Thursday, December 18, 2014

irreparable harm is permissible inference, Third Circuit rules

Groupe SEB USA, Inc. v. Euro-Pro Operating LLC., No. 14-2767 (3d Cir. Dec. 17, 2014)

District court opinion discussed here.  Euro-Pro appealed the preliminary injunction against it based on Lanham Act false advertising claims against its advertising for its steam irons.  The court of appeals treated this as primarily a case about “how courts should interpret an advertising claim when the packaging or label unambiguously defines a claim term.”  The court agreed with the district court that if a claim is false by the advertiser’s own definition, then consumer survey evidence can be disregarded and literal falsity is established.  In addition, while bound by the circuit’s earlier rejection of a presumption of irreparable harm, the court of appeals found that the evidence before the district court justified an inference of irreparable harm.

SEB’s Rowenta models 5080 and 9080 compete with Euro-Pro’s Shark 405 and 505.  The Shark 405 packaging claims that the Shark 405 offers “MORE POWERFUL STEAM vs. Rowenta®†† at half the price.” The “††” characters refer to a fine-print footnote on the bottom of the packaging, which states that the claim is “††[b]ased on independent comparative steam burst testing to Rowenta DW5080 (grams/shot).” The front of the packaging also says that the Shark 405 delivers “#1 MOST POWERFUL STEAM*.” The asterisk refers to another footnote on the bottom saying the Shark 405 “*[o]ffers more grams per minute (maximum steam setting while bursting before water spots appear) when compared to leading competition in the same price range, at time of printing.” The Shark 505 packaging makes substantially the same claims, except with a comparison to the Rowenta 9080.  Packaging hang tags claimed “MORE POWERFUL STEAM vs. Rowenta . . . at half the price,” with a reference claiming “[b]ased on independent comparative steam burst testing” to the respective Rowenta  steam irons in “(grams/shot).”

SEB ran tests to check these claims, and found that the Rowenta 9080 performed the same as the Shark 505 in grams per minute.  In grams per shot of steam, the Rowenta 9080 was superior.  SEB then commissioned an independent lab to do more tests, which found that the 5080 and 9080 outperformed the Shark 405 and 505, respectively, in grams per minute and grams per shot, on average.  (The district court made a calculation error that led it to conclude that the Shark 405’s average performance was slightly higher than the Rowenta DW5080’s average performance.)  

Euro-Pro introduced testimony and a study from its scientific expert, Dr. Abid Kemal, who calculated steam power based on the kinetic energy of a steam burst divided by the duration of the burst. Using this measurement, Kemal concluded that the Sharks outperformed the Rowentas on steam power, and that the grams per shot results were comparable between the products.  Euro-Pro also submitted a consumer survey from Dr. Gary Ford showing that consumers do not have a uniform understanding of the meaning of the phrase “more powerful steam.”

SEB’s marketing director, Scott Pollard, testified that “SEB had invested substantial resources to promote Rowenta as  the best brand of steam irons in  the eyes  of retailers and consumers. According to Pollard, the direct reference to Rowenta on the lower-priced Shark steam irons likely would erode the Rowenta brand’s reputation in the eyes of retailers, current consumers, and future consumers.”

The key dispute on appeal was whether the Shark claims were literally false.  Literal falsity analysis must consider the message in context.  The first interpretive step is figuring out whether the challenged claim conveys an unambiguous message, which is then evaluated for falsity.  Only unambiguous claims can be literally false.  The standard of review for a determination of ambiguity/unambiguity is clear error.

The district court found that the “more powerful than Rowenta” was unambiguous, given the footnote reference to grams per shot.  The “#1 most powerful” claim was also unambiguous by necessary implication because of the proximity to the other claim’s comparison to Rowenta.  This was false, given SEB’s evidence and the fact that the Kemal report didn’t measure steam power in grams/shot or grams/minute.

The court of appeals agreed that the “more powerful vs. Rowenta” claim was unambiguous.  “When a product’s packaging includes an advertising claim and unambiguously defines a claim term, the packaging’s definition of the claim term applies to the claim’s explicit message.”  (As we’ll see, there are some qualifications to come.  I don’t think this is license to advertise “$40/day every day*” and define “day” in a footnote as Monday-Friday.)

