Thursday, September 29, 2016

Right of publicity/passing off blast from the past

From The Spirit of the Times, May 21, 1845

"Gen. Tom Thumb's father brought suit in Paris, against the manager of a theatre, who announced a play called Tom Pouce, (Thumb,) while the General was exhibiting himself at another place. The tribunal decided in favor of the General, the name of Tom Pouce had to be removed from the bills, and the manager paid the costs of suit. The piece was produced as 'Tom Pouff' afterwards."

H/T Zach Schrag

when are state law unfair competition claims preempted?

Duer v. Bensussen Deutsch & Associates, Inc., 2015 WL 11256568, No. 14-CV-01589 (N.D. Ga. Jul. 8, 2015)

Very broad preemption finding makes me blog this older case that popped out of Westlaw.  Duer makes medicine dosage adherence tools suitable for affixing to pill bottles. The product has seven slides, each representing a day of the week, and a user moves a slide each day she takes a pill.  Duer claimed rights in the trademark “Take-n-Slide”; a utility patent; and copyright in the insert sheet packaged with her product.  Defendants allegedly copied Duer’s product and package insert sheet, which she discovered when one of their customers contacted her, believing that they’d received her product.

Duer properly alleged non-functionality by identifying  several non-functional elements, including the particular shape of the product, the vertical arrangement of the days of the week, and the chosen color scheme. “The existence of a utility patent which contains claims that may include the above elements does not change the analysis.” The utility patent was strong but not conclusive evidence of functionality; she was entitled to try to meet her “heavy” burden of showing nonfunctionality. Duer also properly pled secondary meaning, with details about her ad expenditures, how long she’d advertised, and at least one instance of actual confusion as well as intentional copying.

However, the court dismissed Duer’s claims for false advertising and unfair competition.  False advertising: the product insert allegedly actually displayed Duer’s product.  However, this wasn’t “commercial advertising or promotion,” because it wasn’t disseminated to influence consumers to buy defendants’ goods.  “A product insert cannot influence a consumer’s purchasing decision because the public would only see a product insert after purchasing the product.”

Duer’s unfair competition/passing off claim failed because she failed to allege that defendants weren’t the actual, physical origin of the products it sold.  This seems quite wrong: her argument was that defendants sold products that were falsely attributed to her; the fact that they are the origin is kind of the point.

More plausibly, but still interestingly, the court held that Duer’s Georgia Uniform Deceptive Trade Practice Act and her tortious interference with contract claim were preempted by the patent/copyright laws because they relied on the same conduct alleged in her patent, copyright, and trade dress infringement claims.  [Sloppiness here: there’s no preemption based on the trade dress-related claims, on these facts.]  Duer was essentially arguing reverse passing off—that defendants were claiming her design as their own—which courts routinely find to be preempted.

Duer argued that her GUDTPA claim had an “extra element” of a deceptive act, but reverse passing off implicitly contains a deceitful act or misrepresentation.  “The fact that the defendants were selling the allegedly infringing works under their own names—and, hence, implicitly misrepresenting the origin of the works or causing confusion in the consuming public cannot alter the finding of preemption.” 

Parody product fails to squeak through the cracks in dilution/infringement claim

VIP Products, LLC v. Jack Daniel’s Properties, Inc., No. 14-cv-02057 (D. Az. Sept. 27, 2016)

The court denied VIP’s motion for summary judgment on its declaratory judgment action against JDPI, and also kicked out a number of VIP’s defenses, leaving confusion and dilution claims for trial based on VIP’s “Bad Spaniels” durable rubber squeaky novelty dog toy, which is in the shape of a liquor bottle and features a wide-eyed spaniel over the words “Bad Spaniels, the Old No. 2, on your Tennessee Carpet.” On the back of the Silly Squeakers packaging for the Bad Spaniels toy, it states: “This product is not affiliated with Jack Daniel’s.”

 VIP's product, on left
VIP's label

The court found that VIP couldn’t be engaged in nominative fair use because this defense only applies where a defendant uses the plaintiff’s identical mark or trade dress, which VIP didn’t.  “[I]t is the defendant’s very use of the plaintiff’s identical trademark that makes the nominative fair use analysis necessary rather than application of AMF Inc. v. Sleekcraft Boats, 599 F.2d 341 (9th Cir. 1979) which utilizes eight factors to focus on the similarity of the trademarks used by the plaintiff and the defendant in order to determine liability for likelihood of confusion in the marketplace.”  This is an extremely tone-deaf reading of New Kids, because it’s the reference to the plaintiff, not the identicality of the marks, that drives the First Amendment interests justifying a different liability test.  The fact that a trademark owner can claim confusion based on a parodic reference to it makes the need for New Kids at least as great when the reference also involves distortion.

Then, and arguably worse, the court found that VIP couldn’t raise a First Amendment defense because its dog toy wasn’t an artistic or expressive work.  Aaaaaaaaaaargh.  OK: (1) Both parties claim that the markings, shape and coloration of the dog toy communicate a message, though they disagree about what that message is.  That means that the dog toy is expressive, even if it’s not a painting.  (2)  Expressive is not the opposite of commercial speech, nor is it the opposite of “has trademark significance”; the dog toy is not, in any event, commercial speech. (3) The trademark owner’s claim seeks to suppress an allegedly infringing message, not any nonexpressive characteristics of the dog toy: trademark regulates communication, which doesn’t make it unconstitutional but does mean that extending it beyond commercial speech is dicey business indeed. 

Nonetheless, the court found that regular Sleekcraft applied. “[T]he First Amendment affords no protection to VIP because it is trademark law that regulates misleading commercial speech where another’s trademark is used for source identification in a way likely to cause consumer confusion.”  Why is the design of the product commercial speech?  Because “VIP makes trademark use of its adaptations of JDPI’s trademarks and the Jack Daniel’s trade dress to sell a commercial product, its novelty dog toy,” and thus it has “the dual purpose of making an alleged expressive comment as well as the commercial selling of a non-competing product.”

A reasonable trier of fact could find likely confusion and dilution of a famous mark. VIP also failed to exclude the report and the testimony of JDPI’s dilution expert, Dr. Itamar Simonson, who opined on “the implication(s) of the association between the Bad Spaniels toy and Jack Daniel’s whiskey on JDPI’s trade dress and trademarks and the meaning of the mark/brand to consumers.”

JDPI proposed that Simonson would discuss: 1) The basics of consumer behavior and “how marks such as famous trade dress are represented in memory”; 2) the basics of the “associative network memory model” which are accepted by experts in the consumer behavior field; 3) the application of the “associative network memory model” to the instant case; and 4) the conclusion that VIP’s Bad Spaniels toy causes negative implication for JDPI’s trade dress and marks and thus is likely to tarnish them.  The court allowed his testimony as admissible based his knowledge, training and experience rather than on his use of scientific evidence with a testable, proven methodology.  Surveys, focus groups, studies, or other real world tests weren’t required for him to apply his expertise to the facts of the case.

Texas and 3 other states sue to block ICANN transition

Read the complaint.  Let me know if you can make sense of the theory.

Ad featuring old, mild citations against health facility was false by necessary implication

Heartland of Urbana OH, L.L.C. v. McHugh Fuller Law Group, P.L.L.C., 2016 WL 5375676, 2016 -Ohio- 6959, No. 2016–CA–3 (Ct. App. Sept. 23, 2016)

Heartland appealed from summary judgment granted to McHugh in Heartland’s deceptive trade practices case against McHugh, and the court of appeals reversed, finding that the relevant ad was false by necessary implication and that injury was presumed because the ad targeted Heartland.

In 2014, McHugh published a full-page ad and online ad in the Urbana Daily Citizen newspaper that discussed Heartland, a skilled nursing care facility located in Urbana, Ohio. The ad contained a picture of Heartland’s facility in Urbana, and stated:

The government has cited HEARTLAND OF URBANA NURSING AND REHABILITATION CENTER for failing to provide necessary care and services to maintain the highest well-being of each resident. If you suspect that a loved one was NEGLECTED or ABUSED at Heartland of Urbana, call McHugh Fuller today! Has your loved one suffered?
Broken Bones
Unexplained Injuries

“Attention,” “Neglected or Abused,” and “Death,” were in red, bold type. “Cited” was also underlined in red.

In fact, Heartland had not had a citation of any kind for over two years, and had not had a citation remotely similar to the one alleged in the advertisement since June 24, 2010, more than four years previously. Even the June 2010 citation did not cause harm to any nursing home patient, and the deficiencies had been corrected in June 2010.  Under Federal standards, violations are assessed by letters ranging from “A” to “L,” with “L” being the most severe. “J,” “K,” or “L” violations mean that a nursing facility is in immediate jeopardy, and is in risk of being cut-off from Medicare reimbursement. The particular violations on June 24, 2010 were only “E” and Level 2 violations, “which, at worst, contemplate only minimal physical discomfort and the potential to undermine a given resident’s ability to maintain or reach his or her highest practicable well-being, in light of definitions of that resident’s plan of care.”

