reasonable consumers expect real estate agents to be licensed, but remedies are still limited by the 1A

People ex rel. Flippo v. Silva, 2017 WL 5712601, No. H041209 (Cal. Ct. App. Nov. 28, 2017)

Susana Silva operated Estates on the Bay, which advertised itself as a professional real estate company, while her real estate broker’s license was revoked. Defendants’ activities included grossly overstating a borrower’s income on mortgage loan applications.  After a bench trial, the court found violations of the FAL and UCL and awarded civil penalties, restitution, and injunctive relief. The court of appeals upheld the liability finding but remanded on the remedies.

Defendants argued that Estates on the Bay’s website wouldn’t confuse reasonable consumers into thinking Silva had a valid real estate license, as she was required to do in order out to carry out real estate brokerage or selling.  The website had a page entitled “My Resume,” and the top of the webpage stated, “Estates on the Bay - A Professional Real Estate Company.” The body included: “Our experience in the Real Estate industry will provide you the knowledge and expertise that you need throughout the entire buying or selling process. As you choose one of our real estate agents, and/or loan agents our job to you is to price your home effectively from day one ….”  Defendants argued that there was no reference to Silva, and that even if “the use of the first-person-plural to refer to a corporation and its agents is somehow flawed, it is at most the mildest of innocuous puffery posing none of the risks the [false advertising law] protects against.”

Likely deception is generally a question of fact.  The court of appeals found that the website wasn’t too vague to be actionable: “a reasonable consumer would expect that a corporate entity holding itself out as a professional real estate company and offering real estate services requiring a license would in fact have the necessary license(s) to carry out those services, and specifically that all its agents/employees who were carrying out those services would be licensed to the extent necessary to lawfully conduct those services.”  Given the trial court’s findings that Silva violated the licensing law, and that Estates on the Bay permitted this, substantial evidence supported the liability finding.

As for the UCL, the violation was in connection two mortgage loans that they brokered for one borrower, Rosa, by deliberately and knowingly overstating Rosa’s income on mortgage loan applications to induce the lenders to fund the loans. These overstatements unjustly enriched defendants at Rosa’s expense, and that the practices were “a repeat by Silva of the very conduct which led the [Department of Real Estate] to revoke her license.” However, the court apparently imposed a separate penalty for every day the sales were pending, for a total of $21,500.  The UCL allows the People to ask for “a civil penalty not to exceed two thousand five hundred dollars ($2,500) for each violation.” “In assessing the amount of the civil penalty, the court shall consider any one or more of the relevant circumstances presented by any of the parties to the case, including, but not limited to, the following: the nature and seriousness of the misconduct, the number of violations, the persistence of the misconduct, the length of time over which the misconduct occurred, the willfulness of the defendant’s misconduct, and the defendant’s assets, liabilities, and net worth.”

What a “violation” is must be determined case by case, and can be calculated per victim or per act. The amount is reviewed for abuse of discretion.  The court assumed that it would have been proper for the court to determine that there were two violations based on income misrepresentations in loan applications that induced the funding of two loans, or that there were three violations based on three victims (Rosa and the two lenders), or that there were four violations based on income misrepresentations affecting Rosa and a lender as to each of the two properties.  However, the evidence didn’t support the conclusion that false income representations were made to one or more victims on a daily basis for 86 days. Thus, the court remanded for recalculation.

An order of restitution to Rosa was affirmed, in the amount of $29,575, based on the commissions defendants received for brokering the loans and for a “yield spread premium” they received for getting her to take a higher interest rate than her credit entitled her to. Though defendants argued that she got what she paid for—refinancing—the court accepted the argument that the loans were only issued because of the misrepresentations.  However, Rosa was not entitled to recovery of a prepayment penalty in connection with paying off the existing mortgage that she refinanced through defendants.  The UCL allows recovery of restitution, not compensatory damages, and the prepayment penalty went to the bank, not to the defendants.  However, the court pointed out that this could potentially be considered in setting the amount of the civil penalty.

In terms of injunctive relief, the court of appeals affirmed the imposition of recordkeeping requirements on defendants.  The court also ordered “Silva and [her codefendant and sister] Gobert shall not jointly engage in the sale (this specifically includes acting as real estate agents or brokers) or financing (specifically including, but not limited to, originating, negotiating or soliciting loans) of real estate.” Defendants argued that this interfered with their constitutional rights to engage in lawful work and their constitutional rights to association as sisters.  But they didn’t have a constitutional or statutory right to work with each other in real estate. They could individually work in real estate, if they complied with the rest of the injunction, and they could associate with each other; along with the ability to modify the injunction over time, that was enough.  Defendants’ argument that they’d already dissolved the business didn’t matter, given their past behavior of violating the law after Silva’s license revocation (of which Gobert knew).  Even assuming that the injunction burdened the constitutional right of association, it was no more than necessary to serve the compelling interest in protecting the public.

