Degelmann v. Advanced Medical Optics Inc., --- F.3d ----, 2011 WL 4470641 (9th Cir.)
Degelmann represents a putative class of purchasers of contact lens solution, alleging violations of the UCL and FAL because AMO advertised Complete MoisturePlus as a product that cleans and disinfects lenses. In 2007, the CDC reported an increase in a serious eye infection associated with the use of MoisturePlus; AMO recalled it and established a refund program for unused product. The putative class did not include people who’d contracted an eye infection. The court of appeals affirmed denial of certification on different grounds than the trial court used.
Plaintiffs alleged that AMO knew that MoisturePlus was a poor disinfectant compared to other similar products, and that the company misled consumers into believing MoisturePlus was as effective as other solutions. But for the inaccuracy of AMO's labeling practices, they alleged, they would not have purchased MoisturePlus. The district court ruled that the class suffered no injury because (1) they never contracted AK, so they suffered no harm from use of MoisturePlus, (2) they were not forced by the product recall to discard unused product, and (3) they did not lose money because if they had not bought MoisturePlus, they would have bought another lens solution.
The court of appeals disagreed. Class representatives properly averred that they bought MoisturePlus in reliance on the disinfectant representation, which means they suffered injury in fact: economic harm. It’s probably true that they would have bought other contact lens solution had they not bought MoisturePlus, but that doesn’t mean they didn’t suffer economic harm. They presented evidence that they were deceived into purchasing a product that did not disinfect as well as it represented. With accurate labeling, they would not have been willing to pay as much for, or would have refused to buy it. The district court read “injury in fact” too narrowly.
However, the court of appeals found that the case was preempted, because the FDA provides criteria for a contact lens solution to be labeled as a “disinfecting solution,” preempting claims that use of the term “disinfects” was false or misleading. The Medical Device Amendments of 1976 to the FDCA include a provision that states can’t establish any requirement “(1) which is different from, or in addition to, any requirement applicable under [the FDCA] to the device, and (2) which relates to the safety or effectiveness of the device or to any other matter included in a requirement applicable to the device under this chapter.”
First, the court had to decide whether the FDA had promulgated a specific requirement that applies to contact lens solution. Lens care products are Class II devices, involving some risk of injury but not subject to the intensive pre-market approval process. Class II devices need only § 510(k) clearance, designed to ensure only that a product is substantially equivalent to a product that is already on the market. AMO argued that MoisturePlus was subject to special controls on the testing, manufacture, and labeling of multipurpose contact lens solutions, as laid out in an FDA Guidance Document for Contact Lens Care Products. It sets out requirements for a contact lens care solution to be labeled a “disinfecting solution.” One path to such labeling is to “meet the primary performance criteria of the standalone procedure for contact lens disinfecting products.” This AMO’s product undisputedly did, and the court found that these were specific requirements for preemption purposes.
Then the question was whether the lawsuit would impose a different or additional requirement on AMO. The court held that, in order for the class to recover, a court would have to hold that the UCL and FAL required something different than what the FDA required to label MoisturePlus a disinfectant: that AMO test for a specific pathogen and show that MoisturePlus kills it in sufficient quantities. This was preempted.
Friday, September 30, 2011
No state law standing for manufacturer against retailer
Aviva Sports, Inc. v. Fingerhut Direct Marketing, Inc., 2011 WL 4457956 (D.Minn.)Aviva makes inflatable waterslides and pools, in competititon with Manley. The parties’ products are available through retailers including Fingerhut, Menard, and Kmart. Aviva argued that Manley’s ads violate the Lanham Act and Minnesota UDTPA by superimposing scaled-down images of children onto images of its products to make the products appear larger than they actually are. Interesting reviews here on that point. The court previously dismissed Wal-Mart as a defendant and denied a preliminary injunction.
Though a few of Aviva’s sales are through its website, almost all are retail. The defendants here are retailers who sell both parties’ products in stores and on their websites. Thus, Aviva lacked standing under the Lanham Act.
Under the UDTPA, "[a] person engages in a deceptive trade practice when, in the course of business, vocation, or occupation, the person ... (5) represents that goods or services have sponsorship, approval, characteristics, ingredients, uses, benefits, or quantities that they do not have ...; or (13) engages in any other conduct which similarly creates a likelihood of confusion or of misunderstanding." The law specifies that a plaintiff need not prove competition or actual confusion (this comes out of the UDTPA’s history as a trademark-plus statute).
Still, Aviva lost because it failed to show likely injury from defendants’ conduct. It alleged lost opportunity for sales. This was a competitive injury. Though Aviva argued that it didn’t need to be a competitor, the cases it cited did not involve allegations of competitive injury. (They involved allegations of false advertising causing injury to consumers, which current Lanham Act jurisprudence doesn’t cover.) “Where plaintiffs have not alleged competitive injuries, direct competition is not a requirement for standing.” But where competitive injury is asserted, requiring competition is a better fit with the plain language of the law. “Standing under the statute requires likelihood of damage--which may or may not require competition between the parties, depending on the type of damage alleged.” (This is probably the right result, but saying it’s based on plain language seems pretty weird. The statute requires damage and does not require competition; Aviva argued that defendants were a necessary part of the causal chain of lost sales, which sure seems like damage.)
The court found support in its review of the original UDTPA, drafted by the National Conference of Commissioners on Uniform State Laws and approved by the American Bar Association. The drafters commented that the no-competition provision was designed to "remove[ ] the enumerated factors as absolute bars to relief." They cited what we’d now call a trademark case involving false association between two businesses that didn’t directly compete. Thus, in certain contexts, especially in passing off/false association/trademark cases, competition need not be proved. But that doesn’t mean that a competitive injury won’t require competition. (So what exactly is damage to reputation or goodwill? If it’s not competitive injury, what is it?)
In addition, Minnesota courts have noted that the UDTPA generally mirrors the Federal Lanham Act and that claims under both statutes are analyzed in essentially the same way. The standing provisions are therefore similar: "any person who believes that he or she is or is likely to be damaged" may bring a civil action, 15 U.S.C. § 1125(a)(1), and "[a] person likely to be damaged by a deceptive trade practice of another" may do the same under state law, Minn.Stat. § 325D.45, subdiv. 1. “This parallel language strongly suggests that the requirements for standing under the UDTPA are the same as those under the Lanham Act.” Indeed, the original drafters commented that "[s]imilar phraseology determines standing to sue under Section 43(a) of the Lanham Trademark Act."
But doesn’t the UDTPA explicitly disavow a competition requirement? And don’t some circuits hold that competition is a Lanham Act requirement? The court reasoned that (1) this categorical test is not applicable under the UDTPA, but the multifactor/reasonable interest Lanham Act standing tests would be, and (2) there might or might not be a conflict on standing for consumers (you think?); fortunately, this case didn’t involve a consumer plaintiff.
Summary judgment for these defendants.
Thursday, September 29, 2011
Copyright and pre-1978 dissertations on microfilm
Gail Clement and Melissa Levine have written an article on the topic concluding that such dissertations were considered "published" by the relevant scholarly community. Abstract:
We investigated whether American dissertations that were deposited in university libraries or disseminated on microfilm prior to 1978 were "published" for copyright purposes. This question has direct bearing on the copyright status of these works today. In the absence of a directly relevant legal decision to clarify the matter, the authors examined how the former community of practice interpreted the law in the context of dissertation dissemination. A content analysis of written communications by members of this community indicates that both forms of dissertation dissemination were considered to be legal publication under the 1909 Copyright Act.HT Zach Schrag.
generic drug seller avoids injunction
Intendis, Inc. v. River's Edge Pharmaceuticals, LLC, 2011 WL 4442849 (D. Md.)
Intendis makes NeoBenz Wash Plus Pack, and defendants make the generic BP 7% Wash External Kit, both of which are prescription drugs. Intendis alleged that defendants make false or misleading statements about the BP wash on its product insert page and package label, and in marketing information distributed to national pharmacies and pharmacy databases. Intendis sought a preliminary injunction requiring defendants to submit supplemental information to the national pharmacy databases to correct or clarify the false or misleading statements made in their prior submissions to these databases and to post statements on their website; the court denied the motion.
The NeoBenz pack contains NeoBenz Micro Wash, a 7% benzoyl peroxide wash, and NeoBenz Micro SD, pre-filled sponge applicators with a 5.5% benzoyl peroxide cream. These are to be used in tandem to treat acne. The product insert states that the active ingredient, benzoyl peroxide, is incorporated into patented porous microspheres to "provide gradual release of active ingredient into the skin and absorb natural skin oils,” but it doesn’t disclose the specific release rate.
The BP Wash Kit contains a 7% benzoyl peroxide wash and a 5.5% benzoyl peroxide cream with sponge applicators. The product insert states that the active ingredient, benzoyl peroxide, is "incorporated into a series of microscopic concentric vesicules of oil and water .... [that] results in the release of the active ingredient into the skin over a sustained period of time." Rather than using the NeoBenz microsponge delivery system, it contains the skin conditioner Incroquat OSC, “a self-emulsifier and polymeric drug delivery system that incorporates the benzoyl peroxide into vesicules of oil and water.”
Intendis discovered the BP Wash Kit via an alert from Wolters Kluwer, a national pharmaceutical database. Wolters Kluwer, like other national pharmacy databases, classifies drugs based on: (1) active ingredient, (2) route of administration, (3) strength of active ingredient, and (4) dosage of active ingredient. The databases assign each drug a generic product identifier code ("GPI" or "GCN"). “Pharmacies rely on a drug's GPI code to make dispensing decisions and will substitute lower priced generic drugs for name-brand drugs with the same GPI unless otherwise prohibited by state law.” Pharmacies thus began to substitute the BP Wash Kit for NeoBenz prescriptions because the price of the former was significantly lower (pharmacies paid $96.47 versus 122.19 as of July 2010).
Intendis alleged a number of falsehoods: (1) the BP wash is a 7% benzoyl peroxide wash; (2) the BP Wash Kit provides sustained release of the active ingredient through the use of microscopic vesicules; (3) the BP Wash Kit contains microscopic vesicules; and (4) the BP Wash Kit has a shelf life of twenty-four months. Statements (1)-(3) are in the product insert and were separately submitted to the national pharmacy databases. The 24-month shelf life claim was in deal sheets submitted to national pharmacy chains and pharmacy database organizations to announce the product release. There were no explicit claims of equivalence or substitutability.
There’s an industry standard for gel and lotion benzoyl peroxide formulations: a gel must contain between 90% and 110% of the claimed label strength of active ingredient, while a lotion must contain between 90% and 125%. There’s no industry standard for washes and creams. Intendis had a testing company test two lots of the BP wash and cream. For the wash, one lot had between 88.0% and 90.0% of the claimed strength, and the other had between 80.1% and 80.5% of claimed label strength. For both lots of the BP cream tested, the results were between 93.8% and 95% of the strength claimed on the label. The margin of error was plus or minus 2%.
Defendants relied on the manufacturer’s tests. These tests on the wash showed results from 98.6% to 101% of label strength. In prior tests, a sample kept at room temperature had remained at 100% of label strength for twelve months, and a sample subjected to accelerated aging had decreased to 98.6% of label strength after three months. In the manufacturer’s tests of the BP cream, one lot started at 100% of label strength and remained at 100% after three months of accelerated aging and six months at room temperature. For other lots not tested by Intendis, the results were all “close, if not equal, to 100% of label strength and well within the industry standard monographs for gels and lotions.”
Dow (the tester Intendis used) calculated the shelf life of the BP wash and cream based on the idea that the shelf life expired when the active ingredient went below 90% of label strength. Using a steady rate of degradation for benzoyl peroxide, it calculated that one lot of the wash had a shelf life of less than two months and the other had an 8-month shelf life. For the cream, Dow calculated a shelf life of nine months and eleven months.
The parties also conducted their own tests of release rates. “The Franz Cell test is used to measure the in vitro permeation rate of active ingredients in solution. The test utilizes a Franz Cell apparatus that contains two distinct chambers separated by a membrane designed to represent human skin. The test solution is placed into the top chamber and measurements are taken from the bottom chamber at regular intervals to measure the amount of active ingredient that has diffused through the membrane.” Defendants’ expert’s tests showed that, on average, the BP wash released at a rate that was 15% slower than the NeoBenz wash.
Dow also conducted a Franz Cell test, but it was deemed inadmissible at the hearing for lack of proper foundation for authentication; this test was supposed to show that the BP wash released at a 50% slower rate.
Intendis had similar troubles introducing photographs that purportedly showed that, at high levels of magnification, microscopic vesicules couldn’t be seen in the BP products. Defendants submitted expert testimony that the photographs did not prove or disprove the presence of concentric vesicules of oil and water because the photos' exposure and lighting conditions rendered them inconclusive. Defendants’ expert opined that “one could infer the existence of concentric vesicules in the BP wash from the fact that it allows for extended release of the active ingredient and the fact that it contains Incroquat OSC.”
Intendis was able to show lost sales, though there’s now a third generic competitor that makes predictions about the impact of an injunction more complicated—if the BP product were enjoined, its sales might go to the new competitor instead of to River’s Edge.
In a footnote, the court explained that, though defendants initially argued that the product inserts weren’t commercial advertising or promotion, the evidence showed that the inserts were submitted to the databases as a way to advertise the BP wash kit.
Literal falsity of 7% benzoyl peroxide claim: Intendis only identified one lot with less than 90% of the claimed label strength, considering the margin of error, and the court wasn’t willing to find likely success on this record.
Sustained release/microscopic vesicules: The BP wash provided sustained release; the questions surrounded its rate and whether the release was accomplished by using microscopic vesicules. Defendants didn’t claim any particular rate or equivalence with NeoBenz’s rate. Thus there was no literal falsity as to rate. The evidence on vesicules was also insufficient; even had the photos been admitted, Intendis wouldn’t have won, because they did appear to contain at least some vesicules and because of defendants’ expert’s testimony.
Shelf life: Dow’s methodology for extrapolating shelf life was unreliable “because it was based on very limited data and incorporated assumptions that were unsubstantiated.” The FDA prefers a trend analysis “where one takes data over a period of time, takes the log of that activity, and then extrapolates over a two-year time period.” The manufacturer’s data was entitled to more weight because it used longer-term data and used an FDA-approved method of calculation. Intendis didn't successfully show falsity.
Intendis also argued that defendants failed to substantiate their establishment claims of product strength and shelf life. Defendants argued that there was no express claim that tests were conducted; to the extent their statements implied that tests were conducted, that’s only meaningful if a single test can prove truth; otherwise there’s no establishment claim. (I take the point that if it’s not clear what the tests were, then a broad range of tests might count as substantiation, but in a litigation context I have no idea what it would mean for a single test to be able to prove truth—it’s always possible to create some FUD about a particular test.)
The court rejected the establishment claim theory. First, the court said, this analysis is typically applied in comparative advertising cases. (What? “Tests prove” is a credible statement whether it’s “tests prove our product works” or “tests prove our product works better”; that’s why advertisers use it instead of “our product works.” Comparison has nothing to do with the underlying justification for the doctrine, which is that “tests prove” gives consumers a material reason to believe the underlying claim.) A defendant isn’t required to provide reliable test data for every factual statement in an ad. (True enough, but some claims necessarily imply scientific substantiation and some don’t; drug claims seem precisely the kind that fit in the former category.) Without an explicit tests prove or comparative superiority claim, there was no establishment claim.
Second, the claim failed on its merits: defendants provided test results confirming the percentage of active ingredient and shelf life. “The mere fact that Intendis conducted similar tests and reached different results is not sufficient to challenge the methodology and results provided by Defendants.”
The court also rejected Intendis’s arguments that defendants deliberately made false statements with the intent and effect of causing pharmacies to treat its BP wash as a substitute for NeoBenz, and made false claims of substitutability. There was no evidence that defendants ever claimed substitutability. (Given the modern pharmaceutical database system, can there have been any other intended result when the defendants submitted a product claimed to be the same across all four relevant attributes?) The data sheets sent to national buyers and retail chains explicitly disclaimed bioequivalence, and pharmacy databases don’t list the products as equivalents.
Comment: Is equivalence the same as substitutability? It seems not, by this description of the system, in which case I’d say there’s a necessarily implied claim of substitutability—but Intendis seems not to have proven that the substitutability claim is false. I think my reading is consistent with the court’s conclusion that “[i]t is not actionable to seek to obtain market share by manufacturing a comparable product that costs less if no false statements are made” (emphasis added).
Without likely success, there wasn’t going to be a preliminary injunction, but the court considered irreparable harm anyway. Intendis argued that, because the parties compete directly, defendants’ false advertising was likely to cause irreparable harm. Past cases applying a presumption of irreparable harm in literal falsity cases, however, predates Winter, in which the Supreme Court emphasized that a plaintiff must always show the likelihood of irreparable harm. Defendants argued that, because pharmaceutical sales are carefully tracked, it would be easy to calculate money damages, and that the entry of a third competitor would prevent Intendis’s market position from changing in any event.