According to Heartland, “negligence, abuse, bedsores, broken bones, unexplained injuries, and death” would have Level 4 severity. By contrast, three matters that were involved in the June 24, 2010 citation, were: a failure to document and administer laxatives prescribed for constipation; a failure to timely reassess abdominal pain for 18 hours; and a failure to apply prescribed antibiotic for two weeks after a physician had ordered a culture.

Subsequently, the legislature amended state law to prohibit the use of the results of an inspection or investigation of a home in an ad unless the ad included:

(i) The date the inspection or investigation was conducted;
(ii) A statement that the director of health inspects all homes at least once every fifteen months;
(iii) If a finding or deficiency cited in the statement of deficiencies has been substantially corrected, a statement that the finding or deficiency has been substantially corrected and the date that the finding or deficiency was substantially corrected;
(iv) The number of findings and deficiencies cited in the statement of deficiencies on the basis of the inspection or investigation;
(v) The average number of findings and deficiencies cited in a statement of deficiencies on the basis of an inspection or investigation conducted under this section during the same calendar year as the inspection or investigation used in the advertisement;
(vi) A statement that the advertisement is neither authorized nor endorsed by the department of health or any other government agency.

Query: what are the First Amendment implications of this rule?

The trial court found that this legal change had mooted Heartland’s claim.  The court of appeals reversed, because if McHugh willfully violated the state Deceptive Trade Practices Act, Heartland would be entitled to attorneys’ fees.

Ohio courts follow the Lanham Act in interpreting the DTPA.  The court of appeals found the ad false by necessary implication.  “When the advertisement was published, McHugh, a law firm, would have known that any claims based on the June 24, 2010 citations were barred due to the statute of limitations.”  McHugh also had access to information that Heartland wasn’t cited in 2012 or 2014, and that none of the 2010 citations related to harm to residents. “[T]he only reasonable conclusion is that the advertisement falsely implied Heartland was a facility where patients were being exposed to very dangerous conditions, including death,” which justified a finding of intent to deceive consumers.

In noncomparative advertising, plaintiffs must show causation and harm, but a material, misleading comparison to a specific product necessarily causes harm to the target, relieving the target of its burden of separately showing causation and harm.  The court of appeals applied this rule here, to the broader category of “misleading advertisements identifying a specific party,” although the ad wasn’t comparative. The court of appeals did say that the presumption of causation and injury was rebuttable.

Conversation on fan films and copyright, part 2

My exchange with Henry Jenkins can be found here.  Part 1 here.

Monday, September 26, 2016

Advertiser's self-voting on positive reviews as "helpful" may be false advertising

Vitamins Online, Inc. v. HeartWise, Inc., 2016 WL 5106990, No. 13-CV-982 (D. Utah Sept. 19, 2016)

Following up on its previous opinion, the court rules again about the possible falsity of reviews posted in exchange for undisclosed gifts of the reviewed product.

Vitamins Online sells dietary supplements online, including on Amazon under the brand name NutriGold.  Defendant (NatureWise) does the same, selling competing garcinia cambogia and green coffee supplements. Vitamins Online sold its versions before 2010, but then Dr. Oz made them famous and caused competitors to enter the market.  NatureWise had its employees vote on the helpfulness of some of the reviews on its product pages, promoting positive reviews and demoting negative reviews. NatureWise also encouraged customers to post or repost their positive reviews on Amazon by offering them free products or gifts cards; “NatureWise would review and, in some cases, make minor edits to the reviews before asking the customers to post them on Amazon.”  The number of positive Amazon reviews a product receives affects that product’s position in Amazon search results.

NatureWise argued that it didn’t make any false or misleading statements, which led the court to a scholarly and thorough discussion of omissions under the Lanham Act.  Because the language of the Lanham Act bars “any word, term, name, symbol, or device, or any combination thereof, or any false designation of origin, false or misleading description of fact, or false or misleading representation of fact” that constitute infringement or false advertising, false advertising doesn’t “necessarily require a false or misleading description or representation of fact.”  In other words, “the statute unambiguously allows for a false advertising claim to be based on the ‘any word, term, name, symbol, or device’ language as long as the use of that conduct ‘in commercial advertising or promotion’ results in the unlawful effect of ‘misrepresent[ing] the nature, characteristics, qualities, or geographic origin of his or her or another person’s goods, services, or commercial activities.’”

The court thought that NatureWise’s Amazon-related conduct could fall under the concept of a “device.”  Offering free products was a mechanism to increase positive reviews; NatureWise also used a mechanism provided by Amazon “for the special purpose of increasing the visibility of positive reviews and decreasing the visibility of negative reviews.” 

NatureWise also argued that its conduct wasn’t “commercial advertising or promotion” because it wasn’t the source of the statements at issue (an argument already rejected above) and because there was no evidence that the statements at issue were viewed by a sufficient number of the relevant purchasing public.  The court rejected an actual viewing standard, and held that “the test only requires a showing that the information was sufficiently disseminated to the relevant purchasing public.” The information at issue—the reviews and helpfulness votes—was available on the NatureWise Amazon product pages.  NatureWise only sells the products at issue on Amazon, so that information was disseminated to all of NatureWise’s actual or potential customers, which was enough to satisfy the test.

But was there a misrepresentation?  Offering free products in exchange for positive reviews wasn’t enough to show that that NatureWise’s conduct gave a false or misleading representation of the nature, characteristics, or qualities of NatureWise’s goods or commercial activities. Vitamins Online failed to show that the reviews posted by the customers were not genuine.  But what about disclosing that they were in exchange for free products? The FTC thinks this disclosure is material to consumers to judge the credibility of the review and therefore required.  I agree—I do give less weight to positive reviews with the required disclosure, though I don’t discount them entirely.  The court doesn’t discuss whether the reviews failed to disclose the quid pro quo, just says that Vitamins Online didn’t show that the reviews were false or misleading.

However, manipulating the prominence of the reviews block voting on the helpfulness of the reviews could constitute a false or misleading representation.  (Note that the reason for this is essentially the same reason that quid-pro-quo reviews ought to be disclosed!)  “The representation being made by the placement of these reviews on the product page is that customers wrote, posted, and rated the reviews and that the reviews that appear first in the list are the ones that customers found to be most helpful.”  Distorted ranking of helpfulness could clearly deceive consumers about which reviews were most helpful.

NatureWise argued that, to be actionable, an omission has to relate to an affirmative claim, and that therefore there can be no liability when it didn’t make any affirmative claims.  But the court’s reasoning above disposes of that argument (and NatureWise did make affirmative claims about helpfulness/lack thereof of particular reviews to consumers).  “Because Vitamins Online has demonstrated that the reality, that some customers and a block of employees of the manufacturer voted on the helpfulness of some of the review, may be different than the implied representation, that a certain number of customers voted on the helpfulness of some of the reviews, the court concludes that genuine issues of material fact exist as to whether the statements are false by necessary implication.”

Section 43(a) is not a “federal codification of the overall law of unfair competition,” but the court concluded by noting that, even under its broad interpretation, several “causes of action related to unfair competition” would still not be covered by the Act, including “trade secret violations,” “[c]ontractual disputes,” and “false claims of trademark rights.”

Speech in study would be commercial if knowingly false, court rules

Crossfit, Inc. v. National Strength & Conditioning Ass’n, 2016 WL 5118530,  No. 14cv1191 (S.D. Cal. Sept. 21, 2016)

CrossFit generates revenue by credentialing and certifying fitness trainers for a fee and through licensing the CrossFit trademark and other intellectual property to affiliate gyms. The NSCA is a nonprofit corporation that is “dedicated to the educational and professional exchange of ideas in the areas of strength development, athletic performance, and fitness.” It offers educational publications and also certifies fitness professionals for a fee. One of the NSCA’s publications is its “flagship journal,” the Journal of Strength and Conditioning Research (JSCR).

In November 2013, the JSCR published “Crossfit-based high intensity power training improves maximal aerobic fitness and body composition.” Though much of the article praised CrossFit’s effectiveness, one passage says:

Out of the original 54 participants, a total of 43 (23 males, 20 females) fully completed the training program and returned for follow up testing. Of the 11 subjects who dropped out of the training program, two cited time concerns with the remaining nine subjects (16% of total recruited subjects) citing overuse or injury for failing to complete the program and finish follow up testing.

Revisiting the point, the article says, “[a] unique concern with any high intensity training programs such as HIPT or other similar programs is the risk of overuse injury. In spite of a deliberate periodization and supervision of our Crossfit-based training program by certified fitness professionals, a notable percentage of our subjects (16%) did not complete the training program and return for follow-up testing.”  The study received attention in social media outlets and from news media.

