Wednesday, June 16, 2010

Litigating & Resolving Advertising Disputes, part 3

The Realities of Bringing and Defending a Lanham Act Case in Federal Court Part 2: Litigating and Proving the Case

Thomas C. Morrison, Manatt, Phelps & Phillips LLP

He’s tried to get other substitutes for consumer survey evidence in implied falsity cases, such as intent, and it’s never worked very well. Example: Nair has baby oil. But the mineral oil was bound up with other ingredients so that it didn’t stay on the skin once the product was washed off; classic example of an implied claim requiring a survey.

Sometimes you guess wrong but get lucky: Tropicana orange juice case; they thought that it was probably implied that the carton contains fresh juice because it showed Bruce Jenner squeezing an orange into the carton. They did a survey; the district court thought it was a bad one; they appealed, and the Second Circuit held that a visual image could be literally false. Sometimes you just guess wrong: Claim that Nexium worked better than Prevacid for people with an eroded esophagus; in small type they talked about a clinical study that only involved people with moderate to severe erosion, which was only 10% of the users. For the vast majority, the claim wasn’t true. Judge ruled that the super was sufficient and there was no literal falsity. They did do a survey; the case settled. Have to make those judgments very quickly and you won’t always be right.

Burden of proof: performance claims v. establishment claims. Generally technical evidence. In one Tropicana case, were able to show falsity of a “fresh” claim by showing pallets of frozen cartons. But it rarely works like that.

Do you want full-fledged discovery? If you want injunction and damages, you’ll need it. Most courts will allow expedited discovery; he always aims for a schedule as tight as possible and thus the requests must be as narrow as possible. You have to be prepared to do your side too.

Best evidence can come from discovery—in the Nair case, a woman wrote a letter to Nair complaining that she saw the ad, stopped using baby oil and used Nair instead, and got burned. That was their case in a nutshell.

Rules of thumb for proving the message to judge/jury: (1) repeatedly expose judge and jury to the claim—in the pleadings, in the papers, show the ad, talk about it in the opening, talk about it throughout trial. Show that ad to every witness. (2) Even with express claim, get testimony from marketing executives to explain the commercial context of the ad and why it’s a problem. Papa John’s ad trashing Pizza Hut: important to show that Pizza Hut historically had a reputation for low-quality pizza but had brought in new management and upgraded pizza production; ad was timed so that it hit the day after the revamp was announced. (3) Use marketing executives or outside expert to show materiality, which is taking on much greater importance.

Proving materiality: normally that factor isn’t given much attention in a false ad part of a major campaign—why else would a company spend tens of millions to run the ad? Took on more significant role in the Pizza Hut case in the 5th Circuit. The ads did things like show sculptors making statues out of Pizza Hut’s tomato paste, just slamming Pizza Hut. The jury found that “Better Ingredients. Better Pizza” was false in the context of the ads. The Fifth Circuit had a different view; in a result-oriented opinion, they found the evidence sufficient to show the ads false, but Pizza Hut failed to show materiality. Ignored five weeks of evidence, including surveys, tracking studies, Papa John’s marketing consultants, all of which indicated that it was a way to convince consumers of an important difference between the parties. That decision elevated the materiality requirement to a more contentious issue. Get in the record: defendant’s marketing plans (best evidence); defendants’ communications with ad agencies, etc.

Injury: part of the cause of action. Even if injury is quantifiable, it may not be irreparable. To get an injunction, you need irreparable injury. Effect of eBay: he believes it will apply to false advertising cases, including at the PI stage under Winter v. Natural Resources Defense Council. Doesn’t think it will make a big difference though.

Damages: False generic drugs, where the drugs have been in the market for years; the only aim is damages/get the drugs out of the market. You’ll need a forensic accountant to link the ads to the success of the defendant’s product and the injury to yours. Be modest to avoid a backfire.

Lewis R. Clayton, Paul, Weiss, Rifkind, Wharton & Garrison LLP

Questions you want the judge to ask from the defense side: Why did the plaintiff really bring this case? Who has the better product? What result will serve consumers best? Why shouldn’t the market rather than the court solve this problem? What’s the rush?

Just let me innovate! The remedy is advertising in the marketplace, which is what the marketplace is for.

