Friday, July 29, 2016

ADR website was commercial speech for purposes of client's false advertising lawsuit

JAMS, Inc. v. Superior Court of San Diego County, No. D069862, --- Cal. Rptr. 3d ----, 2016 WL 4014068 (Cal. Ct. App. Jul. 27, 2016)

Kevin Kinsella sued JAMS, an ADR provider, and the Honorable Sheila Prell Sonenshine (Retired), alleging that he relied on misrepresentations and omissions on the JAMS website about Sonenshine’s background in stipulating to hiring her to resolve divorce issues.  Defendants filed an anti-SLAPP motion to strike, and the trial court found the action exempt from the anti-SLAPP procedure because it involved commercial speech.  The court of appeals functionally affirmed (procedural details omitted).

JAMS allegedly promotes the hiring of neutrals for ADR, collecting a fee for its services. JAMS provides biographies of its neutrals on its Web site and represents its family law neutrals are “ ‘trusted’ experts.” According to the complaint, the JAMS Web site stated “ ‘[JAMS ensures] the highest ethical standards’ and ‘[e]verything we do and say will reflect the highest ethical and moral standards. We are dedicated to neutrality, integrity, honesty, accountability, and mutual respect in all our interactions.’”  Kinsella alleged that he agreed to hire Sonenshine to resolve his over-eight-figure divorce which included assets from venture capital partnerships he managed.  He alleged that he carefully reviewed the JAMS website, and agreed to Sonenshine because of her alleged business experience enabling her to understand his separate property holdings and private venture capital funds.

However, after Sonenshine began conducting hearings, Kinsella alleged he “became alarmed by what he saw and doubted that she possessed the business accomplishments her resume led him to believe she possessed.” He began to look into her background and discovered information causing him to question her integrity.  JAMS allegedly touted Sonenshine’s business success surrounding the co-founding and management of two companies when “the history of those two ventures is full of adverse and unfavorable accusations” against Sonenshine and her son in a class action lawsuit for fraud, and JAMS stated that she founded an equity fund when “the equity fund existed in name only as it never raised any equity capital and was, therefore, never funded” and never operated “as a functioning investment entity.”

Kinsella sued for violations of the CLRA, fraud, negligent misrepresentation, and state-law false advertising.  Defendants argued that the statements on the JAMS Web site and in Sonenshine’s online biography weren’t within the commercial speech exemption to the anti-SLAPP law because (1) the exemption applies to “ ‘representations of fact’ “ not to omissions or nonfactual representations such as puffery, and (2) Sonenshine’s biography was not purely commercial speech because it was also used for noncommercial purposes such as for litigants to evaluate potential conflicts of interest or for dissemination to bar groups for noncommercial events.

The commercial speech exemption was added to curb abuse of the anti-SLAPP statute.  It exempts actions arising from commercial speech when (1) the cause of action is against a person primarily engaged in the business of selling or leasing goods or services; (2) the cause of action arises from a statement or conduct by that person consisting of representations of fact about that person’s or a business competitor’s business operations, goods, or services; (3) the statement or conduct was made either for the purpose of obtaining approval for, promoting, or securing sales or leases of, or commercial transactions in, the person’s goods or services or in the course of delivering the person’s goods or services; and (4) the intended audience for the statement or conduct was a commercial audience.  This exception is to be narrowly construed.

The court of appeals held that the commercial speech exemption covered more than “positive assertions of facts.”  Likely success on the merits was not an element of whether the exemption applied.  Rather, the legislative history showed an exemption aimed squarely at exempting false advertising claims.  The exemption was designed to track Nike v. Kasky, focusing on the speaker (someone who’s selling stuff), the content of the message (representations of fact meant to induce sales), and the intended audience (actual or potential buyers).  However, Kasky and the legislative history didn’t require affirmative or positive representations, as opposed to omissions or half-truths.  Kasky specifically noted that unfair competition law and false advertising law “prohibit ‘not only advertising which is false, but also advertising which[,] although true, is either actually misleading or which has a capacity, likelihood or tendency to deceive or confuse the public.’”

Statements on the JAMS website about Sonenshine’s background and qualifications to provide ADR services as well as general statements about how JAMS conducts its business in providing ADR services were thus commercial speech. The representations in her biography were factual; their truth or  misleadingness was a matter for the merits, not for the exemption. Statements that JAMS ensured “ ‘the highest ethical standards,’” that “ ‘[e]verything we do and say will reflect the highest ethical and moral standards’” and that JAMS is “ ‘dedicated to neutrality, integrity, honesty, accountability, and mutual respect in all our interactions’” were also representations of fact “for purposes of analyzing the commercial nature of the speech.”  They were “specific statements representing how JAMS conducts its operations,” and were “certainly intended to be relied upon by customers of its services, otherwise they would serve no legitimate purpose.” The court noted that violation of these standards could lead to bar discipline for lawyers.  Further, posting Sonenshine’s biography in conjunction with these statements “may have implicitly represented JAMS adopted her representations about her credentials and ratified them as reflecting ‘integrity, honesty, [and] accountability.’”  But the court of appeals didn’t finally reach the issue of whether these statements were true, false, or otherwise nonactionable.  The court distinguished cases involving mere promises of future action.

Defendants also argued that the website statements might be used for multiple purposes, such as to comply with Sonenshine’s judicial duty of disclosure, and that the causes of action arise from postretention conduct, not commercial speech. The court of appeals rejected these arguments; first, all the website statements Kinsella challenged were there in order to be viewed by actual or potential ADR buyers or customers, or attorneys representing actual or potential buyers or customers of ADR services. Kinsella used them for that purpose. “Therefore, the statements or conduct from which Kinsella’s causes of action arise is more ‘commercial speech’ than anything else. Whether or not the statements may be used for other purposes does not change the analysis.”

References to Sonenshine’s postretention statements in the complaint also didn’t defeat the commercial speech exemption.  Those allegations were about how Kinsella found out there were problems, not about the speech that allegedly misled him to his detriment.  If he did allege claims based on noncommercial speech, that could be taken care of later.

Design Patent Damages event in DC, Aug. 2

Details/RSVP here.

Thursday, July 28, 2016

Court of appeals says FU to state university's TM claim

Florida International University Board of Trustees v. Florida National University, Inc., 2016 WL 4010164, --- F.3d ----, No. 15-11509 (11th Cir. Jul. 26, 2016)

FIU sued FNU for changing its name from Florida National College to Florida National University; the district court rejected FIU’s claims and the court of appeals affirmed. 

FIU is a public university founded in 1965.  “It has grown to become one of the nation’s largest public four-year universities, with over 50,000 full-time students enrolled in the fall of 2012.”  FNU is a for-profit higher education institution that, when founded in 1987, offered only associate’s degrees.  It began as Florida International Institute, changed to Florida International College, then changed again to Florida National College when FIU sued for trademark infringement.  In the 21st century, Florida National College became accredited to offer bachelor’s degrees and a master’s degree, and in 2012 it changed its name to FNU.  It had 2,795 students enrolled in a recent winter term; it currently operates two campuses in Miami-Dade County – one of which is less than two miles from FIU’s main campus – and also offers online courses.  FIU has opposed FNU’s 2012 applications for the word mark “Florida National University” and a related design mark.

In the confusion analysis, the strength of the accusing mark is the second most important factor.  In the 11th Circuit, incontestability enhances strength, and FIU’s word mark was incontestable.  The reasoning here is not logical but the result is sensible:

The district court observed that, viewed in isolation, the terms comprising FIU’s word mark were either generic or descriptive. But, in light of its incontestable status, the court appropriately presumed that FIU’s mark was relatively strong. Nonetheless, it determined that FNU had rebutted the presumption of strength by showing extensive third-party use of the mark, explaining that FNU had identified “13 other entities using the terms ‘Florida’ and ‘University’ – all of which are aimed at the same education marketplace as FIU.” Thus, the district court adjudged FLORIDA INTERNATIONAL UNIVERSITY and the attendant acronym to be “relatively weak.”

Note: it seems a little odd to treat incontestability, which is an irrebuttable presumption of distinctiveness, as creating a rebuttable presumption of “relative” strength, but not a lot odder than treating it as an uptick in strength.

