New article on DMCA rulemaking

Rebecca Tushnet, I Put You There: User-Generated Content and Anticircumvention, 12 Vanderbilt J. Ent. & Tech. L. 889 (2010). Unfortunately it came out just before the actual rulemaking, so it lacks an ending, but it provides an extended argument for the noncommercial remix exemption.

It's fun to get away from the DMCA

Like Christmas in July (and only a couple of months more overdue), today’s DMCA Rulemaking had a number of good things. Quick reactions: I’m pleased but not terribly surprised about the jailbreaking/using phones on other networks exemptions. The Copyright Office recognized what everyone else does: nothing about the technologies at issue implicates copyright’s purposes; it’s all about contracts and business models.

Obviously what I care about most is the digital video exemptions, which are surprisingly strong. Though K-12 educators and non-media studies students didn’t get an education-focused exemption, the noncommercial remix exemption will pick up most of the slack there. As long as students and teachers at any level are creating their clips in the context of a presentation (PowerPoint, montage, or other new work) and not selling the result, they can be within the scope of the noncommercial exemption. The question of when circumvention is “necessary” is an interesting one. I found it odd that the Copyright Office insisted that screen capture would often work when the record evidence was to the contrary; but if screen capture won’t work on the particular DVD/system the remixer is using, then by definition it won’t provide the quality necessary to make a commentary.

I also found striking the heavy dose of realpolitik in the Librarian’s approval of the exemption for blind and visually impaired readers despite the Register’s recommendation against such an exemption. Essentially, no one was enough of a jerk to oppose the proposed exemption (contrast the other approved exemptions; traditional print publishers apparently don’t yet have the habit of sending someone to oppose every potentially relevant DMCA exemption the way the MPAA does, but perhaps will develop it), which made it relatively easy to weigh the harm shown by the proponents in favor of an exemption. (I should say that what the Register apparently saw as mild inconvenience— no one format is reliably accessible without circumvention, so you’d apparently have to piece together a bunch of different formats to be relatively certain that you could get an accessible ebook, and you can’t predict which one will work—is pretty much exactly the kind of thing that the ADA targets; it’s an artificial level of difficulty that people without visual impairments don’t have to deal with.) Given our international activism on exemptions for people with visual impairments, it might have been embarrassing to reject a DMCA exemption that no one had even opposed; failure to meet the burden of proof is not always an easy sell.

And, of course, a reminder: ACTA in current form doesn’t require exemptions for its anticircumvention provisions, not even ones as minimal as those the DMCA; the same with Canadian proposals.

DMCA rulemaking

III.The Designated Classes

A. Motion pictures on DVDs that are lawfully made and acquired and that are protected by the Content Scrambling System when circumvention is accomplished solely in order to accomplish the incorporation of short portions of motion pictures into new works for the purpose of criticism or comment, and where the person engaging in circumvention believes and has reasonable grounds for believing that circumvention is necessary to fulfill the purpose of the use in the following instances:

• Educational uses by college and university professors and by college and university film and media studies students;
• Documentary filmmaking;
• Noncommercial videos.

My thanks to Casey Fiesler of the OTW, who did great work on our written submissions in the hearings, along with Francesca Coppa and Tisha Turk, who testified with me about vidders and fair use in video.

Possibly more later when I have finished jumping up and down.

Farhad Manjoo on substantiation of dropped-call claims

Smartphone makers don't want to share the data behind their claims to beat industry averages on dropped calls. (Insert Garrison Keillor joke here.) So, are these statements "commercial advertising or promotion"? My take is: yes. Are the manufacturers prepared to substantiate them before NAD or elsewhere? I guess we'll hear.

Manjoo is apparently not holding out much hope for a regulatory response:

[T]his kind of secrecy is one of the main reasons wireless service in America lags the rest of the world. These days, it's possible to find accurate performance data for most of the major purchases we make in our lives. If you're shopping for a car, you can find out its gas mileage. If you're shopping for a plane ticket, you can look up each airline's on-time rate. When you go looking for a new cell phone, though, you enter a data-free zone in which every company is free to claim that its devices offer spectacular service. If customers or the media disagree, the companies can argue—as Apple did last week—that the critics are just carping, because nobody has any definitive data that can prove them wrong.

Should we believe RIM, Motorola, HTC, Nokia, and other phone manufacturers when they claim that their phones offer better reception than Apple's? Not blindly. After all, Apple was recently boasting that the "iPhone 4's wireless performance is the best we have ever shipped"—a claim that fell apart when Jobs, to his credit, brought out actual dropped call data at his press conference, data that showed the new iPhone drops more calls than last year's model, the 3GS. If we're now questioning Apple, we should also question everyone else. While I commend Apple's rivals for taking advantage of a good PR opportunity, I wouldn't put too much stock in their statements. If you want me to believe the BlackBerry Bold or the Droid X or the HTC EVO really drops fewer calls than the iPhone, prove it to me. Otherwise, just stop talking.

... I've got slightly higher hopes that the FCC will one day impose such disclosure requirements, but that kind of regulation is probably far off if it will ever come at all. In the meantime, then, I've got another idea for getting the real dropped-call rate for the iPhone, various BlackBerrys, Droids, and other popular phones: Reception engineers of the world, I want you to send them to me! If you know how often a smartphone drops calls—whether that rate is spectacular or dismal—e-mail me the stats with some proof of their authenticity. I pledge to keep your identity secret. I don't care who you are, I just want the numbers.

Reading list: when a monopolist deceives

Maurice E. Stucke, When a Monopolist Deceives, 76 Antitrust Law Journal 823 (2010).

Abstract:

This essay uses one context - a monopolist’s deceptive advertising or product disparagement - to illustrate how competition authorities and courts should evaluate a monopolist’s deception under the federal antitrust laws. Competition authorities should target a monopolist’s anticompetitive deception, which courts should treat as a prima facie violation of the Sherman Act without requiring a full-blown rule of reason analysis or an arbitrary, multi-factor standard.

Let it bleed: tape falsity claims lose

Intertape Polymer Corp. v. Inspired Technologies, Inc., 2010 WL 2776562 (M.D. Fla.)

Intertape sued Inspired; Inspired counterclaimed for trademark infringement and false advertising. The court found no likelihood of confusion on the trademark claims: Inspired’s “FrogTape” green painter’s tape (with frog logo) using “Paint Block” polymer versus Intertape’s bluish-teal “Bloc-IT” painter’s tape with the phrase/acronym “PST”/“Paint Shock Technology” and Intertape’s “LILI Low-Environmental Impact Line From Intertape,” which uses a different frog logo but which is not painter’s tape. As to the painter’s tape, the court emphasized the differences in the main marks—FrogTape versus Bloc-IT, as well as other differences in the overall appearances of the products/marks as presented to consumers. LILI, the court found, was in a different product category. Summary judgment for Intertape because no reasonable trier of fact could find likely confusion.

