Tuesday, July 31, 2007

Tartmaster, tortmaster

Magic Kitchen LLC v. Good Things International Ltd., --- Cal.Rptr.3d ----, 2007 WL 2171375 (Cal.App. 2 Dist.)

Plaintiff makes a kitchen device, the Tartmaster. From the mid-1980s until 1993, one defendant Pampered Chef bought Tartmasters in 3- and 4-inch sizes from plaintiff, which it sold at “The Pampered Chef Tartmasters.” Plaintiff never required Pampered Chef to use plaintiff’s name on the Tartmaster. Pampered Chef also bought cookbooks from plaintiff; the cookbooks described recipes that could be made with the Tartmaster, and the back cover showed “3 easy steps” for using the Tartmaster: “fill,” “cut ‘n seal,” and “cook.” Around 1993, defendants learned that plaintiff’s patent had expired, and they began producing and selling copies of the device, which they called the Cut-N-Seal. The Cut-N-Seal was the same basic design, but used a different material and a different spring. It was also marked “Cut-N-Seal” and “The Pampered Chef.” Plaintiff knew this no later than mid-1993, but only sued in 2003, alleging trade dress infringement, unfair competition, and false advertising.

Between 1993 and 2003, Pampered Chef invested in the Cut-N-Seal by traveling to Asia (where it was produced), promoting it, and developing recipes for it. In the late 1990s, Pampered Chef switched to selling only a 3½-inch version. When it was introduced, both the product and its instructions were marked “patent pending,” but Pampered Chef never filed a patent application, and it removed the term from the product in 2002, and from the instructions in 2002 or 2003. It also put a sticker stating (ungrammatically) “No patent pending are issued for this product” on earlier versions that remained in stock.

The basic claim was that the Cut-N-Seal infringed the Tartmaster trade dress. The unfair competition and false advertising allegations were also based on claims that defendants transacted business in California without obtaining a certificate of qualification from the Secretary of State and falsely marked the 3 1/2 -inch Cut-N-Seal as “patent pending.”

Unsurprisingly, defendants’ laches defense was successful. The trial court granted a directed verdict on laches after a full jury trial, and also ruled in favor of defendants on other grounds. The court of appeals noted a dispute over whether the Lanham Act has a statute of limitations or whether laches is the only timeliness defense. Some federal cases borrow statutes of limitations from analogous state law claims, but other cases disagree. But, given that the court agreed that laches barred this suit, it did not take a side.

Laches has three elements: (1) delay (2) that was not reasonable or excusable and (3) that resulted in prejudice to the opposing party. If a Lanham Act claim is filed within the analogous state limitations period, there is a strong presumption that laches is inapplicable, whereas if it’s filed outside that period, there is a presumption of laches. Here, the parties disagreed over the analogous period – plaintiffs wanted the four-year limit for unfair practices under section 17200 of the Business & Professions Code, but defendants argued for the three-year limit for fraud and mistake. (I’m with plaintiffs, since the former is the more specific provision.) But it doesn’t matter, not when the plaintiffs delayed ten years.

Plaintiffs argued that they should nonetheless be entitled to damages sustained during the relevant limitations period. But for laches purposes, a continuing tort is considered a single act, not a series of separate acts – even for purposes of prospective injunctive relief. They then argued that the 3½-inch Cut-N-Seal, introduced in April 2000, justified their suit. But the allegedly infringing conduct began with the 3- and 4-inch versions; size does not, here, matter.

Plaintiffs had no good explanation for their delay, arguing only that Pampered Chef knew of plaintiffs’ objection in 1993 and that the parties were litigating other matters. Defendants adequately showed prejudice through their investment in producing millions of Cut-N-Seals and advertising the product.

Finally, plaintiffs argued that defendants’ unclean hands disqualified them from benefiting from laches, based on defendants’ (1) intentional copying of the Tartmaster design, (2) false marking of “patent pending,” and (3) omission of plaintiffs’ prior use of the phrase “cut ‘n seal” from defendants’ trademark application.

The court allowed that unclean hands can bar a laches defense in Lanham Act cases. But the relevant precedent comes from cases involving willful or deliberate infringement, not merely intentional copying. There was no evidence here that defendants knew plaintiffs owned a valid trade dress. The “patent pending” misrepresentation was irrelevant to the trade dress issue, and thus couldn’t support an unclean hands finding. The court didn’t specifically address “cut ‘n seal,” but found that defendants’ hands had not been dirtied in acquiring the rights they were asserting.

The court additionally affirmed the trial court’s rejection of the other state-law claims. California law provides that a foreign corporation may not transact interstate business without a certificate of qualification from the Secretary of State, but defines transacting interstate business to exclude sales through independent contractors or merely soliciting orders that require acceptance outside the state. That’s all Pampered Chef did. Moreover, under Prop. 64, plaintiffs apparently lack standing to raise this claim, since the failure to have a certificate of qualification doesn’t seem to have injured them.

The false patent marking issue was somewhat more serious. But plaintiffs still weren’t entitled to relief. First, their state-law false advertising claim was equitable and didn’t allow damages, and they weren’t entitled to restitution by disgorgement of profits because there was no evidence that plaintiffs had given any money to defendants. Nor was an injunction proper, since the unlawful conduct was unlikely to occur. The court also repeated the standing objection – though here there is an argument to be made (whether or not plaintiffs actually made it) that false patent markings harm competitors, because consumers may think that there are no competitors, or that competitors are infringers, as a result.

The court of appeals also affirmed the denial of defendants’ motion for attorneys’ fees. The Lanham Act standard for fee awards requires an exceptional case. In federal cases, the FRCP require explicit findings for an order denying (or awarding) attorneys’ fees, but that is federal procedure and not applicable in state court. Even if the court of appeals were to find that the case at bar was exceptional and plaintiffs’ claims groundless and unreasonable, the trial court would not have abused its discretion, because the Lanham Act says fees “may” be awarded in exceptional cases. (Didn’t quite get the reasoning here – even discretionary decisions can occasionally be abuse of discretion, no?)

Copyright, plagiarism, and bibliographies

The Chronicle has an interesting pseudonymous piece by an academic who prepared and maintained an online English-language bibliography about "a minor figure in early modern studies." Sent a review copy of a "foreign publisher's" bibliography on his* topic, he was initially amazed to find that the English-language section included everything he'd included in his bibliography. Then he figured out, based on common errors, that the reason for that was that the English-language section was his bibliography. Though he attributes his successful detective work to his training in medieval history, which "acquainted [him] with the practice of identifying dependencies among manuscripts by tracing the repetition of errors," this is the same method the telephone company used in Feist and that mapmakers use.

He wrote to the publisher, who replied that it would contact the authors, but expressed uncertainty whether (1) a web site could be copyrighted, and (2) a bibliography could be copyrighted. Given that it's a foreign publisher, I'll give (1) a pass, since the publisher might not have consulted a lawyer, but unless the publisher's country was one of the few adherent to no modern copyright treaty, web sites are copyrightable like every other form of presenting a work.

(2) would pose an interesting question in the US, since the bibliography is factual and since, as described, the selection principle is "everything." The Second Circuit recently dealt with a similar issue in assessing whether collecting the poems of Dorothy Parker was copyrightable if the selection principle was simply "all uncollected poems." Can sufficient creativity exist in deciding whether an article deals with a particular historical figure, or whether a collection of words is a poem? (Side note: the Dorothy Parker Society site has a blow-by-blow account of the testimony in this hard-fought copyright case, if anyone's interested in what the rare infringement trial to a jury looks like. God bless the internet, despite what it allowed to happen to our poor pseudonymous author -- how else would such an account be available to us?) In many other countries, however, the author's hard work would also provide an entitlement to copyright, regardless of whether it evidenced a creative spark. My guess -- the bibliography would be entitled to a thin copyright even in the US, which would be infringed by simple duplication.

The real issue here, as the publisher recognized, is plagiarism, which is not coextensive with copyright protection. This was a clear case of plagiarism -- violation of academic standards of credit and citation -- regardless of whether copyright infringement occurred. Fittingly, the author asked for credit as a co-editor as a remedy, to which the publisher agreed -- though the book itself was apparently not reprinted, so the author may be the only one with a copy that bears proper attribution.