Of course, Intendis couldn’t rely on the presumption of irreparable harm without showing literal falsity. Also, any lost sales could be calculated using information maintained by the national databases. Nor did Intendis submit evidence of less tangible forms of harm.
Naturally, the other factors didn’t favor Intendis either—there’s a public interest in avoiding deception, and in free competition for lower-priced alternatives, but in the end it was the absence of evidence of deception that was key.
Intendis makes NeoBenz Wash Plus Pack, and defendants make the generic BP 7% Wash External Kit, both of which are prescription drugs. Intendis alleged that defendants make false or misleading statements about the BP wash on its product insert page and package label, and in marketing information distributed to national pharmacies and pharmacy databases. Intendis sought a preliminary injunction requiring defendants to submit supplemental information to the national pharmacy databases to correct or clarify the false or misleading statements made in their prior submissions to these databases and to post statements on their website; the court denied the motion.
The NeoBenz pack contains NeoBenz Micro Wash, a 7% benzoyl peroxide wash, and NeoBenz Micro SD, pre-filled sponge applicators with a 5.5% benzoyl peroxide cream. These are to be used in tandem to treat acne. The product insert states that the active ingredient, benzoyl peroxide, is incorporated into patented porous microspheres to "provide gradual release of active ingredient into the skin and absorb natural skin oils,” but it doesn’t disclose the specific release rate.
The BP Wash Kit contains a 7% benzoyl peroxide wash and a 5.5% benzoyl peroxide cream with sponge applicators. The product insert states that the active ingredient, benzoyl peroxide, is "incorporated into a series of microscopic concentric vesicules of oil and water .... [that] results in the release of the active ingredient into the skin over a sustained period of time." Rather than using the NeoBenz microsponge delivery system, it contains the skin conditioner Incroquat OSC, “a self-emulsifier and polymeric drug delivery system that incorporates the benzoyl peroxide into vesicules of oil and water.”
Intendis discovered the BP Wash Kit via an alert from Wolters Kluwer, a national pharmaceutical database. Wolters Kluwer, like other national pharmacy databases, classifies drugs based on: (1) active ingredient, (2) route of administration, (3) strength of active ingredient, and (4) dosage of active ingredient. The databases assign each drug a generic product identifier code ("GPI" or "GCN"). “Pharmacies rely on a drug's GPI code to make dispensing decisions and will substitute lower priced generic drugs for name-brand drugs with the same GPI unless otherwise prohibited by state law.” Pharmacies thus began to substitute the BP Wash Kit for NeoBenz prescriptions because the price of the former was significantly lower (pharmacies paid $96.47 versus 122.19 as of July 2010).
Intendis alleged a number of falsehoods: (1) the BP wash is a 7% benzoyl peroxide wash; (2) the BP Wash Kit provides sustained release of the active ingredient through the use of microscopic vesicules; (3) the BP Wash Kit contains microscopic vesicules; and (4) the BP Wash Kit has a shelf life of twenty-four months. Statements (1)-(3) are in the product insert and were separately submitted to the national pharmacy databases. The 24-month shelf life claim was in deal sheets submitted to national pharmacy chains and pharmacy database organizations to announce the product release. There were no explicit claims of equivalence or substitutability.
There’s an industry standard for gel and lotion benzoyl peroxide formulations: a gel must contain between 90% and 110% of the claimed label strength of active ingredient, while a lotion must contain between 90% and 125%. There’s no industry standard for washes and creams. Intendis had a testing company test two lots of the BP wash and cream. For the wash, one lot had between 88.0% and 90.0% of the claimed strength, and the other had between 80.1% and 80.5% of claimed label strength. For both lots of the BP cream tested, the results were between 93.8% and 95% of the strength claimed on the label. The margin of error was plus or minus 2%.
Defendants relied on the manufacturer’s tests. These tests on the wash showed results from 98.6% to 101% of label strength. In prior tests, a sample kept at room temperature had remained at 100% of label strength for twelve months, and a sample subjected to accelerated aging had decreased to 98.6% of label strength after three months. In the manufacturer’s tests of the BP cream, one lot started at 100% of label strength and remained at 100% after three months of accelerated aging and six months at room temperature. For other lots not tested by Intendis, the results were all “close, if not equal, to 100% of label strength and well within the industry standard monographs for gels and lotions.”
Dow (the tester Intendis used) calculated the shelf life of the BP wash and cream based on the idea that the shelf life expired when the active ingredient went below 90% of label strength. Using a steady rate of degradation for benzoyl peroxide, it calculated that one lot of the wash had a shelf life of less than two months and the other had an 8-month shelf life. For the cream, Dow calculated a shelf life of nine months and eleven months.
The parties also conducted their own tests of release rates. “The Franz Cell test is used to measure the in vitro permeation rate of active ingredients in solution. The test utilizes a Franz Cell apparatus that contains two distinct chambers separated by a membrane designed to represent human skin. The test solution is placed into the top chamber and measurements are taken from the bottom chamber at regular intervals to measure the amount of active ingredient that has diffused through the membrane.” Defendants’ expert’s tests showed that, on average, the BP wash released at a rate that was 15% slower than the NeoBenz wash.
Dow also conducted a Franz Cell test, but it was deemed inadmissible at the hearing for lack of proper foundation for authentication; this test was supposed to show that the BP wash released at a 50% slower rate.
Intendis had similar troubles introducing photographs that purportedly showed that, at high levels of magnification, microscopic vesicules couldn’t be seen in the BP products. Defendants submitted expert testimony that the photographs did not prove or disprove the presence of concentric vesicules of oil and water because the photos' exposure and lighting conditions rendered them inconclusive. Defendants’ expert opined that “one could infer the existence of concentric vesicules in the BP wash from the fact that it allows for extended release of the active ingredient and the fact that it contains Incroquat OSC.”
Intendis was able to show lost sales, though there’s now a third generic competitor that makes predictions about the impact of an injunction more complicated—if the BP product were enjoined, its sales might go to the new competitor instead of to River’s Edge.
In a footnote, the court explained that, though defendants initially argued that the product inserts weren’t commercial advertising or promotion, the evidence showed that the inserts were submitted to the databases as a way to advertise the BP wash kit.
Literal falsity of 7% benzoyl peroxide claim: Intendis only identified one lot with less than 90% of the claimed label strength, considering the margin of error, and the court wasn’t willing to find likely success on this record.
Sustained release/microscopic vesicules: The BP wash provided sustained release; the questions surrounded its rate and whether the release was accomplished by using microscopic vesicules. Defendants didn’t claim any particular rate or equivalence with NeoBenz’s rate. Thus there was no literal falsity as to rate. The evidence on vesicules was also insufficient; even had the photos been admitted, Intendis wouldn’t have won, because they did appear to contain at least some vesicules and because of defendants’ expert’s testimony.
Shelf life: Dow’s methodology for extrapolating shelf life was unreliable “because it was based on very limited data and incorporated assumptions that were unsubstantiated.” The FDA prefers a trend analysis “where one takes data over a period of time, takes the log of that activity, and then extrapolates over a two-year time period.” The manufacturer’s data was entitled to more weight because it used longer-term data and used an FDA-approved method of calculation. Intendis didn't successfully show falsity.
Intendis also argued that defendants failed to substantiate their establishment claims of product strength and shelf life. Defendants argued that there was no express claim that tests were conducted; to the extent their statements implied that tests were conducted, that’s only meaningful if a single test can prove truth; otherwise there’s no establishment claim. (I take the point that if it’s not clear what the tests were, then a broad range of tests might count as substantiation, but in a litigation context I have no idea what it would mean for a single test to be able to prove truth—it’s always possible to create some FUD about a particular test.)
The court rejected the establishment claim theory. First, the court said, this analysis is typically applied in comparative advertising cases. (What? “Tests prove” is a credible statement whether it’s “tests prove our product works” or “tests prove our product works better”; that’s why advertisers use it instead of “our product works.” Comparison has nothing to do with the underlying justification for the doctrine, which is that “tests prove” gives consumers a material reason to believe the underlying claim.) A defendant isn’t required to provide reliable test data for every factual statement in an ad. (True enough, but some claims necessarily imply scientific substantiation and some don’t; drug claims seem precisely the kind that fit in the former category.) Without an explicit tests prove or comparative superiority claim, there was no establishment claim.
Second, the claim failed on its merits: defendants provided test results confirming the percentage of active ingredient and shelf life. “The mere fact that Intendis conducted similar tests and reached different results is not sufficient to challenge the methodology and results provided by Defendants.”
The court also rejected Intendis’s arguments that defendants deliberately made false statements with the intent and effect of causing pharmacies to treat its BP wash as a substitute for NeoBenz, and made false claims of substitutability. There was no evidence that defendants ever claimed substitutability. (Given the modern pharmaceutical database system, can there have been any other intended result when the defendants submitted a product claimed to be the same across all four relevant attributes?) The data sheets sent to national buyers and retail chains explicitly disclaimed bioequivalence, and pharmacy databases don’t list the products as equivalents.
Comment: Is equivalence the same as substitutability? It seems not, by this description of the system, in which case I’d say there’s a necessarily implied claim of substitutability—but Intendis seems not to have proven that the substitutability claim is false. I think my reading is consistent with the court’s conclusion that “[i]t is not actionable to seek to obtain market share by manufacturing a comparable product that costs less if no false statements are made” (emphasis added).
Without likely success, there wasn’t going to be a preliminary injunction, but the court considered irreparable harm anyway. Intendis argued that, because the parties compete directly, defendants’ false advertising was likely to cause irreparable harm. Past cases applying a presumption of irreparable harm in literal falsity cases, however, predates Winter, in which the Supreme Court emphasized that a plaintiff must always show the likelihood of irreparable harm. Defendants argued that, because pharmaceutical sales are carefully tracked, it would be easy to calculate money damages, and that the entry of a third competitor would prevent Intendis’s market position from changing in any event.
Of course, Intendis couldn’t rely on the presumption of irreparable harm without showing literal falsity. Also, any lost sales could be calculated using information maintained by the national databases. Nor did Intendis submit evidence of less tangible forms of harm.
Naturally, the other factors didn’t favor Intendis either—there’s a public interest in avoiding deception, and in free competition for lower-priced alternatives, but in the end it was the absence of evidence of deception that was key.
No cause of action against purchaser under state consumer protection law
Benz Farm, LLP v. Cavendish Farms, Inc., --- N.W.2d ----, 2011 WL 4089954 (N.D.)
Benz sued Cavendish for breach of contract and violation of the North Dakota Unlawful Sales or Advertising Practices Act. Benz sells potatoes and Cavendish processes potatoes. The parties contracted for Benz to provide and Cavendish to buy 263,000 hundredweight of potatoes, to be stored after harvest by Benz until Cavendish directed they be delivered to its processing plant. They also entered into a written credit agreement for Cavendish to provide financing for Benz. There were quality provisions in the agreement.
Problems meeting the quality standards developed, and Benz sued, alleging among other things that Cavendish had, among other things, agreed to accept deliveries on certain dates, but failed to do so sufficiently, causing inefficiencies and additional expenses for Benz. The Unlawful Sales or Advertising Practices Act prohibits the use “by any person of any deceptive act or practice, fraud, false pretense, false promise, or misrepresentation, with the intent that others rely thereon in connection with the sale or advertisement of any merchandise,” allowing private lawsuits by any person against any person “who has acquired any moneys or property by means of any practice declared to be unlawful in this chapter.”
Here, Benz was the seller, and the court found that there was no statutory basis for holding purchasers liable under the Act. The act bars deception “in connection with the sale” of merchandise, and sale is defined as “any sale, offer for sale, or attempt to sell any merchandise for any consideration.” It doesn’t mention a purchase, offer to purchase, or attempt to purchase.
Because of provisions in the parties’ contracts, Benz was also required to pay Cavendish’s attorneys’ fees.
Benz sued Cavendish for breach of contract and violation of the North Dakota Unlawful Sales or Advertising Practices Act. Benz sells potatoes and Cavendish processes potatoes. The parties contracted for Benz to provide and Cavendish to buy 263,000 hundredweight of potatoes, to be stored after harvest by Benz until Cavendish directed they be delivered to its processing plant. They also entered into a written credit agreement for Cavendish to provide financing for Benz. There were quality provisions in the agreement.
Problems meeting the quality standards developed, and Benz sued, alleging among other things that Cavendish had, among other things, agreed to accept deliveries on certain dates, but failed to do so sufficiently, causing inefficiencies and additional expenses for Benz. The Unlawful Sales or Advertising Practices Act prohibits the use “by any person of any deceptive act or practice, fraud, false pretense, false promise, or misrepresentation, with the intent that others rely thereon in connection with the sale or advertisement of any merchandise,” allowing private lawsuits by any person against any person “who has acquired any moneys or property by means of any practice declared to be unlawful in this chapter.”
Here, Benz was the seller, and the court found that there was no statutory basis for holding purchasers liable under the Act. The act bars deception “in connection with the sale” of merchandise, and sale is defined as “any sale, offer for sale, or attempt to sell any merchandise for any consideration.” It doesn’t mention a purchase, offer to purchase, or attempt to purchase.
Because of provisions in the parties’ contracts, Benz was also required to pay Cavendish’s attorneys’ fees.
Wednesday, September 28, 2011
Abstract claim of lost goodwill isn't irreparable injury
AFL Telecommunications LLC v. Surpluseq.com, Inc., Tech Sales, LLC2011 WL 4102214 (D. Ariz.)
Same court, same gray market issue, different defendant, somewhat different result.
To recap, AFL is the exclusive authorized seller of Fujikura fusion splicers in North America. Defendants sell grey market Fujikura splicers.
Unfair competition: The key is whether there is likely confusion, which may occur if the products are materially different. In grey market cases, “the threshold of materiality must be kept low enough to take account of potentially confusing differences—differences that are not blatant enough to make it obvious to the average consumer that the origin of the product differs from his or her expectations.” Societe Des Produits Nestle, S.A., v. Casa Helvetia, Inc., 982 F.2d 633, 641 (1st Cir. 1992). AFL sufficiently alleged that defendants modified the splicers by changing their serial numbers and replacing memory chips in a way that damaged the products. These are material changes, according to AFL, and therefore AFL alleged facts sufficient to create a presumption of confusion (though the court dismissed its common-law unfair competition claim for failure to explain which theory of unfair competition it was using).
False advertising: The statements alleged to be false here were disseminated through defendants’ websites and blog. Defendants argued that their blog was informational, not commercial speech, but AFL alleged that the statements were published on sales sites as well, so whether or not this was true AFL had still stated a claim for false advertising.
Unlike the previous court, this court also found that AFL stated a claim for copyright infringement by pleading that it was the exclusive licensee of the software in the splicers and that defendants were distributing the splicers. Under Omega v. Costco, the first sale defense is limited to domestically made copies, and thus unavailable to defendants. Nor was it barred by a misuse defense (at least on the pleadings).
None of this guaranteed AFL a preliminary injunction. Irreparable harm is no longer presumed upon a showing of likely success on the merits. AFL argued that injury to reputation and goodwill, along with threatened loss of customers, was irreparable harm. But speculative injury isn’t irreparable injury. (This is a looming question: courts that say that they’re applying eBay, but then say that lost goodwill is irreparable injury without explaining what goodwill is, are in my opinion not making sense.) Here, AFL had no factual evidence of injury, and therefore no preliminary injunction was appropriate.
Same court, same gray market issue, different defendant, somewhat different result.
To recap, AFL is the exclusive authorized seller of Fujikura fusion splicers in North America. Defendants sell grey market Fujikura splicers.
Unfair competition: The key is whether there is likely confusion, which may occur if the products are materially different. In grey market cases, “the threshold of materiality must be kept low enough to take account of potentially confusing differences—differences that are not blatant enough to make it obvious to the average consumer that the origin of the product differs from his or her expectations.” Societe Des Produits Nestle, S.A., v. Casa Helvetia, Inc., 982 F.2d 633, 641 (1st Cir. 1992). AFL sufficiently alleged that defendants modified the splicers by changing their serial numbers and replacing memory chips in a way that damaged the products. These are material changes, according to AFL, and therefore AFL alleged facts sufficient to create a presumption of confusion (though the court dismissed its common-law unfair competition claim for failure to explain which theory of unfair competition it was using).
False advertising: The statements alleged to be false here were disseminated through defendants’ websites and blog. Defendants argued that their blog was informational, not commercial speech, but AFL alleged that the statements were published on sales sites as well, so whether or not this was true AFL had still stated a claim for false advertising.