The court of appeals agreed that the evidence of third-party use was “an essential factor in determining a mark’s strength.”  Here, the district court’s findings of diminished strength of the name and acronym were reasonable.  Florida A&M University (FAMU), Florida Atlantic University (FAU), Florida Christian University (FCU), Florida Gulf Coast University (FGCU), Florida Memorial University (FMU), Florida Polytechnic University (FPU), Florida State University (FSU), University of Central Florida (UCF), University of Florida (UF), University of North Florida (UNF), University of South Florida (USF), and University of West Florida (UWF), were geographically proximate and offered the same services, which was sufficient to weaken the FIU marks.  “[I]n context, it seems to us that FIU operates in a crowded field of similar names.”

FIU argued that the district court focused too much on conceptual strength and not on commercial strength.  “The practical problem with FIU’s argument, however, is that FIU didn’t offer any direct evidence of commercial strength.”  Yes, FIU spends millions annually on marketing, but that “tells us precious little about the efficacy of those efforts in creating marketplace recognition of FIU’s mark. Absent comparative evidence establishing that FIU has spent substantially more on advertising than its competitors in the field of higher education, or ‘direct evidence of consumer recognition,’” FIU’s promotional efforts didn’t count as evidence of commercial strength that would require the district court to ignore third-party uses. 

The district court also, inconsistently, accepted FIU’s claim to own a famous mark within the meaning of the Florida Anti-Dilution Act, which requires  that a mark be very strong and distinctive. Third-party use cuts against a finding of fame, but there was no error in the court’s ultimate conclusion that FIU’s mark was weak.  The court relied in its dilution reasoning on FIU’s duration and extent of use, duration and extent of advertising, and federal registration, ignoring the other five factors identified by the state legislature in the statute. Also, the district court didn’t give full attention to the fame inquiry because it found FIU’s dilution claim failed on other grounds.  There was no clear error in the finding that FIU’s mark was relatively weak.

Similarity of marks: The district court reasoned that there were similarities in sound and appearance, but that the antonymic meaning of the words “national” and “international” outweighed any similarity. This was a reasonable conclusion,

especially in a field where so many competitors have names that appear and sound similar. Moreover, in a crowded field of similar acronyms, the district court reasonably found that the addition of one more school identifying itself with an acronym containing the letters F and U would not materially add to the confusion. This is especially true in a field like post-secondary education, where the primary consumers – potential students (and likely their parents too) – generally spend a substantial amount of time and energy learning about their options before choosing a school and are, therefore, unlikely to be confused by similar names.

Note: consumer sophistication comes in here because the 11th Circuit doesn’t have that as a separate factor.

Similarity of goods/services: Favored FIU. 

Similarity of retail outlets and customers: The district court found that the student populations were significantly different: “most FNU students are seeking associate’s degrees or ESL programs that FIU doesn’t provide; FIU targets students who are directly out of high school and seeking a four-year degree, whereas most FNU students have been out of high school for an average of ten years; and, unlike FIU, FNU doesn’t require students to submit standardized test scores prior to admission.”  But, both schools offer bachelor’s and master’s degrees as well as online courses and, therefore, they have some potential overlap in prospective students. This favored confusion but not heavily so.

FIU argued that the district court underweighed this factor because of the substantial overlap in students and campuses.  The court of appeals disagreed, because nearly half of FNU’s students sought an associate degree, which FIU doesn’t offer.  (If FIU is like many other state schools, though, it admits plenty of students with associate degrees.)  Over 21% were enrolled in ESL programs; though FIU offered ESL as well, that was only for students “seeking to enter college or professional schools.” Also, while FIU generally offers a “traditional” four-year college experience, including living on campus, almost all of FNU’s students commute to class at night after work.  The campuses and websites for students were also dissimilar. FIU has a “342-acre metropolis” containing residential halls, an eight-story library, a nature preserve, an athletic stadium, and an art museum. FNU has two main campuses, each consisting of a single building.  And each offers online courses through their own websites, which “would dispel rather than cause confusion ... because the websites are separate and distinct, suggesting two completely unrelated [ ] entities.” The district court didn’t clearly err in assigning little weight to this factor.

Similarity of advertising media: the parties advertised in the same types of printed publications, “there was no evidence that any of the readers of FIU’s publications were likely to also read magazines or other publications in which FNU advertises.” They do advertise on the same South Florida NPR station.  Again, the district court reasonably found that this favored confusion, but had little weight overall.

FNU’s intent: The district court found that FNU’s knowledge of FIU’s marks, and the prior litigation between the parties, wasn’t evidence of improper intent because the parties had peacefully coexisted for more than twenty years after settling that lawsuit. FNU’s shifting explanations for its name change—it first said that it had to do so to be accredited, and when that proved false it said that “university” was more attractive to foreign students—could support a finding of bad intent.  But the district court’s finding to the contrary was not clear error, given FNU’s reasonable explanation for adopting “university.”

Actual confusion: There was no evidence of actual confusion among prospective students at either institution.  However, there was one email from a FedEx employee to an FIU administrator asking whether FNU “is accredited with FIU”; and one letter sent to FNU from a California high school student who requested information regarding “both admission to and programs at Florida International University” because she was investigating “the various colleges and universities [that she was] considering attending” as part of a sophomore class project. Also, a radio announcer who was reading an FNU advertisement once said “Florida Int -- Florida National University.”  The district court found that the FedEx employee wasn’t shown to be an actual consumer; that the student’s letter was de minimis evidence; and that the announcer’s “flub” wasn’t evidence of confusion. Thus, actual confusion didn’t weigh in favor of FIU, and this conclusion wasn’t clear error, especially given the sophistication that a reasonable consumer would exercise in deciding among institutions of higher education.

Given all this, there was no clear error in the district court’s balancing of the factors.

Along with its classic trademark infringement claim, FIU argued that “FNU’s name change, its intentional omission of its for-profit status, and its adoption of the course numbering system of Florida’s state universities were all part of an attempt to falsely associate itself in the public eye with Florida’s state universities.”  The district court recognized that “a significant portion of the public may be confused about FNU’s affiliation with the State of Florida,” but concluded that this confusion had not resulted in confusion over FNU’s affiliation with FIU.  (Sounds like a job for the Florida AG—except the Florida AG doesn’t have a great record of pursuing for-profit educational institutions.)

The court of appeals affirmed on other grounds.  “The district court’s construction of Section 43(a) of the Lanham Act would render that cause of action wholly duplicative of a trademark infringement action for trademark holders, when in fact the language of Section 43 is much broader.”  The language of §43(a) “seems to encompass FIU’s false association theory that FNU has used a name, symbol (its logo), and device (the course naming and numbering system) that create the false impression that FNU is associated with the State of Florida.”  But the court of appeals didn’t resolve the issue, because FIU didn’t explain how it was harmed by FNU’s acts associating itself with Florida public universities.  FNU’s expert testified that 30% to 50% of survey respondents thought that the State of Florida or some other government entity operates FNU, but less than 1% of survey respondents associated FNU with FIU.

Dilution: Lack of similarity; lack of intent to piggyback on FIU’s name or goodwill; and lack of risk of association doomed the claim. 

Tuesday, July 26, 2016

Incentivizing creativity through suffering?

Ana Swanson at the Washington Post reports on a study that appears to connect unhappiness with greater creativity.  If we care about incentivizing creative output, should we therefore deliberately torment artists?
Borowiecki’s analysis suggests that negative emotions are not just correlated with creativity but that they actually have a causal effect on it. Using econometrics, he calculates that a 9.3 percent increase in negative emotions leads to a 6.3 percent increase in works created in the following year. To generate an entire important composition in the next year, the composer would need to see his negative emotions increase by about 37 percent. “Creativity, measured by the number of important compositions, is causally attributable to negative moods, in particular to sadness,” he writes.

