The standing mess gets worse

Trump Plaza of the Palm Beaches Condominium Ass'n, Inc. v. Rosenthal, 2009 WL 1812743 (S.D. Fla.)

I don't know whether to be amused or disgusted. In this trademark case against Rosenthal's use of "Trump Plaza of the Palm Beaches" in advertisements along with the descriptive phrase, "Your Designated Broker," the court engages in extensive analysis of whether Trump Plaza of the Palm Beaches (a Trump-owned condo with a license to use the Trump Plaza name) has standing under the Conte Bros./Phoenix of Broward standing test; very little of its analysis is devoted to answering the question of a nonexclusive licensee's standing, the only question worth asking. As usual, the Conte Bros. test is either trivial, creating only opportunities for error, or misses the point.

The court gets to the answer that the plaintiff has standing--and of course the court may well just be reacting to the parties' arguments, so I'm not saying the judge did anything wrong, just that the effort expended demonstrates how bad "prudential standing" doctrine has gotten. The rot has spread to trademark; I can only hope we'll see some courts rethinking the standing mess.

On the dilution claim, the court focused its attention on the ability of a nonexclusive licensee to bring a federal dilution action, concluding that standing was absent because the TDRA reserves such a claim to the "owner" of a mark, and plaintiff was not the owner of the mark even in its limited territory, both because of nonexclusivity and because of Trump's reserved power to police the plaintiff's use of the mark.

Speedo competitor can't take the heats

TYR Sport Inc. v. Warnaco Swimwear Inc., 2009 WL 1769444 (C.D. Cal.)

Warnaco does business as Speedo, competing with TYR in the high-end swimwear market. The events at issue surrounded Speedo’s promotion of its swimwear; Schubert, a paid spokesperson for Speedo, was also the national and Olympic team head coach. The court refused to dismiss some antitrust claims, and also addressed false advertising and Speedo’s anti-SLAPP motion.

Among other things, TYR alleges that USA Swimming (the entity behind the US Olympic team) falsely promoted Speedo as superior and rivals’ products as inferior, including claiming that Speedo’s LZR Racer provided a 2% advantage over other products; removing logos of competing products from pictures of sponsored athletes; and refusing competitors the ability to advertise in the official magazine, Splash, or to sponsor USA Swimming-sanctioned meets or post signs at meets.

Speedo argued that the Lanham Act claims should be dismissed as mere puffery, and in any event as protected by the First Amendment. The court agreed that many of the statements at issue—general claims about superiority/inferiority and being “far ahead” of competitors—were puffery. It was puffing for Schubert to say that he was going to tell his team to wear Speedo at trials, even if they were sponsored by another company, and that they’d need to choose between sponsorship revenue and gold medals (among other things, he said that swimmers not wearing Speedo “are contracted to an inferior product” and that “There is one manufacturer that's put millions into research while others are more into fashion”). Schubert may be an expert, but his opinion is still just an opinion.

The court took judicial notice of the fact that Schubert’s relationship with Speedo was well-known among competitive swimmers and coaches. Aside from being surprised that this is a proper subject for judicial notice, I’m not sure that cuts it for FTC endorsement guideline purposes, especially if there’s any chance that ordinary consumers will see the endorsements. The court noted, however, that many of the articles reporting Schubert’s endorsements also contained disclosure of his paid-consultant status, which would suffice.

A few allegations survived, though the court thought it was a close case. In particular, specific and measurable claims of superiority based on testing were not puffery; a numerical comparison “gives the impression that the claim is based upon independent testing.” The 2% advantage claim is unambiguous, and not puffery. Given the allegations that the speech was false/misleading commercial speech, the First Amendment argument also failed.

Likewise, in Speedo’s promotional materials, potentially actionable claims were: (1) “Speedo sent team dealers promotional materials that ‘understated the number of athletes wearing TYR equipment (thus overstating the percentage of athletes wearing Speedo)’ in certain races.” (2) Speedo misleadingly used the large majority of swimmers who’ve recently won meets or set records wearing Speedo, because in fact the majority of all participants were wearing Speedo, and Speedo sponsors a disproportionately high number of world-class athletes who are likely to win/set records anyway. (3) Speedo distributed a promotional document to its team dealers misleadingly analyzing the statistics from a particular competition, omitting races with unfavorable results. These were well-pleaded enough to survive a motion to dismiss, though the trade libel claim based on the same facts was dismissed for failure to plead special damages.

Speedo also asserted an anti-SLAPP defense. California’s anti-SLAPP statute doesn’t apply to commercial speech about a competitor. There’s actually an exception to the commercial speech exception for a nonprofit that receives more than half of its annual revenues from government grants or reimbursements, but that’s not true of USA Swimming and the US Olympic Committee, the relevant nonprofits in the case, which make almost all their money from sponsorships and private funding. However, the exception only applies to a person “primarily engaged in the business of selling … goods or services,” and USA Swimming generally isn’t. But it does employ Schubert, a Speedo spokesperson. Thus, applying the commercial exception to these facts is consistent with the legislative history and the purpose of the exception. The allegations primarily involve a commercial dispute featuring an alliance between USA Swimming and Schubert for Speedo’s benefit. USA Swimming argued that granting exclusive rights to a sponsor is standard in sports generally, but that doesn’t negate the allegations of anticompetitive behavior.

Kayak v. Bing

Click for bigger comparison. Story from Wired. The story mentions possible copyright claims, but not trade dress, which seems odd given that the story also quotes multiple reviews noting the similarity between Bing and Kayak, including one person who simply assumed that Bing had licensed Kayak's technology. Query: do you need to make more changes to design around a copyright claim, or a trade dress claim? My money's on trade dress, actually. (Disclosure: I'm a Kayak user and like it; I think the Bing result shown is highly similar to Kayak, but I also think Kayak's design has a lot of attractive functional features, so I have yet to form an opinion about the viability of any legal claim.)

Out-of-date mailing not false

Klayman v. Judicial Watch, Inc., 2009 WL 1797867 (D.D.C.)


Teeny bit of background here. Klayman founded and then split with Judicial Watch. After a lot of motion practice, the court granted summary judgment against Klayman on a number of the resulting claims.

Klayman brought Lanham Act claims based on a fundraising letter Judicial Watch sent more than a month after Klayman stepped down, alleging that it falsely represented that Klayman was still Chairman and General Counsel, and that it used Klayman’s name and image without permission.

However, Klayman was Chairman and General Counsel at the time the letter was written and he himself authorized and approved the letter. The evidence showed that this was a monthly newsletter, preparations for which usually begin 4-6 weeks before mailing. Before he resigned, Klayman participated in developing and publishing the newsletter, and he also signed the cover letter sent to supporters. Because Judicial Watch doesn’t print or mail its own newsletter, the monthly letters had to be approved to go to its outside vendor by the third week of the preceding month. Thus, Klayman, following his usual practice, edited the October 2003 letter at issue and accompanying cover letter in the first week of September—all this while he knew he was engaged in severance negotiations. When Klayman left, the newsletter had already been sent out to be mailed. All other planned mailings bearing his signature—60,000 pieces of mail—were stopped, at a cost of $30,000.

The court noted some uncertainty about the legal basis for false endorsement, though many courts have treated it as a §43(a)(1)(A) claim. To win such a claim, a celebrity must demonstrate that he or she didn’t endorse the goods or services at issue. Here, Klayman did authorize the use of his name and identity. The endorsement wasn’t false. (The FTC requires that endorsements be up-to-date, but the evidence here is that it was up-to-date.)

Klayman also asserted a §43(a)(1)(B) claim. Here, Klayman couldn’t show falsity because the statements were true at the time they were made. The court wouldn’t hold Judicial Watch liable “for making a statement that, although true at the time made, subsequently became inaccurate due to a change of circumstances.” (Of course, in a continuing ad campaign, this wouldn’t be enough: if a competitor revised its formula, negating comparative test results being used in advertising, the comparative campaign might have to be pulled. But here, where there was only one instance of the claim being made, strict liability does not mean inevitable liability; it’s a little like the volition requirement some courts added to copyright infringement before the DMCA largely obviated that question for ISPs. Note also that a deceived consumer in a similar situation of changed circumstances might, depending on the law of the jurisdiction, have a claim for recission/restitution.)

The court indicated that Klayman would lose anyway, because he couldn’t show injury from the mailing and thus couldn’t maintain a claim for damages.