False advertising: according to Inspired, Intertape knew from repeated testing that Bloc-IT failed to outperform FrogTape, but advertised to the contrary. Thus, a memo noted that FrogTape outperformed Bloc-It on painted wallboard; an email revealed “higher than normal paint bleed” with Bloc-It but noted that FrogTape continued to remain within “normal standard deviation”; an internal study revealed that its sales force was getting “mixed results” with Bloc-it and that they could not “consistently demo the tape”; and an independent testing agency concluded that competitors’ products repeatedly outperformed Bloc-It.

Nonetheless, Intertape made aggressive marketing claims. It made a presentation to Lowe’s claiming “Best in Class” performance, with “industry leading bleed resistance” and “does not require special handling” compared to FrogTape’s “good bleed resistance,” “must be stored in special container,” “subject to moisture contamination and product failure.” (The court expressed doubt that statements to Lowe’s were “advertising and promotion,” but assumed they were for purposes of the motion.)

Other materials stated that Bloc-IT “Solves paint bleed problem” and “allows for CLEAN EDGES Every time.” Intertape also issued a back-patting press release to investors, among others, with similar claims that painters could count on Bloc-IT “for clean crisp paint lines every time.” The press release claimed new technology and proprietary chemistry that “STOPS THE BLEED and ensures clean lines every time.” Inspired argued that these and similar statements were false.

The court concluded that these statements were not shown to be literally false or were puffery. Even assuming literal falsity, Inspired failed to show materiality.

The technological superiority claims were “ambiguous puffery,” in part because they were ungrammatical. In any event, Inspired didn’t show that Bloc-IT was inferior. (I’m not sure why the internal documents weren’t evidence for this, other than that some of the claims didn’t specify what the tape was superior to.) “Best in class” was used to identify both parties’ tapes, and “class” was an inherently ambiguous term anyway; it wasn’t clear how many types of products were included in the class. “Industry leading bleed resistance” compared to FrogTape’s “good bleed resistance” was not literally false. Though the performance tests appeared to reveal inferiority, “industry leading” was “classic puffery and, similar to the term ‘class,’ invites significant ambiguity as to, inter alia, the breadth of the ‘industry’ to which the statement refers.” And “good bleed resistance” was literally true, and anyway just an indeterminate expression of opinion.

This strikes me as a candidate for falsity by necessary implication. It’s the contrast that makes the implication. But the court reasoned that, even if the statements taken together conveyed a superiority message, that statement was not a specific, measurable claim that could reasonably be interpreted as an objective fact.

The same with the rest of the statements. “New technology” wasn’t false, and “any masking tape, depending on the skill of the painter, type of paint, surface, etc., could arguably ‘allow for clean edges every time.’” Innovation didn’t show that Bloc-It fails to “solve” or “stop” bleeding or fails to “promote” smooth lines. (Again, didn’t the internal communications say something about that?) Finally, “delivering performance results not yet seen” and “the line is picture perfect, crisp and straight” were puffery or opinion.

Even assuming literal falsity, Inspired didn’t show materiality. Sales of Bloc-IT, without more, are not evidence of a material effect on retailers’ or end consumers’ purchasing decisions. There must be evidence that Intertape “misrepresented an inherent quality or characteristic of the product.” (It does seem to me that bleed resistance is pretty close to the core of what one would want from painters’ tape, as underscored by these claims’ prominence in the advertising across multiple media and by representatives’ concerns that they couldn’t consistently demo the tape, which suggests they thought they couldn’t sell the tape without bleed resistance. I would think a reasonable factfinder could infer materiality from these facts alone.)

In a footnote, the court expressed some doubt that Innovation had prudential standing, citing Phoenix of Broward, Inc. v. McDonald's Corp., 489 F.3d 1156 (11th Cir. 2007), for the proposition that “direct competitors did not have standing to assert false advertising claim under Lanham Act where there was only [an] attenuated link between false advertising statements and harm.” I note that this case involved direct comparative advertising. I’m left to wonder what it would take for standing on this theory.

Dastar precludes false advertising claim against explicit misattribution

Rudovsky v. West Publishing Corp., 2010 WL 2804844 (E.D. Pa.)

Add another to the list of Dastar-defeated attribution claimants. Plaintiffs, two law professors, wrote a two-volume treatise, published by West in 1987, on Pennsylvania criminal procedure, with annual pocket parts. (I remember filing the pocket parts in my mother’s office when I was a kid; a good job for a kid, really.) In 2000, the parties contracted for a second edition, published in 2001, with annual pocket parts. In 2007, they entered into a standalone agreement for the 2007 pocket part. In 2008, things fell apart. West staff prepared a 2008-2009 pocket part. The cover listed the authors as:

DAVID RUDOVSKY

Member of the Pennsylvania Bar

Senior Fellow, University of Pennsylvania Law School

LEONARD SOSNOV

Member of the Pennsylvania Bar

Professor of Law, Widener University School of Law

and

THE PUBLISHER'S STAFF

The treatise as updated was published in the Westlaw database, apparently without reference to the publisher’s staff. Plaintiffs argued that the pocket part was largely a reprint of the previous year’s pocket part, and didn’t reflect legal changes that had occurred in the interim.

Plaintiffs sued for violation of the Lanham Act and for unauthorized use of name, defamation, and invasion of privacy under state law. At that point, West notified subscribers that plaintiffs had not “participated in any manner in this pocket part and they have discontinued their involvement in the publication,” noted the same on the Westlaw database, and sent out a new pocket part that both revised the substance of the pocket part and took plaintiffs’ name off.

The court held that the Lanham Act claims for false advertising and false endorsement were barred by Dastar, though bizarrely the court misstated Dastar’s holding as being that “‘communicative products,’ such as books, were not ‘goods’ for the purposes of the Lanham Act,” because that would create a conflict with the Copyright Act. In fact, the Court’s ruling turned on the meaning of “origin,” and books are of course goods for the purposes of the Lanham Act without a necessary conflict with copyright law. Anyway, allowing the claim to proceed would force publishers to navigate the Scylla of false endorsement and the Charybdis of failure to attribute.

This is an extension of Dastar, though a reasonably natural one. Dastar solved the problem by removing Charybdis, leaving the possibility of retaining Scylla. Note the strangeness of the outcome, compared to our otherwise bloated law of false endorsement: plaintiffs can’t recover even if, as they allege, their reputations were harmed by being falsely identified as the authors of an inferior product; the estate of John Facenda, by contrast, can recover because his voice was sampled for a few seconds in a promotional movie about an NFL-based video game, because that’s somehow a false endorsement. In other cases, Dastar has been extended (more properly, I think) beyond communicative goods based on the Supreme Court’s interpretation of “origin.” Put that together with this reasoning, and would there be anything left of a false endorsement cause of action?

Note also that, while the copyright preclusion argument has some force applied to this situation, it also implies the existence of copyright conflict preemption for the state law claims. The question is not one of an extra element (§301 preemption), but, if a federal law with an extra element/aimed at preventing deception can’t impinge on the sphere regulated by copyright, then must it not necessarily follow that state law purporting to do the same thing conflicts with the objects of Congress? (This is why conflict preclusion/preemption makes the most sense for failure to attribute claims; the implications of applying Dastar to false affirmative ascription of authorship just don’t work very well, at least when you try to make the Supreme Court’s interpretation of “origin” apply also to the alternate terms like “description of fact” or “endorsement” that appear in the statute.)