Reading list: the First Amendment and the FDA

Christopher Robertson, A Trojan Horse? How Expansion of the First Amendment Threatens Much More than the Regulation of Off-Label Drugs, forthcoming, __ Ohio State Law Journal __ (2017)


Scholars, advocates, and courts have begun to recognize a First Amendment right for drugmakers to promote their products “off-label”, without proving safety and efficacy of new intended uses. Yet, so far, this debate has occurred in a vacuum of peculiar cases, where convoluted commercial speech doctrine underdetermines the outcome. Review of the seven arguments deployed in the off-label domain finds that they cannot be so limited. Instead, if they were valid, they would undermine the FDA’s entire premarket approval regime, reopening the door to a snake oil market where hype replaces science. Even more, if valid, this First Amendment logic would undermine a wide range of statutory regimes that have similar intent-based structures and rely on speech as evidence of intent. Ultimately, with relevance to First Amendment theory, this article reveals a broad and longstanding coherence in the law.

I find Robertson’s argument compelling as a matter of logic, though I think at least some judges are likely to treat unapproved drugs as just different and therefore think that Caronia and Amarin can be limited to substances approved as drugs for some purpose even absent a sensible theoretical distinction.

Failure to do anything to show damages leads to fee award in false advertising case

Gravelle v. Kaba Ilco Corp., No.13-CV-642, 2016 WL 3920208 (E.D.N.C. Jul. 15, 2016)

Bringing false advertising claims isn’t risk free for the plaintiff. Not only may the defendant scrutinize the plaintiff’s own advertising for counterclaims, attorney’s fee awards against a losing plaintiff are not unknown, and here’s one.  Gravelle, pro se, made two electronic key cutting machines, the CodePro 4500 and later the RapidKey 7000.  Kaba makes key blanks and key cutting or duplication machines, and bought  the right to manufacture and sell a key cutting machine, now known as the EZ Code, from Gravelle a decade ago. 

Gravelle alleged that Kaba falsely labeled two features on its EZ Code machine as “patent pending,” despite the fact that Kaba never filed an application for a patent for those features, and that defendant’s use of that false mark diverted sales away from Gravelle’s company. He alleged false marking under the Patent Act and false advertising under the Lanham Act, as well as state-law unfair competition.  Kaba won summary judgment because Gravelle couldn’t show competitive injury or damages proximately caused by Kaba’s conduct.

“Exceptional” cases allow fee awards in patent and false advertising cases.  Octane Fitness says that an “exceptional” case is “one that stands out from others with respect to the substantive strength of a party’s litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated.”  Here, the claims were “exceptionally meritless” for two reasons: first, Gravelle couldn’t produce any evidence of harm to sales of his older machine; sales numbers were consistent and only tapered off at the end of the machine’s useful life. Second, he couldn’t show any harm to sales of his new machine or any connection between his sales and Kaba’s use of “patent pending.”  The fact that the court granted summary judgment weighed in favor of finding exceptionality. Though it’s regularly the case that reasonable arguments ultimately fail, here there were no reasonable arguments.  “Plaintiff’s lack of evidence demonstrated a lack of thoughtful consideration about the quantum of evidence necessary not only to prove his claim but to substantiate it at the most basic level.”  A fee award would also discourage further frivolous claims.  The court considered Gravelle’s pro se status as well as the parties’ relative disparity in resources, but found that fees should be awarded anyway, given that “no litigant could have reasonably believed that plaintiff had been damaged by defendant’s conduct” on this record.

Friday, July 22, 2016

Settlement class can't stand where settlement notice gave mistaken info

Duran v. Obesity Research Institute, LLC, No. D067917, 2016 WL 3913205 (Cal. Ct. App. Jun. 23, 2016)

Duran sued ORI and Wal-Mart for allegedly falsely advertising the weight loss benefits of Lipozene and MetaboUp. The court approved a claims-made settlement providing that class members submitting a claim without proof of purchase would receive $15, and those submitting receipt(s) would receive one refund of double the unit price paid. (A claims-made settlement isn’t a fixed fund but depends on the number of claims submitted; “[s]uch settlements may promise far more than they deliver because the claiming rate is notoriously low.”) The settlement also provided that ORI would cease making certain advertising claims, and that defendants wouldn’t oppose a motion seeking $100,000 in attorney fees to class counsel.  The class is estimated at between 400,000 and 600,000 consumers.  In total, 895 claims were submitted, in the total amount of $31,800, or 0.179% of the class (assuming 500,000 class members)—about six cents per class member.  Objectors appealed, and the court ruled that the notice, which was emailed to consumers who bought online directly from ORA and also appeared in USA Today, was insufficient.

The notice here depended on the settlement website.  The email, which went to 237,334 class members, didn’t include the terms, but just told recipients to click on a link to the settlement website.  The USA Today notice explained the method of calculating settlement payments and generally described the injunctive relief, but also referred readers to the settlement Web site “[f]or additional information on submitting a claim ....“ The settlement Web site said that submitting a valid claim form was the only way to get a cash payment.  But the downloadable claim form, integral to the settlement, was wrong.  Instead of stating that class members who submitted receipts would get one refund of double the purchase price, it said they’d get a refund of all products bought during the class period, resulting in overvaluing or undervaluing claims.

The online claim form also misstated the product involved—it referred to Hydroxycut products, not involved here—and the scope of the release involved in taking the settlement (the trial court had rejected a release of unknown claims, but the claim form included it).  These issues weren’t raised in the trial court, even by objectors, but class counsel and defendants argued that the settlement was fine and a remand was necessary only to decide the “details and logistics“ of giving corrected class notice.  The court disagreed.  “The judgment must be reversed because the class notice failed in its fundamental purpose—to apprise class members of the terms of the proposed settlement.”

The court found that the problems its independent review of the claim form revealed weren’t waived.  The relevant facts were undisputed and couldn’t have been changed by presenting addditional evidence.  And the trial court couldn’t have cured the error at the final approval hearing because the claims process was over.  Further, “[t]he court’s responsibility to protect absent class members” justified an exception to waiver or forfeiture.

Defendants and class counsel argued that, even though the notice was bad, the finding that the settlement was reasonable, fair, and adequate should be left untouched.  But the adequacy of class notice of settlement was too intertwined with the reasonableness of the settlement to accept that argument, since, among other things, “the amount offered in settlement“ and “the reaction of the class members to the proposed settlement” are relevant to the court’s assessment.

As for notice to class members, “process which is a mere gesture is not due process. The means employed must be such as one desirous of actually informing the absentee might reasonably adopt to accomplish it.”  ORI sent notice by email to its direct website customers.  Objectors argued that purchasers could have been given email notice too, and that the parties should have subpoenaed records from other retailers, such as Amazon, CVS, and Walgreens, to obtain addresses of other class members.  Wal-Mart argued that it couldn’t get addresses for those who purchased from its online store because the entity operating— USA, LLC—wasn’t the entity Duran sued, which was Wal-Mart Stores, Inc.  ORI’s attorney filed a declaration stating he “reached out“ to “several retailers“ to obtain customer contact information, but was told that “obtaining such information is illegal, unavailable or improper.”

“On remand, class counsel and defendants will have to provide a better foundation to support a ruling that direct notice need not be given.”  Among other things, the fact that the brick and mortar store was owned by one entity, and the online store by another, didn’t by itself establish the requested information wasn’t reasonably obtainable.  What’s required is “a notice plan that one would implement if one genuinely wanted to inform someone, all relevant factors considered.”  It wasn’t enough to say, vaguely, that counsel “reached out to several retailers.”  Direct notice might not be required for online purchasers other than those who used ORI’s website, but the court needed more information.

Objectors also submitted a declaration from a media expert asserting the USA Today notice reached only approximately 1.06% of class members. She used “industry-standard research data” about “demographic, lifestyle, product usage and exposure,” using data for audiences targeted with a definition of “Meal/Dietary/Weight Loss Supplements Used For Weight Loss in Last 6 Months.”  There was no evidence disputing her opinion or even evidence that Lipozene was advertised in USA Today.  ORI didn’t explain how a settlement class member who didn’t receive e-mail notice and who didn’t read the notice in USA Today would even know to look for a Lipozene settlement Web site.  The idea of using publications targeting class members needed to be explored.

As for injunctive relief, the settlement required ORI to change its advertising and some other business practices.  Among other things, ORI agreed to add a disclaimer regarding Lipozene’s effectiveness, including links to studies about Glucomannan, an ingredient contained in Lipozene. It would also add, “For best results, use in conjunction with reasonable diet and exercise.“ ORI also agreed to end its pay-per-click Internet advertising, increase its return policy from 30 to 45 days to claim a refund, and use “best efforts“ to “eliminate all testimonials created prior to January 1, 2010.”

