TCPA survives strict scrutiny

Brickman v. Facebook, Inc., No. 16-cv-00751, 2017 BL 25487 (N.D. Cal. Jan. 27, 2017)

One criticism of expanding strict scrutiny is that courts will be extremely tempted to find that sensible regulations pass strict scrutiny, thus watering down its protection for when it is needed.  Consider this decision, finding that the Telephone Consumer Protection Act survives strict scrutiny: is that evidence of the feared phenomenon?

Facebook sent computer-automated “Birthday Announcements Texts” to cell phones of Facebook users informing them of friends’ birthdays.  Brickman sued on behalf of a putative class for violation of the TCPA. A violation requires that (1) the defendant called a cellular telephone number; (2) using an automated telephone dialing system (“ATDS”); (3) without the recipient’s prior express consent.  Skipping a bunch of analysis, Facebook’s system allegedly qualified because of the automation despite the involvement of humans in selecting their own friends and entering birthday information.  Nor did the court need to address whether Brickman actually consented, contrary to his allegations, at the motion to dismiss stage.

The court agreed that, under Reed v. Gilbert, 135 S. Ct. 2218 (2015), the TCPA was content-based because its exceptions for any “call made for emergency purposes” and any call “made solely to collect a debt owed to or guaranteed by the United States.” Each of these exceptions would require a court to examine the content of the message that is conveyed in order to determine if a violation of the TCPA has occurred.  Brickman argued that the debt-collection exemption was based on a relationship, not on content, but the court disagreed, because “[t]he plain language of the exception makes no reference whatsoever to the relationship of the parties” and referred instead to the purpose of the calls. [I’m not sure the purpose can be disentangled from the relationship, but that’s Reed for you.]  The FTC’s authority to create further exceptions to protect privacy interests was not content-based; the FTC could create content-neutral, relationship-based exceptions.

Fortunately, the TCPA passed strict scrutiny.  The compelling government interest was that in protecting residential privacy, an interest strengthened when individuals seek protection from unwanted speech.  From Frisby: “[A] special benefit of the privacy all citizens enjoy within their own walls, which the State may legislate to protect, is an ability to avoid intrusions.”

Next, the TCPA was narrowly tailored.  Facebook argued that it was underinclusive and overinclusive, and because there were less restrictive means of achieving the compelling interest.

While “underinclusivity raises a red flag, the First Amendment imposes no freestanding ‘underinclusiveness limitation.’” Underinclusiveness can raise doubts as to whether the government is really pursuing a stated interest or whether the statute actually furthers that compelling interest. Because “[a] State need not address all aspects of a problem in one fell swoop,” the Supreme Court has “upheld laws — even under strict scrutiny — that conceivably could have restricted even greater amounts of speech in service of their stated interests.”

Facebook argued that texts about emergencies or government debt were no less intrusive than other types of calls.  But that’s not true.  First, the TCPA isn’t “riddled” with exceptions, as the code in Reed was.  Nor would these exceptions allow “unlimited proliferation” of calls.  Emergencies by definition are limited in time and purpose, and Congress specifically found that limiting automated calls except with consent or in emergency situations was “the only effective means of protecting telephone consumers from the nuisance and privacy invasion.” Telephone Consumer Protection Act of 1991, Pub. L. No. 102-243, § 2(12), 105 Stat. 2394 (1991).  Thus, the exception was narrowly tailored and carefully balanced to address both privacy and health/safety.  Reed recognized that a speech regulation narrowly tailored to address the challenges of protecting safety “well might survive strict scrutiny.”

The government debt exception was likewise limited by the fact that such calls would only be made to those who owe a debt to the federal government.  Anyway, the US wouldn’t be subject to the TCPA regardless because it hasn’t surrendered its sovereign immunity.  That exception “merely carves out an exception for something the federal government is already entitled to do, and government speech is exempt from First Amendment scrutiny.” [Not sure why the fact that the message would be government speech relates to whether the statute is underinclusive.]  Even assuming this exception, added to the TCPA in 2015, was unconstitutional, it would be severable.

Underinclusivity makes a speech restriction fail strict scrutiny “when it leaves appreciable damage to that supposedly vital interest unprohibited.” Reed.  But here, the exemptions left “negligible damage” to privacy to continue.

Facebook also argued that the TCPA was overinclusive because “in purporting to target the ill of unwanted telemarketing it sweeps in speech that facilitates social connections.” But the court disagreed, finding that the TCPA was quite limited in what it prohibits: calls made using an ATDS without the prior express consent of the recipient. Express consent completely removes calls from the statute’s purview.  Thus, it wasn’t overinclusive.

Facebook also suggested less restrictive alternatives to show lack of narrow tailoring, but they wouldn’t be effective.  In Cahaly v. Larosa, 796 F.3d 399, 406 (4th Cir. 2015), the court found plausible alternatives to include time-of-day limitations, mandatory disclosure of the caller’s identity, and do-not-call lists. Gresham v. Rutledge, No. 4:16CV00241 JLH, 2016 WL 4027901 (E.D. Ark. July 27, 2016), recognized plausible less restrictive alternatives as including time-of-day limitations, disconnection requirements, and prohibitions on calls to emergency lines.  However, in those cases, the government didn’t argue about whether those would actually work; it did here, and the court agreed with the government’s criticisms.

“Time-of-day limitations would not achieve the same privacy objectives because even though such a restriction may designate the span of time in which callers can intrude on an individual’s privacy, it would also designate a time for intrusive phone calls.” Mandatory disclosure of a caller’s identity and disconnection requirements would also not be as effective because they wouldn’t prevent the privacy intrusion from the phone call in the first place. Do-not-call lists wouldn’t work as well; by requiring opt-out instead of opt-in, they’d “obviously” not be as effective.   And the TCPA already prohibits calls to emergency lines.

Facebook also suggested exempting noncommercial calls on residential and fax lines, but under Facebook’s own analysis, those are content-based and also subject to strict scrutiny, so they can’t count as less restrictive alternatives.

Facebook’s as-applied challenge also failed, even assuming that its texts were noncommercial speech, given the above reasons.

Amazon escapes liability for ads & emails touting vendors' infringing products

Lasoff v. Amazon.com Inc, 2017 WL 372948, No. C16-151 (W.D. Wash. Jan. 26, 2017)

Lasoff owns Ingrass, which sells artificial turf and related products.  He sold through Amazon, but in 2013 his sales allegedly began to plummet, both on his own website and on Amazon.  He alleged that third-party sellers were offering cheaper, counterfeit “Ingrass” products for sale on Amazon.com. When potential online consumers would click on links advertising “Ingrass” products in Defendant’s promotional emails or in “sponsored link” advertisements on third-party search engines, they were allegedly directed “to competing listings which falsely advertised products as ‘Ingrass’ products at a substantially discounted price.”

Amazon’s emails and its “sponsored link” ads on third-party search engines are created automatically based on information retained from that customer’s browsing sessions on Amazon; the content of the ads come from vendors, who represent to Amazon that they have the right to license Amazon to display that content. Likewise, Amazon automatically generates “keywords” (words or phrases related to products or product names) based on consumer searches on its websites, then an algorithm determines what keywords it chooses.

Lasoff alleged that Amazon misappropriated the Ingrass trademark and domain name by buying the keywords ‘Ingrass’ and/or ‘Ingrass.com’ on search engines.

The CDA applied to his state-law claims, including state-law trademark infringement.  Lasoff argued that the emails and online ads weren’t provided by another information content provider, because that was done by Amazon’s creation of the algorithm that sends the emails/purchases of the keywords.  The court disagreed; based on existing precedent, to allow this claim “would place liability on [Defendant] for simply compiling false and/or misleading content created by the individual defendants and other coconspirators.”  Amazon didn’t develop the underlying information that Lasoff alleged harmed him.