But never mind! To the extent that Dastar left open the possibility of §43(a)(1)(B) claims, they require “commercial advertising or promotion.” The cover page of the pocket part was not such.

The court denied summary judgment on West’s argument that the 2000 contract between the parties barred any tort claims.

Likewise with West’s defenses that everything it published was substantially true and that plaintiffs didn’t suffer any harm. It was true that plaintiffs authored most of the 2008-2009 pocket part: that’s “precisely the problem.” “By its very nature, a pocket part is presumed to be current as of its publication date, and so the alleged harm comes from the possibility that a subscriber could interpret the pocket part as a representation by plaintiffs that the pocket part is an accurate analysis of Pennsylvania criminal law and procedure as of December 2008.” A jury could accept that the pocket part communicated that purported experts had provided outdated and incomplete information, knowing that readers would rely on it, and find that the pocket part constituted defamation per se by ascribing to plaintiffs conduct that would adversely affect their fitness for proper conduct of their lawful business. Plaintiffs only needed proof of general damages—harm to reputation or humiliation—and they’d provided sufficient evidence of personal humiliation to avoid summary judgment.

KFC coupon class action continues

In re Kentucky Grilled Chicken Coupon Marketing & Sales Practices Litigation, 2010 WL 2742310 (N.D. Ill.)

This putative class action (over five million in the class) alleged claims for breach of contract, common law fraud, and violations of the consumer protection statutes of Illinois, Michigan, and California based on a free product giveaway in May 2009. Defendants moved to dismiss.

According to the complaint, KFC introduced a new product in April 2009, Kentucky Grilled Chicken, which was promoted as a healthy option. KFC’s promotion included a Kentucky Grilled Chicken giveaway announced by Oprah on her show in May. Anyone could get a free KFC meal by downloading a coupon from unthinkfc.com or Oprah’s site and redeeming it between May 5 and May 19, except for May 10 (Mother’s Day). The coupon entitled the bearer to a free 2-piece Kentucky Grilled Chicken meal, with two sides and a biscuit.

KFC then allegedly began “almost immediately” to refuse to honor the coupons, first limiting the promotion to the first 100 per restaurant per day and then on May 7 stopping the promotion altogether, while still offering Kentucky Grilled Chicken for purchase. From May 5 to May 7, at least 10.2 million coupons were downloaded from unthinkfc.com, and only 4.5 million were actually redeemed. Then, KFC offered consumers the option to apply for a “rain check,” which required filling out a form with name and address, attaching the coupon, and mailing it to KFC or giving it to a KFC “team member.” KFC told consumers these procedures were necessary to verify the coupons’ validity. KFC would then send the consumer a new coupon for a free meal along with a complimentary Pepsi product.

The complaint also alleges that Kentucky Grilled Chicken contains rendered beef fat and beef powder, though those ingredients weren’t disclosed in KFC marketing materials. You really would think fast food places would have learned from the McDonald’s debacle (note that the apology is apparently no longer on the McDonald’s website, sigh).

Breach of contract: For purposes of the motion to dismiss, KFC presumed the existence of a valid contract for a free meal in exchange for a coupon. The coupon provided for a two-week redemption period, but KFC argued that time was not an essential term of the contract. The court found that the plaintiffs had alleged sufficient facts to plausibly suggest an entitlement to relief. The materiality of a breach is generally evaluated for remedies, not for liability. A lot of the cases KFC cited were also about parties seeking to avoid contractual obligations because of the counterparty’s alleged breach of an essential timing term; here, however, KFC was trying to set aside the redemption period to excuse its own alleged breach. Anyway, whether time is of the essence is a fact-specific question not suitable for a motion to dismiss.

KFC then argued that its raincheck program adequately cured any breach, but that’s an affirmative defense, not part of stating a claim; anyway, the allegations that plaintiffs needed to submit identifying personal information to get the raincheck were sufficient to allege that it was not a cure, but a requirement for additional performance.

Common law fraud: KFC argued that the complaint failed to satisfy Rule 9(b), though it conceded that allegations of fraudulent intent aren’t subject to the particularized pleading standards of that rule. KFC contended that plaintiffs failed to allege facts plausibly giving rise to an inference that KFC “never intended to honor” the coupons. The court found that this general allegation had been supported with additional facts, such as that many of the KFC locations that refused to redeem the coupons had ample supplies of Kentucky Grilled Chicken on hand and continued to sell them.

KFC argued that it couldn’t plausibly have harbored an intention not to honor the coupons when they honored 4.5 million in the first two days of the promotion. But plaintiffs alleged that KFC began almost immediately to refuse to honor then and stopped the promotion two days after it was announced. The court found it “plausible” based on the allegations that KFC never intended to honor the coupon as represented. It was reasonable to assume that “Defendants contemplated the possibility that millions of consumers would seize the opportunity to obtain a free ‘Kentucky Grilled Chicken’ meal, and that Defendants considered what would happen if individual KFC restaurants ran out of the advertised product.” So it was plausible that KFC intended all along to offer a rain check or otherwise limit redemption beyond the terms stated on the face of the coupon. The claim survived.

As to the consumer protection law claims, KFC argued that there was nothing inherently unfair or deceptive about refusing to honor the terms of a contract, and that the claims simply restated the idea that KFC breached the terms of its original offer. The court disagreed. A classic bait and switch is actionable under the relevant consumer protection laws. KFC argued that it wasn’t alleged to have engaged in bait and switch, which requires selling the consumer a more expensive item. However, plaintiffs alleged actual damages. Also, because plaintiffs alleged that KFC never intended to honor the promotion from the outset, the allegations involve more than a mere failure to perform. Moreover, the conduct at issue implicates an inherent consumer interest on its face, inasmuch as the offer was allegedly accepted by millions of consumers nationwide.

Illinois: KFC argued that offering a free meal doesn’t fall within the scope of the Illinois Consumer Fraud and Deceptive Business Practices Act (ICFA), because it wasn’t an act or practice “in the conduct of any trade or commerce” and the coupon didn’t involve any sale or offer of sale. However, the statute defines “trade” and “commerce” to include, among other things, “advertising,” and this coupon was properly alleged to be such. Plaintiffs alleged that the coupon was part of an ad campaign; the reasonable inference is that the goal was to promote future sales, especially since the coupons had to be redeemed in person at KFC restaurants.

Plaintiffs also alleged that KFC violated a specific prohibition of the ICFA against offering “free” stuff without clearly and conspicuously disclosing all material terms and conditions at the outset of the offer “so as to leave no reasonable probability that the offering might be misunderstood.” KFC argued that plaintiffs weren’t “consumers” because they weren’t required to purchase anything and that they didn’t allege any unclear or inconspicuous disclosure. The first argument failed because on its face the law didn’t require a purchase from a named defendant, nor would the reading make sense in the context of a provision that clearly, and only, regulates free stuff. Nor is the problem unclear disclosure: the problem is that KFC added new conditions after the offer was made. The court stated that KFC can’t be expected to disclose up-front any after the fact conditions later made part of the offer, but that the complaint sufficiently alleges that KFC revised the terms of the offer without clearly and conspicuously disclosing these terms before plaintiffs accepted the offer.