This raises a practice point. When I was consulted informally on a similar issue -- large portions of an acquaintance's book had been reprinted in a law journal article -- I suggested that he approach the editors, who were likely to be appalled at his revelation, with a specific list of requests, including the emendation of any electronic versions and the printing and distribution of an errata sheet to subscribers. They quickly agreed. In this case, the author might have asked for some more affirmative action on the publisher's part -- to send an errata sheet to known purchasers and to change the cataloging information of the book so that credit would be more widespread. The author can use the credit in his tenure case, but he'd like more.

Finally, I was a little surprised that the author ended up reviewing the book and making no mention of the fact that the English-language portion was his own work. His review, even if it did identify weaknesses in the book, amounted to grading his own work. For the very reason academics hate plagiarism, his readers would have wanted to know that he wrote a chunk of the book under review.

*I say "his" because the author mentions a pregnant wife, but of course I'm playing the odds and might be wrong.

Monday, July 30, 2007

Documentary on law school

I received an email from the filmmaker about this documentary, The Trials of Law School, which follows different students through their introduction/indoctrination into the law. Professors in the film apparently include my father, Mark Tushnet, as well as my colleague Randy Barnett and my former classmate Richard Primus. Trailer here, though at the risk of being tarred and feathered, I will say that one line in the trailer -- that law school takes twice as much time as anything in undergraduate life -- was completely the opposite of my experience. I was a fanatical policy debater in college, so having time to watch TV and go to the gym was new to me.

Jurisdictional hole in the ozone over Kansas

Oxion, Inc. v. O3 Zone Co., 2007 WL 2155675 (D. Kan.)

This declaratory judgment patent action was filed in Kansas, where plaintiff is based. Along with its request for a finding of noninfringement of an ozone generator product useful in agriculture, the plaintiff alleged affirmative false advertising and unfair competition claims. Defendant, an Idaho corporation that had no Kansas customers, contested personal jurisdiction.

Plaintiff argued that the facts alleged in its false advertising, tortious interference with business relationships, and defamation claims meant that defendant purposefully directed its conduct towards a Kansas resident. But circuit precedent held that alleging an intentional tort isn’t enough to show that personal jurisdiction exists. Plaintiff also relied on the Tenth Circuit’s Lanham Act precdedent that false statements can be presumed to injure direct competitors, but the court here was not satisfied that this made a prima facie showing of personal jurisdiction. So the court looked at the interactivity of defendant’s website, which it found insufficient to establish purposeful availment of the Kansas forum – the website didn’t allow purchases but just provided contact information and an email inquiry option.

What about those allegedly disparaging statements on the website? Here the court distinguished between falsehoods about the seller and falsehoods about the seller’s competitor. Defendant’s alleged website falsehoods were in the nature of “puffing” its own goods and contained no direct references to plaintiff, just vague references to “some companies,” “other current technology,” or “competitive technologies.” (If the parties were the only two competitors in the market, this would necessarily target plaintiff, but there’s no indication in the opinion that this is so.)

Moreover, the court considered excerpts from magazine articles linked from defendant’s website. (“Linked” appears to be a misstatement; the website itself hosts copies of the articles.) Defendant allegedly makes false claims about its patents in articles from magazines such as Spudman, Feed & Grain, and The Badger Common ‘Tater (who says potato farmers have no sense of humor?). The court noted that it was unclear whether defendant paid to run those articles, though it seems likely that there was some solicitation. Given that some of the magazines had as many as 16,000 subscribers, the court thought it possible that defendant might have intended to expand its marketing area if it did solicit self-promoting ads, but that would still make a Kansas presence dependent on the extent of circulation of those magazines within Kansas, which was apparently not in evidence.

Had the court found this sufficient as a jurisdictional matter, there would be an interesting issue of whether the articles could support false advertising claims. Some courts have held that articles in specialized publications written at the behest of an advertiser are subject to the Lanham Act despite formal designation as articles, but there may be First Amendment limits to such holdings. Under the circumstances, however, there was no need to define the substantive coverage of the Lanham Act, because defendant’s contacts with Kansas fell short of the minimum necessary for personal jurisdiction.

Friday, July 27, 2007

Lying in the gutter (but looking at the law)

Bassett Seamless Guttering, Inc. v. GutterGuard, LLC, 2007 WL 2079714 (M.D.N.C.)

The parties sell gutter replacement systems in North Carolina. Each is licensed to sell patented components made by K-Guard. Plaintiff Bassett allegedly had an exclusive market area agreement with K-Guard; it claimed that defendants induced K-Guard to breach this agreement and entered Bassett’s exclusive area. Plaintiff’s claims included tortious interference with prospective contracts with end consumers and false advertising.

Usually, tortious interference with prospective economic advantage requires plaintiffs to identify specific lost business. Here, however, the claim is that any sales defendant made within plaintiff’s exclusive trading area would have gone to plaintiff in the absence of defendant’s tortious conduct, because the components at issue are patented and so plaintiff should have been the only available source within that area. Given the existence of the exclusive territory, there’s nothing speculative about the harm to plaintiff. The court allowed the claim to proceed on that theory.

The state and Lanham Act false advertising claims were based on defendants’ claim that its products were its own patented design – “our patented system, “only one is the patented two-channel system from GutterGuard,” etc. (Given that K-Guard is apparently the manufacturer, Dastar isn’t necessarily a fatal barrier to § 43(a)(1)(A) claims – you could construe this as classic reverse passing off, though if the complaint is couched as one about “design” then Dastar is at least implicated.) Analyzed as a false advertising claim, defendants’ statement was at least potentially explicitly false, since they didn’t own a patent. Defendants argued that their ads were misleading at most, because certain components of the system are patented, but the court found this to be a dispute on an issue of material fact and denied summary judgment. (Also, the key here is not system v. components, but whether consumers could get the patented benefit elsewhere – if the patent claim is deceptive, it’s deceptive because of the promise of exclusive benefit, not because of a distinction between parts and whole.) The court suggested that there was “reason to believe” that some of defendants’ customers would have bought from plaintiff if they’d known the systems were the same, since plaintiff offered a lower price.

Hard drive plaintiff gets one more byte

Suzuki v. Hitachi Global Storage Technologies, Inc., 2007 WL 2070263 (N.D. Cal.)

Suzuki filed a putative class action against Hitachi for violations of California’s Unfair Competition Law, False Advertising Law, and Consumer Legal Remedies Act. Hitachi removed the case.

Suzuki bought a 250 gigabyte hard drive from Hitachi. Gigs can be measured in decimal or binary; decimal means 1,000,000,000 bytes, and binary means 1,073,741,824 bytes. (Wikipedia’s definition of gigabyte is interesting in this regard.)Hitachi labels its drives in gigs, but doesn’t explain whether that capacity is decimal or binary. Suzuki alleged that use of decimal gigs intentionally and deceptively overstates the capacity available, since standard operating systems measure drive capacity in binary. So, when a consumer buys a “250 gig” hard drive and connects it, Windows and Mac will report approximately 230 gigs free. To get 250 gigs in binary, the drive would need 265,435,456,000 bytes. (Suzuki also alleged that Hitachi deceptively omitted the fact that the drives require formatting and partitioning, which further decrease available storage.) Moreover, Hitachi’s website defined the term gigabyte in both binary and decimal terms, which plaintiff alleged further misled consumers and estopped Hitachi from denying that gigs should be measured with a binary standard. But Suzuki didn’t allege that he ever visited the website before buying.

Hitachi succeeded in dismissing the UCL and CLRA claims under California’s safe harbor doctrine for conduct clearly permitted by the legislature. Congress has declared that “[i]t shall be lawful throughout the United States of America to employ the weights and measures of the metric system,” and California law provides that contracts can’t be objected to on the basis that they use metric measures. This was enough to show that decimal expression was clearly permitted by the legislature. Hitachi wasn’t estopped from this argument because estoppel requires reliance, and plaintiff didn’t rely on the website.

Hitachi also argued that the UCL claim failed because Suzuki didn’t lose money or property. All storage devices use decimal notation, so he wouldn’t have been able to buy a bigger “250 gig” drive (though he alleges he wouldn’t have paid as much for this one had Hitachi disclosed the binary capacity). Plaintiff alleged that he relied on the product packaging, and argued that reasonable consumers would only care about binary capacity because that’s what their computers show. But he didn’t allege that he relied on any statements that the drive capacity was shown in binary gigabytes. (Not sure this is enough – suppose I offer to sell you a ton of X – can I define ton differently than a reasonable consumer would?) Nor did Suzuki allege that he actually believed the drive was measured in binary when he bought it, and that’s required to state a claim under the UCL and CLRA. His other space-related claims (partitioning etc.) failed for the same reasons. At most he relied on Microsoft’s space calculations, but Microsoft’s calculations can’t be imputed to Hitachi.