The court found that “Ingrass” was suggestive (Lasoff testified that it was short for “It’s Not Grass”) because it required imagination to go from the product name to the product.   “While the Court cannot imagine an average consumer instantly understanding what Plaintiff’s product is based on the name, it is not difficult to imagine that same consumer saying something like ‘Oh, I get it’ upon seeing the product to which the mark is attached.”  [Sigh.  I am increasingly convinced that we need to dump suggestiveness, especially if it’s going to be interpreted this way—consider that “Gold Medal” and “Best” are suggestive based on this test.]

Amazon argued that it couldn’t be held directly liable for trademark infringement. The court found the swap meet cases inapposite because, among other things, “there is no evidence that the swap meet operators generated promotional messages advertising the counterfeit goods.” Network Automation found use in commerce, and the court found Amazon’s purported distinction between “the ‘deliberate’ selection of Advanced’s trademark by Network and the Amazon algorithm which automatically selects keywords” to be meaningless for purposes of deciding whether Amazon was “using” the mark.  Although Network Automation and Rescuecom, cited with approval by the Ninth Circuit, precluded summary judgment on the use in commerce issue, the court found “critical factual differences” here.  Unlike Network Automation, Amazon wasn’t a competitor of the plaintiff; unlike Google, Amazon was buying, not selling, the use of Lasoff’s mark.  Calling this a direct infringement situation was trying to fit a square peg into a round hole—when we have a square hole that will do just fine.

Even assuming that Amazon’s keyword buy was a use in commerce, Tiffany v. eBay showed that Amazon was entitled to summary judgment on direct liability.  Tiffany held that “a defendant may lawfully use a plaintiff’s trademark where doing so is necessary to describe the plaintiff’s product and does not imply a false affiliation or endorsement by the plaintiff of the defendant.” eBay, and likewise Amazon, need not be the guarantor of the genuineness of all of the products offered on its website, given that to do so would “unduly inhibit” its right to lawfully offer genuine goods.

The Lanham Act false advertising claim failed because of the CDA.  “[L]iability lies with the vendors who created the misleading content, not the service providers who transmit that content.”

The court also dismissed a Sherman Act monopoly claim because, among other things, search engine ads are interchangeable with the larger market of all internet ads, so there was no monopsonized relevant market, and there were multiple competing purchasers. 

Disgorgement isn't distinguishable from restitution in ordinary consumer protection case

Brazil v. Dole Packaged Foods, LLC, 660 Fed.Appx. 531 (9th Cir. 2016)

Brazil brought the usual California claims, alleging that defendants deceptively described their fruit products as “All Natural Fruit.” Brazil property alleged that Dole’s labels were deceptive given that the products contain synthetic citric and ascorbic acid. His allegations of misleadingness including his own testimony that he was deceived; Dole’s consumer surveys prepared for the litigation; the FDA’s informal, non-binding policy on the use of the word “natural” in food labels (as meaning “that nothing artificial or synthetic ... has been included in, or has been added to, a food that would not normally be expected to be in the food”); and recent FDA warning letters to food sellers that alleged deceptiveness under the policy because the products in question included synthetic citric acid, among other substances. This evidence could allow a trier of fact to conclude that “All Natural Fruit” was misleading to a reasonable consumer and that the synthetic citric and ascorbic acids in Dole’s products were not “natural.”

However, class certification was properly denied, leaving only Brazil’s individual claims.  Brazil offered a price premium theory of damages; Dole’s products weren’t valueless.  Brazil didn’t explain how a price premium could be calculated with proof common to the class.  Brazil couldn’t substitute a theory of “nonrestitutionary disgorgement”:

Under California law, a plaintiff who successfully proves a defendant was unjustly enriched at his expense may in some cases recover all profits the defendant received unjustly. Theoretically an award of disgorgement may exceed an award of restitution; not always is the defendant’s benefit equal to the plaintiff’s loss. But in most cases, as in this one, the defendant’s benefit is equal to the plaintiff’s loss, so restitution and disgorgement are functionally the same remedy. 

For law students: Notre Dame summer IP program

Details on the Notre Dame “Get a Leg Up in IP” program this summer.

Another "omissions about slave labor" case fails in Cal.

Sud v. Costco Wholesale Corp., No. 15-cv-03783, 2017 WL 345994 (N.D. Cal. Jan. 24, 2017)

Sud brought the usual California claims based on allegations that Costco sold prawns for which the supply chain was tainted by slavery, human trafficking, and other illegal labor practices. Sud alleged that the defendants were aware that the feed for the prawns comes from trash fish caught on boats that use slave labor or other illegal labor practices, including human trafficking. Costco publicly states on its website that it has a “supplier Code of Conduct which prohibits human rights abuses in our supply chain,” but plaintiffs alleged that this was misleading given these facts, and that Costco omitted to tell consumers these important facts.  

To show that an omission was, as required by California law, a substantial factor in a plaintiff’s decision, she must show awareness and a change in behavior. Change in behavior may be presumed if the omitted information is material, “but a plaintiff must still be able to show she would have been aware of the information if it had been disclosed.”  Here, plaintiffs alleged that Costco’s packaging stated only that the prawns were a product of a given country, rather than including information about labor abuses in the supply chain, creating an actionable omission.  The plaintiffs sufficiently pled reliance on the packaging, though not on Costco’s “Disclosure Regarding Human Trafficking and Anti-Slavery” on its website.

Plaintiffs alleged that Costco had a duty to accurately disclose to consumers that slavery, forced labor and human trafficking have been tainting and continue to taint Costco’s supply chain for farmed prawns.  For a UCL or CLRA claim, “to be actionable the omission must be contrary to a representation actually made by the defendant, or an omission of a fact that the defendant was obliged to disclose.” Disclosure obligations include those relating to safety risks, but not all material facts, including supply chain practices.  Given public information available about labor conditions in the fishing industry in Thailand and Southeast, Costco also lacked the superior/exclusive knowledge that might have generated a duty to disclose; nor did plaintiffs properly allege partial representations plus active concealment, which also could have sufficed.

The unfair/unlawful UCL claims also failed.  Plaintiffs alleged that Costco’s conduct “in sourcing and selling farmed prawns actively contributes to the use of slave labor in violation of bans on such human trafficking enacted by the U.S., California and by international conventions, including but not limited to the Tariff Act of 1930 [,] ... [t]he Anti-Trafficking in Persons Act, the UN Declaration on Human Rights, and California Penal Code § 236, § 237, et seq.,” and the Supply Chains Act. The Supply Chains Act didn’t clearly speak to product labels, and, to the extent plaintiffs challenged the website disclosure’s adequacy, they lacked standing.  Nor did they explain how the allegations in the complaint supported alleged violations of the other laws.

On unfairness, assuming that the standard is whether the alleged practice “is immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers,” and weighing “the utility of the defendant’s conduct against the gravity of the harm to the alleged victim,” the harm alleged by the plaintiffs (buying a product they wouldn’t otherwise have bought) didn’t state a claim.  Consumers have access to information about supply chains, including Costco’s website statement, so the absence of such information on the packaging is not “substantially injurious to consumers” or necessarily immoral.  Likewise, plaintiffs didn’t identify a particular policy or other statutory or regulatory provision that demonstrate “it is ‘unfair’ within the meaning of the UCL for [a] manufacturer to fail to disclose” such violations on its product packaging.

Pure omissions, when the defendant didn’t make any statement at all about a subject, aren’t covered by the FAL, so those claims also failed. 

Older case: placement of medical device on market isn't representation of FDA approval

Intra-Lock International, Inc. v. Choukroun, 2015 WL 11422285, No. 14-cv-80930 (S.D. Fla. May 4, 2015)

Old, but new in Westclip (why? It’s an algorithmic mystery), and presents an interesting fact pattern about FDA approval/the lack thereof and the relationship between that and the Lanham Act.  Intra-Lock made the IntraSpin System, used for drawing and centrifuging a dental patient’s blood. It had three different components: (1) blood collection material, (2) a centrifuge, and (3) a fabrication kit and instrumentation.  Defendants allegedly sold a “kit” of products substantially identical to the components that make up the system, which were then assembled by the target audience to create a competing system.  They also allegedly promoted the kit in the US, including with courses by Choukroun promoting the use of the competing device in various dental surgical procedures.