Defendants also challenged two aspects of the injunction as unconstitutional prior restraints: (1) a requirement that they use their best efforts to remove any reference to Silva’s broker’s license from all media, including electronic media and social or business websites, such as LinkedIn, Facebook and Google and (2) a requirement that they submit any real estate-related advertising to the Monterey County District Attorney’s Office at least 15 days in advance of publication.  “[A]n injunctive order prohibiting the repetition of expression that ha[s] been judicially determined to be unlawful [does] not constitute a prohibited prior restraint of speech,” but such an order must be in the narrowest terms that will accomplish a permissible goal.  Under this standard, the ban on any advertising about real estate services, property management, or real estate financing without first obtaining written consent from the district attorney or a court order was too broad: the injunction required preapproval of (1) advertising that could be unrelated to activities requiring a real estate license, and (2) advertising that didn’t contain any reference, express or implied, to Silva’s licensing status. The court of appeals remanded for tailoring more closely to the unlawful conduct in this case. Likewise, requiring the removal of any reference to Silva’s broker’s license from all media also was broader than necessary. “For example, to the extent the reference to her license includes the start and end dates of her licensure, the representation might not be false or misleading depending on the context.” 

AIPLA scholarships & contests for students

Sidney B. Williams scholarship for law students from underrepresented minority groups interested in IP law.

Jan Jancin award for law students with a demonstrated record in the study of IP.

Moot Court on patent issues.

Robert C. Watson award for best student paper on IP.

Closure gets closure from Second Circuit

Schutte Bagclosures Inc. v. Kwik Lok Corp., No. 16-2767 (2d Cir. Nov. 2, 2017): In a summary opinion, the Second Circuit affirmed a district court finding that the design of Kwik Lok’s bag closures, albeit registered as a mark by the PTO, was functional and thus unprotectable by trademark law, as well as the belt-and-suspenders finding that no confusion was likely.  Thanks to an eagle-eyed correspondent who should probably buy this vase as a reward for learning so much about bag closures.

Allegedly outdated comparison not enough to justify TRO in sophisticated industry

NEXTracker, Inc. v. Array Technologies, Inc., 2017 WL 5625926, No. 17-cv-06582 (N.D. Cal. Nov. 22, 2017)

The parties (NX and ATI) compete in the market for solar tracking devices, which “adjust the positioning of solar panels...to increase the efficiency of their solar power capture.” In September 2017, TUV, “which appears to be a non-governmental testing and assessment organization,” issued a report comparing the operational costs of two different solar tracking architectures and concluding that “Architecture 1” -- a tracker “driven by a single motor linked by a rotating driveline to multiple tracker rows” -- is associated with lower lifetime operational costs than “Architecture 2” -- “a system where each row operates as a self-contained unit with...dedicated tracker system components.” NX alleged that “Architecture 1” is ATI’s technology and that “Architecture 2” shows an NX product.

Apparently in response to NX’s objections, TUV retracted the report, but NX alleged that ATI widely disseminated the report both before and after the retraction.  NX sought a TRO based on its false advertising, trade libel, and defamation claims, which the court denied.

First, NX didn’t show falsity or misleadingness; the TUV report didn’t mention NX or its products by name, and though it showed an NX product, NX didn’t provide evidence that the relevant claimed trade dress (NX’s “signature gold-colored paint” and “distinctive curve-shaped tube”) had acquired secondary meaning such that consumers would perceive a reference to NX systems in particular, rather than “Architecture 2” systems in general.  

Even assuming that the association existed, NX still failed to show likely success on the merits.  NX argued that the report was false or misleading because “Architecture 2” was a three-year-old NX design, whereas the system described as “Architecture 1” was ATI’s latest tracker.  But the report didn’t purport to compare systems of the same generation or age, and it wasn’t false or misleading just because it compared systems of two different vintages.  “Such a comparison may even be useful in the solar industry because, as NX itself argues, ‘Solar trackers are a long-term investment -- they can remain operational for many decades.’ It also seems possible that solar industry participants savvy enough to identify ‘Architecture 2’ as an NX system might also recognize that the featured device was not necessarily the latest model.”  Nor did the record justify a finding that the report falsely described the NX system, as NX alleged. NX claimed that the report made false statements about its gears, its positioning of solar modules, and its use of struts, but never clarified whether those statements were false only as to current NX products or as to the prior ones too.  ATI argued in opposition that the statements were true for the tested NX products, which was uncontested in NX’s reply brief.

Although TUV retracted the report, the evidence showed that NX’s objections, rather than independent concerns about the veracity of the report, drove the retraction, stating that TUV  “did not subjectively entertain any serious doubt about the truth of the statements in the report,” but still believed that it was “in the best interest of all parties to retract the Report and conduct a diligent investigation of NEXTracker’s allegations about the Report.”

The court also declined to find irreparable harm likely; much of the harm alleged by NX likely already occurred because of the report’s alleged wide dissemination.  Although NX argued that a TRO could help at the margins, NX “fail[ed] to quantify the reputational injuries it will suffer if ATI continues to distribute the report” and thus failed to show irreparable injury.