Finally, KFC argued that it complied with Illinois’s raincheck exception. Under the Illinois Administrative Code, it’s unfair or deceptive to advertise any product when the seller doesn’t have sufficient stock to meet reasonably anticipated customer demand, except where the seller tenders a raincheck entitling prospective purchasers to buy the advertised product at the advertised price and redeems the raincheck within a reasonable time. First, the court wasn’t clear that this applied to products that aren’t sold. The allegations weren’t that KFC failed to sufficiently stock Kentucky Grilled Chicken, but that it refused to honor the coupons. The provision also appears to require the same terms as the original offer, with the exception of the redemption date, but plaintiffs here alleged that KFC required additional terms. KFC didn’t clearly establish the existence of this affirmative defense.

Michigan: Same argument about “trade or commerce” requiring an offer for sale, same result. Similar raincheck provision in the Michigan Administrative Code, same result.

KFC sought to dismiss the requested injunction under Michigan law for an order requiring clear and conspicuous disclosure of additional animal ingredients in the Kentucky Grilled Chicken product. The MCPA prohibits failure to reveal a material fact the omission of which tends to mislead or deceive a consumer when the fact could not reasonably be known by the consumer. “Whether the presence of beef in a poultry product is the type of information that affects a consumer's decision to enter into the transaction, and whether that information could reasonably be known by the consumer, are legitimate questions of fact.” The MCPA also specifically authorizes injunctive relief whether or not the plaintiff seeks damages, and plaintiffs need not suffer a “loss” before suing for injunctive relief.

California: Similar argument about whether trying to redeem a coupon for free stuff made plaintiffs “consumers.” It did. KFC argued that it offered an appropriate remedy sufficient to defeat plaintiffs’ entitlement to relief after it unforeseeably ran out of Kentucky Grilled Chicken, since California law allows defendants to offer appropriate remedies and escape liability. These contentions were “of no moment” in determining the sufficiency of the complaint.

The parent company, YUM!, also failed to get out of the case because plaintiffs sufficiently alleged its participation in the acts at issue.

Scylla and Charybdis: alternative patent and false advertising claims survive

Deston Therapeutics LLC v. Trigen Laboratories Inc., 2010 WL 2773317 (D. Del.)

Deston sued Trigen over either its use or failure to use a chemical called u-polycosanol 410 in their purportedly generic version of Deston’s ear drops. Polycosanol is a general term for a type of alcohol extracted from waxes, but Deston alleged that u-polycosanol 410 is a unique patented composition. Trigen’s package insert indicates it contains “u-polycosanol 410 (synthetic),” which is allegedly a way of ensuring that the product would be used by wholesalers, distributors, and pharmacies as a generic equivalent for Deston’s Auralgan. Generic equivalence requires both pharmaceutical and bioequivalence; otherwise, pharmacists won’t substitute the generic for the brand-name drug. Trigen, by labeling its product Treagan to include u-polycosanol 410, got drug information databases relied on by market participants to link its product to Auralgan as a generic equivalent. “Similar ear drops that list polycosanol as an ingredient but not u-polycosanol 410 have not been linked to Auralgan, because of the unique composition of u-polycosanol 410.” This behavior allegedly caused sales of Auralgan to erode due to substitution.

Deston argued that, if Treagan contains u-polycosanal 410, it’s infringing plaintiffs’ patent, and that if it doesn’t, then Trigen is falsely advertising in violation of the Lanham Act and state law. The court refused to dismiss the complaint, first finding that the challenges to the patent claims couldn’t be resolved on a motion to dismiss. Then, since Deston was pleading in the alternative, the court refused to dismiss the false advertising claims.

Trigen argued that Deston inadequately alleged falsity, misleadingness, and commercial advertising or promotion. Because of the patent infringement claim, it was sufficient to allege in the alternative that, if Trigen’s u-polycosanol 410 isn’t the same as Deston’s, then Trigen made a false statement by listing that ingredient on Treagan and presenting Treagan as a true equivalent to Auralgan.

Trigen’s argument was that, under the patents at issue, it could make and use u-polycosanal 410 so long as the chemical was not derived from the plant listed in the patents. If that’s true, it may also be true that the labeling is true because their u-polycosanal 410 is chemically identical without either infringing on the patents or making any false representations of equivalence. But, the court having declined to adopt Trigen’s construction of the patent claims for purposes of the motion to dismiss, the present allegations were sufficient.

Deston also sufficiently alleged actual confusion and misleadingness because of the listing in drug information databases and resulting behavior by wholesalers, distributors, pharmacies and pharmacists.

Finally, Deston sufficiently alleged commercial advertising or promotion. Trigen argued that Deston was required to allege that the label and insert proposed a commercial transaction and was disseminated widely in the industry. The court pointed out that Third Circuit cases have found a product’s name and label to be false advertising (Mylanta Night Time Strength, Breathasure). Deston alleged that consumers are purchasing Treagan “precisely because of the contents of its label,” that listed ingredients are the principal form of advertising in the generic pharmaceutical market, and that drug information databases have broadcast this information across the country. Even if widespread dissemination is required, Deston sufficiently alleged it.

The court also refused to dismiss the §43(a)(1)(A) claims of false designation of origin, on largely the same grounds. (Is a false claim about ingredients a false designation of origin? Under Dastar, how can it be? Does the test for the two prongs of §43(a) differ here? Is this a way of getting around the implicit/explicit falsity divide if the claim is only implicitly false and Deston lacks evidence of actual confusion?) The court rejected the argument that the term “synthetic” on Tregan’s label doesn’t resolve confusion, because the word doesn’t “distinguish the chemical makeup of the two substances (as opposed to the source).” (Doesn’t that implicitly concede that the problem is not one of designation of origin? How is a false ingredient claim any more a claim of origin than a false claim that “this computer has a really fast processor”? Composition isn’t the same as origin, I wouldn’t think.)

Anyway, the Delaware Deceptive Trade Practices Act claims also survived, as did the common-law unfair competition claims: Deston alleged misconduct causing interference with a business expectancy by claiming that Auralgan was a leading prescription product and that sales have eroded as a result of Trigen’s false marking of Treagan as a generic equivalent.

Too much in the sun: Neutrogena fails to win reconsideration

Schering-Plough Healthcare Products, Inc. v. Neutrogena Corp., 2010 WL 2788240 (D. Del.)

After Neutrogena had the opportunity to submit extra evidence relevant to its motion for reconsideration, the court denied the motion. Reminder: the falsity here is using the term Helioplex® in advertising for Neutrogena’s new Ultra Sheer Dry-Touch Sunblock SPF 100k sunscreen when that product, for a long time, didn’t have Helioplex® as Neutrogena had defined it in advertising. Neutrogena submitted ads that ran during the period in which its products didn’t contain the chemical DEHN; none of them had information about the chemical formula of Helioplex. Neutrogena also said, without evidence, that the ad that explicitly disclosed Helioplex’s ingredients, including DEHN, was meant for skin care professionals and not consumers.

