cause confusion” (emphasis added). Infringement under §43(a) likewise prohibits uses that are “likely to cause confusion … as to the origin, sponsorship, or approval of [the infringer’s] goods, services, or commercial activities.”

Does the identified use in commerce – use in the service of selling advertising – cause confusion among purchasers about source or sponsorship? The suggestion that competing advertisers might be confused is laughable, though there are nonetheless traces of it in the JR Cigar opinion, when the judge hints that advertisers might think that JR Cigar gave Overture permission to sell its mark as a keyword. If you agree with me that there’s no likelihood of this type of confusion, then the activities that give rise to the jurisdictional “use in commerce” are unproblematic.

But not so fast! The part of the transaction that isn’t a use in commerce of a mark – the delivery of targeted ads to consumers – may or may not cause confusion about the source of the advertisers’ goods. At the extreme, an ad whose text said “JR Cigars Here” and led to a counterfeiter’s site would be pretty basic infringement.

The real question – one which the Lanham Act naturally didn’t anticipate – is whether a court can take one from column A (jurisdiction) and one from column B (possible confusion) and come up with a complete cause of action. The failure to recognize that this is the crucial issue accounts for a lot of incoherence in the JR Cigar opinion and elsewhere about use in commerce, initial interest confusion, and what exactly the defendant’s goods and services are for purposes of whether the goods and services are similar.

The proper resolution, as the court in JR Cigar almost concluded, is to apply standard principles of contributory liability, rather than engage in a hobbled and self-contradictory confusion analysis stacking search engine against cigar store. This would take some of the silliness of initial interest confusion and “diversion” out of the picture, and focus analysis on the specific ads at issue.

I’ve been thinking about whether there’s a possible statutory fix – say, defining “use in commerce” in the current limited manner for purposes of establishing ownership, but expansively for purposes of infringement. But that would generate lots of First Amendment problems and frivolous litigation. Trademark owners don’t like comparative advertising, but it’s legal in the US, and keyword buys are just another kind. When intermediaries like search engines have a limited ability to detect and prevent infringement and when most of their activities are legitimate, imposing gatekeeper liability on them through an expansive theory of “use in commerce” is a mistake.

Wednesday, July 19, 2006

Duck, duck, celebrity

I thought ice cream-branded stamps were at the boundary of licensing, until I discovered Celebriducks. Yes, they're rubber ducks in the shape of celebrities. Options include sports figures, KISS, Snoop Dogg, Ozzy Osbourne, Mr. T (rotating views!), James Brown, the litigation-inspiring Three Stooges, the Blues Brothers, Elvis, Bill Clinton, and one based on the movie Scream. Also, sports mascot Celebriducks and major league sports ducks (for the Baltimore Orioles, you have your choice of duck or oriole, and similarly with the Pittsburgh Penguins; I don't have any idea what's up with the Toronto Raptor). There are weird things going on with the beaks -- and Jesus gets an especially abbreviated beak, even compared to that of Moses. I'm assuming that many of these figures are licensed. These days, people will license anything -- which means that willingness to license isn't a good proxy for whether something is a parody or other type of commentary.

Sunday, July 16, 2006

Misleading checks work -- until the FTC catches you

Federal Trade Commission v. LLC, --- F.3d ----, 2006 WL 1928496 (9th Cir.)

Between 1999 and mid-2000, defendant’s subsidiaries mailed 4.4 million solicitations offering internet access to individuals and small businesses. As the court explained, the mailings

included a check, usually for $3.50, attached to a form resembling an invoice designed to be detached from the check by tearing at the perforated line. The check was addressed to the recipient and the recipient's phone number appeared on the "re" line. The attached invoice-type form included columns labeled "invoice number," "account number," and "discount taken." The back of the check and invoice contained small-print disclosures revealing that cashing or depositing the check would constitute agreement to pay a monthly fee for internet access, but the front of the check and the invoice contained no such disclosures.

At least 225,000 small businesses and individuals cashed or deposited the solicitation checks, leading to charges for $19.95 or $29.95 a month added to their ordinary telephone bills. Internet usage records show, however, that less than one percent actually logged on to the service.

Defendants’ principals were aware that they’d misled some consumers; they received complaints, and informed a prospective buyer of one of their subsidiaries that they believed “a number of customers” signed up without realizing they’d done so. After they ceased mailing solicitations, defendants commissioned a study, which found that “87.9 percent of 256 participants who actually read the language on the back of the solicitation understood that the act of cashing or depositing the check would constitute agreement to purchase internet service.”

The FTC sought an injunction and consumer redress in the district court. The defendants stipulated to a permanent injunction; the court then granted summary judgment to the FTC on liability, including individual liability for defendant’s principal Ian Eisenberg, and over $17 million in consumer redress.

Section 5 of the Federal Trade Commission Act prohibits "deceptive acts or practices in or affecting commerce." FTCA § 5(a)(1), 15 U.S.C. § 45(a). An act violates § 5 if it is likely to mislead consumers acting reasonably under the circumstances in a way that is material. (The Ninth Circuit rejected defendants’ attempt to add another element, that the FTC must prove that consumers could not reasonably have avoided injury.) Unsurprisingly, the court of appeals agreed that the fine print on the back of the check and other marketing materials was insufficient to avoid liability. The net impression of the offers was of an “invoice” resolving some small outstanding debt.

The fact that over 200,000 people were deceived – as evidenced by low usage rates – was powerful additional, though not necessary, evidence of deception. This reinforces my conclusion that the “reasonable” consumer is the ordinary consumer. In a world where we see thousands of ads a day, it’s not reasonable to expect detailed attention to every one. If an ordinary consumer would take a claim at face value, it’s reasonable to do so. Thus, defendants’ consumer survey did nothing to show that reasonable consumers wouldn’t be deceived, because the survey didn’t look at whether reasonable consumers would read the fine print in the first place. (I’m also worried about the 12% who didn’t understand. There’s always some noise in a survey like this, and 12% is on the low side of deceptiveness, but I find it difficult to believe you couldn’t convey “you’re signing up to pay $X for internet access every month if you cash this check” in a way that more people would understand.)

The court further concluded that the misleadingness was material. The idea that the check was merely a refund clearly made it more likely that consumers would deposit the check, obligating themselves to pay for internet service. This materiality is unusual because it’s materiality with respect to whether consumers even thought they were entering into a transaction; they were unlikely to think they were receiving any representations about goods or services. (Does this reasoning have any relevance for proposals to regulate buzz or stealth marketing, in which the claim is that the apparent ordinariness and disinterestedness of the individual marketer gives an ad message special credibility?)

The court of appeals also upheld summary judgment on Eisenberg’s individual liability, because he participated directly in the deceptive practices by reviewing some of the solicitations before they were mailed, and he had the requisite mental state because he had numerous conversations with a billing manager about customer complaints of deception; he was at least recklessly indifferent to truth or falsity. Reliance on advice of counsel isn’t a valid defense to individual liability for FTC Act violations.