Thursday, August 31, 2017

Outlet sales of outlet-only clothes under brand name aren't inherently deceptive

Rubenstein v. The Gap, Inc., --- Cal.Rptr.3d ----, No. B272356, 2017 WL 3634212 (Ct. App. Aug. 24, 2017)

The court affirmed the trial court’s dismissal of a claim against the Gap for selling lesser-quality products at its Gap and Banana Republic factory/outlet stores that were never sold at its ordinary stores.  Rubenstein didn’t sufficiently allege a misrepresentation or actionable omission. Rubenstein didn’t identify any advertising or promotional materials or any Gap other statements that its factory store clothing items “were previously for sale in traditional Gap stores or were of a certain quality.” The mere use of its own brand names wasn’t deceptive just because the apparel wasn’t of the quality that Rubenstein had come to expect. “As a matter of law, Gap’s use of its own brand name labels on clothing that it manufactures and sells at Gap-owned stores is not deceptive, regardless of the quality of the merchandise or whether it was ever for sale at other Gap-owned stores. Retailers may harm the value of their brands by selling inferior merchandise at factory stores, but doing so does not constitute false advertising.”  [This line of cases directly addresses, perhaps for the first time in litigation, the occasional debate in the literature about whether trademark owners should be responsible to consumers when they break their own promises about consistent quality that are communicated by a trademark with secondary meaning.] 

Plaintiff alleged that “[r]easonable consumers believe outlet stores sell products that were previously available for purchase at retail stores,” but didn’t allege specific facts showing this to be true.

Moreover, a consumer for whom the retail history of factory store items is material can ask Gap employees about this. A reasonable consumer would also inspect the quality of factory store clothing items before buying them and could return items after purchase if they turn out to be unsatisfactory. In the end, the allegation that Gap is not living up to the quality standards it has set for Gap and Banana Republic brands fails to state a cause of action for a fraudulent business practice under the UCL.

There was also no duty to disclose; the use of the brand name didn’t constitute a partial representation “even if the products are alleged to be inferior to other brand name products.”

Nor was selling nonidentical brand-name clothing in a factory store “unfair.”  In particular, “[t]he injury alleged is not substantial because consumers are getting Gap and Banana Republic brand name items for low prices.”  This interestingly suggests that there’s no quality differential to the extent that consumers are just buying the brand name, not the clothes.  Plus, consumers could have asked sales associates about the items’ history and examined their quality before purchase.

name alone doesn't ID average people in internet search ROP case, court rules

Dobrowolski v. Intelius, Inc., No. 17 CV 1406, 2017 WL 3720170 (N.D. Ill. Aug. 29, 2017)

Defendants sell online reports on people using information compiled from public records and other sources.  When a consumer uses a search engine to search a person’s first and last names, dynamic keyword ads appear, with the first and last name automatically plugged into an otherwise generic ad.  The ads “give the appearance that the reports contain valuable information about the searched-for person, such as arrest records, background check, phone number, and address.” Plaintiffs sued Intelius and other entities under the Illinois Right of Publicity Act for this advertising; Intelius got out for lack of personal jurisdiction but the others got out on a motion to dismiss on the merits.

The Illinois Right of Publicity Act prohibits the use of “an individual’s identity for commercial purposes during the individual’s lifetime without having obtained previous written consent from the appropriate person.” IRPA defines “identity” as “any attribute of an individual that serves to identify that individual to an ordinary, reasonable viewer or listener, including but not limited to (i) name, (ii) signature, (iii) photograph, (iv) image, (v) likeness, or (vi) voice.”  Defendants argued that they didn’t use plaintiffs’ “identities” because the ads only reflect the coincidental result of a third-party’s internet search for their names, without any additional information to identify one “Anna Dobrowolski” or “Nicole Vinci” over another. Even though IRPA specifically uses “name,” that’s in the context of identifying a particular individual; a name alone isn’t necessarily sufficient to identify an individual, since many people have the same name. The use at issue must serve “to identify that individual to a reasonable audience.”

Plaintiffs argued that defendants designed their ads to make a person searching the internet for “Nicole Vinci” or “Anna Dobrowolski” believe that the defendants had located the plaintiffs and had information on them. But that wasn’t enough.  Though a plaintiff need not allege facts sufficient to show that she was identified to the exclusion of all other persons bearing their name or likeness, she must still allege facts to plausibly infer that she was identified to a reasonable audience by the defendant’s use. Without any additional context, “Anna Dobrowolski” or “Nicole Vinci” didn’t identify the plaintiffs. The complaints do not suggest that the ads identify the plaintiffs in any manner except for name. The fact that the defendants benefited from designing their ads in the way they did still didn’t mean they identified the plaintiffs in particular.

To deal with a possible amended complaint, the court also addressed defendants’ arguments that because the names “Anna Dobrowolski” and “Nicole Vinci” were automatically populated into defendants’ generic ads as the result of a third-party’s search, the plaintiffs could not show that the defendants intended to appropriate the names “Anna Dobrowolski” and “Nicole Vinci.” But the requisite intent is simply “to use the material about the plaintiff for trade purposes”; the defendants’ intent to use full names in their otherwise generic ads was enough.

Defendants also argued that a ROP claim required the plaintiff’s identity to have intrinsic or commercial value before the defendant’s use. Though some pre-IRPA case law required this, IRPA did not—it’s about each individual’s “right to control and to choose whether and how to use [their] identity for commercial purposes” and isn’t limited to protecting celebrities or public figures.  [Query, as usual, how this is at all compatible with the First Amendment in the absence of falsity/misleadingness.]

Nor did an IRPA claim require an apparent endorsement. Even if ads stating “Anna Dobrowolski Located” or “We Found Nicole Vinci” don’t suggest to a reasonable viewer that Anna Dobrowolski or Nicole Vinci endorse defendants’ products, IRPA doesn’t require that the defendant’s commercial purpose be an apparent endorsement. “IRPA’s definition of ‘commercial purpose’ is broad, and the act contains no endorsement requirement. Neither does IRPA have a falsity requirement.”  Which is why it’s unconstitutional, especially as applied to services like this one.

Wednesday, August 30, 2017

Comparison to former licensor's products isn't trademark infringement

Alpha Pro Tech, Inc. v. VWR Int’l, LLC, No. 12-1615, 2017 WL 3671264 (E.D. Pa. Aug. 23, 2017)

APT sued VWR, a competitor in the market for nonwoven, disposable laboratory apparel for use in clean rooms and similar environments. VWR formerly carried APT’s Critical Cover line of laboratory apparel products, but transitioned to its own private line of products, prompting this lawsuit, which survived a motion to dismiss but not summary judgment.

APT used a proprietary fabric coating method to produce its products.  For a time, the parties agreed that VWR would be APT’s exclusive distributor of Critical Cover, and that VWR had the exclusive license to use the Critical Cover trademark and promotional literature.  APT began outsourcing components of Critical Cover products in the early 2000s, using XXPC, a company that made lab apparel for other competitors.  APT disclosed its resins and recipe for the extrusion coating with XXPC, under an oral confidentiality agreement.

VWR sought bids from suppliers in China to use as comparators with the APT garments, and XXPC submitted a successful bid. APT ran tests and monitored the resins it sent to XXPC and concluded that XXPC didn’t use APT’s materials to produce VWR’s products.

In 2010, VWR launched its private label line, branded Basic, Advanced, and Maximum Protection. The marketing materials explained that it was transitioning from the Critical Cover line to its new line and explained that VWR “ha[d] not changed the manufacturer, manufacturing location, or the manufacturing process for 95% of the products in [the] new line. For the majority of the portfolio, only the brand name and part numbers w[ould] change.” It also certified that some of the new private label products did not experience a change in raw materials from the Critical Cover line. VWR referred to a number of APT marks as points of comparison for VWR’s new Basic, Advanced, and Maximum protection lines, including a comparison chart with specs and drawings.

There were initial concerns about VWR’s shoe covers flaking more than Critical Cover shoe covers, and XXPC produced a second generation of shoe covers that addressed those issues. Independent testing established that the performance specifications of VWR’s new line were superior to APT’s in some respects and used a different combination of resins. VWR issued a correction letter advising end users to conduct their own testing, as it could no longer verify that the raw materials it used were exact.

The court found that APT couldn’t show misappropriation of trade secrets, because its resin recipe could be reverse engineered, which precludes trade secret protection in Pennsylvania.

Trademark infringement/false designation of origin: APT argued that VWR’s representations caused customers to believe that VWR’s new product line was comprised of Critical Cover products under a different brand name, thereby falsely representing its origin/causing initial interest confusion.  The court accepted the basic theory to avoid a situation in which “a defendant could escape liability for passing off simply by using another’s mark—a false designation of origin—to establish the equivalency of the other’s mark and the defendant’s new mark, and then shift to using only its new mark.”  [Of course, that description is an overgeneralization: if the products are equivalent, then an equivalence claim is not false; it’s just comparative advertising.]