Motions for reconsideration are to correct manifest errors of law or fact or to present newly discovered evidence. The standard was not met here. The new evidence in the form of an internet ad was from a site last updated on April 20, 2010, and the court granted partial summary judgment on liability on May 18; Neutrogena should have presented the evidence already, and in any event the ad didn’t address the chemical formula.

The court reiterated its conclusion that “consumer reaction is immaterial when the asserted advertisement is literally false.” The case law states that a court facing a literally false claim may grant relief without considering whether the public was misled. “Therefore, once plaintiff proves literal falsity of an advertisement, the court may presume all other elements of the § 43(a) claim. Although no case has specifically stated that all remaining elements of the § 43(a) claim may be presumed upon a showing of literal falsity, perhaps this can be attributed to the rarity of an advertiser promulgating literally false statements to consumers.” The presumption of injury also relieved Schering Plough of the need to demonstrate actual injury. “Indeed, it would be extremely difficult to prove monetary damages in the majority of cases where more than two competitors are locked in a struggle for consumers.” And in any event Schering Plough was seeking an injunction, so there was no (eBay) problem with a presumption. (Side note on my own personal hobby horse: note the implications of the court’s correct statement on the difficulty of proof for standing inquiries conducted on motions to dismiss; this is another reason why Conte Bros. as interpreted by Burger King is a serious mistake.)

Filthy minds

Thanks to GK for pointing this out: The Second Circuit has an interesting bit of cultural commentary in its decision striking down the FCC's anti-fleeting-obscenity policy as too vague to satisfy the First Amendment:

Take, for example, the disparate treatment of “Saving Private Ryan” and the documentary, “The Blues.” The FCC decided that the words “fuck” and “shit” were integral to the “realism and immediacy of the film experience for viewers” in “Saving Private Ryan,” but not in “The Blues.” We query how fleeting expletives could be more essential to the “realism” of a fictional movie than to the “realism” of interviews with real people about real life events, and it is hard not to speculate that the FCC was simply more comfortable with the themes in “Saving Private Ryan,” a mainstream movie with a familiar cultural milieu, than it was with “The Blues,” which largely profiled an outsider genre of musical experience.

The FCC, perhaps, was acting on an expectation that soldiers--real men--can legitimately curse, and the horrors of war include cursing. Realism was more important than reality, because reality is full of people who sometimes curse, and especially if they're people who lack cultural power, the court recognized, that can be threatening. Some of the examples of self-censorship by broadcasters in the opinion are also pretty striking.

Also, GK made the excellent point that bleeping the fleeting obscenity is a terrible way to avoid exposing us to it or to preserve the cause of civility. The bleep simply recruits us to supply the nasty word for ourselves, a phenomenon The Daily Show uses to good effect. The bleep constructs the obscenity, much as Amy Adler has argued that modern child pornography law forces us to think with a pornographic mind.

Here, let the Count from Sesame Street show you.

Private activism on the meaning of organic

Whole Foods will soon require "organic" in the personal care aisles to mean something sort of like what it means in the food aisles. Story from the NYT.

Allegations of deception satisfy pleading standard

Forest River, Inc. v. Heartland Recreational Vehicles, LLC, 2010 WL 2674540 (N.D. Ind.)

The parties compete in the recreational vehicle market. Heartland moved to dismiss a false advertising claim based on an ad for Heartland’s North Country trailer comparing it on 24 points with “The Competition.” The name of the product being compared is apparent only in the first two pictures of Forest River’s Puma trailer, with the Puma logo clearly visible under the label “The Competition.” But Forest River alleged that twelve of the pictures in the remainder of the ad are trailers from some other manufacturer, and that the ad has the natural effect of misleading consumers into thinking that those trailers all come from Forest River. Reverse passing off by the competition!

Heartland argued that, when a statement isn’t literally false, a plaintiff has to prove misleadingness with actual consumer confusion, and that Forest River failed to allege literal falsity or to allege actual confusion.

The court disagreed. Forest River alleged, in the court’s words, that customers and dealers “are likely to, and have in fact, assumed that the references in the ad to The Competition mean Puma brand products, when many of the comparison pictures actually show some other RV brand.” The ad, which was attached to the complaint, plus the pleadings together stated a “plausible” claim that the ad was both false and misleading and that viewers of the ad were actually misled under Iqbal and Twombly.

Kozinski takes another whack at nominative fair use

Toyota Motor Sales, U.S.A., Inc. v. Tabari, No. 07-55344 (July 8, 2010).

Very interesting case with a lot to chew on. Among other things, in the course of holding that buy-a-lexus.com and buyorleaselexus.com are nominative fair uses of the Lexus mark, Judge Kozinski rejects earlier panel precedent holding that the burden of proof for nominative fair use is on the defendant. Under KP Permanent, he points out, the burden of proof of likely confusion is always on the plaintiff. Therefore, a defendant “need only show that it used the mark to refer to the trademarked good,” after which the burden “reverts” to the plaintiff to show that the use was not nominative. Well, sort of: the burden reverts to the plaintiff to show “a likelihood of confusion.” And the nominative fair use test “evaluates the likelihood of confusion in nominative use cases."

See, the problem is that third factor of the nominative fair use test, which Kozinski here restates as whether “defendant falsely suggested he was sponsored or endorsed by the trademark holder.” Since we know that in the Ninth Circuit the nominative fair use test replaces the standard multifactor likelihood of confusion test, and Kozinski explicitly says that it was error for the district court to use the multifactor test and the nominative fair use test sequentially, how are we supposed to know whether this occurred?

As in Abdul-Jabbar, the Tabari court made clear that something less than explicit claims of official authorization would satisfy the third factor. With respect to domain names, the court explained that “naked” use of a trademark, or a trademark plus a geographic indicator, as a domain name would not be nominative fair use. Though the opinion didn’t use the term, the reasoning is apparently that the necessary implication of trademark.com, e-trademark.com, trademark-usa.com and the like is that the site comes from the trademark owner, whereas no such necessary implication comes from more contextually ambiguous domain names such as trademarkdealer.com. But this rule only works if courts are very confident of their ability to assess context and also very confident that consumer understandings of domain names remain static—as Judge Kozinski evidently is.

Also recall that the alternative to explicit falsity/necessary implication in false advertising is proof through a consumer survey. Will a survey now suffice to rebut a nominative fair use defense? Can a court eyeball the situation? Given that the usual key factors in the multifactor test are pretty bad guides for figuring out whether a referential use is confusing, what might we substitute other than our expectations about how consumers think?

