Thomas and Tommy

This weekend's haul at the local kid's stuff sale included this T-shirt, front and back:


Blurring? If Tommy Hilfiger has a non-childlike image, could it be tarnishment?

Standing and advertising/promotion in a SLAPP suit

Nemet Chevrolet, Ltd. v. Consumeraffairs.com, Inc., 564 F. Supp. 2d 544 (E.D. Va. 2008)

Consumers posted negative reviews of Nemet on defendant’s website. Nemet sued for defamation, tortious interference, and Lanham Act violations. Eric Goldman gave a good summary. The CDA proved an insurmountable barrier to the claims.

As Goldman noted, the court mushed together trademark and false advertising considerations in evaluating the apparently confused Lanham Act claims. Treating Nemet as mainly making false advertising arguments, it held that there was no standing, as the parties didn’t compete. But, in the alternative (which, under the circumstances, must mean: if Nemet was actually making a trademark claim; the court seemed to think that Nemet wasn’t really trying to do so), it held that the complaint should still be dismissed because the parties’ goods are unrelated as a matter of law and there could be no sales diversion.

Goldman thinks this is in tension with the main line of trademark cases, which wouldn’t accept this argument on a motion to dismiss, but it’s so clearly the correct result that we should embrace it. Factfinding won’t make a SLAPP suit like this any more credible as a trademark claim. To the extent that some courts have found that a false endorsement claim must be allowed to proceed merely because plaintiffs allege that consumers might believe that a website requires permission from a trademark owner to talk about the trademark owner, those cases are rotten at the core; if a claim can only succeed if the plaintiff proves such a belief on consumers’ part, then it should be dismissed at the pleading stage.

There is an interesting false advertising issue lurking here: Nemet apparently argued that the website name, consumeraffairs.com, misled consumers into thinking that the site had some official governmental connection. In that, this case has some resemblance to the DMV.org case. Unfortunately for Nemet, its focus on how this name “divert[ed]” consumers only highlighted the standing problem, because it didn’t divert consumers from Nemet.

In an extra ruling that coincided with the standing determination, the court further found that the consumeraffairs.com domain name didn’t count as “commercial advertising and promotion” because it wasn’t commercial speech by a defendant in commercial competition with Nemet. Thus, the court held, even if Nemet had standing, its claim would fail.

The court’s belt-and-suspenders approach highlights the way in which “advertising and promotion” caselaw has developed in illogical isolation from the surge in standing caselaw. In assessing whether something counts as “advertising and promotion,” direct competition has always been a requirement—both necessary and sufficient to satisfy one part of the standard four-prong test. One could easily argue that whether a defendant competes with a plaintiff has nothing to do with whether a particular statement is “advertising” or “promotion.” Indeed, the standard test leads to the facially illogical result that statements are advertising with respect to some people (competitors) but not with respect to others (noncompetitors).

The notable point is that “advertising and promotion” caselaw was, before recent cases like Phoenix of Broward, the primary way in which standing questions were navigated in false advertising law. Given the standing revolution now going on in Lanham Act caselaw, it’s time to rationalize the doctrine and either remove direct competition from the test for whether something is “advertising” (the logically superior alternative) or at a minimum use the same definition of acceptable standing for both, such that a plaintiff with “standing” would also satisfy the “competition” prong of the advertising and promotion test.

Shining light on false advertising allegations

Nightingale Home Healthcare, Inc. v. Anodyne Therapy, LLC, 2008 WL 4367554 (S.D. Ind.)

Anodyne has the rights to an infrared lamp that is supposed to relieve pain and improve circulation—light-emitting diodes are placed in direct contact with a patient’s skin. (Comment: I find this freaky in the extreme, but then I dislike sunlight.) Anodyne made a professional model, the 480, marketed to health-care providers such as doctors and nursing homes, as well as a home model, the 120. The 120 had fewer LED-containing pads, a lower energy level than the 480, and non-adjustable power levels. Anodyne marketed the 120 indirectly, through health-care providers who used the 480.

The lamp is a Class III medical device and thus required premarket approval from the FDA, which it received “for relief of minor muscle and joint pain and improvement of superficial circulation” in 1994. Sometime after the turn of the century, Anodyne began marketing the device as a treatment for peripheral neuropathy and other conditions, including wound care. Peripheral neuropathy is a painful condition involving decreased circulation.

In 2004, Nightingale bought four 480 lamps. Anodyne’s statements are in dispute, but at least it represented that the lamp treated peripheral neuropathy; that the lamp was FDA-approved; and that Anodyne was working on getting Medicare to reimburse for the device. Nightingale actively marketed and promoted the lamp to its patients and the general public, and had good experiences with using the lamp to treat peripheral neuropathy, so it bought more units.

Then the FDA sent a warning letter to Anodyne about its marketing, noting that the lamp was only approved for minor conditions and that Anodyne’s promotion for unapproved uses rendered the device “adulterated.” Anodyne revised its marketing, but didn’t tell Nightingale, instead running a special promotion to sell more lamps. Nightingale didn’t find out (from another source) until it had bought 4 or 5 more lamps. Then Medicare ruled that the lamp wouldn’t be covered; Anodyne had to change its marketing materials, which included statements that Medicare reimbursement codes had been assigned, that some reimbursements had been made, and that Anodyne was actively working towards coverage.

Nightingale sued, arguing that Anodyne’s misrepresentations left it stuck with a number of machines for which it could never receive reimbursement.

Anodyne argued that Nightingale lacks standing, because it’s a consumer and not a competitor. Nightingale responded that it and Anodyne compete for the same dollars for treatment of peripheral neuropathy; every sale of a 120 to an individual costs Nightingale sales of its more comprehensive in-home services for treatment of peripheral neuropathy. Anodyne countered that Nightingale promoted Anodyne’s lamp and could still use it to treat peripheral neuropathy even though it legally couldn’t be promoted for that purpose.

The court noted that Anodyne didn’t provide statistics or studies on lost sales, and it seemed likely that such an impact would be small, but its basic argument was reasonable and the Lanham Act doesn’t seem to have a threshold for the amount of competitive injury. Thus, Nightingale had standing.

However, Nightingale couldn’t show a false statement of fact. It focused on two alleged statements: (1) that the lamp treats peripheral neuropathy, and (2) that the FDA approved the device for such treatment. First, statement (2) wasn’t made in commercial advertising, only in a statement from Anodyne’s sales rep to Nightingale. (Case law suggests that a consistent practice of sales reps of saying this would indeed count as “advertising or promotion,” but it doesn’t seem like the lawyers in this case spent a lot of time citing Lanham Act precedents.) Second, statement (1) is not false, according to the court. Nightingale’s falsity argument depended on the fact that the lamp isn’t FDA-approved to treat peripheral neuropathy and that it provides only symptomatic relief, rather than treatment or cure.

The court found that Nightingale misunderstood the role of FDA premarket approval for Class III devices. Premarket approval requires a statement of the disease or condition at which the device is aimed and the patient population for which it is intended; approval will be denied if there’s no showing that the device is safe and effective under the proposed conditions of use. Premarket clearance, therefore, covers only the indications declared by the applicant. Here, the lamp’s approval was limited to “relief of minor muscle and joint pain and improvement of superficial circulation,” which set the boundaries of permissible marketing for the lamp. But that doesn’t mean that the lamp is ineffective or dangerous for treating peripheral neuropathy. Anodyne violated FDA rules on promoting its device, but health care providers can prescribe or administer any legally marketed device to any patient without violating FDA rules. There’s simply no evidence that the lamp was not safe and effective for peripheral neuropathy. And “treatment” can include mere symptomatic relief, so it might be the case that the lamp "treats" peripheral neuropathy.