Similarly, the UCL and FAL claims faced difficulties because plaintiff didn’t allege that he was misled by Hitachi’s statements or that he believed he was buying a drive measured in binary. Given that the California Supreme Court is presently considering a case on the role of actual reliance after Prop. 64, the court decided not to reach the issue at this time. However, even if actual reliance is unnecessary, Suzuki would still need to show that he was an appropriate class representative. For the remaining FAL claim, the court held defendant’s motion to strike the class allegations in abeyance until either (1) the California Supreme Court issues an opinion that disposes of this case, or (2) defendant has taken Suzuki’s deposition to determine whether he was an average consumer who would have been misled.

Thursday, July 26, 2007

Class action against Cingular "rebates" proceeds

Faigman v. AT&T Mobility LLC, 2007 WL 2088561 (N.D. Cal.) (Patel, J.)

Cingular may be gone, but the lawsuits live on. Plaintiffs filed a putative class action challenging Cingular (now AT&T) advertising under California’s CLRA, false advertising law, and unfair competition law. They claim they bought mobile phones and service contracts from Cingular as a result of a misleading rebate program. Cingular used to use rebate checks, but in 2005 switched to Visa Rewards Cards, which are similar to debit cards. According to plaintiffs, Cingular advertised the rewards cards as “rebates,” but they don’t directly reduce the price of the phone, and they’re less valuable than cash or checks because of restrictions on their use. The key restrictions: the cards must be activated; they aren’t accepted everywhere; they can incur service charges; they expire; they aren’t redeemable for cash; they don’t earn interest; they aren’t divisible or transferrable; they collect private information; and they’re issued in maximum $50 increments, which make them awkward to use, especially since they can’t be used in transactions that exceed the card balance.

Plaintiffs alleged that they bought three phones and signed two-year service contracts, relying on in-store ads stating “buy one, get one free” after rebate and “free” after rebate. They alleged surprise and disappointment when the reward cards arrived instead of checks, difficulties in activating the cards, and rejection when they attempted to use a card at a Chevron station.

On pleading, defendants argued that Rule 9(b)’s heightened pleading requirement applied. Fraud wasn’t a necessary element of any of plaintiffs’ state claims, but Rule 9(b) might nonetheless apply where plaintiffs chose to allege fraudulent conduct. The court earlier held, ruling on the original complaint, that each cause of action rests on an allegation of fraudulent conduct, and the amended complaint is the same in that respect. Thus, each claim is subject to heightened pleading requirements, except that Judge Patel had earlier held that CRLA claims aren’t strictly subject to Rule 9(b); instead, plaintiffs are required to provide “some specificity,” which the court described as an intermediate standard.

The court found that plaintiffs had met their burden by identifying specific language claimed to be misleading. The court found that “a reasonable consumer, upon seeing an advertisement that promises a ‘rebate’ of a certain amount, would generally understand that advertisement to mean that the amount will be returned to the consumer in cash, check or its equivalent.” Other forms of tender could satisfy consumer expectations, but the more restrictions they have, the less likely they are to do so. The restrictions alleged in the complaint – two pages’ worth -- might be enough to make “rebate” and “‘free’ with rebate” misleading. If, as alleged, the cards were materially different from checks, the advertising would be misleading. (Cingular did itself no favors by claiming that its ads, which often showed a phone’s price as the remainder after subtracting savings from a “mail-in rebate card,” used “mail-in rebate card” to refer to the reward card mailed by Cingular to the consumer. As the court concluded, this argument is meritless.)

Plaintiffs satisfied their burden by describing the ads they saw at the Cingular store and attaching additional representative sample ads containing similar language to the complaint; representative sample ads satisfy Rule 9(b) and of necessity also satisfy the intermediate CLRA standard. Defendants argued that the samples are different from the ads plaintiffs actually saw, and thus lack sufficient particularity. The court rejected this argument because the complaint alleges that the relevant language appeared uniformly in Cingular’s ads. Also, Cingular changed its ads after plaintiffs filed suit, and requiring them to attach a copy of the actual in-store promotional material they saw in 2005 would be “unduly difficult” without discovery.

Defendants also challenged causation under the CLRA, arguing that plaintiffs failed to plead injury “as a result of” Cingular’s misrepresentations – they needed to allege both causation and actual reliance. The court found that causation was a necessary element, but not actual reliance – causation can be shown by demonstrating that a misrepresentation was a “substantial factor” influencing a consumer’s decision. It need not be the sole or predominant factor. Plaintiffs sufficiently alleged the requisite causation. The court reserved judgment on whether the UCL or FAL require actual reliance, because the California Supreme Court is presently considering that issue.

Trademark infringement and punitive damages covered by advertising injury policy

Western Wisconsin Water, Inc. v. Quality Beverages of Wisconsin, Inc., 2007 WL 2119415 (Wis. App.)

Western, which bottles and sells La Crosse Premium Water for water coolers, sued Quality for trademark infringement based on a terminated distribution agreement. Quality sold its business to Crystal Canyon, which continued to use Western’s logo on its trucks, uniforms, and water bottles but sold water from Crystal Canyon after it finished its stock of La Crosse water. A jury found in Western’s favor, but the court granted judgment notwithstanding the verdict for lack of causation. The court of appeals reversed, relying on testimony from a few customers who were confused by the switch, though it directed the court to address Quality’s motion for remittitur of the damage award.

In case of a successful appeal, the trial court also ruled that Crystal Canyon’s insurer was obligated to cover the damages, including punitive damages, based on its advertising injury policy, and the court of appeals agreed. First, the court ruled that the definition of advertising injury that included “infringement of copyright, title or slogan” covered trademark infringement – the name of the business and other trademarks were “titles” for these purposes, even though the policy didn’t mention trademark. The court rejected the once-influential holding of Advance Watch Co. v. Kemper National Insurance Co., 99 F.3d 795 (6th Cir. 1996), that the insurance policy would have said “trademark” explicitly if trademark were covered. Instead, the court construed the policy in favor of coverage. It didn’t need to reach the insured’s argument that trademark was also covered under “misappropriation of advertising ideas or style of doing business.”

The advertising injury coverage excluded knowing falsity. The insurer argued that the jury finding that defendants’ conduct constituted an intentional disregard of the trademark owner’s rights could only mean that defendants knew they were making false representations. Here, however, Crystal Canyon didn’t try to pass off its own water as La Crosse water. Instead, it caused confusion by using the logo-marked trucks and uniforms and delivering remaining La Crosse water in inventory while simultaneously transitioning to Crystal Canyon. The jury finding of intentional disregard for rights, and of likely confusion, didn’t amount to a finding of known falsity. The actual bottles Crystal Canyon delivered were properly labeled – La Crosse for the remaining inventory, and Crystal Canyon thereafter. When a customer asked if she could get La Crosse from Crystal Canyon, defendants told her she couldn’t and directed her to Western.

Separately, Crystal Canyon’s conduct didn’t count as “oral or written publication of material,” which is another (and usually irrelevant) component of the knowing falsity exclusion. Crystal Canyon didn’t publish anything; it just used materials on hand. The court noted that the result would differ if Crystal Canyon added the logos after it bought the distributorship.

Wednesday, July 25, 2007

Claim against insurance sold as investment can proceed

Toy v. Metropolitan Life Insurance Co., A.2d ----, 2007 WL 2048931 (Pa.)

Toy sued MetLife and a sales rep, Bob Martini, for bad faith under Pennsylvania’s statute governing bad faith by insurance companies and for unfair trade practices under state consumer protection law. In 1992, Toy wanted to plan for retirement. She met with Martini, who pitched MetLife’s 50/50 Savings Plan to her as a savings vehicle that would generate approximately $100,000 when she reached 65 if she put in $50 a month. He also told her that life insurance was part of the plan. At his urging, she completed an “Application for Life Insurance.” She then received a policy from MetLife with a cover sheet indicating she’d received life insurance in the face amount of $31,544 as of 1992. The cover sheet also stated that she had 10 days to return the policy and get a refund. On page 4, the policy stated a guaranteed cash value at age 65 of $11,008.86. The policy contained an integration clause and stated that sales representatives had no authority to change any contract terms.