Objectors argued that the injunctive relief was illusory; on this record, the court of appeals agreed.  Adding language about how “study participants” had been helped by Lipozene wasn’t helpful in correcting the allegedly false claims.  Nor was changing that  Lipozene has “effectively helped millions of people”  to Lipozene has “effectively helped countless people.”  There was no evidence that the extra 15 days in the return period offered any material benefit to consumers.  As for the diet/exercise statement, ORI was already working under a stipulated judgment with the FTC prohibiting ORI from representing that Lipozene or MetaboUp products “[c]auses rapid or substantial weight loss without the need to reduce caloric intake or increase physical activity.” Requiring ORI to obey an existing judgment didn’t add value.

IP Professors' Amicus in Star Athletica v. Varsity Brands

Filed today: Mark McKenna, Chris Sprigman, Mark Lemley, Tyler Ochoa, Betsy Rosenblatt, Pam Samuelson, Kathy Strandburg, and I submitted a brief in this copyright separability case, arguing that conceptual separability is simply a coda to physical separability, dealing with situations in which physical separation couldn't be accomplished without destroying the useful article--regardless, there must be something other than the design of the article itself that can be identified as a protectable work.  The existence of design patent also sheds important light on the limited role Congress intended copyright to play for useful articles.

Don't send a TM to do a (c)'s job: 7th Circuit rules in Slep-Tone case

Mark McKenna organized an amicus brief in this case, which was not cited by the court but advocated a position similar to that adopted by the panel.

Phoenix Entertainment Partners, LLC v. Rumsey, No. 15-2844 (7th Cir. July 21, 2016)

Slep-Tone and its successor in interest Phoenix argued that defendants, a pub and its owner, infringed Slep-Tone’s trademarks by passing off unauthorized digital copies of Slep-Tone karaoke files as genuine Slep-Tone tracks. The court of appeals concluded that Slep-Tone hadn’t “plausibly alleged that the defendants’ conduct results in consumer confusion as to the source of any tangible good sold in the marketplace.”

Slep-Tone is a serial litigant that distributed karaoke accompaniment tracks under the trademark “Sound Choice.” The audio component of the track is a re-recorded version of a popular song that omits the lead vocals, while the graphic component displays the lyrics to the song as well as a variety of visual cues (including color coding and various icons) that are synchronized with the music. Slep-Tone alleged that it had a distinctive trade dress in the typeface, style, and visual arrangement of Slep-Tone tracks, along with the entry cues for singers (a series of vanishing rectangles) and the Sound Choice mark is typically shown with the song lyrics.  According to Slep-Tone, its trade dress was “sufficiently recognizable to karaoke customers to enable them to distinguish a track produced by Slep-Tone and a track produced by a competitor even if the Sound Choice mark itself were not displayed.”  However, Slep-Tone didn’t own any relevant copyrights.

Slep-Tone sold physical media such as disks to customers, but karaoke customers now prefer to use hard drives with hundreds or thousands of accompaniment tracks to cut down on the time and effort of loading a new disk.  Media-shifting is necessary to accomplish this for Slep-Tone tracks.  In 2009, Slep-Tone adopted a media-shifting policy that permitted customers to copy tracks, under specific conditions including paying for each copy and providing notice to Slep-Tone. “It should come as no surprise that not all operators comply with Slep-Tone’s media-shifting policy,” allegedly depriving it of revenue.  The Basket Case, and its principal Rumsey, allegedly had one or more hard drives containing copies of Sound Choice tracks made in violation of Slep-Tone’s media shifting policy.

Slep-Tone’s theory of confusion was that, when unauthorized copies were played at the pub, pub customers would see Slep-Tone’s Sound Choice mark and trade dress “and believe they are seeing and hearing a legitimate, authentic Slep-Tone track, when in fact they are seeing an unauthorized copy.”  This was fundamentally flawed because Slep-Tone’s allegations didn’t plausibly suggest that confusion was likely among Basket Case customers “as to the source of any tangible good containing the karaoke tracks they are seeing and hearing.” Dastar makes clear that it’s “consumer confusion about the source of a tangible good that a defendant sells in the marketplace” that matters for purposes of trademark infringement.  But defendants don’t sell any relevant tangible good; they just play unauthorized copies:

What pub patrons see and hear is the intangible content of the karaoke tracks. They will see SlepTone’s trademark and trade dress and believe, rightly, that Slep-Tone is the source of that intangible content. But patrons will neither see nor care about the physical medium from which the karaoke tracks are played; consequently, any confusion is not about the source of the tangible good containing the karaoke tracks.

Slep-Tone argued that an unauthorized copy of a Sound Choice track was a new good that would look and sound like a genuine Sound Choice track; in addition, customers might mistakenly believed that Slep-Tone “sponsored or otherwise approved the defendants’ services and commercial activities.”  

The parties don’t compete in the market for karaoke tracks, but Slep-Tone argued that Basket Case’s failure to pay gave it a competitive advantage as against compliant karaoke establishments.  If legitimate operators were discouraged from paying for genuine Slep-Tone tracks, Slep-Tone could lose sales.  Plus, Slep-Tone argued that “unauthorized copying may result in inferior knock-offs that will injure its reputation for quality karaoke tracks.” 

This chain of causation was indirect, but the court accepted it, noting however that it was important that unauthorized copying of the karaoke tracks (not the trademark or trade dress as such) was the core of the injury-producing conduct.  These tracks were copyrightable works, and copying a creative work is ordinarily a matter of copyright law.

There was therefore a mismatch between Slep-Tone’s problem (unauthorized copying) and the legal right it invoked.  The court noted that one oddity of Slep-Tone’s theory is that a legitimate customer would also make a “new good” according to Slep-Tone’s theory when it loaded a Slep-Tone track onto a hard drive, as it was allowed to do.  The only thing distinguishing the legitimate from the illegitimate copy was authorization to make the copy—and that’s really about copyright.  Copyright’s limited term is one reason it’s important to distinguish copyright and trademark; trademark could allow a perpetual monopoly if applied to creative works.

But how to draw the line?  The court noted that, “where, as here, the protected mark (including the trade dress) is embedded in the good’s creative content, such that the mark is invariably displayed along with the content, it can be particularly difficult to decide whether the unauthorized copying of the good presents a claim of trademark infringement or one of copyright infringement.”  However, Dastar made clear that trademark couldn’t be used to assert what’s “really” a copyright claim.  Dastar wasn’t directly controlling, because this case didn’t involve reverse passing off, but it was helpful.  Dastar specifically rejected a broader understanding of the “origin of goods” “for communicative products that consumers will value more for the intellectual and creative content they convey than for their physical form.” Karaoke tracks were such a product. 

Thus, the court’s job was, first, to identify the “tangible product sold in the marketplace” at issue here, and second, to ask whether the confusion alleged would be about who produced the good, or whether it would really be about the source of the creative content in the good.  Only the former would be actionable under the Lanham Act.

The court accepted that a digital file could count as a tangible good for these purposes.  However, defendants didn’t sell these files.  They allegedly played unauthorized copies to patrons, encouraging alcohol and food sales.  “[W]hat the pub patrons see is the performance of the creative work contained on the copies: they hear the musical accompaniment and they see the corresponding lyrics and graphics.”  They didn’t encounter the physical good in question, even if they might be aware that such a file exists; from their perspectives, it wouldn’t matter whether the track came from a disk, a hard drive, or from streaming video.

True, the Sound Choice mark and trade dress would be displayed, and patrons might assume that they were seeing “a genuine, authorized Slep-Tone product when in fact it is a bootleg copy.”  But here’s the relevance of the second part of the inquiry: what (if anything) is the patron confused about at that point? 

On seeing the Sound Choice mark, a patron may believe that she is seeing and hearing content that was created by Slep-Tone. And she is. But what Dastar makes clear is that a consumer’s confusion must be confusion as to the source of the tangible good sold in the marketplace. A consumer of karaoke services like a patron of The Basket Case never sees a disc that is wrapped in Slep-Tone or Sound Choice packaging. He never sees a website offering downloads of Sound Choice tracks.… Any confusion, in short, is not about the source of the tangible good sold in the marketplace, as Dastar requires.