Comment: here, the court’s relative lack of reliance on Lanham Act precedent served it quite well. Courts often get tangled up in hair-splitting and pin-dancing about preemption, when the question of the relationship between the FDCA and the Lanham Act can be better navigated by asking whether failure to comply with the FDCA or FDA rules means that an ad claim is false, without more evidence, or whether the plaintiff ought to be required to submit independent evidence of falsity.

For similar reasons, Nightingale’s breach of contract claim largely failed, though its allegation of breach of warranty that the lamps were FDA-approved to treat peripheral neuropathy proceeded. Nightingale’s fraudulent misrepresentation claims regarding what Anodyne said about Medicare reimbursement also survived because of factual disputes.

Pay wonderful: extraordinary false advertising case leads to fee award

POM Wonderful, LLC v. Purely Juice, Inc., 2008 WL 4351842 (C.D. Cal.)

POM Wonderful won its false advertising case against Purely Juice and sought attorneys’ fees, on top of the $1.5 million award it had received as compensatory damages. Fees are available, though not required, in “exceptional” Lanham Act cases, which generally requires conduct that’s malicious, fraudulent, deliberate, or willful. California false advertising law allows a fee award when a lawsuit results in enforcing “an important right affecting the public interest,” if (1) the suit conferred a significant benefit on the general public or a large class; (2) the costs of litigation make an award appropriate; and (3) the fees aren’t paid out of the recovery.

The court had already found that defendants knew or should have known in 2006 that there were “serious issues of adulteration” in imported pomegranate juice, including the juice they imported. Defendants advertised “100% pomegranate juice” without testing, and indeed in defiance of plaintiffs’ tests, about which they were notified, and ultimately their own tests. Defendants argued that they weren’t aware of problems until they tested the juice themselves, in February 2007, and anyway other competitors were selling adulterated juice. Despite the test results showing added sucrose, they believed, and still believe, that their product was within the range for “pure” pomegranate juice. Negligence alone, they argued, isn’t exceptional.

The court found a fee award justified. Defendants continued to sell the product for over a month after they knew of the problem, which was willful/deliberate misconduct. Moreover, the Lanham Act and state-law false advertising claims were inextricably intertwined, so plaintiffs were entitled to fees for all the false advertising work, even though they wouldn’t be independently entitled to a fee award under California law because the benefit to the public was coincidental.

The court also found plaintiffs’ outside counsel’s fees reasonable (they ranged from $750/hour for the most expensive partner to $275/hour for the cheapest associate) and awarded over $600,000, though it declined to increase the award for in-house counsel’s efforts because those didn’t cost plaintiff anything extra.

Sawmakers battle it out in court

Better than on the field of battle, I'd think.

Trilink Saw Chain, LLC v. Blount, Inc., 2008 WL 4261040 (N.D. Ga.)

Trilink and Blount (here, “Oregon”) make chain saw components and accessories. Trilink is a new entrant and Oregon has been around for decades; Oregon is one of the two major US competitors, with a 57% market share as of 2005 when Trilink entered. Oregon perceived a threat and prepared a memo summarizing the results of Oregon’s tests on Oregon and Trilink products. Oregon discussed the results with several customers. Oregon then had third-party testing labs conduct additional tests, resulting in a memo it distributed to customers. It also disseminated a brochure listing “Eight Important Considerations In Choosing Your Partner for Saw Chain.”

Trilink alleged that these materials contained false advertising. Oregon counterclaimed for trademark infringement and unfair competition based on Trilink’s use of PROLINE for chain saw accessories in competition with Oregon’s PRO-LITE for chain saw guide bars.

Evidence of False Advertising

Trilink offered the testimony of a mechanical engineer, Hal Dunham, with 19 years of product testing experience, to show that Oregon’s ads made claims unsupported by its testing data. Oregon moved to exclude his testimony. FRE 702 requires that expert testimony be (1) based on sufficient facts or data and (2) the product of reliable principles and methods which are (3) applied reliably to the facts of the case. Thus, a district court must consider the expert’s qualifications, the reliability of his methodology, and the extent to which the testimony assists the trier of fact to understand the evidence or resolve disputed issues.

FRE 702 takes a liberal view of qualifications; training and experience need not be narrowly tailored to the exact point of dispute in a case, as long as the expert has the education or background to permit him to analyze a given set of circumstances, as long as he doesn’t try to become an expert in an entirely different discipline. Here, Dunham’s background qualified him to testify about general product testing procedures; how Oregon’s tests diverged from those procedures; and how Oregon’s ads didn’t correspond to the tests.

Unfortunately for Oregon, Dunham’s actual testimony went beyond those topics: in particular, he testified about how average consumers would interpret Oregon’s language in the ads and about the meaning of consumer research data, but he’s not a consumer survey or market research expert. Likewise, Dunham drew many conclusions about saw chains, typical saw chain practices and uses, and saw chain industry standards, but he’s not an expert about those things and has no education, training or experience specific to chain saws. So, for example, he wasn’t qualified to testify that Oregon was wrong to claim that chain breakage is the most important attribute for durability. Dunham was qualified to testify about whether Oregon’s tests tested for and found “durability issues” and injuries therefrom, but not qualified to testify about whether substantiated durability issues cause potential safety threats. Further, and closer to the core of his expertise, he wasn’t familiar with industry standards for chain saw testing, so he couldn’t testify about whether Oregon’s test methods met industry standards. Likewise, because he wasn’t familiar with chain saw use in practice, he couldn’t opine on whether Oregon’s fatigue testing reliably simulated actual chain saw use.

Oregon also argued that Durham’s testimony wouldn’t be helpful to the trier of fact. Expert testimony is unhelpful if all the primary facts can be accurately and intelligibly described by the jury and the jury is capable of understanding their implications without special training. Many of the facts on which Dunham relied were evident to anyone (e.g., Oregon treated the Trilink saw chain as identical to another chain produced in the same factory), but he used them to draw conclusions (e.g., Oregon deviated from an “important rule of product testing: proper sample identification”). Rule 702 doesn’t require exclusion of testimony about basic facts that support an ultimate expert conclusion; the court declined to “comb through” Dunham’s testimony for helpfulness.

Damages from False Advertising

Oregon also argued that Trilink couldn’t show any damages. Trilink sought actual damages, including lost sales and the cost of testing to counter Oregon’s ad materials, as well as a recovery of Oregon’s profits from customers who received the ads.

To get money damages, a Lanham Act plaintiff must show actual harm, which means actual and not just likely deception. In some circuits, literally false ads are presumed to cause actual deception, and willfully deceptive comparative ads are presumed to cause financial injury; the court was persuaded by these authorities and by the Eleventh Circuit’s presumption of irreparable harm from false comparative statements. Thus, at this stage, Trilink’s allegations of deliberate literally false comparative advertising was enough to presume damages; Oregon did not rebut the presumption with any evidence. At trial, Trilink would need to show its entitlement to damages as well as their amount. But that wouldn’t necessarily require further evidence of causation, only of the financial extent of the harm.

Further, Trilink’s claim for “damage control costs” was allowed to proceed, even though Oregon argued that testing was a standard expense; the court found an issue of fact over whether Trilink would have conducted the tests in any event.

An award of Oregon’s profits would be appropriate where (1) the conduct was willful; (2) Oregon was unjustly enriched; or (3) the award would serve deterrence purposes. There should be some connection between harm and recovery; some courts require plaintiffs to show that defendants actually benefited from false ads. However, in the Eleventh Circuit, trademark cases consistently conclude that once the plaintiff shows the defendant’s gross sales, the burden is on the defendant to show that its profits aren’t due to Lanham Act violations. At least when a defendant “specifically disparages a market newcomer through deliberately false advertisements,” the court agreed that the plaintiff’s burden was to show gross sales, and then it would be eligible for an award of profits. The court noted that, as a practical matter, a veteran seeks to maintain its market share against a newcomer, so it would be very hard to “prove” benefit. Oregon was therefore not entitled to summary judgment on Trilink’s claim for profits.