Toy only looked at the cover sheet, and subsequently paid $1,400 in premiums. Two years later, she found out about a Florida class action against MetLife and stopped making premium payments. She sued, alleging that defendants misrepresented the policy as a savings/investment vehicle in order to reap the premiums and fees, which were higher for life insurance than for annuities and similar retirement products.

A majority of the Pennsylvania Supreme Court ruled that the state’s bad faith insurance statute covered only bad faith in refusing to pay third- or first-party claims, not bad faith in inducing insureds to become insureds. The Court also held that justifiable reliance was an element of Toy’s consumer protection claims, but a majority concluded that a jury could find such justifiable reliance on these facts. The key question was whether the parol evidence rule precluded Toy from relying on Martini’s alleged misrepresentations, which contradicted those in the insurance contract. In other words, are insureds required to read the written contract, such that no consumer protection claim is available to those who fail to do so and therefore fail to see the differences between the contract and the earlier claims about the contract?

The majority concluded that Toy’s claims alleged fraud in the execution of the contract, triggering an exception to the parol evidence rule. A partial dissent would have found Toy’s claims to concern fraud in the inducement, which is not an exception to the parol evidence rule because it would swallow that rule. The majority generally agreed with this concern, but construed Toy’s claim as one that Martini misrepresented that savings plan features would be part of the contract. That is fraud in the execution, since Toy alleged that she was mistaken as to the actual terms of the agreement because of Martini’s fraud.

The dissent argued vigorously that such an expansive reading of fraud in the execution turns it into fraud in the inducement. “[T]he parol evidence rule subsumes an objective to promote certainty and stability of contract, and to place some reasonable limitations on the litigation exposure of the business community and others, by investing contracting parties with an obligation to read their written agreements and abide by clear terms, short of an allegation of fraud of a sort that would not be obvious from the face of the integrated agreement, and/or in the absence of circumstances in which reading the written agreement would not be reasonable.” Misrepresentations about actual terms of the contract, the dissent thought, should generally be treated as fraud in the inducement if the real terms are clear and apparent and parties have the ability to review those terms.

Defendants also argued that, regardless, Toy’s failure to read the policy prevents her from showing justifiable reliance as a matter of law. But the court pointed out that such a holding would essentially remove the fraud in the excecution exception to the parol evidence rule. Consumers have no general duty to investigate the falsity of misrepresentations (though known or obvious falsity cannot justifiably be relied upon). “[A] party who engages in intentional fraud should be made to answer to the party he defrauded, even if the latter was less than diligent in protecting himself in the conduct of his affairs.” Toy was under no duty to read the policy.

Moreover, the majority concluded that the falsity of Martini’s misrepresentations was not obvious, given the cover sheet. Justifiable reliance is a question of fact; given that Toy claimed that Martini told her that there was a life insurance component to the product she bought, she might have thought that the face amount referred only to the life insurance component and not the overall value of the product.

The dissent disagreed with this as well. The application she filled out was an “Application for Life Insurance” that identifed her as the “Proposed Insured,” contained medical data, and listed other insurance-related provisions. The dissent would not have excused her from failing to read both the application and the policy in reliance on Martini’s representations. The dissent expressed concern for protecting consumers, and didn’t want to require them “to study detailed policy terms at length in circumstances in which they could reasonably expect that coverage would be available.” But here Toy testified that she didn’t think she was getting insurance; Toy’s belief that she was investing in a savings plan was simply unreasonable “when the only application that she signed was one for life insurance, and the policy that she received was, on its face, materially out of sync with her asserted expectation.” The broader pattern of alleged fraud by MetLife in selling insurance as a savings vehicle, the dissent believed, could be addressed by the state insurance commissioner.

Both the majority and the dissent acknowledge that the line between fraud in inducement and fraud in execution is a fine one. There is simply an irreducible tension between protecting parties from fraud and ensuring certainty by enforcing integrated written contracts. Given the disparity in knowledge and sophistication between individual consumers and large insurance companies, I don’t think the majority was wrong to draw the line as it did, despite the obvious costs to the scope of the parol evidence rule.

Recovering profits in Lanham Act cases: willfulness not required, but it helps

Hipsaver Company, Inc. v. J.T. Posey Co., --- F.Supp.2d ----, 2007 WL 2050861 (D. Mass.) – prior discussion here. Plaintiff failed to disclose “key documents and information relating to causation” until the week before trial. The court sanctioned this behavior by precluding the introduction of the evidence and awarding attorney’s fees. But the remaining evidence was enough to allow a jury to infer causation and injury, so the case proceeds, including plaintiff’s attempt to win disgorgement of defendant’s profits. Though plaintiff’s evidence of harm was thin, it argued that a factfinder could reasonably infer causation and injury because defendant made willful and literally false comparisons. Though it didn’t name plaintiff, the parties are the only two competitors in the market; in such markets, factfinders can find that superiority claims necessarily target the other side.

Profits may be awarded in Lanham Act cases not only as a rough measure of harm to the plaintiff, but also to avoid unjust enrichment and to deter a willful bad actor. The 1999 amendments of the Lanham Act, which provided that plaintiffs could recover defendants’ profits in cases of “willful” violation of the antidilution law (section 43(c)), suggested by negative implication that willfulness was unnecessary to recover profits for violation of section 43(a). When the rationale for disgorgement is deterrence and there is no evidence of actual harm, however, the court concluded that plaintiffs must show willfulness. Other circuits have adopted a rebuttable presumption of causation for willfully false comparative ads, and the court found this appropriate – emphasizing that the presumption could be rebutted.

Tuesday, July 24, 2007

Globetrotting: foreign b-ball manufacturer not liable for failure to mark origin

Baden Sports, Inc. v. Molten, 2007 WL 2058673 (W.D. Wash.) – previous discussion here. Baden patented a game-quality cushioned basketball, padded with a sponge underlayer. Baden alleged that Molten’s new models infringed its patent. Molten has a sponsorship agreement with FIBA, the Federation Internationale de Basketball, a French body which sells Molten balls directly to consumers through its online store. Balls sold through the store arrive in the U.S. without any country of origin marking.

Molten advertised its “Dual Cushion Technology” as its own innovation, and it was featured as a proprietary design created by Molten in FIBA Assist Magazine, “[t]echnology that only Molten can create.” Amazon.com labels Molten balls as featuring “Innovative Molten Dual Cushion Technology” Baden objected to this advertising, as well as to the absence of country of origin marking; since the balls are not US-made, this allegedly deceives consumers as to source.

Molten argued that Dastar barred Baden’s claim. Dastar precludes 43(a)(1)(A) claims about the origin of the ideas behind products, but not 43(a)(1)(B) false advertising claims. Several courts have nonetheless used Dastar to dismiss false advertising claims based on inventorship of a product: “the Lanham Act does not protect inventions or ideas.” But was Baden’s false advertising claim merely a repackaged reverse passing off claim? In other words, are the words “innovative, exclusive, and proprietary” about inventorship? “Exclusive” and “proprietary” mean no one else offers the same technology for sale, and “innovative” means new in comparison to other products, regardless of who invented it. The court concluded that the Lanham Act claim partially survived Dastar – the claims based on “exclusive” and “proprietary” were just reverse passing off claims, but “innovative” could be false advertising.

This seems wrong – “exclusive” is not about inventorship, but about whether competitors can or do offer the same technology. “Exclusive” and “proprietary” may indicate a claim of right to preclude others from offering the same technology, but it doesn’t matter who invented that technology. For example, Molten might have exclusive technology transferred from the true inventor, and its advertising would still be true and would have nothing to do with the origin of the ideas behind the technology. And claims of exclusivity might well be material to consumers, who could conclude that they couldn’t get the promised characteristics elsewhere. Again, Dastar has been extended beyond its strictly logical limits, perhaps because of a judicial intuition that plaintiffs in these kinds of cases can rarely show actual materiality and deceptiveness.

Baden’s geographic false advertising claim based on failure to label country of origin was separate. Here, its claim foundered on the problem that Molten was not the distributor or US importer of the unmarked balls, but only a supplier to FIBA. Its only participation in the transactions was wholly outside the US. Baden argued that Molten was contributorily liable if it sold the balls with knowledge that they’d be resold in the US without proper country of origin markings, following Inwood v. Ives on contributory trademark infringement and Steele v. Bulova Watch Co. on the extraterritorial scope of the Lanham Act.

