xkcd and false advertising

xkcd today is about false advertising. Check out the alt-text: "Telling someone who trusts you that you’re giving them medicine when you’re not, because you want their money, isn’t just lying--it’s like an example you’d make up if you had to illustrate to a child why lying is wrong.” HT Greg Klass.

Comparative advertising

Seen at the mall. I think the reference is to Pandora bracelets; Pandora sells a breast cancer line, though none of the charms in the picture seemed to match all that well with the Pandora line. Legitimate? At least the pricing's about right.

Empire down

Empire Today, LLC v. National Floors Direct, Inc., 788 F. Supp. 2d 7 (D. Mass. 2011)

Empire and NFD compete to provide on-site carpet and flooring. Empire sued NFD for tortious interference and trademark and false advertising Lanham Act violations as well as violations of M.G.L. chapter 93A, the state consumer protection law. Empire settled with three former sales reps for breaching their agreements with Empire before the end of trial. NFD counterclaimed for defamation, tortious interference, false advertising under the Lanham Act, and abuse of process. A jury found against plaintiff on all its claims, except for the 93A claims the court had reserved for itself. The jury found in favor of NFD on the abuse of process claims and awarded NFD $500,000.00.

The parties’ business model relies heavily on TV ads and salespeople. Roughly 10 managers and 20 sales reps left Empire to work for NFD, “some under acrimonious conditions.” The evidence around whether NFD induced these employees to leave was hotly disputed.

NFD has long run a “15% or it’s free” promotion promising to beat anyone’s price by 15% “or it’s free.” Empire alleged that NFD didn’t provide the advertised discount. It offered evidence of a customer order containing less than that discount, and orders in which one NFD principal, Dan Rosenberg, reduced the prices by only 13%, despite claiming that he was offering a 15% discount. In one case, a customer complained and Rosenberg then reduced the price by 15%.

Customers were only entitled to the 15% off if they had a written quote from another company for the same quality and quantity of flooring. The first customer order Empire showed hadn’t satisfied those prerequisites. Only about 10% of NFD’s orders beat competitors’ prices. As for the others, Rosenberg testified that he sometimes took 15% off by dividing the competitor’s price by 1.15—that is, he took 13% off, not 15%. He should have multiplied by .85. Rosenberg’s calculation was used in about 10% of the orders that beat competitors’ prices. NFD, in a move that would make some politicians proud, cast Rosenberg’s calculations as “an issue of internal disagreement,” and also as a method that NFD’s software used. (Argh. This is math. Getting it wrong doesn’t mean there’s relevant disagreement; it means there’s right and wrong.)

As for NFD’s counterclaims, NFD alleged that Empire targeted it as a threat to Empire’s market. Empire performed at least eight “secret shops,” when a competitor’s employee pretends to be a customer to learn more about the target, including its pricing. Though the parties hotly contested the causes of changes in market share, NFD grew at least in part because of its low prices. Empire also reduced its ad spending in the Boston area and suffered from management problems in the Boston office. Indeed, Empire initially planned to close its Boston office, but cancelled the plan partly because it didn’t want to leave NFD without direct competition, which would ease NFD's expansion into other areas. Because Empire felt NFD was poaching its reps, Empire began sending C&Ds to NFD.

In one email chain featuring key figures at Empire, one of several possible strategies mentioned was: "We should aggressively work on the legal front. (non-competes and potentially their advertising/disclosures/disclaimers) This could be an expensive distraction at a time where [NFD is] investing in a new facility and heavy advertising." Another said that one key figure would like to see if it would be feasible to get a "large amount" of damages and take the "most aggressive" legal position, including "appropriate suing individuals [sic]." This garnered a reply: “[If Plaintiff] truly want[ed] to hurt [a competitor in Chicago] and NFD (including in this conversation at this point as to looking to expand the legal actions to them) we should leverage the profit in other markets to offset loses in Chicago and Boston. The competitors do not have this advantage and [in] losing money they will need to continue to dig into their own pockets versus leveraging other profitable markets....” The court viewed this as top management discussing legal action “seemingly as a tactical means of competition against NFD and as a tool to force NFD to incur legal fees.”

Empire also filed at least one complaint with the BBB about the 15% promotion. Months after Empire filed its initial lawsuit, it decided to close the Boston office because of a mix of price competition from NFD, leadership troubles, and generally poor economic conditions. It reversed its decision after a sales rep pointed out that this would give NFD “free reign [sic],” and that Empire would only be able to get back into the Boston market by underselling NFD.

Empire moved for judgment as a matter of law on NFD’s abuse of process counterclaim, arguing that NFD didn’t meet its burden to provide the jury with an evidentiary basis on which to award any fees because it mentioned those fees only in general and unsubstantiated ways, without any specifics for hours, charges and rates. NFD argued that the award was based not merely on attorneys’ fees but also on the financial harm caused to NFD’s business as a result of the lawsuit, which Empire argued was also never quantified by documentary or expert evidence.

The court found that the jury’s award was based on sufficient evidence. NFD’s president testified that NFD incurred more than $1.5 million in defense costs, which had to be diverted from advertising, resulting in lost revenue. This testimony was corroborated by the president’s relative, NFD's consultant with over forty years of experience in the carpet business. Also, testimony throughout the trial explained how the Rosenbergs' diversion of time, attention, and financial resources was a result of Empire’s suit. Though Empire argued that these claims weren’t supported by sufficient evidence, the court declined to disturb the jury’s verdict: the testimony of a company’s president is not insufficient as a matter of law, and Empire didn’t provide any evidence disputing NFD’s calculations. Also, NFD provided specifics in some instances, and there was no authority that more quantification of general financial harm was required. Moreover, though NFD’s financial condition improved after it was sued, that didn’t undermine the jury’s finding that it suffered damages that prevented it from realizing more profits.

Turning to NFD’s Chapter 93A counterclaim: NFD claimed that the abuse of process also violated Chapter 93A, constituting unfair and deceptive conduct. Empire waited for two years to file suit, didn’t seek injunctive relief, and sued individual employees. The court ruled that, though abuse of process could constitute a violation of Chapter 93A, it wasn’t bound by the jury’s finding on abuse of process.

Unfairness generally requires “rascality”: the "'objectionable conduct must attain a level of rascality that would raise an eyebrow of someone inured to the rough and tumble world of commerce.'" Abuse of process means that "'[1] process was used, [2] for an ulterior or illegitimate purpose, [3] resulting in damage.'" More than intent to cause a party to spend substantial time or money is required; there must be an intention to use process for coercion or harassment to obtain something not properly part of the suit.

The court found that NFD was not entitled to judgment on its abuse of process Chapter 93A claim. The emails weren’t enough to convince the court that Empire engaged in abusive litigation unfair enough to violate Chapter 93A. Empire discussed using its deep pockets offensively, but the court didn’t find that the lawsuit was motivated by a desire to injure NFD’s business. The lawsuit was filed 8 months after the first email, and the second was part of a conversation about various legitimate business practices, including leveraging profits in other markets and recovering market share by generating and closing more leads. Even though one participant suggested a desire to “hurt” NFD, that didn’t show that Empire sued to hurt NFD’s finances or drive it out of business. The court read the emails to refer to “(1) the legal fees that NFD would incur as a result of a legal action and (2) beating NFD by various legitimate practices, including providing different financing offers.” Indeed, Empire’s primary investor and ultimate decision maker replied to the second email by endorsing only the improvement of financing offers and increase in advertising. “In sum, mere conversation among interested individuals about a possible lawsuit does not constitute abuse of process.”

The other conduct was also insufficient, even in conjunction with the emails. Chapter 93A has been violated when parties raced to litigate unmeritorious claims without knowing all the facts or failed to make a reasonable settlement offer in the face of a meritorious claim. Here, by contrast, Empire attempted to resolve the issues out of court for two years, sending multiple C&Ds. It went to the BBB. It sued only as a last resort, and the court found that NFD itself may not always have enaged Empire in good faith. Moreover, Empire engaged in settlement discussions. This was not sufficient rascality to surprise people inured to the world of commerce: NFD failed to show that other corporations don’t discuss suing “as one of many means of competing against companies that they believe are engaging in illegal conduct.”

Empire’s Chapter 93A claim: Empire argued that NFD’s 15% promotion was literally false because (1) one of the principals confirmed that NFD only provides a 13% discount (remember that testimony about how the computer program does it), and (2) NFD has never given a free job. The second was easily disposed of: there was no evidence that NFD had ever been in a situation when it couldn’t give 15% and would thus have to do the job for free, yet refused to do so. Empire pointed to inconsistency in testimony on NFD’s side, such as at one time alleging that the promotion accounted for very little business and at other times claiming that the promotion was used "all day long" and "on every single customer."

A Chapter 93A claim requires the same elements as a Lanham Act false advertising claim. (Really? Chapter 93A requires that a statement be made in interstate commerce? This seems unlikely and shows the silliness of relying on such general, casual equations of state and federal false advertising law, which are generally tossed off in circumstances where people aren’t paying attention to the differences.) So Chapter 93A also uses the false/misleading distinction.

The court held that Empire didn’t show literal falsity. It didn’t prove that NFD didn’t honor the 15% discount as a standard practice, given the conditions (which were disclosed in the offer). Even the customer orders showing Rosenberg’s “alleged” miscalculations weren’t definitively established as qualifying for the 15% promotion. (Hmm—so why did the customer who complained get the 15%?)