Trilink’s tortious interference claim, however, failed because Trilink didn’t show that Oregon induced any particular third party not to enter into or continue a business relationship with Trilink.

Trademark Infringement

On the trademark claims, here are some more facts: Trilink filed to register PROLINE for chain saw parts and accessories. The PTO published the mark for opposition in early 2006, and Oregon duly opposed in August 2006. Trilink was actually unaware of Oregon’s incontestable registered PRO-LITE mark for chain saw guide bars until that time. When Oregon opposed, Trilink decided to abandon PROLINE and ceased soliciting new business under that name, though it continued shipping PROLINE products to its only US PROLINE customer, a small West Virginia chain, until April 2007.

The parties agreed that PRO-LITE, because it’s incontestable, is presumed to be at least descriptive with secondary meaning. The Eleventh Circuit has stated that such marks are “relatively strong.” (Compared to what? That’s the minimum necessary to have a mark in a descriptive term at all.) But a mark’s strength can still be attacked; incontestability is simply one piece of the overall puzzle.

PRO has been registered 40 times, including four in relation to chain saws and saw chain, and 13 for other handheld saws and saw blades. The court wasn’t convinced that this diminished the strength of the PRO-LITE mark. None of the other marks used the entire PRO-LITE name, nor was there evidence that the other uses were in a format or in conjunction with symbols confusingly similar to PRO-LITE.

Oregon has used PRO-LITE since 1981, expending “significant resources” in advertising and selling millions of dollars worth of PRO-LITE products, which also supported a finding of strength. Trilink argued that Oregon only promotes its product in catalogues, at trade shows, and on Oregon’s web sites, and that recognition of the trade name Oregon is low, so that therefore PRO-LITE recognition must also be low. The court disagreed; people might recognize PRO-LITE without recognizing the parent brand. However, the limited advertising undermines the strength of the mark, but not enough to take it out of the category of “relatively strong.”

Given the similarity of the goods, lower similarity of the marks was required to prove likely confusion; the marks differ only by one letter and thus sound and look similar. However, the trade dress differs: PRO-LITE generally follows OREGON as part of a pine tree/mountain design. The PROLINE mark appeared in large block letters with no design, in a different font. Differing presentation may suffice to distinguish marks that would be confusingly similar in the abstract, and the court found that this was the case here. (Oddly, the court noted here in support of its conclusion the fact that the PTO didn’t mention PRO-LITE when Trilink attempted to register PROLINE, though the PTO ignores context.)

Nonetheless, the similarity of the goods weighed heavily in Oregon’s favor, as did the similarity of retail outlets and customers and the advertising media used. (Oregon alleged that Trilink operated prolinesawchain.com; the court saw that as evidence of use of the mark in internet advertising, though archive.org only has an “under construction” page archived.)

There was no evidence of actual confusion.

On bad faith, Oregon was required to show that Trilink adopted its mark with the intention of benefiting from Oregon’s goodwill, or that it was intentionally blind to a likelihood of confusion. Trilink argued that it chose PROLINE because it was a versatile mark for multiple products; that it engaged in online trademark searches; that it used counsel to seek registration for the mark; that the PTO didn’t see Oregon’s mark as an issue; and that it abandoned the mark after it learned of Oregon’s opposition. Oregon argued that Trilink may have been intentionally blind to confusion and may have conducted a deficient trademark search; moreover, this dispute, combined with two other similar disputes the parties have had indicated Trilink’s “general disregard” for Oregon’s IP rights.

The court sided with Trilink. Other disputes just mean the parties are litigious; Trilink voluntarily discontinued two other practices after Oregon objected, but that’s not an admission of guilt and would be excluded by FRE 407 if it were. Speculation about Trilink’s trademark clearance is insufficient to create a jury issue.

On balance, the court found no likely confusion.

Iraqi IP

The New York Times reports that a planned golf course in Baghdad will be known as the Tigris Woods Golf and Country Club. No word on whether Iraq recognizes a right of publicity.

A somewhat confusing false advertising ruling

ACE American Ins. Co. v. Wachovia Ins. Agency Inc., 2008 WL 4165746 (D.N.J.)

ACE contracted with WIA’s predecessor to be the exclusive writer of policies on certain E-Risk (electronic risk) business insurance sold by WIA. In 2008, Wachovia became interested in selling WIA, but declined ACE’s offer to purchase WIA and then provisionally accepted an offer by WIA’s management to purchase WIA.

ACE then discovered that Scottsdale, another insurance company, had filed various forms with state insurance agencies that were substantially the same as ACE’s forms and used trademarks associated with Ace’s E-Risk program. Allegedly, the forms were based on confidential information, and ACE contended that WIA violated its agreement with ACE by providing confidential information to Scottsdale as part of a WIA-Scottsdale business arrangement. ACE sued, alleging among other things that Scottsdale engaged in tortious interference with contract, trade secret misappropriation, and false advertising.

The court found that ACE had shown a likelihood of success on the breach of contract claim against WIA, but not on its trade secret claim or tortious interference claims against Scottsdale, because though the forms Scottsdale submitted were very similar to ACE’s forms, there wasn’t sufficient evidence that Scottsdale knew it was “in receipt of a betrayed confidence.” It expressly referenced an ACE company in its filings, disclosing the source of its information, which I presume suggests to the court that there was no attempt to conceal guilty knowledge.

Similarly, the court rejected the false advertising claim on this record. The allegedly false advertising was Scottsdale’s website ERiskServices.com, email address containing the phrase “ERiskServices,” and use of certain marks allegedly belonging to WIA on insurance filings and on its website. ACE alleged that this would lead consumers to believe that E-Risk insurance is provided by Scottsdale and not ACE. (Note: this sounds much more like TM infringement than general false advertising; also, E-Risk seems like a highly descriptive mark at best.) However, the court found that ACE’s other allegations proved to much: WIA intends to sell its assets to WIA’s current management, terminating the agreement with ACE. If the sale went forward, other insurance companies could provide the relevant business insurance. ACE also asked the court to infer that Scottsdale would be the partner of WIA’s successor. Thus, the ads in question “would simply have been disseminated in the reasonable expectation of entering a market currently occupied by a competitor, and not false or misleading.” (I am not sure I get this. Whose mark is E-Risk? Or is E-Risk even a mark? There doesn't seem to be a registration for it. If it’s ACE’s protectable mark for these services, then WIA’s ability to offer the same services doesn’t translate into an automatic entitlement to use the mark.) Anyway, the court found that Scottsdale was not attempting to confuse the marketplace about an officially licensed product, and there was no showing of likely consumer confusion.

Here, a trademark analysis would have helped the plaintiff, since trademark doesn't make false advertising's explicitly false/misleading distinction. Though perhaps it should!

Sports artists and trademark

The Washington Post’s Rachel Beckman just had a story in which I’m quoted, For Portrait in Tribute to Slain Player, a Legal Snare: painter paints a picture of Redskins player in uniform; wishes to sell painting; now there’s a dispute over the presence of Redskins marks in the painting. I mentioned ETW v. Jireh.

Payless to pay less

Adidas America, Inc. v. Payless Shoesource, Inc. (D. Or.)

A couple of interesting rulings out of the district court’s decision to deny a new trial on damages, conditioned on adidas’s acceptance of a substantial remittitur.