Nonetheless, the court found that Molten’s conduct was outside the jurisdictional scope of the Lanham Act. Molten has no control over the eventual sales of the balls, though it anticipated that some would be sold in the US. Rather than selling to a US importer, Molten sells to a French distributor who then sells balls around the world.

Law firm's use of Internet Archive is noninfringing

Healthcare Advocates Inc. v. Harding, Earley, Follmer & Frailey (E.D. Pa. 2007): The court dismissed copyright infringement, DMCA, and Computer Fraud & Abuse Act (CFAA) claims against a law firm for accessing archived pages through the Internet Archive; because of an apparent glitch, the IA's servers were not at the time checking to see if a robots.txt header had been added to previously archived material, as it had been to the Healthcare Advocates site. The court's fair use analysis is a little unusual, if only because it doesn't use the magic word "transformative" (and there's also discussion of the ways in which this particular "public display" really doesn't resemble the public displays at the core of the display right) but the court gets the right result without much difficulty. There's not much caselaw cited, not even Bond v. Blum, 317 F.3d 385 (4th Cir. 2003), a fair use-in-ligitation case almost directly on point, and maybe that's a strength -- without getting too bogged down in fair use arcana, the court reasons its way afresh to the obvious conclusion.

My question is whether the court should have dignified the argument with as much analysis as it did -- it should not take forty pages to deal with these arguments. The basic claim was that it was infringing and otherwise unlawful for defendants to view, automatically cache, and print screenshots of the website of a party who'd sued their client based on alleged infringement of that very website. Plaintiffs here went beyond chutzpah and should have to pay defendants' fees. Some of the arguments seem sanctionable, as for example the claim that failure to preserve the temporarily cached copies of the site created by using the Internet Archive -- by immediately taking the relevant computers out of service -- "shocks the conscience" and constitutes spoliation of evidence; this type of argument is why many laypeople think the law is an ass.

As the court points out, in the underlying lawsuit, plaintiffs hadn't attached any copies of their allegedly infringed website. It would have been malpractice for defendants to fail to visit it and to look for older versions -- which turned out to be quite useful in the defense of the underlying lawsuit, because the older versions apparently did very little to support plaintiffs' claims. The present lawsuit is harassment, pure and simple; plaintiffs were embarrassed by the prior contents of their website and really wish defendants hadn't been able to use it against them. Copyright law doesn't just have a bad name because people like free music -- though that surely plays a role -- it has a bad name because enough courts have made enough expansive decisions that this court thought it had to work carefully to explain why this ridiculous claim was different. And the same with the DMCA and CFAA claims, in spades.

One other notable holding: in these circumstances, the court said, robots.txt is a technological measure that effectively controls access to a work. I don't think this is right (though I can see how robots.txt creates difficulties in the already shaky division between Corley and Lexmark), and I sure don't see how this holding can be limited to these circumstances, as the court says; under what circumstances would the court's reasoning not apply? I worry about the next stupid lawsuit when someone sues the Internet Archive for having malfunctioning servers that don't always respect robots.txt. (IA was sued here, but was dismissed from the case by stipulation.)

Friday, July 20, 2007

Getting carded

Credit cards have problems – people who use them spend more than if they’d paid cash because they don’t perceive credit as costing the same amount (even though it costs more, if you carry a balance). And because issuers have incentives to compete on rewards rather than simple price, it’s difficult to compare cards because they differ on so many metrics, as my colleague Adam Levitin has documented.

Other cards also pose problems of understanding the terms. Gift cards expire over time and have other limits, sometimes according to terms that cross the line into deception. And now BusinessWeek reports on similar problems with prepaid phone cards that promise large numbers of minutes, then cut back using difficult-to-comprehend and un- or underdisclosed rules, and apparently sometimes outright failure to honor terms. There’s an ongoing false advertising case between competitors, and a consumer class action was settled with refunds and improved disclosures, but the FTC is just “monitoring” the situation.

Thanks to Eric Goldman for the link.

Thursday, July 19, 2007

Celebrex class action continues (again)

In re Bextra and Celebrex Marketing, Sales Practices and Product Liability Litigation, 2007 WL 2028408 (N.D. Cal.)

After ruling on standing, the court turned to defendants’ motion to dismiss for failure to state a claim. Essentially, plaintiffs complain that defendants intentionally misrepresented Celebrex’s effectiveness and safety for pain relief, specifically by claiming that (1) Celebrex had fewer gastrointestinal side effects than traditional non-steroidal anti-inflammatory pain relievers, (2) Celebrex improved quality of life, and (3) Celebrex was cardioprotective or at least safe for cardiovascular health. The proposed class consists of all consumers and third-party payors who paid for Celebrex from Dec. 1, 1998.

The complaint has three claims: (1) the violation of state consumer protection laws of every state and territory, (2) unjust enrichment, and (3) breach of warranty.

On the consumer protection claims, defendants’ main argument is that there can be no “market causation” theory of damages, as set forth in Oliveira v. Amoco Oil Co., 776 N.E.2d 151 (Ill. 2002). Oliveira concerned an Illinois consumer protection class action against Amoco for false advertising of premium gas. Plaintiff didn’t allege that deceptive ads induced him to buy gas, but that he was damaged because the ads created an artificially inflated price for gas he did purchase. Deception, in other words, increased demand, thus raising prices and injuring all consumers whether or not they saw the deceptive ads. The Illinois Supreme Court rejected this theory, because the plaintiff didn’t allege that he was himself deceived; there was no proximate causation.

The court distinguished Oliveira because plaintiffs here aren’t arguing market causation. Rather, they allege they were deceived by false advertising – defendants convinced doctors to prescribe Celebrex and third-party payors to pay for it, at ten times the cost of the alternatives, by falsely claiming superiority. The complaint alleges that Celebrex substituted for cheaper drugs that would have been used absent the false advertising.

Defendants objected that plaintiffs didn’t allege that they saw specific ads, nor that their doctors prescribed Celebrex based on specific ads. But the consumers need not have been aware of the false claims to have been damaged by them. When a third party is a necessary intermediary – for example, a builder who relies on false claims and uses a defective product to build a house for a consumer – falsity, reliance, and damage can all be present even though the end consumer has no independent knowledge of or beliefs about the specific falsely advertised product. That’s what plaintiffs pled here: the medical community was deceived and prescribed Celebrex to patients who paid for it. They aren’t complaining that they paid too much for Celebrex given the truth, but that they wouldn’t have used Celebrex at all. “The unmistakable inference from the [complaint] is that there is no reason for physicians to prescribe and for consumers and third-party payors to pay for Celebrex other than defendants’ false claims; thus, the physicians must have been aware of those false claims when they prescribed the drug.” On a motion to dismiss, that suffices.

The court therefore also rejected defendants’ argument based on the “learned intermediary doctrine.” Because the complaint alleges that doctors were deceived along with patients and third-party payors, the requirement of a prescription doesn’t break the chain of causation.

Defendants also argued that plaintiffs suffered no injury because they received the benefit of their bargain: a pain reliever without gastrointestinal or cardiovascular side effects. But the court thought that argument sidestepped the central allegations of the complaint: “plaintiffs could have and would have received exactly the same relief at a much lower cost but for defendants’ deception.” You can’t just market the same old product at a higher price, claim it’s better than the alternatives, then defend against a false advertising claim by arguing that there was nothing better on the market. In such circumstances, you’ve taken consumers’ money under false pretenses.

Likewise, the court refused to dismiss the unjust enrichment claims. It may be the case that unjust enrichment requires a direct relationship between the plaintiffs and defendants – money transferred directly between them – and maybe plaintiffs ultimately won’t be able to show such a direct relationship. But the complaint sufficiently stated a claim.

By contrast, the court dismissed the breach of implied warranty claims for failure to allege manifestation of a defect. The drugs weren’t unfit for the ordinary purposes for which they were used; the mere possibility of unfitness is insufficient if it doesn’t manifest. Without allegations that plaintiffs suffered cardiovascular or gastrointestinal problems from taking Celebrex, the complaint was fatally deficient. A false advertising claim can be based on the theory that a cheaper drug would have worked as well; an implied warranty claim cannot be.

Wednesday, July 18, 2007

There's nothing true or false; only thinking makes it so

Filmmaker Errol Morris argues that truth and falsity are concepts that can't be applied to pictures, only to statements about pictures. I'm not sure what to make of this argument; by his logic, it seems to me, truth are falsity are concepts that can't be applied to words, only to statements about words. Meanings only exist in context, sure. But what do we learn from that? How should I think about pictures differently because of that?