VWR argued that Dastar barred this claim, but the court disagreed; the case could be analyzed as a regular passing off case.  Still, on summary judgment, APT didn’t raise a triable issue on likely confusion.  Customer care and attention “casts great doubt on any likelihood of confusion,” given that the relevant purchasers were experienced professionals buying apparel for use in clean room/controlled environments, “where customers’ validating procedures tend to be thorough.”

Likewise, the evidence of actual confusion and the length of time the mark was used without actual confusion weighed against a likelihood of confusion. Three customers “engaged in conversation with APT about the transition, asking APT for further explanation of the differences between VWR’s new product line and the Critical Cover products.” This wasn’t trademark confusion, but rather confusion about “whether a VWR-produced product they purchased was equivalent to APT’s Critical Cover products.”  Other communications identified by APT didn’t indicate any confusion.  For example, communications noting problems with VWR’s first generation of shoe covers “might support that the customers believed they were receiving an equivalent product that would perform in the same manner as APT’s products,” that again wasn’t trademark confusion. 

VWR’s intent also weighed against finding likely confusion.  VWR knew that it could be easier to proceed through certification and testing procedures if it represented that was the same product that APT produced, but that’s different from adopting a similar mark.  It didn’t “adopt” a similar mark at all; it compared its products to those of APT.  (Again, “use as a mark” is a shortcut/an explanation for why there’s no confusion.)

False advertising: This is a better theory, but it fares no better in the end.  APT argued that VWR falsely equated the parties’ products, causing customers to believe that VWR’s products were Critical Cover products under a different brand name (because they had the same components and processes).  APT tried to rely on a presumption of causation and materiality based on literal falsity, but those presumptions don’t apply when a plaintiff seeks only monetary damages, not an injunction.  (I’d think the customer complaints about the first generation might tend to show materiality, even without a presumption.  Separately, I haven’t seen this distinction articulated for actual deception before—it seems to get rid of the literal falsity/misleadingness distinction for money damages cases, requiring evidence of deception, probably a consumer survey, no matter what the theory is—which doesn’t make a lot of sense for a straight-up literal falsity case.)  Even if some of VWR’s statements were literally false, APT failed to show (1) actual deception or a tendency to deceive and (2) materiality. “These requirements are not easily satisfied.” There was no non-hearsay customer testimony that the statements misled customers or influenced their purchasing decisions.  

"100% grated parmesan cheese" doesn't have to be all cheese, court rules

In re: 100% Grated Parmesan Cheese Marketing & Sales Practices Litig., 2017 WL 3642076, No. 16 C 5802, MDL 2705 (N.D. Ill. Aug. 24, 2017)

Ah, implicature, how I wish judges understood you.  A product labeled “100% Grated Parmesan Cheese” is, apparently, ambiguous—it could mean the product has a bunch of different ingredients, but the parmesan component is 100% grated, rather than only partially grated.  This is nonsense for a product that purports to be cheese, though it would make sense for a non-cheese-only product with a “made with 100% grated parmesan cheese” label.  In fact, the common-sense comparison is the challenged phrase with or without “made with”—on its own, the “100%” naturally applies to all the words following it.

Anyway, plaintiffs alleged that they were misled by the labels because the products contained a nontrivial amount of cellulose.  Each product’s ingredient list disclosed the non-cheese ingredients, in smaller, less conspicuous print. Each ingredient list states that the cellulose is added “to prevent caking.”

The court agreed that plaintiffs had Article III standing, having purchased a product allegedly worth less than what they paid and what they were promised. 

Synthesizing consumer protection precedents from multiple jurisdictions, the court concluded that “[w]here a plaintiff contends that certain aspects of a product’s packaging are misleading in isolation, but an ingredient label or other disclaimer would dispel any confusion, the crucial issue is whether the misleading content is ambiguous; if so, context can cure the ambiguity and defeat the claim, but if not, then context will not cure the deception and the claim may proceed.”  This isn’t entirely consistent with the cases the court quotes, such as the 9th Circuit’s Williams—here’s the quote the court pulls from Williams: deceptive marketing claims survived a motion to dismiss where there were “a number of features of the [front of the packaging] … which could likely deceive a reasonable consumer,” and a consumer thus “should [not] be expected to look beyond misleading representations on the front of the box to discover the truth from the ingredient list” (emphasis added).  The question is whether a consumer might rely on the product name without checking the ingredient list, and ambiguity can certainly play a role there, but a consumer might make inferences even from a theoretically “ambiguous” claim and not check the label.  Of course, the larger problem here is that there’s nothing ambiguous about “100% Grated Parmesan Cheese” in context.

The court continued: “consumers who interpret ambiguous statements in an unnatural or debatable manner do so unreasonably if an ingredient label would set them straight.”  The court conflates “unnatural” with “debatable” here, I think—if a substantial portion of consumers are confused by a claim, the fact that others aren’t, and that the question in general is “debatable,” shouldn’t matter (absent some cost-benefit analysis, at least—so if there’s a good way of communicating the truth to avoid deceiving the relevant subset of consumers, that should be used). 

The court analogized people who thought that “100% Grated Parmesan Cheese” meant that the product was 100% parmesan cheese to people who thought that Froot Loops were made with fruit.  The phrase was ambiguous because “it also might be an assertion that 100% of the cheese is parmesan cheese, or that the parmesan cheese is 100% grated. Reasonable consumers would thus need more information before concluding that the labels promised only cheese and nothing more, and they would know exactly where to look to investigate—the ingredient list.” Thus, the labels weren’t deceptive. 

Comment: that statement might avoid perjury because of this equivocation, but that’s not the standard for consumer protection cases.  A reasonable consumer shouldn’t have to ask follow-up questions when the product says on the front that it’s 100% one thing.

The court thought that the nothing-but-cheese reading was the least plausible of its three possible interpretations, because it thought that consumers should know that a product that was packaged and shelf-stable at room temperature could not be pure cheese. Really?  Because I buy parmesan in unrefrigerated-but-sealed chunks, and I’ve also been known to buy Parmalat, a shelf-stable unrefrigerated milk.  We live in an age of miracles and wonders; I’m not saying I’d expect cheese to last centuries, but leaving a dry cheese like parmesan sealed but unrefrigerated seems plausible to me. Still, I’m apparently unreasonable, because reasonable consumers “would still suspect that something other than cheese might be in the container [of unrefrigerated, shelf-stable cheese], and so would turn it around, enabling them to learn the truth from a quick skim of the ingredient label.”

Anyway, warranty and unjust enrichment claims failed for the same reason.

Advertising question of the day: Honeycrisp or honey crisp?

Assuming this alcoholic beverage is not made from honeycrisp apples--but that it does contain honey--would the product name be false or misleading?  H/T Adam Levitin.  Note that the manufacturer doesn't disclose the apple variety one way or another, as far as I can tell.

"universal" is generic for churches

Universal Church, Inc. v. Universal Life Church/ULC Monastery,  2017 WL 3669625, No. 14 Civ. 5213 (S.D.N.Y. Aug. 8, 2017)

The Universal Church, Inc., is a Pentecostal/Charismatic church with “around 30,000 members,” while its Brazilian affiliate has millions of members. Defendant ULC is a nonprofit that offers free ordinations to its members; it’s an offshoot of a church founded in California in the 1950s that was initially called the “Universal Church.”  The plaintiff registered “Universal Church,” “The Universal Church,” and “Universal Church of the Kingdom of God.” The first and third were registered for use in “evangelistic and ministerial services, namely, conducting religious worship services” and became incontestable in 2012. “The Universal Church” was registered in 2012 for use in “religious counseling and ministerial services,” “newsletters and informational brochures all about religious beliefs and practices,” and “t-shirts distributed in connection with religious groups.”

In 2009, defendants attempted to register “Universal Life Church” and several similar marks; they were rejected on 2(d) grounds and the cited marks included “Universal Church” and “Life Church.” They abandoned the applications.

Plaintiff challenged five types of uses: (1) 17 domain names, including (registered in 2010), containing the phrase “universal church”; (2) use of “Universal Church” on the website;

(3) use of “Universal Church” in the website’s metadata so that the website’s name shows up as “The Universal Church” in search results;

 (4) bidding on advertising keywords, including “the universal church,” so that defendants’ websites appear in Internet search engine ads; and (5) “hijacking” map-based searches so that defendants’ website is associated with the location of plaintiff’s churches. For example, the Google Maps search result for plaintiff’s church at 1077 Southern Boulevard in the Bronx was linked to defendants’ website,, as shown below:

The court found that “Universal Church” was generic for the services at issue—in a useful point that reminds me of the Seventh Circuit’s Car Freshner case on descriptive fair use, the court noted that the question of who bears the burden of proof on protectability “turns on whether plaintiff is attempting to enforce its trademark within the class of services for which it was registered.”  The court interpreted “evangelistic and ministerial services, namely conducting religious worship services,” broadly, since ordaining ministers as defendants do is a “ministerial service.”  Also, plaintiff had apparently objected to many other uses by other religious and even non-religious organizations, indicating the breadth of its interpretation of the class.  Thus, plaintiff was entitled to a presumption of validity.

