Trademark Scholars Roundtable, part 2

Session 2: The Product Market Dimension

Robert Burrell: why do we treat territorial and product markets so differently? In the UK there was never any Q that nationwide protection was going to be the result of registration.  Always understood to be an advantage of registration, and an incentive to register. But you were initially confined very strictly to the goods named in the registration. It took a long time to chip away at that and have, for example, a defensive registration process for similar goods.

Part of this may have to do with the technology of registration, it was always understood you’d have to carve out some way of distinguishing what goods a registrant would get protection for and what goods they wouldn’t: never thought sensible to protect across all classes.

When this technology gets transported through the rest of the empire, it seems to have been accepted that you’d have the same nationwide scope, even though it’s far less obvious that Australia should have nationwide registration—there wasn’t really a single market between Sydney and Perth.  A nation-building exercise: the federal gov’t building a single market.  That’s one of the things the federal gov’t was empowered to do, bound up w/sense of nationhood beyond a simple free trade area.

Even in the UK, we quite soon had not quite a Dawn Donut rule but something similar, with a honest concurrent use defense, which provided both a defense and a way of getting onto the register. First person to register got nationwide protection; concurrent user was frozen into place.  We still see the effects of that today. A-mart, eventually sued by K-mart, which now only exists in Queensland.  Frozen there. We don’t rethink those in relation to confusion; just isolated doctrines. Nationwide protection was always illusory to a degree: courts push back on the idea of one registration being for the entire territory. But we’ve started from the opposite end with products, and think about defenses differently—broad confusion standards, but not much thought about the circumstances justifying exceptions. Why do we have honest concurrent use for remote user but not honest concurrent use for user on distinct enough product?

Bob Bone: Change in way of thinking about goodwill, no longer just product-specific. From brand to firm, and then goodwill becomes redefinable based on circumstances, not just protecting consumers.

Consumer protection orientation can be subtly changed.  How do we decide how closely related two products are?  It’s not intrinsic to the products—we ask about consumer perception. But in that case the factor is circular: the factor depends on likely confusion, but likely confusion is the question; we must be using some other principle to decide what risk level we’re tolerating. Consider a field of likely confusion—it gets higher in the center and weaker as we move out, where “out” is about different dimensions of difference such as similarity of marks, etc. Where do we draw the line?  There’s nothing intrinsically different about product and geographic boundaries, except normatively. So we may draw tighter limits on one than the other, but that’s because of reasons related to the type of dimension it is. Geography = sovereignty plays a role.

Move from the consumer perspective where we’re talking about likely confusion, to producer perspective. Different set of arguments about broader product markets. If brand is identity, then it’s odd to ask producer to change its name in order to move to a new market. Lots of problems with that position, but it introduces a new element.  So how do we want to structure product markets? How will these choices influence firm structures? Consumer perspective is all about confusion and whether it’s geographic or product differences is secondary, but not from producer perspective.

A note on dilution: used to think tarnishment was understandable and blurring not.  Still doesn’t think blurring makes sense normatively, or that its empirical assumptions are true. But at least it’s in TM language: selling power.

Tarnishment isn’t so simple: consumers don’t make a connection, so it’s not harming the reputation of the firm.  If you think of a strip club, you don’t think less of Tiffany’s the jeweler.  Under this theory (whose empirics, again, he doesn’t believe). Tarnishment is about product diversity.  When I buy Tiffany jewelry, Tiffany is part of what I’m buying.  Advertising: the advertiser can make the mark more/different.  When Tiffany is used on a strip club, the strip club can destroy that control, and so Tiffany will not be selling the same product “Tiffany jewelry.”  Prevents negative information from affecting the meaning of the mark. If we’d like to have regular jewelry and Tiffany jewelry, then barring tarnishment makes sense (if a bunch of Tiffany strip clubs would otherwise come into existence). If this is true, tarnishment isn’t a part of TM law; it’s doing something else.

Bently: on the assumption of nationwide scope—the mechanics of having a TM office would have contributed to that.

Red Bull decision envisions concurrent use in the field of dilution. Red Bull sued a Dutch company that had run a bar called Bulldog since 1975.  Moved from just serving drinks, for which it had a registration, to serving an energy drink.  Was this due cause?  Court seemed to think it could be: natural expansion of products from one market to another—whether it was natural to extend from bar into energy drinks. 

McKenna: Bone’s story makes tarnishment and blurring sound the same: both are about affecting meaning of the mark.

We do have a way of thinking about how owners move through geography, but not a good way of thinking about how they move through product market space. How do you think about superior rights, given that both producers may have started moving?

Bone: doesn’t know what it means for products to move closer together in the product space.  Is pancake flour closer to syrup than sugar? 

McKenna: marketing literature has some answers there.

Bone: still normative.

McKenna: normative to say “too close,” but descriptive to say there are degrees of closeness.

Bone: in a sense blurring and tarnishment are similar. What gives the mark its attraction is making the product more appealing.  But you can also think of it as a particular type of selling device.  Psychological advertising: made a different product from the unbranded version. Can’t make that separation for tarnishment as he can for blurring.

Dinwoodie: in the product area we have a standard which allows us to meander, whereas in territory area we have a blanket rule: you have America.  Once you have a rule, you need exceptions.

McKenna: one other way to think about the difference—TM is build on connecting a mark to particular goods, which is the only way to assess distinctiveness.  We relax that at the infringement stage.  When courts say an inherently distinctive mark is strong, they apply that to other goods/services where it may not have the same meaning.  Geography isn’t as foundational to the TM system; more politically up for grabs.

Dinwoodie: that’s a common law way of thinking: registration lets you get whole classes.  You’re still measuring distinctiveness in theory against the set of goods/services, but practically you get a lot more.

Sheff: Metaphor of confusion manifold is elegant and interesting but probably not descriptively very helpful. If would be nice if each dimension was a vector that could be measured in terms of distance from origin (P’s product), but that’s not what’s going on. It’s not that product proximity is asking whether consumers are likely to be confused due to similarity b/t products, but that confusion is so empty itself—the factors are doing other things. 

See familiar mark in unfamiliar category: something goes on in consumer’s head. If consumer resolves discrepancy, the process of resolving that discrepancy feels good. If they can’t, the cognitive dissonance makes them feel bad. But what does that have to do with confusion? Probably not much. Whatever these dimensions are measuring, we hope they’re measuring effect on consumers, and Q is whether that effect has normative weight.  We might ask whether there’s negative feedback on the prior mark from discrepancy, though the marketing literature suggests there won’t be.

Dilution: who is allowed to participate in creation of mark’s meaning?  It can’t be the case that only the first user is entitled to participate in that.  Who else?  We have no global answer, but sui generis rules.  No sex/no drugs = tarnishment; what about user-generated content/consumer participation?  There we’re moving to allowing that, but what about uses by other firms?  We don’t have clear guidelines.

Burrell: discussing blurring is like atheists arguing the meaning of the Bible: none of us believes in it.  Tarnishment can be conceptualized as an alien invader, or as part of blurring, but you have to know what blurring is and we don’t.

RT: Bone’s description sounds like the province of patent; usually we expect competition in product markets to do the best job of provisioning them.

Borders/distances don’t actually shrink, absent invasion or devolution.  But what bars serve can change, perhaps in a different way—now that energy drinks are popular mixers with alcohol, competing in the market for bars may require selling them.  Compare Apple Computer’s move into music while music was becoming digital, something that wasn’t as salient, so it looked like Apple Computer was moving into music while really they were both moving. Possible tools for measuring closeness of product categories: Lakoff/psychological literature on how people group things categorically.  Legal precedent: rules of accession? Usually used for other purposes, e.g. people have argued with domain names that accession can provide rules of allocation to TM owners, but could it have relevance for product markets too?

McGeveran: some constraints are totally independent of confusion, like sovereignty—a true defense.  (Or at least it used to be.)