Intra-Lock pled that it had 510(k) pre-market clearance from the FDA, which classified its device a Class II medical device, or “automated blood cell separator,” while defendants deliberately skirted these requirements, instead representing to the FDA that two of the components were Class I medical devices, which are exempt from premarket notification procedures and other quality system regulations. This allegedly posed serious risks to consumers.

Defendants argued that Intra-Lock had unclean hands because it didn’t initially have pre-market clearance; until it obtained the clearance, it was selling nearly the exact same components in a manner similar to defendants’ marketing. That was exactly the conduct Intra-Lock now argued was false and misleading, which gave the court pause, but it proceeded to the merits anyway.

Anyway, Intra-Lock couldn’t identify any false or misleading statements—nothing on defendants’ websites and related materials mentioned “FDA anything.” “Merely because Defendants have opted to market their Competing Device in a fashion similar to Plaintiff, does not make any similarity to Plaintiff’s model a false representation.”  The claim that defendants’ system was “recognized around the world, from Nice to New York from Los Angeles to Shanghai, from Rangoon to Moscow, from Sao Paulo to Cape Town, Santiago to Zagreb” was mere puffery.  With reference to one of the components, a specific type of test tube, the website said that “[t]his tube is the only authorized at this moment.” But that didn’t specify FDA authorization and indeed could easily be read to mean that it was the only type that defendants authorized for use with their other components.  Finally, one defendant stated that one of the components, a centrifuge, was “FDA registered.”  But that was true.

A comment by Choukroun on a dentistry blog and conversations between Choukroun and Dr. Robert J. Miller weren’t commercial advertising or promotion.  Even considering them, Choukroun didn’t claim to have pre-market clearance; he expressed his opinion that “FDA approval” wasn’t required.

It wasn’t enough to claim that presence on the market falsely implied FDA approval.  Some “peculiar” type of marketing was required, such as a direct comparison to a product that had received pre-market clearance, along with evidence that this marketing implied FDA approval.  Intra-Lock lacked any consumer surveys.

Intra-Lock’s real complaint was that the device required pre-clearance, but it had complained to the FDA about that. “Absent misrepresentation, the mere fact that Defendants may be erroneously selling the Competing Device as a Class I device when it is more appropriately considered a Class II device, is a violation of the FDCA, not a violation of the Lanham Act.” Pom Wonderful was not to the contrary; that case applied “where a party has introduced literal falsehoods or other misrepresentations into commerce,” not here. 

False claims of discounts cause Article III injury

Morrow v. Ann Inc., 2017 WL 363001, No. 16-CV-3340 (S.D.N.Y. Jan. 24, 2017)

Plaintiffs alleged that Ann deceptively advertised merchandise sold in its Ann Taylor Factory and LOFT Outlet stores by falsely claiming on its sales tags, in-store signage, and website that products sold in outlet stores were originally or regularly sold at much higher prices.  They brought the usual California (and other state consumer protection law) claims.

Ann argued that plaintiffs lacked Article III standing for want of a concrete injury.  Though they alleged that they wouldn’t have bought the products had they known the truth, they didn’t allege that the merchandise was worth less than the price they actually paid for it. Still, they alleged Article III injury—they spent money they otherwise would not have spent, which is sufficiently concrete.  Spokeo doesn’t change that, since it’s about bare statutory violations in the absence of concrete injury.

Likewise, plaintiffs adequately pled lost money or property under California law.  The allegedly false labels induced them to buy products they wouldn’t otherwise have bought.  Ann argued that only misrepresentations about the “nature of the product” could confer standing, but California law required only that the misrepresentation affect consumers’ “beliefs about quality,” and “[p]rices, like other attributes, can impact consumers’ perception of merchandise.”

Among other things, Ann argued that reasonable consumers wouldn’t be deceived, but this is a question for a jury.  Plus, the court noted, “the very fact that Ann represented its prices as discounted suggests that such representations might impact reasonable consumer purchasing decisions.”

Ann also argued that claims based on the FTCA should be dismissed because there’s no private right of action under that law.  If plaintiffs were actually trying to assert direct FTCA claims, that would be true. But instead, they were using the alleged FTCA violation to identify “unlawful” conduct under the UCL.  It’s ok to use FTCA violations to establish unlawfulness when another statute does confer a private right of action. 

Placebo effect means customer satisfaction doesn't disprove harm; suggestive TM can be fact claim

In re 5-hour ENERGY Marketing & Sales Practices Litig., No. MDL 13-2438, 2017 WL 385042 (C.D. Cal. Jan. 24, 2017)

Plaintiffs alleged that defendants engaged in deceptive and unfair business practices under the laws of various states and the Magnuson-Moss Warranty Act in selling 5-hour ENERGY, including  both representations on the 5HE packaging and off of it.  On-label representations include the product’s name and the claims to provide “five hours of energy” or “hours of energy,” and “no crash.” These statements were allegedly misleading because 5HE provides only a few minutes of energy, at most, and results in a “crash” at the end of the five hours.  Plaintiffs alleged that they used 5HE for a while—up to 1300 times for one plaintiff—before discontinuing use.

Defendants argued that the repeat purchases showed that plaintiffs weren’t injured and that, after their first purchase, they couldn’t have been deceived because they had personal experience with the product and no longer required the statements on the packaging to understand the product’s effects.  However, as a matter of law, repeat purchase isn’t proof of lack of injury; injury is a matter for the jury.  Federal Trade Commission v. Pantron I Corp., 33 F.3d 1088, 1097 (9th Cir. 1994) (even if some consumers were satisfied and became repeat purchasers, claims were false as a matter of law).  In particular, the Pantron court said, “Where, as here, a product’s effectiveness arises solely as a result of the placebo effect, a representation that the product is effective constitutes a ‘false advertisement’ even though some consumers may experience positive results.” Or, as the court here says, “what mattered most in a false advertising claim was not how consumers felt about the product but what the product actually did.” The case law establishes that “evidence of consumer satisfaction takes a backseat to scientific evidence showing that the product’s claims are verifiably false.”

So too with defendants’ reliance argument based on plaintiffs’ personal experiences.  Cases accepting similar arguments concerned “items like a lipstick that promises 24-hour coverage or a ‘fresh’ orange juice—products where the consumer can quickly tell whether the representations on the products’ packaging are true.”  But, as the lipstick case recognized, for things like “dietary supplements”—exactly the issue here—it might be harder to tell for some products.  [That is, 5HE is at least partially a credence good, not an experience good.] Here, plaintiffs testified that they weren’t sure or that they thought they should give the product a chance.  “Although the Court is skeptical that the Plaintiffs on the far end of the spectrum—those who purchased 5HE several hundred times before discontinuing use—can state a false advertising claim for their later purchases, Plaintiffs have raised a genuine dispute of fact that at least some subsequent purchases satisfy the reliance requirement.” A trier of fact should decide when the “reasonable consumer” would learn of the efficacy of the product, especially given that “consumers may operate for some time under a ‘placebo’ effect before realizing that the product lacks efficacy.”

Although plaintiffs couldn’t plead the off-label representations they relied on with sufficient specificity, the court found that some state consumer protection laws didn’t impose reliance requirements, only exposure to the misrepresentation: New York, New Jersey, and New Mexico don’t have reliance.  So too with NJ and California warranty law.  Defendants argued that causation was still required, but “[t]o prove causation in a state that does not impose a reliance requirement, the plaintiff need only prove that the reasonable consumer is ‘likely to be deceived,’” which would be better decided by the trier of fact.

Courts have required that a “written warranty” under the Magnuson-Moss Warranty Act reference a “specified period of time” in order to be actionable. Plaintiffs argued that the 5HE trademark, the “five hours of energy,” and the “no crash” statements qualified, but defendants argued that the 5HE trademark couldn’t be the basis for an MMWA claim because it’s suggestive as a matter of law, not descriptive, and “is used to indicate the source of goods, not to provide a warranty to customers.”  The case law holds that trademarks can be warranties.  The Sixth Circuit’s conclusion that the trademark was suggestive rather than descriptive had “little relevance.”  “It is unclear to the Court why trademark classifications should play any role in determining whether the trademark constituted a ‘written promise’ to consumers. As simple as it is, the 5HE trademark meets the standard required by the MMWA.”