Still, “universal” was generic for churches.  There was lots of evidence, dictionary and historical, that “universal” is understood as referring to the entire Christian Church or all Christians collectively. “Universal” for churches has a similar meaning to “catholic,” which is simply the transliteration of the Greek word for “universal,” “καθολικóς” or “katholikos.” (The court later says it isn’t opining on whether Catholic is itself generic.)  The parties agreed that this meaning was “well-established within the Roman Catholic Church and that at least some non-Catholics understand and use the term in this sense.”  The use had existed for hundreds of years, or thousands if you add in the original Latin and Greek versions.  Defendants also presented evidence that numerous churches use “universal” and “universal church” in their name.  It’s even part of the name of a denomination, Unitarian Universalism.

Plaintiff’s evidence of trademark meaning was minimal.  It claimed that it used the mark in connection with its 230 physical locations and weekly broadcasts that reach 800,000 people. But this was based on testimony from its own employees, which had little probative value; it couldn’t substantiate the viewership claims with documentary evidence.  Even if the court accepted the plaintiff’s claim to use the “Universal Church” mark in connection with its physical churches and broadcasts, that didn’t show how the mark is understood by the vast majority of the “relevant public” who don’t belong to the church. The only evidence about that public was two articles referring to plaintiff as the “Universal Church.”

Based on this record, “the primary significance of ‘universal church’ to the relevant public is a type of church rather than plaintiff, namely one that considers itself to be universal in the sense of representing the entire Christian church.”  The court declined to grant the plaintiff a monopoly over “universal” in church names, “a monopoly which plaintiff has already indicated that it would enforce aggressively. We are persuaded that the trademark law is simply not intended to allow the mark to be weaponized by plaintiff in this way.”

Even if the court found that “Universal Church” was descriptive, it would still reject the plaintiff’s claim, due to the weakness of the mark and other factors.  As to actual confusion, “plaintiff’s evidence suggests that someone searching the Internet for ‘universal church’ will sometimes land on defendants’ website.”  But the evidence didn’t show that this was because of defendants’ use of the mark, or that people conducting such a search were actually looking for the plaintiff.  And there was no evidence that  anyone purchasing ordination services was confused by defendants’ use of “Universal Church.”  Plaintiff’s survey allegedly showing likely confusion “attempts to measure the extent to which someone googling ‘the universal church’ would believe that he had landed on a website for an entity called “The Universal Church.”  (Googling!)  But that was of limited value because the survey takers were just told they were searching “for a generic entity named ‘The Universal Church,’ without any attempt to measure whether the survey takers associated such an entity with plaintiff.”

Plaintiff’s VP testified that “many” of its pastors and members “had a hard time trying to reach our correct Web site while they were searching for our domain.” This was too vague to show actual confusion, or that such confusion “resulted from defendants’ use of plaintiff’s trademarks, as opposed to, for example, defendants’ non-infringing search optimization strategies.”  Neither party discussed IIC separately, but the court doubted whether initial interest confusion is even relevant here, because IIC requires confusion, not mere diversion.  Similarly, instances where individuals “refer[red] to the defendants by the misnomer Universal Church” weren’t relevant to confusion claim because “universal church” wasn’t being used to refer to the plaintiff.

The court did note that a reasonable juror could come out either way on defendants’ intent; it just didn’t matter, even if intent favored the plaintiff.

The quality of defendants’ services, which the Second Circuit hasn’t gotten around to eliminating, was interesting if only because the court was called on to judge the quality of religious services.   “Plaintiff argues that defendants’ ordination services are inferior because they allow anyone to become ordained online without committing to a particular teaching or faith, without formal education, without training, and without committing to attend to the spiritual needs of others. On the other hand, the features that plaintiff views disparagingly are likely the very features that defendants’ customers value. Thus, we find that defendants’ services are not inherently inferior.”

Cybersquatting claims failed too, of course; even if the mark weren’t generic, the primary cybersquatting claim would still  have failed because the mark was not distinctive at the time was registered, in 2010, before the “Universal Church” registration became inconstestable and before it acquired any secondary meaning.

The court granted summary judgment sua sponte on the NYGBL claims because they couldn’t succeed; ordinary trademark or trade dress infringement claims are not cognizable under §§ 349 and 350 unless there is a “specific and substantial injury to the public interest over and above ordinary trademark infringement or dilution.”  The plaintiff argued that there would be harm from getting the wrong religious services, but “the injury is precisely the type of injury that results from ordinary trademark confusion and does not constitute a separate public injury.”

Monday, August 28, 2017

state courts do nominative fair use too

Instant Infosystems, Inc. v. Open Text, Inc., 2017 WL 3634547, No. B276691 (Cal. Ct. App. Aug. 24, 2017)

Another illustration of the principle that courts don’t like to do two dilution analyses—this state court only talks about federal dilution, assuming that the analysis is the same for both.  Open Text owns RightFax, software that allows users to fax documents via computer, without a fax machine.  Instant and Open Text had a contractual relationship; after that ended, Open Text allegedly told customers that Instant wasn’t permitted to service RightFax. Instant disagreed and sued for tortious interference and violation of the UCL.  Open Text counterclaimed for trademark infringement, dilution, and false advertising under state and federal law, as well as breach of contract, and sought a preliminary injunction, which the trial court denied. The false advertising claim was based on emails from Instant stating that certain RightFax products would be reaching its “support end of life” or “end of life.” The court of appeals affirmed the denial of the preliminary injunction.

The court reviewed the denial of the preliminary injunction for abuse of discretion; the factors are (1) likelihood of success on the merits and (2) interim harm to the plaintiff absent an injunction compared to harm to the defendant with an injunction.

The court of appeals used the Ninth Circuit nominative fair use “defense,” holding that all three prongs are factual questions.  Though the trial court issued only a one-line order, California courts of appeal presume the trial court made all findings necessary to support the order, and thus affirm if substantial evidence exists to support such findings.  Factor one: there was evidence that the service Instant provides for support of RightFax is not readily identifiable without specifically naming RightFax.  Factor two: Instant submitted evidence that it used only so much of the mark as was reasonably necessary to identify its own service. On Instant’s RightFax webpage, Instant states: “Instant InfoSystems has been providing world-class technical support for RightFax for nearly 20 years. Our vast experience and depth of technical expertise with RightFax has helped large and small companies implement reliable, secure, and cost-effective solutions for sending and receiving documents ....”  Factor three: There was evidence that Instant’s homepage, which displays a list of Instant InfoSystems’s partners, doesn’t list Open Text as a partner. It also had a Web page dedicated to explaining the company’s history, the previous partnership with Open Text, and that the partnership had come to an end. Though Instant at one point referred to itself as “the Right Fax Experts,” this was replaced with “the Fax Experts,” and Instant removed all references to partnership awards from Open Text from its website.  (Query whether these last steps were necessary; certainly it would seem fair and truthful to put the awards on the history page.)  Based on all this, substantial evidence supported the trial court’s implied finding of nominative fair use.

Nominative fair use also precludes a finding of trademark dilution because, by definition, it doesn’t “create an improper association in consumers’ minds between a new product and the trademark holder’s mark.”

False advertising: the parties submitted conflicting evidence pertaining to whether a consumer would be deceived regarding the term “end of life.” Open Text’s declaration from its RightFax product manager stated that he had to make on-site visits to customers to convince them RightFax would continue to be supported after the emails, and that Instant had informed several customers RightFax was dead, which required him to respond. But Instant’s declaration from a former employee at RightFax’s previous owner stated that “end of life” was used properly by Instant as it was understood in the industry, and was even used in such a way by Open Text’s current partners when referring to RightFax.  Presuming that the trial court resolved the conflicting evidence in favor of Instant, the court of appeals affirmed the finding of no likely success on the merits.

Finally, substantial evidence supported the implied finding that the balance of harms didn’t tip in favor of Open Text. Instant’s harm if the preliminary injunction was granted was the loss of business involving RightFax services, which it had been performing for 15 years.  The status quo was seven months of Instant using the RightFax trademark on its Web site and in other communications, which an injunction would immediately change. Further, Open Text waited more than seven months after terminating the parties’ agreement to object to the continued use of the RightFax mark, supporting the trial court’s finding on the balance of harms.

Plaintiff can't win false advertising claim because there's evidence on both sides

Korolshteyn v. Costco Wholesale Corp., No. 15-cv-709, 2017 WL 3622226 (S.D. Cal. Aug. 23, 2017)

Ugh. Costco’s TruNature Gingko labels represent that the product “supports alertness & memory,” that “Gingko biloba can help with mental clarity and memory,” and that “[i]t also helps maintain healthy blood flow to the brain to assist mental clarity and memory, especially occasional mild memory problems associated with aging.” Plaintiff alleged that these were false or misleading under the UCL and CLRA.  Relying on In re GNC Corp., 789 F.3d 505 (4th Cir. 2015), the court here found that this was an impermissible lack-of-substantiation claim, and that therefore a private plaintiff can never prove falsity “when a defendant offers scientific evidence and admissible expert testimony supporting an advertising claim about the efficacy of the product in question.”  To prove falsity, all reasonable experts in the field must agree that the representations are false.  The court found that California would follow GNC, because no state court cases have rejected it, but I doubt that given the state’s tradition of consumer protection and its occasional rejection of the Lanham Act analogy ostensibly underneath GNC (occasional because there’s so much California consumer protection law that the analogy is only rarely made).