The court dismissed Klayman’s allegations that Judicial Watch made defamatory statements to its employees for lack of proof that such statements actually occurred. The remaining claim concerned statements to the media that Klayman owed Judicial Watch over a quarter of a million dollars, and that his lawsuit was a tactical maneuver. Klayman is a public figure; thus he’d need to show both falsity and actual malice.

The monetary figure was, Judicial Watch argued, based on Klayman’s severance agreement and Judicial Watch’s audited financial statements. It incorporated amounts that Klayman owed individually and on behalf of his law firm, Klayman & Associates, P.C., for which he’d agreed to indemnify Judicial Watch, as well as attorney’s fees. The statements were, therefore, neither false nor malicious, because Judicial Watch had reason to believe in their truth.

However, the question of debt under the severance agreement was still disputed in the lawsuit, so the court was unable to determine its truth. And yet actual malice exercised its protective function: Klayman didn’t have sufficient evidence that would allow a reasonable jury to find that Judicial Watch knew or entertained serious doubts about the untruth of the monetary figure.

Money4Nothing, falsity for free

Green Bullion Financial Services, LLC v. Money4Gold Holdings, Inc., 2009 WL 1758728 (S.D. Fla.)

Plaintiff does a good business as Cash4Gold. It spent a bunch of money building a brand, but a descriptive name and a difficulty showing secondary meaning at the time of defendants’ actions prevented it from succeeding on its trademark claims, as detailed here. (Its copyright claims also failed). Many of defendants’ internet ad banners and logos “took Plaintiff’s advertising efforts and brand and attributed them to Defendant. For example, one advertisement on Google placed on behalf of Defendant asked whether consumers had seen Defendant's Super Bowl commercial. Defendant, however, did not run an ad during the Super Bowl, but Plaintiff did. Other websites placed by Defendant’s sub-affiliates directly stole Plaintiff’s operating name and logo. Clicking on these sites would direct consumers to Defendant’s website.”

I find it interesting that this intentional copying didn’t support at least a finding of secondary meaning in the logo at the time of the copying.

Anyway, plaintiff tried to get around the trademark problem by pleading false advertising. The “See our Super Bowl Ad?” ads were literally false, as were the ads containing plaintiff’s name, Cash4Gold, because they “impl[ied]” (necessarily) that plaintiff was the operator of the advertised sites. And because of the literal falsity, consumer deception could be presumed.

The hangup was one of the substantial differences between modern trademark law and false advertising law: materiality. A trademark plaintiff doesn’t have to show that confusion was material; a false advertising plaintiff does. And because materiality would have come from secondary meaning—a consumer’s expectation of doing business with the entity known as Cash4Gold—failure to show secondary meaning left plaintiff with no evidence of materiality.

I note that “As Seen on TV” has been found to be material in other cases, though secondary meaning was not separately litigated. Telebrands Corp. v. Wilton Indus., Inc., 983 F. Supp. 471, 475 (S.D.N.Y. 1997); Project Strategies Corp. v. National Comms. Corp., 1995-2 Trade Cas. (CCH) P 71,181 (E.D.N.Y. Oct. 27, 1995) (finding statement material because it was likely to cause consumers to identify defendant’s product with plaintiff’s, which actually had been advertised on television).

Separate from the trademark issue, one could argue, using fairly standard economic theories of advertising, that “as seen on TV” is material in itself because it indicates a sort of reproductive fitness: this company is successful enough to advertise on TV, and thus is not a fly-by-night operation. (Indeed, the court notes in its recitation of the facts how unusual it is for a new company to be able to afford a Superbowl ad.) Consumers may be reassured by national TV advertising and use it as a factor in determining whether to do business with the company. See, e.g., Lillian R. BeVier, Competitor Suits for False Advertising Under Section 43(a) of the Lanham Act: A Puzzle in the Law of Deception, 78 VA. L. REV. 1, 10 (1992) (explaining the economic theory according to which advertisers use the high costs of advertising to signal consumers that their products are good and successful); Jean Wegman Burns, Confused Jurisprudence: False Advertising Under the Lanham Act, 79 B.U. L. REV. 807, 827 & n.88 (1999) (same).

The court evidenced some displeasure with the defendants’ conduct and with the parties’ presentation of the case, signalling that it might be favorable to a return by the plaintiff, with better evidence.

Seasons, rings, and Lanham Act epicycles

AFL Philadelphia LLC v. Krause, 2009 WL 1562992 (E.D. Pa.)

The Philadelphia Soul, an arena football team, had its 2009 season cancelled because of financial problems, though the team hopes to return next year. The team and Joseph Krause, a former employee, sued each other over events related to the cancellation: plaintiffs for copyright and trademark infringement and other claims related to a design for the 2008 Championship Ring to be distributed to players, coaches, and executives; and Krause for Lanham Act violations/misappropriation of name. This decision denied plantiffs’ motion to dismiss the counterclaims.

Krause is the former director of sales, with responsibility for game and season ticket sales. He alleged that he was hired for his strong reputation in the sports and entertainment business, and that his success promoting the team enhanced his solid reputation.

The 2009 season was suspended in mid-December 2008; Krause and other employees were given one week notice of termination. Krause alleged that the cancellation was hugely unpopular, especially among 2009 season ticket holders, who criticized the team’s failure to immediately issue refunds and complained to the Pennsylvania AG.

Krause alleged that, after he was terminated, the team sent email to its fans about the season’s cancellation that falsely identified his email address as the source. He alleged that the team sought to cause confusion about his association with the decision and to trade on his good name.

The counterclaim defendants argued that Krause lacked prudential standing (a false advertising question most places, though the 3^rd Circuit says that the test should be the same for (a)(1)(A) and (a)(1)(B)). Because standing doctrine has become one of the most screwed-up areas of the Lanham Act, the court devoted a bunch of effort to determining whether Krause had pled not only harm to his own reputation but benefit to the team as the result of the use of his name. Arguably he did, so (considering the other Conte Bros. factors) he had prudential standing, even though the nature of his injury was “somewhat remote” from the type of harm Congress wanted to address in the Lanham Act.

Next question: was Krause’s name a valid mark? He pled sufficient facts to allege secondary meaning. The trouble is that, especially in the 3^rd Circuit, false endorsement cases are a bizarre hybrid of (a)(1)(A) and (a)(1)(B); Krause hadn’t alleged that his name was used in advertising, just that it had secondary meaning in the abstract. The court concluded that because he was bringing a “false designation” claim, he didn’t need to make “allegations regarding advertising,” but that the same test for secondary meaning applies to false designation and false advertising claims and that Krause had pled enough to overcome the secondary meaning hurdle.

The team argued that there was no likelihood of confusion, because the email showed that it came from the Philadelphia Soul, with an @philadelphiasoul.com address. However, the email’s from line was “From: Joe Krause [mailto:jkrause @philadelphiasoul.com],” thus indicating that the email originated from Krause, albeit in his role as employee. (Another thing to insert in one’s employment contracts, apparently: control over employees’ email addresses and right to use in marketing.) So Krause sufficiently pled likely confusion (the court using, by the way, the trademark factors here).

Krause also counterclaimed for misappropriation of name, a variant of the privacy tort. The court found that he’d validly pled that the email appropriated his good name and reputation, and that he didn’t need to plead that his name was appropriated for commercial advantage, because that’s a component of the right of publicity, which is a different tort. However, Krause had also alleged that the team’s purpose was commercial, as distinguished from an incidental use of his name.

OTC supplement worked like prescription drug because it was prescription drug

Jackson v. Balanced Health Products, Inc., 2009 WL 1625944 (N.D. Cal.)

Grady Jackson and Kelley Alexander brought a consumer class action against dietary supplement retailer defendants the Vitamin Shoppe and GNC, among others, who moved to dismiss. The case is about StarCaps, promoted by defendant BHP and its principal, Nikki Haskell. Haskell promoted StarCaps as an “all natural” OTC diet pill with garlic and papaya extract as its main active ingredients. Each bottle comes with a pamphlet promising: “This all natural dietary supplement detoxes your system by metabolizing protein and eliminating bloat. It's safe, fast and effective, and it contains no ephedra. Lose between 10 and 125 pounds and keep it off!”

In late 2007, The Journal of Analytical Toxicology ran an article, “Detection of Bumetanide in an Over-the-Counter Supplement.” The Center for Human Toxicology used high performance liquid chromotography revealing that all the StarCaps it tested contained near-therapeutic doses of Bumetanide, a prescription drug that is banned by the NFL. Bumetanide is prescribed to treat edema, but it can also mask steriod use.