Credit card processors aiding and abetting California unfair competition violations: Perfect 10 revisited?

Schulz v. Neovi Data Corp., 60 Cal. Rptr. 3d 810 (Ct. App. June 15, 2007)

Schultz alleged that defendant EZ Expo (which wasn’t a party to this appeal) operated an “Internet Matrix” that was really an illegal lottery. Its site promised consumers expensive electronics like plasma TVs for trivial sums. The catch: you only get the prize by paying a fee to enter a “matrix,” and then a sufficient number of other suckers have to sign up after you. In other words, it’s a pyramid scheme.

After dropping over $500 on the site, Schultz asked for a refund and was refused. He sued EZ, along with the other defendants (including PayPal), who offered various ways to pay for the site’s services. Though the court affirmed the dismissal of claims against PayPal and another defendant, Neovi, it remanded to give him a chance to allege facts against two other defendants, Ginix and PaySystems, that would survive the post-Proposition 64 standards.

Schultz alleged that PaySystems and Ginix were “the former and current credit card processing and billing services for EZ.” EZ sent its website to them for their review, and they realized the site was an unlawful lottery and knew EZ was making false claims, but nonetheless allowed EZ to use their payment services, with the knowledge and specific intent of aiding and abetting the lottery. Moreover, they knew that credit cards “‘would lend an aura of respectability’” to the site, “deceive consumers into believing the activity was legal, and make participation easier, thereby generating more revenue.” They contracted with EZ to display their logos and create links to their websites so they could process payments. The orders were actually placed on their websites, and they charged victims’ credit cards, collected the money, deducted processing fees, and then paid EZ. Plaintiff alleged that Neovi’s relationship with EZ was similar to that of Ginix and PaySystems, except customers paid with a “‘virtual check.”

EZ transferred PayPal-using customers to PayPal’s website, where their transactions were completed. PayPal deducted its commissions and paid EZ. Schultz alleged that PayPal reviewed EZ’s site, determined it operated an illegal lottery, and authorized a link with EZ with knowledge and intent to aid and abet similar to that described for the other processors.

Schultz alleged that the defendants were engaged in an unlawful business act or practice under California law. He sued as an individual, as a private attorney general, and as a putative class representative. The complaint doesn’t meet post-Prop. 64 pleading requirements, but he argued that he used Ginix’s payment processing services and can amend the complaint to allege actual injury. The court determined that this should be allowed. Counsel also argued that alternative parties were available to substitute in as plaintiffs who’d used the services of the other defendants, and the court believed this also appropriate, except insofar as the complaint failed to state a claim against any defendant regardless of standing.

The court thus turned to the sufficiency of Schultz’s substantive allegations. Aiding and abetting liability for an intentional tort may be imposed if the person knows the main tortfeasor’s conduct is a breach of duty and gives substantial assistance or encouragement to the tortfeasor.

The court found the allegations against Ginix and PaySystems satisfied these elements. Schultz pled actual knowledge of illegality; his claims did not rely on any duty to investigate a website or monitor its conduct to determine whether it was illegal. The court specifically stated that its conclusion was in accord with public policy: “We do not quarrel with the claim that payment processors provide useful services to consumers. But this does not give them license to aid and abet illegal activity.”

Moreover, Schultz pled substantial assistance or encouragement: these defendants “authorized EZ to configure its site to display their respective logos so that consumers could link directly to their sites to process credit card payments,” with knowledge and specific intent to aid and abet, in order to make more money. After PaySystems ended its relationship with EZ, someone from Ginix “‘personally assured [EZ] that Ginix did not have any problem with the operation of the lottery site and would not freeze funds paid by consumers [as PaySystems had done].... Ginix ... essentially promised it would have a “stronger stomach.”’” These allegations, the court held, showed more than the provision of the usual, legitimate service of processing credit card payments, but went “far beyond” mere processing. Moreover, the allegations were more than merely conclusory, and sufficiently pleaded ultimate facts at this stage of the case. Some California cases suggest that a complaint must allege that an aider and abettor had the specific intent to facilitate wrongful conduct. Even assuming this is required, the court pointed out that Schultz had alleged specific intent.

Defendants relied on Emery v. Visa Internat. Service Assn., 116 Cal. Rptr. 2d 25 (Ct. App. 2002). In Emery, the plaintiff brought state claims based on solicitations to participate in illegal lotteries that allowed payment with Visa cards. The defendant was a clearinghouse whose members either contracted with merchants to accept Visa for payent or issued credit cards to consumers. The defendant didn’t issue cards, transfer funds, bill cardholders, or receive any fees based on particular transactions. Plaintiff alleged that defendant’s “advertising, licensing of its logo, and utilization of its payment system create[d] either an actual or ostensible agency relationship with its merchants” and that defendant aided and abetted the lottery by failing to police the exploitation of its logo and repudiate lottery-running merchants.

The court distinguished Emery because here, Schultz alleged that Ginix and PaySystems, “with prior knowledge of its operations, contracted directly with EZ and received payment based on their activity” (emphasis added). Schultz was not pleading liability from failure to police; rather, he alleged that defendants “had a direct stake in the success of the website and contracted for use of their services to encourage participation and make more money.” When an aiding and abetting allegation is based on failure to stop lottery solicitations, making a credit card available for payment is not itself sufficient; the Emery court found no evidence that the defendant knew of the solicitations, facilitated their distribution, or in any manner helped with an intent or purpose of facilitating violation of the law. Here, the allegations of the complaint supplied what was missing in Emery.

The Emery plaintiff also relied on the defendant’s use of the Visa logo, arguing that it implied the truth of merchants’ statements. But the Emery court considered this no more than an extension of the “failure to police” claim. By contrast, the allegation here was not merely licensing the use of the logo to bad actors. Rather, Schultz pled that defendants, “with full knowledge of the alleged illegal website, actively participated in processing payments, hoping use of the direct link from EZ's site to their sites would generate more revenue.”

As to PayPal and Neovi, however, the court found the complaint insufficient. Plaintiff pled only PayPal’s knowledge that EZ was running an illegal lottery and agreement to allow EZ to use its system because it would be profitable for PayPal. The allegations against Neovi were similar – knowledge of illegality plus knowing and intentional aiding and abetting by providing a payment system. Such conclusory allegations were insufficient to allege knowledge of the illegal lottery or “substantial assistance or encouragement.”

Discussion: This case suggests that Kozinski’s dissent in the recent Perfect 10 case might have merit as to the state claims, since it makes distinctions similar to his. Assuming reconsideration would be justified, it seems to me that preemption is a separate barrier to many of the state-law claims. Perfect 10’s claims are mainly about aiding and abetting copyright infringement, though it has a potpourri of other allegations. Here’s the Perfect 10 district court’s description of the factual allegations supporting the state-law claims: “The misconduct, all perpetrated by the allegedly infringing websites or unidentified ‘webmasters,’ includes selling misappropriated content, deceiving customers as to the origin of their content, misrepresenting the amount and scope of material on the websites, falsely claiming their websites are free, selling access to unauthorized passwords, and running websites that promote rape and incest, illegal downloading, and stealing cable television services.” The only thing left out, it seems, is tortious failure to repair the kitchen sink.

The first item on the list, selling misappropriated content, is clearly preempted, and the next two might be as well depending on the facts – deception can be an extra element, but if the alleged deception comes merely from failing to identify Perfect 10 as the source of the images, that’s just infringement. (See also Dastar.) False “free” claims and selling unauthorized passwords are possibly valid claims, as long as Perfect 10 can allege standing under state law, which it probably can as a competitor of these sites and of sites for which the bad guys sell passwords. As for promoting rape and incest, illegal downloading, and stealing cable – there, not so much hope with the standing requirement. How do those bad behaviors harm Perfect 10 exactly? Separately, unless the sites meet the rigid requirements for incitement under the First Amendment, which I highly doubt, promoting rape and incest isn’t illegal, just disgusting. Illegal downloading and stealing cable raise preemption questions again, not to mention the kind of tertiary liability issues – liability for aiding a site that itself promotes infringement by others – that might make even Kozinski nervous.