Mullins v. Premier Nutrition Corp., 178 F.Supp. 3d 867 (N.D. Cal. 2016), held that a plaintiff could prove claims “literally false if a reasonable jury concludes that all reasonable scientists agree,” or that the claims are “misleading by showing that the vast weight of the competent evidence establishes that those health claims are false.” This is an attempt to draw off some of GNC’s poison, but as we will see it doesn’t work well.  The main reasons that this formulation isn’t a good one are that (1) the Lanham Act’s false/misleading distinction, from which GNC’s consumer protection law reasoning is supposedly drawn, doesn’t have anything to do with “all reasonable scientists” v. “vast weight of the competent evidence,” but rather with issues of consumer perception, and (2) the way scientific evidence works doesn’t generally allow for such a distinction; the most you can say about any given study is that, at various levels of quality, it provides support for an affirmative claim or it doesn’t provide support for that claim.  Mullins said that, for misleadingness, a plaintiff “can concede the existence of scientific studies substantiating a representation, but argue that those studies are poorly designed, incredible, or represent the view of a minority of scientists.” But now we are firmly detached from the idea of consumer perception, and the existence of poorly designed or “incredible” studies shouldn’t be allowed to avoid a finding literal falsity anyway!

It is one thing to say that “[i]nconclusive findings and unsettled science are insufficient to meet Plaintiffs’ burden of raising a question of fact on the issue of falsity,” and quite another to say, as if it were a mere restatement, that “mixed evidence demonstrates at most that the science on [the product’s] effectiveness is inconclusive.”  This is the fallacy of the excluded middle: in the former situation, even crediting all the evidence, the plaintiff couldn’t meet its burden of proof at trial on the merits; in the latter, it might be the case that, depending on which evidence you credited, the plaintiff could meet its burden.  This distinction may seem fine, but it makes a big difference because it is about whether courts will throw up their hands when truth is in question—the very essence of the factfinding project. And that’s not hyperbole on my part, that’s from the courts following GNC: “where there are studies demonstrating both the effectiveness and ineffectiveness of the Products, a reasonable jury could not find that the advertising claims are false.”

So, the court here reasoned, “when a defendant presents scientific studies supporting its advertising claim, a plaintiff must do more than present its own studies that do not support the advertising claim, thereby demonstrating that evidence is equivocal.” Mullins, with which the court here disagreed, held that the plaintiff could offer “principled, supported critiques” of the defendant’s studies, allowing the jury to disregard them or to find the plaintiff’s studies more persuasive and thus find the advertising claims misleading.

The court here also found that the plaintiff was only alleging falsity, not misleadingness, because it thought misleadingness had nothing to do with consumer perception.  Though she used the words “false and misleading,” she was really arguing that the claims were misleading because they were false.  Again, the court didn’t seem to understand misleadingness as something that happened on the consumer end.  In fact, consumers might—and, we know from other studies, in fact do—think that a claim on the label of a supplement has substantial scientific weight behind it, including FDA approval; they are thus misled, quite possibly materially, about the quality of the claim.

“Whether the Label Claims are true or false is a binary choice—they are true, or they are false. When the scientific evidence is equivocal, it is impossible to prove that an advertised claim is either literally true or literally false.”  Comment: This is (ironically?) at best misleading.  Not all cases in which there are factual disputes—even cases where there is enough on both sides to get past summary judgment—are “equivocal.”  Many of them are merely contested, something that courts see easily enough in the ordinary partisan context.  That doesn’t deprive the factfinder of the ability to determine which is the truth, and if it can’t do so, then the burden of proof does the necessary work.  GNC, as I feared, has led to a series of false equivalences, with slippages in meaning each time—from judge-made Lanham Act doctrine to consumer protection law, from false to misleading, from “equivocal” to “equipoise.”

“Essentially, Plaintiff is arguing that the Label Claims could be misleading because a jury could find that Defendants have not proven them to be literally true, which is little more than a ‘lack of substantiation’ claim.” Comment: No, the jury could find that the statement “this product aids memory” is false, because the plaintiffs’ evidence about the studies makes its falsity more likely than not.  If a good study would likely have shown an effect, and a good study exists that didn’t show this effect, that tends to make it more likely that there is no effect—indeed, that’s why you try to disprove a hypothesis.  “Literally false” and “lie” are not the same thing (even if “literally false” was a part of consumer protection law).

“In sum, when a plaintiff presents admissible expert testimony that scientific studies do not support an advertised claim, and a defendant presents admissible expert testimony that scientific studies support the advertised claim, the evidence is equivocal and all reasonable scientists do not agree. No jury conclusion would change either of these facts.” Comment: Note how misleadingness, in the ordinary sense of causing consumers to have false beliefs regardless of literal truth, has become conceptually impossible as well.  Under the court’s reasoning, attempting to prove misleadingness would also cause the impermissible “substantiation” problem—because the fact that a statement deceived consumers about the level of proof would also not change the fact that there was scientific evidence on both sides.

Missing from the court’s reasoning about substantiation is the role of the burden of proof.  A substantiation requirement means that the defendant has the burden of showing that its claim is true.  A falsity or misleadingness requirement means that the plaintiff has the opposite burden; scientific studies showing no effect are one way of meeting that burden.  In fact, they are the best way to do so, though whether they are sufficient in any given case may well be a matter for the jury. 

I think the courts who follow GNC have been confused about the concept of “scientific study” and its intersection with a very different mode of factfinding, the judicial trial. Consider the following claim: X sold the most houses in the county last year.  This might or might not be true; we have various means of getting at the truth; we might even have conflicting evidence (records, after all, may be imperfect; sometimes the best evidence comes from fallible human memory, or human testimony that might require a factfinder’s credibility evaluation).  Could anyone seriously maintain that “X sold the most houses in the county last year” cannot be false if the defendant possesses evidence sufficient to avoid a verdict on summary judgment?  What’s so different about “science”? 

What the GNC line of cases is really saying is that courts will not engage in the very process they’re constituted to engage in if a consumer protection case requires a factfinder, as the court makes clear when it says “under California law a Plaintiff cannot maintain a false advertising claim when the defendant offers admissible expert testimony and scientific evidence supporting the advertisement in question.”  That is, the court will only look at one side of the evidence; I would call that not very judicious.  And by the way, this formulation means that in fact there is a substantiation requirement under California law—just one in which the quality of the substantiation is judged by a minimal standard, that of admissibility. When a rationale for a rule makes the rule a failure on its own terms, there is something deeply wrong.

Because there was competent evidence on both sides, the defendant won on summary judgment.  If you see something wrong with that previous sentence, then you see the problem with GNC.

Friday, August 25, 2017

Suing critics using copyright doesn't work

Hosseinzadeh v. Klein, No. 16-cv-03081 (S.D.N.Y. Aug. 23, 2017)

Hosseinzadeh posts original video content on YouTube, playing a character known as “Bold Guy.” Ethan and Hila Klein criticized “Bold Guy vs. Parkour Girl,” in which the Bold Guy flirts with a woman and chases her through various sequences, in a video titled “The Big, The BOLD, The Beautiful.” The accused video is almost fourteen minutes long, and intersperses long segments of commentary with short clips of the Bold Guy video, ultimately using three minutes and fifteen seconds of that five minute, twenty-four second long video. “As critical as it is, the Klein video is roughly equivalent to the kind of commentary and criticism of a creative work that might occur in a film studies class.” From that, you can fill in the rest of the fair analysis: Kleins win.

Remaining claims: a §512(f) false DMCA counternotification claim and defamation based on statements about the lawsuit. Those fare no better. If a subjective good faith belief is enough to submit a §512 notice, as the Ninth Circuit has held, then the same is true for a counternotification. Since the video was fair use, there weren’t any misrepresentations in the counternotification. But even had the court found otherwise, the §512(f) claim still fails because the Kleins “clearly had a subjective ‘good faith belief’ that their video did not infringe plaintiff’s copyrights.” The court emphasized that it was “undisputed that defendants understand the concept of fair use and have an established practice for ensuring their videos make fair use of copyrighted material,” which was enough to clearly establish their good faith belief/win summary judgment.

Defamation: nothing in the lawsuit video was defamatory; it was either substantially true or opinion. E.g,, Ethan Klein’s statement “I think that the heart and soul of this is . . . he doesn’t like that we made fun of him, and so he’s suing us” was “a quintessential statement of pure opinion.” The plaintiff also challenged Ethan Klein’s statement that “several months passed [and] nothing happen[ed]” prior to plaintiff’s first settlement offer and threat of litigation, when plaintiff sent a warning email during that time. A statement is “substantially true” “if the statement would not have a different effect on the mind of the reader from that which the pleaded truth would have produced.” Plaintiff argued that Klein’s statement portrayed him as “a trigger-happy litigant who immediately activates his lawyers when he is criticized.” But (1) in context, the statement was clearly about the Kleins’ surprise and disappointment that a lawsuit was filed several months after they first posted the video, and didn’t necessarily mean that the parties had no communication during that period. And (2) anyway, mention of the warning email wouldn’t have changed anything—if the actual statement would lead a viewer to see plaintiff as a “trigger-happy litigant,” “it is exceptionally unlikely that knowledge of the April 2, 2016 email, in which plaintiff explicitly threatened ‘costly’ legal action if defendants did not comply with his demands within twenty-four hours, would change that perception.”