On dilution, Payless argued that it didn’t use two or four stripes on shoes as its own trademark, but merely for decoration, thus falling outside the TDRA. The court disagreed that subjective intent controlled. The question was whether consumers perceive Payless’s use as a trademark “so that the value of the mark to adidas is diluted.” This can happen even if Payless does not deliberately promote the stripes as its own trademark. So, the court apparently accepted the “use as a mark” requirement, but found it satisfied by evidence of consumer perception (this evidence appears to be standard branding bull, rather than survey evidence, which further weakens the “use as a mark” requirement as a constraint on dilution liability). Mark McKenna has argued that this is the natural result of current trademark thinking and that it makes “use as a mark” a fairly useless limit.

Speaking of evidence: adidas had no evidence of lost sales. Instead, its marketing expert testified that the infringement damaged the “distinctiveness, perceived quality, positive consumer associations, and consumer loyalty” of its brand, even though sales continued to grow during the period of infringement. The court ruled, however, that loss of the ability to control a reputation for quality is a legally cognizable form of injury. A couple of things about that: first, that doesn’t mean that the damages from “loss of ability to control” can be measured in any rational way; in most tort cases, courts don’t like to compensate people for risk alone, though perhaps “market monitoring” might be appropriate damages, like medical monitoring.

Second, the line of cases about loss of ability to control as damage presuppose that the parties do not compete; courts were trying to explain why there could be infringement without lost sales. Yale Electric Corp v. Robertson, 26 F.2d 972, 974 (2d Cir. 1928) (“[A] merchant may have a sufficient economic interest in the use of his mark outside the field of his own exploitation to justify interposition by a court. …. If another uses it, he borrows the owner’s reputation, whose quality no longer lies within his own control. This is an injury, even though the borrower does not tarnish it, or divert any sales by its use . . . .”). Where the parties do compete, infringement should mean lost sales; if there are no lost sales, the infringement story is just unpersuasive. Here, the expansion of trademark liability to cover noncompeting goods has actually increased the scope of liability as between competing goods; it seems to me that accepting this story for competing goods is like allowing dilution claims on competing goods—it allows trademark owners to suppress competition without any justification in consumer protection.

Anyway, the formal doctrine is that plaintiffs have to prove the fact and the amount of damage. But in the Ninth Circuit, plaintiffs can still recover damages based on the “totality of the circumstances.” Here, that evidence came essentially from two marketing experts who repeated standard claims about brand value; the court accepted their testimony even though they couldn’t quantify the harm.

Nonetheless, the court still ruled that the jury’s random number used for damages was too large.

First Payless challenged the $30.6 million “reasonable royalty” calculation. Even though adidas would not have licensed its mark, the court accepted this as an appropriate part of a damages calculation. The Lanham Act allows recovery of damages, which can be adjusted up (but not down) if necessary to compensate the plaintiff, but can’t be a penalty. A hypothetical reasonable royalty can be a measure of actual damages in a trademark case. Here, the royalty would have resulted in a loss to Payless given the price at which it sold the shoes, but that didn’t make it unreasonable; a royalty can wipe out an infringer’s profit.

Second, Payless challenged the award of profits. Profits can only be disgorged in cases of willful infringement; the court rejected Payless’s argument that willfulness needed to be shown by clear and convincing evidence. The court endorsed the jury’s willfulness finding. However, the time period of the willfulness was limited: there was a 1994 settlement agreement that Payless believed governed its conduct, and two federal judges adopted Payless’s interpretation of the agreement. Moreover, many other companies sold four- and two-stripe shoes. Though the Ninth Circuit reversed the district court three years later, Payless wasn’t behaving willfully until it refused to change its conduct after the court of appeals acted.

However, adidas was “very aggressive” in calculating Payless’s profits; the judge concluded that adidas overstated the profits and didn’t follow generally accepted accounting principles. For example, it didn’t deduct the royalty as an expense of selling the shoes, which meant its calculations included a double recovery. The adidas expert argued for $208 million in profits, but admitted that a commonly used measure would result in a figure of $19 million, close to the Payless expert’s calculation. The order of magnitude difference demonstrated the unreasonableness of the jury’s award ($137 million). Thus, the court found that $19.7 million was the appropriate award of profits.

The Lanham Act doesn’t make punitive damages available (and in fact instructs against damages as penalties). The jury awarded $137 million on adidas’s common-law infringement/unfair competition claims. Payless argued that differences in state laws, as well as general due process considerations, precluded this award. For example, some states require clear and convincing evidence; others cap punitive damages. Because the jury awarded a punitive amount equal to its finding of Payless’s profits, Payless argued, it clearly and illegitimately awarded punitives based on 50 states’ worth of conduct.

Adidas argued that the punitive award was justified because the harm was felt in-state, where its North American headquarters are. State Farm Mutual Automobile Insurance Co. v. Campbell, 538 U.S. 408, 421-22 (2003), held:

A State cannot punish a defendant for conduct that may have been lawful where it occurred. Nor, as a general rule, does a State have a legitimate concern in imposing punitive damages to punish a defendant for unlawful acts committed outside of the State’s jurisdiction.

The court, however, was “not convinced” that State Farm applied, because State Farm’s business practices in numerous states bore no relation to the particular bad-faith conduct underlying the plaintiff’s claim. However, here the conduct all related to Payless’s infringement of adidas’s marks. (I don’t see how this answers the objection that, say, in Louisiana that infringement could not be punished with punitive damages; it is possible that Oregon has a sufficient interest in adidas’s health that it can punish Louisiana-based conduct with Oregon rules, but it seems to me that argument needs a bit more attention.)

In any event, the court accepted the alternative argument that the punitive award violated due process. Under State Farm, courts must consider

(1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.

(1) is most important, and requires consideration of whether the harm was physical or economic; whether defendant’s conduct showed indifference to or reckless disregard of health or safety; whether the target was financially vulnerable; whether the conduct was repeated or isolated; and whether the harm was intentional, malicious, deceitful, or mere accident. In practice, few awards exceeding a single-digit punitive:compensatory ratio will be acceptable.

Here, the harm was entirely economic and there was no evidence of lost sales or financial vulnerability. But the conduct was repeated—267 lots of shoes infringed—and the infringement was no mere accident. However, for 3 years Payless believed that the district court’s opinions allowed the sales.

The second factor is the disparity between the harm and the punitive damages. The first issue, the court noted, was what numbers the court needed to compare. The $30.6 million royalty was compensatory. The award of Payless’s profits was to prevent unjust enrichment. Though profits are part of the recovery allowed, they do not count as harm suffered by the mark owner for purposes of due process analysis. Thus, the court compared the royalty award with the punitive award, producing a 4.5:1 ratio. This in itself did not offend due process. However, where compensatory damges are substantial, a lesser ratio, “perhaps only equal to compensatory damages, can reach the outermost limit of the due process guarantee.” State Farm, 538 U.S. at 425. The royalty award was substantial, especially given that adidas lost no sales and the damages were “theoretical.”

After considering the guideposts, the court concluded that even a 1:1 ratio was too high. This was unusual, but not unknown in cases involving only economic harm. Thus, the court denied Payless’s motion for a new trial, conditioned on adidas accepting a remittitur of the punitives to $15 million.

Three advertising law stories from the NYT

Superfood or Monster From the Deep?

The Food and Drug Administration does not conduct nutritional research. Several other federal agencies do so, but functional foods are not evaluated by any specific office. “Nutraceutical products have characteristics of both food and drugs,” said David A. Kessler, a former commissioner of the F.D.A. “It’s easy for them to slip through the cracks, and the industry is always

Consumer Ads for Medical Devices Subject of Senate Panel

As makers of medical devices like artificial knees and heart stents increasingly pitch their products directly to consumers, some lawmakers, medical groups and others are calling for restrictions on such advertisements, claiming they mislead patients.