Unlike the previous court, this court also found that AFL stated a claim for copyright infringement by pleading that it was the exclusive licensee of the software in the splicers and that defendants were distributing the splicers. Under Omega v. Costco, the first sale defense is limited to domestically made copies, and thus unavailable to defendants. Nor was it barred by a misuse defense (at least on the pleadings).
None of this guaranteed AFL a preliminary injunction. Irreparable harm is no longer presumed upon a showing of likely success on the merits. AFL argued that injury to reputation and goodwill, along with threatened loss of customers, was irreparable harm. But speculative injury isn’t irreparable injury. (This is a looming question: courts that say that they’re applying eBay, but then say that lost goodwill is irreparable injury without explaining what goodwill is, are in my opinion not making sense.) Here, AFL had no factual evidence of injury, and therefore no preliminary injunction was appropriate.
Eavesdrop on a Lanham Act Oral Argument
PDF of the invitation here. At this teleseminar, October 11, 2011, 12:30-2:00 pm eastern, sponsored by the Private Advertising Litigation subcommittee of the ABA's Antitrust Section, three experienced Lanham Act litigators will present a mock argument. As part of the mock case, the attorneys will debate the admissibility of a survey where the advertising claim is literally truthful — and arguably “unambiguous.” The defendant will rely on the recent “Havana Club” case, Pernod Ricard USA v. Bacardi (3d Cir. August 2011), which held that “a factually accurate and facially unambiguous statement is not open to attack through a consumer survey.”
litigators:
Steve Zalesin, Patterson Belknap Webb & Tyler LLP
Randy Miller, Arnold & Porter LLP
judge:
Randi Singer, Weil Gotshal & Manges LLP
I will moderate.
Sign up at www.LanhamActEvent.com.
litigators:
Steve Zalesin, Patterson Belknap Webb & Tyler LLP
Randy Miller, Arnold & Porter LLP
judge:
Randi Singer, Weil Gotshal & Manges LLP
I will moderate.
Sign up at www.LanhamActEvent.com.
functionally worthless insurance might be actionable
Servedio v. State Farm Ins. Co., 2011 WL 4373923 (E.D.N.Y.)
Servedio, putative class representative, claimed that State Farm’s offers of additional Personal Injury Protection ("PIP") coverage constituted a deceptive trade practice and false advertising in violation of sections 349 and 350 of the New York General Business Law, as well as fraud under the common law. State Farm moved to dismiss because its policy language for its additional PIP coverage is mandated by the NY Department of Insurance and therefore uniform in the industry.
The court held that the DOI’s approval of the language didn’t preclude the statutory claims as a matter of law, though it dismissed the fraud claim.
Servedio had State Farm policies on three cars. As required by NY law, each policy provided PIP (“No Fault”) coverage, under which State Farm promised to reimburse the "basic economic loss sustained by an eligible injured person on account of personal injuries caused by an accident arising out of the use or operation of a motor vehicle." "Basic economic loss" was defined as (1) medical expenses, (2) 80% of lost wages, up to $2,000 per month for up to three years, and (3) other "reasonable and necessary" expenses of up to $25 per day for up to one year; the total benefit payable was $50,000. An eligible injured person was the named insured, his/her relatives, and any person injured by the insured car in NY or any NY resident injured by the insured car outside the state.
Each policy also had an optional PIP benefit under which State Farm promised to pay "additional first-party benefits to reimburse for extended economic loss sustained by an eligible injured person." The definition of "eligible injured person" was expanded to include any passenger (regardless of residence or accident location) in any vehicle operated by the insured or his or her relatives. "Extended economic loss" was defined as the difference between basic economic loss under the mandatory PIP provision and basic economic loss as "recomputed in accordance with the time and dollar limits set out in the schedule." The schedule, however, provided exactly the same time and dollar limits as mandatory PIP coverage. Servedio paid an additional premium for this optional coverage: $1.34 on the first policy, $0.90 on the second and $1.04 on the third. (State Farm also sold additional coverage with actually higher limits.)
Servedio was involved in a car accident, as a result of which he made a claim; State Farm refused to pay more after his $50,000 in mandatory PIP benefits were exhausted. He sued.
State Farm argued that the extra PIP it sold was fine because it enhanced coverage through the broader definition of “eligible insured person.”
The court questioned whether CAFA jurisdiction was present because of the small individual claims for premium refunds. However, State Farm “commendably” acknowledged that it had collected over $4.1 million in premiums for the type of coverage Servedio challenged over the six-year limitations period applicable to his fraud claim. Given that his statutory claims could produce treble damages and attorneys’ fees, as well as his claim for punitive damages, the court was satisfied that Servedio established a “reasonable probability” of seeking more than $5 million, as required for CAFA jurisdiction.
To show a violation of § 349, a plaintiff must show (1) a consumer-oriented act or practice that was (2) misleading in a material way, (3) causing the plaintiff to suffer injury as a result.
State Farm argued that private contract disputes unique to the parties, such as disputes over the scope of insurance coverage, don’t fall within the statute. But this was not a breach of contract claim. Servedio argued that the coverage he paid for was illusory, which was not a private contract dispute but a broader challenge to the way State Farm offers coverage to all its insureds. This was consumer-oriented within the meaning of the statute.
A practice is materially misleading if it’s likely to mislead a reasonable consumer acting reasonably under the circumstances, a far broader standard than common-law fraud. State Farm argued that the terms of its coverage were fully disclosed and defined in terms required by the DOI. The court disagreed that the policy fully disclosed the nature of the coverage. The language implied that the additional PIP option would expand the mandatory coverage both by broadening the definition of “eligible insured” and by providing reimbursement for “extended,” as opposed to “basic,” economic loss. At the level Servedio bought, though, “extended” and “basic” were equal, “hardly an intuitive understanding of the word extended.”
Moreover, the DOI did not require State Farm to do this. “It mandates the endorsement language to be used, but does not purport to assign the numerical limits to the coverage.” Indeed, DOI’s Office of General Counsel issued a 2008 opinion letter stating that an additional PIP endorsement "must confer an additional benefit on the insured by altering the time and/or dollar limits available under [mandatory] PIP." “Though not binding, the letter represents DOI's official position, and accords with the Court's view that State Farm's Q1 coverage--which does not alter any of those limits--is likely to mislead reasonable consumers as to what they are paying for.”
Servedio’s explicit allegation of injury was just that—he was injured—and was too conclusory. However, rather than going through the rigamarole of granting leave to amend, the court interpolated into the complaint the alleged injury that had become clear. The additional premium paid as a result of the allegedly deceptive practices was distinct from breach of contract damages and was a cognizable injury under §349.
The common-law fraud claim, however, failed because a fraud claim must rest on representations extraneous to the parties’ agreement; a party relying on representations intrinsic to an agreement is limited to a breach of contract claim. The description of the additional PIP coverage was intrinsic to the policy.
Servedio, putative class representative, claimed that State Farm’s offers of additional Personal Injury Protection ("PIP") coverage constituted a deceptive trade practice and false advertising in violation of sections 349 and 350 of the New York General Business Law, as well as fraud under the common law. State Farm moved to dismiss because its policy language for its additional PIP coverage is mandated by the NY Department of Insurance and therefore uniform in the industry.
The court held that the DOI’s approval of the language didn’t preclude the statutory claims as a matter of law, though it dismissed the fraud claim.
Servedio had State Farm policies on three cars. As required by NY law, each policy provided PIP (“No Fault”) coverage, under which State Farm promised to reimburse the "basic economic loss sustained by an eligible injured person on account of personal injuries caused by an accident arising out of the use or operation of a motor vehicle." "Basic economic loss" was defined as (1) medical expenses, (2) 80% of lost wages, up to $2,000 per month for up to three years, and (3) other "reasonable and necessary" expenses of up to $25 per day for up to one year; the total benefit payable was $50,000. An eligible injured person was the named insured, his/her relatives, and any person injured by the insured car in NY or any NY resident injured by the insured car outside the state.
Each policy also had an optional PIP benefit under which State Farm promised to pay "additional first-party benefits to reimburse for extended economic loss sustained by an eligible injured person." The definition of "eligible injured person" was expanded to include any passenger (regardless of residence or accident location) in any vehicle operated by the insured or his or her relatives. "Extended economic loss" was defined as the difference between basic economic loss under the mandatory PIP provision and basic economic loss as "recomputed in accordance with the time and dollar limits set out in the schedule." The schedule, however, provided exactly the same time and dollar limits as mandatory PIP coverage. Servedio paid an additional premium for this optional coverage: $1.34 on the first policy, $0.90 on the second and $1.04 on the third. (State Farm also sold additional coverage with actually higher limits.)
Servedio was involved in a car accident, as a result of which he made a claim; State Farm refused to pay more after his $50,000 in mandatory PIP benefits were exhausted. He sued.
State Farm argued that the extra PIP it sold was fine because it enhanced coverage through the broader definition of “eligible insured person.”
The court questioned whether CAFA jurisdiction was present because of the small individual claims for premium refunds. However, State Farm “commendably” acknowledged that it had collected over $4.1 million in premiums for the type of coverage Servedio challenged over the six-year limitations period applicable to his fraud claim. Given that his statutory claims could produce treble damages and attorneys’ fees, as well as his claim for punitive damages, the court was satisfied that Servedio established a “reasonable probability” of seeking more than $5 million, as required for CAFA jurisdiction.
To show a violation of § 349, a plaintiff must show (1) a consumer-oriented act or practice that was (2) misleading in a material way, (3) causing the plaintiff to suffer injury as a result.
State Farm argued that private contract disputes unique to the parties, such as disputes over the scope of insurance coverage, don’t fall within the statute. But this was not a breach of contract claim. Servedio argued that the coverage he paid for was illusory, which was not a private contract dispute but a broader challenge to the way State Farm offers coverage to all its insureds. This was consumer-oriented within the meaning of the statute.
A practice is materially misleading if it’s likely to mislead a reasonable consumer acting reasonably under the circumstances, a far broader standard than common-law fraud. State Farm argued that the terms of its coverage were fully disclosed and defined in terms required by the DOI. The court disagreed that the policy fully disclosed the nature of the coverage. The language implied that the additional PIP option would expand the mandatory coverage both by broadening the definition of “eligible insured” and by providing reimbursement for “extended,” as opposed to “basic,” economic loss. At the level Servedio bought, though, “extended” and “basic” were equal, “hardly an intuitive understanding of the word extended.”
Moreover, the DOI did not require State Farm to do this. “It mandates the endorsement language to be used, but does not purport to assign the numerical limits to the coverage.” Indeed, DOI’s Office of General Counsel issued a 2008 opinion letter stating that an additional PIP endorsement "must confer an additional benefit on the insured by altering the time and/or dollar limits available under [mandatory] PIP." “Though not binding, the letter represents DOI's official position, and accords with the Court's view that State Farm's Q1 coverage--which does not alter any of those limits--is likely to mislead reasonable consumers as to what they are paying for.”
Servedio’s explicit allegation of injury was just that—he was injured—and was too conclusory. However, rather than going through the rigamarole of granting leave to amend, the court interpolated into the complaint the alleged injury that had become clear. The additional premium paid as a result of the allegedly deceptive practices was distinct from breach of contract damages and was a cognizable injury under §349.
The common-law fraud claim, however, failed because a fraud claim must rest on representations extraneous to the parties’ agreement; a party relying on representations intrinsic to an agreement is limited to a breach of contract claim. The description of the additional PIP coverage was intrinsic to the policy.
Tuesday, September 27, 2011
New book review by me
Making and Unmaking Intellectual Property: Creative Production in Legal and Cultural Perspective, edited by Mario Biagioli, Peter Jaszi, and Martha Woodmansee, 2 I.P.L. BOOK REV. 1 (2011).
Also check out the rest of the volume of the I.P. Law Book Review.
Securities law and the contraction of standing
As I've mentioned, a friend of mine maintains that the general contraction of standing is a contagion spreading out from securities law, now affecting other areas of the law such as consumer protection class actions.
Short background: Lehman Brothers issued numerous different mortgage backed securities in a short period of time, all of which essentially had the same basic misrepresentations about the quality of the securities. The court held that the named plaintiffs only had standing to bring claims for the securities they had purchased themselves, and dismissed claims pertaining to the other securities. These are two amicus briefs focused on the standing issue.
Presumption against finding literal falsity defeats summary judgment
K & N Engineering, Inc. v. Spectre Performance, 2011 WL 4387094 (C.D. Cal.)
There were a lot of evidentiary disputes in this case, which I will ignore. K&N sued Spectre and Spectre counterclaimed for false advertising/unfair competition under the Lanham Act and California state law. The parties compete to sell automotive air intake products, including air filters that replace OEM filters and air intake kits that replace the entire factory-installed air path to the engine.
The parties’ systems and filters are designed to reduce the air flow restriction caused by OEM air filters, thereby potentially increasing the engine's power. Air flow is generally measured in cubic feet per minute ("CFM"), while engine power is typically measured in horsepower ("HP"). The air flow restriction caused by an air filter creates a pressure differential in the system. To compare air filter products, therefore, one must compare the air flow at the same pressure drop point (and measure it in the same way).
Air flow. Since 2002, K&N’s air filter packaging has included two bar graphs, each comparing a "K & N Washable Reusable Air Filter" to an equivalent "Average Disposable Aftermarket Air Filter." The packaging says “Dust-free air flow test performed on laboratory equipment. These charts are examples of individual filters. Results will vary depending on part number and vehicle. Complete test protocol and results available at www.knfilters.com." The first chart is for a "Round Filter," No. E-1500, and reports an air flow of 881 CFM for K & N's filter, compared to 545 CFM for the average aftermarket filter. The second chart is for a "Panel Filter," No. 33-2042, and reports an air flow of 441 CFM for K & N's filter, compared to 319 CFM for the average aftermarket filter. The bar graph depicts the results of June 2001 (though the average filter got 548.4 CFM) and April 2002 tests, respectively.
K&N’s expert opined that K&N’s testing protocol, which K&N carried out itself, reliably and accurately tests air flow rate. K&N won summary judgment on Spectre’s contention that its “tests prove” air flow claims were false: the only evidence of testing reliability before the court was from K&N’s expert who supported the reliability and accuracy of K&N’s test protocol.
Horsepower. K&N and its competitors, including Spectre, use chassis dynomometer ("dyno") tests to evaluate product performance. This requires controlling variables that can affect test results, including air intake temperature, under-hood temperature, oil temperature, engine condition, use of shop fans, and vehicle tie-down tension. There’s no government mandated or industry standard dyno testing method, but K&N has standardized its own protocol.
K&N has performed thousands of dyno tests since 1997, including more than 700 comparisons on more than 500 vehicles showing increased horsepower from replacing an OEM air intake with a K&N air intake. K&N doesn’t have dyno test results for every intage and vehicle combination, but for most of its systems it publishes a comparison graph on its website. The advertised horsepower increases are non-specific and will necessarily vary in practice.
In 2005, K&N ran an ad promising "12 more horsepower to the wheels on a 2004 Subaru WRX Sti guaranteed," followed by the question "Can we guarantee this?--Legal," and the response "Dyno tests prove it!--D.V." Other ads used the template "[X] more horsepower on a [specific vehicle] guaranteed." Other K&N ads promised, "Whether you drive a Forester XT, Impreza WRX STi, or Legacy, [or other listed vehicles] K & N's website now allows you to get the exact guaranteed wheel horsepower numbers for your [vehicle]." There were other similar ads.
In 2007, another ad had the large-font claim "53 More Horsepower!;" in substantially smaller font under the picture, it continued, "The GT500 is unique and so is the 53HP gain our High-Flow Intake System achieved. We can't offer 53HP for every vehicle, but we do guarantee our intake systems will provide an increase in horsepower. Visit knfilters.com to see the horsepower increase for your vehicle." Other ads had similar layout and statements. Many ads had a chart showing a horsepower increase compared to an OEM intake, out to two decimal places. (In one instance, K&N ran an ad claiming results for a 2009 Dodge Challenger 6.1L that were actually from a 2005 Dodge Magnum RT 5.7L. However, K&N had tested a 2008 Dodge Challenger 6.1L, which was functionally identical to the 2009 version, and obtained greater horsepower gains than advertised.)
K&N admitted that horsepower gains would vary, but contended that replacing an OEM intake with a K&N intake in a properly tuned vehicle in good condition would result in at least the claimed gains. The court found that it was disputed whether the later “guaranteed horsepower” ads guaranteed the specific horsepower advertised or merely guaranteed that some horsepower would be added: the ads were reasonably susceptible to multiple interpretations. However, the earlier ads using claims of the form "[X] more horsepower on a [specific vehicle] guaranteed" did promise a specific horsepower increase. (This distinction doesn’t pass the smell test for me: I don’t see the difference in the message a reasonable consumer would take away from the later ads.)