On the genericity of Velcro/velcro

Denver's Science Museum:
Note the use of "Velcro," capitalized, as the generic term for hook-and-loop fasteners, as well as the uncapitalized use in the Spanish translation immediately below.

Is a ban on the words "climate change" in grants consistent with Tam?

This image, of a government employee telling a grant applicant that her proposal can't use "climate change" or "global warming" and get funded, seems like a pretty good example of a "happy talk" provision.  Is this new requirement an unconstitutional condition/viewpoint discrimination under Rust and Finley?

Thursday, August 24, 2017

cy pres-only settlement ok'd in Google privacy case

In re Google Referrer Header Privacy Litigation, --- F.3d ----, 2017 WL 3601250, No. 15–15858 (9th Cir. Aug. 22, 2017)

The underlying class action claimed that Google violated users’ privacy by disclosing their internet search terms to owners of third-party websites. The court of appeals, over a partial dissent, finds that the district court didn’t abuse its discretion in approving the $8.5 million cy pres–only settlement.  The settlement provided that Google would provide information on its website disclosing how users’ search terms are shared with third parties.

About $3.2 million was set aside for attorneys’ fees, administration costs, and incentive payments to the named plaintiffs, and the remaining $5.3 million or so was allocated to six cy pres recipients who agreed “to devote the funds to promote public awareness and education, and/or to support research, development, and initiatives, related to protecting privacy on the Internet”: AARP, Inc.; the Berkman Center for Internet and Society at Harvard University (disclosure: I am affiliated with the center, now the Berkman-Klein Center); Carnegie Mellon University; the IIT Chicago–Kent College of Law Center for Information, Society and Policy; the Stanford Center for Internet and Society; and the World Privacy Forum. Each recipient submitted a detailed proposal for how the funds would be used to promote Internet privacy; the dissent criticized the inclusion of the relatively new Chicago-Kent program, and the majority opinion touts its accomplishments.

Because this settlement took place before formal class certification, settlement approval requires a “higher standard of fairness.” Cy pres-only settlements are the exception, not the rule.  They are appropriate where the settlement fund is “non-distributable” because “the proof of individual claims would be burdensome or distribution of damages costly.” The district court reasonably found the settlement here non-distributable; “each class member was entitled to a paltry 4 cents in recovery—a de minimis amount if ever there was one,” and the cost of finding and verifying them would far exceed that.

Objectors sought a requirement that some non-named class members be compensated, perhaps by lottery.  But that’s not required for fairness.  Further, the fact that the settlement fund was non-distributable doesn’t disprove superiority under Rule 23(b)(3). “[T]he purpose of the superiority requirement is to assure that the class action is the most efficient and effective means of resolving the controversy.” Small individual recoveries are a hallmark of situations where class actions are superior, so that’s consistent with a cy pres-only settlement. 

The majority also rejected objectors’ challenges to the recipients due to claimed relationships between counsel or the parties and some of the cy pres recipients. To avoid unfairness and abuse, cy pres awards must meet a “nexus” requirement by being tethered to the objectives of the underlying statute and the interests of the silent class members. But objectors didn’t argue that the nexus requirement had been violated; the recipients were independent, established national organizations with “a record of promoting privacy protection on the Internet.” “Although the district court expressed some disappointment that the recipients were the ‘usual suspects,” it recognized that “failure to diversify the list of distributees is not a basis to reject the settlement ... when the proposed recipients otherwise qualify under the applicable standard.’”  

However, the objectors argued, Google had in the past donated to some of the cy pres recipients, three of the cy pres recipients previously received Google settlement funds, and three of the cy pres recipients were organizations housed at class counsel’s alma maters. The ALI says, “[a] cy pres remedy should not be ordered if the court or any party has any significant prior affiliation with the intended recipient that would raise substantial questions about whether the selection of the recipient was made on the merits.” But not every prior relationship is disqualifying. The fact that Google had a role in reviewing the recipients wasn’t disqualifying, as long as the nexus requirement was satisfied, because Google was entitled to bargain in its own interests.  Moreover, Google’s earlier donations were unsurprising, given “the burgeoning importance of Internet privacy” and the breadth of its donations; the district court conducted its own review of the recipients’ proposals and found them appropriate.  “Notably, some of the recipient organizations have challenged Google’s Internet privacy policies in the past,” but more importantly, the process was transparent and the proposed recipients disclosed previous Google donations and explained how the cy pres funds were distinct from Google’s general donations.

Previous receipt of cy pres funds from Google wasn’t disqualifying “without something more, such as fraud or collusion,” and a ‘new recipient every time’ rule would be in tension with the nexus requirements, which prefer a cy pres recipient with a “ ‘substantial record of service.’ ” “But in emerging areas such as Internet and data privacy, expertise in the subject matter may limit the universe of qualified organizations that can meet the strong nexus requirements we impose upon cy pres recipients.”

Finally, class counsel’s alma maters didn’t matter.  There might be a case where alumni connections could cast doubt on the propriety of the selection process, but this wasn’t it. “[C]lass counsel have no ongoing or recent relationships with their alma maters and have no affiliations with the specific research centers,” which were well-recognized in the relevant field; the objectors didn’t suggest more qualified alternatives.

Judge Wallace agreed that a cy pres-only settlement was appropriate in this case and agreed that the fee award was fine, but was troubled that “47% of the settlement fund is being donated to the alma maters of class counsel” and wanted an evidentiary hearing at which class counsel would be examined under oath about the role of their prior affiliations in the selection.  Given the connection, Judge Wallace wouldn’t put the burden on the objectors to show that the settlement might be tainted; district courts “must be particularly vigilant not only for explicit collusion, but also for more subtle signs that class counsel have allowed pursuit of their own self-interests and that of certain class members to infect the negotiations.” A cy pres-only settlement was a yellow flag, as was a settlement before class certification; adding several million dollars being given to class counsel’s alma maters raised a red flag, especially to the newborn Chicago-Kent center.  The burden should be on class counsel to show appropriateness, and one-line declarations of a lack of present affiliation with the relevant institutions weren’t sufficient.  Unsworn statements in court weren’t enough: “My experience as a trial judge taught me to be skeptical of unsworn statements from lawyers, especially when it comes to conflict of interest issues.” Judge Wallace wanted to know, among other things, what other institutions were considered, whether counsel donated funds in the past, whether their family members served on any alma mater committees or boards, and how often counsel visited.

4th Cir. holds certification nonprofit's self-promotion to retailers is commercial speech

Handsome Brook Farm, LLC v. Humane Farm Animal Care, Inc., No. 16-1813, 2017 WL 3601506, -- F. Appx. – (4th Cir. Aug. 22, 2017)

The court of appeals affirmed the district court ruling that a nonprofit egg certifier’s disparagement of an egg seller who wasn’t certified by the nonprofit was commercial speech.  HFAC certifies egg producers for humane treatment of their laying hens, and it sent an email to thirty-six grocery retailers, including some of the largest grocery chains in the nation, stating that Handsome Brook Farm lacked up-to-date certifications to support its representations that its eggs are organic and pasture raised. The email continued, “I hope you reconsider changing suppliers,” and touted egg producers with HFAC’s certification.  Though Handsome Brook lost existing and potential retailers as a result, its organic certifications were up-to-date and its pasture-raised certification had been recently audited. The district court preliminarily enjoined HFAC from circulating the email and required HFAC to publish a retraction email.

HFAC’s “Certified Humane” certification process is one of several in the market.  HFAC charges between $75 and $300 for an application, $600 per day per inspector for any farm inspection, and five cents for every thirty dozen eggs the producer sells with the Certified Humane label. It also solicits donations, because its revenue doesn’t fully cover its expenses.

Gordon & Breach, once the leading case on the matter, defined “commercial advertising or promotion” as (1) commercial speech (2) by a defendant in commercial competition with the plaintiff (3) for the purpose of influencing consumers to buy goods or services, (4) sufficiently disseminated to the relevant purchasing public to constitute advertising or promotion within that industry.  The court of appeals adopted the Gordon & Breach factors, except for (2), indicating that Lexmark had defined standing beyond direct commercial competition.   “[A]ny communication that is commercial speech, promotes a good, and is sufficiently disseminated is an advertisement for the promoted good, regardless of the speaker.”  Competition was a gatekeeping factor that had been superseded by Lexmark.