All told, the only plausible sources of state-law liability – defendant’s involvement in the bad guys’ actual misrepresentations about the costs or benefits of paying for bad-guy sites, which cause Perfect 10 to lose business to the bad guys – are limited, but maybe Perfect 10 should get the chance to offer facts in support of them. The scattershot presentation of allegations doesn’t inspire much confidence, though.

Tuesday, July 17, 2007

Multistate class actions not entirely dead

At least not if you're a third-party payor who can aggregate the claims of its insureds, the way a traditional class action allows the legal system to do on the fly. In re Bextra and Celebrex Marketing Sales Practices and Product Liability Litigation, --- F. Supp. 2d ----, 2007 WL 1977282 (N.D. Cal.)

These putative class action lawsuits arise out of the marketing and sale of Celebrex and Bextra. This recent opinion dealt with challenges to the standing of third-party payor plaintiffs such as health plans and associational plaintiffs such as California Public Interest Research Group under state consumer protection laws. The judge analyzed the various state statutes at issue, reaching different results depending on the state.

Losers: The associational plaintiffs all lacked standing. Not all their members who took Celebrex or Bextra suffered the same harms. The association thus couldn’t stand in its members’ shoes, because those members needed to participate individually to determine damages. The associational plaintiffs wanted to press for injunctive and declaratory relief, but the court pointed out that other parties in the case with indisputable standing were already seeking that, so the associations were unnecessary. Moreover, the associations couldn’t allege that all of their members took Celebrex or Bextra. All their claims were dismissed.

In Texas, consumers have private rights of action, but business entities with assets of $25 million or more are excluded from the definition. The Texas third-party plaintiff here, according to filings with the state insurance commission, had more than $25 million at the relevant times, and the court took judicial notice of this and dismissed its claims, rejecting its arguments that the measure should be net assets and that reserves should be excluded. In Ohio, plaintiffs would have consumer standing if they are “persons” engaging in “consumer transactions” with suppliers. Though third-party payors are persons, they did not engage in consumer transactions – sales to individuals for personal purposes. In Alabama, plaintiffs have to be “natural persons,” and the third-party payors aren’t.

Non-losers: In Michigan, by contrast, plaintiffs have standing if they are persons and are damaged by unfair or deceptive acts in trade or commerce, which means providing goods etc. primarily for personal or household purposes. Because the statute does not require that the plaintiff be the consumer who purchased the goods, but only that it be damaged by the transaction, the Michigan third-party payor plaintiffs had standing. Indiana law is similar (requiring a “person” who suffers damages as a consumer), but there’s not much case law on the subject. Especially given that the legislature had amended the law to remove an earlier, more restrictive interpretation, the court held that sales to third-party payors for patients’ personal use could qualify, and thus relevant third-party payors could amend the complaint to allege Indiana state claims. New York law requires consumer-oriented conduct and injury to the plaintiff. The issue here was consumer orientation – did the challenged conduct affect the public interest? Because the allegations include that defendants falsely advertised the drugs directly to consumers, and that the misleading statements had an effect on consumers by leading them to pay more for their prescriptions, the complaint sufficed under New York law.

Thursday, July 12, 2007

Whole Fool: CEO sowed Wild Oats

I don't know much securities law, but I'm guessing it wasn't kosher, so to speak, for the Whole Foods CEO to badmouth a rival company online under a pseudonym, even though Whole Foods says his posts didn't represent the company. I'm also guessing he didn't mention to his attorneys that he had a secret life as "rahodeb" at the time. (Oh, to be a fly on the wall at the meeting at which this was revealed.)

As the speech of a competitor (statements by company representatives can count as such), CEO John Mackey's disparagement of rival Wild Oats could be actionable under the Lanham Act and various state statutes, though perhaps safe because it was mostly opinion -- braggadoccio -- and not fact. (Predicting bankruptcy might be sufficiently factual, even if it is qualified by "IMO," depending on what else he said. Also, a CEO using Netspeak: how charming.)

He justified his statements in part by claiming: "The views articulated by rahodeb sometimes represent what I actually believed and sometimes they didn't. Sometimes I simply played 'devil's advocate' for the sheer fun of arguing." I'd like to point out, however, that the devil's advocate was not, in fact, employed by the devil.

The focus group defense to false advertising

The NYT ran a story about negative reactions from doctors to an American Cancer Society ad about skin cancer, funded by Neutrogena: ““My sister accidentally killed herself. She died of skin cancer,” the ad says. The problem? Sunscreen protects against skin cancer, but it’s not necessarily your best bet for avoiding melanoma, the fatal kind of skin cancer. The society’s explanation:

Dr. J. Leonard Lichtenfeld, deputy chief medical officer at the American Cancer Society, acknowledges that the advertisement is aggressive. “We have taken some license in taking that message and using it the way we’ve used it,” he said, “because that’s the way to get the message to our target audience.”

Dr. Lichtenfeld said the advertisements were aimed at women ages 20 to 48 because sun exposure in childhood and young adulthood can influence skin cancer risk later in life, and it is mothers who largely control children’s time in the sun.

He added that the advertisement’s creators settled on the approach with the help of focus groups, who told them, “To get the message through to me, you have to shock me and get my attention.”

In other words, we are so inured to claims of danger that it takes exaggeration – what some might call false or misleading claims – to get us to notice smaller, but still important, risks. This is a persistent problem in advertising regulation: Because of predictable problems with human cognition, our regulatory choices routinely require us to choose between overkill and underkill.

Wednesday, July 11, 2007

To boldly infringe

This story about a British man who rebuilt his apartment to resemble the interior of the starship Voyager, then sold it for a tidy sum, raises both copyright and trademark questions. For trademark: Is interior design a market consumers would expect the Star Trek franchise to enter? For copyright: Can there be copyright in an architectural work constructed as a set? The set of Star Trek: Voyager was apparently the Next Generation set, which would have been constructed before the US started protecting architectural works in copyright. Another possibility would be to claim copyright in the interior as a compilation, a strategy that’s worked for at least one museum curator in Europe.

Interview: Bruce Keller of Debevoise & Plimpton

I’m inaugurating a new occasional feature, interviews with lawyers whose practices include advertising law. I’m starting close to home, with Bruce P. Keller, a partner at Debevoise & Plimpton LLP (where I was an associate). At Debevoise, he supervises the firm’s Intellectual Property Litigation Group. Along with his extensive litigation experience, he has taught Internet Law at Harvard with his partner Jeff Cunard and published extensively. He was an advisor to the American Law Institute’s Restatement of the Law: Unfair Competition, and is the co-author, with David Bernstein, of an advertising law treatise to be published next year by Law Journals Press.

Q: How did you get into advertising litigation?

Keller: I had been interested in the field of advertising as an undergraduate, written some pares on the subject and continued this interest in law school, where I was fortunate enough to get a job as a research assistant to Professor David Rice, who had both authored a case book on consumer law and was a principal draftsman of Massachusetts’s Unfair and Deceptive Practices statute, Section 93(a). Based on that background, I was able to land a job out of law school with a firm that had a large Madison Ave. advertising agency as a client.

Q: Tell us about a favorite advertising case (or cases) you litigated.

Keller: I have several. One is the lawsuit the Times Square building owners brought against the producers of the first Spiderman motion picture (Sherwood 48 Associates v. Sony Pictures Entertainment, Inc., 213 F. Supp. 2d 376 (S.D.N.Y. 2002)). They alleged, among other things, that the battle scene with Green Goblin, depicting digitally altered billboard signs, falsely communicated their endorsement of the film. I like that one not only because I was a huge Spiderman fan as a kid, but also because I got to tell my son that Spiderman needed my help.

Another involved the short-lived product, Mylanta Night Time Strength Antacid (Novartis Consumer Health, Inc. v. Johnson & Johnson & Merck Consumer Pharmaceuticals, Co., 129 F. Supp. 2d 351, aff’d, 290 F. 3d 578 (3d Cir. 2002)).

It is a case that made new law and involved a false claim that was inherent in the name of the product. As a result, the injunction stopped both the advertising and the sale of the product itself.

My favorite case, though may be one of my first, back in 1986. It involved the false claim by E.P.T. that it was the fastest home pregnancy kit then on the market because it could tell a woman if she was pregnant in as fast as 10 minutes (Tambrands, Inc. v. Warner-Lambert Co., 673 F. Supp. 1190 (S.D.N.Y.1987)). In fact, although that was true if you were sufficiently far along in your pregnancy, you could never know you were not pregnant until a full 30 minutes had elapsed, making our client’s 20 minute, positive or negative, test faster by 10 minutes. I always thought that was a particularly clever false advertising claim and was relieved we could prove it false to the court.