Bone: wants us to focus on harm, not on aspects like strength of the mark or similarity.  True that confusion is a grab bag of concepts, but using harm at the center of the infringement manifold has some beneficial effects. 

With dilution: he thinks it’s part of sellers deciding what they’re selling.  With tarnishment, the Q is whether they get to decide the quality or character of the good itself, or whether consumers will be allowed to participate—do we democratize what the goods are?  Or can the producer control? (But will they come when you do call for them?)  Of course the producer can’t control—the public does define this quality.  But it’s sort of like a market for lemons: the acts of particular private individuals can create an externality where people who like Tiffany jewelry may be saddened by the rise of the Tiffany strip club, if the subconscious effects story is true.  You buy this story or you don’t. But if you do, it seems that’s how you have to justify it. (OK, I’ve written a lot about how the empirics are wrong, and Bone does seem to agree, but it’s worth reiterating.)  True, as soon as you say “Tiffany jewelry” is a different product than “jewelry,” we are now fighting over the definition of the relevant market.

Burrell: even if you buy it, you still have to ask when tarnishment might be present.  EU: there might be tarnishment between whiskey and dog food, and he’s not sure that’s different from sex/drugs.

Litman: Does anyone buy this story as something that actually happens?

RT: No! Related point: if you say that making other people feel sad is an externality, you walk into an important issue in utilitarianism, which is whether we should ever count the sadness that some people feel while observing the behavior of others as a harm in a utilitarian calculus.  John Stuart Mill says no, and I’ve said the same. It turns out that if Tiffany stumbles, Cartier is willing to start providing the same benefits, and consumers even seem to enjoy the churn.

Grynberg: we don’t believe in dilution; we don’t think confusion is coherently configured. But we still have a dilution law and a confusion law, committing us to something. So maybe we should turn away from consumers and towards these other policies, like helping businesses.

McKenna: we should stop pretending that dilution is a thing. Attracted to something Tushnet said once: if we must, just say that famous mark owners own the mark, not connected to anything that a defendant’s use does to consumer perceptions, and have all the weight rest on showing fame and on rigorously enforced exceptions.

Dinwoodie: transaction/enforcement costs also have some bearing on that.

McGeveran: might have avoided some monkeying with the confusion rationale, if we no longer had very famous marks exerting a sort of gravitational pull on confusion doctrine.

Litman: Boy Scouts have that; are we happy with that?

McKenna: turns out that, though the new dilution statute has problems, its exceptions are much more robust than for confusion.  For enforcement costs: in order to allow people to protect incremental source meaning, we’ve created a series of rules that are expensive and difficult to apply, and the designs that make it through the hurdles are very few.  Dilution may be the same; there’s now a split about whether you have to show something more than association, and maybe why bother?

Bone: it’s possible that most claimants will give up if you have these hurdles. The Q that would arise: why just famous marks?  Why not give this right to more marks?  The common law asks what principles justify limiting this right to famous marks, and there is nothing but politics.  Courts would try to extend it. 

Heymann: Bently asked what has changed—and maybe it’s not distribution, but the way the consumer interacts with the brand as a personality. Dilution then can be a right of publicity for famous marks, like a right for celebrities.  Brand as persona drives the claims being pressed.

RT: Bone says it’s possible that most claimants will give up if you have these hurdles.  Though that still affects risk calculus in a different way than a small but absolute rule. He fears pressure to extend the right. But this wouldn’t be a common law right—that’s the point. Though I take the point that courts might try to stretch others’ rights to match the statutory right.  Not clear that we’d be worse off, especially if the standard required identical and not merely similar marks. Right of publicity analogy is great.  Notable that the right of publicity too has been under pressure to expand to noncelebrities in various ways.  One piece of evidence on statutory solutions, at least at the state level: NY did a much better job limiting the right than California did!

McKenna: the other issue w/the right of publicity is what counts as use. If you give courts any rein about what counts as use—“persona”—then they’ll run away with it. So any TM solution should require use of the identical mark.  (RT: maybe using the counterfeit standard?)

McGeveran: NY statute has a list, and has been effectively policed, unlike California’s standard.

Bently: we do have special rights for the Olympics, Red Cross, Red Crescent, and are extremely strong rights with no suitable First Amendment limitations/possible free expression defense under ECHR.  However, other institutions don’t seem to be clamoring for the same set of rights, so maybe they don’t inevitably expand.

Bone: all statutes are rent-seeking, so that won’t necessarily constrain it. Q is whether courts would use analogies to the statutes in other areas.  Heymann is right about branding of identity.  But what justifies protecting this identity? There may be a moral right, but that doesn’t work for a corporation.  If the reason is instrumental, then that instrumental rationale can be extended, and clever lawyers will try to do so. We may not be able to contain it by speaking to the identity of famous marks.

Dinwoodie: European standard uses “identity” but has been interpreted to mean “close to identity.”

Litman: points out that there are dozens of Tiffany’s strip clubs, as well as dozens of Tiffany’s restaurants (Posner’s example).

Mid-point Discussants: Jeremy Sheff

Looked at registrants and whether marks were in same category or not. Atlas has had as many as 127 prior registrations live at the time of applications in the same product class, and 268 live in other classes.  These numbers may be slightly off for technical reasons, but the basic point is there. Champion, Phoenix, Ace, ABC, Titan, Sentinel, Eclipse, Guardian, Star, Guardian, Eagle, Delta, National—similar story.

Takeaway: at least in registration context, TM system hasn’t seen any significant problem with concurrent use of standard character marks by different owners both in the same and different product classes.  This is particularly so with marks that might be arbitrary but connote “strength.”

Consumers are probably pretty good at sorting through different users’ applications of identical marks to different products, and PTO has long recognized this. 

McKenna: this is more evidence that the courts which conclude that registration is evidence of strength are clearly wrong.

Burrell: you’re just using classes, which are broad.

Sheff: yes, and classes have also changed in size and shape over the period studied.

Laura Heymann: when a consumer sees “Virgin” on hammers, what do we assume the consumer thinks?  Maybe we want to ask what’s material to the consumer’s decisionmaking process.  What happens when the consumer experiences the same name in two different product spaces? Examine the assumptions behind our accounts of what consumers think and do.

Bone: we think consumers generalize some experiences.  May feel less positive about the entity to which the bad experience is linked—that’s intuitive. 

McKenna: Marketing research: when it happens, it’s because of sufficiently transferable skills in making and selling products that consumers believe the skills will transfer successfully—there, there might be some feedback. When the products are far enough apart, consumers won’t penalize the producer.  Happens when there’s fit.  Marketers consider extensions “far” when TM cases would consider them closely related—it’s not that it never happens, but it’s a lot more rare than TM doctrine things. 

There is a producer side story to be told: in those settings where what’s perceived to be a brand extension is a failure won’t have a feedback effect, it might nonetheless interfere with other extension plans. If Virgin the airline is perceived to be bad at making hammers, the airline may have trouble with other product extensions.  Normatively we can talk about that, but it’s at least plausible.

Bone: suppose I don’t have a prior positive experience with the senior mark, and I just experience the junior mark.  My first contact will be bad.

McKenna: would have to go back and look.

RT: Bone on the intuitive appeal of harm: Except the memory research and advertising research says that we’re very bad at resisting manipulation: ads make salty orange juice taste good; ads can make us think we saw characters at Disneyland owned by WB; we are very resistant to changing our already formed opinions, from brands to students (what happens when you tell teachers that their kids are particularly smart).  Because we get powerful messages from ads, our first contact with a brand is usually not consuming the product but getting the brand’s message. That’s why I don’t worry too much about the unusual person who has never seen an ad for the senior mark, encounters the junior mark, and then develops a bad opinion of the senior mark when he finally does encounter it.

McKenna: even really sophisticated consumers are really bad at resisting ads.