So, was the email commercial speech?  The basic factors are: whether the message is economically motivated, promotes a specific product, and is an advertisement. The Fourth Circuit has also previously asked whether the message is “placed in a commercial context and [is] directed at the providing of services rather than toward an exchange of ideas.” Greater Balt. Ctr. for Pregnancy Concerns, Inc. v. Mayor & City Council of Balt., 721 F.3d 264 (4th Cir. 2013).

HFAC, as a nonprofit, had a noneconomic purpose in advocating for the humane treatment of farm animals. But it also had an economic motivation in the sale of its licensees’ eggs, not just from revenue from egg sales, but also from becoming a market leader in certification.  “This hope of economic gain is made even more apparent by the email’s target audience: grocery store chains, including some of the largest in the nation, that HFAC had a relationship with and that were considering switching their egg supplier from another brand to Handsome Brook.” 

The speaker’s identity “factors into the reasonable recipient’s perception of economic motivation,” such that a for-profit company “is often presumed to have primarily economic motivations for its speech. Thus, a corporation’s informative literature or seminar is often still seen as commercial speech, especially if it includes any product promotion,” as in Bolger.  “Conversely, a non-profit organization is often presumed to have primarily noneconomic motivations for its speech, even if there are ancillary economic benefits. Thus, a watchdog non-profit organization’s report on allegedly abusive or unethical practices is still likely noncommercial speech, even if the report garners more donations; a reader would know that the watchdog organization’s primary motivation for publishing the report is noneconomic.”  But the speaker’s nonprofit status isn’t categorically determinative.  “Where a non-profit organization has a direct economic stake in the provision of its product or service, and structures its message in the hopes of realizing an economic gain rather than merely informing the public or pursuing its ideological views, it may reasonably be viewed as economically motivated.”  Given the targeting of retailers considering or recently switched to Handsome Brooks eggs, and given the comparative touting of HFAC-certified eggs, the court found that HFAC had an economic motivation despite its status as a nonprofit.

HFAC argued that its email didn’t specifically promote HFAC-certified eggs, but merely urged retailers to purchase any eggs that were humane, rather than Handsome Brook’s allegedly inhumane eggs. But the email “implicitly compared its licensees to the licensees of any other humane certification, and touted HFAC-certified eggs over all other eggs, including eggs certified by other organizations.”  Given this, “HFAC’s message was placed in a commercial context and fixated on the provision of services rather than advocacy of its ideological commitments.”  Its message “focused, not on ideological or moral concerns, but on economic and legal ones—‘this in turn protects you.’” Indeed, “HFAC’s message fits neatly into the type of promotional, commercial activity an identical for-profit organization would engage in.”  Thus, the email could be distinguished from a nonprofit’s charity auction or ancillary sales of paraphernalia, like hats or t-shirts or pens.  In such contexts, a reasonable audience “would recognize that the context was meant to celebrate, promote, and spread [the nonprofit’s] ideological mission.”

The email, however, “also in part disseminates noncommercial speech: its warning to retailers about Handsome Brook’s allegedly fraudulent labeling.” But this message wasn’t “inextricably intertwined” with HFAC’s promotion of its license, and so the email was correctly treated as commercial speech.  [Note the conceptual weirdness of this reasoning: the speech that the court specifically calls out as noncommercial is also the speech that was false, and for which HFAC was held strictly liable because the email as a whole was commercial speech.  Why do this slicing?  The same motive/focus on competing services reasoning absolutely applies to the warning, making it pure commercial speech under the court of appeals’ own reasoning.  Just because the same words could, in another context, be noncommercial speech doesn’t change that; the same words in HFAC’s self-promotion could also be noncommercial speech in another context.]

Under “inextricably intertwined” analysis, nonprofit solicitation for charitable donations is noncommercial speech, wholly protected by the First Amendment, even though it solicits money. Such solicitations are intertwined with informative/persuasive speech, and without solicitations, the flow of such speech might stop. Anyway, a nonprofit isn’t primarily concerned with providing information about the characteristics and costs of goods and services.  But “[n]o law of man or of nature makes it impossible” to warn the public of misleading labeling without promoting one’s own products, so the “commercial proposition” in HFAC’s email wasn’t “inextricably intertwined” with its noncommercial message, making the email as a whole commercial speech despite its mixed messages.

Finally, dissemination to thirty-six retailers, including some of the largest supermarket companies in the nation, was sufficient. “[A] ‘cold-send’ to anonymous recipients is not needed for a dissemination to be considered advertising.”

HFAC also argued that its statements weren’t false or misleading, because it had in fact received a complaint about Handsome Brook’s eggs from another producer’s employee, justifying the statement: “Based upon a whistleblower complaint we recently conducted a traceability inspection of a packing plant that packs Certified Humane® eggs and also packs Handsome Brook[’s ] eggs.”  But that didn’t matter, because HFAC never conducted an audit “based on” the complaint it received. In fact, HFAC wasn’t Handsome Brook’s licenser, so it couldn’t do any inspection.

Irreparable harm: in extraordinary circumstances, were monetary damages are unavailable or unquantifiable, they can constitute irreparable harm.  The district court found that the email caused two retailers to remove Handsome Brook eggs from their shelves and a third retailer to indefinitely suspend plans to sell Handsome Brook eggs. In addition, the email strained client relationships and led to continued discussion.  Under these circumstances, finding irreparable harm wasn’t abuse of discretion. “The business’s reputation continues to be tarnished as questions about the reliability of its labeling continue to circulate. And even if the monetary damages from Handsome Brook’s lost profits were quantifiable, they would likely be unattainable at judgment; Handsome Brook estimated that its monthly loss of revenue could number in the hundreds of thousands, and HFAC is a non-profit organization that likely cannot pay the damages Handsome Brook would be due.”

HFAC argued that the injunction was an unconstitutional prior restraint on its speech and mandated an unconstitutional compelled disclosure. Commercial speech isn’t subject to prior restraint doctrine, and compelled speech is more likely to be constitutionally permissible in the context of commercial speech. Thus, “disclosure requirements aimed at misleading commercial speech need only survive rational basis scrutiny, by being ‘reasonably related to the State’s interest in preventing deception of consumers.’ ”  A retraction email satisfied that standard, mitigating the harm of the first message.  It also served the public interest in truthful information.

Monday, August 21, 2017

Tag-along state UDAP claim leads to $18.5 million fee shift against unsuccessful plaintiff

Procaps S.A. v. Patheon Inc., No. 12-24356-CIV, 2017 WL 3536917 (S.D. Fla. Aug. 17, 2017)

This case stands as a stark reminder that adding a state-law deceptive trade practices claim to a federal claim can have serious consequences—the only reason to do it as a plaintiff is if you think the substantive standards will vary (certainly possible, depending on the state) or the remedies will vary (likewise).  But where that’s true, consider whether the fee-shifting standards will also vary.  In Florida, they do.

Here, Procaps is ordered to pay about $18.5 million in attorneys’ fees and costs after losing “a full-throttle lawsuit which has generated 1165 docket entries and an appeal (including oral argument) since it was first filed in mid-December 2012.”  Procaps’ main claim was a federal antitrust claim, but it brought a coordinate Florida Deceptive and Unfair Trade Practices Act claim.  The federal antitrust statute authorizes an award to a prevailing plaintiff but not to a prevailing defendant, but that turns out not to matter even though the FDUTPA claim was a “tag-along” claim, “based mostly (though not entirely) on the same circumstances at issue in its federal Sherman Act antitrust claim.”

Under FDUTPA, a “prevailing defendant” is permitted to recover its attorney’s fees and costs from a non-prevailing plaintiff after the exhaustion of all appeals; the court has to consult a non-exhaustive list of discretionary factors:

(1) the scope and history of the litigation; (2) the opposing party’s ability to satisfy the award; (3) whether an award would deter others from acting in similar circumstances; (4) the merits of the respective positions, including the degree of [Procaps’] culpability or bad faith; (5) whether the claim brought was not in subjective bad faith but was frivolous, unreasonable, or groundless; (6) whether the defense raised a defense mainly to frustrate or stall; and (7) whether the claim brought was to resolve a significant legal question under FDUTPA law.

I’ll let the judge summarize the scope and history: “Nothing was easy in this case. Nothing. Basically, the parties fought about anything and everything.” Further descriptors: “difficult,” “problematic,” “stressful,” “grueling,” “especially unpleasant and nasty.”  Procaps could pay.  On appeal, the Eleventh Circuit characterized its theory as “intrinsically hopeless,” so that supported a fee award.  Procaps and its counsel, “at a minimum, … made this case far more difficult than it had to be, and … this caused Patheon to incur additional attorney’s fees and costs.” Frivolousness isn’t a requirement, and courts award fees under FDUTPA to defendants who prevail on summary judgment on a FDUTPA claim after a plaintiff initially gets past a motion to dismiss.  Though the court declined to find the claim frivolous, its antitrust theory was “either unreasonable or approaching the level of being unreasonable,” because it needed and could not show concerted action.