Another court declines to apply GNC where plaintiff alleges only negative studies

Yeldo v. MusclePharm Corp., 2017 WL 5499588, Case No. 17-11011 (E.D. Mich. Nov. 16, 2017)

Yeldo brought a putative class action alleging that MusclePharm used misleading marketing practices to promote its glutamine dietary supplement, whose label and online ads indicate that it “enhances muscle growth and recovery, supports rebuilding and recovery from the toughest workouts, reduces catabolism and supports an anabolic environment, aids in muscle growth, causes faster recovery, and helps consumers rehydrate, rebuild, and recover faster and more efficiently.” Although glutamine naturally found within the body plays a role in muscle growth, recovery, and immunity support, Yeldo alleged that “glutamine supplementation has been found to be completely ineffective at mimicking these physiological responses.” Yeldo based his claims on nine scientific studies finding no benefit from glutamine.

The court found that Yeldo plausibly alleged falsity.  Although the court accepted that a plaintiff must plead the existence of a study that tests the combination of ingredients used in a given product, that means the active ingredient/s in combination.  Here, the product at issue relied only on one active ingredient. The studies alleged “support the proposition that glutamine supplementation has no effect on muscle performance or strength, muscle growth, recovery, or performance during exercise,” even if they didn’t test MusclePharm’s specific products or dosages. 

MusclePharm argued that some of the studies supported its claims, making the case more like In re GNC Corp., 789 F.3d 505 (4th Cir. 2015), which (wrongly) held that literal falsity is impossible unless all reasonable experts disagree with the advertising claim. Here, the complaint didn’t concede that any scientists found glutamine effective, and MusclePharm merely “cherry-pick[ed] sentences from the papers’ introduction sections, which summarize the findings of other studies or hypothesize conditions where supplemental glutamine may create the represented effects.”  Because the conclusions supported Yeldo’s argument, he stated a claim.  Weighing the merits of these scientific findings to determine which is most credible wasn’t appropriate on a motion to dismiss. [Which is why GNC is wrong.]

Nor did Yeldo need to plead how and when he consumed the product or whether he experienced the advertised benefits; he alleged that he bought and consumed the product and either would not have done so or would not have paid as much for the product if he’d known defendant’s representations were false. That monetary harm was sufficient. However, his negligent misrepresentation claim was barred by the economic loss doctrine.

Yeldo also had Article III standing to seek injunctive relief, because consumer protection statues, which provide for injunctive relief, could never be invoked to enjoin deceptive practices if the complaining consumer’s standing dissipated the moment she discovered the alleged deception and could no longer be fooled.

Yeldo’s claims weren’t preempted by the FDCA, since that statute deems food misbranded when the label contains a statement that is “false or misleading in any particular,” and so Yeldo’s claims paralleled the FDCA’s requirements; the conduct at issue would also give rise to liability under Michigan common law even if the FDCA had never been enacted. Nor did the doctrine of primary jurisdiction bar these claims.

To the spoliator does not go the victory in corporate betrayal case

OmniGen Research, LLC v. Wang, No. 16-cv-268, 2017 WL 5505041 (D. Or. Nov. 16, 2017)

After OmniGen successfully moved for a default judgment in its favor due to spoliation of evidence, the court awarded damages on OmniGen’s trade secret, false advertising, and related claims.  Default means that the factual allegations of the complaint, other than those about damages, will be taken as true.

While working for OmniGen, which makes feed addditives that improve the health of dairy cows and other animals, defendant Wang breached his contracts by secretly creating an OmniGen-clone Chinese business based on stolen OmniGen research and information, forming at least two entities, Bioshen and Mirigen.  He also applied for a Chinese patent that covers a knockoff of an OmniGen product, and had fellow individual defendant Zheng—who is Wang’s wife and ... does not have a background in biological sciences—listed as an inventor in his place, and employed similar tactics with the contact information for Bioshen and Mirigen.  He presented an OmniGen Research slide presentation (whose copyright OmniGen registered) as if it was his own at a large scientific conference in China, with many slides altered only to add the Mirigen logo.  At the conference, which was attended by over a thousand people, including academics, government officials, and business leaders, defendants’ marketing materials claimed to employ “the most advanced modern green agricultural technology from the United States.”  Wang represented the material copied from OmniGen’s slides as Mirigen’s and Bioshen’s, as well the innovations described therein.  [This seems to be Dastar-barred at least as a §43(a)(1)(A) claim, but in a default situation, don’t expect that to matter.]  His acts also led to the dissemination of confidential OmniGen research notes at the conference and elsewhere.  Bioshen and Mirigen also submitted a paper falsely describing research as part of their participation in the conference: the paper described a study conducted with pigs by Bioshen and Mirigen using their feed additive, when in fact the studies were conducted by OmniGen on sheep and dairy cattle using its feed additive. 