Much of the literature is about advising companies when it’s smart or not to engage in brand extensions.  It’s about measuring costs and benefits.  Marketing departments aren’t advising to expand into everything—there’s a lot about creating sub-brands and differentiating.

Dinwoodie: still suggests huge gap between legal and marketing assumptions.

McKenna: companies are in part interested in preserving space for future action.  Maybe they are thinking 10 years into the future.  (RT: There are companies thinking 10 years into the future?) Maybe in marketing departments.

McGeveran: execs who don’t want to be the one who lost space X if bosses want to move into it.

McKenna: concerns over free riding/leaking value might change incentives some, but hard to say it’s enough to cut back the incentive to advertise heavily. 

Litman: expects some overenforcement is that counsel believes the harm stories, however improbable.  Would be good for the world if the real empirics could be brought to bear on the problem. 

Bone: hard to falsify the proposition once committed, and people are risk averse so don’t want to change behavior.  Accountants claim they’re measuring something: stockholders think so too. Then we’ve got reinforcement of this thing that needs protecting or will be lost. 

Dinwoodie: there are also countervailing cost pressures; in house counsel might be taking some leads from business/marketing.

Heymann: Google sends letters saying “we see you, but we’re not (yet) asking you to stop.”  Could try to change the paradigm there.

Dinwoodie: if overenforcement is the issue, need something more systemic.

Heymann: but if clients are saying “do something!” lawyers need a legal pressure by which they can push back on that unless something actually should be done.  Much discussion of Jessica Silbey’s work.

McGeveran: Silbey emphasizes that it’s a personhood feeling.  Responsibility for integrity of the brand.

Heymann: sometimes they’d even hear from consumers: do something!

RT: but what is protection?  This is a question of scope: we don’t think that owning a building means you have to prevent people from building a similar building nearby or you’ll lose the value of the building, especially if the people in the new building are making a different thing than you are.  I don’t know if anything but persona/personhood concepts can be at work here.  (Jessica Silbey’s work again.)

Also worth mentioning: pressure from authorized distributors, not just consumers.  Costco v. Omega: Omega’s acts were all about protecting distributors. 

Dinwoodie: similar with keywords: if authorized distributors aren’t allowed to buy keyword ads by contract, there’s an incentive to pressure the TM owner to go after non-authorized distributors of legit goods for buying keywords.

RT: I noticed we didn’t spend as much time as we could have on product markets.  Why are they so hard to talk about?

Dinwoodie: You can get very sophisticated in defining product markets, in antitrust, but that’s not congruent with the rough justice that tends to prevail in TM.

McKenna: so many moving parts in the product market definition: are you interested in consumers? Managing business relations?  Ensuring future room for expansion? Or, with promotional goods, you just have a normative commitment to whose market this should be? We’ve all realized there isn’t one normative principle there on which we can all agree, making it hard to draw the line.

Trademark Scholars Roundtable

Sixth Trademark Scholars Roundtable: The Territorial and Product Market Dimensions of Trademark Law, UT Austin

Session 1: The Territorial/Geographic Market Dimension

Graeme Dinwoodie: territoriality is becoming more important in reconciling local and global markets.

Lionel Bently: Geographic localism used to be possible; a common story is evolutionary—the most common word is “increasing.”  Increasing connectivity, move across geographic borders.  But what we lack is a deep history. He’s not convinced that the change narrative is right.  19^th century cases featured a lot of transnational marketing and movement of goods.  Many of 1830s and 1840s brands were being marketed in America and UK.  Not clear whether this was licensing, but should make us skeptical about claims to novelty that underpin much of this work.

Late 19^th/early 20^th century English cases on passing off.  One case from 1909 where House of Lords first recognized “goodwill”—involved Spaulding, an American company making sports goods.  First case that recognizes that descriptive words can have secondary meaning was a case involving camelhair belting (for use on machines), used in tropical countries where traditional materials didn’t work—which is to say, sold as part of a system of international production and distribution of goods. UK registration system was response to pressures from traders from elsewhere who feared they wouldn’t get protection under the passing off regime.

We know that there was a lot of international marketing, and the cases are informed by that. We should be skeptical of claims to novelty, and about what it is that we identify as new. Wants to think of the role of TM in British colonialism—systems that allow protection of goodwill generated in Britain in colonial markets, to allow for expansion of British business easily into those markets.

More conceptual Qs: is it desirable to protect spillover reputation that exists from the marketing of goods elsewhere?  Some situations, most of us would probably agree that it is desirable to bar another from using the relevant designation.  Cybersquatting type situation, where someone has just registered a well-known mark in Country B in order to hold up any potential marketing/extort money from them.  No social benefit from permitting that. 

Then there’s the trader who uses the mark in Country B—potential consumer deception.  Well-known mark doctrine undermines the function of the registration system.  Maybe because there’s no need to register; maybe because it defeats nonuse limitations on registered marks.  Undermining registration might not be too bad a thing, though.  Also, you increase the costs for other traders who want to find out what marks are available, which the registration system is supposed to reduce.

What is the standard?  How do you find out whether a mark has a reputation?  Might be easier to show a mark is well known.  Tendency to think that well known is a higher standard than having a reputation. But if the level of known-ness is lower, there are problems, and the notion of known-ness in Europe is much lower than Americans seem to think.

Empirical questions: Does protecting a well-known mark facilitate expansion into other markets or not?  Does it allow companies to stay out for longer because they have protection anyway? These seem to be testable Qs.  Skeptic: well-known mark protection is sought by already successful businesses and is a product of rent-seeking more than real economic efficiency.

What are the effects on local investment?  Absent cybersquatting/blocking, if someone innocently adopts McDonald’s in a country like South Africa or Jamaica (real examples) and invests in the mark, and in due course gets sued.  We don’t know!  You can say the local producer didn’t need to adopt the mark, but at least in cases of innocence that’s not fully satisfying. 

RT: Thanks also for the opportunity. I’m afraid I won’t live up to it, because I just have a series of questions.  (Bently’s first, historical question: “What it is that we identify as new?” raises for me the possibility of increased direct consumer access, instead of firms bringing goods across borders. Rise of mass media?  But this may well be overstated.  For his project, compare Christine Haight Farley on the inter-American treaties where American companies were apparently doing the same thing.) 

A forehand/backhand: TM is about consumer protection, until TM is about managing relations among businesses.  Or is it vice versa?  Principles, then exceptions that may be so broad as to actually constitute the background rule (Dawn Donut being one possible example).  Another example: exhaustion, where legitimate goods can be sold across borders … unless there are material differences.  Even if the consumer is getting them from Australia herself by buying them on eBay, apparently, the variation in details, including details in the warranty, still means that there will be confusion as a matter of law.  So we have exhaustion in theory but in practice a retailer can prevent it.

Dorpan v. Hotel Melia, from last year: area of use isn’t exactly reputation, certainly not zone of likely expansion.  It’s confusion.  Confusion might not be everything, as Mark and others have told us, but it’s the only thing.  What this demonstrates to me: Lack of theoretical or even practical basis for an understanding of territoriality as something distinct from the trademark’s strength.  And this is true for registered/unregistered both, I think.

Should registered marks be different?  Nationwide priority means hypothetical confusion inquiry.  We act as if the mark had the full scope of presence everywhere, even if it doesn’t really.  This hypothetical confusion inquiry is usually done in opposition proceedings.  I’ve been thinking a lot about using the registration to act as if the rights were defined by the registration, rather than by use.  I think of this as a European model, though clearly the Europeans can’t entirely resist the appeal of looking to the actual use either.  Implications: not just nationwide priority, but possible effects on strength (this I think is wrong, though you’re starting to see cases where courts say it, as well as courts that say that incontestability means strength), and also on similarity (where the registrant has a standard character mark but usually uses a particular design, and the defendant’s design is different but the words are similar/the same).  If we have nationwide priority, why don’t we have these other features of a registration system?