Spectre argued that the ads were literally false because the horsepower increase in the ads couldn’t be achieved by all consumers. In U-Haul International, Inc. v. Jartran, Inc., 522 F.Supp. 1238 (D.Ariz. 1981), the court found that a guarantee of "10 [miles per gallon] or more" was "actually false" because it was "clear that not all [of the defendant's] trucks will obtain 10 miles per gallon of fuel, regardless of use or method of operation, and in no event would this mileage be realized when towing [the defendant's] trailer behind [one of the defendant's] truck[s]." However, the court found U-Haul inapposite because it was decided on a motion for a preliminary injunction, not a motion for summary judgment, which requires that there be only one reasonable conclusion in favor of the party making the motion. More importantly, the court believed that recent case law counseled in favor of giving advertisers leeway, “at least in the absence of a clear intent to deceive or substantial consumer confusion,” and thus avoiding findings of literal falsity.
In addition (and what the court should have relied on instead of giving advertisers a free pass in general), there was no evidence that the test results here were false or that a consumer would gain less horsepower than advertised; the only evidence was that K&N admitted that horsepower gains could “vary,” including being less than advertised. This wasn’t enough: a reasonable jury could conclude that K&N's earlier horsepower advertising was not literally false because it was based on sufficiently reliable tests. There was also no necessary implication that every purchaser would receive the “measured, verified, and guaranteed” horsepower increases, because that language appeared only in the 2007 ads and the court wouldn’t impute it to other ads. However, a reasonable jury could also find literal falsity for both the earlier and the later ads, and thus K&N’s cross-motion on these claims was also denied.
CARB. California mandates that air intake systems are not highway-legal unless the California Air Resources Board ("CARB") has issued an Executive Order for that particular application. As a result, sellers advertising air intake systems in California for which there is no Executive Order must include a disclaimer "to give reasonable notice of [the] limitation on the sale or use of" the air intake system. K&N obtained various Executive Orders exempting specific K&N intake applications; some intakes are exempt or non-exempt depending on particular applications. K&N’s website and catalogs identify each application in which a particular air intake system may be used and whether there is an Executive Order from CARB for each application. Before 2010, K&N didn’t use CARB disclaimers on the outside of its intake packaging, only installation instructions inside the packages.
Spectre’s UCL claim was that it was unlawful (and thus actionable under California Business & Professions code section 17200) for K&N to fail to include disclosures on its product packaging, since state law prohibits any entity from “advertis[ing] in California any device, apparatus, or mechanism which alters or modifies the original design or performance of any required motor vehicle pollution control device or system and not exempted from Vehicle Code section 27156 unless each advertisement contains a legally adequate disclaimer ….” The relevant section of law defines "advertise" and "advertisement" to include "any notice, announcement, information, publication, catalog, listing for sale, or other statement concerning a product or service communicated to the public for the purpose of furthering the sale of the product or service." So, was packaging a statement made "for the purpose of furthering the sale of the product”?
K&N argued that the systems weren’t sold in regular consumer packaging and contain minimal information—not the advertised horsepower increase and not even the vehicles for which the intake system is designed. However, Spectre pointed out that the packaging did include the phrases "Guaranteed Horsepower!" and "The World's Best Air Filter." The court found a factual dispute about whether the packages were designed for consumers to see or use as a basis for a purchasing decision, making summary judgment on that ground inappropriate.
However, injunctive relief—the only kind available under the UCL--was inappropriate because K&N changed the packaging in 2010 to include the disclaimers, so the UCL claim was dismissed. The court also held that simple omission couldn’t ground a Lanham Act claim in the absence of something else, such as a negative comparison omitting information that would weaken a superiority claim or a failure to designate a product as foreign-made, creating a false designation of origin. Thus, the Lanham Act claim against the CARB omissions was also dismissed.
Fuel economy. K&N sells its product through distributors and retail customers, including AutoAnything.com, which claims that K&N products will increase fuel economy. K&N’s research indicates that some consumers choose filters based on perceived fuel economy.
The parties also disputed whether K&N was responsible for AutoAnything’s fuel economy claims. Spectre argued that K&N exercised sufficient control because it would pre-approve select AutoAnything advertisements, and could prevent the advertisements' publication by ending its cooperative advertising policy of reimbursing AutoAnything for published advertisements. This was enough to create a disputed issue of material fact over whether K&N was at least contributorily liable, which can happen if there’s direct control and monitoring of the instrumentality used by a third party to violate the Lanham Act. (Note that given current standing doctrine, Spectre might not be able to make a direct claim against AutoAnything, though in the Ninth Circuit standing goes a bit differently than in other circuits. If Spectre lacked standing, then secondary liability reasoning might be inappropriate, though perhaps K&N is still in some sort of agency relationship with AutoAnything sufficient to make it responsible for the ads depending on the actual facts.)
There were a lot of evidentiary disputes in this case, which I will ignore. K&N sued Spectre and Spectre counterclaimed for false advertising/unfair competition under the Lanham Act and California state law. The parties compete to sell automotive air intake products, including air filters that replace OEM filters and air intake kits that replace the entire factory-installed air path to the engine.
The parties’ systems and filters are designed to reduce the air flow restriction caused by OEM air filters, thereby potentially increasing the engine's power. Air flow is generally measured in cubic feet per minute ("CFM"), while engine power is typically measured in horsepower ("HP"). The air flow restriction caused by an air filter creates a pressure differential in the system. To compare air filter products, therefore, one must compare the air flow at the same pressure drop point (and measure it in the same way).
Air flow. Since 2002, K&N’s air filter packaging has included two bar graphs, each comparing a "K & N Washable Reusable Air Filter" to an equivalent "Average Disposable Aftermarket Air Filter." The packaging says “Dust-free air flow test performed on laboratory equipment. These charts are examples of individual filters. Results will vary depending on part number and vehicle. Complete test protocol and results available at www.knfilters.com." The first chart is for a "Round Filter," No. E-1500, and reports an air flow of 881 CFM for K & N's filter, compared to 545 CFM for the average aftermarket filter. The second chart is for a "Panel Filter," No. 33-2042, and reports an air flow of 441 CFM for K & N's filter, compared to 319 CFM for the average aftermarket filter. The bar graph depicts the results of June 2001 (though the average filter got 548.4 CFM) and April 2002 tests, respectively.
K&N’s expert opined that K&N’s testing protocol, which K&N carried out itself, reliably and accurately tests air flow rate. K&N won summary judgment on Spectre’s contention that its “tests prove” air flow claims were false: the only evidence of testing reliability before the court was from K&N’s expert who supported the reliability and accuracy of K&N’s test protocol.
Horsepower. K&N and its competitors, including Spectre, use chassis dynomometer ("dyno") tests to evaluate product performance. This requires controlling variables that can affect test results, including air intake temperature, under-hood temperature, oil temperature, engine condition, use of shop fans, and vehicle tie-down tension. There’s no government mandated or industry standard dyno testing method, but K&N has standardized its own protocol.
K&N has performed thousands of dyno tests since 1997, including more than 700 comparisons on more than 500 vehicles showing increased horsepower from replacing an OEM air intake with a K&N air intake. K&N doesn’t have dyno test results for every intage and vehicle combination, but for most of its systems it publishes a comparison graph on its website. The advertised horsepower increases are non-specific and will necessarily vary in practice.
In 2005, K&N ran an ad promising "12 more horsepower to the wheels on a 2004 Subaru WRX Sti guaranteed," followed by the question "Can we guarantee this?--Legal," and the response "Dyno tests prove it!--D.V." Other ads used the template "[X] more horsepower on a [specific vehicle] guaranteed." Other K&N ads promised, "Whether you drive a Forester XT, Impreza WRX STi, or Legacy, [or other listed vehicles] K & N's website now allows you to get the exact guaranteed wheel horsepower numbers for your [vehicle]." There were other similar ads.
In 2007, another ad had the large-font claim "53 More Horsepower!;" in substantially smaller font under the picture, it continued, "The GT500 is unique and so is the 53HP gain our High-Flow Intake System achieved. We can't offer 53HP for every vehicle, but we do guarantee our intake systems will provide an increase in horsepower. Visit knfilters.com to see the horsepower increase for your vehicle." Other ads had similar layout and statements. Many ads had a chart showing a horsepower increase compared to an OEM intake, out to two decimal places. (In one instance, K&N ran an ad claiming results for a 2009 Dodge Challenger 6.1L that were actually from a 2005 Dodge Magnum RT 5.7L. However, K&N had tested a 2008 Dodge Challenger 6.1L, which was functionally identical to the 2009 version, and obtained greater horsepower gains than advertised.)
K&N admitted that horsepower gains would vary, but contended that replacing an OEM intake with a K&N intake in a properly tuned vehicle in good condition would result in at least the claimed gains. The court found that it was disputed whether the later “guaranteed horsepower” ads guaranteed the specific horsepower advertised or merely guaranteed that some horsepower would be added: the ads were reasonably susceptible to multiple interpretations. However, the earlier ads using claims of the form "[X] more horsepower on a [specific vehicle] guaranteed" did promise a specific horsepower increase. (This distinction doesn’t pass the smell test for me: I don’t see the difference in the message a reasonable consumer would take away from the later ads.)
Spectre argued that the ads were literally false because the horsepower increase in the ads couldn’t be achieved by all consumers. In U-Haul International, Inc. v. Jartran, Inc., 522 F.Supp. 1238 (D.Ariz. 1981), the court found that a guarantee of "10 [miles per gallon] or more" was "actually false" because it was "clear that not all [of the defendant's] trucks will obtain 10 miles per gallon of fuel, regardless of use or method of operation, and in no event would this mileage be realized when towing [the defendant's] trailer behind [one of the defendant's] truck[s]." However, the court found U-Haul inapposite because it was decided on a motion for a preliminary injunction, not a motion for summary judgment, which requires that there be only one reasonable conclusion in favor of the party making the motion. More importantly, the court believed that recent case law counseled in favor of giving advertisers leeway, “at least in the absence of a clear intent to deceive or substantial consumer confusion,” and thus avoiding findings of literal falsity.
In addition (and what the court should have relied on instead of giving advertisers a free pass in general), there was no evidence that the test results here were false or that a consumer would gain less horsepower than advertised; the only evidence was that K&N admitted that horsepower gains could “vary,” including being less than advertised. This wasn’t enough: a reasonable jury could conclude that K&N's earlier horsepower advertising was not literally false because it was based on sufficiently reliable tests. There was also no necessary implication that every purchaser would receive the “measured, verified, and guaranteed” horsepower increases, because that language appeared only in the 2007 ads and the court wouldn’t impute it to other ads. However, a reasonable jury could also find literal falsity for both the earlier and the later ads, and thus K&N’s cross-motion on these claims was also denied.
CARB. California mandates that air intake systems are not highway-legal unless the California Air Resources Board ("CARB") has issued an Executive Order for that particular application. As a result, sellers advertising air intake systems in California for which there is no Executive Order must include a disclaimer "to give reasonable notice of [the] limitation on the sale or use of" the air intake system. K&N obtained various Executive Orders exempting specific K&N intake applications; some intakes are exempt or non-exempt depending on particular applications. K&N’s website and catalogs identify each application in which a particular air intake system may be used and whether there is an Executive Order from CARB for each application. Before 2010, K&N didn’t use CARB disclaimers on the outside of its intake packaging, only installation instructions inside the packages.
Spectre’s UCL claim was that it was unlawful (and thus actionable under California Business & Professions code section 17200) for K&N to fail to include disclosures on its product packaging, since state law prohibits any entity from “advertis[ing] in California any device, apparatus, or mechanism which alters or modifies the original design or performance of any required motor vehicle pollution control device or system and not exempted from Vehicle Code section 27156 unless each advertisement contains a legally adequate disclaimer ….” The relevant section of law defines "advertise" and "advertisement" to include "any notice, announcement, information, publication, catalog, listing for sale, or other statement concerning a product or service communicated to the public for the purpose of furthering the sale of the product or service." So, was packaging a statement made "for the purpose of furthering the sale of the product”?
K&N argued that the systems weren’t sold in regular consumer packaging and contain minimal information—not the advertised horsepower increase and not even the vehicles for which the intake system is designed. However, Spectre pointed out that the packaging did include the phrases "Guaranteed Horsepower!" and "The World's Best Air Filter." The court found a factual dispute about whether the packages were designed for consumers to see or use as a basis for a purchasing decision, making summary judgment on that ground inappropriate.
However, injunctive relief—the only kind available under the UCL--was inappropriate because K&N changed the packaging in 2010 to include the disclaimers, so the UCL claim was dismissed. The court also held that simple omission couldn’t ground a Lanham Act claim in the absence of something else, such as a negative comparison omitting information that would weaken a superiority claim or a failure to designate a product as foreign-made, creating a false designation of origin. Thus, the Lanham Act claim against the CARB omissions was also dismissed.
Fuel economy. K&N sells its product through distributors and retail customers, including AutoAnything.com, which claims that K&N products will increase fuel economy. K&N’s research indicates that some consumers choose filters based on perceived fuel economy.
The parties also disputed whether K&N was responsible for AutoAnything’s fuel economy claims. Spectre argued that K&N exercised sufficient control because it would pre-approve select AutoAnything advertisements, and could prevent the advertisements' publication by ending its cooperative advertising policy of reimbursing AutoAnything for published advertisements. This was enough to create a disputed issue of material fact over whether K&N was at least contributorily liable, which can happen if there’s direct control and monitoring of the instrumentality used by a third party to violate the Lanham Act. (Note that given current standing doctrine, Spectre might not be able to make a direct claim against AutoAnything, though in the Ninth Circuit standing goes a bit differently than in other circuits. If Spectre lacked standing, then secondary liability reasoning might be inappropriate, though perhaps K&N is still in some sort of agency relationship with AutoAnything sufficient to make it responsible for the ads depending on the actual facts.)
Monday, September 26, 2011
New piece on vidding, with Francesca Coppa
How to Suppress Women's Remix, Camera Obscura: Feminism, Culture, and Media Studies (2011) 26(2 77). Link goes to abstract at present, though I'm happy to send reprints to anyone who wants.
House brands in Australia
This post and accompanying video are an interesting peek into an Australian grocery store's use of packaging to compete with national brands. To an American, what's most fascinating is how very different most of these look (with even the similar ones clearly not enough to trigger a likely confusion finding in the US). In many cases I wondered "how else would you expect the package to look?" most prominently with brown and orange packaging for chocolate/caramel candies. Some similarity also comes from package size (11 bars per package). I should also note that some Americans also feel these kinds of practices are unfair, judging from my trademark students; it's just that our law is pretty house brand-friendly, especially by comparison to other regimes.
Gray market goods presumptively cause irreparable harm
AFL Telecommunications LLC v. Fiberoptic Hardware, LLC, 2011 WL 4374262 (D. Ariz.)
I’m ignoring the personal jurisdiction part of this case. AFL is the exclusive licensee for distribution of Fujikura-brand fusion splicers in North America. Defendant FOH resells fiber optic equipment. AFL alleged that FOH buys Fujikura splicers intended for use overseas, modifies the products, and resells the "gray market" units in the United States. AFL sued for copyright infringement, unfair competition, and violation of the Lanham Act.
The court found that the complaint failed to plead sufficient facts about copyright ownership to state a plausible claim for relief. It alleged that certain fusion splicers are operated in part by Fujikura’s copyrighted software, and that on “information and belief,” Fujikura owned the copyright in the software “as a work made for hire or otherwise.” The court found these “bare allegations” insufficient.
The Lanham Act claims did better. In the Ninth Circuit, a preliminary injunction is assessed on a sliding scale: if a plaintiff shows that the balance of hardships tips sharply in its favor, it need only show serious questions on the merits rather than make a strong showing of likely success. You might think that Winter changed the Ninth Circuit sliding-scale approach, but no: Winter only requires a plaintiff to show that irreparable harm is likely. It does not add on a requirement of showing a strong likelihood of success on the merits.
Since the public interest disfavors confusion, that helped AFL, nor did FOH dispute that the balance of equities tipped strongly in AFL’s favor. All AFL needed to show was that it raised serious Lanham Act questions and that it would likely suffer irreparable harm without a preliminary injunction.
For the §43(a)(1)(A) claim, AFL needed to show that FOH’s use of the Fujikura mark was likely to cause confusion. For gray market goods, that happens if there are material differences between the allegedly infringing good and the authorized product. Sale of materially different goods is actionable because consumers may buy on the basis of the domestic supplier’s reputation and be disappointed.