The court dismissed claims related to decaffeinated 5HE packaging because none of the named plaintiffs had bought it.  Though the alleged misstatements on the packaging were the same, the ingredients differed significantly—6 mg of caffeine compared to 200 mg.  The composition of the product would be very important to the issue of whether the product provided “five hours of energy” and caused a “crash” at the end of the five hours, and no remaining named plaintiff could testify about their experiences with the decaffeinated product.

Food & Drug Law Institute writing competition

Thomas Austern Writing Competition:  

The H. Thomas Austern Writing Competition is intended to encourage law student interest in the areas of law that affect food, drugs, biologics, cosmetics, dietary supplements, medical devices, and tobacco.

Top papers will be considered for publication in the Food and Drug Law Journal and award winners will receive a monetary prize.

Identifying Boundaries in Patent and Trademark Law.

The American University Law Review is proud to present its annual Federal Circuit symposium, 

Panel 2: Trademarks

First Amendment Freedom of Speech and Trademarks: What Is, and What Should Be, the Relationship Between the Two?

Christine Farley, American University Washington College of Law (Moderator)

Ned Snow, University of South Carolina

Gov’t interest in not registering marks?  Ultimate question is whether it aligns with the purpose of TM law.  Breyer provided an answer himself: we want a marketplace where people are nice to one another, an economic marketplace w/o namecalling. That’s right. The economic marketplace is better off w/o that.  Both individually and macro perspective.  There are more participants that will join if they’re less offended/excluded.  You could say: if I want fewer people to buy my good, that’s my own business, but there’s a spillover effect on other market participants and other transactions. We want to make the marketplace one that people are not offended to enter into.  Macro: it is more attractive on the whole even if I’m not going to purchase disparagingly marked products.  Gov’t’s interest is preserving a marketplace where individual participants can get along well.

Douglas Rettew, Finnegan

A lot of TM answers at the argument could have been given but weren’t. SCt was looking for a gov’t justification consistent w/consumer protection and business protection from freeloaders. Gov’t interest: if something is disparaging/scandalous, it’s far off from source identifying function, it’s distracting and the non source identifying function overwhelms the source identification function.

Lee Rowland, ACLU

This case is a perfect storm of threats to 1A.  Really reasonable people who think the economic market is better off w/o namecalling.  Breyer asked why the 1A means we can’t have nice things. The reality is that our 1A comes with harm.  Is there something different about the market?  I can’t begin to find a justification for that. The marketplace for ideas is where the gov’t should be most hands off.  Gov’t making choices about the kind of speech we see in the aisles, or should consumers make choices about what to support?  People fill seats at the Washington team’s game; liberty doesn’t always lead to justice or right moral course.  Breadth of disparagement clause: any institution. End the Fed; Yankees Suck. Those are good source identifiers.

Rebecca Tushnet, Georgetown University

No, those are very good expressive messages about the person wearing the T-shirt, not good source identifiers—PTO denies rights to I heart DC, etc. on a regular basis b/c it’s good information not good source identification.  Rowland’s passionate defense of the 1A applied to “the market” is why this case is ultimately about Lochner.  You should hate TM law and registration in its entirety if you really want the gov’t to be hands off.  TM registration (and infringement law) is not common law fraud.

Snow: 1A is all about context.  If you had an anti-disparagement law in political debates, that would be clearly unconstitutional. What about trademark allows or doesn’t allow for gov’t to play a role in the benefit it will give to TM registrants?  We can learn a lot from other provisions of TM law—other criteria for registration should teach us something about the reach of TM law. If we think about source identification—source identification is expressive, self-identification.  Calling your hotel Marriott if your name is Marriott is the ability to communicate something about your product.  Distinctiveness says you can’t get a TM unless it is sufficiently distinct from the product you’re selling.  I can’t call a product Ned Snow, but we’re fine with it—b/c common names require distinctiveness for TM rights.  So the ultimate question is whether criteria other than distinctiveness/lack of genericity are also sufficiently like distinctiveness in aligning w/the purpose of TM. The purpose becomes very important in order to understand the legitimacy: so what is the purpose? If we can find a rational basis for disparagement, we should be good to go with that content-based distinction.

Rowland: I agree, but it’s not content based.  It’s viewpoint based.  We wouldn’t challenge distinctiveness b/c of the implications for other areas of 1A doctrine.  The difference b/t content based and viewpoint based restriction on speech.  You can say things in a public park you can’t in a private place.  Forum law has gotten too robust, often to the detriment of speech. Whether you’re in a forum analysis or gov’t benefit/unconstitutional conditions, there’s a gradation depending on how much the gov’t is trying to manipulate the content or viewpoint of your speech.  TPM=not much scrutiny.  Content-based rule: then you get strict scrutiny, though commercial speech or limited public forum or gov’t program changes the standard. Third rail: no viewpont or speaker-based discrimination: nobody who supports abortion rights can speak in this room b/c it’s owned by the gov’t. Gov’t may never have as valid interest suppression of private speech.  Except for terrorism, Holder.  That’s true in tax benefits.

RT: That’s all cool, and if Tam were denied any registration at all until he stopped using the name, Rowland would be right.  But he’s not.  He’s allowed to enter the room, he just has to sign in with a nondisparaging name; he’s allowed to chant his name while he’s in the room.  What is viewpoint based/why is it bad?  Hating gays is a viewpoint.  Hating is not.

Rettew: 2(a)’s breadth is such that it doesn’t cover any particular viewpoint.

Snow: Content/viewpoint is a mess.  This case is a hard one.  I came down on the side of content, but there’s more there than meets the eye b/c of the human subjectivity involved in determining disparagement. W/deceptiveness, at first glance, that seems objectively verifiable.  [Though I teach two courses almost entirely dedicated to figuring out what’s confusing/deceptive.]  The subjectivity of distinctiveness is different from the subjectivity of disparagement—it turns on morality and the judge’s perception of what the public morals are, which is inherently shaded by one’s moral code, and so there’s a better argument for invalidating this provision than others.  Ultimately I think it’s content based b/c deceptiveness criterion isn’t black and white, when you look at the actual test.  And on morality—which played a bigger role than we realized in the Fed. Cir. decision—that opens up a deeper question about the role of morality in the law. This is not Lawrence, where morality is the reason for the law; instead it’s about upsetting commerce if you upset the public [or specific groups who get excluded].  We can find that in many other legal contexts. 

Farley: inconsistency in results has been made much of by the challengers—examples of TMs approved by PTO compared to those disapproved.  To make the point about inevitable subjectivity. Lingering question of vagueness.  What do you make of that??

Rettew: this is one of the strongest arguments; I’ve argued cases on that.  One thing people are realizing is that TM is messy.  It’s very vague.  WANKER allowed for beer, rejected for clothing. TITMOUSE refused for computer cursor control devices, but ok for animation production services.  PUSSY POWER rejected for entertainment, but PUSSY POWER REVOLUTION for clothing. 

Farley: they do reject all SHIT marks.

Rettew: Madonna for wines was once considered scandalous.  Norms and viewpoints change over time.

Rowland: we don’t see the kind of inconsistency of other content-based rules.  TM bar and PTO: this isn’t an incredibly diverse bar, any more than this panel is. Not a coincidence that Dykes w/ Bikes was rejected, or that Heeb was rejected, but Redskins was approved and a 50-page federal opinion defends it.  It’s not a representative group of Americans.  Almost every group trying to reclaim a word has been rejected.  Nobody batted an eye on Redskins for decades. Combination of vagueness + demographics = viewpoint discrimination.