Well, maybe because of the common law reasoning that resists these hypotheticals. The cybersquatting like behavior Bently talks about wouldn’t work in a use-based system, since there’s no bona fide intent to use. Dawn Donut: Based on the idea that non-nationwide businesses aren’t really that likely to become nationwide—only a few of them really do manage to make it to all 50 states--so it’s on balance better for society to let other businesses continue to use the currently nonconfusing marks even though if the senior user does expand there would then be confusion.  It is a risk assessment.

Final thought: Carol Rose on crystals and mud in propertylaw.  She says courts will always seesaw between them because each has features that operate as necessary correctives to the others.  Should we think about TM, including territoriality, this way?

Dinwoodie: Territoriality issues often collapse to the distinction between use and registration. If you really bought registration, you’d have rights to chunks of goods (at least for 5 years in Europe) as defined by the registration.

Munich economists studied changes in 1860s when TM regime changed—inconclusive, struggling to isolate variables.  Benelux—in 1973, Benelux abolished national rights and went to unitary right.

At some point, a difference in degree justifies difference in kind—it is fair to say that territorial issues are “increasing.”  More interactions of national marks in foreign contexts, particularly online.

Courts do address the cost/benefit issues in the well-known marks cases, such as Grupo Gigante; even the Bancorp case where the dissent has it right.  They’re thinking them through in context of defining the territorial dimension of rights.  Even European courts may limit relief to countries in which a mark is known and in which therefore there is confusion, even though the right is by hypothesis EU-wide.

McKenna: Every year, we fight about whether TMs are about search costs. International level: becomes more clear that the question of what TMs are for is so much more diffuse.  Right to expand in another market is a political choice about structuring commercial relationships, not a consumer issue.  Compromises at the international level have little to do with the normative Qs Americans tend to think TM is about, and the layering makes analysis more difficult.

Dinwoodie: Grupo Gigante is phrased for the “poor immigrants coming over the border,” but the well-known mark doctrine comes from treaties during a period when there weren’t such immigrants and it really was a right to expand.

Bently: the people who really want the well-known mark doctrine are lawyers who fear consequences of not doing their jobs (that is, getting registrations) in a particular country.  (This assumes a registration based system!)

McKenna: registration system is driven by a sense of geographic expansion of trade across the US; this isn’t new but goes to the 1800s in the US, and also true in the international level—but the expansion is all being carried out by means of registration. What differs now: we’re talking about spillovers beyond registration—scope of relief, infringement, etc.  A lot of the features of the registration system are features of int’l agreements driven by old waves of product diffusion; what’s different now?

Searching for use v. searching for repute: McKenna isn’t sure we search for use in any setting. We say we do, but we’re always searching for repute. We don’t have a great idea of what constitutes use, and so we look for things like analogous use. There are some exceptions in priority disputes, but the overwhelming majority of cases really look for recognition, not use.  Maybe the level of repute we’re talking about is higher versus what’s required to find basic “use,” but use isn’t doing the work.

Robert Burrell: points out that Australian courts will routinely reject consumer surveys. 

Dinwoodie: true of British etc. courts while US courts fetishize them; surveys by definition look at distinctiveness to consumers, whereas nonsurvey proxies are more likely to look at what the business is doing.  The evidentiary rule has effects on (or perhaps reflects) the attitude.

Robert Bone: “use” from the 19^th century was about what was required to appropriate/control the mark, from a property standpoint. 20^th century: move from property to goodwill, pushing us to reputation, but we still have the old use rules.  We’re seeing this old use idea being pushed and crumbling, but TM holds on to the past.

Sheff: how do we determine whether a mark is well known?  Surprisingly difficult to determine fame, which his current empirical project.  Looking at third-party assessments of brand value.  Problem is that best evidence is in the hands of the person claiming big rights; they know what consumers think about their brands better than anyone else.  How do we force that info out of the private user? A registration system is a useful tool for getting one piece of information: I’m staking out a market.  But it’s a very small piece if we’re interested in reputation among consumers in a jurisdiction.  So, we need incentives to disclose.

Dinwoodie: in other countries with pure registration based systems (not much examination as in US) there are a lot of “squatted” marks on the register and there’s cost to getting them back.

Bone: chilling effect on local investment must not be from mark (because there’s always another mark to use), but from fear of big guys coming in.

Burrell: it’s gotten harder to do parallel imports in Australia—in US too?

McKenna: the material difference doctrine has been around for a while, but courts are increasingly willing to treat differences in warranty as material differences—or even removal of product codes.  Why is that material?  Well, Sheff notes that the TM owner claims it interferes with its monitoring of its customers.  RT: but how could that be material to consumers? 

Burrell: maybe in international cases courts require real confusion, not all the proxies we use in national cases—so proving a reputation turns out to be really quite hard. 

Dinwoodie: that works in Australia because it’s not such a mess as the US.

Burrell: if you’re doing a well-known marks case in Australia, the action is technically the same but the foreign company must prove a reputation, not just prove that it’s been selling and advertising for a number of years.

Heymann: Q of whether the marks mean the same thing across jurisdictions.  Does this mark have a meaning is different—do you recognize it v. what does it mean?  Allowing producer to control meanings across jurisdictions—or not. McDonald’s can have different types of McDonald’s depending on local cultures.

Mid-point Discussants:  Marshall Leaffer

There’s good literature on the desire of French firms to promote their goods in French-speaking Africa—could feed into the imperialism discussion.

Interaction of reputation, goodwill, and use: Convinced that de facto we’re looking more at reputation than goodwill.  WIPO says that reputation should be the centerpiece. Leah Chan Grinvald argues that there should have to be a high level of secondary meaning first.  McDonald’s South Africa case seems to comport with WIPO standards—need a substantial number of persons to recognize the mark, which means not a negligible number—a very liberal standard, attenuating the notion of extraterritoriality. Bulova and Vanity Fair are deprecated, after Grupo Gigante; the q of the nationality of the individual in question is less important. Even McBee v. Delica was a close case; if he’d shown real some sales in the US, he should’ve won.

Formalities of registration and renewal: it’s really hard to keep up with them in all countries. Well-known marks = important safety valve for the costly system of today.

Jessica Litman: Many more companies are international today.  First, consumer understanding.  Second, some degree of territoriality is how the different states/contracting parties acknowledge each other’s sovereignty and power over their own markets and citizens. Increase in multinational corporations affects both: likelihood that consumers think that Marlboro in Japan is the same Marlboro in the US.  Acme Donuts in NY and California: increasingly consumers believe that two companies are related not because consumers or goods are traveling more but because they’re aware that many companies aren’t local.  50 years ago if you were traveling to a different city and saw a descriptive mark you’d assume that this was just a different local company.  Multinationals also change political economy.  Lobbying their various sovereigns to respect their marks cross-border.

Mike Grynberg: How strong/robust do we think these expectations are, versus the costs of weakening territoriality?

Burrell: shouldn’t assume that multinationals desire to trade everywhere; sometimes they have no interest in being in the market. McDonald’s has said outright that it won’t enter Bosnia because it’s too much of a dump.  Well-known marks doctrine still applies.

Dinwoodie: they might come in if Bosnia improves.

McGeveran: they’d say that badly run McDonald’s would harm their reputation among non-Bosnian tourists even if Bosnians aren’t confused.

Dinwoodie: that’s a very producer oriented argument, not really about consumer protection.

RT: (Note on harm stories being quite often wrong.)  Now I’m confused about what goodwill means (ok, I’ve always been confused).  I thought it meant something like the selling power of the mark, which is to say the power to bring sales to the TM owner.  So you can have reputation without selling power? 

Some discussion with Litman over whether consumers would really think Acme was the same in a different state, given other contextual elements. It may be that we shouldn’t treat Proctor & Gamble as a descriptive term and should abandon the old rule about proper names, but just because there are some crossnational brands doesn’t mean they all are, and I think consumers can still tell the difference.