Nor did the embedding of the Sound Choice mark in the creative content of the track allow Slep-Tone to plausibly allege that consumers would likely be confused about its endorsement of the pub.  “The producers of communicative goods often embed their marks not only on the packaging of the good but in its content.”  Films have studio marks in their credits, and yet, when the copyright expires, “it is not a trademark violation simply to display the work without first deleting the mark that was inserted into its content.” For example, when a Universal film enters the public domain, “[s]o long as Universal’s mark is not overtly used to market the performance, there is no risk that a theater patron might think that Universal is sponsoring or endorsing the performance.”  Others are free to make and sell copies of the film without permission and without deleting Universal’s mark from the credits.  The court of appeals then cited nominative fair use cases—which actually supports a broader point, which is that Universal’s mark could be “overtly used” to market the performance as long as it was a truthful description of the original source of the creative content.

In the case at bar, there was no allegation that Basket Case promoted itself as offering Sound Choice karaoke products, so there was “no reason to believe that its patrons will think that Slep-Tone is sponsoring the performance of the copied karaoke tracks.” Likewise, because patrons saw only the creative content of the tracks rather than the particular medium from which the tracks are played, there was no reason to think that they believed that the digital file was itself produced or approved by Slep-Tone.

The court then addressed Slep-Tone’s concern about degraded quality. Not only did Slep-Tone fail to allege that defendants’ copies were noticeably inferior in the perception of patrons (something that’s presumably against defendants’ own interests), but that concern still didn’t involve a tangible good in the marketplace.  Defendants—or the people from whom they got their hard drives—might have committed a wrongful act, but not one that was actionable as trademark infringement.

Thursday, July 21, 2016

court grants motion to dismiss on nominative fair use grounds

Beachbody, LLC v. Universal Nutrients, No. 16-02015, 2016 WL 3912014 (C.D. Cal. July 18, 2016)

Beachbody sued Universal and Wal-Mart for using its “shakeology” mark on product packaging and purchase receipts. The court granted defendants’ motion to dismiss—apparently the standard is higher when you sue Wal-Mart.

Trademark infringement: the court found nominative fair use on the allegations of the complaint.  First, Beachbody alleged that its “shakeology” meal replacement shakes had a unique blend of ingredients that weren’t comparable to the ingredients in defendants’ OmniHealth shakes, and that its shakes were widely recognizable. However, the court found that Beachbody didn’t plead facts showing that consumers would readily identify Beachbody’s shakes without the use of “shakeology,” making the use necessary to identify Beachbody. 

Second, Beachbody alleged that defendants’ use of the term was almost identical to Beachbody’s.  But defendants said they didn’t use the same logo, font, or coloring scheme, and the court found that Beachbody didn’t plead facts showing that defendants used more of the mark than reasonably necessary to identify Beachbody.

Third, Beachbody alleged that the phrase “compare to the ingredients in shakeology” on the OmniHealth packaging would confuse consumers about Beachbody’s endorsement of the OmniHealth meal replacement shakes.  I would have called this “implausible,” but the court said that Beachbody didn’t provide evidence of actual association, and noted that the back of the OmniHealth boxes “clearly stated” the lack of association.  Moreover, Beachbody’s shakes are only sold on its own website, and they are sold for much more than defendants’ product.  Therefore, Beachbody didn’t sufficiently allege likely confusion about affiliation.

The use on the receipts was different (and I would have advised against this)—allegedly, receipts for purchases of the OmniHealth shakes say only “shakeology” as the product description.  But the court found that Beachbody didn’t allege any facts to show that consumers would likely associate the products based on the receipts.  Absent sufficient allegations to defeat the nominative fair use defense, the trademark infringement claim had to be dismissed.

Related claims such as contributory infringement and state-law unfair competition also failed, for the same reasons.

False advertising: “compare to the ingredients of shakeology” allegedly falsely suggested to consumers that the ingredients in OmniHealth shakes were comparable or similar to those in Plaintiff’s shakes. “Compare to ...” statements can convey a specific message and thus can be falsifiable.  However, such a claim of implicit falsity requires extrinsic evidence of consumer deception, and Beachbody didn’t plead any.  “Simply making the conclusory statement that Defendants’ ingredients are incomparable to Plaintiff’s proprietary blend of ingredients does not establish a plausible claim for false advertising.”  (So it has to have a survey in hand to sue?) 

Nor did the use of “shakeology” on Wal-Mart receipts constitute false advertising, because the use of the name on the receipt “would not be a significant factor in a consumer’s purchasing decision,” and therefore wouldn’t be an advertisement.  [Hunh?  This is under-reasoned; it first sounds like materiality (which is bold on a motion to dismiss).  The argument that a receipt isn’t “commercial advertising or promotion” is reasonable, but given that meal-replacement shakes are probably supposed to be purchased multiple times, a receipt might serve as a kind of ad for the next purchase.  The real problem is that this is really a trademark claim; the alleged falsity is about the source of what the consumer bought, and if anything a receipt that said “shakeology” would probably make it harder for the consumer to figure out that she can only get OmniHealth shakes at Wal-Mart.]

Commercial disparagement/trade libel failed too: Beachbody didn’t plead facts that if believed, could prove any special pecuniary damages from the Wal-Mart receipts. 

Thursday, July 14, 2016

Standard competitive bluster can be used as evidence of bad faith

Hillman Group, Inc. v. Minute Key Inc., 2016 WL 3654437,  No.13-cv-00707 (S.D. Ohio Jul. 8, 2016)

Hillman makes duplicate keys, sold in at mass merchants, home centers, automotive parts retailers, franchise and independent hardware stores, grocery/drug chains, parcel shipping outlets, etc.  Key duplication has traditionally been manual; a human identifies the proper blank key that fits the one the customer hands over, then cuts the duplicate.  Hillman has 60% of that market.

Self-service, automatic key duplication is a new trend. Kiosks allow retailers to devote fewer employees, less inventory, and less floor space to the process. Minute Key patented such a kiosk and sought to displace Hillman and its FastKey kiosk.  Minute Key placed 19 kiosks in Walmart stores across the country, then in 2012 signed a Walmart contract for a national rollout of 1000-1600 kiosks.  The rollout was delayed, and Minute Key found that it would have to compete against Hillman in a 100-store head to head pilot.  Minute Key believed that Hillman’s “very good relationship” with Walmart’s Tire Lube Express (TLE) team was at the root of the decision to extend the pilot and, in turn, delay Minute Key’s national rollout, which “practically put minuteKEY out of business.”

A Minute Key board member and investor, as part of discussions about the Walmart pilot, asked if its patent applications could be used to create “some FUD” about Hillman with Walmart.  In late 2012, Hillman won the pilot, with 900 stores going to Hillman and 300 to Minute Key.  A Minute Key principal responded, “in every retailer where we have gone head to head with fastkey @ Lowes, Menards, Meijer, Orchard Supply Hardware; our machine has won in every category; revenue, reliability, customer experience and accuracy. Is there anything we can do here to improve our position?”  (Etc.)  Discussions with Walmart revealed that Hillman succeeded in stores that also used Hillman’s transponder key program in their auto departments.  Another Minute Key person questioned whether it was time for Minute Key to consider “how/whether to use our patents to play offense.” There was further discussion of the patents, the threat they might pose to Hillman, and when the “patent card” should be played.

And there were some of the usual insider comments, which are almost inevitable; generally just bluster; and yet can be made to look bad.  E.g., “Fuck Hillman, they don’t know they are messing with a pirate.”/ “ it. Always need a competitor and we will whack them in time,” to which another responded, “Need to whack them now!”

The Walmart employee responsible for the Walmart decision then took a job at Hillman; his replacement looked at the trial and concluded that, based on revenue per square foot, downtime, returns, and customer experience, Minute Key, rather than Hillman, should have won:

In terms of profit per square foot, [Minute Key] was 25 percent more per machine per store. The customer experience was a little over a minute compared to between a little over three minutes. The downtime was a fracture [sic] of what the Hillman machine was. And the returns was [sic] significantly less, which all factor into customer experience.