AFL identified a confused and disappointed consumer: the Minnesota Air National Guard (ANG). FOH sold four Fujikura-brand fusion splicers to a reseller, who had FOH ship them to the ANG. Fujikura had initially shipped the splicers to China and licensed them for use only in that country. Less than a month after receiving one of the splicers, “the ANG had concerns about an error message on the unit's startup screen stating that the unit is ‘licensed for use only in Europe.’ Although pressing an ‘agree’ button would make the message disappear, the ANG worried that the unit ‘may not be configured properly for U.S. use.’” (Note the possibility that the seller is bootstrapping a nonsubstantive difference into a substantive one with this warning. This seems potentially anticompetitive to me; also what’s up with the European warning for a Chinese splicer?) Anyway, the ANG “also had concerns about a label FOH had placed on the unit warning the operator not to update the unit's software using Fujikura's website, but instead to return the unit to FOH. Because National Guard personnel would need to be able to update the software in the field, the ANG rightly wondered, ‘Why would connecting the unit to Fujikura's website damage it?’” ANG wasn’t satisfied with the splicers and ultimately shipped them to AFL.
The threshold for a material difference is quite low: any difference that consumers would likely consider relevant creates a presumption of confusion. (This is another example of TM owners being favored over competitors in the TM/false advertising divide: compare the materiality standard used in, say, Pizza Hut with the statement the court quoted that, “because many factors influence a consumer's decision to purchase a product, the materiality standard must be kept low to include even subtle differences between products,” Beltronics USA, Inc. v. Midwest Inventory Distribution, LLC, 562 F.3d 1067, 1073 (10th Cir. 2009) (citation omitted).)
Given the alterations and the ANG’s dissatisfaction, there were serious questions as to the existence of material differences.
AFL also raised serious questions on its false advertising claim that FOH falsely offered “new” fusion splicers for sale on eBay. eBay defines “new” as a "brand-new, unused, unopened, undamaged item in its original packaging," but AFL presented evidence suggesting that FOH makes material alterations to the Fujikura splicers before reselling them. FOH admitted that the splicers it advertises as being "new" are in fact used first by FOH for "quality control" purposes.
FOH argued that it carefully and explicitly informs consumers that FOH, not AFL or Fujikura, services and warranties the splicers FOH sells. But the court found serious questions as to the sufficiency of this disclosure.
FOH also argued that its disclosures averted irreparable harm. Damage to goodwill is irreparable harm. “Given the ANG's dissatisfaction with the Fujikura brand splicers resold by FOH,” AFL was likely to suffer irreparable injury—even though the dissatisfaction was related to the gray market status of the goods.
I’m ignoring the personal jurisdiction part of this case. AFL is the exclusive licensee for distribution of Fujikura-brand fusion splicers in North America. Defendant FOH resells fiber optic equipment. AFL alleged that FOH buys Fujikura splicers intended for use overseas, modifies the products, and resells the "gray market" units in the United States. AFL sued for copyright infringement, unfair competition, and violation of the Lanham Act.
The court found that the complaint failed to plead sufficient facts about copyright ownership to state a plausible claim for relief. It alleged that certain fusion splicers are operated in part by Fujikura’s copyrighted software, and that on “information and belief,” Fujikura owned the copyright in the software “as a work made for hire or otherwise.” The court found these “bare allegations” insufficient.
The Lanham Act claims did better. In the Ninth Circuit, a preliminary injunction is assessed on a sliding scale: if a plaintiff shows that the balance of hardships tips sharply in its favor, it need only show serious questions on the merits rather than make a strong showing of likely success. You might think that Winter changed the Ninth Circuit sliding-scale approach, but no: Winter only requires a plaintiff to show that irreparable harm is likely. It does not add on a requirement of showing a strong likelihood of success on the merits.
Since the public interest disfavors confusion, that helped AFL, nor did FOH dispute that the balance of equities tipped strongly in AFL’s favor. All AFL needed to show was that it raised serious Lanham Act questions and that it would likely suffer irreparable harm without a preliminary injunction.
For the §43(a)(1)(A) claim, AFL needed to show that FOH’s use of the Fujikura mark was likely to cause confusion. For gray market goods, that happens if there are material differences between the allegedly infringing good and the authorized product. Sale of materially different goods is actionable because consumers may buy on the basis of the domestic supplier’s reputation and be disappointed.
AFL identified a confused and disappointed consumer: the Minnesota Air National Guard (ANG). FOH sold four Fujikura-brand fusion splicers to a reseller, who had FOH ship them to the ANG. Fujikura had initially shipped the splicers to China and licensed them for use only in that country. Less than a month after receiving one of the splicers, “the ANG had concerns about an error message on the unit's startup screen stating that the unit is ‘licensed for use only in Europe.’ Although pressing an ‘agree’ button would make the message disappear, the ANG worried that the unit ‘may not be configured properly for U.S. use.’” (Note the possibility that the seller is bootstrapping a nonsubstantive difference into a substantive one with this warning. This seems potentially anticompetitive to me; also what’s up with the European warning for a Chinese splicer?) Anyway, the ANG “also had concerns about a label FOH had placed on the unit warning the operator not to update the unit's software using Fujikura's website, but instead to return the unit to FOH. Because National Guard personnel would need to be able to update the software in the field, the ANG rightly wondered, ‘Why would connecting the unit to Fujikura's website damage it?’” ANG wasn’t satisfied with the splicers and ultimately shipped them to AFL.
The threshold for a material difference is quite low: any difference that consumers would likely consider relevant creates a presumption of confusion. (This is another example of TM owners being favored over competitors in the TM/false advertising divide: compare the materiality standard used in, say, Pizza Hut with the statement the court quoted that, “because many factors influence a consumer's decision to purchase a product, the materiality standard must be kept low to include even subtle differences between products,” Beltronics USA, Inc. v. Midwest Inventory Distribution, LLC, 562 F.3d 1067, 1073 (10th Cir. 2009) (citation omitted).)
Given the alterations and the ANG’s dissatisfaction, there were serious questions as to the existence of material differences.
AFL also raised serious questions on its false advertising claim that FOH falsely offered “new” fusion splicers for sale on eBay. eBay defines “new” as a "brand-new, unused, unopened, undamaged item in its original packaging," but AFL presented evidence suggesting that FOH makes material alterations to the Fujikura splicers before reselling them. FOH admitted that the splicers it advertises as being "new" are in fact used first by FOH for "quality control" purposes.
FOH argued that it carefully and explicitly informs consumers that FOH, not AFL or Fujikura, services and warranties the splicers FOH sells. But the court found serious questions as to the sufficiency of this disclosure.
FOH also argued that its disclosures averted irreparable harm. Damage to goodwill is irreparable harm. “Given the ANG's dissatisfaction with the Fujikura brand splicers resold by FOH,” AFL was likely to suffer irreparable injury—even though the dissatisfaction was related to the gray market status of the goods.
No more lawsuit (until plaintiff lathers, rinses and repeats)
Lieberson v. Johnson & Johnson Consumer Companies, Inc., --- F.Supp.2d ----, 2011 WL 4414214 (D.N.J.)Lieberson filed a putative class action based on J&J’s claims about certain baby bath products: Johnson's Bedtime Bath, Johnson's Bedtime Moisture Wash, Johnson's Bedtime Lotion, and Johnson's Bedtime Baby Bubble & Wash. Except for the Bubble Wash, the front label says, “*Clinically Proven* Help Baby Sleep Better,” and the back label says J&J "has created a nightly routine that is clinically proven to help your baby fall asleep easier and sleep through the night better." The Bubble Wash front label says "help baby sleep better," and advises using the product as part of a "3-step, nightly routine to help your baby sleep better."
Note: most of the pictures I found online are of packages that omit the “clinically,” but I can’t see that this change in favor of grammatical coherence makes a difference; how else would it be proven?
Lieberson bought the Moisture Wash and Lotion when her first child was four months old after seeing ads for the products and the products themselves. She used them, but they didn’t work. She tried again with her second child, but still no success.
She sued for misrepresentations and omissions in violation of the NJCFA as well as breach of the implied warranty of merchantability, arguing that no clinical studies existed to support J&J’s claims and that the products weren’t fit for the ordinary purpose for which they were advertised, because they weren’t clinically proven to do anything.
J&J challenged Article III standing, which requires (1) injury in fact; (2) causation; and (3) redressability. J&J argued that the plaintiff didn’t buy 2 of the 4 products over which she was suing, and the court agreed that she couldn’t show injury in fact as to them. (A friend has pointed out that this kind of ruling would likely have been different 10 years ago, when courts were more willing to accept that injury of the same kind as the plaintiff suffered can be aggregated—the nature of the injury here is the same whether you buy the oil or the bubble wash, at least at the pleading stage where the allegation is that they’re all falsely advertised.) If the lawyers find a suitable class plaintiff who bought those products, they can refile.
The NJCFA requires (1) unlawful conduct by the defendant; (2) an ascertainable loss by the plaintiff; and (3) a causal connection between them. Unlawful acts can be affirmative or knowing omissions; only the latter requires intent. (Regulatory violations are also unlawful but not at issue here.)
J&J argued that plaintiff failed to plead with particularity under Rule 9(b), as required for NJCFA claims. This requires details that give precision or some measure of substantiation for the fraud allegation. Here, though plaintiff alleged nine omissions and misrepresentations, she didn’t specify which TV commercials, print ads, or websites had which statements, when they were made, or when she saw them. Though she alleged that she routinely read various parenting magazines, she didn’t allege whether or when the ads appeared in those magazines or whether or when she saw them.
The labels were a different matter: she alleged that they reinforced her purchase decision, and the court therefore inferred that she saw them, at the least, at the time of purchase. For the labels, that was sufficient to plead unlawful conduct. Moreover, the court rejected J&J’s (ridiculous) argument that the statements were puffery. “Clinically proven” is not vague or highly subjective. The court stated, in my opinion rashly and unnecessarily, that the claim that the products would help babies sleep might otherwise be considered puffery. That’s still measurable, even if measurement isn’t mentioned.
The court also noted that false claims can’t be excused or remedied by footnotes because inconspicuous language that purports to change the apparent meaning of claims is likely to be overlooked; here, though, the asterisks around the “clinically proven” claim were apparently mere typography rather than indications of some further explanation to be found on the products.
Finally, though, J&J argued that plaintiff failed to plead an ascertainable loss, which has to be quantifiable or measurable. This can be the difference in value between what was promised and what was received. Plaintiff alleged that J&J charged a premium of at least $1 for its products and that comparable products cost at least 25% less. However, “other than these unsupported conclusions concerning her alleged loss, Plaintiff has not provided any specificity which would give Defendant notice of the possible damages.” She didn’t allege the price she paid in 2008 and 2010 (gee, I sure hope she kept all her receipts), nor did she allege the identity or cost of any allegedly comparable products. Is this really required by Iqbal and Twombly? These factual allegations seem reasonably specific to me, but the court found them to be “unsupported conclusory statements.” So the claims were dismissed without prejudice. (This is, I think, part of the uncertainty created by Iqbal and Twombly--because different judges have different intuitions about the world, it’s very hard to predict what’s enough. Dismissing a complaint with these allegations also seems like a bad idea because J&J, unlike the plaintiff class, is likely to have excellent information on historical pricing both of its own products and of those of rivals’, but you need discovery to get that.)
The claim for implied warranty of merchantability also failed because the complaint did not allege that the products weren’t fit for the ordinary purpose of cleansing and moisturizing babies’ skin. Merchantability only requires fitness for general purpose, which was satisfied here; though the products were advertised as helping babies sleep, ads alone can’t transform the general purpose of soap and lotion into something unrelated. There were no allegations of manufacturing defects, design defects, or failure to give the buyer proper instructions with respect to the goods, which are the three types of defects that generally violate the warranty.
Wednesday, September 21, 2011
No class action for salons; court finds survey of 1200 too small
Salon FAD v. L’Oreal USA, Inc., 2011 WL 4089902 (S.D.N.Y.)
In an earlier opinion, the court found that salons had properly alleged standing to claim false advertising from defendant hair care products manufacturers' labeling of their products as available exclusively in salons. In this opinion, the court denied class certification.
“Sales of hair care products represent an important revenue source for salons; indeed, the profit margin on these products is generally higher than the margin for the hair care services provided in the salons.” Plaintiffs alleged that defendants claim on product labels, websites, and print ads that their products are available exclusively through salons and not through mass-market retailers. However, defendants have allegedly engaged in widespread diversion to mass retailers, now accounting for more than $1 billion of the industry’s $5 billion in annual sales of salon-only products. This allegedly damages plaintiffs’ reputation with consumers “who purchase products at their salons, only to discover that the products are also available at mass retailers.”
Plaintiffs sought to certify a class of all professional hair salons and licensed cosmetologists that purchased a defendant’s professional products for resale to customers within the US from July 1, 2004 to now, except for salons identified as having engaged in diversion itself. (As it happens, defendant L’Oreal’s distribution contracts state that diversion damages L’Oreal’s goodwill with consumers and provide for liquidated damages of $100 per unit a salon diverts.)
As the court explained, “[t]he primary reason that this motion to certify a class fails is the unresolved tension between the legal claims brought by the plaintiffs and their theory of damages.” The legal theory was false advertising, but the evidence of damages arose from diversion rather than from false advertising.
The defendants all had salon-only labeling. Paul Mitchell even added “Guaranteed only when sold by a professional hairdresser, otherwise it may be counterfeit, black market, and or tampered with,” and had similar anti-diversion provisions in its contracts.
The plaintiffs were a group of salons located in Georgia and Alabama, as well as Salon FAD (Fight Against Diversion), a non-profit organization founded to address diversion.
Under Rule 23(a), a class requires numerosity, common questions of law or fact, typicality, and adequate representation. Then, the class must qualify under at least one Rule 23(b) category. Plaintiffs sought to certify a 23(b)(3) class, or, in the alternative, a 23(b)(2) class. Rule 23(b)(3) permits certification "if the questions of law or fact common to class members predominate over any questions affecting only individual members, and ... a class litigation is superior to other available methods for fairly and efficiently adjudicating the controversy," while Rule 23(b)(2) permits class certification if "the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole."
Predominance tests whether proposed classes are sufficiently cohesive to warrant class treatment. The representative must show that the issues subject to generalized proof predominate over issues that require individual proof. In this case, proof of injury was bound up in proof of damages; plaintiffs can show that these elements are susceptible to generalized proof by disclosing a suitable methodology.
Here, the causation/damage theory rested on the idea that “customers read the labels on the defendants' products, find the representations about those products being exclusively available in salons material, come to believe that the representations are false, attribute the false labeling to the salons, and decide to act on that knowledge and belief in a way that harms the salons.” For purposes of this motion, defendants conceded falsity and the existence of widespread diversion, but argued that a host of individual issues existed because plaintiffs wouldn’t be able to show that the false advertising played any role in consumers’ decisions to patronize stylists.
Here, it was difficult to imagine class-wide proof of causation and injury:
Plaintiffs also offered an internet survey of over 3200 female respondents, 1261 of whom had ever purchased professional hair products in a salon. After they identified the brand they’d purchased, they were then shown either a print ad or package for that brand that described the product as being available exclusively in salons. The survey asked, "Based on what is said or suggested by the ad/package, where would you expect (brand) hair care products to be available for purchase?" The available answers were: only in spas or salons, only in mass retailers, or in both spas and mass retailers. Seventy percent of respondents chose the answer that the products were exclusively available in salons. The survey asked whether the "salon-only" claim on the packaging "suggested anything about the quality" of the product, and 53% said it suggested that the product was of a higher quality.
Finally, the respondents were asked about their "reaction" to seeing products on the shelves of a mass retailer with "salon-only" claims. Response options included that the packaging "raised questions" about the following: "whether the salon lied to me about the hair care products available in the salon" (38% chose this, and 60% answered that it made them question the truthfulness of the salon), "the truthfulness of the (specific salon-only claim)," "the quality of other hair products sold in the salon," and "the expertise of the stylist who recommended (brand)."
The court found this survey “riddled with methodological flaws.” The sample size was quite small, raising questions about its representativeness. (Comment: this is just bizarre—the sample size is huge for a consumer survey; that they had to screen out a lot of people who didn’t fit doesn’t mean the sample size is small.) The survey questions were overly suggestive, and respondents weren’t given the option to respond that they took nothing away from this claim, or that they blamed the manufacturer and not the salon. (This, I have more sympathy with.)
Plaintiffs argued that class certification was appropriate because of the nationwide scope and uniformity of the advertising at issue. But the theory of injury in cases allowing certification based on misleading product labels was much more direct: that consumers were misled by the labels into buying the products. “Here, the consumers who were allegedly misled by the false advertising are not parties to the litigation, and the plaintiff class representatives assert that the consumers associated the false advertising not with the manufacturers but with the plaintiff salons.”
Nor could defendants’ profits from diversion serve as an alternate measure of damages absent class-wide proof of causation. “The plaintiffs have not shown that there is any generalized link between the defendants' profits from diversion and the injury that they have alleged from the defendants' false advertising.”