Unsurprisingly, the court found for OmniGen on its breach of contract, intentional interference with economic relations, and trade secret misappropriation claims.  As for false advertising, the court also found for OmniGen, including for stating that OmniGen’s slides were defendants’ work, for falsely describing the study, and for falsely claiming that Mirigen and Bioshen were affiliated with a ‘professor’ at Oregon State University.” The court accepted the complaint’s allegations that these statements were material because “they lend credibility to Wang, Bioshen, and Mirigen, giving them the appearance of relying on original scientific research and thinking.” The court further accepted that the statements were made in commercial advertising or promotion, and that the parties competed around the world, including in China.  Finally, and perhaps of greatest interest, the court accepted that defendants’ conduct affected interstate commerce because “Bioshen promotes itself as a U.S. company, attendees at the conference included people who do business in the U.S. and who represent companies that do business in the U.S., and people who review and comment on U.S. scientific research.”

The court also found that Wang breached his fiduciary duties to OmniGen, including, along with the above acts, intentionally sabotaging an OmniGen study he was assigned to work on, and fabricating or falsifying data.  OmniGen therefore repeated the work he was assigned to do.

As to damages, they must be proved to a reasonable degree of certainty, but where a defendant’s conduct makes damages difficult to determine, courts allow “broad latitude” in quantifying damages. Defendants’ $821,000 initial investment in Mirigen reflected OmniGen’s expectation interest under its agreements with Wang: if Wang had fully performed, “the Chinese patent would have been assigned to OmniGen and the investment garnered by that patent and other confidential information would have accrued to Plaintiffs rather than Wang’s competing business entity. These are concrete, certain, and quantifiable injuries under a contractual theory of recovery.” OmniGen didn’t seek a separate award for the intentional interference with economic relations.

On the trade secret claim, $821,000 was likewise reasonably certain and a conservative valuation of what was misappropriated.  OmniGen was also entitled to punitive damages due to Wang’s willful and malicious misappropriation, to a maximum of twice actual damages; the court determined that this was warranted, resulting in a total award of $2,463,000.  For copyright infringement, the court accepted that infringement occurred post-registration, entitling OmniGen to statutory damages.  Although the court was required to accept that infringement occurred post-registration, it wasn’t required to accept that the infringement was willful, as this wasn’t alleged in the complaint, and thus the court awarded the statutory minimum of $750.

Under the Lanham Act, OmniGen was entitled to damages, including profits, but defendants’ discovery abuse and spoliation of evidence related to damages prevented a precise calculation of Defendants’ profits.  The court found it equitable to award OmniGen the $821,000 as the value of Mirigen. Treble damages could be awarded “if the allegations in the complaint support it.”  OmniGen was harmed by defendants’ knowingly false statements, and “[a]s is common in such false advertising cases, quantifying damages is difficult (especially where evidence has been systematically destroyed by the defendant).”  The court nonetheless declined to award OmniGen an estimated $80,000 based on defendants’ head start/avoided costs of conducting its own studies, finding them an improper measure of actual damages, and one that would be punitive rather than compensatory. Nonetheless, the $821,000 was a conservative proxy of damages, and so the court enhanced it to $2,463,000, as justified by defendants’ intentional/willful conduct, especially in destroying evidence.  Enhancing damages would capture otherwise evanescent measures of goodwill, as well as deter defendants and others similarly situated from engaging in unfair and deceptive behavior.

Damages from Wang’s breaches of fiduciary duty were the costs to re-create or repeat research projects because of Wang’s breaches of fiduciary duty, or $252,000, as well as the recovery of all compensation paid during his period of disloyalty as damages, or $92,000.

Because OmniGen was limited to a single recovery, the total was $821,000 for breach of contract, misappropriation of trade secrets, and false advertising; $344,000 for Wang’s breach of fiduciary duty;  $750 for copyright infringement; and $1,642,000 for enhanced damages under the Lanham Act/punitive damages under state trade secret law.  [The language of the Lanham Act that enhanced damages can’t be punitive seems not to do a lot of work, given how the cases come out.]

The court likewise granted a permanent injunction.  The disclosure or threatened disclosure of trade secrets or even non-trade secret confidential information was sufficient to meet the irreparable injury requirement for a preliminary injunction, as was the consumer confusion, loss of good will, and increased market place barriers which can result, and, in this case, did result, from false advertising.  [Not clear whether this is entirely consistent with Herb Reed.]  Damages/legal remedies were also inadequate because the injuries were difficult to quantify, and they were also ongoing and could worsen without an injunction.

However, the court would not enjoin defendants from working for certain types of feed industry businesses; that was too much of a restraint on trade, as well as unfairly limiting defendants’ ability to satisfy the judgment in this case. The defendants were enjoined against further use of confidential information and false advertising, and also required to assign to OmniGen all their interest in the Chinese patent and application, as well as register the assignment with the Chinese government.