And here the court adds an intent requirement: the “different ways” of calculating 15% didn’t mean the advertising was literally false. NFD and the Rosenbergs (there were a number of them involved) generally thought they were providing 15% when the customers qualified. “At worst, the 15% Promotion more likely suggested an internal disagreement at NFD over a mathematical calculation.” Argh again! Anyway, this disagreement only affected a small percentage of sales, none of which were clearly established as qualifying for the 15% Promotion. “Such a reasonable but incorrect interpretation of a matter does not alone constitute unfair and deceptive conduct.” Even if this was negligent, negligence alone doesn’t support Chapter 93A liability. (So, not so much like the Lanham Act, is it?) Also, NFD told the BBB its method of calculating 15% (which was, at least as to Rosenberg, actually a method of calculating 13%--look, if I told you that I was measuring in liters and I was actually measuring in gallons, even if I was honestly mistaken about what a liter was I’d be—no, forget it). The BBB apparently didn’t accuse NFD of falsity specifically about the 15% calculation, and anyway the court wasn’t bound by the BBB’s views (citing Timothy Noah, Busted Watchdog: Is the Better Business Bureau a Protection Racket?, Slate (December 7, 2010, 7:38 PM); David Lazarus, Better Business Bureau Grades Companies on a Peculiar Curve, L.A. Times, Jan. 21, 2009, perhaps to suggest why).

Empire didn’t have consumer surveys or other evidence of misleadingness, so without literal falsity its claim failed.

Empire also failed to show causation and damages. A precise showing of harm isn’t required and sales diversion may suffice, but some causal connection between misrepresentation and harm is necessary. Empire lost sales for many reasons, including its own management issues and NFD’s generally low prices. Empire’s decline during NFD’s rise showed only correlation, not causation. Empire didn’t identify any consumers who chose to purchase from NFD over Empire because of the 15% offer. Given the inconsistent evidence, the court found it appropriate to agree with the jury, which is best suited to resolve such a dispute. (Perhaps there was a special verdict form indicating that the jury found that Empire hadn’t shown causation.)

NFD requested a fee award under the Lanham Act. The Seventh Circuit has held that abuse of process makes a case “exceptional” for fees purposes. The court found, however, that NFD hadn’t met the more relevant First Circuit standard, which requires that a defendant show something less than bad faith, “such as a plaintiff's use of groundless arguments, failure to use controlling law, and generally oppressive nature of the case.” NFD didn’t satisfy that standard. Empire’s suit wasn’t completely lacking in merit; it presented a substantial amount of evidence on its false advertising and trademark claims, and both went to the jury. The factual situation was very different from that in the Seventh Circuit case, in which defendant won early summary judgment on a meritless and disingenous claim. The Seventh Circuit described an exceptional case as one in which the party's claim is "objectively unreasonable"--a claim that a rational litigant would pursue "only because it was extortionate in character if not necessarily in provable intention." But the court already found that Empire wasn’t extortionate in its Chapter 93A analysis.

statutory unfair competition claims and the parol evidence rule

Duncan v. The McCaffrey Group, Inc., --- Cal.Rptr.3d ----, 2011 WL 5110475 (Cal. App. 5 Dist.)

One advantage of statutory unfair competition claims for a plaintiff, evident here, is their independence from some of the tactics sellers often use to limit their liability.

Defendants developed a tract of land marketed as the Treviso Custom Home Development. Plaintiffs purchased lots with the intent to build custom homes on each lot; some have finished doing so. They sued, alleging that they paid a premium price because defendants marketed the development as one that would be limited to custom homes with at least 2,700 square feet of living space. However, unbeknownst to plaintiffs, defendants allegedly always intended to build tract homes on some of the lots that would be much smaller than 2,700 square feet. They alleged that this decreased the value of their homes.

The district court dismissed a variety of claims. Plaintiffs appealled only on the statutory unfair competition/false advertising claims and fraud, and also appealled the trial court’s grant of summary judgment on claims for breach of fiduciary duty and constructive fraud.

The trial court ruled that the parol evidence rule precluded any testimony about facts inconsistent with the contract between the parties and the purchase and sale agreement, depriving plaintiffs of a factual basis for their claims. The court of appeals affirmed as to the fraud claim, but reversed as to the statutory causes of action because those didn’t involve any attempt to vary, alter, or add to the terms of the parties’ agreement, and thus the parol evidence rule was inapplicable. The court of appeals also reversed the summary judgment on the question of whether defendant McCaffrey Home Realty acted as plaintiffs’ real estate agent and therefore owed them a fiduciary duty; the agreement was ambiguous, creating a triable issue of fact.

Plaintiffs bought their lots between July 28, 2006, and August 8, 2007. As initially recorded, and at the time plaintiffs bought their lots, the conditions, covenants & restrictions (CC&Rs) required each home built within the development to be at least 2,700 square feet and "'architecturally compatible with each other.'" Defendants also told two of the plaintiffs that the development contained the only custom home lots in the area and did other things allegedly indicating that the development would be full of custom homes.

After the plaintiffs bought their lots, defendants, without notice, caused the CC&Rs to be amended to reduce the minimum size of each residence built in the development, first to 1,700 square feet and then to 1,400 square feet. (This also, plaintiffs alleged, violated several provisions of the Business and Professions Code governing the relations between subdividers and lot owners.) Defendants also began selling tract homes on lots in the development for essentially the same price as plaintiffs paid for their undeveloped lots. This meant that the development was no longer a custom home development, and one defendant allegedly admitted to plaintiffs that it was never intended to be.

Defendants argued that any reliance on the alleged misrepresentations was unreasonable as a matter of law, because paragraph 9(a) of the sales agreement specifically permitted defendants to change the "product, development plan ... and marketing methods" for the development. This included:

Without limitation, … Seller may elect not to build residences on each lot of this phase or future phases of the project, or may elect to build a different type or size of residence on a smaller or larger lot, or may use different construction methods to build such residences.… Any of the foregoing events may adversely affect the value of the Property. Nothing herein shall be interpreted as an express or implied warranty or representation that the Seller will refrain from any pricing program, product design program, development strategy or marketing plan which in any manner adversely affects the value of the Property, and Buyer acknowledges that no sales representative has made any contrary representation, or has made any representation regarding any potential appreciation of the Property, any resale value of the Property, or the effect of any component, option or amenity of the Property upon the value of the Property.

The developer also retained the right to amend the CC&Rs at any time, including the right to reduce the minimum size of any residence within the Development, so long as it owned more than 51 percent of the lots.

The unfair competition/false advertising claims were not subject to the parol evidence rule, because they alleged false advertising, which didn’t affect the terms of the written agreement between the parties. Plaintiffs weren’t arguing that the terms of the agreement and the CC&Rs prohibited defendants from building tiny tract homes in the development. Instead, they alleged that defendants advertised the development as one for only custom homes, justifying a premium lot price. The question is whether plaintiffs could reasonably rely on this allegedly false advertising. Defendants argued that they couldn’t because of what the written contracts said. But plaintiffs sufficiently pled reliance and materiality. “The jury rationally could conclude that defendants' retention of the right to alter the nature of the Development did not necessarily mean they would do so.”

By contrast, the court of appeals refused to apply the fraud exception to the parol evidence rule to these facts. Under California law, the tort of promissory fraud based on an oral promise is limited by the parol evidence rule when the oral promise directly contradicts the terms of the contract to which the parties agreed (at least when there’s no misrepresentation that a particular term is not included in a contract). Here, an alleged promise not to use a right included in the contract was not within the scope of the fraud exception.

As for the fiduciary duty argument, the court found the agreement to be a “model of ambiguity”:

Agency Confirmation (California Civil Code § 2079.17 ). McCaffrey Home Realty is both the 'listing agent' and the 'selling agent' in the purchase and sale transaction contemplated by this Agreement. The 'listing agent' is the real estate broker who has obtained a listing of real property from the Seller to act as an agent of the Seller for compensation. The 'selling agent' means an agent who sells or finds and obtains buyers for real property and presents offers to purchase to the Seller. MCCAFFREY HOME REALTY IS THE AGENT OF [X] THE SELLER EXCLUSIVELY; OR [ ] BOTH THE BUYER AND SELLER. IN ITS CAPACITY AS BOTH THE LISTING AGENT AND THE SELLING AGENT, MCCAFFREY HOME REALTY IS ACTING AS THE AGENT OF BOTH BUYER AND SELLER IN CONNECTION WITH THE PURCHASE AND SALE CONTEMPLATED BY THIS AGREEMENT. McCaffrey Home Realty is affiliated by ownership with the Seller.

Another document labeled "DISCLOSURE REGARDING REAL ESTATE AGENCY RELATIONSHIPS" identified McCaffrey Home Realty as the "AGENT" and the respective plaintiffs as the "BUYER/SELLER."

The court reasoned that the ambiguity of the relevant language was apparent when each sentence was considered in isolation. The court found it impossible to reconcile all that was said in each. As marked, the fourth sentence said that McCaffrey Home Realty was exclusively the seller’s agent, but that was inconsistent with the first and fifth sentences, which said it was the agent for both buyer and seller. Thus, extrinsic evidence should be considered by the trier of fact.

Everything depends on execution: art claims fail

S.A.R.L. Galerie Enrico Navarra v. Marlborough Gallery, Inc. --- F.Supp.2d ----, 2011 WL 2623460 (S.D.N.Y.)