The court also denied 23(b)(2) certification, which provides for class-wide injunctive or declaratory relief. Rule 23(b)(2) is not for cases in which the appropriate final relief relates exclusively or predominately to money damages. It was unwarranted here because the claim for injunctive relief was secondary to plaintiffs’ pursuit of money damages. The plaintiffs couldn’t even agree on the injunction they wanted—some wanted an end to the salon-only ads, and others wanted to preserve the exclusivity message of such ads but to make them true by stopping diversion. The plaintiffs didn’t even seriously pursue injunctive relief, adding their request late and devoting little argument to it.
In an earlier opinion, the court found that salons had properly alleged standing to claim false advertising from defendant hair care products manufacturers' labeling of their products as available exclusively in salons. In this opinion, the court denied class certification.
“Sales of hair care products represent an important revenue source for salons; indeed, the profit margin on these products is generally higher than the margin for the hair care services provided in the salons.” Plaintiffs alleged that defendants claim on product labels, websites, and print ads that their products are available exclusively through salons and not through mass-market retailers. However, defendants have allegedly engaged in widespread diversion to mass retailers, now accounting for more than $1 billion of the industry’s $5 billion in annual sales of salon-only products. This allegedly damages plaintiffs’ reputation with consumers “who purchase products at their salons, only to discover that the products are also available at mass retailers.”
Plaintiffs sought to certify a class of all professional hair salons and licensed cosmetologists that purchased a defendant’s professional products for resale to customers within the US from July 1, 2004 to now, except for salons identified as having engaged in diversion itself. (As it happens, defendant L’Oreal’s distribution contracts state that diversion damages L’Oreal’s goodwill with consumers and provide for liquidated damages of $100 per unit a salon diverts.)
As the court explained, “[t]he primary reason that this motion to certify a class fails is the unresolved tension between the legal claims brought by the plaintiffs and their theory of damages.” The legal theory was false advertising, but the evidence of damages arose from diversion rather than from false advertising.
The defendants all had salon-only labeling. Paul Mitchell even added “Guaranteed only when sold by a professional hairdresser, otherwise it may be counterfeit, black market, and or tampered with,” and had similar anti-diversion provisions in its contracts.
The plaintiffs were a group of salons located in Georgia and Alabama, as well as Salon FAD (Fight Against Diversion), a non-profit organization founded to address diversion.
Under Rule 23(a), a class requires numerosity, common questions of law or fact, typicality, and adequate representation. Then, the class must qualify under at least one Rule 23(b) category. Plaintiffs sought to certify a 23(b)(3) class, or, in the alternative, a 23(b)(2) class. Rule 23(b)(3) permits certification "if the questions of law or fact common to class members predominate over any questions affecting only individual members, and ... a class litigation is superior to other available methods for fairly and efficiently adjudicating the controversy," while Rule 23(b)(2) permits class certification if "the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole."
Predominance tests whether proposed classes are sufficiently cohesive to warrant class treatment. The representative must show that the issues subject to generalized proof predominate over issues that require individual proof. In this case, proof of injury was bound up in proof of damages; plaintiffs can show that these elements are susceptible to generalized proof by disclosing a suitable methodology.
Here, the causation/damage theory rested on the idea that “customers read the labels on the defendants' products, find the representations about those products being exclusively available in salons material, come to believe that the representations are false, attribute the false labeling to the salons, and decide to act on that knowledge and belief in a way that harms the salons.” For purposes of this motion, defendants conceded falsity and the existence of widespread diversion, but argued that a host of individual issues existed because plaintiffs wouldn’t be able to show that the false advertising played any role in consumers’ decisions to patronize stylists.
Here, it was difficult to imagine class-wide proof of causation and injury:
How salon customers would react to learning that a product which was advertised as exclusively sold in salons was also available in another retail environment is inherently an individualized question. To some consumers, it may be of little significance …. Even if a consumer were affected by the discovery of false labeling and also came to conclude that the salon was implicated in the deception, whether and to what extent that leap of association would affect the consumer's loyalty to the salon would necessarily depend on a multitude of factors. A consumer may feel that he or she has no convenient or less expensive alternative to purchasing the products in the salon, may have a strong loyalty to the salon or stylist that outweighs any concern about the false labeling, or may find that every convenient salon is similarly tainted. Alternatively, a consumer may choose to follow a stylist to a new salon, or to change salons for a host of reasons that have nothing to do with the false labeling at issue here.Plaintiffs offered a methodology in a “skeletal” expert report by an economics professor at Emory. However, the model failed to distinguish between harm to the salons caused by diversion and harm caused by false advertising. Sales may have declined because consumers punished salons for the falsity, or because consumers bought defendants’ products at mass retailers for reasons of price or convenience. Nor did the expert offer a consumer survey to gauge reputational harm.
Plaintiffs also offered an internet survey of over 3200 female respondents, 1261 of whom had ever purchased professional hair products in a salon. After they identified the brand they’d purchased, they were then shown either a print ad or package for that brand that described the product as being available exclusively in salons. The survey asked, "Based on what is said or suggested by the ad/package, where would you expect (brand) hair care products to be available for purchase?" The available answers were: only in spas or salons, only in mass retailers, or in both spas and mass retailers. Seventy percent of respondents chose the answer that the products were exclusively available in salons. The survey asked whether the "salon-only" claim on the packaging "suggested anything about the quality" of the product, and 53% said it suggested that the product was of a higher quality.
Finally, the respondents were asked about their "reaction" to seeing products on the shelves of a mass retailer with "salon-only" claims. Response options included that the packaging "raised questions" about the following: "whether the salon lied to me about the hair care products available in the salon" (38% chose this, and 60% answered that it made them question the truthfulness of the salon), "the truthfulness of the (specific salon-only claim)," "the quality of other hair products sold in the salon," and "the expertise of the stylist who recommended (brand)."
The court found this survey “riddled with methodological flaws.” The sample size was quite small, raising questions about its representativeness. (Comment: this is just bizarre—the sample size is huge for a consumer survey; that they had to screen out a lot of people who didn’t fit doesn’t mean the sample size is small.) The survey questions were overly suggestive, and respondents weren’t given the option to respond that they took nothing away from this claim, or that they blamed the manufacturer and not the salon. (This, I have more sympathy with.)
Plaintiffs argued that class certification was appropriate because of the nationwide scope and uniformity of the advertising at issue. But the theory of injury in cases allowing certification based on misleading product labels was much more direct: that consumers were misled by the labels into buying the products. “Here, the consumers who were allegedly misled by the false advertising are not parties to the litigation, and the plaintiff class representatives assert that the consumers associated the false advertising not with the manufacturers but with the plaintiff salons.”
Nor could defendants’ profits from diversion serve as an alternate measure of damages absent class-wide proof of causation. “The plaintiffs have not shown that there is any generalized link between the defendants' profits from diversion and the injury that they have alleged from the defendants' false advertising.”
The court also denied 23(b)(2) certification, which provides for class-wide injunctive or declaratory relief. Rule 23(b)(2) is not for cases in which the appropriate final relief relates exclusively or predominately to money damages. It was unwarranted here because the claim for injunctive relief was secondary to plaintiffs’ pursuit of money damages. The plaintiffs couldn’t even agree on the injunction they wanted—some wanted an end to the salon-only ads, and others wanted to preserve the exclusivity message of such ads but to make them true by stopping diversion. The plaintiffs didn’t even seriously pursue injunctive relief, adding their request late and devoting little argument to it.
Tuesday, September 20, 2011
Call for papers: 2012 Cardozo Arts & Entertainment Law Journal Symposium
The Cardozo Arts & Entertainment Law Review seeks submissions for the journal’s Spring Symposium, to take place on March 29, 2012. The working title of the Symposium is “Examining and Overcoming Enforcement Issues in Copyright Law”.
TOPICS: The Symposium is an opportunity for academics, practitioners, consultants, and students to exchange ideas related to the protection of intellectual property in the Digital Age, from the perspective of enforcement, as well as self-policing and cooperative agreements. Topics might include examinations of the PROTECT IP Act of 2011, the America Invents Act, Content ID and similar technologies, and the recent cooperative agreement between ISPs and content owners.
SUBMISSIONS AND IMPORTANT DATES:
- Please submit materials to: submissions at cardozoaelj.com
- Submission Deadline for Abstracts: October 31, 2011
- Submission Deadline for Articles: January 31, 2012
- Symposium Date: March 29, 2012
LAW JOURNAL PUBLISHED ARTICLE: The Cardozo Arts & Entertainment Law Journal will review, edit and publish submissions in the 2012 Spring Symposium issue. Articles, as well as case studies and abstracts of research in progress, will be considered for the symposium program for presentation purposes. Only complete articles, however, will be published in the law review. Abstracts for these papers will be due no later than the October 31, 2011 deadline and will be accepted on a rolling basis until that time.
PRESENTATIONS (WITHOUT PUBLICATION) BASED ON ABSTRACTS: The Cardozo Arts & Entertainment Law Journal will review and select presentations for the symposium. If you are interested in presenting without submitting a publishable article, an abstract of the presentation must be submitted by the October 31, 2011 deadline and will be accepted on a rolling basis until that time.
FURTHER INFORMATION:
Sarah Nadeau, AELJ Editor-in-Chief: editorinchief at cardozoaelj.com
Olivia Greer, AELJ Acquisitions Editor: submissions at cardozoaelj.com
Jordan Yearsley, AELJ Acquisitions Editor: submissions at cardozoaelj.com
For telephone inquiries, please call: (212) 790-0292
TOPICS: The Symposium is an opportunity for academics, practitioners, consultants, and students to exchange ideas related to the protection of intellectual property in the Digital Age, from the perspective of enforcement, as well as self-policing and cooperative agreements. Topics might include examinations of the PROTECT IP Act of 2011, the America Invents Act, Content ID and similar technologies, and the recent cooperative agreement between ISPs and content owners.
SUBMISSIONS AND IMPORTANT DATES:
- Please submit materials to: submissions at cardozoaelj.com
- Submission Deadline for Abstracts: October 31, 2011
- Submission Deadline for Articles: January 31, 2012
- Symposium Date: March 29, 2012
LAW JOURNAL PUBLISHED ARTICLE: The Cardozo Arts & Entertainment Law Journal will review, edit and publish submissions in the 2012 Spring Symposium issue. Articles, as well as case studies and abstracts of research in progress, will be considered for the symposium program for presentation purposes. Only complete articles, however, will be published in the law review. Abstracts for these papers will be due no later than the October 31, 2011 deadline and will be accepted on a rolling basis until that time.
PRESENTATIONS (WITHOUT PUBLICATION) BASED ON ABSTRACTS: The Cardozo Arts & Entertainment Law Journal will review and select presentations for the symposium. If you are interested in presenting without submitting a publishable article, an abstract of the presentation must be submitted by the October 31, 2011 deadline and will be accepted on a rolling basis until that time.
FURTHER INFORMATION:
Sarah Nadeau, AELJ Editor-in-Chief: editorinchief at cardozoaelj.com
Olivia Greer, AELJ Acquisitions Editor: submissions at cardozoaelj.com
Jordan Yearsley, AELJ Acquisitions Editor: submissions at cardozoaelj.com
For telephone inquiries, please call: (212) 790-0292
Testing lab's claims of accuracy not false despite debate over meaning
Miller v. Redwood Toxicology Laboratory, Inc., 2011 WL 4340860 (D. Minn.)
Redwood operates forensic drug testing facilities, including EtG/EtS urine tests for alcohol. These tests measure EtG (ethyl glucuronide) and EtS (ethyl sulfate), two direct metabolites from ethanol that can be found in urine up to three to four days after ethanol is ingested. Ethanol is found in various fermented alcohol products; EtG/EtS can only be in someone’s urine if that person ingested alcohol, but ingestion doesn’t necessarily mean drinking. “An EtG level over 100 ng/mL and EtS level over 25 ng/mL indicate exposure to ethanol but is not dispositive of intentional consumption of alcohol.”
Redwood's customers specify the EtG and EtS cut-off levels they want for positive findings. Tri-County Community Corrections, a customer, selected the above cutoff for a positive finding of recent ethanol ingestion. Redwood “does not offer a definitive opinion on alcohol consumption,” and in response to a question about accuracy and reliability states:
Miller is a recovering alcoholic on supervised probation, one condition of which is that he may not use or possess alcohol. He’s subject to random alcohol testing. He suffered a relapse, in violation of his probation, which he first denied and later admitted; his probation was later reinstated. A month later, he was tested again, and Redwood returned a positive result: EtG at 1130 ng/mL and EtS t 603 ng/mL.
At his hearing, he testified that in the days before he provided his sample, he assisted his mother in closing up a gift shop by cleaning metal shelving with a lacquer thinner which contained an alcohol substance, that there were heavy fumes and no ventilation, and that he also used hand sanitizer containing an alcohol substance at the hospital where he was visiting his father several times.
The state’s witness, a toxicologist and a technical consultant and certifying scientist at Redwood, testified to the debate over what a good cut-off for determining alcohol consumption, but also testified that the higest value he’d seen for EtG levels from incidental use was 713. Miller’s witness, who uses EtG/EtS testing as a tool to ensure compliance for doctors in the Alabama Physician Health program, testified that a study that involved using hand gel every two minutes for an hour in a closed room resulted in levels up to nearly 800 ng/mL, that a pharmacist using hand gel every half hour throughout the day produced a result of 770, and that a doctor "that fairly certainly had only used topical alcohol on joints" had a level of 1500. In the Alabama program, a positive test coupled with a denial of drinking results in a second test. About 10-15% of positive EtG/EtS tests have negative results on this second test, but that test only produces a positive result if a person has consumed about 7 standard drinks in a week. The state court found that Miller had credibly presented evidence of incidental exposure to alcohol and that the state hadn’t proven that Miller violated his probation by clear and convincing evidence.
Miller sued Redwood for false advertising under state law and negligence. He alleged that Redwood’s website and other advertising materials misrepresent (1) that Redwood's test uses the "most sophisticated, sensitive and specific equipment and technology available"; (2) that the EtG/EtS test was "ideal for zero tolerance and abstinence situations"; (3) that the test could produce "highly accurate results for up to 80 hours after ingestion"; (4) that Redwood's analytical methods "are accepted and approved by the U.S. Department of Health and Human Services"; and (5) that EtG "is only detected in urine when ethanol has been ingested" and that any EtG level over 100 ng/mL is the "most definitive" indicator that the specimen came from a person who has ingested alcohol.
The court found that the state law claims were subject to Lanham Act analysis, as is common in this circuit despite the structural differences between state consumer protection law and the Lanham Act.
The claims were dismissed. Redwood’s material explain the importance of obtaining clinical correlation to a positive test and recognize the potential that incidental exposure to products containing ethanol could trigger a positive test result. The statement that Redwood’s testing is “ideal” for zero tolerance and abstinence situations and is "the best and most definitive test available" are simply expressions of opinion and thus nonactionable puffery.
The claim of “highly accurate” results was also non-actionable. Miller argued that the cut-off values didn’t correlate with proof of drinking alcohol, but the cited ads did not show that Redwood claimed such proof. Its materials explained that different cut-offs varied, even as it stated that “[i]n order to provide alcohol abstinence programs with the most clinically relevant answer to whether or not recent ethanol ingestion has occurred, using a 100 ng/mL cut-off for EtG and a 25 ng/mL cut-off for EtS detection is the best and most definitive test available to answer his question.... In addition, using a 100/25 ng/mL cut-off nearly doubles the time of detection of recent ethanol detection versus the use of a 250 ng/mL cut-off. In summary, the 100/25 ng/mL EtG/EtS cut-off is superior for monitoring purposes, and provides the most sensitive and definitive indicator of recent ethanol ingestion.”
Miller also challenged Redwood's claims that the EtG/EtS test is "approved by the U.S. Department of Health and Human Services" and utilizes the "most sophisticated, sensitive, and specific equipment and technology available." The Department of Health and Human Services licenses Redwood's scientific procedures, documentation and personnel every two years. Miller didn’t allege facts showing that these claims were false or misleading.
Miller’s negligence claim also failed. He alleged that Redwood owed him a duty of being objective because it tested his specimen, which he was required to take and pay for as a condition of his freedom and because his results determined whether or not he’d go to jail. Though there are cases imposing a duty of care on drug testing labs with respect to the actual collection and/or testing of the specimen, there was no broader duty and Miller didn’t allege that Redwood failed to act with reasonble care in its collection or testing. It was Tri-County that interpreted Redwood’s results.
Miller’s class claims also failed, obviously.