I don’t think Kozinski is currently wrong about how consumers use domain names. (Judge Fernandez’s concurrence notes just how many factual claims the opinion makes; the question of the threshold for adoption of common knowledge into legal rules is an interesting one, and quite relevant to many Lanham Act cases, but I won’t go into it further here.) But this ties into what I think is the basic problem here. Judge Kozinski’s version of nominative fair use repeatedly conflates the normative with the empirical. Nominative fair use precludes plaintiffs from showing likely confusion with the multifactor test, including with evidence of actual confusion or consumer surveys. It preserves space for competition and free speech and, not incidentally, deters trademark owners from attempting to exercise certain kinds of control in the first place, thus deterring them from trying to change consumer understandings of the meanings of certain uses. But this has to be a normative commitment if it’s going to work in the long term, which is why there is so much trouble with that third factor.

So what exactly happens when a defendant shows that its use is referential? Apparently a plaintiff then has to show that the use is likely to confuse by showing that the use, while nominative, is not necessary (with necessary being defined broadly), uses more of the mark than necessary and/or suggests source or sponsorship. Even aside from the factor-three problem, this raises various questions. For example, what if the plaintiff shows that the use is not necessary even under a broad definition of necessary. Because the nominative fair use test is a substitute for the regular confusion test, does the defendant automatically lose, or do we then hold a confusion inquiry?

Judge Kozinski gives a (disturbing) hint of the answer when he discusses using more of a mark than necessary. Notably, Judge Kozinski stated that doing so “might” cause confusion, a lower standard than “likely” confusion, and yet he still seemingly presumed that flunking the nominative fair use made confusion likely: “use of the stylized Lexus mark and ‘Lexus L’ logo was more use of the mark than necessary and suggested sponsorship or endorsement by Toyota....[T]hose visual cues might lead some consumers to believe they were dealing with an authorized Toyota affiliate.”

Another puzzle: the opinion goes out of its way to emphasize the availability of dilution claims against nonconfusing websites (though federal dilution isn’t available against a nominative fair use), and even calls out the totally unrelated peopleofwalmart.com as potentially dilutive (even though that seems like a classic nominative fair use). I’m not sure how Judge Kozinski squares his support of dilution with his position that enjoining Tabari’s use of the domain names violates the First Amendment because it interferes with commercial speech that is neither false nor misleading. Even if peopleofwalmart.com is commercial speech, which I doubt he thinks is true, the domain name and the website seem … true and not misleading.

Finally, there's a remand, though what it's for is hardly clear. The opinion might be read to hold out the formal possibility that a proper application of the nominative fair use test, with all the uncertainties discussed above, might legitimately result in a narrower injunction against certain uses of lexus in the Tabaris' domain names, and yet the discussion also nearly compels the conclusion that their domain names are exactly the types of domain names that ought to pass the nominative fair use test. (E.g.: "Outside the special case of trademark.com, or domains that actively claim affiliation with the trademark holder, consumers don’t form any firm expectations about the sponsorship of a website until they’ve seen the landing page—if then.... So long as the site as a whole does not suggest sponsorship or endorsement by the trademark holder, such momentary uncertainty does not preclude a finding of nominative fair use.") My best interpretation is that a remand is required to figure out if any prospective relief is available with respect to the site content, not the domain name, since the content too is entitled to a nominative fair use analysis.

got dilution?

Photo taken on the street in Baltimore. A couple other ads on the website. In any dilution claim, what would be the relevance of the huge number of noncommercial, political images already available using the same idea?

Lack of substantiation equates to falsity

CertainTeed Corp. v. Seattle Roof Brokers, 2010 WL 2640083 (W.D. Wash.)

CertainTeed makes asphalt shingles, including the fiberglass Presidential lines. James Garcia runs a business named Seattle RoofBrokers, using some other names too, and owns seattleroofbrokers.com and similar domain names. Garcia distributes information about roofing products, but he’s not a roofer, a licensed contractor, or an inspector. He makes money by connecting homeowners to roofers and retaining a portion of the cost of the project. He drives around in search of homes that need new roofs and then sends them letters.

His letters, as well as his website, say nasty things about asphalt shingles in general and CertainTeed in particular. Basically, he said that asphalt shingles have a history of premature failure, and can’t pass resale inspection (which he argues is necessary to sell a house without a substantial price hit) within 15 years. His letters included a picture that he labeled as Presidential shingles splitting and failing less than 15 years after installation. He also noted that CertainTeed shingles are currently subject to a class action lawsuit. The website said that there were numerous examples of CertainTeed asphalt roofs failing within 6-15 years, that one roofing contractor reported submitting over 600 warranty claims to CertainTeed within the last 4 years, and that most roofs fail in 10 to 15 years, all without substantiation.

Now a detour into weird: the court held that some of Garcia’s statements did not seem to have been made “in commerce” within the scope of the Lanham Act, because they only went to Washington residents. The court declined to hold that use of the US mail was enough to be “in commerce.” I find this weird not only because of the obvious effect on interstate commerce, but because there’s a mote/beam problem here: Is Garcia a competitor or inflicting competitive injury on CertainTeed? (A footnote addressed the “advertising” question: Garcia routinely used these letters/claims in soliciting business, so it was a general practice, not a single letter that might not be actionable.) Anyway, the website statements were made in interstate commerce by their nature, and thus, unlike the letters, likely to reach out of state residents.

Further, the state consumer protection law (CPA) covered the same conduct as the Lanham Act, so even the letter statements were actionable—here at least is a rationale for bringing state-law claims along with Lanham Act claims. The CPA requires a public interest, and as state law declares that certain roofing practices “substantially affect the public interest,” the court concluded that the letters did so as well.

The court then turned to the specific statements. As to the statement that the “real functional life” of asphalt shingles “is only 10-15 years,” the court found that it need not determine whether the statement is true or false, because it couldn’t find that the statement targeted CertainTeed. The website listed a bunch of shingle manufacturers and said that the “best” options would last 20-25 years, leaving the reader unclear which manufacturers were the worst and which the best.

However, claims that Presidential Shingles “will not be able to pass a resale inspection after 15 to 20 years” and “most roofs fail in 10 to 15 years” (in a section in which CertainTeed was the only named manufacturer) were false, along with unsubstantiated “examples” of over 20 CertainTeed roofs that failed in 10 years or fewer and the claim that “one roofing contractor reports submitting over 600 warranty claims to CertainTeed within the last 4 years.” CertainTeed provided evidence of numerous Seattle-area roofs shingled with CertainTeed products that have lasted more than 10 years and would pass a 20-year inspection. The court noted that this wasn’t easy, because CertainTeed didn’t directly sell its products on the West Coast until 1998. Despite these difficulties, CertainTeed was able to trace 20 roofs from 1991-1999. It examined “several” of these roofs, deeming them in good condition, and took pictures. Garcia had no counterevidence. “From this evidence, a reasonable jury could only conclude that there are Seattle-area Presidential roofs between 16 and 19 years old that not only could pass a resale inspection, but that would be able to do so after twenty years.”

Garcia’s claims about deteriorated roofs were hearsay, plus his statement that he recently observed two CertainTeed roofs that wouldn’t pass inspection. The court thought it likely that none of his evidence was admissible, but did not rely on that conclusion. Even if he could prove that one or more Seattle-area roofs had deteriorated, Garcia still would have had “no basis for declaring that no Presidential shingle could pass a resale inspection after 15 to 20 years, and no basis for declaring a specific lifetime for any CertainTeed product, much less a lifetime of ten years or less.”