Plaintiffs (Navarra) sued Marlborough for unfair competition and attempted monopolization of the global market for the sale of ceramic artwork by the renowned artist Chu Teh-Chun, whose work has been exhibited in over 100 solo shows and is a part of at least 25 museum collections. Navarra is a private, high-end art gallery with space in Europe and the US. Navarra pled that the market for high-end art is small, specialized, and global, with submarkets for works by particular artists and aspects of an artist’s body of work.

Chu is primarily known for his work as a painter. In 2003, Navarra entered into a Fabrication Agreement with Chu and a French ceramic foundry, La Tuilerie. Chu designed 24 plates, each with an original painting by Chu. Following Chu's final approval (including a signed template or bon-à-tirer that was not supposed to be sold), the plates were reproduced in multiples of 40, with a total of 960 produced. The plates sold at auction for $1,700 to $2,100 each.

In 2006, Marlborough began working with Chu, commissioning a series of 57 hand-painted ceramic vases. They sold for about $280,000 each. Navarra argued that its plates were a barrier to sales of the vases, and that Marlborough therefore engaged in a covert campaign to destroy Navarra.

Navarra alleged that on February 29, 2007, Chu's attorney Bourdon sent a C&D to Navarra and the foundry alleging that they were violating the fabrication agreement, demanding that the plates be returned to Chu, and demanding that all exhibitions and sales of the plates cease. Navarra asserted that the letter was actually written and sent at Marlborough's behest and with its participation and substantial assistance. Navarra didn’t comply with the C&D, and Chu sued in France a little over a month later. Navarra also claimed that the still-pending French lawsuit was actually brought at Marlborough's behest and with its participation and substantial assistance.

In May 2008, Navarra attempted to auction a number of its pieces through Christie's in Hong Kong. Nine days before the auction, Chu’s lawyer sent an email to Christie’s stating that the Navarra-commissioned ceramics were the subject of litigation in France and that Chu "has the greatest reservations about the authenticity" of the ceramics and demanding that the auction be cancelled. Christie’s complied. Navarra alleged that these statements were knowingly false and defamatory, and also written and sent at Marlborough's behest.

Navarra also blamed Marlborough for an Oct. 3, 2008 ad in the Journal des Arts, "A Public Warning from Mr. Chu Teh-Chun." “It warned that the Navarra-commissioned ceramics were not genuine and that the Christie's Hong Kong auction was cancelled.” Navarra also alleged that Marlborough republished the ad to media outlets around the world. Navarra sued the Journal des Arts and Chu in France for defamation in 2008; the suit against the Journal des Arts settled and the case against Chu is pending.

Additionally, Navarra alleged that Marlborough exhibited the vases at the Musee Guimet, the French national museum of Asian art, as part of its sales strategy. The Managing Curator, Jean-Paul Deroches, was allegedly a frequent Marlborough collaborator. An illustrated catalogue, De Neige, d'or et D'Azure was produced, written by Deroches. Navarra alleged that the content was provided by Marlborough and that Desroches was enlisted to "pose" as the author. Navarra objected to the following text in the published De Neige: “Over a thousand canvases predated Chu Teh-Chun's rendezvous with the Sevres porcelain manufactory, as did an even greater number of ink drawings and watercolors. Nevertheless, in that time he has conducted only a few experiments with ceramics, notably in a workshop outside of Taipei in 1998 and in another in Treigny, France in 2002. But these modest explorations were not pursued ....”

Relatedly, in 2009, Marlborough allegedly influenced the publisher (La Martiniere) to put a very similar statement on its website. Though it was purportedly a quote from Deroches, Navarra alleged that Marlborough was the actual author, and that the statement was misleading and defamatory because it doesn’t include the Navarra-commissioned ceramics as genuine works of Chu’s art. Navarra alleged that such a statement was understood by members of the art community as a denial of the authenticity of the Navarra-commissioned ceramics. When Navarra complained to the publisher, it allegedly told Navarra that Marlborough had given warranties as to the accuracy of the relevant statement.

Navarra argued that its ceramics had been given a false taint of inauthenticity, causing millions in lost profits and reputation.

The court first found that Navarra couldn’t sue for attempted monopolization under the Sherman Act, because the market definition was insufficient as a matter of law. The two types of Chu works were very different; one involved multiple copies and the other involved unique, original works by Chu, and the latter sold for more than 140 times the former. Thus, the products were not reasonably interchangeable nor was it plausible to suggest cross-elasticity of demand.

The Lanham Act claims also failed because Navarra didn’t allege any false statements in commercial advertising or promotion. The paragraph in De Neige was a subjective claim that couldn’t be proven true or false and thus not actionable, and indeed protected by the First Amendment. “Deroches's description of Chu's previous ceramic work as a ‘modest exploration[ ]’ merely places the works within the context of Chu's career as an artist,” and was clearly just opinion. Even if solicited by Marlborough, the statements in the book and on the publisher's website constituted mere expressions of non-actionable opinion.

Moreover, “the statements by Deroches are those of a disinterested third party. Plaintiffs do not allege that Deroches has any financial interest in the sale of the Chu vases.” Navarra merely speculated that Marlborough ghost-wrote De Neige. “It is implausible that the managing curator of the Musee Guimet would lend his name to a publication in order to insert a vague reference that arguably diminishes the Navarra-commissioned ceramics.”

The state law claims (defamation, product disparagement) failed for similar reasons. Navarra had nothing beyond mere speculation that any of the harmful statements or acts were attributable to Marlborough. In addition, the statements were either non-actionable expressionof opinion or arguably privileged statements made in contemplation of or during the French legal proceedings. (I have no idea how the privilege applies to foreign cases; I’m not sure I’ve ever encountered this situation before and the court didn’t cite any cases, but that sounds plausible.)

Nonetheless, the court declined to find this an exceptional case and therefore didn’t award Marlborough its attorneys’ fees.

California consumer class action certified after Wal-Mart

Schramm v. JPMorgan Chase Bank, N.A., 2011 WL 5034663 (C.D. Cal.)

The putative class plaintiffs sued JPMorgan Chase and Chase Home Finance over disclosure forms and mortgage notes in connection with ARMs they took out. They argued that these documents misrepresented the interest rates they’d be charged: that defendants told them that the rates would be calculated in one particular way but then charged plaintiffs higher rates than produced by that calculation. Most of their claims were dismissed on statute of limitations grounds, but their claims for recission based on fraud or mistake and for restitution and injunctive relief for alleged violations of Cal. Bus. & Prof.Code § 17200 survived. The court here certified a class for the § 17200 claim.

The initial proposed class of about 28,000 in California had to be reduced to deal with borrowers outside the limitations period.

Plaintiffs argued that, if proved, the conduct would violate the law, entitling each plaintiff to restitution of defendants’ ill-gotten gains: the difference between the interest each class member actually paid and the amount he or she would have paid if the rate had been calculated as disclosed. In addition, they argued that each class member was entitled to recission on the basis of mistake or fraud.

The court found that numerosity was not in dispute. Commonality requires a common question of such a nature that it can be resolved classwide: “determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke.” Wal-Mart, 131 S.Ct. at 2551. Ninth Circuit precedent allows findings of commonality when similar misrepresentations were allegedly made to all class members. The court thus found commonality for both causes of action.

As for the restitution claim under § 17200, plaintiffs argued that the case would turn on defendants’ misrepresentations and not on the states of mind or reliance of individual borrowers, making individual issues secondary. They further contended that, as the class was limited to borrowers who received loan disclosures with the same misleading language, there were common questions of fact on likely deception. Defendants rejoined that the case instead would turn on how each borrower interpreted the disclosures that he or she received, and whether each putative class member found the language material. The court held that the question was resolved by Ninth Circuit precedent applying Tobacco II, Stearns v. Ticketmaster Corp., --- F.3d ----, 2011 WL 3659354 (9th Cir. 2011).

Stearns said that a California UCL/FAL claim requires only that members of the public are likely to be deceived. Neither defendant’s knowledge of falsity nor plaintiff’s reasonable reliance are required. In particular, individual inquiries into reliance aren’t required, and trial will focus on whether the representations were likely to deceive a reasonable borrower, consistent with Wal-Mart.

Likewise, the recission claim also satisfied the commonality requirement. Commonality under Rule 23(a) is less exacting than predominance under Rule 23(b)(3), and requires only some common questions of fact or law that are potentially dispositive of the case. Given the factual similarity among the representations made to all class members, these issues included: (i) how a reasonable person would interpret Defendants' disclosures to mean that the initial interest rate would be the sum of an index and a margin; and (ii) whether the alleged misrepresentations would be material to a reasonable borrower. These both went to a dispositive issue of whether plaintiffs would be entitled to a class-wide presumption of reliance.

Defendants contested typicality because one of the named plaintiffs didn’t read the disclosures and the other had a “complicated and highly individualized method of shopping for ARM loans.” Not so; though failure to read the disclosures might be a defense to a claim for recission based on fraud, it wouldn’t be one that would make it difficult for the plaintiff to represent the class. Neither would a particular method of loan evaluation. “The core issue presented is whether the interest rates were as low as promised.”

Defendants failed to identify a problem with the adequacy of class counsel.

On to Rule 23(b)(3), predominance and superiority.

The court first found that common questions predominated in the § 17200 claim. Stearns held that because all putative class members encountered the same representations, common questions predominated over individual ones. The same was true here. Defendants, reflecting the trend to use standing as a separate weapon, argued that there were individual issues regarding standing and the statute of limitations that defeated predominance.