CrossFit identified the individuals who purportedly did not complete the study because of “overuse or injury,” and many of these individuals provided declarations explaining their actual reasons for not completing the challenge, which weren’t based on overuse or injury. The initial manuscript submitted to the JSCR did not include any injury data, and the study’s author said that he only included them after “the peer reviewers and JSCR editors requested information about why 11 participants failed to test out.” CrossFit argued that the inclusion of these data at the JSCR editorial staff’s direction was evidence of the NSCA’s desire to “manufacture a ‘scientific’ study concluding CrossFit training was unsafe.” JSCR’s Managing Editor wrote: “You also need to caution readers as to the context of your findings due to the fact many people do get injured doing these types of workouts,” directing the study’s author to another study finding CrossFit to be dangerous, authored by the Managing Editor himself.

The JSCR published an erratum stating:

After the article was published, 10 of the 11 participants who did not complete the study have provided their reasons for not finishing, with only 2 mentioning injury or health conditions that prevented them from completing follow-up testing. In light of this information, injury rate should not be considered a factor in this study. This change does not affect the overall conclusion of the article.

CrossFit submitted a consumer survey on materiality. Some participants saw the original statement reporting a 16% injury rate and others saw a modified version with the language “CrossFit’s programs injury rates are very much in line with injury rates for the physical fitness industry as a whole.” Respondents exposed to the former “[w[ere 2.4 times as likely to rate CrossFit training as dangerous,” and were “twice as unlikely to say they would purchase a 12 month trial membership for CrossFit training.”

The court granted summary judgment on literal falsity, though other elements of CrossFit’s claims remained.  In particular, the NSCA argued that the journal article was noncommercial speech fully protected by the First Amendment and not subject to the Lanham Act.

The court noted that speech can be commercial even when it contains “discussions of important public issues.” Further, courts must be particularly careful when reviewing causes of action directed toward academic works, “because academic freedom is ‘a special concern of the First Amendment.’ “ ONY, Inc. v. Cornerstone Therapeutics, Inc., 720 F.3d 490 (2d Cir. 2013).  However, ONY was careful to limit its scope to cases in which “a speaker or author draws conclusions from non-fraudulent data, based on accurate descriptions of the data and methodology underlying those conclusions, on subjects about which there is legitimate ongoing scientific disagreement.”  ONY noted that “it is relevant that plaintiff does not allege that the data presented in the article were fabricated or fraudulently created.”  Query: Why does falsity of data bear on the classification of the article as commercial or noncommercial speech?  ONY actually doesn’t present itself as a commercial speech case—defendants were allowed to make their claims, as long as they were accurate descriptions of the data and methodology, in classic ads too.  Nonetheless, the court here held:

a reasonable fact finder could conclude that the NSCA fabricated the injury data and published them in the JSCR knowing they were false with the intention of protecting its market share in the fitness industry and diminishing the burgeoning popularity of the CrossFit program. If the trier of fact were to draw that conclusion from the evidence, the injury data would be commercial speech.

Analytically speaking, this puts the cart before the horse—you only know if it’s commercial speech once you know it’s false.  (Next query: what if this wasn’t knowing falsity, just falsity, which is generally sufficient under the Lanham Act and which the court has already found to exist?  Why would state of mind be relevant to whether this is commercial speech?)  It might be a reasonable practical compromise, however, especially given that I’m no great fan of ONY.

The court here continued that the paper as a whole was far more than a proposed commercial transaction, “but the excerpts based on potentially fabricated data about a competitor’s product may nonetheless be commercial speech.” A reasonable fact finder

could conclude that the NSCA pressured the authors to include data disparaging CrossFit’s exercise regimen, and the editor-in-chief’s admonition—“[r]emember the paper can still be rejected if the reviewers are not impressed with the sophistication of the revisions made”—could be construed as a veiled threat that the JSCR would not be interested in publishing the Devor Study if it did not include information showing “the fact many people do get injured doing these types of workouts,” whether or not that “fact” was true in this qualitative study.

However, a reasonable factfinder could also conclude that “the editor-in-chief was simply bringing his knowledge of the fitness industry to bear and sincerely believed (or for that matter still believes) that CrossFit has a high injury rate, as opposed to an attempt to denigrate CrossFit for the NSCA’s benefit.”

Under the Bolger factors, the study didn’t explicitly promote the NSCA’s products or services, and wasn’t typical advertising content. The factor dealing with reference to a specific product, though typically geared to self-promotion, could also apply to disparagement of another’s product, especially given that the Lanham Act explicitly reaches such disparagement.  And NSCA had an economic motive for publishing the data.  Nor were the noncommercial elements of the study inextricably intertwined with commercial speech:

[A]ssuming the injury data were false and injected into the article to deride CrossFit’s product, it would have been easy enough to publish an article with data that were not made up, and one could easily imagine the Devor Study without the statements premised on these false data. In fact, the Erratum shows that the parts of the article that may constitute commercial speech are not inextricably intertwined with the remainder of the article.

The court also allowed California FAL and trade libel claims to proceed.  Though trade libel usually requires a showing of special damages, some cases have allowed plaintiffs to show instead a “general loss of custom[ers],” by “showing an established business, the amount of sales for a substantial period preceding the publication, the amount of sales subsequent to the publication, [and] facts showing that such loss in sales were the natural and probable result of such publication.”  CrossFit might be able to satisfy that standard.

FTC wins second appellate victory over 230 defense

FTC v. LeadClick Media, LLC, 151009cv (2d Cir. Sept. 23, 2016)

The FTC and Connecticut sued LeadClick over its role in the use of deceptive websites to market weight loss products. LeadClick managed a network of aliates/publishers to advertise the products of LeadClick’s merchant client, LeanSpa.  Some affiliates created deceptive websites making false efficacy claims, including claims about independent testing and testimonials.  The FTC also sued CoreLogic, LeadClick’s parent company, as a relief defendant. The court of appeals rejected LeadClick’s §230 defense, but did let CoreLogic off the hook for $4.1 million in relief.

Facts: Until it went out of business in 2011, LeadClick operated an affiliatemarketing network, connecting merchant clients to thirdparty publishers/affiliates who advertised the merchant’s products. The affiliates used email marketing, banner ads, searchengine placement and websites they created. LeadClick managed the affiliate network through tracking software, referred to as “HitPath,” that would “track the flow of traffic from each individual affiliate’s marketing website to the merchant’s website while remaining invisible to the consumer.”

LeadClick’s affiliate managers were responsible for scouting and recruiting new affiliates, researching affiliates, and matching affiliates with particular merchant offers. “LeadClick would review and control which affiliates were selected to provide online advertising for each merchant’s offer.”  LeadClick also was a media buyer: it bought space for banner ads from well-known websites, then resold the space, sometimes to affiliate marketers, at a markup.

LeanSpa hired LeadClick in September 2010.  LeanSpa paid a set amount, typically $35 to $45, each time a publisher’s ad led a consumer to LeanSpa’s landing page and that consumer enrolled in LeanSpa’s freetrial program.  LeadClick paid 80-90% of that to the publisher and kept the rest. To track individual consumer actions, LeadClick routed consumers through the HitPath server to the LeanSpa website via publisher-unique links. 

LeadClick became LeanSpa’s primary marketing network, and LeanSpa became LeadClick’s top customer, responsible for about 85% of all eAdvertising division sales, or $22 million in billing.  LeanSpa was chronically behind on its payments to LeadClick, but ultimately paid LeadClick $11.9 million.  Following industry practice, LeadClick paid publishers before getting paid by LeanSpa, and ultimately terminated its business arrangement with LeanSpa.

Some of LeadClick’s affiliates used fake news sites, which “looked like genuine news sites: they had logos styled to look like news sites and included pictures of supposed reporters next to their articles.” Theygenerally represented that a reporter had performed independent tests that demonstrated the efficacy of the weight loss products and included a “consumer comment” section, where fake “consumers” praised the products.  The vast majority of LeadClick traffic to LeanSpa’s websites came from fake news sites.

The evidence showed that LeadClick (1) knew that fake news sites were common in the affiliate marketing industry and that some of its affiliates were using fake news sites, (2) approved of the use of these sites, and, (3) on occasion, provided affiliates with content to use on their fake news pages. For example, one LeadClick employee told an affiliate interested in marketing LeanSpa offers that “News Style landers are totally fine.” Another employee told a potential new client that “[a]ll of our traffic would be through display on fake article pages.” LeadClick’s standard contract with affiliate marketers also required affiliate marketers to submit their proposed marketing pages to LeadClick for approval before they were used. 