Based on this, he started talking with Minute Key about rolling out at 1000 more stores, though Walmart had a three-year commitment to Hillman. 

In September 2013, Minute Key emailed Walmart that it would be sending Hillman a patent infringement notice when its patent was issued.  The email continued:

Our investment is only protected by our intellectual property, and thus we have no choice but to enforce our intellectual property against anyone who attempts to misappropriate it, such as by infringing our patent rights. The patent to be issued next Tuesday is only the tip of the iceberg of our intellectual property, and there are many more on the way.… It is flattering to be imitated by others, but it also is evidence of the significance of the contribution that MinuteKey’s technology has made to the industry, and our technology must be protected.

Walmart responded by deciding to give all kiosks at new stores/stores that requested kiosks to Minute Key, while Hillman would continue to install in its approved locations.  Walmart also requested a claim chart indicating which claims Minute Key alleged Hillman to be infringing.

Hillman sued for a declaration of noninfringement; Minute Key then provided Hillman with a covenant not to sue and argued that no case or controversy existed.  Hillman then sought to amend its complaint to add federal and state false advertising claims.

Courts have decided that, in cases involving statements about patent infringement, Lanham Act plaintiffs have to show bad faith in order to “give effect both to the rights of patentees as protected by the patent laws under ordinary circumstances, and to the salutary purposes of the Lanham Act to promote fair competition in the marketplace.”   The court found genuine issues of material fact precluding summary judgment.

First, Minute Key argued that its statements were opinion, not fact. In context, they were claims of fact, clearly declaring that Hillman was a patent infringer, and a jury could readily conclude that Walmart understood these as statements of fact.  Walmart’s counsel responded by asking Minute Key for a claim chart and Hillman to acknowledge its indemnification obligation; then Walmart suspended the deployment of key kiosks based on the patent claim.

Were the statements “commercial advertising or promotion”?  The relevant customer base as the market for self-service kiosks, not key duplication equipment generally. Hillman argued that Minute Key only seriously tried to get Walmart’s business (though why this should matter is unclear, since the key is distribution in the market, whatever that is, not how many entities in that market the defendant targeted).  Whether the market at issue was limited to Walmart was a factual question for the jury.

Bad faith: Minute Key argued that there could only be bad faith if its patent infringement claim was “objectively baseless.”  But Minute Key’s representation in marketing that its machine was fully automatic, while Hillman’s was not, could be taken into account in determining this, as well as the board member’s speculation about using patents to create “FUD” and “quips from its CEO such as ‘Fuck Hillman, they don’t know they are messing with a pirate’ and ‘Need to whack them now!’ and ‘Thinking about raising the patent card.’”

There were also questions of fact about damage to Hillman; though Hillman wasn’t guaranteed any extra stores, Walmart decided to use Minute Key for new stores/requests the day after Minute Key confirmed that it would be issuing a patent infringement notice to Hillman; before that, Hillman was the vendor of choice.  There was a dispute about whether Walmart offered, as a custom though not a contractual obligation, a “right of first refusal” to existing vendors for future business.  There was also a factual question about whether a delay in the already-promised kiosk rollout was due to the infringement claims, or whether the Hillman kiosks were still in production and then blocked by Walmart’s blackout period from mid-October to mid-January during which no vendor is allowed to place any kiosk.

Wednesday, July 13, 2016

Primary jurisdiction doesn't defeat supplement false advertising claim

Nutrition Distribution LLC v. Custom Nutraceuticals LLC, No. CV-16-00173, 2016 WL 3654277 (D. Ariz. Jul. 8, 2016)

The parties compete in the nutritional supplement market; defendant Custom sells Ostarine, a selective androgen receptor modulator (“SARM”) with effects similar to those of anabolic steroids.

Lanham Act claim: Distribution alleged that Custom labeled Ostarine products as “not for human consumption,” while simultaneously representing that Ostarine was a body-building drug and an “[e]asy to dose oral SARM.” Also, Custom allegedly failed to disclose that the World Anti-Doping Agency and the U.S. Anti-Doping Agency have banned the use of SARMs, while targeting competitive athletes.  Moreover, Custom allegedly represented that Ostarine has few side effects, when medical evidence suggests that it has potentially serious side effects.

Custom argued that the court should abstain from deciding these issues based on the primary jurisdiction doctrine. The court disagreed.  “The Court need not consult the FDA to determine whether it is false and misleading to label a product as ‘not for human consumption’ while touting the benefits of such consumption.”  Likewise, the materiality of the omission of the anti-doping agencies’ bans might not even implicate the FDA’s regulatory scheme; the FDCA doesn’t even prohibit all omissions that might be material to a consumer, but only those that are material “with respect to consequences which may result from the use of the article”:

Even assuming the FDA could require Defendants to disclose that their product has been banned by major sports agencies, the issue is not one that implicates the agency’s technical and policy expertise. Indeed, Plaintiff may have a superior understanding of how consumers of body building products would react to this information.

Not even the statements about side effects were beyond the court’s scope.  Though the FDA has primary jurisdiction to regulate statements about the side effects of drugs, Custom denied that Ostarine was a drug. “Having denied the FDA’s authority to regulate Ostarine as a drug, Defendants cannot invoke the same authority to avoid a suit under the Lanham Act.”  Though the FDA has the authority to determine whether Ostarine is safe enough to be sold in interstate commerce, this case was about whether Ostarine was as safe as Custom claimed, which didn’t require the court to opine on the technical and policy questions committed to the FDA.

RICO: no.

Volunteer moderator plausibly alleged to be agent of ISP for 230 purposes

Enigma Software Gp. USA LLC v. Bleeping Computer LLC, 16 CV 57 (S.D.N.Y. Jul. 8, 2016)

Eric Goldman probably won’t like this decision holding that a volunteer moderator may be treated as the ISP’s agent when the ISP gives enough status to him or her; I’m less bothered by the §230 ruling (except for the legal error, which the court may have a chance to correct later).

SpyHunter, an “adaptive malware detection and removal tool,” is plaintiff ESG’s flagship anti-malware product. Consumers can download a free scanning version of SpyHunter through a link on ESG’s website. Consumers can also buy a license to the full version of SpyHunter. That version includes the scanner, as well as tools to remove malware and other security protection tools.

Bleeping operates a website that offers information, advice, and resources about computer technology and security, and one of its focuses is anti-malware software. Bleeping gets commissions from designated “Affiliate” software companies for promoting their products on its website.  In the Bleeping forums, “staff members” “generate and control [the] content” posted. Bleeping has “Advisors,” whom Bleeping holds out as experts who “can be trusted to give correct and understandable answers to [users’] questions.” Above Advisors in the hierarchy are “Global Moderators,” who enjoy “special powers” to enforce rules governing the Forums, e.g., by “closing” discussions, editing the content of users’ posts, and suspending the posting privileges of users who violate the rules. Lawrence Abrams, Bleeping’s owner, is the overall “Admin” of the Forums.

Whenever an Advisor, Global Moderator, or Admin posts in Bleeping’s Forums, “Bleeping clearly identifies that the post has been made by [a Bleeping staff member]. Because Bleeping touts its staff as experts who can be “trust[ed] to provide correct, unbiased and truthful advice,” users allegedly rely on their advice when making purchasing decisions regarding anti-malware products. But Bleeping instead allegedly directs users to affiliates in order to promote its own financial interest, and also made false claims about ESG and SpyHunter  Bleeping also allegedly routinely removes links posted by users that endorse ESG’s products.

ESG allged that Quietman7, a Bleeping Advisor and one of only three Global Moderators, was a chief spokesperson for Bleeping’s “smear campaign” against ESG. In particular, Quietman7 accused ESG of deceptive advertising; labeled SpyHunter a “dubious” and “ineffective” program that generates false positives; and claimed that SpyHunter was a “rogue” product that was properly classified as malware. Quietman7 advised users to remove SpyHunter and replace it with a more “trustworthy” alternative—“invariably an Affiliate product, such as Malwarebytes Anti-Malware, for which he supplied an Affiliate Link.”  Users were allegedly influenced by this, saying things like “I’m convinced. Will buy a more trustworthy product when [SpyHunter] expires.”