Standing requires injury in fact, a causal connection between the injury and the conduct complained of that’s fairly traceable to the defendant, and a likelihood that a favorable decision will redress the injury. Proximate cause is not required. Defendants argued that many putative class members would lack Article III standing because they suffered no injury from receiving the documents. They could have “interpreted the relevant language differently than the class representatives; failed to read the disclosures at all; or chosen a loan from Defendants for reasons unrelated to the allegedly misleading language.”

Plaintiffs responded that demonstrating the standing of one named plaintiff would suffice and that Stearns answered these questions as well. Defendants returned that Article III standing is required for all plaintiffs in any federal matter. The court found Stearns clear: in determining standing, the Ninth Circuit "keys on the representative party, not all of the class members, and has done so for many years." Stearns, 2011 WL 2659354 at *5.

Thus, the argument that individual questions about class members’ standing would predominate didn’t work—those individual questions weren’t central. “Accordingly, class certification can be determined without a more in-depth inquiry into the standing of individual unnamed class members.” In addition, the court found that each class member would satisfy Article III’s requirements. Stearn reasoned that, with respect to the entire class, injury must be concrete and particularized, and that a misrepresentation made to the class as part of a transaction that cost them money would count.

What about individual statute of limitations issues? Defendants identified two sets of documents that might have put reasonable people on notice of the existence of a claim: (i) the loan disclosure documents provided at the time of loan origination; and (ii) a Rate Change Notice sent to plaintiffs in April 2006. But the court already ruled that there was a triable issue of fact as to whether the origination documents were sufficient to provide inquiry notice, common to all class members. Since the standard is that of a reasonable person, once that question is resolved it will apply to all members. Similarly, the court alread held that the April 2006 letter did provide inquiry notice, so anyone who received that letter more than 4 years before the start of the action has time-barred claims. Thus, there were no significant individual issues related to when members should have known of the discrepancy between the represented interest rate and the rate actually charged. The time calculations required will be mechanical and provide no reason to deny class treatment.

What if class members had actual notice? Defendants argued they were entitled to investigate this on an individual basis. However, courts are all but unanimous in holding that possible differences in application of a statute of limitations to individual class members doesn’t preclude certification if common questions predominate, as here. Nor did defendants present evidence that any potential class members had actual notice outside the statutory period; their speculation was insufficient.

However, the court found that common questions didn’t predominate in the cause of action for recission based on fraud or mistake. There’s no precedent for finding mistake class-wide; mistake requires a showing that the party was subjectively mistaken about something important and that the mistake wasn’t caused by excessive carelessness. This individual state of mind inquiry was not appropriate for class treatment.

As for fraud, the question was whether the recission remedy could be applied class-wide and whether plaintiffs could get a class-wide presumption of reliance. Class certification can work for fraud if plaintiffs allege that an entire class has been defrauded by a common course of conduct.

Many Truth in Lending Act cases hold that rescission is a personal remedy that is not amenable to class treatment. Plaintiffs couldn’t identify a California case to the contrary. The court agreed with the TILA cases: recission is a remedy that restores the status quo ante, which requires inquiries into each individual borrower's situation because it generally includes the return of all interest, fees, finance charges, and commissions paid in connection with the loan. Plus, it’s an equitable remedy, and the creditor is generally entitled to consideration of individual circumstances, meaning that common questions wouldn’t predominate.

Another problem with a recission class is that some members might not be able to tender their loan proceeds to Chase as would be required as part of a rescission of their loans. Plaintiffs asked for a recission subclass limited to members who refinanced or paid off their Chase loans, as to whom all that would remain would be for defendants to refund them the difference between the amount of interest they actually paid and the amount they would have paid if their initial interest rate had been as allegedly promised.

This might fix the tender problem, but it wouldn’t solve the fundamental difficulties with class-wide recission. Also, when the loan has been paid off, there’s nothing to rescind. Anyway, recission isn’t just about recovering overpaid interest; there would have to be individualized inquiries into fees, finance charges, commissions, potential rescission of other associated agreements such as short sales, and so on. By contrast, the § 17200 remedy of restitution is designed to return amounts wrongfully taken, which was readily amenable to class treatment. If the interest rate was wrongly described, its calculation will be mechanical and readily determined from defendants’ records. (While I don’t disagree with the legal reasoning here, I am … somewhat skeptical that the defendants’ records will prove as detailed as the court hopes, given the known problems with servicers’ records. But since that’s a potential problem of defendants’ own creation, it shouldn’t affect the legal analysis.)

Superiority to individual actions: defendants didn’t expressly contest this for the restitution claims. Class action is the only plausible way these plaintiffs could seek a remedy because litigating the individual claims would be cost-prohibitive; there aren’t a bunch of other pending claims; the forum is fine; and there would be minimal case management issues because the proposed class members can be easily identified, the potential damages could be readily calculated from defendants' own records, and the class claims were centered on defendants' conduct.

Trademark and Occupy Wall Street

No, not silly registration attempts. Apparently Goldman Sachs had donated $5000 to a 25th anniversary party for a community bank (somehow this is related to its CRA obligations) at which OWS has a bank account. OWS is the honoree at the party. When Goldman Sachs discovered this, it threatened legal action unless the bank reprinted the invitations without its name. I can only assume that the "legal action" was based on trademark law. Trademark bullying at its finest?

Delaware's MERS complaint

Courtesy of Adam Levitin. The complaint asserts deceptive trade practices by MERS under state consumer protection law. This is one for both property lawyers and consumer protection lawyers to watch.

ETA: Discussing the case at the dinner table, my children found this rhyme particularly applicable:

Homeowner: Who's record owner of the mortgage in Delaware? MERS is record owner of the mortgage in Delaware.

MERS: Not me!

Homeowner: Yes you!

MERS: Couldn't be!

Homeowner: Then who?

Good question.

Someone needs a visit from the FTC Endorsement Guide fairy

Check out this Gawker story about a marketing company, 43a, which seems to be offering to pay bloggers for links while hiding these relationships from everyone, including the editors of the sites on which the bloggers post. Quote:

What we suggest (as long as you think it won't get you into any trouble — we don't want anything that isn't beneficial for both parties) is trying to drop a link in the article, and seeing if the editor mentions it. If he does, remove the link, and we'll go our separate ways. If he doesn't, we'll pay you handsomely, and we can continue if you want to. We don't do this for every article, and there is a certain "under the radar" element to it, so you don't want to over do it.

Perhaps someone should inform 43a (whose name sounds disturbingly similar to that of your humble blogger) that getting in trouble with the editor is not the worst thing that could arise out of this scheme. Note that the publishers and most of the businesses named in the solicitation email quickly issued statements that this scheme violated their own policies and that they didn't actually work with 43a, respectively--so those legal teams are on the ball.

Translation: counterclaims are out of luck

Language Line Services, Inc. v. Language Services Associates, LLC, 2011 WL 5024281 (N.D. Cal.)

The parties compete to provide interpretation services (from what I can tell, this means interpretation when non-English speakers call emergency and other lines). Language Line sued LSA for misappropriation of trade secrets and conversion, among other things, alleging that defendants stole Language Line's confidential customer list and accompanying pricing information and misused it to get customers. LSA counterclaimed against Language Line and brought in Brian Lucas, alleging false advertising under the Lanham Act and various state law claims, including that Language Line and Lucas conspired to misappropriate trade secrets from LSA and used those trade secrets to obtain a wrongful injunction that prohibits LSA from contacting prospective customers. LSA alleged that the larger Language Line couldn’t compete with smaller, nimbler competitors like LSA, and that when LSA rejected a purchase offer, the CEO of Language Line told LSA’s CEO that her rejection did not matter because Language Line "has a strong legal department and will prevail in growing its business through legal actions."

LSA continued that Lucas, originally an employee of Language Line, “infiltrated LSA as a salesperson, stole LSA's trade secrets and attempted to blackmail LSA's executives with confidential information and trade secrets.” He was then fired from LSA and rehired by Language Line. Language Line allegedly misused confidential information obtained from Lucas to secure an overbroad preliminary injunction restricting LSA from doing significant business, and then defamed LSA “by falsely informing various customers of LSA that its business model is ‘risky,’ that it is going ‘bankrupt’ and that its employment practices are ‘illegal.’” Language Line’s outside general counsel allegedly published articles on behalf of Language Line asserting that it is the only company in the language interpretation industry that pays its employees legally.

Language Line filed an anti-SLAPP motion against the counterclaims, which was granted in part and denied in part. An anti-SLAPP motion requires the defendant to show that the acts underlying the plaintiff's claims were protected speech activity, as defined by the anti-SLAPP statute. If it succeeds, the burden shifts to the plaintiff to show a reasonable probability of prevailing through a showing facts sufficient to win if the plaintiff’s evidence is credited.

Language Line argued that the counterclaims for misappropriation of trade secrets and conversion should be stricken under the anti-SLAPP law, because they were based on Language Line’s use of information to obtain an injunction. LSA rejoined that the counterclaims were based on misappropriation of two kinds of information, one of which did not arise out of protected activity. The anti-SLAPP law covers communicative litigation activity, which included the allegations here that Language Line stole information, including a confidential customer list, and used it to obtain an injunction. (I am … perplexed by this reasoning. The problem alleged isn’t the use to obtain an injunction; that’s just harm. The problem is the alleged theft. Is that really communicative activity covered by the anti-SLAPP law?)

Anyway, LSA had to show a probability of prevailing on the merits, and it didn’t submit sufficient evidence to do so.