LeadClick employees also requested content edits to some fake news sites.  For example, after hearing of a state action against another network for false advertising, a LeadClick employee reached out to an affiliate to “make sure all [his] pages [were] set up good[,] like no crazy [misleading] info.” The affiliate responded that he was removing references to his page being a “news site” and thinking of “removing the reporter pics” from the site to be safe.  The LeadClick employee advised him not to stop using the fake reporter’s picture, but to “just add [the term] advertorial.” Another time, LeadClick employee advised the affiliate to delete references to acai berry on his fake news site and instead use words like “special [ingredient], formula, secret, bla, bla, bla” because “we noticed a huge increase in [actions] with stuff that doesn’t [s]ay acai.”  Providing feedback on another page, another employee stated that the site “looks good except you CANT say anything about a free trial.. [sic] I need that removed,” and noted that “[i]t is much more realistic if you say that someone lost 1012 lbs in 4 weeks rather than saying anything more than that.”

LeadClick also sometimes purchased ad space on genuine news sites for banner ads that would link to the fake news sites promoting LeanSpa’s products as part of its media buying business.  LeadClick sometimes identified fake news sites as destination pages for the banner ads when negotiating with media sellers by emailing the media seller a compressed version of an affiliate’s page or providing the web address for the destination page.

LeadClick argued that it couldn’t be held liable under Section 5(a) of the FTCA because it didn’t create the deceptive content, and the content wasn’t attributable to it.  The court of appeals responded that, “under the FTC Act, a defendant may be held liable for engaging in deceptive practices or acts if, with knowledge of the deception, it either directly participates in a deceptive scheme or has the authority to control the deceptive content at issue.”  This is consistent with the case law in other circuits, which also hold that “a deceptive scheme violating the FTC Act may have more than one perpetrator.”  The rule that a defendant who knows of another’s deceptive practices and has the authority to control those deceptive  acts or practices, but allows the deception to proceed, can be liable is consistent with the longstanding rule that “an omission in certain circumstances may constitute a deceptive or unfair practice.”  (Very nice equivocation on the meaning of “omission,” which in this context usually refers to an omitted statement, not an omitted action.)

Though the FTCA doesn’t expressly provide for aiding and abetting liability, that wasn’t the kind of liability being imposed.  A defendant with knowledge of deception who directly participates or who has the authority to control the deceptive practice, but doesn’t, is itself engaged in an deceptive practice.  

That standard was satisfied here, as the evidence showed. Direct participation was shown by the facts that a LeadClick employee “scouted” fake news websites to recruit potential affiliates for the LeanSpa account; LeadClick employees required alterations to the content of its affiliates’ fake news pages by instructing them to revise their pages to comply with explicit directives from LeanSpa; a LeadClick employee instructed an affiliate to check that his fake news site was not “crazy [misleading]” and advising him not to remove the reporter photograph, but to “just add advertorial”; LeadClick employees advised affiliates on the content to include in their pages to increase consumer traffic (telling an affiliate “[i]t is much more realistic if you say that someone lost 1012 lbs[.] in 4 weeks rather than saying anything more than that”); and LeadClick purchased banner ad space on genuine news sites to resell that space to affiliates running fake news pages to “generat[e] quality traffic in very lucrative placements.”

Likewise, LeadClick had the authority to control the deceptive practices of affiliates that joined its network, but didn’t.  Ultimately, “[a]s the manager of the affiliate network, LeadClick had a responsibility to ensure that the advertisements produced by its affiliate network were not deceptive or misleading. By failing to do so and allowing the use of fake news sites on its network, despite its knowledge of the deception, LeadClick engaged in a deceptive practice for which it may be held directly liable under the FTC Act.”  Moreover, LeadClick was directly liable “regardless of whether it intended to deceive consumers ‐‐ it is enough that it orchestrated a scheme that was likely to mislead reasonable consumers.” 

What about the CDA? Under §230, a provider of an interactive computer service won’t be held responsible “unless it assisted in the development of what made the content unlawful.”  See FTC v. Accusearch Inc., 570 F.3d 1187 (10th Cir. 2009).  The court here doubted whether LeadClick was even an interactive service provider, because it didn’t provide “computer access in the sense of an internet service provider, website exchange system, online message board, or search engine.”  Its routing of consumers from its affiliates’ webpages to LeanSpa’s websites via the HitPath server “was wholly unrelated to its potential liability under the statute”—that is, none of the acts for which it was being held liable depended on the fact that it provided that routing, which was just done to keep track of who it was supposed to pay.  If it had contracted out that function, it would still have been the actor responsible for all the acts the court previously deemed to justify direct liability.

More disturbingly, the court reasoned that this “service”—access to the HitPath server—wasn’t the kind of activity Congress intended to protect in granting immunity, because the routing “was invisible to consumers and did not benefit them in any way. Its purpose was not to encourage discourse but to keep track of the business referred from its affiliate network.”

But none of this matters, because LeadClick was an information content provider with respect to the content at issue. It participated in the development of the deceptive content: it recruited affiliates for the LeanSpa account that used false news sites; it paid those affiliates to advertise LeanSpa products online, knowing that false news sites were common in the industry (if this is participation, §230 protection is a dead letter); it occasionally advised affiliates to edit content on affiliate pages to avoid being “crazy [misleading],” and to make a report of alleged weight loss appear more “realistic”; and it bought ad space from legitimate news sites, “thereby increasing the likelihood that a consumer would be deceived” by the fake news sites.  LeanClick’s managerial role “far exceeded that of neutral assistance.”

Further, LeadClick wasn’t being held liable as a publisher or speaker of another’s content, but for its own deceptive acts or practices.  This is a version of the agency argument I’ve made before, I think, but it means we have to be very careful about when failure to act (omission) counts as a deceptive act or practice. Here, the court reiterated that LeadClick’s own conduct was “providing edits to affiliate webpages, … purchasing media space on real news sites with the intent to resell that space to its affiliates using fake news sites, and [having] the authority to control those affiliates and allow[ing] them to publish deceptive statements.”  I imagine Eric Goldman will be none too pleased, but it does seem significant that the editing suggested was to increase deceptiveness, not just to increase the attractiveness of the content.

Finally, relief defendant liability: In 2005, CoreLogic’s predecessor bought LeadClick (as an indirect owner through its wholly owned subsidiary CLUSI). In 2010, LeadClick became a direct subsidiary of CoreLogic, and a sister company to CLUSI.  During the restructuring, CoreLogic transitioned LeadClick and six of its sister subsidiaries into a “shared services system” to streamline and enhance back office functions across the subsidiaries. Shared services programs allow related entities to consolidate some or all of their backoffice functions, such as accounting, legal and compliance, human resources, and information technology, into a single office.

When LeadClick accrued a payable expense, CoreLogic would make the payment directly on its behalf, and track the payment as an advance to LeadClick. Both LeadClick and CoreLogic intended that LeadClick would later reimburse CoreLogic for those advances, and ultimately LeadClick repaid a total of $8.2 million of its advance balance to CoreLogic.  Half of this amount was repaid in a single cash transfer of $4.1 million in August 2011, the month before LeadClick ceased business.  The district court treated that transfer as gratuitous and held CoreLogic liable as a relief defendant.

The court of appeals found that CoreLogic was not an appropriate relief defendant because CoreLogic had a legitimate claim to repayment of its prior advances to LeadClick.  A relief defendant needs a legitimate claim, which can be based on an outstanding loan, but not on a gratuitious transfer.  Though CoreLogic lacked a formal loan agreement, the transfer of $4.1 million was  the repayment of an outstanding intercompany loan, implemented as part of its shared services agreement under which CoreLogic had previously paid LeadClick’s accounts payable. Shared services agreements generally don’t involve formal debtor-creditor relationships, since such documentation “is incompatible with the very purpose of shared services: streamlining operations and increasing efficiency by reducing excess paperwork.” Because the companies were consolidated under general accounting principles for public companies, an interest charge would be inappropriate. “Under these circumstances, the lack of a formal loan agreement does not create suspicion that the transactions were a sham.”

43(a) question of the day

Actors who played doctors on TV evoke their roles for Cigna ad:  any false endorsement implications for Cigna? Tagline: “They’ve saved lives on TV, but now they’re helping save lives for real by teaming up with Cigna to encourage America to get an annual check-up. Get ready to go, know and take control of your health with the TV Doctors of America.”

Thursday, September 22, 2016

Advertising question of the day

Does the following pose any advertising issues?  Does it matter whether the business sells non-organic food?
Thanks to James Grimmelmann for the photo.

"unique" and "innovative" are puffery

LoggerHead Tools, LLC v. Sears Holdings Corp., 2016 WL 5080028, No. 12-cv-9033 (N.D. Ill. Sept. 20, 2016)

LoggerHead sued Sears under the Lanham Act and Illinois state law for false advertising; the court granted summary judgment to Sears.  LoggerHead sells a hand tool, the Bionic Wrench, which Sears sold from 2009.  In 2012, Sears sought a Bionic Wrench replacement to be sold under the Sears Craftsman brand and sent LoggerHead’s patent to a patent lawyer, who identified another patented tool that could be used as a model for a replacement wrench and that (he opined) would not infringe.  In late 2012, Sears began retailing the Max Axess Locking Wrench (MALW).