In terms of deterrence, the court considered that Procaps apparently brought its antitrust claim because it was a limited exception to the parties’ arbitration agreement “and because it wanted to use the threat of treble damages to pressure Patheon into paying a hefty settlement.” Because of the weakness of the antitrust claim, a fee award wouldn’t deter legitimate antitrust claims brought by private attorneys general, but it would be good to deter a putative plaintiff from bringing an “intrinsically hopeless” antitrust claim.  The remaining factors were neutral, and the court declined to follow a few federal district court cases holding that FDUTPA fees shouldn’t be awarded when the FDUTPA claim is a tag-along to a separate federal claim.

In fact, Florida state caselaw indicates that the prevailing party should get the benefit of overlapping claims; fees can’t be deducted for work unless it was clearly unrelated to the FDUTPA claim.  “[I]t is Procaps’ burden to establish that the attorney’s fees and costs incurred by Patheon were clearly not related to the FDUTPA claim, which was largely based on the same antitrust theory as the antitrust count.” Thus, “the time Patheon spent defending the Sherman Act claim was time spent defending the FDUTPA claim.”  And that’s $18.5 million.

The court emphasized that not every party who prevails on a FDUTPA claim would be entitled to fees; if “some” of the factors had gone in Procaps’ favor, the result could well have been different. But the factors “strongly” favored a fee award.

Bad dilution claims are so common that they aren't "exceptional" for fee-shifting, court rules

Parks, LLC v. Tyson Foods, Inc., 2017 WL 3534993, No. 15-cv-00946 (E.D. Pa. Aug. 17, 2017)

Tyson sought attorneys’ fees in this Lanham Act case after its summary judgment victory was affirmed by the Third Circuit. The court found that this was not an exceptional case meriting an award of fees, despite the novelty of Parks’ main legal theories.

There was an unusual degree of discovery trouble in the case, but not because of “wasteful procedural maneuvers” or “dilatory tactics.” Instead, the parties just didn’t seem to understand each other’s claims or to work collaboratively at discovery; this didn’t mean that one side litigated the case in an unreasonable manner.

Tyson argued that all three of Parks’ Lanham Act theories—false advertising, false association, and trademark dilution—were frivolous, but the court disagreed. The primary claims were for false advertising and false association. The first theory was that Tyson’s use of the name “Park’s Finest” was false, or at least misleading, because it conveyed to consumers that Tyson was selling Parks’s finest product. From early on, the evident problem was that this seemed to simply duplicate the false association claim.  But that didn’t weigh against a fee award, because “at the time Parks brought the claim, there was little case law—particularly in this circuit—addressing the dividing line between claims of false advertising and claims of false association.”  On appeal, the Third Circuit also noted that this case offered an opportunity to “clarify” what it had never before directly held about that line.  “Given the state of the governing law at the time this case was filed, Parks’s decision to attempt a claim under the banner of false advertising was not ‘unreasonable.’”

Anyway, the collapse of theory one into theory two (false association) meant that the merits were the same as to both, and the false association claim was not so “exceptionally meritless” as to warrant fee shifting. But really, this case was about failed proof: the Parks name “once enjoyed widespread recognition” as a result of an ad campaign that was at one time “ubiquitous and long-running,” so much so that the appellate judges recalled it at oral argument.  That recognition, it appeared, no longer existed, but this past glory “differentiates this case from the mine-run of frivolous trademark infringement suits brought by plaintiffs who seek to prevent others from infringing on marks that do not and have never had the sort of recognition in the marketplace that would entitle them to protection.” The similarity of the parties’ marks and goods also made the suit potentially meritorious.  “Even now, Tyson perhaps does not appreciate how close it may have come to a different result in this case.… A properly-designed survey (and perhaps a bit more modesty in the geographic area Parks sought to protect) might have changed the course of this case.”

As for Parks’s claim for trademark dilution, which was voluntarily withdrawn at summary judgment, it “had little chance of success from the start,” but a fee award isn’t about how great the disparity was between the parties’ positions—it’s about whether the present case “stands out from others.”  And dilution claims are commonly “tacked on to claims for trademark infringement or false association,” despite the rarity of true fame; as a result, “the vast majority of attempted dilution claims not only fail, but had very little chance of ever succeeding.”  Fees could be available for some non-meritorious dilution claims, but in light of the Parks name’s former strength, “the company’s attempt to characterize its mark as ‘famous’ is not so different from numerous other plaintiffs that have tried the same thing, despite having hardly any chance of being considered alongside that pantheon of truly famous marks.” [Urgh.]

Parks’s motivation, though not dispositive, also seemed legitimate to the court: Parks “genuinely viewed Tyson’s use of the name ‘Park’s Finest’ as an existential threat—a potential final blow to the once-prominent company, inflicted by a competitor that, by revenue, is approximately four thousand times its size.” Parks’ good faith was relevant, and also weighed against a fee shift.

reading list: Willis on remedies for consumer fraud

80 Law and Contemporary Problems 7-41 (2017)

In resolving cases of unfair, abusive, and deceptive acts and practices, consumer protection enforcement agencies often prospectively dictate—in great detail—the design of defendants’ marketing, websites, disclosures, sales processes, and products. However, advances in technology and analytics increasingly allow defendants to comply meticulously with these precise requirements while simultaneously continuing to deceive and injure consumers.

By trying to micromanage defendants’ conduct, enforcement agencies fail to protect consumers, squander precious enforcement resources, and create pointless compliance work for defendants. Defendants themselves are in the best position to ascertain how to cure the confusion and ill consequences they have wrought and they should bear ultimate responsibility for doing so.

To effectuate this, this article introduces two new performance-based remedies to consumer law enforcement: (1) confusion prohibitions and (2) consequences prohibitions. These injunctive remedies order defendants to eliminate the confusion and ill consequences induced by defendants’ fraud. To comply with these prohibitions, defendants would be required to reduce the confusion and ill consequences they inflicted on their customers to prescribed levels within a prescribed time period. Defendants would bear the costs of demonstrating, through independent third-party audits, their compliance.


Friday, August 18, 2017

Comparative advertising using P's logo is nominative fair use

SolarEdge Technologies Inc. v. Enphase Energy, Inc., 2017 WL 3453378 17-cv-04047 (N.D. Cal. Aug. 11, 2017)

SolarEdge sued Enphase, a competitor in the business of selling electronic components for solar panels (aka PV modules), for false advertising and trademark infringement.  SolarEdge’s primary products are components involved in the “optimization of energy generated from solar panels.”  PV modules convert solar energy to direct current, which then must be converted to alternating current to be delivered through the power grid.  An “inverter” performs this conversion. Traditionally, competitors in the industry have used multiple solar panels connected to one or a small number of centralized inverters. SolarEdge’s “power optimizers” are attached to each individual solar panel and then connected to a simplified centralized inverter to aid in a more efficient conversion from DC to AC. This practice is referred to as “module-level power electronics” (MLPEs). Enphase instead uses “microinverter” technology, which attaches a “small inverter at each solar panel,” also an MLPE.

MLPEs can come in two varieties: an embedded MLPE is installed into the solar panel before it leaves the factory, thereby reducing the time required to install a PV system at an end user’s location.  Non-embedded MLPEs are installed on-site.  SolarEdge alleged that it produced embedded power optimizers, but that it was still known “primarily for its non-embedded optimizers, as embedded technology is still not widely used in the PV industry.”

Enphase announced that it would be offering an embedded version of its microinverters, the Enphase AC Module. Its ad campaign included a video, “Enphase Energized AC Module vs. String+Optimizers,”  purporting “to depict a time-compressed video comparison between the installation times for PV systems using comparable SolarEdge and Enphase products.” On Enphase’s website, the video appeared with the text “Stop wasting time installing optimizers—When compared to optimizers, the Enphase AC Module cuts rooftop installation time in half. See for yourself.” The video also featured a testimonial from an installer attesting to the ease of installing an AC Module panel as compared to a non-embedded SolarEdge power optimizer. The video ended displaying the conclusion that the “Enphase Energized AC Module cuts installation time in half.” SolarEdge alleged that the comparison was false because it tested the AC Module against SolarEdge’s non-embedded optimizer, rather than the embedded version. The video also included SolarEdge’s stylized logo, displayed throughout the video.

This motion for preliminary injunction hinged on whether the claims at issue were literally false, given that the heading and the introductory page of the video purports to compare the AC Module against “string+optimizers” generally, and implied that SolarEdge didn’t produce an embedded version. Enphase argued that the marketing campaign was directed at experienced installers, who would immediately recognize the specifics of the comparison; also, other statements on the website, such as “Stop wasting time installing optimizers,” indicated no literal falsity because that statement wouldn’t make sense if Enphase were comparing its embedded technology against embedded optimizers. Also, nothing in the video suggested that Enphase is the only producer of embedded MLPE technology.  On this record, the court did not find likely success on the merits.

Trademark infringement: The court applied nominative fair use and (rightly) found in favor of Enphase, despite the use of SolarEdge’s stylized logo.  Under Ninth Circuit precedent (to the extent it can be discerned), if a nominative use fails to satisfy all three factors, “the district court may order defendants to modify their use of the mark so that all three factors are satisfied,” but “it may not enjoin nominative use of the mark altogether.”  In a useful reformulation, the court here said: “while satisfying all the factors necessarily negates trademark infringement liability, the failure to satisfy one of the factors does not establish liability in and of itself.”  So NFU is only a replacement for the multifactor test if the defendant succeeds; this is an important clarification of Judge Kozinski’s muddling of the issue in Tabari.