Language Line also moved to strike the trade libel and defamation counterclaims based on a blog post written by Language Line’s counsel. LSA said that these claims involved commercial speech and were thus excluded from the anti-SLAPP law.

The counterclaims were based on a blog post by Language Line’s outside general counsel (I note that Language Line’s name appears right after his name on the post), a statement from Language Line to Farmers Insurance Group that LSA is "going out of business," and two letters delivered by Language Line to employees of LSA. If the first is protected conduct, then the counterclaims as a whole would be subject to the anti-SLAPP statute.

And the blog post was protected. It was written by an attorney for Language Line, published in an online legal news publication, and offers a general discussion of legal issues in the language interpretation industry as a whole. The commercial speech exclusion only applies to speakers who are themselves in the business of selling goods or services, and doesn’t apply to speakers acting on behalf of someone in the business thereof, like the attorney here. (The limited nature of the commercial speech exclusion should mean that the publisher of an ad can’t be liable and can use the anti-SLAPP law, but I find it hard to believe that the anti-SLAPP statute meant to upend the law of agency entirely. Without more reasoning on agency, I don’t have any idea how far the court thinks this distinction extends. What if the CEO, who as an individual isn’t directly engaged in sales, said the allegedly false things? What if it was an in-house attorney, further insulated from direct consequences of the company's financial performance?)

Anyway, the anti-SLAPP statute applied, and LSA couldn’t prevail on the merits because the blog post was protected opinion which couldn’t give rise to liability. (The court doesn’t mention the other two claims here, but I infer that LSA also didn’t submit sufficient admissible evidence on them.)

Language Line couldn’t get the Lanham Act counterclaims stricken because causes of action arising under federal law aren’t subject to the anti-SLAPP statute.

Language Line also argued that the tortious interference with employment relations/breach of contract claims should be stricken because the underlying conduct was that Lucas gave a copy of the customer list to Language Line in order to obtain an injunction. LSA responded that the counterclaims didn’t involve any petition to the courts, but because LSA alleged that the fraudulently acquired materials were used to secure an injunction, they did fall under the anti-SLAPP statute. Again, LSA failed to submit evidence showing a probability of success on the merits.

The same thing happened with the conspiracy counterclaims, and with the counterclaims for wrongful injunction (who knew that was a thing?), intentional interference with prospective economic advantage and tortious interference with customer contracts.

Language Line was entitled to its attorneys’ fees for its successful anti-SLAPP motion.

In light of these rulings, the court considered only Language Line’s motion to dismiss the Lanham Act claims. These were based on (1) the blog post by Language Line's outside counsel, stating that Language Line is the only interpretive company of which he is aware that does not classify employees as independent contractors; (2) a statement on Language Line's website that it has "taken the lead on [sic] 'setting standards and best practices for interpreter training and quality'"; (3) a statement on Language Line's website that Language Line offers "on-site, face to face interpreters"; and (4) a statement on Language Line's website that customers have benefitted for over 28 years from Language Line's "over-the-phone, over-video or on-site interpretation services."

The court questioned whether the attorney’s statements on a legal blog could be attributed to his client, but Language Line didn’t raise the issue. The allegedly false statement was that “with only one exception of which I am aware, that being Language Line Services, interpretation companies have decided that it is more important for them not to pay employee benefits and taxes than to provide the training management, supervision, quality control, and scheduling critical to ensuring effective interpretation.” LSA argued that this falsely implied that Language Line is "the only company in the language interpretation industry that does not misclassify its employees or use independent contractors." It further alleged falsity in that LSA did not misclassify its employees. The court found this was a statement of legal opinion and thus not actionable under the Lanham Act. The statement did contain the implication LSA took from it, and thus might be actionable as to a company that neither used independent contractors nor misclassified permanent employees, but LSA didn’t dispute that it uses independent contractors. “While the article goes on to offer non-favorable assessments of the risk to clients of working with companies who either use true independent contractors or who misclassify permanent employees, this risk assessment cannot be characterized as anything other than opinion.” Thus, LSA couldn’t properly allege falsity.

The statement that Language Line has “taken the lead” was nonactionable puffery. It’s neither quantifiable nor verifiable about any specific aspect of Language Line’s services.

Language Line argued that the remaining statements were literally true. LSA rejoined that they were misleading in context and thus actionable. “However, although a misleading statement may be actionable under the Lanham Act, courts have held that if a statement is purely factual and unambiguous, then that statement cannot be proven to be misleading through the use of consumer surveys. See Mead Johnson & Co. v. Abbott Labs., 201 F.3d 883, 886 (7th Cir.2000); Am. Italian Pasta Co. v. New World Pasta Co., 371 F.3d 387, 393-94 (8th Cir.2004)….Thus, where a statement is alleged to be misleading only in that it is possible that consumers could interpret it to mean something other than what it does, that statement is not actionable under the Lanham Act.” (Sigh. And we know “what it means” before taking evidence how, exactly?)

LSA alleged that Language Line’s claim to offer “on-site, face to face interpreters” was false because it didn’t offer those in any area except California, and did not do so until this year. Likewise, the website statement that "[f]or over 28 years, [clients] have benefited from using [Language Line's] over-the-phone, over-video or on-site interpretation services" was allegedly false because Language Line has not offered all three services for 28 years, and in fact, Language Line did not have on-site interpretation services until 2011.

Sadly, the court found that these statements were unambiguously factually true, “and are not actionable based on the mere possibility that consumers might interpret them to mean something other that what they plainly state.” Since Language Line offers some on-site interpretive services and at least one of the three services for 28 years, there was no plausible Lanham Act claim.

I think the court is not quite clear on what “ambiguous” means. If you have to qualify the truthfulness of the claim with “in some areas” and “at least one of the services,” then the claim is at least ambiguous. If I said “I’ve taught copyright, trademark, advertising law and property for ten years,” I’d be a liar. I’ve taught some of those things for ten years, but not the others. Compare, e.g., the FTC's Green Guides on recyclability, compostability, etc.: the FTC is pretty clear that if your product is in theory compostable, but only at specialized facilities that are rare in the US, you should not be marking it with the term "compostable" alone, and your disclosure ought to be pretty specific.

Basically, Mead Johnson is finally starting to infect the water in other circuits, making Lanham Act claims unpredictable even for plaintiffs who can produce evidence that a substantial number of consumers receive a misleading message from a claim. This case seems like a mess for a variety of reasons, but the court allocating full interpretive wisdom of how consumers react to itself is not helping.

Google and the nymwars

As Google prepares to integrate Reader and other products into G+, it has signaled a retreat on its poorly-thought-out, poorly-enforced, nasty "real name" policy. Conditional rapture! Unresolved questions: (1) the Reader implementation timeline is a week or so, while pseudonyms/autonyms/whatever Google ultimately accepts are supposed to arrive in the coming months. Is my primary Google profile going to get suspended during the gap because it's not my government name, and do I therefore need to abandon Reader anyway? This would be pretty boneheaded and I'd expect enforcement discretion during the gap, but I no longer have full confidence in Google. (2) Google's been pretty vague on what will count as an alternate form of identity. Will you need some sort of internet credit history to claim a non-government name? I'm breathless with anticipation. Maybe I'll even get to re-enable multiple logins on Google and therefore be able to use Blogger in the same browser as I use for everything else.

Towards Symmetry in the Law of Branding

Rebecca Tushnet, Towards Symmetry in the Law of Branding, 21 Fordham Intellectual Property, Media & Entertainment Law Journal 971 (2011)--12 pages on unbranding and expansive trademark claims.

Tobacco, trade and trademark

O’Neill Institute Colloquium 2011
Tobacco and Trade
Matthew Myers — President, Campaign for Tobacco-Free Kids

Tobacco is a unique product: kills ½ of longterm consumers when used exactly as intended. There’s no such thing as a safe level. It’s addictive, and US courts have found that the industry manipulates the nicotine in its products to enhance the addiction. Virtually all new users are children; long-term users start as children. If it were introduced today, tobacco would be banned.

When trade lawyers say tobacco is just a legal consumer product, that’s just an historic accident, and we don’t have to ignore 60 years of knowledge in making trade policy. From the day that anyone learned that tobacco caused disease, the industry engaged in a campaign of deception, undermining government efforts, selling products without regard to social cost. 1600-page decision in US v. Philip Morris so found.

This industry has demonstrated by its behavior that it’s willing to let anyone die to sell its product. Magnitude of harm is also unique: #1 case of premature preventable death in the US and now globally. Kills more than 400,000 in the US annually. More than 8 million Americans suffer from tobacco-related disease. Nearly 90% of lung cancer deaths, 1/3 of cancer deaths, and 1/5 of heart disease deaths are tobacco-related. Nearly $100 billion in health care costs in the US annually. This is a miniscule fraction of the global impact. 100 million people worldwide died from tobacco in the last century. 2000-2025, 150 million deaths predicted; a billion people in the 21st century.

Framework Convention on Tobacco Control, 2003, ratified by more than 170 nations: the only global health treaty.

Industry response: undermine public health actions, challenge them in court, and, when it has no national cause of action, use global trade agreements to claim the right to continue prohibited activities.

Framework Convention and US agree: strong warning labels on packs; tobacco industry shouldn’t be allowed to mislead consumers with terms like light and low tar, because consumers think those products are safer and the science shows they’re not; comprehensive ban on tobacco advertising, promotion and sponsorship consistent with a country’s constitution. We don’t want the industry to use the Marlboro Man to promote tobacco.