Litman: Gave her students the Cracker Barrel case, and they were largely shocked that the two companies were separate entities.

RT: yes, where a brand presents itself as a national brand and you can find Cracker Barrel cheese in multiple supermarkets, I see that.  But there are also plenty of businesses that are obviously local.

Bone: is there harm from any difference?  The quality of Cracker Barrel cheese and Cracker Barrel restaurants isn’t really related.  If they both look like national brands, you can presume you’ll be ok. 

Dinwoodie: convergence among products is related to convergence in territory (Cracker Barrel being a great example). Change in business organization affects both.

One of the tradeoffs of trade liberalization is that new companies can come in and fight for market share on the established one’s turf. So while you can call the TM rent-seeking, it looks less so in the context of the broader trade deal.

Common-law system in theory starts with reality and has developed hypotheses; the registration system starts with hypothesis and occasionally consults with reality.  The Q is whether they end up in a different place.

Leaffer: Goodwill: what is the mark worth is another definition, but it all depends on other things such as reputation. Reputation is a less loaded term; skeptical of arguments that well-known marks doctrine should be limited to cases in which the mark has goodwill.

Materiality in exhaustion cases, used to destroy exhaustion—does seem to be going in the opposite direction of the copyright cases. 

McKenna: in terms of the harm story, are there points of differentiation between the marks? Relationship between scope of mark and territoriality.  Someone need not open McDonald’s with the same logo/colors in Bosnia. Empirical evidence suggests that consumers are good at differentiation when there’s a reason for them to do that.  “Big Mac Noodles” have successfully opened in some East Asian countries.

We keep talking about reputation/goodwill, but in the context of functionality he’s considered non-reputation-related advantage, and the Q is “reputation for what?”  Courts are pretty slippery and use the concept as a makeweight, as in Au-tomotive Gold. The court thinks that the use of the mark on a keychain necessarily calls the reputation to mind, ignoring the question of whether the reputation is for those goods or services. We have the same problem with confusion, talking about it as all one thing, and we do that with “reputation” too.

Laura Heymann: agrees with the point about logos. Marks don’t exist in tombstone, black and white form; almost always visually presented, even though cases sometimes mention the radio.  Always has a context, which affects how consumers think about the relationship between the two.

Thinking through harm story about Bosnian McDonald’s: if consumers are confused, do they judge McDonald’s business judgments as opposed to the ordinary meaning of the quality of the goods and services?  That’s a different kind of reputation.

Dinwoodie: “what’s the harm?” is a distinctively American question to ask. One could ask a different question (e.g., unfair advantage/unjust enrichment).

RT: (1) a registration system has a ready answer to the “marks don’t exist in tombstone format” point, if the word mark is registered—so then we should dig into the question of why allow that kind of registration, and relatedly why we allow nationwide priority.  (That is, McDonald’s doesn’t use the block letters; it uses its own distinctive font. If we nonetheless agree that McDonald’s is “using” the standard character mark, which I think we must (otherwise it should be cancelled for nonuse!), then someone who opens a McDonald’s in Bosnia with a different font is also using the standard character mark, whether or not that causes confusion).  (2) On Leaffer’s exhaustion comments: There’s a connection also between exhaustion and the point Dinwoodie makes about having to compete against entrants from outside. Exhaustion means that in theory the owner has to compete with its foreign products too.  The larger trade scheme needs to be considered, and the Europeans seem to be ahead of us here.

Jeremy Sheff: Mary LaFrance is working on a paper on the implications of Kirtsaeng for TM—predicts shift to TM methods of exercising control/preventing exhaustion.

Mark Janis: what is the body of law on well-known marks outside the US?

Bone: Persons has this rule about “bad faith” adoption by a remote junior user.  But the theory is that it’s a remote area and there’s no local meaning—what could bad faith possibly mean?  Maybe it’s an evidentiary test—an idea that the D might have reason to believe that there is secondary meaning in the area.  Or maybe it’s a proxy for potential market entry into the area, though that would be weird.  Then you have a Dawn Donuts problem: there’s no entry yet, so what are we accomplishing by stopping the junior use?  Also, as to secondary meaning/goodwill, if that’s the only evidence thereof that’s really slight.

Litman: real consumers encounter TMs in context. A strict application of territoriality treats copying logo, trade dress, business concept exactly the same as copying only the word mark. If we want to treat them differently, and her impulse is to do so, the Q is if there’s a way to do that, say by limiting famous mark doctrine to identity of logo/other visual elements.

Leaffer: there’s a paucity of cases on well-known marks. The South African McDonald’s case is therefore our fallback.

Dinwoodie: you can have passing off in many countries; the countries in which you find these cases tend to have registration-only systems and no passing off backup.

McGeveran: we should be distinguishing between products and services. The nature of what’s moving across territorial boundaries can be goods or it can be information/reputation, and those are distinct.  Increase in both of those movements. Consumer’s ability to go online can defeat decision of goods-maker not to enter a country (unless exhaustion doesn’t apply!), whereas the Bosnian McDonald’s is different.

McKenna: why would we want TM rights to preserve rights to entry?  We might think that owners are more likely to be good at expanding to/exploiting a new geographic market than a new product market.

Registration: maybe we have a rule for registration purposes that block letters encompass everything, but once we get to infringement we ignore that.  We’ve been talking mostly about word marks: but what are we talking about with a registered trade dress?  We don’t really have a long history of interpreting what registration of a product configuration means, mostly because we don’t care what the registration says in an infringement case. But as we start thinking more about stuff outside the registration system, that will force us to think harder about the relationship between the registration system and infringement actions.  We wouldn’t necessarily want the McDonald’s registration for Ba Da Ba Ba Ba, which is registered in standard character form, to cover all alternatives.  You might want to treat it like a patent: you get what you claim, and people who use more than that don’t infringe the patent.

Dinwoodie: Compare Louboutin.  Registered mark valid, but not used. 

When you export US registration for international registration purposes, what do you get? Problems are usually thought to come from the description of goods and services/classes, but also this discussion shows that there can be issues from the description of the mark itself.

Janis: now we’re talking about a regime of claim interpretation, which has its own costs.

Maybe the McDonald’s issue with the different logo should really be a 10bis claim, unfair competition not TM.  There, you focus on what the D has done, not the scope of the P’s right.

Dinwoodie: one reason we’ve moved away from “use” is the rise of the service economy, where advertising is more important, and once you do that for services, why not for goods?

EU is now struggling with need for Dawn Donut type rules since rights are now so geographically broad.  The internet doesn’t make local use irrelevant, it makes it more relevant.

Bently: to what degree is this related to nationbuilding and perceptions of nationbuilding—does Dawn Donut reflect a view of the nation that no longer seems accurate to us?  (Comment: If anything, we’re more divided!)  In Europe, the TM stuff is clearly part of a process of Europe-building, but placed registration in tension with some of the functions of TM, so we’ve started to carve out a series of exceptions from the unitary mark.

RT: w/r/t nationbuilding, contrast the nationalism of our export of copyright—one might suggest that now that the US doesn’t make anything but movies, it hasn’t felt much need to export TM, or even incorporate others’ rules. By contrast we’ve felt great need to export our copyright regimes, minus our limitations.  Exporting culture and law together.

Dinwoodie: European politicians are resistant to any derogation from one EU policy; judges however worry about granting relief that covers 29 countries without reason for that breadth.

Also, © harmonization might be behind TM harmonization for various reasons and TM thus less in need of pressure from the perspective of the harmonizers.

Trump U: puffery defense rejected and class certification granted in 2 cases

Cohen v. Trump, 2014 WL 690513, No. 13–cv–2519 (S.D. Cal. Feb. 21, 2014)

Cohen brought a putative class action against Donald Trump based on Trump’s involvement with “Trump University.”  Allegedly drawn in by Defendant’s name and reputation, Cohen attended a free preview event, then paid $1,495 to Trump University to attend a real estate retreat, where he subsequently purchased a “Gold Elite” program for $34,995.  He alleged that misrepresentations led him to pay for these programs, specifically that the programs would give access to Donald Trump’s real estate investing secrets; that Donald Trump had a meaningful role in selecting the instructors for Trump University programs; and that Trump University was a “university.” His RICO claims used mail and wire fraud as predicate acts.  I won’t discuss the RICO-specific issues, but the court declined to dismiss the complaint.