Weight-loss (bariatric) surgery seems like another related topic whose advertising deserves further scrutiny, given the dangers.

Sorting Through the Claims of the Boastful Egg

IT used to be, an egg was an egg.

Now they can be cage free and free range, vegetarian and omega-3 fortified, organic, “certified humane” or “American humane certified.” The incredible, edible egg is becoming unintelligible.

Some claims on egg cartons are regulated by the federal government, some by the states and some not at all. Some affect consumers’ health, some touch upon ethics and some are meaningless.

Balloon law?

In recent years, trademark owners have made a big push to exert control over the costume and rent-a-character market. I wonder what they think of Balloon Guy Entertainment? Slideshow here, including characters from The Nightmare Before Christmas and various videogames. Via boingboing.

(At least it's unlikely that the Elvis impersonator will be mistaken for the real thing.)

The meaning of mandatory disclosures

Robert Post writes at Balkinization about state attempts to determine the meaning of words, herein of abortion. I agree with him about the constitutionality, and the wisdom, of the laws he discusses that require doctors to “disclose” specific biased information and moral conclusions. I’m most interested in this portion of his argument:

Gruender [the author of the majority opinion in the Eighth Circuit en banc case Post is discussing] apparently believes that the meaning of what the state requires a person to say is to be determined by the very government that is mandating a person to speak. That is Orwellian. It denudes the First Amendment of independent significance. If South Dakota passes a statute requiring Gruender to affirm that the “holy trinity” exists, and if the statute defines the “holy trinity” as the three atoms making up water molecules, Greunder would seemingly have no cause for complaint.

The implications of Gruender’s opinion are breathtaking. Statutory definitions control the meaning of statutes, which is to say that they control what those who are obligated to obey statutes must and must not do. But statutory definitions do not and cannot control the meaning of what statutes require persons to say. In virtually every legal context, the meaning of a person’s words are determined by reference to how they are understood by a reasonable auditor. Think in this context of the law of defamation or the law of the Lanham Act.

There are certainly some advertising law cases that point in this direction. But there are others that don’t, and plenty of laws that purports to define terms for commercial purposes: miles per gallon, organic, dolphin-free, made in America, etc. Most of them have never been challenged on the grounds that the definitions don’t correspond to preexisting reasonable understandings. I’ve written about this question before.

An initial question for Post is whether he means to limit his claim about what government can define to cases in which there is an identifiable preexisting or competing understanding of the term at issue. If consumers have no particular definition in mind when they hear “organic,” but they think it means something (and in that situation, when surveyed, they’re likely to make up a lot of different definitions, so surveys are going to be particularly unreliable), is it okay for the government to specify the meaning?

A related question: how are we going to determine what reasonable listeners understand? Post mentions both defamation and the Lanham Act, but those bodies of law have starkly different approaches. The former relies on judges and juries, using their unconstrained intuitions. The latter relies on multifactor circumstantial tests, and occasionally on evidence from actual consumers. Deciding which is better is an exercise left for the reader (and I’m totally serious about this: multifactor tests and consumer surveys have serious weaknesses); in the abortion context, Post seems to be using a defamation model, where we use our common sense to determine what a reasonable listener would hear.

All the things the Romantics don't wanna hear: Guitar Hero prevails

Romantics v. Activision Pub., Inc., -- F.Supp.2d --, 2008 WL 3913967 (E.D. Mich.)

The Romantics sued Activision for violation of the right of publicity, false endorsement, unfair competition, and unjust enrichment, based on the use of a soundalike recording of What I Like About You in the videogame Guitar Hero Encore: Rock’s the 80’s [sic]. Defendants secured the appropriate synch licenses for the musical work. They also won summary judgment on all counts. Some highlights:

What I Like About You (video of GH performance; make your own decisions about the fidelity of the soundalike) is available only to advanced players; it’s one of 30 tracks in the game. If a player encounters the song, it’s identified by title and the words “as made famous by The Romantics,” which the court said “informs players and onlookers that The Romantics are not actually performing the Song.” (I’ve got to say, though I think the conclusion is right, the semantics on this are odd. “As made famous” sounds like you’ll be hearing the Romantics’ recording; “which was made famous” sounds more like you won’t be. In any event, What I Like About You isn’t used in ads or marketing for the game, and the band’s name doesn’t appear on the package.

The Romantics don’t own any copyright interest in their sound recording of the song. But they argued that people will are confused about whether The Romantics sponsored or endorsed Guitar Hero. (Actually, the band is not at this time composed of exactly the same people who made the sound recording—this helps the defendant in ways both doctrinal and not, even though personnel turnover wouldn’t ordinarily matter to a pure trademark claim.)

Plaintiffs started badly by arguing that every song creates three distinct rights: (1) the sound recording copyright, (2) the musical work copyright, and (3) a publicity right derived from the performer’s sound.

First, the court found that Michigan wouldn’t recognize a publicity right in the sound of a voice, even if distinctive, or a right of publicity in a combination of voices. Even if it did recognize such a right, it wouldn’t extend the right to this situation, which is not “unauthorized commercial exploitation” of plaintiffs’ identity because there’s no reference to them in ads for the game and because when a player encounters the song the words “as made famous by The Romantics” make clear that The Romantics aren’t actually performing the song. Thus, no reasonable juror could conclude that the song was used to promote the game or that defendants commercially exploited plaintiffs’ identity. (A right of publicity analysis would generally not turn on consumer confusion: it seems that the key here is failure to appear in ads, not the statement in the game itself.)

Plaintiffs appealed to Midler v. Ford Motor Co., 849 F.2d 460 (9th Cir.1988), and Waits v. Frito-Lay, 978 F.2d 1093 (9th Cir.1992). California law, however, has little persuasive force in Michigan. Moreover, the cases were limited to situations in which distinctive voices were deliberately imitated in ads. Plaintiffs failed to show that their “sound” is distinctive, in that it is distinguishable from other singers. The sound associated with What I Like About You came from a different group of people; the lead singer on the song wasn’t a plaintiff. Thus, any sound associated with the song isn’t distinctive to plaintiffs.

The court analogized to Sinatra v. Goodyear Tire & Rubber Co., 435 F.2d 711 (9th Cir.1970), in which Nancy Sinatra sued based on an ad that used a soundalike (and three lookalikes) of her singing her famous song These Boots Are Made for Walkin’. In Sinatra, the court refused to protect a voice that was only distinctive in combination with the particular music and lyrics at hand. There was no reason to think that “her” voice would have been identifiable with another song, and the song was owned by others and licensed to the defendants, as here.

The court further agreed that, were Michigan law to cover this situation, it would violate the First Amendment. The First Amendment protects expressive works against right of publicity claims unless the use of a plaintiff’s identity is “wholly unrelated” to the content of the work or simply a disguised ad for the sale of goods. The court readily concluded that Guitar Hero was an expressive work protected by the First Amendment, involving many creative choices and options for players (they can choose their own costumes!). After that, the result was foreordained: “Given that the purpose of the Game is to allow players to pretend they are in a rock band, the Song is not wholly unrelated to the content of the work.”

This is a particularly good example of the way that both the Rogers v. Grimaldi test applied here and the competing Saderup test applied in California are highly protective of certain expressive works and not very protective of others. With Rogers, art about a celebrity will be protected as long as it doesn’t explicitly claim authorization, whereas a Saderup analysis might well find a lack of transformativeness in the same artwork. Saderup, meanwhile, would protect transformative uses of celebrity identity even if they have no obvious relevance to the artwork (e.g., Rosa Parks), while Rogers can be and has been used to find potential Lanham Act liability in those same circumstances. Here, Rogers let the defendants easily off the hook—of course The Romantics’ identity was relevant; the game used a song they made famous—but we should remember that these victories come with costs for other defendants.