The court’s injunction was worldwide, given that defendants’ wrongful actions included conduct in China.

The court also awarded attorneys’ fees and costs pursuant to the Lanham Act, the Oregon Trade Secrets Act, and Fed. R. Civ. P. 37(b)(2)(C) (relating to spoliation of evidence).  As for the Lanham Act, the complaint’s allegation of intentional and willful false advertising was, “on its own, sufficient to establish the substantive weakness of Defendants’ litigation position.”  Defendants also litigated in an unreasonable manner, including Wang’s attempt to evade service by lying to the process server, an initial default, discovery violations, and a destruction of evidence “beyond anything previously witnessed by this Court.” The award of attorneys’ fees pursuant to the Oregon Trade Secrets Act and Lanham Act applied to the entire action and not just the individual claims under which the fees are authorized, because the claims all involved a common core of facts and were interrelated. Fees awarded were nearly $990,000.

We got the empire, now as then: Rogers precludes record label suit against Fox show

Twentieth Century Fox Television v. Empire Distribution, Inc., No. 16-55577 (9th Cir. Nov. 16, 2017) 

“Empire Distribution, founded in 2010, is a well-known and respected record label that records and releases albums in the urban music genre.”  Then came Fox’s TV show Empire, “which portrays a fictional hip hop music label named ‘Empire Enterprises’ that is based in New York” and “features songs in every episode, including some original music.” Columbia Records releases music from the show, and Fox promotes the show and its music through live musical performances, radio play, and consumer goods such as shirts and champagne glasses bearing the show’s “Empire” brand.  Fox sought a declaratory judgment of noninfringement and Empire counterclaimed for infringement and dilution. The district court granted summary judgment to Fox, relying on Rogers v. Grimaldi, and the court of appeals affirmed.

Empire argued that at least some of Fox’s uses weren’t part of expressive works and thus outside Rogers: Fox allegedly used the “Empire” mark “as an umbrella brand to promote and sell music and other commercial products.” The court of appeals found that these were only “technically” outside the title or body of an expressive work: works protected by Rogers “may be advertised and marketed by name.”  There was no reason to think the TV show was a pretextual expressive work “meant only to disguise a business profiting from another’s trademark”; Fox’s promotional activities, “including those that generate revenue, are auxiliary to the television show and music releases, which lie at the heart of its ‘Empire’ brand.”

A footnote in Rogers says that Rogers’ limiting construction of the Lanham Act wouldn’t apply to titles that are confusingly similar to other titles, because the public interest in sparing consumers this type of confusion outweighs the slight public interest in permitting authors to use such titles. But appellate courts haven’t cited this footnote, and even the Second Circuit applied Rogers in the subsequent Cliffs Notes case involving conflicting titles.  Any such exception might be “ill-advised or unnecessary,” and was anyway inconsistent with Ninth Circuit precedent speaking of Rogers as the test that applies when expressive works are accused.

Applying Rogers: Empire argued that, in order for Rogers to apply, the mark must have attained a meaning beyond its source-identifying function.  [Which, not for nothing, “empire” does—it just had that meaning before Empire entered the scene.] But that’s merely a consideration—expressive uses often, but not always, occur “when a brand name enters common parlance and comes to signify something more than the brand itself,” and Rogers is broader. Then, unfortunately, the court commented that “a mark that has no meaning beyond its source-identifying function is more likelyto be used in a way that has ‘no artistic relevance to the underlying work whatsoever,’ because the work may be “merely borrow[ing] another’s property to get attention’” (citing Dr. Seuss Enters. v. Penguin Books, sigh)—which of course is inconsistent; if the mark didn’t have some sort of meaning beyond source identification, it wouldn’t make sense to use it to get attention for an expressive work.

Here, Fox used the common English word “Empire” for artistically relevant reasons: “the show’s setting is New York, the Empire State, and its subject matter is a music and entertainment conglomerate, ‘Empire Enterprises,’ which is itself a figurative empire.”  Prong one was satisfied. There was no additional requirement, as argued by Empire, that the junior work refer to the senior mark. “A title may have artistic relevance by linking the work to another mark, as with ‘Barbie Girl,’ or it may have artistic relevance by supporting the themes and geographic setting of the work, as with Empire.”

The title wasn’t explicitly misleading.  Empire Distribution argued that the “relevant inquiry . . . is whether the defendant’s use of the mark would confuse consumers as to the source, sponsorship or content of the work.” But that’s the general likelihood-of-confusion test, which applies outside the Rogers context of expressive works. Likely consumer confusion wasn’t the key, but rather whether there was “an ‘explicit indication,’ ‘overt claim,’ or ‘explicit misstatement’ that caused such consumer confusion.” Fox’s Empire show contained no overt claims or explicit references to Empire Distribution, and thus wasn’t explicitly misleading; game over. 

false advertising of copyright ownership of songs not preempted, court rules

Carter v. Pallante, 256 F. Supp. 3d 791 (N.D. Ill. 2017)

Tollie Carter sued, as relevant here, alleging that ARC, Fuji, and BMG infringed his copyrights in certain songs by selling unauthorized licenses to third parties, who in turn publicly performed the songs. Carter’s father, Calvin Carter, and his uncle, James Bracken, were songwriters, and Carter is their heir who allegedly recaptured rights in their works under §203 and §304.