Of note, the court rejected Trump’s argument that the statements at issue were nonactionable puffery.  Cohen’s allegations centered on the relationship, or lack thereof, between Trump and Trump University rather than Trump’s claims of general program quality.  Puffery involves a general statement that’s extremely unlikely to induce reliance; “misdescriptions of specific or absolute characteristics” are actionable.  Though many of the ads contain puffery, Cohen’s challenges related to Trump University delivered the specific or absolute characteristics of (1) Donald Trump’s involvement; and (2) an “actual university.”

Trump also made an argument that trademark law protected him, since Trump University was allegedly just a brand—no one would think that Michael Jordan made the sneakers bearing his name, or that Fred Astaire taught classes at the Fred Astaire Dance Studio.  First, Trump lacked legal support for his claim.  In any event, even the hypotheticals were distinguishable, given the extensive allegations that Trump made repeated representations as to his participation with Trump University beyond lending his name to the institution. The ads featured Trump’s signature, with statements such as “I can turn anyone into a successful real estate investor, even you.—Donald Trump.”

Nor did the court strike Cohen’s allegations that included slogans/puffery; he was challenging ads that, while they included puffery, at least created factual issues as well. Anyway, there was no indication that the statements created a serious risk of prejudice, delay, or confusion of the issues. Likewise, the court declined to strike allegations about government agency investigations into Trump University and about TU’s Better Business Bureau rating, since the investigations were potentially probative of Trump’s knowledge and intent to defraud.

Makaeff v. Trump University, LLC, 2014 WL 688164, No. 3:10–cv–0940 (S.D. Cal. Feb. 21, 2014)

The court here certified some consumer protection class claims against Trump University, though rejected nationwide classes. The Court certified a class and five subclasses of residents of California, New York and Florida who purchased a Trump University 3-day live “Fulfillment” workshop and/or a “Elite” program within the applicable limitations period who hadn’t received a full refund.

Plaintiffs alleged materially false representations in ads and the Trump University free preview, which led the named plaintiffs to pay anywhere from $1,495 for a three-day fulfillment seminar up to $35,000 for the “Trump Gold Elite Program.”  The following misrepresentations were allegedly common and pervasive in the materials: (1) Trump University was an accredited university; (2) students would be taught by real estate experts, professors and mentors handselected by Mr. Trump; and (3) students would receive one year of expert support and mentoring.

Plaintiffs alleged a campaign of free previews and ads throughout the US.  While the content varied, all of the marketing materials uniformly referred to the business as “Trump University” and uniformly claimed that Donald Trump was integrally involved in the teaching of students at Trump University. For example, print ads included quotes such as “I can turn anyone into a successful real estate investor, including you,” and “I’ll show you how”; the TU website used a large photograph of Mr. Trump and the message: “Are YOU My Next Apprentice? Prove it to me!”; marketing emails said “76% of the world’s millionaires made their fortunes in real estate ... I’m ready to teach you how to do it too”; and print ads and letters signed by Mr. Trump told prospective customers that they would be shown real estate strategies by Mr. Trump’s “hand-picked experts.”

In order to get attendees at the free preview to pay for more, TU allegedly promised participants that they would learn Trump’s secrets from Trump’s hand-picked instructors over the course of a one-year apprenticeship. Transcripts of the preview and initial three-day program included numerous repetitions of the claim that Mr. Trump hand-picked the instructors and mentors.  Plaintiffs alleged, however, that this was untrue.  Trump’s interrogatories only identified four people he picked, and they developed TU course materials; the instructors and mentors were selected by TU representatives.

Those who paid for the $1495 seminar were allegedly promised a three-day seminar and a year of “expert interactive support,” but received a three-day infomercial and a phone number for a “client advisor.” Rather than teaching concrete real estate information, the seminars tried to get customers to buy the Trump Gold Elite Program for $34,995 to get the “full education.” TU representatives allegedly pressured customers to raise their credit card limits to purchase Trump Elite Programs.

As for that Gold Elite package, participants were allegedly promised unlimited mentoring for an entire year, but TU wouldn’t pay mentors for more than six one-hour mentoring sessions per consumer.

The common evidence included TU’s name (changed in 2010 to the Trump Initiative); TU ads that used “recognizable signs to appear to be an accredited academic institution” including a school crest; and evidence that TU was never accredited and was pressed by the New York Board of Education to cease any claim to being a “university” in 2010.  

In addition, TU’s Playbook directing how seminars should be advertised and conducted was the key common evidence of the allegedly standardized, tightly controlled schemes with the goal to up-sell students.  The Playbook provided sales and advertising guidelines, including tips and scripts to help pitch TU products and services, e.g. representations that the instructor was “hand-picked” by Donald Trump, as well as talking points for use in one-on-one sales sessions.  All TU members were required to use the Playbook.  Also, the PowerPoints used by instructors varied, but shared common messages: the Trump University logo and an image of Donald Trump; statements that the instructors were “hand-picked” or “hand selected” by the Donald Trump or the “TU founders;” and advertising for the three-day fulfillment seminar, one-year apprenticeship program, or Trump Elite packages. “A small sampling of transcribed TU seminar recordings indicates that several instructors made key statements at issue here, including the alleged misrepresentation that instructors were ‘hand-picked’ by Donald Trump and students would receive one year of unlimited mentorship.”

Numerosity was easy, as was adequacy (with respect to all but one named plaintiff).  Commonality requires “the capacity of classwide proceedings to generate common answers” to common questions of law or fact that are “apt to drive the resolution of the litigation” per Dukes. Dissimilarities within the proposed class can impede common answers. Here, plaintiffs alleged that all the class members suffered financial loss after exposure to deceptive ads. The common questions were: (1) whether Defendants misrepresented that Trump University was an accredited university; (2) whether Defendants misrepresented that Donald Trump was heavily involved in TU and “hand-picked” the TU instructors; and (3) whether Defendants made misrepresentations about the “yearlong” mentoring and interactive support.

Defendants argued that TU student experiences varied by program, price, contract, content, market, teacher, mentor and resulting individual performance, and that not all instructors or representatives used the Playbook or spoke directly from TU talking points or scripts. But verbatim recitation from a script isn’t required for commonality. “[T]he tightly orchestrated promotional campaign exposed class members to the alleged deceptive and misleading representations that are at issue here.” The class procedure could determine whether misrepresentations were made and whether they were material.

Defendants argued that the named plaintiffs weren’t typical because they bought at different prices, saw different ads, and received different benefits from the TU programs.  Nope.  Each proposed class representative purchased TU’s three-day fulfillment seminar for anywhere between $750 and $1,495, along with additional TU programs and services. Their purchases were sufficiently typical; the nature of the claims was the same, and was based on conduct not unique to the class representatives. “The fact that each Plaintiff may have seen a different advertisement, or no advertisement at all, does not defeat typicality.” The key in determining typicality and predominance is “determining the scope of the advertising and promotions and whether it is likely that all class members were exposed to the allegedly material misrepresentations.”

Predominance: here the court analyzed each claim separately.  First, the usual California statutory claims: Defendants argued that there weren’t proved misrepresentations, and that ads and promotional materials changed frequently, making it unlikely that all of the putative class members were exposed to the same representations. But the record contained “substantial evidence of common misrepresentations made to all putative class members,” as identified above.