Redwood operates forensic drug testing facilities, including EtG/EtS urine tests for alcohol. These tests measure EtG (ethyl glucuronide) and EtS (ethyl sulfate), two direct metabolites from ethanol that can be found in urine up to three to four days after ethanol is ingested. Ethanol is found in various fermented alcohol products; EtG/EtS can only be in someone’s urine if that person ingested alcohol, but ingestion doesn’t necessarily mean drinking. “An EtG level over 100 ng/mL and EtS level over 25 ng/mL indicate exposure to ethanol but is not dispositive of intentional consumption of alcohol.”
Redwood's customers specify the EtG and EtS cut-off levels they want for positive findings. Tri-County Community Corrections, a customer, selected the above cutoff for a positive finding of recent ethanol ingestion. Redwood “does not offer a definitive opinion on alcohol consumption,” and in response to a question about accuracy and reliability states:
EtG/EtS are direct metabolites of alcohol (ethanol), and their detection in urine is highly specific, similar to testing for other drugs.... This methodology provides highly accurate results. As is the case with any laboratory test, it is also very important to obtain clinical correlation.Clinical correlation means "knowledge of a test subject's medical history, alcohol consumption history and/or abuse, DUI convictions and/or alcohol related convictions and other indicators of alcohol abuse."Incidental exposure to alcohol can result in EtG concentrations over 100 ng/ml, a possibility that is discussed in Redwood's materials as a result of “chronic use of food products (vanilla extract), hygiene products, mouthwash, or OTC medications (cough syrups), which contain ethanol.” Redwood continues that “if measurable ethanol is detected (>.04 gm %) in the urine, and EtG is detected in excess of 100 ng/mL and EtS is also detected in excess of 25 ng/mL, then this is very strong evidence that beverage alcohol was ingested.” In addition, the court noted, most alcohol abstinence programs require an agreement to avoid consuming such products.
Miller is a recovering alcoholic on supervised probation, one condition of which is that he may not use or possess alcohol. He’s subject to random alcohol testing. He suffered a relapse, in violation of his probation, which he first denied and later admitted; his probation was later reinstated. A month later, he was tested again, and Redwood returned a positive result: EtG at 1130 ng/mL and EtS t 603 ng/mL.
At his hearing, he testified that in the days before he provided his sample, he assisted his mother in closing up a gift shop by cleaning metal shelving with a lacquer thinner which contained an alcohol substance, that there were heavy fumes and no ventilation, and that he also used hand sanitizer containing an alcohol substance at the hospital where he was visiting his father several times.
The state’s witness, a toxicologist and a technical consultant and certifying scientist at Redwood, testified to the debate over what a good cut-off for determining alcohol consumption, but also testified that the higest value he’d seen for EtG levels from incidental use was 713. Miller’s witness, who uses EtG/EtS testing as a tool to ensure compliance for doctors in the Alabama Physician Health program, testified that a study that involved using hand gel every two minutes for an hour in a closed room resulted in levels up to nearly 800 ng/mL, that a pharmacist using hand gel every half hour throughout the day produced a result of 770, and that a doctor "that fairly certainly had only used topical alcohol on joints" had a level of 1500. In the Alabama program, a positive test coupled with a denial of drinking results in a second test. About 10-15% of positive EtG/EtS tests have negative results on this second test, but that test only produces a positive result if a person has consumed about 7 standard drinks in a week. The state court found that Miller had credibly presented evidence of incidental exposure to alcohol and that the state hadn’t proven that Miller violated his probation by clear and convincing evidence.
Miller sued Redwood for false advertising under state law and negligence. He alleged that Redwood’s website and other advertising materials misrepresent (1) that Redwood's test uses the "most sophisticated, sensitive and specific equipment and technology available"; (2) that the EtG/EtS test was "ideal for zero tolerance and abstinence situations"; (3) that the test could produce "highly accurate results for up to 80 hours after ingestion"; (4) that Redwood's analytical methods "are accepted and approved by the U.S. Department of Health and Human Services"; and (5) that EtG "is only detected in urine when ethanol has been ingested" and that any EtG level over 100 ng/mL is the "most definitive" indicator that the specimen came from a person who has ingested alcohol.
The court found that the state law claims were subject to Lanham Act analysis, as is common in this circuit despite the structural differences between state consumer protection law and the Lanham Act.
The claims were dismissed. Redwood’s material explain the importance of obtaining clinical correlation to a positive test and recognize the potential that incidental exposure to products containing ethanol could trigger a positive test result. The statement that Redwood’s testing is “ideal” for zero tolerance and abstinence situations and is "the best and most definitive test available" are simply expressions of opinion and thus nonactionable puffery.
The claim of “highly accurate” results was also non-actionable. Miller argued that the cut-off values didn’t correlate with proof of drinking alcohol, but the cited ads did not show that Redwood claimed such proof. Its materials explained that different cut-offs varied, even as it stated that “[i]n order to provide alcohol abstinence programs with the most clinically relevant answer to whether or not recent ethanol ingestion has occurred, using a 100 ng/mL cut-off for EtG and a 25 ng/mL cut-off for EtS detection is the best and most definitive test available to answer his question.... In addition, using a 100/25 ng/mL cut-off nearly doubles the time of detection of recent ethanol detection versus the use of a 250 ng/mL cut-off. In summary, the 100/25 ng/mL EtG/EtS cut-off is superior for monitoring purposes, and provides the most sensitive and definitive indicator of recent ethanol ingestion.”
Miller also challenged Redwood's claims that the EtG/EtS test is "approved by the U.S. Department of Health and Human Services" and utilizes the "most sophisticated, sensitive, and specific equipment and technology available." The Department of Health and Human Services licenses Redwood's scientific procedures, documentation and personnel every two years. Miller didn’t allege facts showing that these claims were false or misleading.
Miller’s negligence claim also failed. He alleged that Redwood owed him a duty of being objective because it tested his specimen, which he was required to take and pay for as a condition of his freedom and because his results determined whether or not he’d go to jail. Though there are cases imposing a duty of care on drug testing labs with respect to the actual collection and/or testing of the specimen, there was no broader duty and Miller didn’t allege that Redwood failed to act with reasonble care in its collection or testing. It was Tri-County that interpreted Redwood’s results.
Miller’s class claims also failed, obviously.
Dastar only covers ideas, court mistakenly suggests
General Scientific Corp. v. SheerVision, Inc., 2011 WL 3880489 (E.D. Mich.)
GS sued SheerVision for violation of the Lanham Act, copyright infringement, violation of the Computer Fraud and Abuse Act, common law unfair competition, patent infringement, and breach of contract (not addressed here).
The parties compete in the market for surgical loupe products, “which includes telemicroscopes, lights, video cameras, and related accessories used by surgeons, dentists, and dental technicians.” SheerVision allegedly poached members of GS’s sales staff, hiring five past employees including individual defendant Caouette. Defendants allegedly used a GS computer and Caouette’s access to GS email servers to gather sales contacts, customer lists, pricing information, and copyrighted marketing material.
Defendants argued that the Lanham Act claims should be dismissed as preempted (precluded) by the copyright claims under Dastar. The court held that Dastar wasn’t dispositive because GS alleged that SheerVision misrepresented the origin of GS’s goods, a photograph and a video: “a misrepresentation by SheerVision regarding the origin and nature of media used in marketing, as opposed to a misrepresentation regarding mere ideas.” Dastar is not limited to ideas; it interprets the word “origin” to mean physical origin, as the court acknowledged, and specifically contemplates copying whole works in the public domain, including their expression, without any violation of the Lanham Act. Unless SheerVision used the same physical copies that GS produced in its marketing—which is possible depending on the actual facts, but inconsistent with the copyright infringement claim, which seems to cover the same materials—then SheerVision is the source of the materials for Lanham Act purposes. The unfair competition claims survived because of the more trade secret-oriented aspects of GS’s claims.
The court found that GS failed to plead its CFAA claims sufficiently, in particular with respect to facts indicating that damages (not including usurped sales opportunities, which are too indirect to count) were over $5000. But the copyright and patent claims survived.
GS sued SheerVision for violation of the Lanham Act, copyright infringement, violation of the Computer Fraud and Abuse Act, common law unfair competition, patent infringement, and breach of contract (not addressed here).
The parties compete in the market for surgical loupe products, “which includes telemicroscopes, lights, video cameras, and related accessories used by surgeons, dentists, and dental technicians.” SheerVision allegedly poached members of GS’s sales staff, hiring five past employees including individual defendant Caouette. Defendants allegedly used a GS computer and Caouette’s access to GS email servers to gather sales contacts, customer lists, pricing information, and copyrighted marketing material.
Defendants argued that the Lanham Act claims should be dismissed as preempted (precluded) by the copyright claims under Dastar. The court held that Dastar wasn’t dispositive because GS alleged that SheerVision misrepresented the origin of GS’s goods, a photograph and a video: “a misrepresentation by SheerVision regarding the origin and nature of media used in marketing, as opposed to a misrepresentation regarding mere ideas.” Dastar is not limited to ideas; it interprets the word “origin” to mean physical origin, as the court acknowledged, and specifically contemplates copying whole works in the public domain, including their expression, without any violation of the Lanham Act. Unless SheerVision used the same physical copies that GS produced in its marketing—which is possible depending on the actual facts, but inconsistent with the copyright infringement claim, which seems to cover the same materials—then SheerVision is the source of the materials for Lanham Act purposes. The unfair competition claims survived because of the more trade secret-oriented aspects of GS’s claims.
The court found that GS failed to plead its CFAA claims sufficiently, in particular with respect to facts indicating that damages (not including usurped sales opportunities, which are too indirect to count) were over $5000. But the copyright and patent claims survived.
Monday, September 19, 2011
Penny Dreadful: FTC succeeds against negative option sellers
Federal Trade Commission v. Willms, 2011 WL 4103542 (W.D. Wash.)
The FTC sued Willms and related defendants for violating the FTCA and claimed that Willms offshored assets to avoid scrutiny and liability. The deceptions occurred in (1) the sale of health and beauty supplements; (2) the operation of penny auctions; and (3) the sale of research services ranging from reverse telephone research to genealogical research.
Willms and the other defendants marketed weight loss supplements, colon cleansing supplements, teeth whiteners, and credit report programs as free or risk-free trials for which the purchaser had to pay only a nominal fee. But consumers were not adequately informed that the purchase was not free or that they were being enrolled in a recurring fee program. Defendants’ websites disclosed the charges but de-emphasized them and placed them in ways likely to be missed by consumers.
The FTC produced consumer complaints indicating that consumers were enrolled in multiple services without their awareness and that they found it very difficult to remove themselves from recurring charges. Defendants often enrolled buyers of one product into several “free” trial programs for unrelated products, information about which was usually disclosed only on the ordering page, “where the buyer was otherwise likely to focus on filing out the requested information to complete the sale.” Defendants claimed that they no longer engage in this “upselling” practice. As for the cancellation/refund policies, many consumers also complained that the time to return the products and affirmatively cancel was very narrow, and the FTC contended that the terms of cancellation were not prominently displayed, leading to numerous customer complaints and difficulties obtaining refunds.
Substantively, the FTC alleged that defendants made false and misleading claims about the efficacy of their products (including weight loss and cancer prevention) and used false celebrity endorsements from Rachel Ray and Oprah Winfrey, misleading customers about the products' safety and reputation.
In late 2009, defendants moved into the penny auction business. The FTC alleged that their sites use “misleading terms to lure customers in with the promise of winning expensive items for mere pennies.” The website requires a $150 enrollment fee and a recurring monthly charge of $11.95, which are allegedly not disclosed up front and set forth only in small font. Refunds are extremely difficult to obtain because consumers are required to use up all their bids without winning an item, leading to hundreds of consumer complaints.
The FTC also pointed to defendants’ high charge-back rates from various credit card companies and the use of multiple corporations as shells. Charge-backs come from disputed charges, and Visa and MasterCard view them as indicators of overly risky or predatory conduct. They frown on rates of 1% or more; defendants had rates over that and as high as 22.7%. Because defendants couldn’t get their charge-back rates down, they created new shell companies that contracted with new merchant processors to avoid Visa and MasterCard investigations. They also allegedly changed the billing descriptions on consumers’ bills to deceive them.
Further, the FTC alleged that Willms moved substantial funds offshore to Cyprus corporations. Defendants allegedly got over $400 million in gross revenues over the time in question, and the FTC provided emails suggesting that at least some of this was moved to Cyprus to avoid scrutiny.
As for defendants’ current activity, the FTC alleged that their 88 websites ranging from phone number lookup services to criminal background checks and to judicial records search services violated the FTCA by inadequately disclosing the existence and terms of negative option continuity plans with recurring monthly charges. “The websites contain nearly identical landing pages where users enter in information about which they wish to search. Several pages later, the user is presented with a page stating ‘For a Limited time, we are offering your report for $1. Please continue to ensure you get your report.’ … If the user presses the "SHOW ME MY REPORT!" button, she is directed to a page where she can fill in her credit card information. On the page in larger font in red is stated ‘Your Report is Ready. Please Order Now to Ensure You Get Your Report.’ Smaller font in the upper right, below the credit card information, discloses that “after 7 days if you do not cancel your account you will be billed $18.95 and each month thereafter for up to 5 searches of 500 million records and additional searches for only $1. To cancel anytime simply contact us by calling 866-437-1702.” The FTC argued that this was inadequate disclosure.
The court found that the FTC would likely succeed on its Section 5 and Electronic Funds Transfer Act claims against the past and current conduct.
Defendants were likely to be liable for failing to disclose negative option and features for services offered for low initial costs or that were advertised as free or risk-free and for misleading consumers that cancellation and refunds were easy to obtain. The FTC provided substantial anecdotal testimony of actual deceptiveness, including declarations from 27 individual consumers who complain that the true costs of the products weren’t made clear. The FTC also offered a statistical sampling of 48 customer calls to defendants, provided by defendants, showing consumer confusion over the terms. “Forty-four percent of the forty-eight calls showed the consumer did not understand the true nature of the charges, fifty-five percent of the call showed the customers were not aware they were enrolled in a monthly program, and nineteen percent of the callers were unaware that they were enrolled in related ‘upsell’ programs.”
But wait, there’s more! The FTC provided information from 635 consumer complaints submitted to the FTC regarding defendants’ penny auction sites, with 600 complaining failure to adequately disclose the signup fee. In a year, Alberta’s BBB received roughly 1,110 consumer complaints, mostly about the membership fees and monthly bid fees. “Defendants' argument that these sampling sizes are too small to be significant misses the mark. Consumer complaints are highly probative of whether a practice is deceptive, and the mere fact that some persons did not know they were deceived is not proof the acts are not deceptive.”
The FTC offered an expert declaration on how the weight loss and SwipeBids penny auction sites were misleading. First, the landing pages advertising the services don’t contain the key terms and conditions. Second, “the websites use font size, white spaces, color, boxes and arrows to emphasize the purported benefits of the products and services, while minimizing the information about the costs.” Third, the cost information is unreadable unless a viewer scrolls down. “Fourth, the webpages place the key information about the costs on pages where the user is focused on filling out other information and distracted.”
Defendants offered their own expert, who argued that this approach improperly assumed that buyers aren’t capable of making their own decisions. “This argument may ultimately convince a jury, but it does not plainly rebut Kleimann's analysis of the placement of key elements of the bargain outside of the buyer's view.”
In addition, the FTC went after the misleading claims about cancellation policies and practices”
Defendants argued that their current websites were FTCA-compliant, but the court disagreed:
Defendants’ experts concluded that no reasonable consumer would be deceived by their sites, but the court found that a “highly speculative proposition.”
The FTC also brought FTCA § 12 claims based on the false claims about the weight loss and colon cleanse products and on the false endorsements. The court found likely success as to the weight loss product, AcaiBurn. The claim was that "the key ingredients in AcaiBurn were found to cause up to 450% MORE WEIGHT LOSS than dieting and exercise alone will get you." The FTC’s expert provided a declaration that the ingredients wouldn’t do that. Defendants’ expert argued that the product was marketed as just one component of a weight loss regime, but there was no substantiation of the claim that the ingredients caused rapid weight loss.
As for the colon product, PureCleanse, the FTC argued that defendants strongly implied cancer prevention through the use of an embedded video of Katie Couric on the PureCleanse website discussing colon cancer. Defendants argued that the website nowhere directly stated a cancer prevention message. Their expert argued that the video only showed that colonoscopies are important to prevent (?) and detect colon cancer. The court disagreed: the inclusion of the video “suggests that the pills may have a strong correlation to prevention of colon cancer, a fact that has not been shown to be true.” Though this was a close question (why?), the court found likely success on the merits.
Defendants offered no response to the allegations of false celebrity endorsement, which the court found unsurprising, since both Rachel Ray and Oprah (yes, the court just calls her Oprah) have denounced the use of their personalities to advertise these products. Though there was no evidence that these efficacy and endorsement claims continued, an injunction was still proper.