Nonetheless, Carter alleged that the publisher defendants, “without [Carter’s] authorization or consent, represented to numerous third parties it could license—and did license to those third parties—the performance rights and other rights to [Carter’s songs].” The court found that claims for copyright infringement and contributory infringement were sufficiently pled.  Selling licenses plausibly violated Carter’s exclusive right to “distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending.” [Which right?  Authorization isn’t usually considered a separate right, but merely the foundation for secondary liability, which does seem adequately alleged here.] The court rejected defendants’ argument that Carter needed to state who the third parties were, which songs were licensed, or when the licenses were sold, none of which is required under Rule 8 for copyright claims. “He cannot be expected to know at this stage who the third parties were, when these sales occurred, or which of his songs were licensed. This information, if it exists, is exclusively within the Publisher Defendants’ knowledge, and Carter can obtain it only through discovery.”  So too with contributory and vicarious copyright infringement.

DMCA §1202: The claim for removing CMI also survived, even though the alleged removal here didn’t relate to “the Internet, electronic commerce, automated copyright protections or management systems, public registers, or other technological measures or processes as contemplated in the DMCA as a whole.” The plain text of the statute doesn’t require any of that.  Further, defendants argued that Carter didn’t plead that false copyright information was conveyed “with copies of the work.”  But under Rule 8 he didn’t to plead particularized facts as to how, when, and to whom the publishers communicated false information in connection with their purported licensing agreements. “In any event, Carter unmistakably alleges that false copyright information was conveyed with copies of the work by way of the licensing agreements he claims the Publisher Defendants entered into with third parties.” [That doesn’t seem right—again the court seems to be conflating authorization with actual exercise of a §106 right.]

State law claims, however, were mostly preempted, including tortious interference claims. The partial exception was deceptive trade practices under the Illinois Uniform Deceptive Trade Practices Act, which covers “pass[ing] off goods or services as those of another” and “caus[ing] likelihood of confusion or of misunderstanding as to the source ... of goods” as deceptive trade practices. The claim that publishers passed off the copyrighted songs as their own, so that consumers would license them, “falls squarely within the Copyright Act and is therefore preempted.”  However, allegations that the defendants “misrepresented that they owned the copyrighted songs in advertising material without infringing copyrights to the songs” were sufficient, since “[m]aking misrepresentations about a copyrighted work in advertising material—short of licensing the copyrighted works at issue or taking any other action in connection with a copyright owners exclusive rights—is not among the exclusive rights enumerated in § 106 of the Copyright Act.”  This doesn’t seem right under Dastar—the interpretation of “source” is usually the same under state and federal law, and Dastar’s reasoning should justify conflict preemption of state law anyway.

physical harm to the public isn't irreparable harm for competitor plaintiff

Nutrition Distribution, LLC v. Enhanced Athlete, Inc., 2017 WL 5467252, No. 17-cv-2069 (E.D. Cal. Nov. 14, 2017)

Defendants allegedly falsely advertised products containing 2,4-Dinitrophenol (DNP) to body builders, gym users, and the like. Defendants allegedly promote it as an ingestible fitness supplement that increases fat loss, despite the health dangers it poses. The plaintiff sells its own competing supplement, and sued for false advertising and RICO violations. The court found that there could be no preliminary injunction because the plaintiff hadn’t shown irreparable harm.  After eBay, the court declined to presume irreparable harm from falsity and materiality. Health harm to the public was third-party harm, relevant to the public interest but not to whether the plaintiff had shown irreparable harm to itself.  The plaintiff’s claim of lost sales since the introduction of DNP into the market didn’t show a causal connection between the two, and anyway lost sales could be remedied by money damages.

Church & Dwight not protected against challenge to "Made in USA" claim for condoms

Claiborne v. Church & Dwight Co., 2017 WL 5256752, No. 17-cv-00746 (S.D. Cal. Nov. 13, 2017)

At least two lines of Trojan brand male condoms have the words “Made in U.S.A.” printed on the packaging. This statement allegedly violates California law because more than ten percent of the condoms’ wholesale value allegedly derives from natural latex material produced outside of the United States.  Claiborne alleged that the condoms state that they contain natural latex, and that US domestic production of natural latex is minimal, with 90% of the global supply coming from Southeast Asia.  Further, the US is allegedly the largest consumer of natural latex—accounting for approximately 20% of global consumption. In addition, the natural latex is allegedly the only substantial component of the Condoms.