As a plaintiff, you don’t want to wait more than six weeks after an ad is out. Want the court to drop everything and give four trial days, maybe more. On the defense side, you ask whether the plaintiff acted as if his house was on fire—but is that taking the fire department away from other burning houses? (This strikes me as a dubious metaphor. If the city is on fire, then the city has a problem, but I don’t think there’s much morally or even practically dubious about trying to get the flames consuming your house doused.)

Counterclaims: remind the plaintiff of the risks of litigation for itself and the entire product category. (Boeing and Airbus both make airplanes; you will never hear them say that the other is less safe, though they have very firm views on the topic—if you make airplanes, you never want to talk about crashes. If you get a broad ruling from a court that doesn’t really understand the industry, you have a problem. But don’t say this directly to the competitor; remind it indirectly, otherwise you have an antitrust problem. Likewise, don’t say it internally.) Broaden the scope of discovery. Ensure the plaintiff has been consistent; you can embarrass the plaintiff by showing what it’s been doing. But don’t lose credibility by bringing weak claims as a counterweight.

Surveys: can use them to show lack of deception or materiality. Considerations: timing, possibility of generating harmful data if the survey is unprivileged (and there are ways it gets dicovered; even if you maintain it’s privileged, it will end up on a privilege log and then there might be a fight); utility of using survey expert to critique their survey instead of conducting yours.

You can win a case all the way and lose it at the remedy stage, depending on whether the injunction crimps the business or allows the defendant to ignore it after that one ad. First Amendment considerations also apply.

He doesn’t think materiality is likely to become a huge issue, but it’s certainly out there.

Keep in mind a potential audience in the court of appeals. The court of appeals will be interested in the same questions as the district court at first—why should we care? Why not let the market take care of it?

Bob L. Klein, Applied Marketing Science, Inc.

Surveys are good for falsity, materiality, and injury.

Causation is key, and to prove causation, you need a control. Interview the right people—prospective customers. Show them the package/product/etc. Start with nonleading questions then filter down to the specific element; end with closed-ended questions to nail the specific issues. Juries are often not given guidance on what has been found to be misleading in other cases. 10% is a weak case, 20% a strong, and in between you have an argument.

What is a good control? Shares as many characteristics as possible with the stimulus except the statement/etc. whose influence is being assessed. Previous ad from defendant; similar ad part of the same campaign without that statement; simulation by removing offending element/language or replacing it with correct statement.

Surveys are great for determining materiality v. puffery and materiality v. unimportance. Conjoint analysis assesses how much consumers will pay for a feature. If they don’t pay more for a feature, it’s not material. Splenda case: why did you first buy Splenda? What other reasons? Etc. If they purchased it more than once, asked why they bought it again. Phone interviews were transcribed and coded. A lot of reasons were given, very few with anything to do with what class plaintiffs claimed; class certification denied—customers didn’t think Splenda was sugar/natural. They cared how it tasted. Without materiality, you couldn’t assume reliance on the advertising.

In front of a jury, though, Splenda loses. The difference in presenting data to a jury v. to a judge is a big one. Up until you get in front of a jury, surveys are important; in front of a jury, if the jury is composed of people who would count as reasonable consumers of the product, they’re going to make the decision for themselves (but may take surveys of pharmacists/doctors etc. more seriously).

View from the Bench: Judicial Perspectives on Advertising Litigation

Moderator: Norman C. Simon, Kramer Levin Naftalis & Frankel LLP

Hon. Timothy Batten, Northern District of Georgia

Observations from the Verizon/AT&T litigation: These are fun cases for judges. The Verizon case: the issue was that Verizon showed AT&T’s 3G’s coverage area, which was smaller than Verizon’s 3G coverage area, but AT&T’s total coverage area was bigger than 3G. Very good briefing on both sides. Ruled from the bench: AT&T had a tough time because the content of the ads was literally true. He said the ads were sneaky—the average person watching TV is in a semi-catatonic state. A person will naturally assume that the white areas on the map are no-coverage areas; that’s the convention that’s always been used. Cleverly, Verizon used white to depict areas without 3G; people wouldn’t hear/notice the 3G limitation in the explicit text of the ads. He asked his children and his wife after the fact—they thought it was misleading. Hard to explain to his children why he ruled the other way.