Likewise with the statement that Presidential shingles have “a history of premature failure.” CertainTeed provided information on “claims” received about its products, from oral complaints to warranty claims. Though this evidence was not a model of clarity, it indicated that only a tiny percentage of its products were subject to claims. This was much better evidence than Garcia provided, which the court expressed “many reasons to doubt”—he didn’t provide names, addresses, or any other information that would allow anyone else to test his claims. Even if his testimony was evidence of some roof failures, it was less probative than CertainTeed’s.

In any event, evidence that “a tiny fraction” of CertainTeed’s products had failed was not sufficient to support the “history of premature failure” claim. That claim was therefore literally false by necessary implication. In context, it meant more than “a few incidences of undesirable performance.” But coupled with assertions that the products won’t pass resale inspection, the necessary implication was that there was a body of evidence that CertainTeed shingles inevitably or nearly inevitably fail. Such evidence was absent. (Garcia also argued that “failure” was an opinion. The court disagreed. “To anyone with a reasonable command of the English language, ‘failure’ connotes a serious adverse event, and in the context of Mr. Garcia’s advertisements, it connotes a roof that no longer functions.”)

The photo included in the letters also made a false representation. Though Garcia refused to disclose the location of the house, CertainTeed provided expert testimony that, based on the physical characteristics of the shingles as they appeared from the photo, they were made from different materials than Presidential shingles are. With no contradictory evidence in the record, the court found no genuine issue of material fact on this subject.

The court, however, found that it was literally true to say that Prudential shingles were “part of” or “named products” in class action lawsuits, even if, as CertainTeed argued, the suits now focus solely on organic shingles (which Presidential shingles aren’t). CertainTeed might be able to prove misleadingness either with evidence of intent or consumer reaction. “Indeed, it is likely they will succeed in proving as much, given the context in which Mr. Garcia’s statements appear.” But summary judgment had to be denied.

The court also rejected Garcia’s cross-motion for summary judgment, which was premised on the idea that CertainTeed couldn’t prove the durability of any of its products beyond 15 years. First, there was uncontroverted evidence of 16- to 19-year-old roofs in the Seattle area. But even without such examples, Garcia would not have “license” to make his claims. “He can no more declare that ‘CertainTeed’s roofs fail after 20 years, unless CertainTeed proves me wrong,’ than Pepsi can declare that ‘people who drink Coca-Cola die 20 years later, unless Coca-Cola proves us wrong.’”

Notes: the Third Circuit has held that completely unsubstantiated claims violate the Lanham Act; this is the same holding. Also compare the law of defamation: it’s reckless to make claims of this sort. But in slightly different circumstances—say, a consumer who’d had a bad experience, or someone who had general reason to think that all asphalt shingled roofs only last 20 years and no evidence beyond CertainTeed’s assurances to think that CertainTeed roofs were an exception—I’d be hesitant to find recklessness. Just another reason why holding competitors to a higher standard than noncompetitors requires us to care about defining competitors!

Garcia argued that his ads were opinions, and noted that CertainTeed’s declarants had varying views about the lifetime of CertainTeed products, such that his observations were no more true or false than theirs. The court held that he was mistaken. The evidence shows that roof lifetimes depend on many factors, including installation and weather. It was understandable that “no one really knows how long a particular CertainTeed roof will last. If Mr. Garcia’s advertisements merely expressed these uncertainties, he might have escaped CertainTeed’s lawsuit. Instead, he expresses with certainty that all or most CertainTeed roofs will not last beyond a term of years he arbitrarily decrees. These are statements of fact, not opinion, and he has no evidence to counter CertainTeed’s evidence that they are false.”

Many of his statements were unchallenged opinion, such as his extended discussion of roofing warranties. Garcia concludes that warranties are deceptive marketing tools because they imply the wrong product lifetime and mislead consumers into thinking that a roof that fails will be replaced while in fact providing only limited coverage. This is either pure opinion or opinion “marbled with facts that can be neither proven nor disproven.” Note: again, there’s a difference between defamation’s looser treatment and the Lanham Act. If a competitor said “consumers are misled into believing that the warranty covers more than it does,” that would be a factual, testable statement: indeed, it’s precisely the kind of claim that consumer surveys routinely test. The fact that the claim is made to consumers only increases the number of things that would have to be proven under the Lanham Act; it doesn’t make the statement nonfalsifiable. But this is a sideshow, since CertainTeed wasn’t challenging those statements.

The court also noted that two wrongs don’t make a right: CertainTeed’s alleged false advertising doesn’t allow him to spread falsehoods. The balance of equities favored an injunction. On remedy, the court ordered that Garcia could, at the top of every page on his website, include a prominent hyperlink to an electronic version of the court’s order, with text stating, “Please click here for court order finding that this website contains false statements.” This order will apply until Garcia notifies the court that the false statements have been removed and the court agrees. Alternatively, Garcia could take the whole site offline, purge the statements, and submit the new website content to the court for approval. Garcia’s website still seems to have the challenged statements; the injunction requires compliance no later than July 12.

The court concluded that both sides had much to gain from settling. Garcia can still target CertainTeed with truthful statements or opinions likely to discourage consumers from doing business with CertainTeed, and many of his ads contained just those things. CertainTeed, however, was “highly likely” to succeed at trial. “Not only will the trial itself divert Mr. Garcia’s time away from his business, but the result of the trial is likely to further damage him via a verdict in CertainTeed’s favor, and costs (including the cost of mediation) to be imposed against him. In short, there are many reasons why a trial might not be in either party’s best interests.” So, was the court suggesting that CertainTeed should look for a settlement that would bar Garcia from attacking it with opinion or truth as well as falsehood? That seems like the only benefit to CertainTeed from settling inferrable from the court’s statement, though of course unrecoupable costs of litigation would also factor in.

Copying as political speech

Thanks to Will Bachman for pointing me to this: Sharron Angle wishes to decrease the publicity given to her earlier campaign positions. Harry Reid wishes the opposite. Reid's campaign posts her old website. Angle responds with a takedown notice. The Nevada state Democratic party then posts "highlights" from the old site. Frankly, I think they should have kept the old site up, or at least some screenshots. Hard to deny the positions or claim they're out of context when it's an obvious quote.

trade dress claims as infringement of slogan

Santa’s Best Craft, LLC v. St. Paul Fire & Marine Ins. Co., --- F.3d ----, 2010 WL 2605874 (7th Cir.)

JLJ sued Santa’s Best (SBC) over its marketing of “Stay-On” twinkling Christmas lights. This is the duty to defend case arising out of that action. JLJ alleged that SBC copied JLJ’s “Stay Lit” lights packaging design and sold Stay-On lights using false and deceptive language. St. Paul tendered money for SBC’s litigation expenses after the district court held that it had a duty to defend. The district court held that St. Paul was not obliged to cover $1.3 million in defense costs for SBC’s contract indemnitee Monogram Licensing, or to reimburse the $3.5 million settlement payment in the underlying action. The court of appeals agreed that St. Paul had a duty to defend, and didn’t breach it. Moreover, St. Paul wasn’t required to reimburse SBC for Monogram’s expenses, but a remand was required on the questions of prejudgment interest on litigation expenses and reimbursement for settlement expenses.