Q: What are some hot legal issues in the courts? What emerging trends in advertising law should advertisers be watching?

Keller: Surprisingly, from time to time, first principle issues like materiality, admissible survey results, standing and the proper standard of proof still crop up in given cases. I don't know that it is possible to generalize beyond that.

Q: Are internet advertising and user-generated content changing advertising law?

Keller: Not so much in the area of false advertising law, because the principles are the same regardless of the medium. These changes relate more to how the business is conducted and, of course, raise a host of ancillary issues related to privacy, rights clearance, making sure contest and other rules are clearly spelled out and issues that do not turn on likelihood of confusion (the standard that must be met in false advertising cases).

Q: What is your advice for a law student who wants to practice in the field? Given that most schools don’t teach advertising law, what are the best courses to take?

Keller: Besides yours, you mean? Actually, don't worry too much about what you take in law school, just enjoy learning how to think like a lawyer. If you want to be regarded as a good adviser to clients in this area, it is helpful to have a basic background in IP law, but more because so much of advertising and marketing is built on either clearing or owning those assets. A solid understanding of what makes a client’s business “go” is always going to stand you in good stead.

Tuesday, July 10, 2007

The iPhone and false dramatizations

David Pogue's blog has a post today about the apparent "fakery" in iPhone ads, which composite images of the iPhone with other images of the screen, achieving a result that approximates user experience but without disclosing that the images are simulations. There were 100 comments to Pogue's post when I looked, essentially all dismissive. We should know, they claimed, that photos are routinely retouched to make products look better.

That's not what the FTC thinks. Colgate-Palmolive made shaving cream that actually could “shave” sandpaper. On TV, however, real sandpaper looked like nothing but colored paper. The advertiser, therefore, rigged a demonstration using simulated “sandpaper” made of plexiglass covered with sand. The Supreme Court upheld the FTC’s order barring the ad. The Court agreed with the FTC’s conclusion that “even if an advertiser has himself conducted a test, experiment or demonstration which he honestly believes will prove a certain product claim, he may not convey to television viewers the false impression that they are seeing the test, experiment or demonstration for themselves, when they are not because of the undisclosed use of mock-ups.” Federal Trade Comm’n v. Colgate-Palmolive Co., 380 U.S. 374, 385-86 (1965).

Using undisclosed props or mock-ups does not necessarily create a false demonstration or dramatization; it is only when consumers are told to rely on their own perceptions to verify the advertiser’s claim that a dramatization or demonstration can be false. The Supreme Court gave the example of a scoop of mashed potatoes used to stand in for ice cream under hot studio lights. If the potatoes are not used to prove a product claim, there is no problem. But if “the focus of the commercial becomes the undisclosed potato prop and the viewer is invited, explicitly or by implication, to see for himself the truth of the claims about the ice cream’s rich texture and full color, and perhaps compare it to a ‘rival product,’” it would become false. Id. at 393. Given Apple's emphasis on the clarity of the iPhone's screen, I think the rule requiring a disclaimer applies here.

The comments to Pogue's post, however, raise the question whether, in this cynical age, we expect all ad images to be fakery anyway. If so, there is no deception. But the disclaimer rule is a modest requirement, and could protect some consumers (as well as preventing further deterioration of our willingness to believe ad claims, which is important when the claims are in fact truthful but we mistakenly discount them as standard fakery).

Parody trade dress and naked licensing

Despair, Inc. produces Demotivators, counters to the "inspirational" posters that dot American businesses like cheerful pimples. The style is distinctive enough to deserve trade dress protection, I believe. But Despair also offers a DIY utility so that you can upload your own photo and treat it in demotivational style. Here's mine:

There are no terms and conditions of use visible on the page, and even if there were, this might serve as naked licensing sufficient to destroy trade dress rights. Does it matter that the licensed uses are probably all noncommercial?

Okay, mostly this post was an excuse to show off this picture. But it's still an interesting question.

Monday, July 09, 2007

What white powder comes in a vial and boosts energy?

It's Blow energy powder, of course, promoted as ideal for mixing with drinks to add a jolt of caffeine. Sample packs even come with a fake credit card for cutting the lines, though you're not supposed to snort it.

Given the experience of Cocaine, the energy drink driven from the market by protests and threats from state AGs, we can expect the same objections of scandalousness and even deceptiveness. (NB: When I googled for Cocaine the energy drink, Blow's was the first sponsored link I saw. Under the Supreme Court's Grokster analysis, the AGs should have a running start on Blow's bad intent.)

To every cow her calf; to every virus its copy?

Bavarian Nordic A/S v. Acambis Inc., 486 F.Supp.2d 354 (D. Del. 2007)

Plaintiff Bavarian Nordic is a Danish corporation; plaintiff Anton Mayr is a German national. They alleged tortious interference and unfair competition based on defendants’ commercial use of a certain virus, Modified Vaccinia Ankara (MVA) 572, useful in creating vaccines. Mayr worked on MVA 572 and was its sole source in the research community; in 1996, Bavarian Nordic entered into an exclusive contract with him, though one that was not supposed to interfere with noncommercial research. Simplifying a bit: a scientist who had worked with Mayr brought a derivative of MVA 572 to the National Institutes of Health (NIH) with him, and at his request, Mayr sent samples of the original to the NIH in 1995 and 2001. In 2002, the NIH announced a request for proposals for development and testing of a modified vaccine, which would include access to a master seed stock of MVA. The NIH split the contracts between Acambis and Bavarian Nordic.

Plaintiffs sued for conversion. The court determined that Maryland law applied, though it was the same as Massachusetts law (the other candidate). Conversion requires the plaintiff to show that the defendant wrongfully exercised ownership of, or control or dominion over, personal property to which it had no right of possession at the time. But this case doesn’t fit into the standard paradigm. First, conversion requires physical possession of plaintiff’s actual chattel. But plaintiffs never had physical possession of the specific material NIH gave Acambis. Mayr’s MVA was purified and cloned by NIH before distribution. Even if physical possession of copies of a chattel may support a conversion claim, the court couldn’t find cases in which the chattel was never in the possession of its alleged owner. Moreover, the case law suggests that a conversion action can only succeed when a defendant exercised exclusive control over the property. But Bavarian Nordic too has had access to MVA stock, albeit not the same sample.

If Bavarian Nordic had the right to immediate possession of the chattel, those problems might have been defeated, but there were problems in Mayr’s claim of title; despite his physical possession of the MVA stock, there was insufficient evidence that he was the legal owner of rights in MVA under German law. In contemporary records (c. 1974), Mayr worked with other scientists at a government agency and made no claim of ownership. Even assuming he had an ownership interest, he transferred the MVA to NIH without written restriction, so whatever expectations he had about noncommercial use didn’t bind NIH.

I find this case interesting because it demonstrates that problems salient in cyberspace – here, trouble with the concept of chattels – also pop up in dealing with biological materials.

The plaintiffs also alleged violations of the Lanham Act and Delaware’s deceptive trade practices law, because Acambis passed off its version of the MVA-based vaccine as a product of its own R&D. Even assuming that plaintiffs have a proprietary interest in MVA 572, these claims failed. After Dastar, the question is who produces the tangible goods offered for sale. Plaintiffs, however, attempted to evade this obvious barrier by arguing that defendants’ product was “‘self-replicating progeny of’ the MVA 572 virus which has been repackaged and relabeled under defendants’ trademark.” I think this is hopeless under Dastar – “self-replication” has to occur under particular physical circumstances, and defendants were in charge of those circumstances, thus they were legally responsible for the origin of the product. But the court took this alleged distinction seriously, and found that defendants’ end product was more than MVA 572, but a virus created by combining MVA with “a proprietary recipe of other additives and diluents to make a vaccine.” There was no disputed issue of material fact on this point, and thus the claim failed.

Separately, plaintiffs claimed that Acambis engaged in false advertising by making claims to the US government regarding Acambis’s “freedom to operate” with MVA. Given that the government -- the consumer receiving the allegedly false representations -- was responsible for providing MVA to Acambis in the first place, and that NIH had made similar statements about MVA, the court found that there was no cognizable false advertising claim. (I don’t know whether this is best categorized as lack of materiality, reliance, or something else, but the result sure seems right to me.)