Plaintiff Grady Jackson is an NFL player who began taking StarCaps in 2008 to help him lose weight. He tested positive for Bumetanide and was suspended. He’s appealing the suspension. When Jackson’s positive drug test became public, BHP issued a statement that it had temporarily suspended shipments of StarCaps to retailers. But retailers kept selling StarCaps until BHP issued a voluntary recall.

The other named plaintiff is a California resident who bought StarCaps for over four years because it was represented as an all-natural dietary supplement.

The retail defendants claim to have quality control standards to monitor supplements from the vendors it uses.

The plaintiffs sued for unfair competition, false advertising, and other torts.

The court began by discussing preemption. There’s no express preemption of false advertising claims about dietary supplements, but there’s also no private right of action for violations of the FDCA. Defendants argued that plaintiffs were trying to sue for violations of the FDCA, and that the premise of the complaint is that the supplement was was (1) improperly labeled and (2) sold OTC but contained a prescription-only drug, both of which constitute misbranding under the FDCA.

Here, the claims were based on false advertising and mislabeling under the Sherman Law; they didn’t depend on FDCA violations. There was no preemption, though some of the non-false advertising claims were dismissed on other grounds.

A fire station of unknown origin

Pacheco Ross Architects, P.C. v. Mitchell Associates Architects, 2009 WL 1606066 (N.D.N.Y.)

The parties, who had worked together in a previous incarnation and apparently ended up in a nasty split, fought over advertising claims related to sixteen architectural designs shown at industry trade shows, in general marketing/PR materials, and on the internet. They compete in a specialized industry, the design of fire houses; each project is worth six or seven figures. Advertising that a company has received an architectural award and that it has performed previous architectural work are useful ways to attract new clients. A large percentage of new business comes from the handful of trade shows each year that are attended by fire chiefs, commissioners, and other fire personnel. These customers are likely to be confused if two different firms claim to have received the same award or performed the same work.

The court reviewed §43(a)(1)(A) and (a)(1)(B). (I bet you’re thinking, correctly, that Dastar precludes an (a)(1)(A) claim, but stick around—(a)(1)(A) will retain relevance.) The opinion identified three ways of proving deceptiveness under (a)(1)(B): survey evidence, evidence of actual confusion, and “argument based on an inference arising from a judicial comparison of the claims and the context of their use in the marketplace.” A welcome result, but not one that’s very common, to say the least!

Here, there was neither survey evidence nor actual confusion evidence, but the court nonetheless went on to consider “whether the ordinary, prudent customer in the marketplace would likely be confused,” using the Polaroid factors. The court said these factors were “well-known and need not be recited in their entirety here,” and “can be enlarged or diminished depending on the facts of the particular case” because the court’s evaluation is not mechanical, but should focus on the ultimate question of confusion. (Notice how not reciting the factors helps obscure that the factors are designed to assess trademark infringement, not false advertising in general!) I like how the court thinks; I am increasingly of the opinion that the multifactor confusion test, though it has its weaknesses, is superior to the rigid and ultimately insupportable falsity/misleadingness distinction.

Applying this method, the court found that the Polaroid factors favored a finding of likely confusion for 14 designs, which the court proceeded to order credited in particular ways. The confusion with which the court was concerned covered primary responsibility for designing the architectural works and/or receiving architectural awards. The modified Polaroid factors played out as follows: The parties’ products are similar in quality and consumers are relatively sophisticated. However, the other factors outweighed these considerations: the strength “of the moving party’s claim to be responsible, or largely responsible, for the architectural design and/or award in question”; the close similarity between the parties’ representations that they were responsible for the designs/awards; the identity of services and advertising channels; the parties’ intent to continue making the same claims; the testimony of both principals that confusion was likely; and the parties’ lack of good faith. (While the strength of the claims makes some sense, comparing mark strength to the degree to which the claim at issue is clearly false, the similarity of the parties’ representations will rarely be relevant in a false advertising case. Applied to false advertising, the exact Polaroid factors will often be poor fits—as the court partly acknowledged by modifying them.)

The court required attributions to be conspicuously placed near the relevant claims, in a typeface at least as large as the claims, with no additional language or competing attribution (including claims by one party to have been part of the “design team,” claims to have been “in charge of design,” or references to “the firm he founded”). The attributions had to disclose the architect of record, though in some cases that had to be accompanied by “now known as.”

NAD v. district court: a case of Enfamil

PBM Products, LLC v. Mead Johnson Nutrition Co., 2009 WL 1684471 (E.D. Va.)

PBM makes store brand infant formula, and Mead Johnson makes Enfamil. Enfamil now contains DHA and ARA, as do store brand formulas: they have the same levels of these lipids and obtain them from the same supplier, which is the only FDA-approved source of them. The challenged ads cite independent clinical studies in which pre-lipid Enfamil was compared to current Enfamil and found inproved eye and brain development for infants. (Abbott, Mead Johnson’s main competitor, challenged similar advertising in front of NAD, which found several times that Mead Johnson was advertising falsely and referred the issue to the FTC. Nonetheless, the advertising was apparently important enough to Mead Johnson to continue—understandably so, since parents will pay a substantial premium to choose products that will benefit their infants.)

The challenged ad states, “It may be tempting to try a less expensive store brand, but only Enfamil LIPIL is clinically proven to improve brain and eye development.” The small-print disclaimer says that this is Enfamil v. Enfamil. The mailer also says, “En-Fact: Enfamil LIPIL’s unique formulation is not available in any store brand.” And there’s a graphic in which one side of a picture of a duck is blurry and the other is clear, marked “without LIPIL” and “with LIPIL” respectively, again with disclaimer. (This picture is the current version at Enfamil's website, which easily discloses the actual comparison, with no need for a separate small-print disclaimer.)

The same disclaimer accompanied the claim, “Store brands may cost less, but Enfamil gives your baby more.” So it appeared three times, which the court thought was notable, even though it was always in small print.

The court rejected a preliminary injunction for failure to show literal falsity, dissecting the ad in a way I think inappropriate. The court found that it was undisputed that the independent studies showed that Enfamil with lipids outperformed Enfamil without lipids, and thus “the reference to clinical studies” cannot be literally false. (Except that PBM wasn’t complaining about “the reference,” but how the reference was used.) “Moreover, to the extent that a consumer could read the statement to mean that clinical studies have compared Mead Johnson’s formula to other brands (which indubitably would be inaccurate), the Disclaimer clarifies the point ….” (Except that consumers don’t process disclaimers, and disclaimers can’t take back what the main text says, and the main text compares store brands to Enfamil.)

Similarly, the court found that “unique” didn’t refer solely to lipids. “An objective reading of this statement suggests that ‘unique’ refers, not to LIPIL® as an isolated component of the overall formula, but rather to Enfamil® LIPIL®, the formula in its entirety.” Enfamil does have some ingredients that PBM’s store brands don’t. (This case is a great illustration of Richard Leighton’s observation at the ABA conference that explicit falsity means what the judge says it means.)

The Blurry Duck illustration survived for similar reasons.

Comment: Standing alone, the “clinically proven” claim that is actually only about Enfamil v. Enfamil might be misleading rather than false. But it’s not standing alone: it’s just after “it may be tempting to try a less expensive store brand”; the necessary implication is that the clinical proof is comparative. Likewise, the references to “unique formulation” might be fine alone, but focusing on the lipids, which are not the unique element of the formulation, changes the ad to false. Now the question is whether PBM will come back with a survey to prove what is obvious.

ABA Consumer Protection conference, green marketing and internet issues

Green Marketing: Communicating Environmental Benefits to Effect Change and Sell Product

Moderator: Nancy J. Felsten, Davis Wright Tremaine LLP, New York, NY

There’s a green gap: most consumers believe they understand the terms, but half think that “environmentally friendly” confers a positive environmental benefit. They think biodegradable products decompose anywhere, in under a year, and are great for the environment. TerraChoice found that almost all “environmental” products committed at least one sin—especially labels with no meaning or third-party verification behind them. How do we atone for our carbon footprints? How can we even measure them?

New terms that weren’t around when the Green Guides first came out: sustainability, renewability, life cycle, carbon offsets, renewable energy credits, carbon footprint, carbon-neutral, bio-based, third party certification, organic textiles, green buildings.

Speakers:

James A. Kohm, Associate Director, Division of Enforcement, FTC

Tent poles of FTC action: Business guidance; enforcement; consumer education. Business guides are focused on the Green Guides, which are under review. We were hopeful we were going to get more consumer perception evidence from our hearings than we did. We are concerned about chilling legitimate claims as well as avoiding bad claims; we intend to conduct our own consumer research as soon as OMB approves it.