The court found that Claiborne plausibly alleged that more than ten percent of the condoms’ wholesale value comes from outside of the United States, which would make it unlawful to market as “Made in U.S.A.” in California.  It was true that Claiborne didn’t allege exactly what percentage of the wholesale value comes from abroad, but all he needed to do was plausibly allege that the foreign wholesale value was greater than ten percent, rather than an exact percentage above that.

Claiborne also plausibly alleged that he suffered damage: he alleged that, but for the “Made in U.S.A.” representation, he would not have purchased the condoms or he would have paid less. That’s enough under Kwikset.  He also had standing to pursue injunctive relief even though he now believed the representations were currently false (this opinion appeared to have been drafted before the 9^th Circuit’s recent ruling on this, because the court says there’s no binding authority; fortunately the court’s reasoning is consistent with the current law).  “[W]here false advertising misleads a consumer, the consumer tends to suffer continuing injury in the form of a lessened ability to trust that any similar future representation is accurate.” Relief “could restore the consumer’s trust, thus aiding him in making informed purchasing decisions in the future.”  Claiborne didn’t need a present intention to purchase a Trojan product in the future; false advertising still injured him “because it lessens his ability to gather all relevant information and incorporate it into his future purchasing decisions.”

Church & Dwight argued that, even under this approach, the allegations of the complaint established that it is not possible for a natural latex condom to carry a lawful “Made in U.S.A.” label because of insufficient domestic natural rubber production. That wasn’t true; it merely alleged that, because of the current domestic supply/demand imbalance, C&D uses imported natural latex.  If C&D changed its sourcing, it could keep the label.

TM question of the day

Game of Bones (at the science museum):

230 bars false advertising claim against antimalware provider

Enigma Software Group USA LLC v. Malwarebytes Inc., No. 5:17-cv-02915, 2017 WL 5153698 (N.D. Cal. Nov. 7, 2017)

Malwarebytes and Enigma compete in the anti-malware software market.  When Malwarebytes’s software detects an unwanted program, it displays a notification and asks the user if she wants to remove the program from her computer. Enigma alleged that, in 2016, Malwarebytes started to misleadingly identify Enigma’s software as a potential threat, in order to interfere with Enigma’s customer base and to retaliate against Enigma for a separate lawsuit Enigma filed against a Malwarebytes affiliate.  Enigma sued for false advertising under state and federal law, as well as tortious interference. The court found all claims barred by § 230(c)(2) of the Communications Decency Act, specifically subsection (B): “No provider or user of an interactive computer service shall be held liable on account of … any action taken to enable or make available to information content providers or others the technical means to restrict access to material [that the provider or user considers to be obscene, lewd, lascivious, filthy, excessively violent, harassing, or otherwise objectionable, whether or not such material is constitutionally protected].”

Zango, Inc. v. Kaspersky, 568 F.3d 1169 (9th Cir. 2009), indicated that “companies that provide filtering tools,” such as Kaspersky, are eligible for immunity under § 230(c). It found that Kaspersky qualified as a service provider, and “has ‘made available’ for its users the technical means to restrict items that Kaspersky has defined as malware.” Thus, Kaspersky qualified for immunity under § 230(c)(2)(B) “so long as the blocked items are objectionable material under § 230(c)(2)(A).” Kaspersky properly classified malware as “objectionable” material.

Enigma argued that Zango was distinguishable because malware, as defined by Malwarebytes’s criteria, wasn’t material that is “obscene, lewd, lascivious, filthy, excessively violent, harassing, or otherwise objectionable” because it is “not remotely related to the content categories enumerated.” Zango did not address whether an anti-malware provider has discretion to decide what is “objectionable” because that argument was waived.  However, Zango clearly held that § 230(c)(2)(B) immunity applies to “a provider of computer services that makes available software that filters or screens material that the user or the provider deems objectionable.” Thus, Zango was factually indistinguishable.

Enigma then argued that Malwarebytes was entitled to § 230(c)(2)(B) immunity only if it acted in “good faith.” Subsection (A) protects “any action voluntarily taken in good faith” to restrict access to objectionable material, but subsection (B) has no good-faith requirement.  The court refused to imply one; Congress knew how to put one in if it wanted, especially given that subsection (B) includes an explicit reference to subsection (A) with respect to the types of material to which immunity applies.

Finally, Enigma’s Lanham Act claim didn’t entitle it to use the IP exclusion; a false advertising claim is not a trademark claim for §230 purposes.

Ad intermediary lacks standing under Lexmark to challenge false ads

Congoo, LLC v. Revcontent LLC, 2017 WL 5076397, No. 16-401 (D.N.J. Nov. 3, 2017)

A rare case discussing Lexmark’s proximate cause requirement in some detail. Congoo operates an online ad business as Adblade, an aggregator that serves as an intermediary between advertisers and publisher websites that display native ads on their pages.  Revcontent competes with Adblade.  Advertisers pay aggregators a fee based on the numbers of clicks on their ads. Publishers usually contract with the aggregator who “pays the higher rate, higher guaranteed minimums, or greatest revenue.” An aggregator may pay a publisher a fee calculated by multiplying a negotiated display rate, CPM/cost per 1000 impressions of an of an ad, by the number of times the aggregator’s advertising unit is displayed on the publisher’s website. In the alternative, an aggregator may pay a publisher a percentage of the revenue the aggregator received from advertisers for the display of the ads on the publisher’s website.

