the intersection of FTC US origin guidelines and the Lanham Act

A.P. Deauville, LLC v. Arion Perfume and Beauty, Inc., No. C14-03343, 2014 WL 7140041 (N.D. Cal. Dec. 12, 2014)

Deauville sued Arion for false advertising and unfair competition, and Arion counterclaimed.  This opinion granted in part Deauville’s motion to dismiss.

Deauville makes Power Stick deodorant, antiperspirant, body spray, and body wash through “value-priced retailers.”  Arion sells European American Design products that compete with Power Stick products.  Deauville alleged that EAD product labels “contain false and misleading statements or otherwise fail to meet the requirements for product labeling in the United States.”

Arion counterclaimed with similar allegations, arguing that the Power Stick product labels were misleading because the statement “Made in the U.S.A. of U.S. and/or imported ingredients” was ambiguous—because of the and/or, there was no guarantee that any ingredients would be domestic.  Deauville also advertises online with languages such as “Why we are made in America?” without clarifying whether the product ingredients are domestic or foreign.

Deauville argued that its products contained no more than a de minimis amount of foreign content (something Arion contested) and that its unqualified and qualified statements weren’t misleading.  Moreover, Deauville argued, whether it complied with the FTC’s guidelines wasn’t provably false and there was no private right of action under the FTCA.  Arion relied on the FTC’s analysis of US origin claims to show the element of deceptiveness, arguing that the FTC had conducted significant research on consumer understanding of such claims; Deauville didn’t disagree with that part of the argument, but did contend that only the FTC could evaluate compliance with its guidelines and resulting deception.

The FTC permits unqualified statements of U.S. origin only when “all or virtually all” of the ingredients are domestic.  The final assembly must take place in the US, but other factors also matter, including “the portion of the product’s total manufacturing costs that are attributable to U.S. parts and processing” and “how far removed from the finished product the foreign content is.” To the FTC, “there is no single ‘bright line’ to establish when a product is or is not ‘all or virtually all’ made in the United States.”  

Power Stick products used a qualified U.S. origin statement (“of U.S. and/or imported ingredients”) and its ads used unqualified statements (“manufactured in the USA”).  Arion didn’t contest that the products were manufactured domestically, but argued that the use of a qualified statement justified an inference that the products contained more than a de minimis amount of foreign content, requiring a better qualification to avoid confusion. 

The court disagreed: the FTC says there’s no bright line, and so even if Deauville was forced to provide all available information about Power Stick ingredients, “neither the parties nor the Court would be in a position to determine whether there was sufficient foreign content to satisfy the FTC’s standard.”  Thus, whether Deauville was in compliance with FTC policy was not provably false.  Query: Would it be provably false if the FTC relied on it in FTC-initiated proceedings?  That is, is this really a falsity holding, or a delegation of this particular question to the FTC even if private false advertising claims can proceed on other theories? Perhaps this sentence suggests an answer:  “The Court does not wish to become the handmaiden of the FTC, nor does it imagine that the FTC would welcome the help.”

The court further clarified that, although the use of both statement types and “and/or” language could be confusing, Arion made those arguments only in the context of FTC policy. The US origin statements could be misleading if the products indeed contained more than a de minimis amount of foreign content, but Arion need to allege some evidence suggesting that confusion could be proven.  It didn’t, other than by arguing about what the label implied about the ingredients, and therefore it failed to state a claim.  (Thus, presumably, if there were sufficient facts alleged, a jury could use the FTC findings as evidence that false statements about US origin were deceptive and material to consumers.  This is not a preclusion case but a pleading case.)

However, some counterclaims under California statutory law survived. Deauville argued that Arion lacked standing to claim that Deauville’s products violated FDA labeling requirements, because their products also violated those requirements.  At the pleading stage, general allegations of injury were sufficient.  Arion alleged that Power Stick Cool Blast violated numerous FDA requirements for over-the-counter drugs, in violation of California’s UCL.  Deauville was allegedly able to charge less than Arion for similar products by “skirting labeling requirements[,]” thus diverting consumers and retaining greater profit.  This was a plausible chain of injury, given Arion’s allegation of direct competition.

Deauville’s argument that Arion too violated FDA rules was essentially an unclean hands argument that the court couldn’t assume to be true for purposes of a motion to dismiss, as was its claim that the products didn’t really compete.