Friday, July 01, 2011

Everybody in the pool: standing makes case needlessly complicated

Two opinions, both weirdly distorted by unhelpful standing inquiries.

Aviva Sports, Inc. v. Fingerhut Direct Marketing, Inc., 2011 WL 2533812 (D. Minn.)

Aviva sells inflatable waterslides and pools. Defendant Manley does the same, and both sell through Wal-Mart. Aviva argued that Manley’s ads violate the Lanham Act because Manley altered images of its products to make them appear larger, by reducing the size of images of children relative to its products, then inserting the scaled-down children into images of the toys to make it look like the children were using them. Aviva does sell products directly to consumers through its website, but very few: from 2001-2010, 3.71 % of Aviva's total sales were retail; 0.13% of Aviva's total sales were retail sales of products at issue in this case; and 0.73% of Aviva's sales of products at issue in this case were retail.

Wal-Mart sells Manley’s products in stores and alongside Aviva’s on its website.

The court found that Aviva had constitutional standing against Wal-Mart, but not prudential standing. It divided the circuits’ prudential standing approaches into (1) a categorical test, requiring that the plaintiff and the defendant be competitors; (2) the five-factor aggregate Conte Bros. test; and (3) a reasonable interest test. The court concluded that Aviva lacked standing under any appproach.

Categorical: Aviva was not truly a retailer under these circumstances (it provided no evidence that it actively attempted to expand its retail sales or compete with Wal-Mart), and as a wholesaler it did not compete with Wal-Mart. (There. Relatively easy to apply, perfectly intelligible, and we’re done. But wait …)

Conte Bros.: Aviva argued that it suffered lost sales, an injury of the type Congress sought to redress in the Lanham Act, but it didn’t argue that the false ads damaged its ability to compete, its reputation, or its good will, which are other types of injuries that Congress sought to redress. (Hunh? Since when do you need to show all relevant types of injury?) Anyway, though Aviva’s evidence supported commercial injury, it didn’t show competitive injury. Its injuries were also only indirectly related to Wal-Mart’s alleged misconduct of carrying Manley’s falsely advertised products. While Manley’s initial misrepresentation was not an intervening cause in the ordinary legal sense, it did bear on the directness of the injury. (This is really a distributor liability case; it seems very odd that we are discussing it as a standing issue.) Aviva was also not particularly proximate to the injurious conduct—other retailers in competition with Wal-Mart would be a better class of plaintiff because they’re at the same level in the distribution chain and have more self-interest in punishing Wal-Mart for false advertising. (Unless they’re carrying both parties’ products, in which case they wouldn’t care—which is again why this is really about distributor/secondary liability.)

Aviva’s damages claim wasn’t “entirely speculative,” which did support prudential standing—Aviva proffered an expert declaration promising lost sales and profit calculations as the case proceeds (since discovery hadn’t yet closed). But, in yet another demonstration of how these standing inquiries are topsy-turvy, the court said—in a statement that is self-evidently true of any false advertising case—that “the actual economic loss depends on consumers reacting in a particular way to the advertisements of Aviva's and Manley's products,” and the amount of any resulting loss would be difficult to quantify. I know I harp on this, but really—compare this to what courts say about why they grant preliminary or permanent injunctions in Lanham Act cases when the plaintiff has shown likely confusion. Difficulty in quantification switches from a reason that the plaintiff should win to a reason that it should lose, and no court has explained why it does so. And the reason is that difficulty in quantification is not actually what matters; it’s the other equities of the case. It would be much more honest and coherent to say so outright.

Finally, the risk of duplicative damages and complex apportionment counseled against Aviva's prudential standing, because of the risks of recognizing liability for every potentially injured party in the distribution chain. So, no Conte Bros. standing.

Reasonable interest: Nope, for the reasons discussed above.

Aviva Sports, Inc. v. Fingerhut Direct Marketing, Inc., 2011 WL 2533846 (D. Minn.)

Aviva also sought a permanent injunction. It seems to have jumped the gun on this, because it wasn’t seeking summary judgment, leading the court to say some weird things.

The opinion concentrated on whether proving literal falsity would entitle Aviva to favorable presumptions on the other elements of a Lanham Act claim. The court held that it would not relieve Aviva of its burden of showing injury or a likelihood of injury and causation. The case law presumes causation and injury only in comparative advertising cases and cases of deliberate deception. The court went further and stated that a presumption of injury and causation based on literal falsity, “without a showing of competition or comparative advertising, cannot be squared with Article III because the presumption would allow a claim with no showing of injury in fact.” Comparative advertising, by contrast, necessarily diminishes the value of the competitor’s product in the minds of consumers. (There’s an interesting side note here about empirical psychology and the assumptions courts are willing to make, without even noting that they are doing so; compare this to the marketers’ research finding that most ads make no impression at all.)

Without a presumption of injury and causation, the record didn’t contain sufficient evidence of Aviva’s injury. Aviva argued that “[i]t is just common sense that any consumer will buy what appears to be the same size product from one company for half the price of another company's similarly-sized product.” Aviva’s pool is roughly twice as expensive as the Manley pool, but in the ads the pools appear to be the same size as judged by the children shown playing in them. Though an appeal to common sense might be sufficient for a factfinder to find likely injury at trial, it was not enough to find actual success on injury and causation.

So far, I see the court's point: it's just too early. Now the strangeness begins (and I can’t help thinking that the language of “standing” has fatally distorted the court’s reasoning):
Some courts have held that a likelihood of injury, and therefore statutory standing under the Lanham Act's requirement that a plaintiff be one "who believes that he is or is likely to be damaged," is demonstrated with a showing of literal falsity and a showing that the plaintiff competes with the defendant. One commentator has, however, noted a circuit split as to whether such a showing is sufficient to establish statutory standing. 5 J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition § 27.31 (4th ed.2011). Assuming that Aviva could meet its standing burden by showing literal falsity and that it is Manley's competitor, the Court cannot conclude, based on the record before it, that Aviva actually succeeded in showing that it is Manley's competitor. Aside from the evidence described above, Aviva points to nothing to support its assertions that it competes with Manley. … Absent such a showing, Aviva's motion for a permanent injunction must fail.
Comment: What the blazes? The parties sell inflatable pools to ordinary consumers, side by side at Wal-Mart. Explain to me any scenario in which they do not compete.

Aviva’s state UDTPA claim suffered the same fate, because its standing requirement was “similar” to the Lanham Act’s. Minn.Stat. § 325D.45 (2010) ("A person likely to be damaged by a deceptive trade practice of another may be granted an injunction against it under the principles of equity and on terms that the court considers reasonable.").

1 comment:

Virginia Llorca said...

Did you ever go to the blog section of They go on and on about Intellectual Property and trademark rights and copyright and opensource. I am not an economist not do I have any education in the law area, but you sound so factual and spot on. I think they need you to weigh in every now and then if you have time. Even I can understand some of the stuff you write.