In DTC ads for the MALW, Sears stated: “[i]f you want maximum versatility in a single wrench, then you’ll love the latest innovation from Craftsman, the Max Axess Locking Wrench.” The product packaging for the MALW shows a picture of the wrench, the term “Unique Design,” and, underneath that, the phrase “Adapts to a wide range of fastener sizes and grips fasteners on all sides to prevent rounding.” The packaging also contains a dotted line going from the writing to the picture of the wrench.  Sears issued a press release with similar claims.
Craftsman package
LoggerHead argued that, taken in context, these features were literally false: (1) the “Unique Design” statement, (2) “Adapts to a wide range of fastener sizes and grips fasteners on all sides to prevent rounding” statement, (3) the illustration of the MALW and (4) the white line connecting them.  First, because the MALW copied its design from the Bionic Wrench, it wasn’t unique. Second, the “unique” claim was connected to the claim, “Adapts to a wide range of fastener sizes and grips fasteners on all sides to prevent rounding,” also false as a uniqueness claim, as was the connection between the “unique” claim and the image of the MALW’s tool head.

The court found no literal falsity in the uniqueness claim “given that there are admitted differences between the MALW and the Bionic Wrench.”  Plus, “unique” has previously been deemed puffery.  Although “unique design” might not be literally false, it could be misleading, but LoggerHead didn’t provide any consumer perception evidence.

What about “latest innovation from Craftsman” in the ads?  Sears argued that this couldn’t be false advertising because of Dastar, but the Supreme Court did not “hold that a false claim of origin is the only way to violate [the Lanham Act].” Gensler v. Strabala, 764 F.3d 735, 736 (7th Cir. 2014). Still, this statement wasn’t literally false, since it didn’t say what the innovation was, and courts have also found “innovative” to be puffery.

As for the press release, LoggerHead argued that it falsely stated: “Despite some visual similarities to other tools on the market, Craftsman Max Axess Locking Wrench operates in a different way, using a mechanism design[ed] in the 1950s.” LoggerHead claimed literal falsity because the MALW uses a mechanism designed by LoggerHead, and also alleged that the press release falsely implied that the MALW is made in America, when it is made in China.

Sears argued that the press release wasn’t commercial advertising or promotion.  The court thought that the press release had characteristics of commercial speech (product references, economic motivation for the speech) despite not being in a traditional ad format, but there was no evidence that the press release was sufficiently disseminated to the relevant purchasing public, even though it was posted on Sears’ website.

As for falsity, the press release didn’t say that the MALW was made in America and LoggerHead didn’t explain why the release was misleading on that point. The phrase “operates in a different way” was subjective and not literally false, since the MALW concededly contains some features that the Bionic Wrench does not, such as a locking mechanism. 

Wednesday, September 21, 2016

How does race affect copyrightable expression?

Fulks v. Knowles-Carter, No. 16-Civ-4278 (S.D.N.Y. Sept. 12, 2016), contains an interesting bit about race and copyrightable expression:

[P]laintiff argues that the “race of the characters in the [Film] is irrelevant to the total concept and feel of a film about relationships.” Plaintiff would be correct if the Film were just about relationships. But it is not, and plaintiff’s say-so does not overwhelm the plain meaning of the work. The Film depicts the protagonist’s journey from a particular perspective: that of an African-American woman in a predominantly African-American community. The Film repeatedly references and dramatizes generations of African-American women, and in the background of one scene, the observer hears an excerpt from a speech by Malcolm X to the effect that the Black woman is the most “neglected” person in America. This all takes place against what defendants accurately characterize as a “Southern Gothic feel.” The settings transition between areas of New Orleans, the abandoned Fort Macomb, and an Antebellum plantation. These significant differences in characters, mood, and setting further distinguish the total concept and feel in the Film from that in Palinoia.

In an opinion that goes from Voltaire to Taylor Swift to Oscar Wilde to Andy Warhol (that last one is just showing off), the court rejects the claim of substantial similarity between plaintiff’s 7-minute film about the aftermath of a relationship and Beyoncé’s Lemonade film and trailer.  Here, enjoy some more references from the opinion:

Plaintiff also argues that because the works all “portray a struggle of a relationship; the reasons for such struggle are unclear and irrelevant.” This is like saying that Casablanca, Sleepless in Seattle, and Ghostbusters are substantially similar despite the different motivating forces behind the struggles there portrayed (Nazis, capitalism, and ghosts, respectively). But “all fictional plots, when abstracted to a sufficient level of generalization, can be described as similar to other plots,” and that is why the differences do in fact matter. 

Tuesday, September 20, 2016

Packaging trade dress needs specific design, not just color, to be inherently distinctive

Forney Industries, Inc. v. Daco of Missouri, Inc., --- F.3d ----, 2016 WL 4501941 (10th Cir.. Aug. 29, 2016)

Forney makes retail metalworking parts and accessories and claimed a protected trade dress in the coloration of its packaging, described as:

a combination and arrangement of colors defined by a red into yellow background with a black banner/header that includes white letters. More specifically, the Forney Color Mark includes red and yellow as the dominate [sic] background colors. Red typically starts at the bottom of the packaging, continues up the packaging and may form borders. Red may also be used in accents including but not limited to lettering. Yellow typically begins higher than the red and continues up the packaging. Yellow may also provide borders and be used in accents including but not limited to lettering. A black banner is positioned toward the top of the package label or backer card. Black may also be used in accents including but not limited to lettering. White is used in lettering and accents.

Here are five pictures of its packaging over the years, reproduced below with Forney’s caption for each:
Four Forney designs

one more Forney design

Forney alleged infringement by Daco, as shown here:
Allegedly infringing packages side by side with Forney
The court of appeals affirmed, holding that “Forney’s use of color, which was not associated with any particular shape, pattern, or design, was not adequately defined to be inherently distinctive,” and Forney failed to show secondary meaning.

The court noted that courts have generally struggled to find a test for inherent distinctiveness of non-word marks, given that Abercrombie doesn’t translate very well.  “[I]t may be useful to supplement that test with the test first introduced in Seabrook Foods, Inc. v. Bar–Well Foods Ltd., 568 F.2d 1342, 1344 (C.C.P.A. 1977)”: (1) “whether it was a ‘common’ basic shape or design,” (2) “whether it was unique or unusual in a particular field,” and (3) “whether it was a mere refinement of a commonly-adopted and well-known form of ornamentation for a particular class of goods viewed by the public as a dress or ornamentation for the goods.”  But the Supreme Court has never adopted a test; Taco Cabana explicitly noted that the question of whether the restaurant trade dress there was inherently distinctive was not before the Court. 

We do know that color alone and product design can’t ever be inherently distinctive, and Wal-Mart’s other statements about avoiding strike suits and preserving competition are instructive about “the need for clear rules about what can be inherently distinctive.”  Seabrook, the Court specifically noted, “would rarely provide the basis for summary disposition of an anticompetitive strike suit.”  The Court also pointed to the availability of copyright and design patent as a reason not to worry too much about protecting design, and told lower courts to err on the side of classifying ambiguities as product design, thus requiring secondary meaning.

Based on these considerations, the court of appeals here ruled that “the use of color in product packaging can be inherently distinctive (so that it is unnecessary to show secondary meaning) only if specific colors are used in combination with a well-defined shape, pattern, or other distinctive design.”  This rule is consistent with the case law; cases involving a color scheme or palette “in isolation” have turned on secondary meaning. E.g., Board of Supervisors for Louisiana State University Agricultural and Mechanical. College. v. Smack Apparel Co., 550 F.3d 465 (5th Cir. 2008).  McCarthy agrees: “whether color is confined to a defined design can determine whether inherent distinctiveness is a possible alternative to proving secondary meaning.”

Here, Forney was out of luck.  It didn’t sufficiently articulate the protectable elements of its claimed mark.  This is especially important for product lines where the features aren’t identical across products.  A “vaguely defined” trade dress shouldn’t be protected.  Such a trade dress would complicate litigation; “courts will be unable to evaluate how unique and unexpected the design elements are in the relevant market.” Moreover, if descriptions are vague, “jurors viewing the same line of products may conceive the trade dress in terms of different elements and features, so that the verdict may be based on inconsistent findings.” Nor would courts be able to shape narrowly-tailored relief without a clear definition.  Perhaps most important, if courts can’t identify infringing designs, competitors certainly wouldn’t be able to know what might draw a lawsuit.