First, the court held that, because §230 excludes IP claims, the Lanham Act false advertising claim wasn’t subject to §230.  The court cited two cases: Gucci Am., Inc. v. Hall & Assocs., 135 F. Supp. 2d 409, 413 (S.D.N.Y. 2001) (as you can probably guess from the plaintiff, this is a trademark infringement case); see also Ford Motor Co. v., Inc., No. 00 Civ, 71544 (DT), 2001 WL 1176319, at *1 (E.D. Mich. Sept. 25, 2001) (same). “On the basis of the statutory text, the Court, therefore, holds that the CDA does not bar ESG’s Lanham Act claim.” [Aaaagh!  Ahem, let me try again.  False advertising is not IP, even if trademark infringement is; §43(a), like 2/3 of Gaul, is divided into two parts. Or, in other words, it's not plausible to define the interest ESG is trying to protect as an interest in its intellectual property, rather than one in its reputation.]

Second, the court held that ESG sufficiently alleged that Bleeping was the provider of the problematic content because, on the facts pled, Quietman7 was acting as Bleeping’s agent when he posted them. Under New York law, an express agency is created through (1) “the principal’s manifestation of intent to grant authority to the agent,” (2) “agreement by the agent,” and (3) the principal’s “control over key aspects of the undertaking.”  Implied agency can also occur where the principal’s conduct, “reasonably interpreted, causes [ ] third [parties] to believe that the principal consents to have the act done on his behalf by the person purporting to act for him.”

Bleeping publicly designated Quietman7 as a “Global Moderator” and “Advisor”—the second and third highest “staff member” positions within the Bleeping member group hierarchy. Quietman7 since signed his posts as “Bleepin’ Janitor” and “The BC Staff.” Bleeping staff members are allegedly directed to promote affiliates’ products and discourage use of non-affiliates’ products, and are allegedly promoted as reliable sources of information. They’re authorized to enforce forum rules and suspend posting privileges for rule violations. This was enough to support the conclusion that Quietman was acting as Bleeping’s agent, at least its implied agent, when he posted the challenged content. 

Interestingly, the court cited two copyright cases in support of its finding of a plausible claim.  Court’s parentheticals: Capitol Records, LLC v. Vimeo, LLC, 972 F. Supp. 2d 500, 518–19 (S.D.N.Y. 2013) (triable issue of fact existed as to whether  employee-uploaders were acting as website’s agents, where uploaders served as “editorial voice” for website and website posted “staff badge” next to uploaders’ names on their posts); Columbia Pictures Indus., Inc. v. Fung, No. 06 Civ. 5578 (SVW), 2009 WL 6355911, at *13 n.21 (C.D. Cal. Dec. 21, 2009) (websites liable for moderators’ infringements, despite lack of evidence of actual authority, where “websites’ act of designating them as ‘moderators’ and providing them with specific forum-related powers [could] lead[] a ‘third party reasonably [to] believe[ ] the [moderators] ha[d] authority to act on behalf of the [website]”) (internal quotation marks and citation omitted).  Although other cases find that “moderator” status, without more, does not render a website operator liable for a moderator’s conduct (as these cases apparently do), ESG’s claim of agency wasn’t just about Quietman7’s designation as a “moderator.” He was designated a “staff member,” had special authority as an Advisor and Global Moderator, and was held out as an expert. Bleeping’s cases involved either moderators who had limited powers or didn’t themselves author the offending posts.

Nor did Quietman7’s volunteer status prevent him from being an agent. “New York courts have repeatedly held volunteers to be agents where the common law requirements for agency were met.”

After that, the court held that the claims weren’t time-barred; some posts occurred within the 1-year statute of limitations for defamation, and there was also an issue about republication because Quietman7 included links to older posts, with additional commentary, in new posts. And courts in the Second Circuit generally borrow the six-year fraud statute of limitations for Lanham Act claims.

Then, the court found that ESG stated a claim for defamation. Of possible interest, the court found that various statements about the allegedly scammy nature of ESG’s product were potentially falsifiable factual statements:

Viewed holistically, the “overall thrust” of Quietman7’s thematically similar and mutually reinforcing statements is that ESG is engaged in a deliberate and fraudulent scam in which it is peddling a product which is the precise opposite of what it purports to be: The challenged statements “reasonably imply” that ESG has intentionally designed SpyHunter, in its “free scanner” mode, to generate false positives so as to induce customers to buy a license for the full version to eliminate ostensible malware.… Such allegations … could reasonably be understood as assertions of objectively verifiable facts.

In isolation, words used in Quietman7’s posts such as “scam,” “rogue,” “dubious,” and “ineffective” “would likely be too imprecise to be capable of being proven true or false.” But, in context, they became more concrete and reasonably precise.  Nor did the statement that SpyHunter was “previously listed as a rogue product” avoid a claim that SpyHunter was a rogue product.  The context made a clear implication that the underlying practices that gave rise to that earlier classification persisted, because Quietman7’s said that “some users have reported [ESG] still engage[s] in deceptive advertising.” And his statement that SpyHunter was not currently targeted for removal by other security programs was followed by an allegation that “security vendors which have tried [to target it] in the past have received threats of legal action for attempting to do so or agreed to legal settlements as a result of litigation brought forth by Enigma Software.” “High rate of false positives” could also be verified or falsified by comparing SpyHunter’s rate with those  of competing products. “That an accusation is ‘somewhat . . . vague and difficult to prove’ does  not mean that it is not objectively verifiable.”

Moreover, the forum pages made the alleged statements more plausibly “anchored in fact.”  Bleeping allegedly held out the pages as tightlyregulated by its member groups, and assured users that its “expert” staff members “can be trusted to give correct and understandable answers to [Bleeping’s] members’ questions.” Quietman7 himself allegedly wrote: “Folks come to Bleeping Computer for advice, recommendations and other assistance. We provide that  based on our experience and expertise so they can make an informed decision.”  “The manner of Quietman7’s written  presentation—one using footnotes and citations—conveyed further that his advice was based on  an ‘investigation’ of verifiable facts.”

Thus, the court distinguished these cases from others involving online forums that were presumed to be places for exaggerated and nonfactual speech.

On the allegations of the complaint, the court declined to find that ESG was a limited-purpose public figure, and considered allegations about its reputation for litigiousness irrelevant because Bleeding didn’t identify a public controversy related to the litigation.

The alleged statements, if false, would constitute libel per se because they imputed “some form of  fraud or misconduct or a general unfitness, incapacity, or inability to perform one’s duties.”  However, ESG didn’t state a claim for trade libel or commercial disparagement; the claim was duplicative of the defamation per se claim, and also failed to allege special damages.

Finally, ESG stated a claim under the Lanham Act.  The key issue here was “commercial  advertising or promotion,” and the key question was whether the statements at issue were “part of an organized campaign to penetrate the relevant market.”

Commercial speech: Quietman7’s posts were commercial speech.  “In nearly all of them, Quietman7, after lambasting ESG’s SpyHunter, recommends that the  reader ‘remove [that] program and replace it with a trustworthy alternative,’ such as  Malwarebytes Anti-Malware and other Affiliate products.”  By promoting affiliate products, these posts were unmistakably ads, and went even further by providing purchase links.  Bleeping had an economic incentive to do this.

Further, the complaint sufficiently alleged that Quietman7’s posts were part of “an organized campaign by Bleeping to penetrate the market for anti-malware products” by repeating or linking to negative reviews of SpyHunter “any time a new forum topic mention[ed] or inquir[ed] about ESG,” not to mention removing pro-ESG posts by users.  “Reactive disparagement” could be sufficient if it reached enough potential consumers.  Given that Bleeping advertises itself as a “premier destination” for computer users seeking information about computer technology and recommendations regarding malware removal, and that the posts could be viewed by the “[more than] 3.5 million unique visitors [that visit Bleeping’s website each] month,” that was enough.

No competition between the parties was required after Lexmark, and anyway, if it were required, the court held that the affiliate relationship with ESG’s competitors sufficed. 

As for injury, the complaint alleged that Bleeping’s members often didn’t know the basics underlying computer issues, and relied on Bleeping’s representations, a fact that Bleeping touted.  “After disparaging ESG and SpyHunter4, Quietman7 trumpeted that ‘[s]ince we [Bleeping] do not recommend this program [SpyHunter], I doubt that  any of our members use it.’” 