Individualized showings of reliance and causation aren’t necessary as long as class members were exposed to the allegedly misleading ads.  After Mazza, without a massive ad campaign, the class has to be defined to include only members exposed to the challenged ads. Defendants argued that there weren’t any scripts or uniform promotional materials containing material misrepresentations, and that verbal representations had to be individually assessed, preventing any presumption of reliance. True, there wasn’t a massive ad campaign, but there was evidence that the campaign here was “uniform, highly orchestrated, concentrated and focused on its intended audience.”  This made it highly likely that each member of the putative class was exposed to the same misrepresentations. “There is substantial evidence that class members paid for TU seminars for reasons that track the advertising and promotional information provided in the highly orchestrated campaign.” Thus, the court found that members of the California class were likely to be deceived.

The NY and Florida consumer protection subclasses showed predominance for similar reasons. “With small differences in wording, all three states [California, New York and Florida] appear to employ the same causation and reliance standard [in their unfair trade and competition laws].”

The court also certified two subclasses for financial elder abuse.  California’s law applies when someone gets property from an elder or dependent adult “for a wrongful use or with intent to defraud,” and an elder is 65 or older.  Florida’s law applies when there are willful violations of Florida’s Deceptive and Unfair Trade Practices Act that victimize a senior citizen, which is someone 60 or older. Since these were premised on the same acts as the consumer protection law violations, common questions predominated.

Defendants argued that individualized determinations would be required on damages, since the court would need to determine what value each student actually received from the program. Individual damages don’t defeat certification as long as the plaintiff can present a likely method for determining class damages.  Plaintiffs sought the amount paid, plus interest, using defendants’ records for distribution. This proposed method of calculating damages didn’t defeat predominance or render the case unmanageable.

However, the nationwide common law causes of action for breach of contract/implied covenant of good faith and fair dealing, fraud, and unjust enrichment failed. Plaintiffs had to show uniformity or at least groupability for the 50 states’ laws.  This required an extensive analysis of state law variances. Plaintiffs proposed nine common law classes; the court found that common issues didn’t predominate. They provided a survey of the applicable common law of the 50 states and proposed verdict forms for the subclass causes of action. But the proposed verdict forms “gloss over the differences in the elements of each cause of action among the 50 states…. It is insufficient to merely refer the district court to densely worded articles, graphs, and charts pertaining to each state’s laws.” 

The court thought there were too many differences in the substantive law.

However, plaintiffs established superiority for the five claims for which they showed predominance.  Though the NY AG recently sued TU, that didn’t defeat superiority as to the NY claims, since it hadn’t yet resulted in restitution, an injunction, or other relief.

FTC wins big against diabetes treatment claims

Federal Trade Commission v. Wellness Support Network, Inc., 2014 WL 644749, No. 10–cv–04879 (N.D. Cal. Feb. 19, 2014) (magistrate judge)

The FTC sued Wellness and its principals Robert Held and Robyn Held for false advertising and deceptive practices in the sale of their Diabetic Pack and Insulin Resistance Pack (the same product sold under two names).  Diabetes is a debilitating disease affecting over 10% of US adults, and insulin resistance is a mechanism by which it does its damage by keeping blood glucose levels too high.

Defendants advertised the products as containing vitamins, minerals, and botanical extracts, formulated into three components: the Glucose Support Formula, the Vitamin-Mineral Formula, and the Calcium-Magnesium Formula.  Wellness stopped using those names in 2011, but it continues to sell essentially the same products under similar names, including Glucose Support Formula and the other two combined under the name Life Support Formula.  Wellness stopped advertising the Diabetic Pack as such, but still sells it, and continued to advertise the individual components, including “Glucose Support.” 

Robert Held formulated the product “on the basis of scientific studies he found on the Internet.” Defendants claimed that the products assisted in the dietary or nutritional management of diabetes by providing nutrients which typical diabetics lack. After subtracting money returned to customers, Wellness’s sales revenue for the products between 2004 and 2012 was nearly $2.2 million.  Robert and Robyn Held developed all the advertising and marketing, including the website, though verifying accuracy was Robert’s job.

Wellness used keywords, metatags, and AdWords to promote its website. Its keywords included “alternative diabetes,” “diabetes control,” “cure diabetes,” “cure for diabetes,” “diabetic cure,” “remedies diabetes,” “natural diabetes cure,” and “diabetes treatment.”  Most of its ads were pay-per-click, a marketign campaign designed by Robert Held.  Though outside contractors managed the campaigns, Robert chose the keywords and AdWords.  Some of the more successful ads made claims such as:

Clinically Proven Natural Solution

To Diabetes With A 90% Success Rate…

Reverse the Effects of Diabetes

Money Back Guarantee

The website “consistently highlighted the Products’ ability to lower blood sugar levels and reduce dependency on medication and emphasized the existence of scientific proof demonstrating these benefits.”  It also contained testimonials from putative customers claiming to have freed themselves from high blood sugar and insulin use.  These testimonials also referred to a low carb diet recommended as part of the Diabetic Pack regimen.  There were numerous references to science and scientific studies, such as the headline, “Nobel Prize Winning Technology Validates WSN Diabetic Pack Ingredients.”  The Diabetic Pack allegedly worked because it “operate[d] at the cellular level.”

An online marketing survey conducted for defendants indicated that the main reason that consumers landed on the website was that they were looking for information about natural remedies for diabetes and about how to control their sugar levels.

Defendants never conducted scientific studies to establish the products’ effectiveness.  Instead, their claims were based on studies about the individual ingredients.  Robert Held also testified that he believed the products worked because people told him that the products worked for them, but he didn’t know how many had told him that.  From 2004-2007, defendants received about 384 complaints: some said the product wasn’t working and others said their doctors didn’t support its use.

In 2005, the FDA sent a letter warning that it considered the Diabetic Pack to be a drug and that defendants’ claims didn’t comply with the FDCA.  In 2006, the FDA sent another warning letter.  In 2007, the FTC sent a Civil Investigation Demand, culminating in this case.

The FTC asserted two causes of action, one for the Diabetic Pack and one for the Insulin Resistance Pack.  Diabetic Pack: Defendants deceptively claimed that the Pack was an effective treatment for diabetes; that it reduced or eliminated the need for insulin and other diabetes medications; that scientific studies proved that it was an effective treatment for diabetes; and that it was clinically proven to cause an average drop in blood glucose levels of 31.9%. Insulin Resistance Pack: defendants deceptively claimed that the Pack reversed insulin resistance, managed insulin resistance, and preventd diabetes; that scientific studies proved that it was an effective treatment for insulin resistance; and that it was clinically proven to cause an average drop in blood glucose levels of 31.9%.

The defendants offered several defenses, all of which the court rejected.  First, the court accepted the FTC’s diabetes/insulin resistance expert, who testified about what experts would consider substantiation with respect to the claims at issue: sufficiently large, controlled, randomized, double-blind trials, using the same dosages and formulations in defendants’ products.  The expert didn’t review defendants’ advertising or attempt to determine whether they actually made the challenged claims, but that wasn’t his job and didn’t make his opinions unreliable.  Defendants’ expert, by contrast, didn’t address the claims the FTC challenged, so his opinions weren’t relevant, and his methodology wasn’t reliable.  Defendants wanted the court to consider his opinions with respect to individual liability—since he testified that the products were useful, they weren’t trying to “hoodwink” customers.  But his opinions still weren’t based on reliable scientific methodology, even if they were relevant to the Helds’ knowledge or belief (and of course intent isn’t required to violate the FTCA).

Defendants argued that the FTC’s claims needed to take into account the FDA’s regulations for medical foods.  That wasn’t the issue in the case, though.

Defendants also argued that the FTC’s claims violated the First Amendment. Citing Pearson v. Shalala, 164 F.3d 650 (1999), defendants argued that Central Hudson applied.  But Pearson was inapposite.  There’s no right to make false or misleading advertising claims; Pearson is about “regulations that limit or ban whole categories of speech,” not enforcement actions against particular deceptive speech.