The court of appeals reasoned that “[t]o make something explicit is to state it clearly and precisely.”  So, when Euro-Pro “took the affirmative step to include a reference on the Shark packaging that clearly defined the key term in its claim—that steam power is measured in grams per shot—it made an explicit claim.”  This was also unambiguous because grams/shot was a unit of measurement used by the leading independent standard-setter for relevant technologies.  There was only one plausible meaning: “the claim means exactly what the reference on the packaging says it does.”

This conclusion was supported by the rule that courts must view claims in the context of the entire ad.  “[I]gnoring the reference in our analysis would be not only to read the claim out of  context, but also to ignore part of the claim itself denoted by the symbol.” 

This conclusion was also consistent with other areas of the law where courts engaging in interpretation must apply an author-provided definition, as in statutory interpretation, patent claim construction, insurance contracts, and other contracts.

What about the fact that the symbol referred to fine-print footnotes that consumers are “presumably” less likely to read?  “We understand that other courts have held that footnote disclaimers purporting to make a false or misleading claim literally true cannot cure the claim’s false or misleading message. We have not addressed this issue, and we do not decide it today.”  (Really?  I hope not, but I don’t see why the logic wouldn’t cross over to make a footnoted claim at least ambiguous, except for the fact that such a conclusion would be a terrible idea, which is why the court of appeals tries to dodge it.)  Instead, the court of appeals said, its holding was “analytically distinct” from such no-takebacks cases. Its holding was that “what a product’s packaging says a claim term means is in fact part of the claim’s explicit message.  If that explicit message is both unambiguous and false, the claim is literally false.”  (But what about my “day” example above?  Wouldn’t the footnote alone require a plaintiff to provide a consumer survey to show misleadingness by making the definition of “day” “ambiguous”?)

Furthermore, Euro-Pro’s consumer survey purporting to show alternative meanings for “steam power” wasn’t relevant.  Euro-Pro invoked Pernod Ricard USA, LLC v. Bacardi U.S.A., Inc., 653 F.3d 241 (3d Cir. 2011), for the proposition that courts had to consider consumer surveys in determining whether a message was unambiguous.  That case actually approved the use of the name “Havana Club” for rum despite consumer survey evidence indicating that many consumers thought the rum came from Cuba, even though the label stated “Puerto Rican Rum.”  There’s got to be a point at which we stop arguing over what a claim means and turn to the legal consequence of that meaning, and that point was reached with the label at issue.  But the Pernod Ricard court cautioned that judges should not “lightly disregard” consumer surveys because they  may reveal “potential ambiguities in an advertisement” that show reasonable consumers may in fact be misled by the advertisement. Plus, “a district court’s decision to disregard survey evidence is reviewable de novo, since it is founded on a legal conclusion based on underlying facts, that is that no reasonable consumer would be misled by an advertisement.”

However, this case, unlike Pernod, involved literal falsity, so evidence of actual consumer deception wasn’t required.  Consumer surveys don’t need to be used to define the meaning of words that are plain enough and have “baseline meanings such that consumer survey evidence is irrelevant.”  Here, Euro-Pro explained what it meant on the packaging; the court wasn’t substituting its own perception for consumer perceptions, but rather using the definition Euro-Pro provided. 

Likewise, the court of appeals agreed that the “most powerful steam” claim was unambigously comparative to Rowenta.  True, the relevant message wasn’t “explicit,” because the corresponding footnote referred to “leading competition in the same price range,” and the parties agreed that Rowenta steam irons are in a different price range.  But this was still false by necessary implication, because consumers would unavoidably receive a false message given that the “most powerful steam” claim appeared directly above the “more powerful vs. Rowenta” claim.  (Note that here we may have an answer to the question whether a footnote definition can convert a claim to ambiguous: at the very least, not in this instance, which means not all the time.  If the main holding is just a version of estoppel, it’s not that significant.)

Since there was no clear error in finding the messages unambiguous, the next question was falsity, and there was also no clear error in that determination.  The district court reasonably relied on SEB’s tests, which used the relevant measurements, and even the Kemal report didn’t find a grams/shot difference.  Euro-Pro argued that the district court improperly shifted the burden of proof to Euro-Pro.