Two categories: people who step over the line and people who live over the line. Guides are not a big constraint on the latter; the former step over the line, generally, with implied claims. Example: K-Mart and biodegradability claims for things like paper plates. They probably biodegrade in an ideal setting. But we know consumers understand such claims to mean that the product will break down into natural components in a reasonably short period of time, and nothing you throw into the trash breaks down that way because essentially nothing breaks down in a landfill.

Note that FTC regulates green business-to-business claims as well.

Best advice for general environmental benefits/life-cycle analysis: stay away from it; difficult to understand; who knows what consumers take from it?

David G. Mallen, Associate Director, NAD, National Advertising Review Council

Role of self-regulation. NAD has been fairly active both in monitoring and reviewing competitor challenges. Green marketing is prevalent and powerful. Guilt: consumers want to feel better about their consumption. Thus, there’s a potential for abuse.

Green claims at NAD: (1) general environmental benefit; (2) comparative claims (we are greener than our polluting competitor); (3) biodegradable and degradable; (4) third-party certification. Companies will seize upon a true attribute and attempt to parlay that into a broader claim that can’t be substantiated. Essentials: no petroleum-based cleaners, only plant-based soaps. This was literally true. Also claimed “more sensible” for the environment. Concern: this isn’t substantiated—may not be a better choice—the complex surfactants have environmental issues even if plant-derived. They can tout plant-based and non-petroleum, but not broader.

Pets for the Planet (2008): reduce your carbon pawprint. The company was prepared to walk us through the supply chain, the feedlots/husbandry. They took a step towards lifecycle analysis—the kinds of things you need to think about to make a very broad environmental claim, even knowing substantiation is difficult.

Challenge: what claims require that kind of analysis? Broad claims require broad support. Panasonic plasma case: no lead, but consumes lots of energy = not “environmentally friendly.” Mythic paint: complied with industry standards on low-VOC, but tagline was “If you knew what their paint was doing to you, it’d take your breath away. Literally.” A lot of competitors have only slightly greater levels of VOC, and there’s no evidence of danger from them. Had to modify the ads.

Certification: who’s doing the certifying? Are the criteria meaningful and verifiable? Does the certification give rise to further implied claims? NAD will be increasingly involved in this, he predicts.

Ellen Goodman, Rutgers University (Camden)

5 sources of federal regulation of green claims, including EPA and Dep’t of Energy. Different agencies stress different reasons for regulating. Consumer protection is one, but regulation through information is another—change consumer preferences, habits, get producers to change products and production processes. This can work even without increasing demand for green products, because the very fact of imposing a label can get producers to reformulate products: when the FDA adopted trans fat regulations, producers reformulated the products subject to them.

The other agencies do use the language of consumer protection, melding these two goals. The consumer protection idea is that there are information deficits; these are credence claims, unverifiable by consumers, giving sellers an incentive to greenwash. When policy seeks to address regulatory gaps, it’s a different type of market failure: failure of market to deal with negative externalities like pollution. Regulators lack information, enforcement tools/will, etc. Information provision through labeling is a way to get movement on the substance without direct regulation—animal welfare, for example.

We usually think that addressing information deficits protects consumers and reduces externalities. But policies that enhance consumer decisionmaking might not reduce externalities—it only works if consumers care about the externalities they inflict. Likewise, information disclosure may get producers to reformulate, even if consumers turn out not to care. Policymakers may have to choose which goal they want to achieve.

Policy levers: False advertising; point of purchase labeling programs (voluntary or mandatory; logos like USDA Organic or narrative information like the EnergyGuide); and also information reporting, which isn’t point of purchase but does generate a record.

Pros of advertising law: flexible and low cost. Gov’t labels: unified standards; transparent and fair. Disclosure: flexible; educational; mobilizing. Cons: Advertising law: post hoc. Gov’t labels: regulatory capture is a risk; inflexible and resistant to information. Disclosure: unclear.

Organic label example: mid-level protection in terms of definition; preemptive effect—label occupies the field for “organic”; certification structure makes it difficult to upgrade/differentiate—the rules prohibit the third-party certifiers from having higher standards; you’d have to pay again to get a higher standard and then there’d be a problem of information clutter. Organic is a very successful label, but with tradeoffs in retarding innovation. Similar process for USDA labeling of meat/animal products with animal welfare/environmental issues.

USDA just adopted a new label for grass-fed/naturally raised animals. The standards are quite lax, not what most people would think those terms meant. There was a conscious agency decision to have a very narrow meaning for the logo, to encourage market segmentation. “Grassfed” means that the animals are given hay in confinement; if you want to say your animal was pastured, you can say that. Maybe we’ll see that, but government labels have a lot of power.

Logo labels are simple, useful, widely adopted; tradeoff is regulatory effect—tend to be relatively weak, sticky standards that are difficult to supplement. (Ties in to Levy’s discussion of satisficing.) Narrative labels give greater potential for consumer education—and even if consumers don’t read them, remember effects on manufacturers and intermediaries. Consumer research shows the Energy Guide label has been much less consumer-friendly than the Energy Star logo, which conveys less information; consumers want a thumbs-up/thumbs-down.

Simplicity v. information tradeoff. EPA wanted to show how well vehicles did v. their class. UCS said they should show how vehicles did v. all vehicles, because then it’s obvious that even a really fuel efficient SUV is terribly wasteful. Turns out consumers didn’t like the more extensive disclosure—more information; they said they were shopping within the vehicle class anyway.

Felsten: Sounds like consumers want cheap and easy info. Consumers don’t just want to know what carbon-neutral means; they want standards. Whose role is this? Government? Should there be safe harbors for following industry standards?

Kohm: The FTC isn’t a standard-setting body, even though that can be a legitimate government function. The keystone is consumer perception. If the EPA or another body set standards, that could be useful in moving consumer perception or giving us a basis to regulation.

Mallen: NAD thinks similarly. We don’t rate companies on green-ness.

Kohm: Consumers interpret “please recycle” as “this is recyclable (where you are)”—producers have to be careful about what they say.

Q: recent congressional hearing at which testimony was that consumer had bought a fridge based on the label, but Consumer Reports testing found gross inefficiency; turned out the seller just accepted the manufacturer’s report.

Goodman: There definitely have been problems with verification.

Kohm: Self-reporting is the rule; we think there are competitive reasons to be accurate. The DOE standard had a loophole, which arguably allowed them to turn off the icemaker when they tested the energy consumption. The DOE has now closed that loophole. Competitors check this kind of thing!

Felsten: how long do we need to wait for Green Guides copy testing?

Kohm: We put it out for comment; the comment period is now over. We are nearly through the first OMB approval period of 60 days. It will take 2-3 weeks to run once it happens. Looking at consumer perceptions of specific terms. We had to make choices and focused much more on new terms in our testing—sustainable, etc.

Consumers Confronted by Old Challenges, New Technologies: Learning From Last Year’s Mistakes

Moderator:

Thomas F. Zych, Thompson Hine LLP, Cleveland, OH

Legal responses to new tech developments: so far we haven’t heard much call to throw out the rules and start over again. But here we have an opportunity to ask whether the law is able to keep up with what’s happening and what we might do about it.

Speakers:

Eric Goldman, Santa Clara University School of Law

230 contemplates a world divided between first-party content and third-party content. Simply: an online actor isn’t liable for third-party content. There are exceptions, and bright lawyers start working on them. Exceptions—federal criminal enforcement, IP (DMCA covers copyright). Still, a robust and strong rule that befuddles lawyers because it’s contrary to what we know about tort law. It’s the flagship of cyberspace exceptionalism.

(1) Nothing has changed for first parties. A website that makes its own marketing representations can be liable under standard theories. (2) But some representations might be rendered untrue by third-party actions. Suppose a site says it offers a “safe” environment. So possibly, applying the principle of 230, sites might not be liable for first-party representations when rendered untrue by third-party conduct. (3) Barnes v. Yahoo!: a site may be liable for promissory estoppel if it promises to remove the content and then doesn’t do so.

What about when the site is intrinsically involved with the content? 230 still generally protects the website—even if the ToS say that the website “owns” the content submitted. SEC said that companies could be responsible for information they linked to. For criminal enforcement, there’s no problem, but civil enforcement is preempted by 230. What about when websites run third-party ads? Attempts to hold sites liable for content they’re paid to run—230 still protects them.