Regardless, Forney’s description did not comport with the court’s requirement that the color scheme be used in combination with a well-defined shape, pattern, or other distinctive design. Forney used words like “typically” and “may” in its description, and that wasn’t due to lack of proper drafting by counsel. “It is probably the best that one could do, given the variety of packaging that Forney has used on its products over the years.”  Without a consistent shape, pattern, or design, “[p]articularly in light of the Supreme Court’s instruction to be cautious about applying vague, litigation-friendly tests for inherent distinctiveness, we conclude that Forney has failed to establish an inherently distinctive trade dress.”

Forney also didn’t have sufficient evidence of secondary meaning.  Its extensive promotional and advertising efforts weren’t probative because “advertising alone is typically unhelpful to prove secondary meaning when it is not directed at highlighting the trade dress.” Here the district court found that Forney’s advertising “utterly fails to mention the Color Mark, or to emphasize it in any fashion.”  Sales data were similarly unhelpful.  Testimony about exclusive use for twenty years also wasn’t enough to survive summary judgment, even though extensive exclusive use could support a finding of secondary meaning.  First, the testimony was conclusory, and didn’t even claim uniqueness, just that Forney’s products using the claimed mark “were uncontested, extensive and exclusive for 20 years.” Forney also submitted pictures of four packages from its “primary” competitors that use different colors.  But defendants submitted several pictures showing product packages in the retail-metalworking sector that bear a close resemblance to Forney’s product packaging.

More importantly, there wasn’t continuous exclusive use of a definable trade dress. Forney’s packaging changed significantly over 20 years. “How then is a consumer supposed to have come to associate the packaging with Forney?”

Using photos of competitor's product confers statutory Lanham Act standing on competitor

Joseph Paul Corp. v. Trademark Custom Homes, Inc., 2016 WL 4944370, No. 3:16-CV-1651 (N.D. Tex. Sept. 16, 2016)

JP Homes sued Trademark, its principal, and homeowners for alleged violations of the Lanham Act and copyright infringement.  JP Homes alleged that it designs and builds custom homes, and that defendants copied and improperly appropriated original elements of JP Homes’s copyrighted work in one such home design, The Martinique. Further, Trademark allegedly used photos of a house designed by JP Homes in advertising its own products. JP Homes sought to halt the construction of the homeowners’ in-progress house and have it torn down or modified sufficiently so as not to infringe.

The court first rejected defendants’ arguments that the court lacked jurisdiction/JP Homes lacked standing. The court determined that this was a statutory standing question, not an Article III question, and thus governed by Lexmark under Rule 12(b)(6). Although JP Homes alleged that it was in the Lanham Act’s zone of interests, Trademark argued that JP Homes failed to plead facts showing injury or proximate causation, and that its allegations were merely speculative. The court disagreed.  JP Homes alleged that Trademark wrongly received recognition as a good builder because of its copying; that the parties competed in the same area; and that the statements were likely to materially mislead consumers.  This was a classic false advertising claim, and the allegations that JP Homes suffered competitive or reputational injury as a result of Trademark’s conduct were not too remote. 

Further, while JP Homes didn’t specify an amount of actual loss, that wasn’t required. Lexmark says that “potential difficulty in ascertaining and apportioning damages is independent basis for denying standing where it is adequately alleged that a defendant’s conduct has proximately injured an interest of the plaintiff’s that the statute protects.” JP Homes might be entitled to injunctive relief or disgorgement of defendant’s profits even if it couldn’t quantify its losses with enough certainty to get damages.  

Turning to JP Homes’ motion for TRO/Preliminary Injunction, the court found that JP Homes failed to show irreparable injury.  JP Homes argued that likely success on a copyright claim raised a presumption of irreparable harm, but the Fifth Circuit never adopted that rule.  (No discussion of eBay v. MercExchange.)  JP Homes also argued that continuing infringement/construction of the house exposed it to the permanent loss of customers or lost goodwill. But JP Homes provided no evidence of this, only conclusory assertions.  JP Homes also didn’t explain why its damages would be unquantifiable or why money wouldn’t be adequate compensation.  JP Homes requested actual damages or statutory damages in its complaint, suggesting that it could develop a basis for a damage award.  (Careful about pleading in the alternative when it comes to irreparable harm.)

Reiterating its claims as arguments about damage to JP Homes’ “competitive position and brand” was unhelpful.  JP Homes didn’t allege wholesale copying of many of its key designs, but copying of a single work that wasn’t even identical copying.  Claims that harm to JP Homes in the community where that house was being built would spread elsewhere were “purely speculative.”  “While courts are willing to entertain a loss of customers or goodwill as a harm, the movant must come forward with evidence that such an injury is irreparable by showing that the loss cannot be measured in money damages and monetary damages would be inadequate.”

Arguments that JP Homes would be harmed if Trademark builds its designs at a lower price and quality, and that JP Homes’ reputation for uniqueness would be damaged because potential customers would see its designs as “common or run-of-the-mill” also failed. First, there was no evidencce that Trademark’s building was lower-quality.  Also, the alleged use of one design wasn’t enough to interfere with JP Homes’ “ability to market its designs and building services to potential customers for other architectural plans.”  Moreover, its claims that Trademark’s failure to attribute the design would cause JP Homes to lose business contradicted its argument that JP Homes would lose customers if people found out that Trademark was building a lower-quality version of the Martinique.

Finally, JP Homes’ delay in seeking relief weighed against an injunction.  As early as December 2015, an employee of JP Homes learned that the homeowners were not going to move forward with JP Homes building their home and had visited a real estate agent who refers customers to builders that often use architectural plans created by others.  She allegedly warned them (through their new real estate agent) to refrain from using any part of the architectural plan created by JP Homes. The agent allegedly responded by asking what percentage of the plan designed by JP Homes would have to be changed to not be considered the same plan. Nonetheless, JP Homes waited until June 2016 before filing suit and seeking injunctive relief, after construction on the McWhorters’ house was well underway.  Meanwhile, JP Homes submitted its registration materials for the Martinique to the Copyright Office, and threatened to take legal action in April 2016.  JP Homes’ “unexplained and undue delay of approximately six months strongly undercuts its claim of irreparable harm and contention regarding the need for urgent relief.”

Monday, September 19, 2016

Celebrity spokesperson isn't directly liable under California consumer protection law

Luman v. Theismann, 647 Fed.Appx. 804 (9th Cir. 2016)

Plaintiffs sued NAC Marketing Company and Joe Theismann for their advertising statements about NAC’s Super Beta Prostate product, bringing warranty claims as well as the usual California statutory claims.  Because one plaintiff’s individual claim for monetary relief was unpaid when he joined the lawsuit, he satisfied the injury in fact requirement and had standing to sue under Campbell–Ewald Co. v. Gomez, –––U.S. ––––, 136 S.Ct. 663 (2016). This portion of the case was remanded for further proceedings, though plaintiffs lacked standing to pursue injunctive relief because they didn’t allege any intent to purchase the product in the future and couldn’t show a likelihood of future injury.

As for Theismann, he was “merely the celebrity spokesperson for NAC and not the seller of SBP,” the district court properly dismissed the claims against him, given the California Commercial Code’s definition of a seller as “a person who sells or contracts to sell goods” and a sale as “the passing of title from the seller to the buyer for a price”; Theismann never had or passed title to the product.

Query whether secondary liability could be appropriate in the right circumstances. What level of fault would be appropriate for a celebrity spokesperson?

No duty to disclose child labor production in California, court rules

Hodsdon v. Mars, Inc., 162 F.Supp.3d 1016  (N.D. Cal. 2016)

Mars sells chocolate, some of which comes from cocoa beans from Côte d’Ivoire, where trafficked children and forced laborers “wield dangerous tools, transport heavy loads, and face exposure to toxic substances….The working conditions on the farms are deplorable. Laborers often do not receive pay, sleep in locked quarters, and fear corporal punishment.”  Despite an agreement with other chocolate manufacturers in 2001, Mars and other signatories haven’t been able to implement certification procedures to eradicate the worst forms of child labor on cocoa farms. “According to the most recent reports, the number of children working on cocoa farms has increased since 2005. As of 2014, ‘[o]nly 36% of [Mars’s] cocoa was certified.’”

Most of Mars’ chocolate products don’t say anything about the supply chain, though the label for Dove chocolates says, “We buy cocoa from Rainforest Alliance Certified farms, traceable from the farms into our factory.” Hodsdon alleged that he “would not have purchased” or “paid as much for” Mars chocolate products had the labels included information about the labor practices of Mars’s cocoa suppliers.

The court found that these allegations properly alleged standing by alleging actual reliance and economic injury.  Hodsdon didn’t need to allege that he bought chocolate containing cocoa beans harvested by children or forced laborers; his alleged economic injury was sufficient.  Nor did he need to trace any of Mars’s chocolate to particular farms that use the objectionable labor practices.  His allegations clearly permitted the inference that he relied on the nondisclosure when buying.  “Hodsdon ties his harm to the lack of certainty about the source of the cocoa beans, not to consumption of cocoa products actually harvested by child and forced laborers. In so doing, he has established injury in fact.”