But the Third Circuit held in Novartis that “a court may find that a completely unsubstantiated advertising claim by the defendant is per se false without additional evidence from the plaintiff to that effect.” Euro-Pro argued that this exception only applied when a defendant refused to present any evidence, whereas it provided the Kemal report.  Novartis was not so narrow.  (This is probably the much bigger holding.)  The Kemal report was “mostly irrelevant” to the messages actually conveyed by the ads. Thus, Euro-Pro’s claims were entirely unsubstantiated.  Anyway, the district court also had affirmative evidence of falsity; it didn’t shift the burden of proof at all.

Now, irreparable harm: the district court didn’t have the benefit of Ferring Pharmaceuticals, Inc.  v. Watson Pharmaceuticals, Inc., 765 F.3d 205 (3d Cir. 2014), which applied eBay to Lanham Act cases and barred presumptions of irreparable harm in place of a “clear showing” thereof.  But it said it wasn’t applying a presumption, regardless.  Portions of the district court opinion do read that way, and the district court cited repeatedly to a case relying on the now-disallowed presumption.  Other parts are consistent with Ferring, so it was unclear whether the wrong standard affected its analysis.  But anyway, the district court could be affirmed if there was sufficient record evidence of irreparable harm.

The record here did contain such evidence of “likely harm to the Rowenta brand’s reputation and SEB’s goodwill. See S & R Corp. v. Jiffy Lube Int’l, Inc., 968 F.2d 371, 378 (3d Cir. 1992) (‘Grounds for irreparable injury include loss of control of reputation, loss of trade, and loss of goodwill.’).”  [Note that this too is pre-eBay.]  SEB’s marketing director testified to Rowenta’s strong reputation; the products compete side by side; and the marketing director testified that false comparative claims would likely harm Rowenta’s reputation, especially since the Sharks were lower-priced.

This was not a “veiled” presumption of irreparable harm.  Ferring does not bar drawing fair inferences from facts in the record. Indeed, a key lesson from Ferring is that courts considering whether to grant injunctive relief must exercise their equitable discretion in a case-by-case, fact-specific manner.”  The inference of likely irreparable harm to brand reputation and goodwill was supported “not by a general rule or presumption but by the literally false comparative advertising claims at issue, the competitive relationship between the parties and products, and the judgment of Pollard that the harm to SEB’s brand reputation and goodwill is impossible to quantify.”  

Chief Justice Roberts’ eBay concurrence noted that the trend to grant injunctions in patent suits shouldn’t be forgotten entirely when applying the four-factor test—a page of history is worth a volume of logic; Justice Kennedy agreed.  (Compare actual results post-eBay in patent cases—a lot of injunctions, but a lot of denials too.)  The same was true here, for reasons particular to false advertising.  Ferring distilled two justifications for the traditional presumption:
(1) a misleading or false comparison to a specific competing product necessarily causes that product harm by diminishing its value in the mind of the consumer, similar to trademark infringement cases; and (2) the harm necessarily caused to reputation and goodwill is irreparable because it is virtually impossible to quantify in terms of monetary damages.
“Although we no longer apply a presumption, the logic underlying the presumption can, and does, inform how we exercise our equitable discretion in this particular case.”  So basically, it’s up to the district court: a permissible inference rather than a presumption. “Logic” seems to be another word for “no individualized evidence of harm required.” Thus, any error by the district court was harmless.

Finally, Euro-Pro challenged the scope of the injunction on First Amendment grounds.  Injunctions against false or misleading commercial speech must be narrowly tailored to cover only the speech most likely to deceive consumers and harm the plaintiff. The injunction here required Euro-Pro to put stickers over the two claims at issue and remove the hang tags.  Given that false commercial speech is unprotected, and that SEB showed likely success on the merits, the court of appeals saw no First Amendment problems. 

Euro-Pro argued that the injunction was overbroad because it required Euro-Pro to cover the ad claims rather than only the references, which were critical to the literal falsity analysis—without the references, the claims might be ambiguous.  No such luck.  The references plus the claims together comprised the literally false message; the injunction was properly limited to literally false claims.  And Euro-Pro’s reasoning would be unworkable: district courts can’t be expected to parse each part of a literally false claim “to see if the removal of a word or a portion here and there would render the remainder true.”  (Not to mention that the plaintiff would then have to be prepared to show falsity and deceptiveness for every imaginable redaction of the claim.)

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