St. Paul’s CGL policy requires it to defend its insured’s contract indemnitees, assuming certain control and cooperation requirements are satisfied. The indemnitee has to provide St. Paul notice of each legal paper as soon as possible after it’s received; St. Paul has to determine there’s no conflict between the insured’s interests and those of the indemnitee; and the indemnitee and the insured have to agree in writing that they can share the same counsel. Monogram never tendered a defense to St. Paul. Monogram was represented by separate counsel, though they coordinated a defense. There’s also some relevant state court litigation involving SBC’s prior insurer, Zurich, which awarded $1.54 million in defense costs, of which about $1.27 million were Monogram’s defense costs.

St. Paul had a duty to defend, which arises when the facts alleged fall within, or potentially within, the policy’s coverage. The complaints in the underlying action potentially stated a claim for infringement of slogan, a covered “advertising injury offense.” A slogan is defined as “a phrase that others use and intend to attract attention in their advertising.” The term slogan excludes a phrase “used as, or in, the name of” organizations or businesses other than the insured or “any of the ... products ... of any person or organization, other than [the insured].” An intellectual property exclusion didn’t apply, or if it did the allegations could be construed as infringement of a trademarked slogan, which was an exception to the exclusion. And an exclusion for “material previously made known or used” didn’t apply because not all the slogans at issue were finalized until 2002, after the St. Paul policy took effect.

St. Paul argued that the policy covered “unauthorized use” of a slogan, which suggested that the claims had to include as an element the underlying plaintiff’s ownership or at least control over the slogan. St. Paul argued that JLJ had no ownership or exclusive right to the slogans on the packages, but the complaints alleged that SBC copied slogans, suggesting a claim of ownership. Though many of these allegations went to JLJ’s trade dress claim, the inquiry is based on the allegations in the complaint, not the legal labels attached to them.

St. Paul’s IP exclusion disallows coverage for “injury or damage ... that results from any actual or alleged infringement or violation of any of the following rights or laws: ... trade dress, ... trademark, other intellectual property rights or laws.” An exception to the IP exclusion is “unauthorized use of ... trademarked slogan ... of others in your advertising.” St. Paul argued that the alleged infringement of slogan “results from” the trade dress claim, so that the IP exclusion applied. But, the court concluded, unless the slogan infringement claim would not have arisen but for the trade dress violation claim, or necessarily arose out of the trade dress violation claim, there was still a duty to defend. Even if the IP exclusion applied, the trademark exception would require St. Paul to defend given uncertainty about whether the court in the underlying action would have decided that the slogan was capable of being trademarked.

There was no breach of the duty to defend because St. Paul timely filed a cross-motion and counterclaim seeking a declaration that it did not have a duty to defend.

The settlement payment: St. Paul argued that SBC failed to designate which of the claims addressed by the settlement were covered by the St. Paul policy, and therefore St. Paul properly declined to reimburse the settlement. SBC argued that it had no burden to allocate, and that JLJ’s threatened damages were undifferentiated as to the various claims so that there is no practical way of allocating the settlement.

In Illinois, an insurer must reimburse an insured for settlement expenses when the settlement was made in reasonable anticipation of liability for damage covered by the policy, and the primary focus of the settlement was a covered claim. An insured is not required to apportion its liability for different claims because that would either “require a retrial of the merits of the underlying lawsuit” or would “discourage settlement because the insured would essentially have to prove its own liability for the underlying conduct even if it had not made that concession in arriving at a settlement.” Thus, the court predicted that Illinois courts would evaluate whether a primary focus of the claims settled was a potentially covered loss, placing the burden on the insured to show this. But if the claims were not even potentially covered, which is the insurer’s burden to show, the insurer isn’t required to reimburse the settlement. Several of the allegations in the underlying action’s complaint here dealt with claims outside of the policy coverage, including trademark claims based on product names and false advertising claim.

So the remaining question was whether the primary focus of settlement was damages for a covered infringement of slogan claim. The court of appeals decided to remand on this point.

It also affirmed the district court’s conclusion a conflict existed between Monogram and SBC such that it did not comply with the preconditions for covering Monogram’s defense. The court of appeals noted that certain of St. Paul’s requirements were impossible to satisfy because St. Paul refused to defend SBC in the underlying action, but SBC could have complied with the other requirements and chose not to do so. (The court of appeals didn’t flat-out say, but one presumes that St. Paul could not defeat covering indemnitees through refusing to play its role in satisfying the preconditions.) The court refused to read a rule allowing recovery of “reasonably related” expenses to extend to the expenses of non-insured parties, because that would swallow the general rule that coverage is limited to the insured.

Are you experienced? Doesn't matter, Dastar bars the claim

Sidem, S.A. v. Aquatech Int’l Corp., 2010 WL 2573882 (W.D. Pa.)

Per the court’s summary of the complaint: Sidem makes large desalination (MED) units for water treatment, and successfully developed MED units that could treat larger amounts of water than previous MED units could. Defendant Desportes was an employee of a company that became a Sidem subsidiary, and allegedly had access to trade secrets relating to the large MED units. Then he left for Aquatech, which shortly submitted a bid for a project that required constructing a large-scale MED unit of a size previously reserved for Sidem.

Sidem alleged that Aquatech falsely represented that it had expertise and experience in designing and building large MED units, that Aquatech independently developed and designed such units, and that increasing the size of a MED unit is “easy and does not require specialized knowledge.”

Aquatech moved to dismiss the Lanham Act claims pursuant to Dastar. Sidem argued that Dastar only applies to §43(a)(1)(A), which Dastar itself actually says. Only problem: many courts apply the reasoning of Dastar to bar §43(a)(1)(B) claims that an ad misrepresents that the defendant originated, developed, or created the goods or services. (I think this is wrong, because the extra requirements of §43(a)(1)(B)—competition, materiality, and “advertising or promotion”—address all the Supreme Court’s concerns in Dastar, providing a way to protect consumers when a misrepresentation of origin really would matter to them. Overreading by some courts, for example, makes a misrepresentation that a product is “new” not actionable, no matter how false it is. However, the court is clearly right that this is the dominant trend.) A defendant’s misrepresentations that it was the author/creator of some good/service are not actionable under the Lanham Act.

Sidem argued that this case concerned “services” or “commercial activities” and not “goods.” The court disagreed. The allegations in the complaint related to large-scale MED units, and in any event Dastar was concerned with “origin” and potential conflict with patent/copyright law, not with goods specificially. Sidem pointed to its allegation of misrepresentation that increasing the size of a unit is easy and doesn’t require specialized knowledge, and argued that there was no conflict with patent law in alleging misrepresentation of experience with designing and constructing large-scale units. The court found, however, that the “gist” of the allegations was passing off Sidem’s design and experience as Aquatech’s work. Under these circumstances, Dastar barred the Lanham Act claim.