Workaround: Roommates.com: site can lose 230 if it encourages illegal content/requires users to input illegal content. FTC action is testing this theory—case against an access provider helping customers engage in illegal activity; the theory is that the provider was more than a conduit. Criminal liability is certainly available. But a civil action premised on illegal conduct involved in being a conspirator or some other type of joint party, 230 is relevant though not an obvious killer. Troubling: when a civil action is based on providing services to third-party customers and plaintiffs try to fit into the Roommates exception.

Two takeaways: (1) There’s a basic division between first and third party content sounds great in theory, but is muddled in practice. (2) Agencies need to rethink some expansive liability approaches. Can’t hold everyone up and down the chain liable for that bad action. 230 may force you to be much more granular and let some people go or choose criminal enforcement if appropriate.

Zych: Has 230 caused problems for regulators?

Genaro Fullano, Deputy Chief, Enforcement, FCC

Hasn’t come up yet but we’re in a very early stage of our enforcement.

C. Brad Schuelke, Assistant Attorney General, Office of the Texas Attorney

General

Has to fundamentally disagree with Goldman’s last point—need to continue to push and try to get around 230. The state of the law doesn’t look really good for regulators, but those aren’t necessarily rightly decided or what the law was intended to do. We need to enforce the laws as we think appropriate, at least to get Congress to clarify. Background: legislative history doesn’t suggest this broad a reading. Was passed in reaction to Stratton Oakmont, a defamation case holding an ISP liable as a publisher because it reviewed postings on its website. Prodigy ended up having greater liability for acting as a Good Samaritan. Congress wanted to avoid that problem. They shouldn’t be considered publishers or speakers of third-party content, but there are other ways of characterizing them that would allow liability in certain circumstances. Congress wanted to encourage monitoring, but it’s actually discouraging ISPs from monitoring their sites. It’s worth regulators pushing some.

Like the FTC, we’ve encountered 230 numerous times, though haven’t litigated it yet. Julie Brill talked about Facebook & MySpace. The states in general were hamstrung by what they could do because of FB etc.’s ability to disclaim liability for what’s done on their sites; less leverage to force changes. Similarly with Craigslist: used for prostitution and other things, and they know it. In a normal, non-230 world, their knowledge and failure to act might give them liability, but 230 puts a wrench in that.

Goldman: It’s equally important to recognize what the courts are doing when they read the statute broadly. It’s a philosophical divide. If you know that there are legal limits on liability, it might not be the right thing to do to test the limit because you can damage the targets of your enforcement by litigating what may turn out to be lawless theories. The FTC has done a pretty good job, but not all agencies have; some seem to look for trouble. It’s embarrassing for the government to get told by judges: what were you thinking? The law was clear.

Zych: 1996 law—crafting a media-specific solution at one point in time may have unintended consequences. Lessons for other sector-specific types of laws.

Fullano: Net neutrality from the consumer protection point of view. Standard disclaimer about his views. Things are literally happening as he speaks.

Madison River, telephone company, was reported to be blocking access to customers’ VOIP services. FCC investigated and the company settled, agreeing not to block VOIP ports and pay a nominal fine. Important: the central issue was whether Madison River’s behavior as a common carrier was “unjust and unreasonable.” The FCC used its general authority under the Telecom Act.

Questions of statutory interpretation: what authority does the FCC have? Internet Policy Statement: users’ rights to access lawful internet content, claiming Title I authority, allowing jurisdiction ancillary to regulating communication. Consumers are entitled to access lawful content, use legal devices, and have competition among providers of network access, content, services, and applications.

Complaint against Comcast (wasn’t really a “complaint”) about secret degradation of P2P protocols. FCC concluded that discrimination among applications had occurred; after an initial denial, Comcast argued it was just reasonable network management practices. FCC concluded that these practices were invasive and unacceptable. FCC threatened injunctive action; Comcast argued the FCC lacked statutory authority because there was no violation of rules, only the policy statement. The FCC responded by saying that Comcast’s practices effected Title II (common carrier) functions, and thus the FCC could exercise its ancillary jurisdiction. That’s still pending before the court of appeals. Comcast has cleaned up its act.

Now, we have the economic meltdown and much talk of the necessity of broadband deployment to promote recovery. Grants will have nondiscrimination and interconnection requirements. Thousands of initial comments have come in. Comcast argues that any openness regulation will undermine national broadband policy. Others like Public Knowledge take the position that every packet is equal. The ultimate question: will the internet be managed? Will people have to pay extra for extra broadband services?

The FCC asked to be informed about consumer protection issues related to the provision of service.

There’s little trust among commenters that network owners won’t engage in anticompetitive behavior. Comments: disclosure to the consumer is key. (Given what we know about disclosure, how can this possibly help? Does anyone seriously think that Comcast will offer you the option to buy unblocked access to P2P for a higher price if it’s allowed to discriminate?)

Goldman: Disruptive technologies—net neutrality is a microcosm—rapidly evolving tech, rapidly evolving business models, complex consumer decisions (what are you buying when you buy connectivity?).

Schuelke: Standard disclaimer of personal opinion. Everyone seems to agree that self-regulation isn’t working, in large part because many moves are invisible from a consumer perspective. More likely that something will have to change. One possibility for industry: states probably will try to act—you’ve already seen 3-4 states bring legislation to regulate behavioral advertising.

Zych: Web 1.0 thinking may not apply to web 2.0. Buying something at the store was never a truly private act—it occurred in public—but storage of data creates a scale problem and a persistence problem. Social networking: Europe’s Art. 29 working group has announced that applications on sites like FB (polls, etc.) can be held liable for violations of European privacy laws even if their transactions with FB are entirely within the US. What’s absent from the analysis is anthropology: we think of things from an e-commerce point of view, control over commercial transactions. But social networking is cultural.

Schuelke: Goes back to the FTC’s distinction between first-party behavioral advertising and third-party behavioral advertising: consumers aren’t as surprised to know that the website they’re on tracks them. Like going into the grocery store: consumer understands that the cashier sees the products; it’s troubling if the store shares that information with dozens of other sources and combines it with other purchasing decisions.

Goldman: fundamental assumptions about how people interact are breaking down, and the internet may finally put the stake in the heart of some distinctions, like personally identifying information and non-personally identifying information, or private and public. Distinction between commercial and noncommercial is also increasingly fraught. Things look commercial but may not be despite indicia.

Me again:

I would be remiss if I didn't give credit to John Villafranco, who took the laboring oar organizing the conference. Thanks to a great group!

ABA Consumer Protection conference, financial products safety

Luncheon Address: The Rise of the Consumer in the Obama Administration

Caroline Holland, majority counsel for Senate Antitrust, Competition Policy and Consumer Rights Subcommittee

Agenda: ban reverse payments in patent settlements used to delay the entry of competing generic drugs against the (ex)patentee. Discount pricing consumer protection act, to overturn the recent Supreme Court decision and ban minimum resale price-fixing. Also on the horizon: Railroad antitrust, to remove antitrust exemption that the RR industry currently enjoys.

Eric Stein, Treasury Department, Deputy Assistant Secretary for Consumer Protection (a new title at the department)

If you forget about the consumer, you do so at your peril: if people can’t pay back their loans, that breaks the economy. There’s no sharp distinction between consumer protection and safety and soundness of the banks, but the regulatory agencies looked with a different lens. We learned that we need a consistent voice standing up for consumers: need a single entity that can set standards, reduce gaps in federal supervision, coordinate with the states, and create consistent regulation for similar products. The goal isn’t more regulation but better regulation.

(1) Subject matter is quite expansive: all financial products. Payday lending, mortgages, credit cards, savings products, payment products.

(2) Powers are strong. The ability to write rules. TILA, RESPA, Fair Debt Collection Protection Act, the CRA, etc. exist and the agency will be able to enforce them and to write rules to fill in gaps—level playing field for everyone. Also have the ability to supervise and examine institutions with subpoena power.

(3) Enforcement powers, similar to powers bank regulators have over banks. There’s a feedback loop between rule-writing and enforcement

There is also backstop authority—an agency that used to have authority can enforce its rules if the new agency doesn’t act. The states can also go further than the agency, and enforce state as well as federal rules.

Guiding principles: Transparency, simplicity in products, unfairness (some terms are so unfair they should be banned, or constrained), accountability in access to credit.

FTC and SEC should have expanded powers as well—they’ve been hamstrung before.