In any event, just in case the state law and First Amendment rulings weren’t enough, the court also found copyright preemption. Defendants argued that plaintiffs were really claiming a right to license the copyright in the sound recording, thus not adding anything distinct from a copyright right.

The court agreed. As pleaded, plaintiffs’ claim arose from the fact that defendants’ sound recording sounded like plaintiffs’. (Here, the absence of confusion in a right of publicity claim hurts plaintiffs: confusion is generally accepted as an extra element of a trademark claim sufficient to defeat copyright preemption, even when confusion is then inferred from similarity.) In fact, plaintiffs’ musicologist focused on the sound recording, not plaintiffs’ “voices” in general, and stated that his aim was to examine “possible copying” from the sound recording. Plaintiffs’ claimed right was therefore equivalent to copyright rights in sound recordings and preempted.

And then, interestingly, the court discussed copyright arguments raised by the parties. Bizarrely, plaintiffs claimed that defendants needed synch licenses both for the musical work and for the original sound recording. This would only have been true, of course, if defendants had used the original sound recording. Moreover, §114(b) explicitly provides that rights in a sound recording don’t extend to soundalikes. (And I think it would have been better to hold that §114(b), rather than §301, preempted this claim, based on conflict preemption: Congress intended anyone to be able to make soundalikes, and made no exception for when a soundalike is used to promote a product or service. But since it doesn’t matter here I won’t complain much.)

The Lanham Act and state unfair competition claims fared no better. Initially, the First Amendment analysis was the same as for the right of publicity.

Moreover, the court found that plaintiffs failed to make a prima facie case of infringement. Given that plaintiffs’ “sound” was not distinctive, there was no “mark” to protect. Separately, the Second Circuit has made clear that trademark law doesn’t give performers rights in their “signature” performances—the song isn’t a mark for the singer. Trademark shouldn’t be used to protect the “essence” of a sound recording; that’s for copyright.

Plaintiffs also failed to provide admissible evidence of likely confusion. The court here focused on the absence of non-hearsay evidence from actual consumers, even though plaintiffs had nine months in which to develop such evidence. Actual confusion evidence is supposedly not dispositive; the court didn’t analyze the other factors, though they might well have been unhelpful, as they so often are in cases involving a defendant’s truthful reference to a separate entity.

Interestingly, the court also discounted evidence that third parties had mistakenly thought that the sound recording in the game was the original sound recording, and had thus stated that The Romantics were part of the game. The court reasoned that defendants had no control over the fan blog or the Amazon.com page that made the misstatements. This may have been a failure of plaintiffs’ argument: the question is not whether defendants made the misstatements, but whether the mistakes reveal relevant confusion; other courts have treated third-party confusion as probative of likely consumer confusion (and the fan is probably a consumer, not a third party). I should note, however, that being mistaken about whether the original sound recording appeared in the game is not at all the same thing as being mistaken about source or sponsorship, and as far as I could tell from the opinion none of the evidence—hearsay or not—went to that issue, which is the only one that should matter.

The unjust enrichment claim also failed; defendants are entitled to use the song.

Five favorite non-legal blogs

Tagged by Ann Bartow, I give you, in alphabetical order:

Asking the Wrong Questions: sf/fantasy reviews and musings. I don't always agree, but I always learn.

cryptoxin: Pop culture, fan culture, and high theory. Although it's completely true that I am always happy when a new post pops up here, this is also a somewhat political inclusion: there's very little LJ/"blogosphere" crossover, but there should be more.

Free iTunes Downloads: They keep track so you don't have to.

Kung Fu Monkey: I'm often not all that into the details of making a TV show, but the politics posts are viciously awesome.

xkcd: Not sure if this is cheating, but it does have a feed. Geek humor is the best humor! If you recognize the target of the latest comic, you're my kind of nerd.

Tarnishment by proximity

From Trendhunter's Gallery of Poorly Placed Advertising.

Slate on McCain's use of music

The licensed and the unlicensed, explained.

P&G's false advertising claim gets the brush-off

Procter & Gamble Co. v. Ultreo, Inc., -- F. Supp. 2d --, 2008 WL 4066710 (S.D.N.Y.)

Despite an earlier procedural victory in obtaining discovery of Ultreo’s studies, P&G has been as yet unsuccessful in its substantive false advertising claim against Ultreo. P&G’s Oral B line is one of two dominant product lines in the “premium power toothbrush” market, with a 38.2% share. (Philips has 61.2% of the market.) Ultreo is a new entrant. Its toothbrush “combines ultrasound technology with sonic bristle action” and as yet has no market share. The Ultreo’s sonic bristles “remove plaque and create bubbles,” while the brushhead generates ultrasound waves that cause nearby bubbles to oscillate and change size. This is known as cavitation, and lab tests have shown that it can remove plaque from a simulated tooth surface. Ultrasound waves are used to clean jewelry, surgical equipment, and other objects.

Ultreo makes a bunch of ultrasound-based claims that P&G dislikes. First, claims that allegedly suggest that bubbles remove plaque, e.g. “The sonic bristles create bubbles that pulsate at an exact ultrasonic frequency for optimal plaque removal” and “the ultrasound technology creates tiny bubbles that blast away the plaque” along with infomercial images of bubbles pulsating in the mouth. Second, claims that allegedly attribute a cleaning/plaque-removal effect to ultrasound, e.g. “the Ultimate Ultrasound Clean” and comparisons stating that while “[a] power toothbrush scrubs your teeth with brustle action, high speed bristle action ... Ultreo does something else altogether, something more.” Third, claims that Ultreo cleans beyond the reach of the bristles, e.g. that a “transducer in this device emits ultrasound waves, whipping your toothpaste into a pulsating froth of microscopic bubbles that penetrate under the gum-line and between teeth.” Fourth, claims that connect “the feeling of clean” to ultrasound or bubbles. Fifth, failure to disclose that clinical studies do not support Ultreo’s ultrasound claims.

P&G’s basic complaint was that Ultreo relies on in vitro (lab) studies, rather than in vivo studies of the human mouth.

The court found that P&G hadn’t shown a likelihood of irreparable harm and thus couldn’t get a preliminary injunction.

There was no presumption of irreparable harm because (1) there was no comparative advertisement, either explicitly or by obvious implication, (2) there was no public health danger, even though P&G argued that Ultreo’s ads undermined proper oral hygiene, and (3) there’s no presumption of irreparable harm just because a false statement is material, though such circumstances certainly can lead to irreparable harm.

Thus, P&G needed to show a reasonable basis to believe it would be injured. Actual lost sales aren’t required, because that’s virtually impossible to prove—all a plaintiff needs is enough indication of actual injury and causation to show that its injury isn’t speculative.

P&G submitted a study by a consulting firm that anticipated that Ultreo would sell 66,000 toothbrushes, about half of which would substitute for Oral-B purchases. But that study wasn’t based on showing consumers actual Ultreo ads and didn’t distinguish between lost sales from lawful competition and lost sales from false advertising. (If P&G is right about falsity, what non-false reasons does Ultreo proffer to buy its brush instead of others? Aren’t the ultrasound claims at the core of the product promise?) P&G then developed a new theory that any sales in excess of 66,000 would result from false advertising, but the court didn’t buy that either. The study might have been wrong in projecting sales, especially since it didn’t provide consumers with comparative price points or distinguish between sales to dental professionals and retail sales, which differ substantially. The court also expressed concern that it didn’t have enough information about the study sample (it was an internet survey). Thus, the study didn’t provide a logical connection between the alleged falsehood and the harm.