In 2009 the US finally granted the FDA broad authority over tobacco: allowing regulation of sale, marketing, and content of tobacco products for public health purposes. Applies to all cigarettes, not to protect the US tobacco industry.

Industry’s response to ban on “light” and “low tar” was to change packaging and identify different types with different colors. Stunning degree of uniformity across the brands and the world, backed by heavy ad campaign so that by the time the words disappeared consumers had the cues from color. Sent documents to retailers: when someone asks for “light,” give them the blue package. In countries that were slower in banning the terms, they ramped up the false advertising. In China, 2007: “a little lower means more loving care! Low harm cigarettes give you more loving care!” Claimed a guarantee of health for your smoking life. The picture has a father cuddling a baby!

Using cigarette packs as billboards. Marketing cigarettes to women in Russia as symbols of liberation.

US trade policy has never been in sync with US public health policy or the public health policy of our trading partners. In the 1980s and 1990s, used trade policy/threatened sanctions to force open the doors of countries with restrictions/local companies that were less efficient at selling cigarettes. In 1997 Congress banned some US personnel from promoting tobacco abroad, and in 2001 Clinton signed an executive order to the same effect for everyone. Stopped the USTR from initiating trade actions, but didn’t stop the US from including tobacco in all its free trade agreements, with bad consequences: no longer needed tobacco-specific promotion.

Tobacco companies have turned to trade law as the last resort after losing in democratic institutions, even though measures were not designed to discriminate against foreign trade or protect domestic industry.

Indonesia and the US: in the Act giving authority to the FDA, Congress was worried about a series of new products targeted to youth. Thus Congress said that there ought to be an immediate ban on flavored cigarettes, including clove cigarettes predominantly made in Indonesia. They’d just entered the market; no adult would be caught smoking a strawberry cigarette. But Congress saw menthol as different—over 25% of smokers smoke menthol, including ¾ African-Americans. So seemed to play a different role in youth use and also in terms of millions who were currently addicted. Thus, Congress banned all other flavored products and instructed FDA to examine menthol and determine what the response should be.

Response: Indonesia claimed trade violation: ban on clove cigarettes was discriminatory and unnecessary to protect the health of the public. The overwhelming majority of the other flavors were made in the US. The claim was brought under the Agreement on Technical Barriers to Trade, not GATT, so GATT’s Article XX allowing an exception for actions “necessary to protect human, animal or plant life or health” didn’t apply.

Panel rejected Indonesia’s claim that the ban was unnecessary to protect public health. Extensive scientific evidence supported the conclusion that banning clove and other flavored cigarettes could contribute to reducing youth smoking. But, the US lost because the ban failed to give national treatment to clove cigarettes, treating them less favorably than menthol. The products were “like products” within the meaning of the trade agreement.

Uruguay has strong restrictions, a world leader in reducing tobacco use. Tobacco companies redesigned cigarette packages. Domestic and foreign companies responded by color coding and instructing retailers how to transfer the information. Uruguay responded by expanding the size of the warnings to 80% of the package and also mandated that each brand could only have a single representation, so that color coding wouldn’t work. Philip Morris then sued Uruguay before a World Bank panel on investment disputes under a treaty between Uruguay and Switzerland. Claimed violations of TM rights, expropriation of their property, and diminished value of investment in Uruguay. Threatened to bankrupt Uruguay by claiming damages in the billions. Country decided to stand and fight, because other countries recognized that Philip Morris was trying to make an example of Uruguay. 80,000 customers in Uruguay when they brought the case; not about Uruguayan profits. Philip Morris has also announced intent to sue Australia over proposed plain paper packaging. Also last week announced that it would close its only manufacturing plant in Uruguay because “it could no longer make a profit”—another way to punish Uruguay.

Indonesia case taught US an important lesson: it could lose too. (US just asked for extension of time to appeal.)

Benn McGrady — O’Neill Institute Trade and Health Program Manager

Relevant questions: what’s the right level of regulation (global, local, etc.), and what are the substantive standards for what counts as a health reason? These determine the level of national sovereignty. Could reallocate authority or tinker with the substantive standards to achieve regulatory goals.

Indonesia example: not enough reason to distinguish between menthol and clove cigarettes. Changed the balance between enforcing trade commitments and domestic regulatory autonomy. Gov’ts have been reluctant to bring claims because of the potential for backlash to their own regulatory autonomy, but this is the first real test of the Agreement on Technical Barriers to Trade. There are WTO committees where members can raise issues and put pressure on other countries to remove barriers; if nothing happens, may result in a formal dispute. In 12-18 months, there have been 4-5 issues in the TBT and TRIPs councils relating to tobacco and noncommunicable diseases more generally, including Australia’s plan. Canada implemented measures similar to those in the US, questioned by a number of tobacco-growing countries; Brazil is in a similar position.

Thailand wants to be the first country to implement graphic warnings on alcoholic beverage: gave notice to the TBT committee. This is of great interest to alcohol-producing countries, pressuring Thailand not to use warning labels at all. Australia is arguing that its tobacco regulations are lawful, but at the behest of its wine/alcohol industry, has criticized the Thai proposals. Emblematic of failures of coordination within government. Trade authorities respond to industry; health authorities argue that they can regulate.

Under bilateral treaties, the terms may specify that private companies can bring claims to protect their investments; this is common but not universal. (Australia now takes the position that it will never sign another treaty that allows private companies to bring claims, even though it’s a capital exporter that would like protections when its companies sign agreements with, say, Angola.) 100 years ago, more traditional international law approach was that gov’t would have to bring claim on behalf of its nationals: only WTO members/governments can bring WTO claims. There’s a problem of policy coordination, but at least the government can view the system as a whole. But in the investment context this was deemed a flaw; gov’ts didn’t want to bring claims on behalf of domestic consituencies very often because of political and other costs. That changes everything: whereas there’s been restraint at the WTO, int’l investment agreements are more likely to have challenges. There have been some claims against environmental health measures, but nothing comparable to the Philip Morris direct attack on public health measures.

Philip Morris argument: Uruguay’s acts constitute unfair expropriation for which it seeks compensation. Similar claim against Australia will be made: expropriating not only the TM but also their business; significant interference with use of their investments.

My Q: how do you think about the TM aspects of the tobacco companies’ arguments?

McGrady: rightsholders don’t have the right to use the TM. TM rights are a negative right: to exclude third parties from using the mark. Uruguay and Australia may be indirectly affecting the use of the right, but not prohibiting the registration. There would be no valid claim under TRIPs, which requires a country to object. An expropriation agreement under an investment treaty, which allows private companies to object, would require interpretation of whether domestic law has a positive right to use a TM. If there is a positive right, then the expropriation argument would be stronger, but there’s still a balancing question.

Australian rule deals with abandonment issues by providing that tobacco companies won’t lose marks for nonuse as a result of the rule, so the negative TM right would remain.

Myers: we’ve seen with big warnings that companies are still able to use their logos—even in Uruguay where the 80% restriction is in effect—Marlboro or Camel is small but visible. TM argument in Uruguay is very weak. No other country has threatened Uruguay under TRIPs. Only threats from other countries come from when regulation tinkers with the product itself.

(My reaction: the TM right asserted requires some careful back-and-forth between the abstract idea of a property right in a TM and the idea of brand value, with the tobacco companies appealing to the former and then the latter as suits their interests.)

Misleading and unfair garnishment letters lead to disgorgement

F.T.C. v. LoanPointe, LLC, 2011 WL 4348304 (D. Utah)

Defendants used GetECash.com to offer payday loans. The loan terms at issue included the following in fine print, albeit bold and underlined: “NOTICE: I agree to have my wages garnished to pay any delinquent amount on this loan.” Individual defendant Strom knew about this but believed it was lawful, and consulted a lawyer before authorizing the loan documents. Using this clause, defendants attempted to garnish consumers’ wages when they were in default. Eighty percent of these attempts failed, but defendants used the wage assignment clause to recover approximately 16% of all loan repayments from approximately 10% of all borrowers.

To garnish a consumer’s pay, defendants, using the name LoanPointe, sent a package to his or her employer including: 1) a “Letter to Employer & Important Notice to Employer”; 2) a “Wage Garnishment” document; 3) a “Wage Garnishment Worksheet”; and 4) an “Employer Certification.” “These document titles match exactly the document titles that the Treasury Department's Financial Management Service (“FMS”) includes in the wage garnishment package that it sends to employers when federal agencies seek to garnish wages.” The “Letter to Employer” also used wording similar to the FMS’s wording. The FMS says:

One of your employees has been identified as owing a delinquent nontax debt to the United States. The Debt Collection Improvement Act of 1996 (DCIA) permits Federal agencies to garnish the pay of individuals who owe such debt without first obtaining a court order. Enclosed is a Wage Garnishment Order directing you to withhold a portion of the employee's pay each period and to forward those amounts to us. We have previously notified the employee that this action was going to take place and have provided the employee with the opportunity to dispute the debt.

Defendants omitted “nontax,” replaced references to the US with references to GetECash, and removed “Federal” from the references to agencies. Defendants also sent copies of the consumer’s loan application, including the loan amount.

The Treasury Department informed defendants that the reference to the DCIA was inaccurate and unacceptable, and then defendants removed that language. They asked the Treasury agent if she had any other concerns with the letter, but received no response.