Q: the consumer products safety commission got split off from the FTC, and nobody would say that’s a successful agency. Nor is the FCC good at doing consumer protection. Why would a regulatory agency for financial work starting from scratch do better for consumer protection than the FTC?

Stein: The bank regulatory agencies have a division for CRA enforcement; that will come over to the new agency. Feeling: symbiosis of putting them all together that will be stronger than existing authority. Full rule-writing ability, not restricted as FTC is; full ability to sue while providing notice to the Department of Justice.

Q: Resale price maintenance—why not treat it under a rule of reason?

Holland: there’s a concern that the businesses suffering from this don’t have the resources/ability to bring a case to prove it under the rule of reason. Breyer’s dissent: we haven’t seen this bring benefits for consumers, and it worked for 90 years to keep prices lower. The states that banned minimum resale prices had lower prices before the law.

Villafranco: recently approved act out of subcommittee allowing regulation of various lending practices—what are your thoughts on that?

Stein: He’s heard of that bill but doesn’t know its prospects. There are important gaps in regulation. On the fraud side, the FTC can still go after debt settlement fraud, but there is a need for more.

Q: In connection with health care, is anyone looking at McCarran-Ferguson and price competition?

Holland: Sen. Leahy is looking at removing the antitrust exemption, but it hasn’t percolated up as a serious issue. We are concerned about antitrust issues from health care reform.

Q: Preemption?

Stein: Nope.

Q: So potentially 50 different rules.

Q: Would that also cover bank regulation?

Stein: Yes.

Q: Right now there are 7 financial agencies. Washington Post says the Federal Reserve will take the lead—is that what you’re saying?

Stein: Federally chartered banks, supervision will be consolidated. Tier 1 financial holding companies—those that pose systemic risk because of their size, scope, complexity and interconnectedness—would be regulated by the Federal Reserve, which would oversee all those firms and set capital requirements. Their consumer protection division would come over to the new agency. It’s not accurate to say the Federal Reserve would take the lead, but it would focus on these large entities.

Q: The SEC has been attacked as overlawyered. What will ensure that the new entity will not be overlawyered?

Stein: There’s a commitment to be data-driven—all complaints to federal agencies will be funneled to the new agency. It will test disclosures to deal with biases that lenders preyed on; will use behavioral economics.

Q: What do you mean by backstop authority?

Stein: When you disperse authority, people look for gaps or they forum-shop and choose the weaker regulator; there’s a competition and the regulator may market itself as friendly. We want to avoid that. If the FTC sees a bank problem, they’d refer it to this agency, but if the agency didn’t act within 90 days, the FTC could. Similarly, states could act.

Q: Does the legislation contemplate staffing up from ground level?

Stein: No, transferring. All of the agencies but one have separate divisions focused on CRA and compliance; the one used to have a separate division. There will be integration issues, but you can move those people.

Q: what about private rights of action?

Stein: 15 or so statutes are transferred over; left alone in terms of whether there’s a private right of action. There would not be a private right with respect to the agency’s new gap-filling regulations.

Q: homeland security problem: how do we get these different agencies to work/think together?

Stein: Will be an integration challenge, no doubt. Strong leadership and single mission will help.

Q: Has the legislation described the agency structure?

Stein: Not yet! Early next week. It doesn’t depart from the white paper’s description of the consumer agency.

Q: Former FTC commissioners spoke about a time when the agency did a lot of unsuccessful rulemaking. That takes agency time and focus; think about unbridled authority to write rules by unelected officials.

Stein: inherent issue with administrative agencies. Core principles: access to credit preserved through data-driven measures. The Federal Reserve was quiet for a long time on mortgages. Congress delegated the ability to issue mortgage rules, and the Federal Reserve did a rule to provide targeted protections for subprime mortgages; widely welcomed and overdue. As the crisis has evolved, it could go further. It will be a thoughtful, long process. Banning will be a last resort: disclosure and tailoring will be the watchwords.

(Everybody talks about disclosure; and yet as Alan Levy told us, it does so little for us! Though I think Levy might well agree that mortgages are a place where information-seeking goes into enough depth for good disclosure to help.)

Consumer Protection in Financial Transactions: The Need for a Financial Products Safety Commission

Moderator: Dana B. Rosenfeld, Bryan Cave LLP, Washington, DC

Adam J. Levitin, Georgetown University Law Center

States traditionally took care of consumer protection; feds took over regulation of banking, but left consumer protection behind, creating gaps. The architecture of regulation determines the tenor of the substance. We have a real problem of regulatory architecture in financial services. The FTC has no authority over banks, thrifts, credit unions. Authority for consumer protection for banks is spread out over a bunch of different agencies. They’re focused on safety/soundness of the banks. Soundness requires profitability, and abusive lending is often profitable, at least in the short term. That presents a tension for regulators, who are judged on their performance in insuring safety and soundness; consumer protection almost always loses.

Regulatory arbitrage: deciding whether to be a thrift or another kind of institution—so banks seek out the weakest regulatory institutions, and some of the institutions are in active competition with each other to gain regulatees and avoid being phased out. Countrywide was induced to choose a particular structure by the promise (fulfilled) that it would be able to choose its own oversight.

Congress has rarely done things in this area. Deregulation happened within the agencies, in opinion letters, in failure to take enforcement action, and in active litigation against states to assert preemption of any interference with financial services.

What to do? Regime change may help, but not all agencies are under direct political control. And it’s neither a guarantee of change in regulation nor a permanent feature—administrations change. Another possibility: put the states back in the game; that doesn’t seem to be the way we’re headed. Finally: reorganize consumer protection on the federal level.

That’s got potential, but the risk is that you’re gambling all your eggs in one undiversified basket. Example: consumer product safety commission, dropped the ball on lead in children’s toys; the director fought against congressional appropriations to fund the agency. No regulatory system is fail-safe. Current proposal seems open to intervention by the states. Though not all states will act, even one Eliot Spitzer can do a lot of good for consumer protection nationwide.

There are costs to duplicative regulation, but there are also costs to abandoning consumer protection, which we’re seeing right now.

Angela K. Littwin, University of Texas School of Law

Why we need regulation: there is lots of misunderstanding of the products consumers are buying; subprime borrowers didn’t understand even the basic terms of their mortgages; the evidence is the same for credit cards. Contracts and practices change so quickly that the usual failsafes don’t apply—the credit card contract changes over the life of the loan, so Consumer Reports can’t come in and rate the loan, and consumers who invest in educating themselves are less likely to help them in the long term.

Disclosure needs to be done more uniformly, more effectively. Harder question: why we need more than disclosure. Answer: psychology/behavioral economics. Consumers are using lending products in ways they regret in the long term. Study of women in public housing: self-identified as using credit cards in ways against their long-term interests. They couldn’t have done that kind of spending without access to credit cards. Oren Bar-Gill calls this “use transparency”—people mis-predict how they’ll use products. People think they’ll never be subject to the late fee. Long known a problem in credit cards; increasingly seen to be a problem with mortgage loans and payday loans.

People often use products in ways that objectively cost them more money—people who borrow with teaser rates frequently don’t change when the teaser rate expires, even though it would have saved them $250. Consumers prefer shorter teaser rates that are slightly lower even when longer, slightly higher teaser rates are better deals. Issuers know this. The business models here aren’t accidents. Lenders use to make their money off transaction fees and people who paid on time; now, consumers, especially in the credit card industry, can’t pay off the whole loan but end up paying a lot in small payments over time. An agency that truly did its job would address those problems and force lenders back into the model in which consumers had to pay back their loans.

Administration’s white paper: A new agency, as outlined in the 20 pages of the paper devoted to consumer protection, goes a long way towards addressing these problems.

New agency is useful, instead of new laws: lender practices change so fast; Congress can’t keep up. New credit card legislation is helpful, but card issuers can figure out workarounds.

Also keeps financial institutions from shopping around for regulators. Another factor of importance: the agency would be evidence-driven. Regulations must be studied 3 years after enactment. Section of the white paper is devoted to the agency’s data-collection powers. White paper requires regular testing of any disclosure regulations the agency enacts, tested in the field. Exemptions from regulations can be granted on the basis of testing evidence. This is important because theory has outstripped evidence in this area—the theory that all regulation reduces access to credit, for example.

Financial education isn’t sufficient—most lawyers can’t understand their own credit card contracts--but in context of better disclosures and regulations, it would make sense, especially with a standard of reasonableness instead of deceptiveness. The paper also advocates going back to “plain vanilla” products. There could either be a positive label for simple products, or a negative label for risky, complicated ones.