Verizon used the fact that people weren’t paying attention; just because an ad is misunderstood doesn’t mean it’s misleading. (This is a misreading of the positive law, in my opinion, though of course that won’t stop judges from changing the law. People who have misunderstood something relevant to them have been misled. That is the only difference between misunderstood and misleading that has relevance to consumer behavior. One may misunderstand something in the abstract. When one is misled, however, as the more active root indicates, one might reasonably change position because of that misunderstanding, and the connection to action is what converts a misunderstood message to a misleading one. Thus, if people are taking away a false material message, they’re misled.)

An ad is only false if there is only one possible interpretation—Verizon showed people shaking their AT&T phones and said it wasn’t necessarily because the phones weren’t working. It’s not his job to un-dumb-down the American public: not his job if people don’t read or listen to the express truthful representation. (Consider by contrast the FTC’s position on disclosures/disclaimers in small print: no dice.)

Hon. Warren W. Eginton, District of Connecticut

Getting more summary judgment motions. That has in turn led to more 12(b)(6) and 12(b)(1) motions. You can spend a great deal of time and money on the discovery necessary for summary judgment motions. We all seem to be in agreement that there’s a marked decrease in federal jury cases. Trial burden for federal courts is down compared to number of cases brought that go to mediation/arbitration. Corporations in particular don’t want to try cases in federal court. The bad part: they’re spending the money, but a lot of it up front, so there’s pressure on them and on the courts to make summary judgment rulings definitive.

Simon: what do you think of NAD decisions—do you count it as precedent?

Batten: he respects NAD a lot. But doesn’t defer in the way he’d defer to an agency. An explanation of their reasoning can help, but it’s still his job to make the call.

Eginton: compare reactions to administrative decisions.

Batten: it’s like a PTO decision to register a mark—not binding, but the opinion of an expert.

Simon: What about the FTC?

Batten: a little more respect. Not my job to defer to someone else. In a close case, reasoning I hadn’t really thought of could be helpful, and that occurs because they do this all the time.

Eginton: no difference between FDA and FTC. Before antitrust law was abolished, we had the FTC before us constantly. It’s the same as any other agency.

Simon: What about survey experts?

Eginton: I pay close attention to medical experts in medical malpractice. In advertising, I rely more on my own common sense. Juries have similar reactions.

Batten: He knows what the survey expert will say, depending on what side the expert is on. Who is the universe and what were the questions? Those are the two most important factors. The AT&T survey was incredibly broad—basically asked if the respondent might ever use a cellphone. People who know what 3G is must have some technical familiarity with cellphone aspects. Questions didn’t include the phrase 3G. Just asked about “coverage.” That’s not a worthless question, but before he adopts what someone else thinks he’s going to make sure their methodology is right.

Simon: why not have a substantiation requirement, as they do in NAD (and at the FTC)?

Batten: doesn’t make much of a difference whether it’s an establishment claim or not. The question of deceptiveness/fairness doesn’t turn on who has the burden of proof. If a claim seems like BS, then you don’t really presume it’s true. For establishment, the burden is squarely on the advertiser, but even with a nonestablishment claim it’s hard to imagine situations where the burden matters.

Eginton: Buck doesn’t stop at trial court level. Very often appeals court will talk in terms of burden of proof, so you do have to keep an eye on circuit precedent. At the trial level you have a sense of good guys/bad guys without as much concern for burden of proof.

Simon: trend of consumer fraud class action suits following successful Lanham Act suits. What do you think about that when you’re making a decision?

Eginton: doesn’t enter into his consideration. If there’s going to be a class action, there’s going to be a class action. Low priority.

Batten: he hasn’t seen that situation. He can’t see how it would change the opinion. If you’ve got a case where there’s been a finding of deceptiveness in the Lanham Act context, it’s hard to say it’s not misleading in another context.

Q: What about nonsurvey evidence?

Batten: nonsurvey evidence of confusion is really hard to find. Doesn’t expect a boatload of actual confusion evidence out of a plaintiff.

Q: How often does oral argument in a PI influence you?

Batten: hard to say. Usually has a good feel for what will be said. Provides context/flavor of how lawyers see the dispute.

Eginton: know the judge: how important is oral argument? One of his colleagues will write the opinion before the oral argument, and though he will tear it up if that’s how it goes, it’s well to be aware of that.

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