But do California’s consumer protection laws cover omissions?  The FAL bans “mak[ing] or disseminat[ing]...any statement...which is untrue or misleading, and which is known, or by the exercise of reasonable care should be known, to be untrue or misleading...” “with intent directly or indirectly to dispose of real or personal property.” Courts are divided on whether omissions can violate the FAL, but the court here held that the decisions could be harmonized by looking at whether the defendant made any statement at all about a subject; if it does, then it is responsible for material omissions made about that subject that render the affirmative statements misleading.  If it stays mum, however, there is no FAL liability.  That was the case here.

How about the CLRA and the UCL?  The CLRA bans “unfair methods of competition and unfair or deceptive acts or practices undertaken by any person in a transaction intended to result or which results in the sale or lease of goods or services to any consumer,” and prohibits conduct “likely to mislead a reasonable consumer,” The UCL prohibits “unfair competition” defined as “any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue, or misleading advertising.” In order to prevail, Hodsdon needed to show that Mars had a duty to disclose the information.  Mars argued that there was no duty to dislose information unrelated to a safety issue or product defect. Hodsdon argued that such a duty arises when “the defendant had exclusive knowledge of material facts not known to the plaintiff.”

“California courts have generally rejected a broad obligation to disclose,” except for omissions that are “‘contrary to a representation actually made by the defendant, or...omission[s] of a fact the defendant was obligated to disclose.’” The California Court of Appeal has held that a defendant did not have a duty to disclose product defects that did not pose any risk of physical injury or safety concerns.  Another case said the duty to disclose exists when “(1) when the defendant is in a fiduciary relationship with the plaintiff; (2) when the defendant had exclusive knowledge of material facts not known to the plaintiff; (3) when the defendant actively conceals a material fact from the plaintiff; and (4) when the defendant makes partial representations but also suppresses some material fact.”  However, the overwhelming authority limited the duty to disclose in situation (2) to product design/safety issues.  As the court pointed out, “[t]he definition of a material omission has stunning breadth, and could leave manufacturers (chocolate or otherwise) little guidance about what information, if any, it must disclose to avoid CLRA or UCL liability.”  This took care of the UCL “unlawful” and “fraudulent” claims.

As for “unfair,” the definition of this under the UCL is in flux.  Many courts have found a business practice “unfair” when it “offends an established public policy or when the practice is immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers.” This approach requires courts to “examine the practice’s ‘impact on its alleged victim, balanced against the reasons, justifications and motives of the alleged wrongdoer.’ ” But this may well be too amorphous; the public policy test requires that the UCL claim be tethered to some specific constitutional, statutory, or regulatory provisions.”

The court found that Hodsdon couldn’t show that the failure to disclose was immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers. Information about Mars’ labor policies and supply chain is “readily available to consumers on Mars’s website,” so the absence of information on the packaging is not immoral even though the underlying labor practices are.  A broader formulation, which defendants are likely to quote: “Mars’s failure to disclose information it had no duty to disclose in the first place is not substantially injurious, immoral, or unethical.”  Likewise, Hodsdon’s alleged harm wasn’t tethered to any “specific constitutional, statutory, or regulatory provisions.”

Mars also argued that it was entitled to a safe harbor under the Supply Chains Act, Cal. Civ. Code § 1714.43. “To forestall an action under the unfair competition law, another provision must actually ‘bar’ the action or clearly permit the conduct.”  The court was dubious.  That law requires retailers and manufacturers that earn more than $1,000,000 in gross receipts to disclose their “efforts to eradicate slavery and human trafficking from [their] direct supply chain for tangible goods offered for sale.”  They must post on their website’s homepage “a conspicuous and easily understood link to the required information,” or provide “written disclosure within 30 days of receiving a written request for the disclosure from a consumer.”

First, the SCA was about and human trafficking, not child labor. “While the distinction between child labor and forced labor may be thin, the safe harbor doctrine cautions against creating safe harbors in the absence of ‘specific legislation.’” Plus, the court wasn’t convinced that the legislature “considered a situation and concluded no action should lie.” Here, legislative history was silent about whether the legislature considered disclosures on labels. Plus, if the court accepted the safe harbor reasoning, then big businesses would be exempt from a disclosure requirement that smaller businesses not subject to the SCA would have, which would be “anomalous.”

Ebony Elizabeth Thomas & Amy Stornaiuolo, Restorying the Self: Bending Toward Textual Justice, 86 Harv. Educ. Rev. 313 (2016)

Monday, September 12, 2016

Taking advantage of known consumer ignorance is deliberately false, 2d Circuit rules

Church & Dwight Co. v. SPD Swiss Precision Diagnostics, GMBH, No. 15-2411, 2016 WL 4708179, -- F.3d. – (2d Cir. Sept. 9, 2016)

Judge Leval deems this “an exceptionally well argued case,” noting the same thing I did: Paul Clement for plaintiff Church & Dwight, Seth Waxman for defendant SPD. (As someone else said, I guess that relative dearth of SCt cases is really wearing on them.) I previously discussed the district court decision finding SPD’s over-the-counter pregnancy test to be falsely advertised here. This decision happened fast, for the 2d Circuit—it was argued a few months ago.

SPD’s Clearblue Advanced Pregnancy Test with Weeks Estimator is the first OTC pregnancy test to also furnish information as to how long (how many weeks) a woman has been pregnant, which it does by measuring the amount of hCG in her urine.  But SPD used the number of weeks since ovulation, and for reasons both historical and practical the medical profession universally measures weeks since last menstrual period, not since ovulation—a two-week difference.  They do this even when IVF is the implantation method and when ultrasound is used to measure pregnancy duration.  The parties agreed that “when the Defendant’s Product and the woman’s doctor are in complete agreement in estimating how long the woman has been pregnant, the Product would announce a number of weeks that is about two weeks lower than what the doctor would say.”  The basic falsity claim is that Clearblue falsely communicated that it used the same metric and gives the same number of weeks of pregnancy as a medical professional would.

Home pregnancy tests are Class II medical devices subject to the requirements of § 510(k) of the FDCA.  This requires premarket notification to the FDA in order for the FDA to determine whether the device is “substantially equivalent” to an existing authorized device.  The FDA may, notwithstanding a substantial equivalence determination, require changes to the product’s labeling or promotional materials designed to discourage potential off-label use of the product that might cause harm to consumers.

The FDA initially issued a “hold letter” in August 2012, expressing a concern that the “weeks indicator feature may provide misleading information to lay population of users” because it would under-estimate gestational age by an average of 2 weeks, which users might misinterpret. The hold letter required SPD to remove the phrase “Also Tells you How Far Along you Are” from the proposed box.  Ultimately, the FDA issued a clearance letter in December 2012, but required SPD, among other things, to include a specific “conversion chart” explaining how a doctor would date the pregnancy compared to the product’s results, using language provided by the FDA. It also specified that the product’s results could not be expressed as “weeks pregnant,” but only as the number of weeks since ovulation.  In addition, the FDA required an additional statement that “[t]his test provides a different estimate that cannot be substituted for a doctor’s determination of gestational age.”  Finally, the clearance letter said that the “FDA’s issuance of a substantial equivalence determination does not mean that FDA has made a determination that your device complies with other requirements of the [FDCA] or any Federal statutes and regulations administered by other Federal agencies.” FDA approval is required to modify or remove anything on the package.
Original package

side panel

When the product was launched, it used its name—Clearblue Advanced Pregnancy Test with Weeks Estimator—in large font, along with four windows, designed to appear similar to the window that appeared on the product itself. One window showed the word “Pregnant” on the first line and “1-2 weeks” on the second; and so on.  The front and back of the package didn’t use the word “ovulation,” though one side panel had the full FDA-required language.  The initial TV ad had the dialogue:

Woman 1: I’m pregnant.
Woman 2: Really?
Woman 1: Two weeks.
Woman 2: You already went to the doctor?
Woman 1: Not yet, but I took this new Clearblue test. It’s like two tests in one.
Woman 2: Oh my God, I think I’m going to cry!

SPD’s website and other advertising was similar.  After C&D complained to the FDA, the FDA told SPD that it was marketing the product in violation of the limits imposed by the clearance letter.  The FDA told SPD to remove the word “weeks” from the product windows and replace it with “weeks along” outside the windows.
revised package
The revised package included a gray strip in the top right corner with the phrase “Only Test That Estimates Weeks Since Ovulation*”. The asterisk linked to the Indications for Use Statement on the side panel. SPD complied with the FDA’s instructions about the windows.  SPD pulled the TV commercial, but revised the ad for the internet to remove the discussion of a doctor and Woman 1’s declaration of how far along she was. SPD also modified its website accordingly.