Defendants contended that they attempted to contact consumers several times prior to garnishment, warning them of the garnishment. The FTC submitted evidence of two consumers who were unaware of the garnishment threat until defendants contacted their employers, and another who didn’t understand that after reviewing the loan application. Several consumers complained that defendants’ contact with their employers exposed them to embarrassment and risk of adverse action, such as job loss.

Using the loan application with the wage assignment clause, defendants made at least 7,121 payday loans from which they have collected slightly over $3 million. Of that, $976,107.54 represents repayment of principal. Defendants used garnishment to collect $468,020.91.

The FTC filed a complaint alleging violations of the FTC Act, the Fair Debt Collection Practices Act, and the FTC's Trade Regulation Rule Concerning Credit Practices. The parties agreed to a preliminary injunction. The FTC then moved for summary judgment.

The FTC argued that defendants violated the FTCA by “misrepresenting to consumers' employers that they were authorized to garnish wages under the DCIA without a court order; misrepresenting to consumers' employers that they had notified consumers and given consumers an opportunity to dispute the debt prior to sending the garnishment request; and communicating with and disclosing the existence and amount of consumers' loans to consumers' employers without consumers' knowledge or consent.” The first two were deceptive, and the third unfair.

Defendants didn’t dispute the factual predicates. As to the first two statements, therefore, the questions were whether the misrepresentations were material and likely to mislead consumers. Defendants argued that there was no likelihood of misleading consumers because the letters went to employers, not consumers. The court found that the employers were the relevant consumers. Defendants sent them letters that looked identical to a government garnishment request and asserted a statutory right to garnish. While defendants could be expected to know the laws governing credit, the employers in various fields couldn’t be. They were therefore likely to be misled by the letters. Moreover, the letters said that defendants had given the employee a right to dispute the debt, and the employers couldn’t know the truth of that. Even if they asked their employees, they wouldn’t be able to verify whose version of the truth was correct. This also was likely to mislead the employers.

The claims were also material: they were likely to affect a consumer’s choice or conduct. Express claims are material because saying them shows the advertiser’s belief that they matter. Also, 20% of employers who received the letters actually garnished the wages, further proving materiality.

What about disclosing consumers’ debts to their employers without consumers’ prior approval? Unfairness requires that a practice be likely to cause substantial injury to consumers which is not reasonably avoidable by consumers and not outweighed by countervailing interests to consumers or competition. The disclosure was likely to cause substantial injury, as the FTC’s rulemaking record reflected: employers don’t like wage assignments and view failure to repay debt as a sign of irresponsibility, threatening employees’ jobs or benefits. Thus, defendants’ practices were unfair.

Likewise, the FTC argued that defendants violated the FDCPA through false representations and through prohibited communications. Defendants argued that the FDCPA didn’t apply to them because a lender collecting its own debts doesn’t fall within the scope of the law. However, a lender comes within the scope of the law if “in the process of collecting [its] own debts, [it] uses any name other than [its] own which would indicate that a third person is collecting or attempting to collect such debts.” 15 U.S.C. § 1692a(6). Defendants did this. Though their collection efforts were done in the name of GetECash, they used the name LoanPointe to create the impression that a separate entity was attempting to collect.

Defendants also argued that they were exempt because GetECash and LoanPointe are related by common ownership or affiliated by corporate control. But this statutory exception only applies if the principal business of the person collecting the debt is not the collection of debts. “Inherent in the payday lending business is collecting on the loans.” Thus, collecting was part of defendants’ principal business. (Would this also apply to mortgage lenders? What about car dealerships which almost always finance purchases? What about businesses that routinely supply services then bill for them later? Does it create a bright line that defendants are selling access to money, rather than something else? I don’t know this area of the law, and there may be very easy answers.)

The FDCPA prohibits the use of “any false, deceptive, or misleading representation or means in connection with the collection of any debt.” So defendants violated it. The law “also bars debt collectors from communicating with third parties other than for the purpose of obtaining a consumer's home or workplace address or telephone number, unless the consumer consents to third-party communication or the communication is reasonably necessary to effectuate a post-judgment judicial remedy.” Defendants also violated this provision.

Further, the FTC argued that defendants violated its Credit Practices Rule, which generally prohibits the use of wage assignment clauses, unless the wage assignment: (i) is, by its terms, revocable at the will of the debtor; (ii) is a payroll deduction plan or preauthorized payment plan, commencing at the time of the transaction, in which the consumer authorizes a series of wage deductions as a method of making each payment; or (iii) applies only to wages or other earnings already earned at the time of the assignment. 16 C.F.R. § 444.2(a)(3). Defendants’ wage assignment clause didn’t qualify. “Even though several consumers refused to allow Defendants to garnish their wages upon request, the wage assignment clause was still not revocable by its terms.”

Defendants argued, wrongly, that the FTC was required to show that the violation was deceptive or unfair. But that’s the point of rulemaking: the FTC has already determined that all conduct violating the Rule is unfair. Defendants argued that they didn’t know that their wage assignment clause is illegal. But good faith is no defense to liability under the FTCA, nor is reliance on counsel.

Good faith may be relevant to the scope of injunctive relief, because permanent injunctions should only be granted if there’s some danger of a recurring violation. This involves two factors: 1) the deliberateness and seriousness of the present violation and 2) the violator's past record with respect to unfair advertising practices. Here, however, defendants’ ignorance didn’t negate the need for a permanent injunction, because the conduct was still deliberate and serious, and because defendants “should have been diligent in understanding the law relating to their chosen line of business.”

Defendants’ good faith argument reinforced, rather than excused, the need for permanent injunctive relief to protect consumers from them. “Defendants' inability to demonstrate that they are capable of understanding the law relating to credit practices and debt collection makes a permanent injunction, with monitoring by the FTC, a proper remedy in this case.”

Because the defendants had shared ownership and control, they were a common enterprise (and individual defendant Strom had the authority to control the corporations’ activities and knew about and participated in the wrongful acts, he was individually liable). They were all subject to the injunction and jointly liable for monetary remedies.

Turning to monetary relief: Disgorgement is appropriate to deprive the wrongdoer of its ill-gotten gains. The FTC argued that disgorgement should include all gains flowing from the illegal activities, without the need for the FTC to show actual consumer loss.

The FTC argued that the over $3 million collected from consumers on loans with a wage assignment clause should count, and that over $2 million of that was interest rather than principal that should be disgorged. Moreover, the FTC argued that the $468,020.91 taken in through garnishment should be disgorged.

Defendants argued that courts have distinguished between legally and illegally obtained profits in considering disgorgement. They contended that they did not collect any money that was not owed, and thus were not unjustly enriched by their deceptive practices.

The court reasoned that it only had equitable power over “property that is causally related to the illegal actions of the defendant.” Consumers agreed to pay defendants’ terms. “[T]here is no argument in this case that the other terms of repayment were misleading, deceptive, or inappropriate.” Thus, the court was forced to balance the need to hold defendants accountable for their deceptive and unfair practices with their right to repayment of the loans. First, the court ruled, consumers who repaid their loans in compliance with the terms weren’t harmed by the garnishment clause; there was no basis for concluding that the garnishment clause affected those repayments.

Thus, the relevant consumers were those who had garnishment letters sent to their employers. These letters violated federal law, but the court concluded that defendants shouldn’t be required to disgorge the principal. “To the extent that disgorgement applies to ‘ill-gotten gains,’ a return of the loan principal lent to the consumer is not actually a ‘gain’ to Defendants.” This seems to me a mistake about the level of risk of losing the principal involved in the loans, which was among other things likely reflected in the interest rate (which was, it should be noted, paid by people whose wages weren’t garnished too). Defendants received both interest they might not have received otherwise and principal they might not have recovered otherwise as a result of their misconduct. Both the interest and the principal were part of the contract; either they were entitled to both or neither, and neither seems like the appropriate deterrent. However, the court awarded only the interest as appropriate disgorgement.

“Technically, Defendants may have been entitled to the interest payments under the terms of the loans.” But requiring disgorgement of interest would fulfill one purpose of the remedy, which is supposed to make violations unprofitable. “If Defendants were subject to only an injunction, the resulting message would be that improper wage assignment clauses can be included in loan applications until discovered, at which point, the only consequence would be to stop violations of the law in the future. … This disgorgement also serves to equalize the marketplace. Defendants' violations should not allow them to profit more than other similar businesses who have complied with the law.” (Note again how this justification seems equally applicable to recovery of principal.)

DMCA Exemptions, education edition

Passing this on from Patricia Aufderheide, who writes:

Teachers and students have many situations where they might want to access unlicensed copyrighted materials, employing their fair use rights. (Does your assignment permit critiquing media? Might a student who is preparing a paper for digital posting want to quote from an e-version of a book? Are you incorporating copyrighted material into a slideshow for a workshop or conference lecture? etc.)
...
We are looking for two kinds of evidence:
1) Are you able to use [the existing] exemption--to break encryption on DVDs to teach/research better--now? If so, how do you use it? (Renewal is not guaranteed; if it turns out nobody cares, well then maybe it's not necessary, the Office could reasonably argue).
2) Are there any situations in which you find yourself thwarted from teaching or researching because you can't legally break encryption on some piece of media, or now that you think of it you might like to expand your practice to be able to do something with encrypted media that you've "taken off the table" because you "knew" you couldn't get at it legally?

Examples have proved highly persuasive to the Copyright Office in the past; please consider contributing any you have. Further information is available at Patricia's earlier blog post on the educational exemptions.

you gotta reinforce the places they're likely to attack

Wired piece on secure content delivery via Ultraviolet. The author is not impressed. xkcd, as usual, had the definitive take.