P&G submitted survey evidence to support its claims that consumers were being misled. Dr. Thomas Dupont conducted a survey for litigation, and two other studies assessed the market impact of Ultreo, supporting P&G’s position that Ultreo’s claims for ultrasound and a “beyond the bristles” effect were compelling to dental professionals and consumers. The court, however, found the Dupont survey deeply flawed. It didn’t use a control group to distinguish between preexisting consumer beliefs about ultrasound and bubbles and ad-generated beliefs. Dupont didn’t believe there were any such preexisting beliefs, but he conducted no research on this point, and Ultreo introduced numerous toothbrush and toothpaste ads referring to the cleaning potential of bubbles. Moreover, several survey responses revealed preexisting beliefs.

In addition, the court considered the survey’s “filter questions” to be inappropriately leading: “What does the ultrasound do?” and “What is the benefit of ultrasound?” It also used altered ad materials. And it conflated sonic vibrations with ultrasound; many respondents didn’t perceive that ultrasound alone would clean teeth. As a result, the Dupont survey didn’t show that consumers were being misled. Given that, though other studies found that Ultreo’s ads were effective, P&G failed to show likely harm from the alleged falsity.

Even assuming that P&G had shown harm, the court found that the injury was quantifiable and thus didn’t warrant injunctive relief. Lost sales are compensable with money damage, though lost market share constitutes irreparable harm. (Is anyone willing to explain the difference? Sales generate goodwill, so lost sales cause persistent goodwill loss … no?) P&G didn’t show lost market share or price erosion, and given the “enormous disparity” between P&G and Ultreo in market share and ad spending, it’s unlikely that P&G could show lost market share as a result of competition from Ultreo. And, because Ultreo is substantially more expensive than P&G’s highest-priced product, competition won’t force P&G to drop prices, either.

Furthermore, P&G’s delay weighed against finding irreparable harm. (Practice point: the bigger your company, the faster you have to sue.) Though P&G complained about Ultreo’s ads in March 2007, it waited six more months to sue. The casualness of its response suggested that there was no urgency to stop the allegedly false advertising and thus no irreparable injury. P&G failed to adequately explain the delay, and there was some evidence that the suit was timed to coincide with the American Dental Association’s annual meeting.

Finally, P&G and Philips (the market leader) have both made comparable ad claims, further undermining the claim of irreparable harm. They’ve both used in vitro studies to substantiate claims. The court didn’t make an unclean hands finding, because it didn’t determine whether in vitro-based claims are false. But P&G has used in vitro studies; has extolled “beyond-the-bristles cleaning” shown by lab studies; and regularly makes “feeling of clean” ad claims. The court was unwilling to enjoin a new market entrant from making the same claims that the “giants” have made for years: “Indeed, it seems evident that P & G’s litigation strategy in this case is simply an attempt to keep Ultreo in the starting blocks.” Having benefited from in vitro studies itself, P&G couldn’t claim irreparable harm when a new market entrant took the same position it once did. (I can imagine circumstances in which this would not be true: if, for example, a new cigarette maker started making health claims. But there’s no reason to think the state of scientific knowledge about tooth care has changed so much in a few years.)

Natural results and sponsored links both deceptive, court rules

TrafficSchool.Com, Inc. v. eDriver, Inc., 2008 WL 4000805 (C.D. Cal.)

Plaintiffs provide California traffic school courses in physical classrooms, for home study, and online; they also market and sell third-party driver’s ed courses for other states to online consumers. Defendants own dmv.org, which carries a lot of driver-related information and ads; they make money when consumers buy driver’s ed courses they discover on the dmv.org site. Plaintiffs sued for false advertising under California state law and the Lanham Act.

Defendants argued that plaintiffs lacked standing. Under the Lanham Act, standing requires a competitive injury. In particular, the parties must compete in that they must “‘vie for the same dollars from the same consumer group,’” and the misrepresentation must “at least theoretically” divert business from plaintiff to defendant, though likelihood of injury rather than actual injury suffices. False statements that could theoretically draw business away from competitors justify granting those competitors standing. Plaintiffs had Lanham Act standing: they get revenue from advertising third-party non-California courses and (their currently dominant business model) they sell non-California courses on their own sites that are then taught by third-party providers, earning hundreds of thousands of dollars in partner/referral revenues from 2002 to 2007. Defendants argued that they make their money through receiving referral fees, rather than from collecting money and then splitting it with third-party providers. The court found the distinction unpersuasive: both plaintiffs and defendants make money “by connecting consumers with third-party traffic school or driver’s education providers.”

The consumer is indifferent to the compensation mechanism. Indeed, one consumer testified that she bought a course by clicking on an ad “recommended” on dmv.org, and that if she’d known the course was recommended by a private party instead of her own state’s DMV she probably would have looked elsewhere and would have considered plaintiff’s site. Likewise, one of defendant’s executives admitted that customers would probably choose between the parties’ sites to find a traffic school provider. Even if most of plaintiffs’ business is California-based and involves directly providing traffic school services, there is standing when competition exists even over a small part of a plaintiff’s business.

Defendants also argued that plaintiffs lacked standing because their claim was really one for false affiliation, and other cases have refused to allow Lanham Act claims over false implications of FDA approval. This isn’t actually a standing objection, but anyway the court disagreed: the claim was that (1) defendants portray themselves as an official motor vehicle agency, and then (2) explicitly recommend particular providers. This isn’t analogous to the FDA cases. “Moreover, many courts have found that false advertising claims can be based on actual or implied approval by an agency or third party.”

Plaintiffs did not, however, have standing under California law, which requires “injury in fact” and “lost money or property.” Plaintiffs had no evidence of actual injury or lost money. They showed that one consumer was confused and that the confusion influenced her purchasing decision, but she didn’t testify that she definitely would have used plaintiffs’ site had it not been for the false advertising; rather, she “probably” would have looked elsewhere and considered other providers, including plaintiffs. Plaintiffs also showed evidence of decreased business in several states, despite a stable/increased marketing budget. However, they didn’t show a causal link between the decrease and defendants’ conduct.

The key liability issue was whether “dmv.org” was impliedly false. There was significant anecdotal evidence of confusion. Between 70-80% of consumers arrived at dmv.org through search engine listings. If you googled “dmv” in late 2006, the first sponsored result would be titled “California DMV,” linking to www.ca.dmv.org, described as “CA Dept. Motor Vehicles Guide, Guide to DMV, License, Registration.” The actual link for the California state DMV, www.dmv.ca.gov, was the first natural listing on the left. Dmv.org appeared again as the second natural listing, with the description “DMV Motor Vehicles Guide. Nationwide DMV Information. Drivers License, Vehicle Registration, DMV Forms, Locations, Vehicle History, ....” A search for “drivers ed” would have triggered the sponsored listing “California DMV Drivers Ed” at california.dmv.org, described as “CA recommended drivers ed Course for obtaining a Learners Permit.” (Here’s a version from archive.org.)

At the dmv.org homepage (archive.org), there was a big license plate logo and a header: “No need to stand IN LINE. Your DMV Guide is now ONLINE!” Consumers were invited to choose their state; ones who chose California would then see a big header, “Your Online Guide to the CALIFORNIA DMV,” a California state flag, and a license plate logo that added “California” above “DMV.ORG.” There were links “about how to complete DMV-related transactions,” with titles like “Drivers License,” “Vehicle Registration,” “Locations & Hours,” and “DMV forms.” “Traffic Schools” took consumers to a page stating “We recommend [one of their referral partners] as your best choice for California traffic school online.” Similar “we recommend” statements appeared for other services.