RT: (1) Vagueness doctrine, if an independent reason, should invalidate all registration system.  Churrascos: same applicant, different results; that’s not about political or demographic characteristics of examiners.  School grades, likewise are going to vary across the country—if vagueness if fatal to a gov’t program, bye-bye public school.  (2) Each examiner has limited time and resources; a lot depends on what the applicant does. Wanker and Titmouse actually have really easy explanations (product differences and audience interests—beer is an adult product and clothing is not so there’s more scope; the Titmouse clothing had a bird logo and the Titmouse computer peripheral was a mouse in the shape of a woman’s breast; Madonna was litigated at a different point in time, but that’s also true of genericity); it’s true that the Pussy ones are more inconsistent.

Snow: the one thing about disparagement/immoral/scandalous that’s different is moral judgments going on. The question as I see it reflects lack of diversity on moral norms/codes, but that doesn’t feed directly into viewpoint/content based Q. It’s about whether law can turn on moral judgments or not.

Rowland: A teacher having lots of rules: can’t write about Civil War b/c this is geography class.  And if you write about Trump, you can only write in favor.  That’s the difference.  Turn on political views of the teacher. Antidiscrimination laws are aimed at conduct.

RT: Can a student get a bad grade for denying the Holocaust? [Rowland says that’s about truth; I think that’s deep waters.] Could you have an assignment “write about someone you admire, not someone you hate”?  I think so.  You can’t disparage anyone is not you can’t disparage Trump; nature of gov’t program also matters—you can get a registration and keep using your disparaging term.

Farley: is denying registration really a huge deterrent?

Rettew: Registration is not that big a deal. Corporation: a lot of time companies can’t clear marks; they do search after search. We often tell them they can use it even if they can’t register it b/c the standard for registration is different from the standard for protectability/noninfringement of others’ marks. Many companies don’t care as much about registration because internet allows nationwide use/rights even without a registration. There are people who have overestimated the value. There are benefits to registration, but not the ones people talk about: (1) counterfeiting. (2) Juries like registrations; it’s a blue ribbon that means something to them.  Those are what matter.  So it really matters only if you’re going to trial or going after counterfeiters.

Rowlands: matters b/c people value it.  It’s definitely a meaningful benefit. If gov’t denies you benefit based on viewpoint or content of speech, that’s a burden.  Simon & Schuster, Son of Sam case.  Commandeered his money and gave it to victims.  When the gov’t is using the power of the purse to penalize speech, that’s a massive burden.  Practically people won’t speak. Denial of benefit should always be considered a burden.  Irony: ACLU really does have weird relation to IP b/c it’s a restriction on speech. If we’re better off w/o namecalling—denying registration allows proliferation of that kind of mark—not accomplishing the goal.  Our positions are bizarre b/c end result doesn’t align.

RT: I think my position aligns.  Depends on whether or not you’re committed to the expressive message!  I heart DC shirts will be more prolific when there’s no registration b/c people can compete to provide the message.  Baking soda sold with racist mascots won’t be. And that probably reflects the right balance—when you have a commercial motive distinct from your expressive motive, you are more likely to modify the message than when you think the expression sells the product.

Farley: 43(a)?

Rettew: yes and no. I don’t know the answer; I think you could and would bet on that side, but then Taco Cabana says otherwise.

RT: [brief precis of my argument]

Farley: what will the Court do?  Gov’t speech, unconstitutional conditions?  Consider some marks expressive and subject to different rules?  Content/viewpoint?

Rowlands: the third rail is gov’t speech.  The four-part test is not great (ACLU was on the other side), but at least makes some sense about observers/gov’t’s historical role.  Administrative involvement isn’t enough.  Adjudicating application is what happens when you apply for a park permit. Gov’t itself has disclaimed that TMs represent gov’t speech.  Far more likely to be unconstitutional conditions.  Distinctions in that case law b/t money and program that isn’t money; this is the latter.  Where they focus in on: the nature of this benefit, and is the gov’t’s role close enough to gov’t speech to justify this regulation?  The worst case scenario for the Justices is gov’t imprimatur for a slur.  There’s no case that really is on point.  Manipulating private viewpoints outside the scope of the program, you lose.

Snow: Agree—think unconstitutional conditions.  One other spin: something to be said for content of speech? Are they more likely to find viewpoint-based discrimination when it deals w/religion or politics v. registration of a commercial TM.  Maybe obscenity is viewpoint based, but we didn’t really know.

Q: any way to reduce vagueness?

Rowlands: blacklists, as state license plate authorities have.  A stretch to interpret the statute that way, but PTO has some discretion.  Or interpret disparaging as meaning of a real person, but “institutions” in statute makes that a dead letter.

Q: how the standard of substantial composite works in practice. 

Rowlands: Badly!

Rettew: Best you can do is analogize to infringement.  15% or higher is usually enough for confusion.

Rowlands: Heckler’s veto.

Q: Reed v. Town of Gilbert/Brown v. EA.  Key issue: morality/content based.  Strict scrutiny.  If this is content based, would it survive?

Rowlands: Reed isn’t in one of these compromised areas of the law—commercial speech, gov’t benefit.  It’s the purest version of what the 1A stands for. We’ve conceded already, if this is just content distinctions, we wouldn’t have filed.  Brown + Reed + Ward v. Rock Against Racism—Ct articulated more of a mushy, touchy-feely definition: gov’t targeting speech b/c of content, and Reed rejects that test and begins more textual analysis.  Get more protection even if the motive is suppressing content even if the law looks content-neutral on its face.  Morality is all through this, but at the same time we’re seeing a Ct rejecting more subjective moral framewk. They will likely back off Reed—pretend it doesn’t mean what it says.  Reed: you could see 2 distinct categories of speech treated differently, and they’ll say Reed only means that. We didn’t mean to eclipse everything else.  Otherwise they can’t issue judgments based on morality, and the new nominee will want to do so.  E.g., new attempts to crack down on revenge porn, mandating filters.

Q: how grandfathering comes into this.  You can find a large segment of Af-Am population that would object to Negro or Colored People, yet NAACP/UNCF are old, established marks. If someone came in today, they probably wouldn’t be able to get it through.

Farley: Whitelist/blacklist.

Snow: Also an issue w/genericity. There is one distinction b/t the two. A markholder can police the mark; these cases lie in a sea of ambiguity and policing will be persuasive to a judge. But we can’t police morality and make sure the morals of society change/don’t change.

Rowlands: it’s a one-way ratchet.  NFL team 40 years ago wasn’t considered offensive, but Tam wants to reappropriate – language gets more offensive over time. Creeping chill about what future society will accept; unfair to ask any markholder.

RT: w/o 1A controlling, you can have an easy doctrinal answer: evaluate at time of application. Madonna! You already showed it wasn’t a one way ratchet. That wasn’t the standard applied to the Washington team.  That means no TM law uncertainty, though societal change may still produce uncertainty.

If you don't like low-cost imitator brands, you'll love this decision

Moroccanoil, Inc. v. Zotos Int’l, Inc., 2017 WL 319309, -- F. Supp. 3d --, No. 16-7004 (C.D. Cal. filed Jan. 19, 2017)

The court granted a preliminary injunction in this trademark case, using the “serious questions going to the merits” standard, which others consider dubious after eBay.  Irreparable harm came from the potential threat to plaintiff’s high-end brand positioning if people believed it also appeared in discount stores.

Moroccanoil distributes hair and body care products in the United States featuring “argan oil to revitalize and replenish hair.” It has incontestably registered trademarks for MOROCCANOIL and for design marks for hair care products.  It also alleged, and the court found, protectable rights in a trade dress including:

(1) a distinctive turquoise blue color; (2) copper orange lettering, graphics and background design elements; (3) copper orange and white lettering, the word “MOROCCANOIL” in vertical and horizontal orientation, graphics and background design elements on a turquoise blue background; and (4) an amber bottle packaged in a rectangular blue box.

registered marks

trade dress

This combination, the court found, was nonfunctional, inherently distinctive product packaging serving “a purely aesthetic purpose comprised of specific colors, fonts and styles,” and, though suggestive marks are presumptively weak, Moroccanoil’s advertising and promotion in major media outlets had added commercial strength.  Moroccanoil positions itself as a premium product, sold on its own website as well as “premium” salons and spas, “high-end” retailers such as Saks, Neiman Marcus, Barneys, Nordstrom and Sephora, and “upscale” beauty supply stores such as Planet Beauty and Design Collection.