The FTC also argued a § 5 violation because defendants charged consumers’ accounts without express informed consent and ignored proper attempts to cancel charges. Another likely success on the merits. This was unfair: it “causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.” 15 U.S.C. § 45(n). Likewise, the FTC argued an EFTA violation (and violation of EFTA regulations) because defendants failed to obtain written authorization from consumers for the merchant to place recurring charges on consumers' debit accounts, and provide a copy of the written authorization to the consumers, and an EFTA violation by definition also violates the FTCA.
The FTC argued that the high charge-back rates were evidence of unauthorized charges. Many of the charge-backs were coded as unauthorized charges or fraudulent charges. During one period, 38% of MasterCard’s 1273 charge-backs were coded as "fraud transaction--no cardholder authorization" or "non-possession of card." This was typical of 2010. The FTC contended that defendants tried to minimize charge-backs by splitting up charges, relabeling them confusingly, and processing sales through multiple merchant accounts with diferent payment processors, as well as by creating different corporations with nominee principals who could obtain apparently unrelated merchant accounts to avoid Visa and MasterCard’s flags.
Here, the defendants offered a “substantial” defense that the user of corporate affiliates to obtain merchant accounts was not an unfair practice, and that the affiliates were responsible for the high charge-backs. First, merchant processors require an American citizen to be the signatory, so Willms was required to use other individuals to open these accounts. Willms didn’t hide his his beneficial interest in the companies and he never directly dealt with Visa or MasterCard. He claimed that he used multiple processors "to obtain increased volume to satisfy the bona fide customer demand for his product and not for any other reason." Moreover, defendants argued that they were "repeatedly victimized by affiliate fraud," leading to the charge-backs.
However, the FTC’s counterattack was sufficient to show likely success on the merits. There was substantial testimony that Willms’ beneficial ownership interests weren’t adequately disclosed and that the affiliates were structured to avoid scrutiny. The evidence that the charges were coded confusingly on consumers’ statements was also unrebutted.
An injunction was appropriate, and defendants’ past conduct was “sufficiently serious and deliberate to suggest a strong likelihood of continued unfair advertising practices in the absence of an injunction.” The court accepted the FTC’s request for a broad injunction prohibiting defendants from (1) offering for sale any product with a negative option and continuity plan feature; (2) offering any products, programs or services as "free" trial" or "bonus"; (3) misrepresenting the nature of the costs to receive the product and any cancellation policy; (4) failing to disclose the amount, timing, and manner of payment of fees and the terms and conditions of any refunds; (5) making representations about the performance, benefits, and safety of any products, including those about weight loss and colon cancer; (6) misrepresenting that any product is endorsed by a celebrity or using consumer testimonials about obtaining refunds; (7) charging or debiting a consumer's bank account or credit car without express informed consent; and (8) requiring them to cease collection activities, maintain proper accounting, and preserve all records related to this action. In addition, defendants were ordered to engage in compliance monitoring and to distribute copies of the order.
Defendants argued that the restriction on negative option and continuity plans was unconstitutional and inappropriate. Nope. Any FTC remedy reasonably necessary to the prevention of future violations doesn’t impinge on constitutionally protected commercial speech. The prohibitions here satisfied that standard.
The court also granted the FTC’s request to freeze Willms’ assets and require repatriation of his funds to the US. The FTC showed that defendants had engaged in substantial offshoring on a daily basis. Combined with the FTC’s current inability to trace the whereabouts of over $400 million in revenue, that supported an asset freeze and an accounting. “[A]t the bare minimum, Defendants have bank accounts in Cyprus through which they have transferred funds and there is no full accounting of where their assets are,” and defendants’ emails suggested that the movement of funds outside the US might be for an improper purpose (there was a reference to “money laundering” in a sort of half-serious way). However, the FTC didn’t show that the other individual defendants engaged in offshore asset transfers, so the freeze only applied to Willms and the corporate defendants he controlled and directed. The other individual defendants and their personal assets were presently untouched.
The FTC sued Willms and related defendants for violating the FTCA and claimed that Willms offshored assets to avoid scrutiny and liability. The deceptions occurred in (1) the sale of health and beauty supplements; (2) the operation of penny auctions; and (3) the sale of research services ranging from reverse telephone research to genealogical research.
Willms and the other defendants marketed weight loss supplements, colon cleansing supplements, teeth whiteners, and credit report programs as free or risk-free trials for which the purchaser had to pay only a nominal fee. But consumers were not adequately informed that the purchase was not free or that they were being enrolled in a recurring fee program. Defendants’ websites disclosed the charges but de-emphasized them and placed them in ways likely to be missed by consumers.
The FTC produced consumer complaints indicating that consumers were enrolled in multiple services without their awareness and that they found it very difficult to remove themselves from recurring charges. Defendants often enrolled buyers of one product into several “free” trial programs for unrelated products, information about which was usually disclosed only on the ordering page, “where the buyer was otherwise likely to focus on filing out the requested information to complete the sale.” Defendants claimed that they no longer engage in this “upselling” practice. As for the cancellation/refund policies, many consumers also complained that the time to return the products and affirmatively cancel was very narrow, and the FTC contended that the terms of cancellation were not prominently displayed, leading to numerous customer complaints and difficulties obtaining refunds.
Substantively, the FTC alleged that defendants made false and misleading claims about the efficacy of their products (including weight loss and cancer prevention) and used false celebrity endorsements from Rachel Ray and Oprah Winfrey, misleading customers about the products' safety and reputation.
In late 2009, defendants moved into the penny auction business. The FTC alleged that their sites use “misleading terms to lure customers in with the promise of winning expensive items for mere pennies.” The website requires a $150 enrollment fee and a recurring monthly charge of $11.95, which are allegedly not disclosed up front and set forth only in small font. Refunds are extremely difficult to obtain because consumers are required to use up all their bids without winning an item, leading to hundreds of consumer complaints.
The FTC also pointed to defendants’ high charge-back rates from various credit card companies and the use of multiple corporations as shells. Charge-backs come from disputed charges, and Visa and MasterCard view them as indicators of overly risky or predatory conduct. They frown on rates of 1% or more; defendants had rates over that and as high as 22.7%. Because defendants couldn’t get their charge-back rates down, they created new shell companies that contracted with new merchant processors to avoid Visa and MasterCard investigations. They also allegedly changed the billing descriptions on consumers’ bills to deceive them.
Further, the FTC alleged that Willms moved substantial funds offshore to Cyprus corporations. Defendants allegedly got over $400 million in gross revenues over the time in question, and the FTC provided emails suggesting that at least some of this was moved to Cyprus to avoid scrutiny.
As for defendants’ current activity, the FTC alleged that their 88 websites ranging from phone number lookup services to criminal background checks and to judicial records search services violated the FTCA by inadequately disclosing the existence and terms of negative option continuity plans with recurring monthly charges. “The websites contain nearly identical landing pages where users enter in information about which they wish to search. Several pages later, the user is presented with a page stating ‘For a Limited time, we are offering your report for $1. Please continue to ensure you get your report.’ … If the user presses the "SHOW ME MY REPORT!" button, she is directed to a page where she can fill in her credit card information. On the page in larger font in red is stated ‘Your Report is Ready. Please Order Now to Ensure You Get Your Report.’ Smaller font in the upper right, below the credit card information, discloses that “after 7 days if you do not cancel your account you will be billed $18.95 and each month thereafter for up to 5 searches of 500 million records and additional searches for only $1. To cancel anytime simply contact us by calling 866-437-1702.” The FTC argued that this was inadequate disclosure.
The court found that the FTC would likely succeed on its Section 5 and Electronic Funds Transfer Act claims against the past and current conduct.
Defendants were likely to be liable for failing to disclose negative option and features for services offered for low initial costs or that were advertised as free or risk-free and for misleading consumers that cancellation and refunds were easy to obtain. The FTC provided substantial anecdotal testimony of actual deceptiveness, including declarations from 27 individual consumers who complain that the true costs of the products weren’t made clear. The FTC also offered a statistical sampling of 48 customer calls to defendants, provided by defendants, showing consumer confusion over the terms. “Forty-four percent of the forty-eight calls showed the consumer did not understand the true nature of the charges, fifty-five percent of the call showed the customers were not aware they were enrolled in a monthly program, and nineteen percent of the callers were unaware that they were enrolled in related ‘upsell’ programs.”
But wait, there’s more! The FTC provided information from 635 consumer complaints submitted to the FTC regarding defendants’ penny auction sites, with 600 complaining failure to adequately disclose the signup fee. In a year, Alberta’s BBB received roughly 1,110 consumer complaints, mostly about the membership fees and monthly bid fees. “Defendants' argument that these sampling sizes are too small to be significant misses the mark. Consumer complaints are highly probative of whether a practice is deceptive, and the mere fact that some persons did not know they were deceived is not proof the acts are not deceptive.”
The FTC offered an expert declaration on how the weight loss and SwipeBids penny auction sites were misleading. First, the landing pages advertising the services don’t contain the key terms and conditions. Second, “the websites use font size, white spaces, color, boxes and arrows to emphasize the purported benefits of the products and services, while minimizing the information about the costs.” Third, the cost information is unreadable unless a viewer scrolls down. “Fourth, the webpages place the key information about the costs on pages where the user is focused on filling out other information and distracted.”
Defendants offered their own expert, who argued that this approach improperly assumed that buyers aren’t capable of making their own decisions. “This argument may ultimately convince a jury, but it does not plainly rebut Kleimann's analysis of the placement of key elements of the bargain outside of the buyer's view.”
In addition, the FTC went after the misleading claims about cancellation policies and practices”
Consumers were often told that “you will never be charged” and that there was a “TRUE SATISFACTION GUARANTEE” for many of the services. Yet refunds were usually only available by jumping through a myriad of hoops. Cancellation periods were exceedingly short and the terms required for a refunds were difficult to meet. For those enrolling in penny auctions, a refund was only possible when all of the bids were used and the buyer won no items. Out of six-hundred-thirty-five consumer complaints related to the auctions, five-hundred-twenty-nine stated that they never received a refund, despite trying to follow the complex process. Similarly, with regard to the trial products, nearly half of those complaining to the FTC did not receive full refunds.The court found a likely § 5 violation here as well.
Defendants argued that their current websites were FTCA-compliant, but the court disagreed:
These websites continue to contain negative option and continuity plans (e.g. ‘trial’ packages) whose enrollment fees and recurring costs are poorly disclosed. Notably, the fact that the services for sale contain any continuity plan or negative option is not disclosed until the user lands on the sixth page on which he or she is required to enter credit card information. The landing page and the four following pages nowhere suggest there are any other charges but a one-dollar fee. (See, e.g., Dkt. No. 79-1 at 2-6.) The ordering page itself discloses the terms of the continuity plan in text that is smaller than the other text. The placement is not central, and there is no means of purchasing the service without accepting enrollment into the continuity plan. The website design and layout are similar to those the FTC's expert reviewed and found to have a net impression that was misleading.Defendants tried to compare their sites to an Intellius website that the court found nondeceptive, but the differences were patent. The Intellius website contained a stand-alone page explaining the terms of the offer, including the continuity plan and negative option, without any requirement to input information. There was also a separate box on the same page allowing users to remove the continuity plan before buying. Defendants’ websites don’t permit the purchase of their services without the continuity plan. Also, the font size, text placement, and overall page display was entirely different, with a roughly consistent font size for the entire Intellius disclosure page. And Intellius has two successive pages disclosing the continuity plan to the user before the credit card input page.
Defendants’ experts concluded that no reasonable consumer would be deceived by their sites, but the court found that a “highly speculative proposition.”
The FTC also brought FTCA § 12 claims based on the false claims about the weight loss and colon cleanse products and on the false endorsements. The court found likely success as to the weight loss product, AcaiBurn. The claim was that "the key ingredients in AcaiBurn were found to cause up to 450% MORE WEIGHT LOSS than dieting and exercise alone will get you." The FTC’s expert provided a declaration that the ingredients wouldn’t do that. Defendants’ expert argued that the product was marketed as just one component of a weight loss regime, but there was no substantiation of the claim that the ingredients caused rapid weight loss.
As for the colon product, PureCleanse, the FTC argued that defendants strongly implied cancer prevention through the use of an embedded video of Katie Couric on the PureCleanse website discussing colon cancer. Defendants argued that the website nowhere directly stated a cancer prevention message. Their expert argued that the video only showed that colonoscopies are important to prevent (?) and detect colon cancer. The court disagreed: the inclusion of the video “suggests that the pills may have a strong correlation to prevention of colon cancer, a fact that has not been shown to be true.” Though this was a close question (why?), the court found likely success on the merits.
Defendants offered no response to the allegations of false celebrity endorsement, which the court found unsurprising, since both Rachel Ray and Oprah (yes, the court just calls her Oprah) have denounced the use of their personalities to advertise these products. Though there was no evidence that these efficacy and endorsement claims continued, an injunction was still proper.
The FTC also argued a § 5 violation because defendants charged consumers’ accounts without express informed consent and ignored proper attempts to cancel charges. Another likely success on the merits. This was unfair: it “causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.” 15 U.S.C. § 45(n). Likewise, the FTC argued an EFTA violation (and violation of EFTA regulations) because defendants failed to obtain written authorization from consumers for the merchant to place recurring charges on consumers' debit accounts, and provide a copy of the written authorization to the consumers, and an EFTA violation by definition also violates the FTCA.
The FTC argued that the high charge-back rates were evidence of unauthorized charges. Many of the charge-backs were coded as unauthorized charges or fraudulent charges. During one period, 38% of MasterCard’s 1273 charge-backs were coded as "fraud transaction--no cardholder authorization" or "non-possession of card." This was typical of 2010. The FTC contended that defendants tried to minimize charge-backs by splitting up charges, relabeling them confusingly, and processing sales through multiple merchant accounts with diferent payment processors, as well as by creating different corporations with nominee principals who could obtain apparently unrelated merchant accounts to avoid Visa and MasterCard’s flags.
Here, the defendants offered a “substantial” defense that the user of corporate affiliates to obtain merchant accounts was not an unfair practice, and that the affiliates were responsible for the high charge-backs. First, merchant processors require an American citizen to be the signatory, so Willms was required to use other individuals to open these accounts. Willms didn’t hide his his beneficial interest in the companies and he never directly dealt with Visa or MasterCard. He claimed that he used multiple processors "to obtain increased volume to satisfy the bona fide customer demand for his product and not for any other reason." Moreover, defendants argued that they were "repeatedly victimized by affiliate fraud," leading to the charge-backs.
However, the FTC’s counterattack was sufficient to show likely success on the merits. There was substantial testimony that Willms’ beneficial ownership interests weren’t adequately disclosed and that the affiliates were structured to avoid scrutiny. The evidence that the charges were coded confusingly on consumers’ statements was also unrebutted.
An injunction was appropriate, and defendants’ past conduct was “sufficiently serious and deliberate to suggest a strong likelihood of continued unfair advertising practices in the absence of an injunction.” The court accepted the FTC’s request for a broad injunction prohibiting defendants from (1) offering for sale any product with a negative option and continuity plan feature; (2) offering any products, programs or services as "free" trial" or "bonus"; (3) misrepresenting the nature of the costs to receive the product and any cancellation policy; (4) failing to disclose the amount, timing, and manner of payment of fees and the terms and conditions of any refunds; (5) making representations about the performance, benefits, and safety of any products, including those about weight loss and colon cancer; (6) misrepresenting that any product is endorsed by a celebrity or using consumer testimonials about obtaining refunds; (7) charging or debiting a consumer's bank account or credit car without express informed consent; and (8) requiring them to cease collection activities, maintain proper accounting, and preserve all records related to this action. In addition, defendants were ordered to engage in compliance monitoring and to distribute copies of the order.
Defendants argued that the restriction on negative option and continuity plans was unconstitutional and inappropriate. Nope. Any FTC remedy reasonably necessary to the prevention of future violations doesn’t impinge on constitutionally protected commercial speech. The prohibitions here satisfied that standard.
The court also granted the FTC’s request to freeze Willms’ assets and require repatriation of his funds to the US. The FTC showed that defendants had engaged in substantial offshoring on a daily basis. Combined with the FTC’s current inability to trace the whereabouts of over $400 million in revenue, that supported an asset freeze and an accounting. “[A]t the bare minimum, Defendants have bank accounts in Cyprus through which they have transferred funds and there is no full accounting of where their assets are,” and defendants’ emails suggested that the movement of funds outside the US might be for an improper purpose (there was a reference to “money laundering” in a sort of half-serious way). However, the FTC didn’t show that the other individual defendants engaged in offshore asset transfers, so the freeze only applied to Willms and the corporate defendants he controlled and directed. The other individual defendants and their personal assets were presently untouched.
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