This ues in a comparative ad satisfied all three factors, and regardless SolarEdge didn’t make any arguments about how confusion over sponsorship or endorsement by SolarEdge.

The court briefly addressed irreparable harm as well.  SolarEdge argued that it would suffer lost sales if Enphase if the ad could be shown at an upcoming trade show, one of the largest in the industry.  It also argued that Enphase was unlikely to be able to pay damages here, given that it had faced significant financial difficulties of late.  The court found “only a bare, threshold showing” on irreparable harm—statements from a senior executive could be evidence of irreparable harm, but the record lacked data supporting her conclusions. Also, Enphase’s modification of the ads to clarify that the comparison was to non-embedded, standalone optimizer systems minimized the likelihood of irreparable harm, as did the court’s adoption of a fast schedule for further proceedings on the case.

taking customer list as conversion; false claims of official investigation as false advertising

Yeti Enters. Inc. v. Tang, 2017 WL 3478484, No. 13-cv-01203 (D. Or. Aug. 14, 2017)

This is a tangled story that illustrates how false advertising claims can arise from failed business agreements.  Plaintiff NPK sued Nicholas Jackson and Jessica Lilga for conspiring with Jim Heagle to eliminate NPK from the distribution market for frequency-water products.  NPK contracted with Yeti to market and distribute Yeti’s product known as frequency water, which appears to be sold as a better way of preventing plant mildew/mold than regular water.  NPK created three plant washes, Mighty Wash, Power Wash, and PM Wash, all of which contained and were marketed as containing frequency water.

Jackson is a part owner of NPK, though his relationship with NPK was bad for a while.  Lilga initially took over Jackson’s responsibilities as VP of sales when Jackson was incarcerated, though that relationship was also difficult and ended after three weeks.  As Jackson continued to negotiate his exit from NPK, he sent Heagle a draft copy of a proposed NPK ad that depicted a new series of products: “They’ve been lying to you. I mean, sitting there telling you they weren’t going to do other products. They already did.... They’ve got their whole nutrient line....” Heagle moved to terminate Yeti’s distribution agreement with NPK; the termination letter said that the “last straw” was the draft ad.  Yeti and NPK worked out an agreement for continued supply for a year, in exchange for which NPK would turn over to Yeti certain frequency-water-related trademarks that NPK had registered in its name.  This agreement didn’t work out; the parties sued each other in state court.  NPK also sued Jackson in state court; Jackson countersued.

By this time, NPK’s distribution agreement with Yeti had ended and NPK had relaunched its product line without Yeti’s frequency water. Jackson began working with Left Coast, a former distributor of NPK’s products, to launch a competitive product line using Yeti’s frequency water. Jackson promised to supply Left Coast with a list of 1300 Sunlight stores; Sunlight was a major NPK customer.  Left Coast then sent emails to NPK’s customers stating that it had “decided to discontinue distributing products from NPK industries” because NPK’s new plant-wash line, which no longer contained frequency water, was susceptible to molding.  It also stated that Left Coast would now “provide the original frequency altered formulations and will be marketing under the trade names Mega Wash, White Wash, and Freq Wash....” The emails, plus the new Left Coast product line, halved NPK’s sales, which had already been halved earlier in the year due to the loss of Yeti’s frequency-water products.  

In this litigation, NPK sued Jackson for fraudulent misrepresentation, violations of the Lanham Act, common law trade libel, conversion, and breach of the parties’ nondisclosure agreement.

Fraudulent misrepresentation requires showing, by clear and convincing evidence: (1) a material misrepresentation that was (2) false, (3) made with knowledge of its falsity or with ignorance of its truth, (4) with the intention that it be acted upon by the party claiming fraud, and (4) that the acting party in fact justifiably relied on the material misrepresentation, (5) suffering an injury as a result. Typically, “mere silence is not fraud,” but “[w]here the law imposes a duty on one party to disclose all material facts known to him and not known to the other, silence or concealment in violation of this duty with intent to deceive will amount to fraud....” NPK argued that Jackson “had a special relationship with [NPK] which included the duty to disclose to [NPK] all information which could damage its business,” including his assistance in bringing competitive products to the market and assistance in cutting NPK out of the plant-wash distribution market.

The court disagreed.  Members of an LLC who aren’t managers, as Jackson wasn’t once he was incarcerated, owe no duty to disclose information that could damage its business.  As for fraudulent misrepresentation through active concealment, the evidence didn’t show active concealment—“Jackson repeatedly attempted to leave NPK and made his intentions to do so quite clear.” His failure to disclose private business negotiations was distinct from active concealment, which requires the fraudster to take steps that eliminate an opportunity to discover the truth, leading the victim to rely on the falsity.

Lanham Act claim: Jackson allegedly told NPK’s customers that NPK’s plant-wash products were susceptible to molding; that their products no longer contained frequency water; that frequency-water products would no longer be distributed by NPK; that Lest Coast and other wholesalers discontinued distribution of NPK’s products; and that Yeti was releasing a “new and improved product line....” Further, Jackson allegedly aided in distributing e-mails falsely claiming NPK was being investigated and going to be shut down by the EPA, IRS, DEQ, and other agencies.

NPK easily showed harm from these statements, and the court was convinced that Jackson participated in their distribution.  However, NPK could only show falsity for two statements.  (That conclusion would seem to require a re-evaluation of the harm question—can NPK show harm flowing from the false statements specifically?)  It was true that NPK’s products no longer contained Yeti’s frequency water at the time the statement was made; it was true that Left Coast and others discontinued distribution of NPK’s products; it was true that Yeti was releasing a new-and-improved product line.

The statements that NPK was being investigated by the EPA, IRS, DEQ, and other agencies were not literally false—NPK’s witness testified that NPK was being investigated, though its position was that Jackson and Left Coast had prompted their investigations by providing false information.  However, the statements “were likely to, and in fact did, mislead or confuse consumers, as these statements implied the agencies were going to shut down the company.” The “susceptible to molding” claim was also rebutted at trial, and thus proved false.  These statements were also material: molding would indicate that the products didn’t work as intended, and false statements that NPK would be shut down for regulatory noncompliance “certainly raised the presumption that its products or business was operating improperly or outside the law.”  Thus, NPK proved a Lanham Act violation.

Common law trade libel: the court found that NPK didn’t prove that Jackson made or aided in the distribution of the two false statements maliciously or with knowledge that they were false. In fact, he appears to have believed his own claims (drunk his own frequency water?) that molding would be a risk without frequency water.  This belief also meant he didn’t act with malice.  Though he did “demonstrate a complete disdain for NPK,” that contempt isn’t malice.  The same was true for statements involving agency investigations into NPK.

Jackson was also liable for conversion for getting Lilga to download NPK’s customer database. The court doesn’t address tangible/intangible property as the subject of conversion, instead holding that Jackson’s “exercise of control over [the property] constituted a serious interference because it severely impacted the economic value of the database.” But NPK didn’t provide an accurate assessment of the market value of any of the information converted.  However, “if the property has no market value at the time and place of conversion, either because of its limited product, or because it is of such a nature that there can be no general demand for it, and it is more particularly value to the owner than any one else, then it may be estimated with reference to its value to him.” As secret information, the database could be evaluated in this way.  (I believe that some states wouldn’t allow trade secret liability standards to be circumvented in this way, though it sounds as if this information might well have constituted a trade secret as well.)  The customer database, while valuable, was only part of the results of NPK’s marketing campaign and couldn’t represent the entire value of NPK’s goodwill, which included other elements such as name recognition. Still, its customer relationships were “clearly an integral part of the value of its goodwill.” Thus, the court would factor the conversion into the damages award.

NPK also argued that Jackson breached the parties’ nondisclosure agreement by distributing the customer lists.  There was no question that he breached the express terms of the contract by disclosing NPK’s database of customer lists and by disclosing a proposed ad.  Jackson didn’t show that NPK failed to substantially perform any part of the its side of the agreement. And NPK suffered ascertainable damages that were foreseeable by the parties at the time they entered into this agreement, so Jackson was also liable for this breach.

Civil conspiracy and aiding and abetting: because NPK didn’t show any other torts beyond conversion and violation of the Lanham Act, and because Jackson was already liable for those, he couldn’t be independently liable on those claims.

Damages: “[I]f the plaintiff proves with the requisite degree of certainty that the defendant’s violative actions have resulted in damage, the actual amount of damages need not be proved with exact certainty.”  That was the case here.  “NPK went from sales of $3 million in 2012 and a profit of around $125,000 to virtually no revenues and strictly losses in the years since.” Likewise, NPK could recover for lost goodwill, even though “such damages are not capable of exact ascertainment.”  The court found damages of a little under $166,000. However, the end of Yeti’s distribution agreement was also responsible for NPK’s lost goodwill, and so the court cut the damages in half, for which Jackson’s liability was partly shared with Lilga.