A tiny disclaimer appeared on the bottom of each page, below the copyright notice. (Ooh, snap.) If one were to print out the page on standard paper, the disclaimer would be on the bottom of the second or third page; the court concluded that the disclaimer would not be visible on a typical screen without scrolling down.

One consumer testified that she believed that dmv.org was an official California site and, based on the site’s recommendation, which she believed to be official, enrolled in its partner’s course. Another person, who ran an online traffic school, also testified to confusion. In fact, hundreds of emails in the record evidenced confusion. Many consumers sought information about where their tags were, the status of tickets, the validity of their licenses, etc., providing detailed personal and vehicle information in an attempt to resolve problems—sometimes criminal problems—they were having with their actual DMVs. Law enforcement personnel were confused, seeking investigative information from dmv.org (one email began, “Dear Oregon DMV …”). Even actual DMV personnel were confused.

Non-email evidence also showed confusion. Cities in California provided links on their sites that purported to go to the California DMV, but actually went to dmv.org; other sites made similar mistakes; so did a number of newspapers.

Defendants admitted receiving confused emails on a daily basis, even after the lawsuit was filed. Though the site receives millions of visits a month, there’s no way to tell how many of the non-emailers were also confused, making even a small percentage of visitors who actually demonstrate confusion persuasive evidence. As the court pointed out, the consumer who testified about her confusion didn’t learn her mistake for nearly a year, and she never emailed dmv.org.

After the lawsuit was filed, defendants changed some of their site content, for example changing “California DMV” to “California DMV Info” in their sponsored search results and “CA recommended drivers ed” to “Recommended Drivers Ed Course.” They attempted to include “unofficial” in some of their headers and sponsored listings, though in practice “unofficial” is often not included in sponsored listings. They also added a small disclaimer below the logo: “Privately owned comprehensive guide to the DMV since 1999” and then “DMV.ORG is not associated with any government agency.” “Unofficial Guide to the DMV” now appears in small type below DMV.ORG in the license plate logo. None of these changes have affected consumer confusion as evidenced by the emails.

The parties both submitted surveys; the court found both flawed, though not excludable. Plaintiffs’ first survey was internet-based; it asked consumers to suppose they were searching for an online traffic school, then shown a Google result for “online traffic schools” and asked about the DMV.ORG result: “Whose website do you think this link directs you to?” They were then asked about endorsement or affiliation. “57.6% of respondents thought the search result linked to a Department of Motor Vehicles website, and … just over half thought the search result was linked to a website endorsed by a government agency.” A second survey showed respondents screenshots of dmv.org and asked “Whose website do you think this is?” 56% answered “the DMV.” In response to an endorsement/sponsorship question, “47% felt it was endorsed, and 43.8% felt it was sponsored,” by a government agency.

Defendants’ expert criticized the survey for lacking a control, failing to instruct respondents not to guess, and using leading stimuli. Respondents weren’t allowed to see the full dmv.org webpage so they could scroll down and see the disclaimer if they desired to do so. The court agreed that the lack of a control and the unavailability of the full webpage were significant problems (even though the court had already, and wisely, concluded that consumers were unlikely to see the disclaimer).

Defendants’ rebuttal survey also showed respondents pages from dmv.org and modified versions with car.org in the same places. The court found the core survey question unintelligible: “If you have an opinion, do you think that any of the entities shown on these four pages is affiliated with anyone else or that none of them are affiliated with anyone else?” Nor did the survey ask respondents who owned dmv.org—the question was broad enough to include answers about advertisers on the site, not just the owner/operator. Moreover, the survey used respondents from California, which uses “DMV” as an abbreviation, and from four other states which don’t, yet combined all the data. Under the circumstances, plaintiffs’ survey was more credible.

In sum, dmv.org had “the tendency to deceive a substantial segment of its audience.”

There was also ample evidence of materiality, including direct consumer testimony. Plaintiffs’ survey also found that 67% of consumers consider “recommended by the DMV” to be an important factor. People who buy traffic school courses want to get rid of points on their record; this requires that their school be approved by their state’s DMV. Thus, consumers might be confused into thinking that “recommended” schools are DMV-approved to mask points.

Defendants argued that their deception was not material because their conversion rate—sales to visitors—was lower than plaintiffs’ conversion rate. The court was not impressed. Defendants’ figures include confused visitors seeking official DMV information, who thus are unlikely to become customers, but defendants didn’t separate out people who arrived on the site from searches for traffic school or driver’s ed.

Moreover, defendants’ deception was willful. The California DMV asked dmv.org to stop in 2004 because its site was causing confusion and oppsed defendants’ attempts to register dmv.org. Defendants admitted “longstanding” awareness of public confusion; the director of customer service responds to many confused emails and voiced concern to others in the company. He suggested adding a pop-up screen to tell consumers that dmv.org is a private site and they shouldn’t send credit card numbers, social security numbers, or other sensitive information, but this suggestion was never implemented.

Defendants have registered other misleading names, including lasuperiorcourts.org, ustreasury.org, and usdepartmentofhomelandsecurity.org, all of which redirect consumers to other sites, including dmv.org.

Defendants argued that plaintiffs were guilty of unclean hands. Unclean hands can bar relief in Lanham Act cases when the plaintiff has engaged in precisely the same type of conduct of which it complains, though the public interest still remains important.

Plaintiffs registered domain names using dmv, including dmvlicenserenewal.com, dmvregistrationrenewal.com, dmvrenewals.com, internetdmv.com, online-dmv.org, internet-dmv.org, cadmvtrafficschool.com, and dmvi.com, and used some to redirect traffic to their site. The court found that those names are confusing in precisely the same way. Moreover, plaintiffs tried to advertise on dmv.org, running test ads on the site and negotiating with defendants for a partnership at precisely the same time as they were also internally planning a campaign of notifying DMVs that dmv.org was causing confusion. Thus, plaintiffs were complicit in the false advertising.

Unclean hands don’t necessarily preclude injunctive relief. McCarthy argues that injunctions protect the public, and it’s better to remedy one wrong than leave two wrongs unaddressed; the defendant should counterclaim instead of escaping condemnation. Given that people are emailing “extremely sensitive information” to defendants in the believe that they are a state agency, the wrong here justifies remedy. The harm goes beyond consumers simply being duped out of their money—which wouldn’t be enough, given plaintiffs’ unclean hands—to the disclosure of sensitive information “to unintended recipients through insecure communication channels.”

The evidence was that “an appreciable percentage” of consumers were confused by the search engine marketing and non-sponsored natural listings, including the domain name. Any remedy must therefore target the confusion that develops even before consumers show up at the site. (Incidentally, this case is great for Eric Goldman’s arguments about the lack of differentiation consumers make between left-side and right-side search results.) Moreover, the remedy must eliminate confusion from “all members of the public,” not just plaintiffs’ likely consumers, to solve the public interest/privacy harm. And it must be sufficient to inform likely consumers, many of whom are probably teenagers looking to get a learner’s permit.

Thus, the court ordered defendants to use an acknowledgement page communicating to all visitors to all “entry pages” that the site is privately owned and not a government site. The page must contain an affirmative click-through, and also have links to official state agencies. The court analogized to prior remedies required in cases involving telephone numbers where consumers might have reached the wrong party as a result of confusion.

The court, however, rejected plaintiffs’ request for disgorgement of defendants’ profits. Given plaintiffs’ unclean hands, disgorgement was inappropriate, especially because plaintiffs hadn’t shown a causal connection to any injury of their own.

Incidentally, this post marks this blog's five-year anniversary--I'm a day late, but school started yesterday, so posting volume may be off for a while.