The white paper also tackles specific problems, like yield spread premiums, prepayment penalties, and mandatory arbitration.

She is cautiously optimistic. The concern is how strong the agency will actually be in protecting consumers. Will there be a revolving door between industry and regulators? Strong conflict of interest provisions are needed. Could be exacerbated by explicit mission to balance cost of regulation in access to credit against benefits of regulation.

One way statutes deal with capture risks is through private rights of action; the current proposal is neutral. Selective preemption addresses this risk as well.

Thomas Pahl, Assistant Director for Advertising Practices, FTC

Standard FTC disclaimer: his own views, not official. Consumer protection is more prominent now than ever—recent credit card reform legislation; new proposal to combine functions of current agencies.

What could we expect from the president’s plan? FTC could play a greater role in protecting consumers outside financial products—the president’s plan recommends adding power to the FTC to engage in notice-and-comment rulemaking under the APA, instead of the Magnusson-Moss restrictions. Also recommends enhanced penalties under section 5. And the plan calls for more resources.

Does substantially contract FTC authority over financial services, transferring it to the new agency. But apparently the FTC would have backup authority for the things over which it currently has jurisdiction, and would retain concurrent authority over fraud in things like credit repair and foreclosure rescue. Not clear exactly what role the FTC would play.

Rosenfeld: Suppose we just increased FTC authority—arguably we wouldn’t need a new agency.

Levitin: He’s agnostic: could do a lot with granting FTC authority. Two issues: (1) would it put too much on FTC’s plate; (2) agency culture: if you move consumer protection out of safety and soundness regulators, it doesn’t end the tension but just changes the stage—from intra-agency to inter-agency conflict. If it’s an independent agency, then in theory the White House doesn’t resolve it but the courts do, and maybe that’s right; but recent experience suggests politics come into play. The CFTC chair wanted to regulate derivatives under Clinton (looks like a good idea from where we are now!). CFTC is technically independent, but got enough administration pressure that it backed down. So there is a concern about whether the FTC can stand up to Treasury/the Fed, though there’s no guarantee a new agency could do better. Levitin is not expressing any opinion on FTC’s backbone himself!

Pahl: Another question to add to the pros and cons: if you want change fast, the FTC already exists and has substantial experience, including in research, and could immediately bring that to bear on financial products. However, supervising financial institutions is not something FTC has experience with and is labor-intensive. Rulemaking in financial services would also be new to the FTC.

Littwin: Agency devoted to consumer protection may also get funded more than a subdivision of an agency.

Q: is the vision to include small business customers in the scope of “consumer protection”?

Littwin: She didn’t see that in the white paper, but that would be an important question for actual legislative language. The white paper seems to take more functional approach to who gets considered to be a financial institution; it would also make sense to treat small business credit cards like individual consumer credit cards, since they’re so similar and often identical.

Pahl: The FTC sometimes acts for small businesses—we do include them as consumers.

Q: Why single out financial services for a new agency? There are other areas of business practice. Also concerned about the difficulty of ramping up a new agency. See: Homeland Security.

Levitin: It’s an easy-to-understand political move to deal with a crisis. We do have consumer protection agencies for other areas already; there isn’t an acute crisis in other areas, like a problem of exploding toasters. Next, there’s a different level of expertise needed to understand financial products: what makes a financial product unsafe is just different from what makes a toaster unsafe. A 2/28 ARM may have some benefits and some harms; harder to figure out.

Littwin: A lot of the specific mechanisms that lead consumers to make bad decisions seem small, but the interplay between decisionmaking problems and lack of regulation has enabled the huge growth of the subprime mortgage market, which is causally linked to the banking implosion.

ABA Consumer Protection conference, Lanham Act doctrine and empirical evidence

Presuming Consumer Reactions in Lanham Act Litigation and Industry Self-Regulation – Puffery, Materiality, and the Failure of American Italian Pasta as theNew Standard

Moderator: Rebecca Tushnet, Georgetown University Law Center, Washington, DC

A persistent problem in law is the use of presumptions, especially unrebuttable presumptions. Lanham Act false advertising doctrine forces us to confront this with respect to evidence of actual consumer deception: sometimes no such evidence is needed, if a claim is deemed literally false; sometimes such evidence is absolutely required, if a claim is deemed potentially misleading; and sometimes such evidence is completely rejected, if a claim is deemed puffery or otherwise transcendentally true (as in Mead Johnson). Because there is nothing natural about the division between literal falsity and misleadingness, courts have been driven to create hybrids, like falsity by necessary implication, or rely on doctrines like materiality and puffery to adjust the results that basic falsity doctrine seem to require.

We’ve brought together two respected decision makers and two accomplished lawyers to talk about how doctrine interacts with facts on the ground. Judge Ellis comes to us with years of experience in complicated patent and Lanham Act cases, among others; Andrea Levine, the director of the NAD, will give us the perspective of a decisionmaker who is not constrained by the Lanham Act’s doctrinal categories. As for the lawyers, Dick Leighton informs me that he is the absolute very best false adverting lawyer ever to exist anywhere in the world to speak about puffing. Bruce Keller, who is also a very fine trademark lawyer, informs me that he is #2, but he tries harder.

(My notes here are bad because I was busy following the panel, sorry.)

The Honorable Thomas Selby Ellis III, US District Court Judge, Eastern

District of Virginia

Basic question: how is law made? Where is puffery or literal falsity in the Lanham Act? Legal glosses are everywhere, made by judges; sometimes this is controversial. He will not opine on what the law should be. Literal falsity is a dandy doctrine because it provides a way to end litigation quickly: judicial economy. You can dispute literal falsity, though; dictionaries are nothing but a kind of survey by lexicographers. If someone had a survey showing that what appeared to be literal falsity wasn’t, that would be a tough call. Differences between false advertising and trademark are also of interest—when we get to false advertising, similar statutory language is treated very differently; does the context really warrant that?

Andrea C. Levine, Director, National Advertising Division, New York, NY

Why has NAD deviated from the courts in treating falsity/puffery? Our role is not to punish, which colors our thinking about which claims to advise against. More flexibility about proof. Handled more puffery cases than any other forum in the country. More unlikely to find puffery than courts.

NAD can act as a specialized expert, sees claims and cares about uniform national precedent, as courts can’t because of their generalist jurisdiction. Judicial deference to NAD occurs and is welcome.

Ellis: when ought one choose the NAD v. courts?

Keller: Sometimes you need speed from courts—if you need a preliminary injunction now, then you have to go to court. NAD is good but overwhelmed.

Leighton: You may need discovery from courts and remedies like corrective advertising. You can get good publicity from NAD. Most advertisers are becoming aware that NAD is the place to go—a cadre of people who know this stuff—advertisers know that making claims is expensive and important, and having courts dismiss them as meaningless puffery is not consistent with business reality.

Richard J. Leighton, Keller and Heckman LLP, Washington, DC

Puffery is a lie intended by the advertiser, yet there’s no remedy. Reality: puffery is anything a judge, NAD, or arbitrator says a consumer clearly should not rely on. Materiality is best seen as the flip side of puffery in his opinion: evidence can come in on it.

Bruce P. Keller, Debevoise & Plimpton LLP, New York

Know it when I see it is the standard many judges employ for judging false advertising. Sometimes you shouldn’t substitute your judgment for consumers; but eyeballing the ad still has value in many cases, and it is inevitable. We use presumptions in trademark cases as well. Snuggle case: sometimes you just don’t care—the fine was worth the publicity value for Battletanx. In both Battletanx ads, there was no need for a multifactor test to see the obvious derivative version of the Snuggle character and likely confusion, at least as to whether consumers are likely to think that Snuggle was licensed to the game makers.

Literal falsity: should you always need proof of deception? No, the court can determine matters on their face—whether a contract is ambiguous, for example. Mylanta Night Time Strength: first time a court adopted the FTC principle, for Lanham Act purposes, that lack of substantiation is equivalent to falsity. False by necessary implication: communicating that it’s designed for night-time use, which wasn’t the case. And survey evidence showed that people took away a message of special formulation for night-time use and greater efficacy for night-time.

Falsity by necessary implication: recently developed concept, but it’s been around since 1986 at least—the EPT case. At the time, the tech of home pregnancy kits was less advanced than it is now. Took 20-30 minutes to work. Ad: 10-minute test. But it was “as fast at 10 minutes.” You wouldn’t know you weren’t pregnant until 30 minutes had passed.

Ellis: Why do we need a separate category and not just call it misleading?

Keller: as a matter of trial strategy, you wouldn’t just rely on falsity by necessary implication.