Zotos is a “professional beauty industry leader that manufactures and markets a range of hair care products.” Zotos began to sell hair care products featuring argan oil known as “Luxe Majestic Oil” in packaging with the term “MAJESTIC OIL” in vertical white lettering with an orange fleur-de-lis symbol in front of a blue background.

Majestic oil

Zotos’ largest client is Sally Beauty Supply, a retailer chain that sells beauty supplies at value prices. Zotos’ products appeal to consumers in the market for “a lower-priced alternative to hair care brands that are typically sold at higher price points at high-end department stores and salons.” Zotos used flyers, in-store displays and emails that stated: “Compare to Moroccanoil® and Save” and “If you like Moroccanoil® products, you’ll LOVE our new Luxe Majestic Oil line.”  (I found a saved email online using the tagline “Naturelle Pro Majestic Oil was created to compete as a low cost alternative to MoroccanOil brand”—does adding “compete” change anything?  What about the Sally Beauty webpage where there are a number of different “compare and save” options presented?)

 

compare to display

like/love page from Sally Beauty

like/love ad on the same page for Bed Head/BTZ

like/love ad on the same page for Biolage/Biotera

As to similarity, Zotos argued that vertical lettering was functional and common in hair care products, and that the shades of blue were clearly distinct, and that an amber bottle was functional for liquid products.  The court found that product names “Moroccanoil” and “Majestic Oil” are sufficiently distinct, and the injunction wouldn’t cover the name, but the appearance of the products was “strikingly similar”: similar white vertical lettering, similar placement of an orange symbol, and a similar blue background, even if an amber bottle by itself was functional.

There was no consumer evidence of confusion; Moroccanoil’s survey found that 41% of respondents believed that Majestic Oil products were manufactured by or associated with Moroccanoil.  The survey was flawed—it used the Squirt format, which is “most appropriate where a product with a weak mark is sold in close proximity to the alleged infringer in the marketplace,” and though it’s possible for consumers to encounter both products online, it was unclear that a significant number of consumers would encounter the marks in close proximity.  Still, the court found the survey to be “some evidence” of likely confusion.

Though the products were sold in different types of stores, the court found that the parties targeted the same general class of purchasers – female consumers of hair care products, as evidenced by Zotos’ “efforts to target and capture Moroccanoil customers” through its comparative advertising, such as “If you like Moroccanoil, you’ll LOVE Luxe Majestic Oil!”  Zotos argued that this tactic expressly distinguished its products, but Zotos products are sold on the Internet without the “comparative advertising.” Plus, the term “our” in (one) Zotos’ ad - “If you like Moroccanoil® products, you’ll LOVE our new Luxe Majestic Oil line” – “may appear ambiguous to consumers as to whether the companies are associated with each other.”

The court found Zotos’ intent neutral; it was obviously aware of Moroccanoil but there was no evidence of intent to confuse.

Overall, the factors favored Moroccanoil.

Irreparable harm: since Zotos was targeting Moroccanoil with its like/love ads, Moroccanoil argued that Zotos was interfering with Moroccanoil’s ability to maintain its image as a premium brand.   Moroccanoil’s expert report by “an independent consultant in the professional beauty industry” claimed that once the public perceives a brand is no longer “premium,” it is “difficult, if not impossible, to reinstate the premium position,” using examples of beauty brands such as Miss Clairol and Sebastian Shaper “whose ‘premium’ products declined in sales once such products entered the mass market consumer retail channel.” Given the survey evidence, the court found a risk of irreparable injury to Moroccanoil’s customer good will and reputation.

The court enjoined Zotos from distributing its Majestic Oil products in their current packaging.  It accepted Moroccanoil’s testimony that it might be possible to repackage the product.  Thus, Majestic Oil could be required to recall the product from Sally Beauty’s brick-and-mortar stores and distribution centers.

What's in the box? Not a valid agreement to arbitrate!

Norcia v. Samsung Telecommunications America, LLC, --- F.3d ----, 2017 WL 218027, No. 14–16994 (9^th Cir. Jan. 19, 2017)

Norcia brought a putative class action bringing the usual California claims against Samsung, alleging that Samsung made misrepresentations as to the performance of the Galaxy S4 phone. Samsung moved to compel arbitration on the ground that an arbitration provision contained in a warranty brochure included in the Galaxy S4 box was binding on Norcia. The court of appeals affirmed the denial of Samsung’s motion.

Norcia bought his phone at a Verizon Wireless store.  When he paid, he got a receipt labelled “Customer Agreement” which included a statement (in all capital letters) that: “I understand that I am agreeing to ... settlement of disputes by arbitration and other means instead of jury trials, and other important terms in the Customer Agreement.” Norcia signed the Customer Agreement, and Verizon Wireless emailed him a copy.

After that, Norcia took the phone, still in its sealed Samsung box, and a Verizon Wireless employee opened the box and helped Norcia transfer his contacts from his old phone to the new phone. Norcia declined the offer by the Verizon Wireless employee to take the box and the rest of its contents, which included Samsung’s “Standard Limited Warranty,” which included a statement that “All disputes with Samsung arising in any way from this limited warranty or the sale, condition or performance of the products shall be resolved exclusively through final and binding arbitration, and not by a court or jury.”  The statement continued that purchasers could opt out of the arbitration agreement by providing notice to Samsung within 30 calendar days of purchase, either through email or by calling a toll-free telephone number.

“[A]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.”  Samsung bore the burden of showing agreement by a preponderance of the evidence.

First, Samsung argued that including the arbitration provision in the Product Safety & Warranty Information brochure created a valid contract between Samsung and Norcia. California law governs contract formation.  “A party who is bound by a contract is bound by all its terms, whether or not the party was aware of them.”  Contracts can be made “in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.” Silence or inaction isn’t acceptance, unless the offeree has a duty to respond to an offer and fails to act in the face of this duty (when she’s given the opportunity to opt out) or the offeree retains the benefit offered.  Nonetheless, silence won’t be consent when the offeree reasonably did not know that an offer had been made.

Norcia didn’t expressly assent to any agreement in the brochure, or sign the brochure or otherwise act in a manner that would show “his intent to use his silence, or failure to opt out, as a means of accepting the arbitration agreement.” No exception to the general rule applied; Samsung didn’t identify any duty imposed on Norcia by California law, nor any previous course of dealing between the parties. Nor did Norcia retain any benefit by failing to act, given that the brochure stated that Norcia was entitled to “the benefits of the Limited Warranty” regardless whether Norcia opted out of the arbitration agreement.  Without “outward manifestations of consent [that] would lead a reasonable person to believe the offeree has assented to the agreement,” no contract was formed between Norcia and Samsung.

Samsung argued that the brochure was analogous to a shrink-wrap license, or to terms included in a box sent to the consumer, which the Seventh Circuit has held to be enforceable.  The court of appeals first commented that a previous “unreasoned” Ninth Circuit statement about the enforceability of shrink-wrap licenses in California wasn’t focused on contract formation, and anyway wasn’t free from doubt; there were no identified California cases on the subject.

At most, previous precedent indicated that “a shrink-wrap license of intellectual property is enforceable in California” when it states on the packaging that opening the package constitutes consent to the license. But “[e]ven if a license to copy software could be analogized to a brochure that contains contractual terms, the outside of the Galaxy S4 box did not notify the consumer that opening the box would be considered agreement to the terms set forth in the brochure.”  

How about the in-the-box contract approved by the Seventh Circuit?  In the relevant case, consumers ordered a computer over the phone, but when the box arrived, it contained the computer and “a list of terms, said to govern unless the customer return[ed] the computer within 30 days.”  The Seventh Circuit stated that “[p]ractical considerations support allowing vendors to enclose the full legal terms with their products,” and concluded that “[b]y keeping the computer beyond 30 days, the [buyers] accepted [the seller’s] offer, including the arbitration clause.”  But California hasn’t adopted that rule (though it has held that statements in the box can constitute warranties; warranty and contract law differ).  Even if in-the-box contracts may be binding under certain circumstances, no contract is formed “when the writing does not appear to be a contract and the terms are not called to the attention of the recipient.” 