On appeal, SPD argued FDCA preclusion, because its marketing materials had been reviewed and approved through the § 510(k) process. Pom Wonderful was to the contrary.  The court of appeals noted that the Pom Wonderful court rejected the government’s position as amicus that Lanham Act claims are not precluded by the mere fact that the FDCA covers a product generally, but are precluded in situations when the FDCA or the FDA, through its regulations, have “specifically require[d] or authorize[d]” a challenged aspect of a label.  Instead, the Court “rejected the proposition that the FDCA’s or FDA’s regulation of a label creates a ‘ceiling’ that precludes any further challenges to that label under other statutes.”  Such a result would “distort Congress’s intent to allow the Lanham Act and the FDCA to exist in tandem to serve the distinct interests each statute protects.”  Competitors have market expertise the FDA lacks.  And, as the court of appeals pointed out, the FDA explicitly warned SPD in its clearance letter that its approval didn’t constitute a determination of full compliance with the FDCA or other federal laws.

SPD relied on PLIVA, Inc. v. Mensing, 564 U.S. 604 (2011), which found preemption of consumer lawsuits against generic drug manufacturers under state tort laws based on failure to warn, since FDA regulations require generic drug labels to be the same as their brand-name equivalents. The Court found conflict preemption even though the defendants could have requested permission from the FDA to change their labels so as to comply with the state laws.  It’s true that SPD will have to get the FDA’s permission to change its label, but this isn’t a preemption case, and preclusion involves different interests. “The uniformity concerns that drive preemption doctrine are not necessarily applicable when two federal statutes overlap.”

On to falsity. The district court found both falsity by necessary implication and implicit falsity. Although none of the materials expressly equated the product’s results with a doctor’s metric, in context, they unambiguously implied that false message.  (In other words, when there’s a standard definition of a term, you can’t avoid liability by redefining the word, whether that’s in mouseprint or by using terms that consumers won’t understand are modifying the usual meaning.  Here, it’s a bit unusual because consumers have no reason to think about the usual definition of pregnancy duration, and the usual definition is weird—you start out 2 weeks pregnant.  But there are lots of things we don’t know the details of—how MPG is calculated, for example—and just rely on the existence of a standard for.)

SPD argued that its materials were “susceptible to more than one reasonable interpretation” and thus not unambiguous. It claimed that a reasonable ordinary person in the market for a home pregnancy test could understand the claim to measure “weeks” as weeks-since-ovulation/fertilization “without forming a belief about whether that measure is the same or different from the convention used by doctors.”  (Because they wouldn’t know they needed to!)  The court of appeals was unpersuaded:

The issue is whether Defendant’s measurement of weeks would be understood by reasonable consumers to measure by a different metric than used by the medical profession. If an advertising message means something different from what reasonable consumers would understand it to mean, that message can be considered false.…The crucial point is that a reasonable consumer would have assumed from the text of the Launch Package, TV Commercial, and other associated advertising that the Product was not giving a different number than a medical professional would give.

The court of appeals pointed out that the package didn’t “indicate in any visible or clear way that the Product provides a different measurement from a doctor’s.”  The only mention of ovulation and of the difference in dating conventions was in the Indications for Use Statement on the side of the box, and the district court properly found that this “was too wordy and ‘minuscule’ to render ambiguous the Launch Package’s message that the Product provides an estimate of weeks-pregnant that is consistent with the measurement provided by doctors.”  So too with the other advertising.

Regardless, the district court also correctly found implied falsity, given actual evidence of consumer confusion and evidence of SPD’s intent to deceive.  SPD “recognized and understood that the Weeks Estimator’s result did not align with how doctors express pregnancy duration and that this misalignment could confuse consumers,” as extensively detailed by the record. 

Notably, the court of appeals singled out statements by Clearblue’s Brand Manager that, the district court found, indicated a deliberate attempt to evade FDA limits and convey a false message.  As the FTC says, don’t be cute.  When discussing promotional materials for CVS, the brand manager stated that “we can’t actually link together the weeks and pregnant in the way it was on the last couple. What you can say is the only test that estimates weeks, or the only test that also estimates weeks, then the consumer will see Pregnant 1-2 Weeks in the windows and put it together.” In another email, in response to a suggestion that an advertisement say “Find out how far along you are,” she wrote, “This is a tricky one, but the FDA doesn’t actually want us to say that. I think it can be phrased as a question ..., or we need to use the ‘estimate weeks’ language.”

This evidence of deceptive intent was sufficient to support a presumption of consumer confusion supporting a finding of implied falsity.

The revised package was still subject to the implied falsity finding, based on a consumer survey that tested the revised package and found that “16.0% or 17.3% of participants... answered both that the [P]roduct estimates the number of weeks a woman is pregnant and that the [P]roduct’s estimate of weeks is the same as a doctor’s estimate of weeks-pregnant.”  SPD’s best argument was that the survey was flawed because the survey didn’t test whether these beliefs came from respondents’ preexisting erroneous beliefs about the way pregnancy is measured.

But the truckload of evidence that SPD was “aware of this widespread consumer ignorance and took no effective steps to guard against misunderstanding of Defendant’s messages attributable to that ignorance” meant that it wasn’t error to rely on the survey.  Given such ignorance, SPD’s own messaging was deceptive insofar as it did nothing to tell consumers that what it measuredwas a different measurement from that used by doctors. “It makes no difference whether the widespread consumer ignorance predated the Defendant’s Revised Package or was caused by it.”  The revised package implied that medical professionals would measure pregnancy the same way.

Materiality: I thought the Second Circuit was well-settled that its “inherent quality or characteristic” language was just materiality, but SPD argued that the district court found only the former. Accepting that the issue was somewhat unsettled, the court of appeals found that, even if it required an additional showing that deception was “likely to influence [consumer] purchasing decisions,” the district court’s findings of likely harm to C&D satisfied that requirement.  “While the materiality of the falsity and the likelihood of injury to the plaintiff resulting from the defendant’s falsity are separate essential elements, in many cases the evidence and the findings by the court that a plaintiff has been injured or is likely to suffer injury will satisfy the materiality standard—especially where the defendant and plaintiff are competitors in the same market and the falsity of the defendant’s advertising is likely to lead consumers to prefer the defendant’s product over the plaintiff’s.”

Here, the district court expressly found that C&D lost sales from SPD’s false advertising.  “If consumers, faced with the choice to purchase either the plaintiff’s product or the defendant’s, are likely to prefer the defendant’s product by reason of the defendant’s false advertising, the falsity of the defendant’s advertising is material to the plaintiff’s Lanham Act claim.”  [Query: how does this square with puffery doctrine? Can you show that a statement isn’t puffery by showing that it’s material?]

The court of appeals found it “entirely reasonable to expect that, for a significant number of women interested in learning whether they are pregnant—especially those who have not previously been pregnant or are otherwise ignorant of the details of the reproductive cycle—the information that Defendant’s Product will tell them something different from what a doctor would provide would make them less likely to trust Defendant’s Product, and more likely to purchase from Plaintiff, Defendant’s closest competitor.” Indeed, the evidence indicated that this was “precisely the risk that motivated Defendant to avoid making clear to consumers that its Weeks Estimator gave information different from what a doctor would give.”

SPD argued that C&D’s lost market share wasn’t due to falsity, but rather to the important new feature SPD introduced into the market.  Even if that was somewhat true, though, the evidence that concealing the truth improved SPD’s market share was sufficient; the court hadn’t awarded damages, in any event.  Also, deliberate deception in a two-player market makes a presumption of injury appropriate, and here the parties were direct competitors in a “sparsely populated market” in which other brands (manufactured by a co-owner of C&D) represent only a small portion of the market.

Finally, SPD challenged the scope of the injunction.  Among other things, the injunction required SPD to include with the test a specified forty-one-word statement clarifying the difference in the estimates, in a particular position and font size; prohibited SPD from using several phrases in its advertising, such as “weeks pregnant,” “weeks along,” or “Weeks Estimator”; required SPD to deliver a corrective notice to all retailers and distributors with a copy of the injunction; required SPD to publish Internet banner advertising prominently displaying its logo and stating that a federal court has determined that SPD “engaged in false advertising”; and required SPD to produce a video explaining the difference between its product’s and standard pregnancy length estimates and stating that “a federal court found the manufacturer ... to have engaged in false advertising,” and to make it prominently available on Defendant’s webpages, YouTube channels, and Facebook page.

SPD argued that the corrective notices were excessively harsh.  But, especially given the intentional deception findings, the court of appeals declined to say that the injunction was more than curative.  Further, SPD argued that the district court abused its discretion in the sweeping scope of the relief it ordered, especially in view of such factors as the relatively brief time the public was exposed to the deceptive materials and the time passed since their withdrawal. “Although Defendant’s argument is not unreasonable, and less intrusive requirements might well have sufficed, we cannot say the court’s orders constituted an abuse of the court’s wide discretion to fashion the terms of injunctive relief.”