Defendants then tried the argument that the APA barred the FTC’s claims because the FTC is seeking to make new rules through adjudication rather than complying with the procedures that govern rulemaking under the APA. Nope.  Agencies can have case by case enforcement policies.  While an agency may abuse its discretion when it makes a “prospective pronouncement of a broad, generally applicable requirement [in an adjudication], without application of the requirement to the parties before the [agency],” here the FTC was relying on well-established rules and legal theories in suing based on Sections 5 and 12.  It wasn’t trying to announce through adjudication any broad new rule.

Now, for the claims themselves: to show a claim has been made, the FTC must show either that it was explicitly stated, or that, from a reasonable consumer’s perspective, the ad gives the net impression that the claim has been made.  A court can determine this net impression, and ads capable of being interpreted in a misleading way should be construed against the advertiser.

Under this standard, the court found that defendants made the challenged claims.  As to “effective treatment for diabetes,” the court disagreed with defendants’ argument that their claims related only to the ingredients and not to Diabetic Pack.  “Any reasonable consumer reading the description on Defendants’ website of how Diabetic Pack works would conclude that the scientific studies relating to the Foodform® ingredients also establish that Diabetic Pack is effective in treating diabetes.”  Likewise, the ads claimed that Diabetic Pack reduced or eliminated the need for insulin and other diabetes medicine, “notwithstanding references to diet and exercise or disclaimers advising consumers that they should use the Diabetic Pack under medical supervision and should continue to take their prescribed medication.”  The pay-per-click ads expressly promised a “drug-free” “solution” to diabetes, and the website stated that one of Diabetic Pack’s “breakthrough benefits” is “less dependency on medications.”  This was reinforced by the testimonials. 

The disclaimers warning consumers to continue to take their medications didn’t help.  For example, the website had the following Q and A:

When starting on the WSN Insulin Resistance Pack can I stop using other medications I am taking for my insulin resistant condition?

You should continue to take any medications that have been prescribed by your physician. As your symptoms begin to reverse ... you should inform your physician about what is happening and that you want to reduce the amount of medications you are taking accordingly. Working together with your physician, you can continue to reduce any medications you are taking, and in some cases, completely eliminate the use of all medications.

This was hardly a disclaimer: it gave “the strong impression that [consumers’] need for insulin or other diabetes medications will be reduced as a result of using the Diabetic Pack.”

Misleadingness: The FTC has the burden of showing inadequate substantiation, but doesn’t need to have clinical studies showing the product doesn’t work.  Establishment claims have to be substantiated as claimed; the appropriate level of substantiation for non-establishment claims depends on context, including “1) the type of claim; (2) the product; (3) the consequences of a false claim; (4) the benefits of a truthful claim; (5) the cost of developing substantiation for the claim; and (6) the amount of substantiation experts in the field believe is reasonable.”  The claims here were of both types; the court found all misleading because they lacked a reasonable basis, and the establishment claims were actually false.

The FTC’s expert used the same substantiation standard for both establishment and non-establishment claims, because experts in the field would require “consistent results from well-designed and well-conducted studies in representative human populations that directly assess the specific therapeutic effects at issue” in either case, because the claims were disease-specific treatment or prevention claims. Even when defendants didn’t directly say “studies prove,” they made claims about “treatment of a serious health condition where the consequences of adopting a particular course of treatment may be significant,” both in benefits and risks (for example, discontinuing diabetes medication).  The evidence showed that the claims lacked adequate substantiation, and that defendants’ cited studies didn’t support the claims. Among other things, many of the studies were in vitro or in animals, not in humans; the single-ingredient studies had weaknesses such as insufficient size, lack of placebo or other controls, and testing of much larger doses than are found in defendants’ products; and other well-designed studies produced inconclusive or negative results.

Of course the claims were material.  They were express and health-related, both of which are presumptively material.

The court then found individual liability for Robert Held and Robyn Held.  Injunctive relief against individuals on the basis of corporate acts or practices is available where: “1) [the] corporation committed misrepresentations or omissions of a kind usually relied on by a reasonably prudent person, resulting in consumer injury, and 2) [the individual] participated directly in the acts or practices or had authority to control them.”  For restitution, the FTC must also show knowledge of the deception. This standard requires that the individual “had actual knowledge of material misrepresentations, [was] recklessly indifferent to the truth or falsity of a misrepresentation, or had an awareness of a high probability of fraud along with an intentional avoidance of the truth.” But it doesn’t require intent to defraud.

The only issue here was whether the Helds had the necessary knowledge. FTC v. Garvey, 383 F.3d 891 (9th Cir. 2004), found a spokesperson hired to appear in weight-loss infomercials not individually liable.  He was given samples of the product a few weeks before filming, and his wife lost significant weight using the product, and he also received booklets about the product from the manufacturer. Because of his first-hand anecdotal evidence and the purported scientific evidence provided by the manufacturer, the 9^th Circuit held that he lacked the requisite mental state, given that he was merely a hired spokesperson and thus should only be held to a duty to examine the material from the perspective of a reasonable layperson.

FTC v. Medlab, Inc., 615 F. Supp. 2d 1068 (N.D. Cal. 2009), reached the opposite result as to a different individual.  There, the individual defendant also claimed to have personally used the product and lost 18 pounds.  But he was “deeply involved in designing the composition of the products and composing the representations at issue” in the case. He continued to place misleading ads even after the FTC initiated a “red flag” campaign warning of “bogus claims” in his advertisements. And his own weight loss didn’t address whether one could, as the ads claimed, lose weight without dieting or exercising, or whether there were clinical studies showing that users could expect this result.

As in MedLab, there was  “extensive and undisputed evidence that Robert Held was at least recklessly indifferent to the truth or falsity of the representations.”  He wasn’t trained as a scientist or doctor but decided on the composition of the products based on internet research.  He and Robyn Held developed all the ads together, including claims that scientific studies supported the products’ effectiveness, so he had sufficient knowledge to support individual liability.

Robyn Held argued that she justifiably relied on her father Robert’s conclusions, but “no reasonable fact finder could conclude that she was anything but reckless.” She wasn’t involved in formulating the products, but she was a co-owner of the company, played a significant role in running it, and was extensively involved in creating the deceptive ads. She was also aware that the composition of the products was based on Robert’s internet research, that Robert had no formal medical or scientific training that qualified him as an expert on the treatment of diabetes, and that the products were never scientifically tested. Thus, both were personally liable.

The district court had broad discretion to order restitution and/or a permanent injunction where a violation of the FTC Act has been established. Courts often award the full amount lost by consumers, not just defendants’ profits.  The court found that the FTC was entitled to nearly $2.2 million in restitution, based on Wellness’s net sales.

The court declined to exclude reorders from its calculation, though defendants argued that these consumers were obviously satisfied.  “A presumption of actual reliance arises once the Commission has proved that the defendant made material misrepresentations, that they were widely disseminated, and that consumers purchased the defendant’s product.”  Reorders don’t negate reliance on misrepresentations, absent evidence that repeat customers didn’t rely on the ads, of which there was none.

The court also agreed with the FTC’s proposed reporting requirements, despite defendants’ argument that they had no history of regulatory violations.  Nonetheless, the reporting requirements were reasonable.  The FTC “is not limited to prohibiting the illegal practice in the precise form’ existing in the past.” Rather, the FTC may “fashion its relief to restrain other like or related unlawful acts.” “These fencing in’ provisions are needed to prevent similar and related violations from occurring in the future,” as long as they have a reasonable relationship to the actual unlawful practices.  Reasonability requires consideration of “(1) the seriousness and deliberateness of the violation; (2) [the] ease with which the violative claim may be transferred to other products; and (3) whether the respondent has a history of prior violations.”

Here, both defendants were personally involved in serious violations of the law over many years.  The reporting—here, changes in title or role in the business, for 20 years—was necessary to monitor their compliance.  The actually proscribed conduct was limited to representations related to the violations established by the FTC.