Ellis: But isn’t that just misleading? When you get all the facts the ad claim doesn’t show what a consumer would think it shows.

Leighton: The key is the categories—an ambiguous claim can be misleading. A false by necessary implication claim is not ambiguous; we don’t need surveys to see whether the ambiguity is resolved by consumers one way or another. Important for preliminary injunctions.

Ellis: bad cases are less a failure of rules than a failure of advocacy.

Question for the panel:

Can you use a survey to rebut the argument that a claim is literally false (or false by necessary implication)? That is, could you use a survey to demonstrate that a claim has multiple possible interpretations? Some cases, like Mead Johnson, suggest that survey evidence is irrelevant if a court finds explicit falsity (or puffery), but is that kind of division really sustainable?

Use, Misuse, and Disregard of Evidence of Actual Confusion in Federal and State Regulatory Proceedings

Moderator: Robert M. Langer, Wiggin and Dana LLP, Hartford, CT

Speakers:Christopher A. Cole, Manatt Phelps & Phillips LLP, Washington, DC

In every litigated case, the parties disagree about whether the falsity is literal or only implicit. Huge disagreement among courts about what counts as literal (and what counts as an acceptable survey). Variations are accounted for by: (1) Quality of advocacy; (2) judge’s gut feeling about falsity; if the judge feels the ad is true, then s/he’ll find reasons to reject a survey and if the judge feels the ad is false s/he’ll find reasons to accept it. The problem is getting worse and not better. There’s also a trend to accept nontraditional evidence, like company’s internal brand tracking surveys, to prove takeaway by actual consumers—seem more credible than litigation-inspired surveys.

C. Lee Peeler, President & CEO, National Advertising Review Council, New York, NY

The Lanham Act lawyers have to eat and sleep copy testing to win claims; the FTC/NAD view copy testing very functionally, as do the states. Focus on the FTC: how it got to a good place of using copy testing. Variations from Lanham Act: FTC mission is protect the public in general. When he showed up at the FTC, the agency was light on the use of extrinsic evidence and there was a real push to use more of it.

Standard Oil case: put cars in a bag; one filled the bag up with dark exhaust and the other filled the bag up with less dark air. The FTC argued that this was an implicit representation that the air would be breathable; then-Judge Kennedy held that no reasonable consumer would think that on the record. That pushed the FTC towards extrinsic evidence.

Patricia A. Conners, Office of the Attorney General, State of Florida,

There’s substantial state by state variation, and the state courts as well as the staff may be unfamiliar with the law and the background for judging empirical evidence of consumer reaction. Florida law applies FTC standards to deciding when to use extrinic evidence, but in other states it’s not clear at all—some states just use “tendency or capacity to deceive” and others use likelihood. States as enforcers view themselves as arbiters, able to look at the ad and tell whether it’s deceptive even if the claim is implied. Survey evidence provided by targets of investigation will be listened too, but many of the states won’t give it great weight, especially if it seems biased in some way. Maryland: we don’t use that evidence because it’s not required under Md law, and it would add needless time and expense to the litigation and divert time and attention from the conduct at issue to the survey methodology.

Example from Pa. case involving prescription discount cards, marketed to seniors in particular ways. Pa. thought the defendant changed marketing to take advantage of the new Medicare benefit to appear government-sponsored. They pursued an administrative remedy; Prof. Mazis provided evidence for the defendant, indicating that an insignificant number of people were deceived. Pa. responded by challenging the survey; the court denied summary judgment to the state, and this was successful for defendant in shifting the focus to the survey away from the marketing materials.

Langer: Doesn’t recall many defendants coming in with surveys; perhaps because Ct., where he was working, was often going after low-hanging fruit.

How do you design a survey to prove the negative?

Cole: It’s tough. You need to ask enough questions to convince the factfinder that you’ve asked enough questions. Stopping at open-ended questions will often not be credible. You don’t want leading questions, and you don’t want to generate a bad result: questions have to be directed and it’s a real tightrope. A court is more likely to admit a survey and use its flaws to assess weight, rather than admissibility, whereas the NAD will quite often reject the survey in its entirety and rely on its own judgment. NAD is more focused on flaws, and he can’t think of a successful defense survey at the NAD that worked to rebut an allegation of implied falsity.

Next question: how do you code it? The other side will recode your answers. There are lots of risks in a defensive survey. Litigation tactic: piloting. Sometimes by the time the survey is produced you’re on your second or third expert.

Langer: How does the FTC think about defendants’ surveys?

Peeler: FTC and NAD are similar in their evaluations. NAD ordinarily deals with closer questions, and with more cases, so it’s more sophisticated in reading survey weaknesses. There are always things that surveys do and don’t show. We want to use survey evidence with the rest of the record, and our own reading of the ad.

Conners: Dueling surveys often lead to courts discounting both and looking to the ad.

Peeler: By the time you’re done with your investigation at the FTC, you often have internal documents that help you understand the intent of the ad, which is helpful in figuring out what to do; makes the survey less crucial.

Langer: What should the regulators do when there’s no survey?

Cole: The NAD should have a lot of discretion. The only consequences of an NAD decision are that the campaign should be stopped/modified, and there is an available appeal. In court, when there are big dollars at stake, the states/FTC should have to prove their case. He doesn’t see why the states should be given more deference in interpreting an ad than anyone else, whether judge or defendants’ lawyers. Example: ex parte shutdown of a telemarketing campaign based on an allegation that tens of thousands have been deceived, alleging millions of dollars owed in restitution, freezing all assets, all on the basis of fifty affidavits. The FTC is increasingly doing this and he thinks it’s illegitimate (interferes with ability to pay lawyers, among other things).

Peeler: Defendants tried to develop caselaw that the FTC’s reading of intrinsic claims without survey evidence violated the First Amendment; the Kraft court disagreed. It was always a good sign if the court asked for copies of the ads; it meant the court was going to decide for itself whether the FTC’s decision fell into the category of reasonableness. (An interesting observation because I would have thought that it could go either way with judges revisiting FTC decisions.)

Peeler also defended the ex parte procedure.

Connors: Emphasized how strongly the states feel about not needing to present extrinsic evidence—this may have something to do with the number of cases they pursue that involve clearly bad actors/low-hanging fruit, though of course there are a number of sophisticated cases as well.

Mortgage rescue scams: increasingly they’re reaching people who don’t even know they’re being deceived. People pay up-front for assistance, which is illegal in Florida; many don’t speak English. When they don’t get the services, instead of complaining—because they don’t trust the government—they go and spend money on another supposed rescuer, often using a credit card (because they don’t have any money). We couldn’t prove deception because people haven’t yet figured out they’ve been harmed. Consumers don’t have the acumen to appreciate what they’re presented, which makes a lesser standard appropriate than that applied to private Lanham Act litigation. Freezing assets here and going in quick is very important and is the only way to help the victims.

NJ: similar situation, where a midsize tax prep firm went into low income neighborhoods and got people to apply for refund anticipation loans. People had filed for fraudulent refunds, but they were innocent of having been scammed. Judge awarded $3.7 million. This doesn’t lend itself to the time necessary to do surveys or marketing studies. (I’m reminded of the observation yesterday that when you see mostly bad actors you are likely to craft your rules for bad actors, which creates problems for good actors who may get tangled up in those same rules.)

Peeler: Issues in Lanham Act cases are often much finer interpretively than government enforcement actions.

Cole: True, but usually the state argues both one false claim and a bunch of other much less clear-cut claims, and the state argues it’s entitled to deference to its judgment of falsity on all of them, which it shouldn’t.

He’s scared to death of courts remanding to the NAD: no discovery, no cross-examinations, pick and choose evidence—for the court to treat it as quasi-judicial and stay cases and cross-refer is very dangerous. Courts don’t truly understand the NAD’s limitations. Litigation is much more probing and can much more clearly expose shortcomings in evidence. Advertisers can submit materials in camera to the NAD, and the NAD has no expert assistance in its decision.

Villafranco: What about internet surveys to make surveys cheaper?

Peeler: The NAD is developing a methodology—could help develop useful standards.

Cole: Faced an internet survey—certain ads are difficult to test, for example ads with visual disclosures that are hard to see online. Representativeness and verification are issues; are people working with multiple tabs open when they take the survey, or using Google to research before they answer questions? Courts need to start developing standards; most internet surveys fail most of Shari Diamond’s criteria. But mall intercepts are less representative than they used to be these days because of social changes; we need to use internet surveys.