Tuesday, July 12, 2016

Discoverable falsity is immaterial to sophisticated consumers

Reed Const. Data Inc. v. McGraw-Hill Companies, Inc., 638 Fed.Appx. 43 (10th Cir. 2016)

Allegedly false claims about the quality of construction project data offered by these competitors were, even if false, not material to consumers, because the consumers were sophisticated.  “Discovery revealed only one customer who arguably relied upon McGraw–Hill’s advertising in deciding between Reed and McGraw–Hill, while numerous other customers testified that they discounted the companies’ representations as to their own products and conducted independent evaluations.”  Even though McGraw-Hill’s marketing professionals “professed great enthusiasm for the advertising campaign at issue, the evidence from consumers makes clear that the market of sophisticated consumers relying largely on face-to-face sales was unmoved.”  Thus, no reasonable jury could have found materiality.

Monday, July 11, 2016

Pom and circumstance: Pom Wonderful wins against Pur Pom

Pom Wonderful LLC v. Hubbard, No. 13-06917, 2016 WL 3621281 (C.D. Cal. Jun. 29, 2016)

Disclosure: I consulted with Pom on an earlier iteration of this litigation, though I have not been involved subsequently.  Even when courts in the Ninth Circuit get outcomes right, their reasoning is often head-scratching, and this case is no exception.

Pom sued Hubbard and his company for trademark infringement over its PUR Pǒm flavored beberages.  The district court initially denied Pom’s motion for a preliminary injunction; the court of appeals reversed, but the district court again denied a preliminary injunction given the high standard set by Herb Reed.  Now we’re at summary judgment, where Hubbard counterclaimed for cancellation of Pom’s marks on various grounds.  Pom won summary judgment; Hubbard lost. The court included lots of pictures, which is great!

The parties’ products are sold in single serve containers in the refrigerated sections of supermarkets, at a retail price of $1.99 for POM Wonderful pomegranate juice and $2.00 for PUR Pǒm.

The parties' marks as used

Hubbard argued that Pom abandoned its standard character mark by only ever using a version with a heart in the place of the “o” in Pom, which it separately registered as a stylized mark. The court held that use of the stylized mark also constituted use of the standard character mark, and thus there was no abandonment.  The parties appear to think that abandonment is important because a standard character mark affords a registrant “a broader scope of coverage” compared to a stylized mark (citing McCarthy), even though that doesn’t actually affect the infringement analysis.  The court cites a number of registration proceedings/rulings about the significance of a standard character mark in the registration process, as well as the Ninth Circuit’s statement in this case, that the “‘POM’ standard character mark is extremely broad, covering the word in all types of depictions.” Pom Wonderful LLC v. Hubbard, 775 F.3d 1118, 1125 (9th Cir. 2014).  But then it went on to ignore that in the infringement analysis, focusing on the similarity between the mark Pom uses and the mark Hubbard uses.
Pom's stylized mark
If the specimen of use shows a display of the standard characters “in a distinctive manner that changes the meaning or overall commercial impression of the mark,” then the standard character mark can’t stand.  The PTO allows a stylized version to be separately registered if “the word [that forms the standard character mark] itself creates a commercial impression separate and apart from the designs in the letters.” The TMEP says: “If a mark remains the same in essence and is recognizable regardless of the form or manner of display that is presented, displaying the mark in standard character format affords a quick and efficient way of showing the essence of the mark.”

The TTAB allowed a standard character registration for OROWEAT with the specimen shown below, because the word “creates a commercial impression separate and apart from the merely ancillary design with which it is associated.”

The same with SPECTRAMET, even though the specimen depicted a stylized “C” consisting of “an arrow within an arrow in contrasting shades, in which the outer arrow is dark and surrounding the inner arrow in white.” 

Given this precedent, the court thought the result here was clearly mandated, because “POM” created a distinct commercial impression; the stylized lettering “does not alter the pronunciation or perception of the word; the standard character mark is both aurally and visually indistinguishable from the mark bearing a heart-shaped ‘O.’”

The TTAB’s contrary decision about the version of FOSSIL shown below was very different: the rights conferred by the standard character mark “FOSSIL” did not cover use of the mark coupled with additional words inside an oval.

The court then granted Pom summary judgment on Hubbard’s argument that the term “pom” was generic for pomegranates.  Hubbard submitted one Pom Wonderful advertisement and evidence of third-party use of the term “pom,” but the court found this failed to create a triable issue of fact, given Hubbard’s burden of proof.  Pom’s own generic use of the term was not repeated and consistent; it was one ad from 2002 that said, “The POM stands for pomegranate.” This single, isolated incident was insufficient.

As for third-party use, Hubbard testified in a declaration that he googled  “pom flavor,” which yielded 52,000 pages of results. He searched the first ten pages and located numerous generic uses in which third parties referenced “pom” as shorthand for pomegranate. Pom has also opposed 32 third-party applications with the USPTO to register trademarks containing the word “pom” as a component of the mark.

The Google search didn’t show anything about whether the term was generic when Hubbard’s product entered the market, in 2013, which was the relevant date for determining genericity.  Also, Hubbard’s URL list dump was unexplained and unanalyzed.  “It is impossible to determine solely from a series of hyperlinks whether competitors are actually using the term ‘pom’ as a proxy for pomegranate or whether these third-party references simply use ‘pom’ in a descriptive manner to designate the pomegranate flavor of their products.”  Hubbard also didn’t explain the relevance of the 32 trademark applications, some of which clearly made no reference to pomegranate, such as “Pom Poms” for cookies in the shape of pom poms.

This “anemic” showing didn’t create a triable issue of fact on genericness.

The parties' beverage containers

Pom’s trademark infringement claim: The court, unfortunately, found that “Pom” was suggestive because it “requires consumers to exercise some imagination to ascertain the nature of Pom Wonderful’s products.”  At this point, I guess I have to say this is not the test outside the 9th Circuit.  Everywhere else does it right: you don’t ascertain conceptual distinctiveness without considering the goods or services.  Is “pomegranate” inherently distinctive?  Well, that depends on what it’s for!  I might have to use imagination to guess that it was for computers, but not for beverages.

This error has limited consequence here because (a) the court considered suggestive marks “presumptively weak” and (b) Pom showed marketplace strength through ad expenditures and other evidence.

Similarities in the marks “abound[ed].”  The letters were the same; both had style variations on the “o,” a heart and a diacritical; they both used uniform casing (all caps and all lower case); they were both in white print on a dark maroon background.  Sound and meaning were also similar/semantically identical.  There were differences in sizes, fonts, and capitalization, as well as the emphasis given to the marks; the Pur product used a smaller “Pǒm” mark near the bottom of the can.  But overall the similarities made this factor weigh in Pom’s favor.

The goods were closely related, the marketing channels overlap (both were even at Albertson’s stores at one point), the degree of consumer care was low, and the remaining factors weren’t important under the circumstances—intent is minimally important, and no evidence of actual confusion is required. Five of the Sleekcraft factors “overwhelmingly” weighed in favor of Pom, and the only one that weighed in favor of Hubbard was intent.

The court then rejected Hubbard’s descriptive fair use defense.  The court first ruled that “pom” didn’t have a descriptive meaning, which seems really inconsistent with its treatment of the Google search results above, not to mention the classification of “pom” as suggestive; the court thought that, because “pom” didn’t have a dictionary definition, it couldn’t be used descriptively, “as it carries no inherent meaning or significance beyond its function as a registered trademark.”

Even if it could be used descriptively, the court (either failing to notice KP Permanent or, perhaps more realistically, doing what courts in the 9th Circuit do when confronted with KP Permanent) held that, in the Ninth Circuit, descriptive fair use is unavailable when there’s a likelihood of confusion.

Questionable branding

Not exactly on topic, but funny: Trader Joe's often uses some signals about what national brands one can compare its house products to. Here, while Cheerios and Spaghettios are hard to confuse, the result is two different kinds of Joe's O's, which could produce pretty funny results if people aren't paying attention.  Self-dilution for Joe's O's?

Joe's O's

Joe's O's compared to Cheerios
Also Joe's O's (compare to Spaghettios)