Samsung’s brochure was called “Product Safety & Warranty Information.” That title indicated that the brochure contained safety information and the seller’s warranty. “A reasonable person in Norcia’s position would not be on notice that the brochure contained a freestanding obligation outside the scope of the warranty.” Nor would a reasonable person understand that failing to opt out of an arbitration provision contained within the warranty constituted assent to a provision requiring arbitration of all claims against the seller, including claims not involving the warranty.

Samsung urged the Ninth Circuit to agree with the Seventh that “the practicalities of consumer transactions require the enforcement of in-the-box contracts and that consumers expect that products will come with additional terms.”  Nope.  Call your legislator if you want a different public policy.

Samsung’s next argument, that Norcia agreed to arbitrate his claims by signing the Customer Agreement with Verizon Wireless, was meritless.  Verizon isn’t Samsung; Samsung isn’t a third-party beneficiary of the contract. 

Are you being served? Omission claim based on "virtualized" server survives

Schellenbach v. GoDaddy.com LLC, 2017 WL 192920, No. CV-16-00746 (D. Ariz. Jan. 18, 2017)

In 2014, GoDaddy issued a press release titled “GoDaddy Launches New Dedicated and VPS Servers with Added Support for Designers and Developers.” Plaintiffs are website designers based in Los Angeles. They bought a “Dedicated Server” hosting plan maintained by Defendant. Plaintiffs allege that, after experiencing “crippling performance issues relating to the server[,]” they hired an independent server expert to diagnose and resolve those issues. They learned that they were actually being provided with a virtualized server, and alleged that they were deceived by GoDaddy’s failure to disclose this.  They brought claims for fraudulent concealment under Arizona law, negligent misrepresentation under California law, violations of the Arizona Consumer Fraud Act (“ACFA”), and violations of California’s FAL and UCL.

The court considered printouts from GoDaddy’s website that were incorporated in the complaint.  GoDaddy argued that one page’s identification of the Dedicated Server as a “single-tenant VM” constituted a clear disclaimer of the virtualized nature of the server. However, GoDaddy didn’t show that plaintiffs or other members of the public understood “VM,” and also the page was from a time after plaintiffs allegedly stopped using the service.

GoDaddy argued that the ACFA claim was barred by a one-year statute of limitations, but the discovery rule applied, and that couldn’t be sorted out on a motion to dismiss. 

GoDaddy then argued that it didn’t have any duty to disclose.  However, the ACFA itself imposes a duty “to refrain from an omission of any material fact with intent that others rely thereon.”  The virtual nature of the “dedicated server” was plausibly a material fact, and plaintiffs sufficiently alleged intentional concealment and reliance.  This also preserved the claim for fraudulent concealment under Arizona law.

However, the California negligent misrepresentation claim was dismissed, because that required a positive assertion; an implied assertion or omission wasn’t enough.

FAL and UCL: The California courts have, though not with consistency, identified four circumstances in which an omission may constitute actionable fraud: “(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 facts.”  The court found that (2), GoDaddy’s exclusive knowledge, plausibly applied here. 

Pipe dreams: expert spokesperson liable for false statements about competing product

Underground Solutions, Inc. v. Palermo, 188 F. Supp. 3d 717 (N.D. Ill. 2016)

This case is part of contentious relations between Eugene Palermo, a scientist/paid expert for one underground pipe maker, and UGSI, a maker of competing pipe.  Previous case about plaintiff’s website impersonating defendant Palermo.  Previous ruling finding jurisdiction over Palermo in this case.

UGSI sued Palermo for trade libel, intentional interference with prospective economic advantage (dismissed after discovery), and false advertising under California law and §43(a) for his statements as a paid spokesperson for a competitor.  In this opinion, UGSI won partial summary judgment on liability on the Lanham Act claim; Palermo won summary judgment on the trade libel claim; and summary judgment was otherwise denied.

Different kinds of pipe with varying properties are used for municipal and industrial water transmission, including ductile iron pipe, high-density polyethylene (HDPE) pipe, and polyvinyl chloride (PVC) pipe. “[E[ach type of pipe exhibits varying degrees of resistance to puncture, cracking, and other types of pipe failure.”  Rapid crack propagation (RCP) is exactly what it sounds like and can happen up to several hundred feet per second; it can happen in any type of pipe under varying conditions depending on the pipe’s diameter and wall thickness, the internal operating pressure of the pipe, and the pipe’s chemical makeup. Although RCP can’t occur in 100% water pressurized pipe, the inclusion of a small amount of air in a pipe could enable RCP failure.

This is RCP in plastic pipe

UGSI is the only producer of Fusible PVC pipe, which is thermally fused instead of jointed. Palermo is “a scientist who has been involved in the pipe industry for roughly forty years,” who now operates a consulting firm providing litigation consulting and failure analysis services. During the relevant period, Palermo had a consulting agreement with Performance Pipe, which made HDPÈ pipe. Along with two HDPE pipe interest groups, “Performance Pipe paid Palermo to attend trade shows and give presentations about Fusible PVC pipe.”

Palermo’s PowerPoint slideshow for these presentations, which was also uploaded to his website, was called “Plastic Pipe for Water Distribution—What You Need to Know About RCP and Butt Fusion Integrity.”  The presentation was “primarily focused on illustrating the high RCP risk associated with butt-fused PVC pipe.”  Palermo pointed out that PVC pipe was more prone to RCP than HDPE and that “butt-fused PVC pipe’s RCP risk is even higher because without bell-and-spigot joints to relieve pressure, cracks can spread farther and faster without meeting resistance.”

sample slide from presentation

The slide show began with a list of all known Fusible PVC RCP failures in the field: 20 across the US, ranging in length from 43 feet to 3,300 feet. He included “pictures of massive cracks in the butt-fused PVC pipe at some failure sites, and he provided details of the damage done and replacement requirements.” Palermo then discussed laboratory test results.  Palermo showed a graph—which the court found to be unambiguous—indicating that when a PVC pipe has 10% air volume, its critical pressure (the pressure over which RCP is more likely) is 2.3 bar, and from about 10.8% to 100% air volume, its critical pressure is 1.6 bar. The next slide reported the pipe’s critical pressure as “1.6 bar for DR 19 PVC pipe with ≥10% air.” His HDPE graph from the study showed that the pipe’s critical pressure was over 7 bar at 10% air volume, and roughly 3 bar at 23% air volume. He also included data for modern HDPE pipes, whose critical pressure he placed at over 10 bar, which meant that “RCP is never an issue.”  Palermo then shared the results of a “Bent Strap Test” and a “Tensile Test” conducted on butt-fused polyethylene pipe and butt-fused PVC pipe: the former passed and the latter failed.

The result was that some people exposed to the slide show or presentation “expressed reticence to use or recommend Fusible PVC as a result.”  “Julie Morrison, a consulting engineer in Illinois, testified that she had been open to the possibility of recommending Fusible PVC for a project in Illinois but had changed her mind after finding and reading Palermo’s presentation online.” A project manager in Illinois received an e-mail from a contractor, with Palermo’s slide show attached, expressing grave concerns, and UGSI produced a slide show of its own to rebut Palermo’s report and retain the contractor’s business.

For the Lanham Act claim, UGSI argued: (1) Four of the crack lengths that Palermo disclosed in his presentation are grossly inaccurate and that he represented that cracks spread hundreds or thousands of feet farther than they actually did.  (The most extreme alleged misrepresentation was 300 feet for 3 feet; the least was 2200/1700.)  (2) PVC’s critical pressure at 10% air volume in the study was the more favorable figure of 2.3 bar, not 1.6 bar.  (3) He misleadingly used an old study without pointing out that Fusible PVC uses pipe that benefits from many years of scientific advancement in PVC pipe. (4) Even Palermo’s accurately reported crack lengths were misleading, because Palermo described them without disclosing the installation or maintenance errors that caused them to rupture in the first place. (5)  It was misleading to report results from the bent-strap test and the tensile test because these testing models are not designed to test PVC.

