Friday, June 19, 2009

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.

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