Unsuccessful copying isn't unfair competition

Jewel Source, Inc. v. Primus Jewels, LLC, 2011 WL 4634019 (S.D.N.Y.)

Jewel pleaded itself out of court. Jewel sued Primus for copyright infringement, unfair competition, tortious interference, and related claims. Primus moved to dismiss, and the court granted the motion.

Jewel alleged that it makes “distinctive” jewelry, which it sells to wholesalers and retailers. The court was disturbed by the lack of detail here. But the complaint alleged that Primus bought pieces bearing Jewel’s mark, took photos of them, sent the photos to wholesalers and retailers—including Jewel’s customers—and claimed that it had made the pieces. These customers contacted Jewel and told it what Primus was doing. Jewel also submitted an affidavit adding some facts: Primus sent an email to QVC including pictures of Jewel merchandise, which it claimed to have produced, and offered to provide the jewelry on the cheap. QVC responded that it had already bought such items from another supplier, and Primus replied, “I know. That is precisely our point.” Primus further indicated that it had “long carefully studied and made product for [QVC's] existing vendors.” QVC declined, stating that it is “protective of [its] vendor community,” then contacted Jewel. The court noted that, even if it considered the facts in the affidavit, it would still have granted the motion (converted, in that case, into a motion for summary judgment).

First, Jewel didn’t plead copyright registrations. Jewel argued that its works weren’t US works and thus required no registration. But a US work means a work first published in the US or published simultaneously in the US and another country. Taking the facts in the complaint as true, Jewel published its works in the US. “To the extent the complaint contains any factual matter, it asserts that Jewel has its ‘principal place of business’ in New York.” Since Jewel sells to wholesalers and retailers, it’s publishing, and such sale occurs principally in New York. Bye-bye copyright claims.

Jewel’s unfair competition claim failed for other reasons. “The complaint fails to provide adequate factual detail concerning why Primus's actions would likely confuse consumers. What detail it provides, moreover, leads to the opposite conclusion.” The only allegations were that customers contacted Jewel to warn it, showing that they weren’t confused. This also defeated the fraudulent misrepresentation claim: Jewel didn’t allege that anyone justifiably relied on Primus’s representations. Likewise for the intentional interference with contractual relations. “Just as Primus confused no customers, it also convinced no one it could manufacture Jewel's styles.”

The tortious interference with prospective business relations and prima facie tort claims failed because Jewel didn’t plead that Primus acted solely from malice/disinterested malevolence, as opposed to a desire to turn a profit, and unlawful motive is an element of both torts.

Court dismisses claims, dodges 230 false advertising issue

Wang v. OCZ Technology Group, Inc., 2011 WL 4903190 (N.D. Cal.)

Wang brought a putative class action representing purchasers of OCZ Agility 2 and Vertex 2 solid state drives (SSDs), alleging misrepresentations as to their storage capacity and performance in violation of California common law and the CLRA.

Allegations: Storage capacity and performance are important to consumers. Before 2011, OCZ marketed a predecessor line of Agility 2 and Vertex 2 SSDs that, like the current generation, use a controller that interacts with the flash memory in such a way that one or more modules of memory are rendered inaccessible to the user. In marketing the predecessor line, OCZ took this reduction into account, consistent with industry standards. Thus, it advertised 60GB for a device with 64GB of raw capacity, with 4GB reserved to the controller. But, before releasing the next generation, OCZ changed the number and type of flash memory chips, resulting in substantially decreased performance and increased memory reserved to the controller. Thus, the capacity of the drive marketed as 60GB allegedly dropped to 55GB with an average 25% drop in performance. Contrary to the industry standard and OCZ’s past practice, OCZ deliberately failed to disclose these material changes in capacity and performance, and instead used the same ads and packaging, along with the same model number and specifications. Wang relied on the misleading ads and marketing materials when he bought a 120GB Agility 2.

OCZ, following the current trend, challenged Wang’s constitutional standing, which requires (1) injury-in-fact, (2) causation, and (3) redressability. Wang didn’t allege that he overpaid or how much he paid for the drive, and thus OCZ argued that his allegations of injury were too conclusory and speculative. Moreover, OCZ contended that Wang failed to allege that he didn’t receive the benefit of the bargain, because the marketing materials show that OCZ disclaimed potential variations in speed and actual capacity, so Wang got what he paid for.

The court disagreed: Wang alleged that he bought the Agility 2 in reliance on OCZ’s performance and capacity representations, and that he didn’t get full value. He also alleged that he paid more for the product than he would have if he’d possessed the truth, and that he and other class members wouldn’t have bought their SSDs if they’d been marketed truthfully. This was enough for the pleading stage. The precise dollar value of losses is not required at pleading, so long as the plaintiff alleges a tangible loss that can be proved or disproved upon discovery.

OCZ’s website disclaimers alerting consumers to potential discrepancies in capacity and variations in rated speeds “may ultimately discredit Wang's claims that OCZ's marketing materials misled him and that he did not receive the benefit of the bargain.” But not for pleading injury and reliance.

OCZ also argued that Wang didn’t have standing to sue for injunctive relief because there was no likelihood that he’d suffer future injury. On this the court agreed; even though OCZ maintains the same marketing materials and therefore (as alleged) continues to violate the false advertising laws, the harm to Wang has already occurred. The possibility that Wang would be unable to buy competitive products (because of a market for lemons problem) was too speculative to warrant injunctive relief. Comment: other courts have, in my opinion rightly, rejected this reasoning in consumer class actions—it means that no consumer plaintiff can represent an injunctive class, because the representative plaintiff by definition knows she’s been fooled and won’t get fooled again. There’s a good article to be written on the use of standing to contract the protection conferred by substantive laws.

The court also agreed with OCZ that 5 of 6 of the causes of action sounded in fraud and were thus subject to Rule 9(b)’s heightened pleading standard: false advertising under the FAL; unfair competition under the UCL; violations of the CLRA; negligent misrepresentation, and unjust enrichment. Wang relied on his allegations identifying (1) who: OCZ as the source of the alleged misrepresentations, (2) when: an approximate time period during which the alleged misrepresentations began, (3) what/where: the location and content of deceptive and misleading statements, including on product packaging, in the model numbers, and on OCZ's product webpages, and (4) how: the substance of the misrepresentations. He also submitted web screenshots and product packaging images as a representative sample of the misrepresentation claimed and its location.

The court found that this wasn’t enough. Wang failed to allege when he saw or relied on OCZ’s representations, and he didn’t specify which of the marketing materials on which he relied. Moreover, he failed to specify how his drive fell short of its advertised qualities—what was its actual capacity and performance speed? Reliance on one of the Pom Wonderful cases, where it was enough to submit a beverage label and the URL of the defendant’s marketing website, was insufficient, because that was one company suing another for false advertising “based on the effect of the misrepresentation on consumers generally--a claim markedly different from that of an individual consumer who must plead his own exposure to and reliance upon the alleged misrepresentation.”

OCZ also argued that California law shouldn’t apply, because Wang is a Washington resident and the complaint didn’t allege where he bought his drive. The court agreed that it was reasonable to presume that the purchase, and thus the injury, occurred in Washington. But the place of injury isn’t solely determinative if OCZ’s alleged misrepresentations took place in California. For pleading purposes, Wang alleged enough to apply California law: he alleged that the misleading practices were "conceived, reviewed, approved or otherwise controlled from [OCZ's] headquarters in California." Moreover, he alleged that OCZ's executive offices are in California and that the company itself selects California law as its forum to address website-based complaints. “Taken as true for the purpose of a motion to dismiss, these allegations are more than sufficient to sustain Wang's California-based claims.”

OCZ also moved to strike two sets of allegations as immaterial. Such motions are generally disfavored. First, Wang alleged that OCZ’s website quoted third-party reviews and testimonials and linked directly to their sources. He alleged that these were based on the older versions of the drives and therefore false and misleading. OCZ urged the court to strike the allegations because any claims based on them would be barred by CDA §230. Wang responded that these allegations were material to his claims and that dismissal would be premature; in addition he contended precedent that the CDA is an affirmative defense, around which he was not required to plead.

The court found that whether OCZ was an interactive service and whether it reproduced content in a manner potentially subjecting it to liability raised factual questions that couldn’t be resolved on a motion to strike. “Material should not be stricken from the pleadings, particularly before discovery has afforded the parties the opportunity to determine the material's relevance to claims or defenses, if there is a possibility that it may have bearing on the litigation.” Seems to me that a motion to dismiss might have been more appropriate; too bad we didn’t get a ruling on this very interesting and important issue, which hasn’t been dealt with since the bad handling of the Subway v. Quiznos court.

Finally, OCZ moved to strike allegations about Vertex drives and all Agility models that Wang didn’t purchase, since he didn’t suffer any injury from them. Wang argued that his allegations added detail and context to his claim that OCZ uniformly designed, constructed, and advertised its SSD products in such as way as to mislead consumers. There is conflicting precedent about standing to proceed with claims about a product the class representative didn’t purchase (again, see the contraction of standing). A motion to strike is not the place to deal with class allegations; OCZ was relying on standing cases, not on whether the allegations were "redundant, immaterial, [or] impertinent." “Although Wang's inability to allege injury based on products that he did not purchase may ultimately subject those claims to proper dismissal pursuant to a Rule 12(b) motion or motion for summary judgment, inclusion of those products at the pleading stage and prior to a motion for class certification is not improper.”

Motion to dismiss granted with leave to amend.