Palermo responded that his statements were not “commercial advertising or promotion” but noncommercial speech.  However, he was paid to deliver “presentations to anonymous purchasers and prospective consumers at trade shows throughout the country.”  That triggered the Lanham Act. 

The court found clear falsity in that the study reported that at 10% air volume, the critical pressure of PVC was 2.3 bar, but Palermo clearly said it was 1.6 bar in his slide based on the study.  Although he defended his value as an approximation, his slides didn’t say that, and their only basis was the S4 study that said otherwise.  This was literal falsity.  The court didn’t separately discuss materiality—a real blow for Palermo, it seems to me, given the real difference in critical pressures between PVC and HDPE, and the other uncontested crack lengths.

Palermo didn’t dispute that he was wrong about the amount of pipe that needed to be replaced in one place and the crack lengths in three instances. He argued that “his underestimating a 200-foot crack occurring in a Tampa, Florida project...[that] was substantially longer than 200 feet” is evidence “[t]hat [he] did not set out to exaggerate crack lengths.”  But, “for liability purposes it does not matter whether Palermo made one literally false claim whose inaccuracy was favorable to UGSI,” when there were other literally false statements unfavorable to it.  UGSI was entitled to summary judgment on liability for these statements.

UGSI further argued that the remaining challenged statements were deceptive. UGSI contended that its pipe had a different chemical makeup that made it substantially superior to the pipe used in the experiments fifteen years previous; that showing critical pressure with varying amounts of air was misleading because properly handled pipe will never contain more than 2% air; that accurately reporting crack lengths was misleading without disclosing the initiating event; and that PVC was not meant to be tested by the methodologies Palermo used.  There were factual disputes about each of these.  For example, Palermo and his expert both testified that water-pressurized pipe in the field commonly contains up to 10% air volume.  (I am especially sympathetic to Palermo’s argument that, notwithstanding that RCP might not have happened without mishandling/mis-installation or random error, it’s reasonable to assume that there will be some of that in the future.  The court, though, found that a jury could conclude that describing RCP without disclosing what caused it is misleading.)

Palermo argued that UGSI lacked a survey to show misleadingness, but surveys are not required as a matter of “an iron rule.”  (No pun intended?)  The evidence of concerns from two engineers caused by seeing the slide show supported “a reasonable inference that the slide show’s false or misleading statements confused these consumers, for their worries were apparently assuaged only after UGSI presented information to rebut Palermo’s claims.”

Palermo finally argued that UGSI didn’t show harm, as required by Lexmark, because one of the concerned engineers had no decision-making authority, while the others ended up using Fusible PVC anyway.  “It cannot be the law that where a plaintiff succeeds in retaining its customers by spending an abundance of time, energy, and money to combat false advertising, the defendant who produced and disseminated the false advertisement or commercial promotion escapes liability for violating the Lanham Act.” The evidence that UGSI needed to produce its own rebuttal presentation “permits a reasonable inference that Palermo’s presentation directly led to a diminution in goodwill and reputation for Fusible PVC.”

Trade libel under California law: This requires that the defendant made a false statement of fact, the statement was made with actual malice, and the false statement diverted business away from the plaintiff or diminished the value of the disparaged product.  UGSI argued that, when a person disparages a plaintiff’s only product, he necessarily defames the plaintiff personally, triggering the lower negligence standard for a defamation claim by a private party. The court disagreed.  Also, UGSI failed to adduce evidence that shows that “particular purchasers...refrained from dealing with [it],” and that it was deprived of any particular transactions. “Unlike claims under the Lanham Act, trade libel claims under California law must be centered on particular losses emanating from lost business opportunities.”  Thus, Palermo was entitled to summary judgment on this claim.

California FAL: Proposition 64 restricted standing under the FAL to “any person who has suffered injury in fact and has lost money or property as a result of a violation” of the law. The resources expended to create UGSI’s corrective presentation and meet with clients qualified as lost money or property.  (I wonder about that—if these were salaried employees doing the work, wouldn’t they have been paid anyway?)  Nor did UGSI need to show its own reliance on the false statements to prevail; Proposition 64 wasn’t designed to preclude competitors from bringing false advertising claims.  Summary judgment denied.

Mass. anti-SLAPP law/litigation privilege doesn't cover p's nasty statements about competitor to customers

Riverdale Mills Corporation v. Cavatorta North America, Inc., 189 F.Supp.3d 317 (D. Mass. 2016)

Previous decision—denying a recall when the falsely advertising competitor had already notified consumers—discussed here.  The parties compete in the market for wire mesh used to make marine traps.  Riverdale makes “Aquamesh.” Metallurgica makes “SEAPLAX,” sold in the US by Cavatorta. Both brands are purportedly “galvanized after welded” (GAW), which is allegedly better than “galvanized before welded” (GBW). In 2015, Riverdale learned of a production error at Metallurgica that caused a non-SEAPLAX, non-GAW product to be delivered to certain customers in the United States and Canada.

Riverdale sued for false advertising.  The court enjoined defendants (1) from manufacturing and selling mesh labeled as GAW if it was not actually GAW; (2) from making false statements in advertising that SEAPLAX was GAW if it was not in fact GAW; and (3) to immediately properly label all SEAPLAX product that was not GAW. 

Larry Walsh, vice president of sales and marketing at Riverdale, sent emails to twelve customers of Cavatorta with a 3-page excerpt from defendants’ memorandum in opposition to the motion for preliminary injunction and two affidavits from defendants. The emails varied; “all referenced the attached materials and stated that Plaintiff’s attorney would contact the customers and request additional information.” One email also stated: “If you did get GBW that was labeled GAW you should have received a notice from [Cavatorta] and some sort of monetary compensation .... For a full year [Defendants] were selling mislabeled product and traps are falling apart very quickly.” Another email characterized Cavatorta’s product as “defective wire.”

Metallurgica and Cavatorta counterclaimed for tortious interference with business relations and violations of Chapter 93A, based on communications that Riverdale had made to some of Cavatorta’s customers during the pendency of this lawsuit.

Riverdale argued that Riverdale’s communications with Defendants’ customers were protected by the litigation privilege, which “protects statements made in the institution or conduct of litigation or in conferences and other communications preliminary to litigation.” “[T]he relevant inquiry is not who made the statement, or to whom it was made, but whether the statement is pertinent to the supervening litigation,” even if the statements were uttered maliciously.  However, the privilege does not protect “unnecessary or unreasonable publication to parties outside the litigation ....”

Defendants argued that Riverdale knew before sending the emails that all of the customer-recipients had already been made aware of the issues with the SEAPLAX mesh, and that Walsh wasn’t seeking any information from them.  The court agreed that the privilege didn’t apply.  “The recipients were outside of the litigation, and it did not serve Riverdale’s prosecution of the case to reiterate its claims and forward the selected pleadings to Defendants’ customers, many—if not all—of whom already knew about the lawsuit.…The purpose of the privilege is not served by giving Riverdale immunity to send gratuitous communications to the customers of its competitors.”

However, defendants still failed to state a (counter)claim.  Though they sufficiently alleged the existence of specific relationships and Riverdale’s intent to harm them, they made no specific allegations of harm, such as customers who ended their relationships or bought less as a result.

Riverdale also moved to dismiss the counterclaims pursuant to Mass. Gen. Laws ch. 231, § 59H (the anti-SLAPP statute), which covers claims based on the targeted party’s “exercise of its right of petition.” The courts have construed “petitioning activity” as including all “statements made to influence, inform, or at the very least, reach governmental bodies—either directly or indirectly.” Riverdale argued that its emails were petitioning activity because the statements mirrored the allegations contained in the pleadings.  However, “the mere replication of protected statements sent to governmental entities is not alone dispositive.”  Given the context—direct competition, careful selection of what to send, and the fact that only two customers were later subpoenaed—“the emails have a distinctly commercial flavor.” Thus, the emails were not petitioning activity, and the anti-SLAPP statute didn’t apply.