Adblade alleged that it avoids business with advertisers using false and deceptive ads, such as negative option membership charges or undisclosed automatic enrollment in expensive membership programs.  This is an issue in direct response advertising, “a subset of native advertising that seeks consumer action, e.g., an online purchase.” When a user clicks on a direct response ad, she navigates to a “landing page” that endorses the good or service, followed by an “order page” where she can buy. 

In 2015, Adblade allegedly discovered that Revcontent was promising Adblade publishers deals with better economic terms through its “use[ ] [of] false and misleading ads that obtain higher CPMs”; Revcontent allegedly also assisted with the creation of such ads.  Revcontent’s algorithm allegedly “automatically” displays “false and misleading” advertisements on publishers’ websites because they “have the highest CPM and revenue to be generated.” Adbeat, a well-known industry data source, allegedly confirmed that the most popular advertisements in Revcontent’s network were “false and misleading.” Its report stated that Revcontent’s top mobile ads included those for diet pills, muscle pills, and skin cream; Adblade provided hundreds of copies of such ads, and alleged that false and misleading ads appeared on five top Revcontent publishers that previously did business with Adblade. (Id. at ¶ 20.)

           

Lexmark requires plaintiffs’ interests to “fall within the zone of interests protected by the law invoked”:  “an injury to a commercial interest in reputation or sales.” In addition, a plaintiff must demonstrate that its alleged harm was proximately caused by the false advertising, though “the intervening step of consumer deception” does not necessarily break the chain of proximate causation. Economic or reputational injury “flowing directly from the deception wrought by the defendant’s advertising … occurs when deception of consumers causes them to withhold trade from the plaintiff.” By contrast, “[t]hat showing is generally not made when the deception produced injuries to a fellow commercial actor that in turn affect the plaintiff.”

For purposes of their motion for summary judgment, Revblade didn’t contest that Congoo’s interests fell with in the zone of interests protected by §43(a)(1)(A), or that there was a causal connection between deceptive native ads and Congoo’s loss of publisher clients.  However, the court agreed that the purportedly false advertising didn’t have a sufficiently close causal link to Congoo’s alleged harm.

In Lexmark, the connection between the actual competitors in the market and Static Control was very close: because Static Control seemed to be the only relevant supplier, every harm to the competitors was also inflicted on Static Control.  Here, however, there was a disconnect “between the injury to the direct victim”—here, competitors of falsely advertised goods—and Congoo’s own injuries as an indirect victim, “unlike the injuries to companies supporting those competitors in the marketplace.” The loss of publisher clients wasn’t “surely attributable” to injury to a competitor, but could have “resulted from any number of [other] reasons.”

Congoo’s expert stated that false and misleading advertisements deceive consumers into clicking on the advertisements and/or making purchases, thereby “enabl[ing] the unscrupulous advertiser to make high cost-per-click bids to an advertising aggregator, such as Revcontent, who in turn offers higher rates to a publisher to obtain its business. … In addition, native ads that are deceptive and misleading likely have higher click-through rates that also translates into a greater revenue to the publishers.” But this was a too-long chain of causation from higher sales/higher revenues to Revcontent’s ability to pass on more money to publishers.

Congoo’s state common law unfair competition claim also failed because standing wasn’t broader than under Lexmark. To the extent, however, that any allegations of fraudulent representations didn’t relate to consumer products but instead to statements to publishers, such claims survived.

Competitor can't challenge compliance w/certification standards

Board-Tech Electronic Co. v. Eaton Electric Holdings LCC, 2017 WL 4990659, No. 17-cv-5028 (S.D.N.Y. Oct. 31, 2017)

Board-Tech accused its competitor in the light switch market, Eaton, of false advertising because, while Eaton was authorized to apply the “UL” certification mark to certain products (as Board-Tech was), those Eaton products allegedly didn’t comply with the requisite safety standards. For the parties’ light switches, the prevailing standard is UL 20, required by the National Electric Code for new buildings; the NEC is state or local law in all 50 states, and even where its use is voluntary, consumers rely on UL 20 labeling for safety information; many retailers also require UL 20 labeling before they’ll sell a switch.

The UL certification mark, “certifies that representative samplings of the goods conform to the requirements” of Underwriters Laboratory.  Authorization requires a manufacturer to provide six sets of representative samples of switches they want certified, which must then pass a series of tests.  The testing can’t guarantee that the products actually sold comply with applicable safety requirements, merely that a purportedly representative sample did.  However, Board-Tech alleged (plausibly, to me) that consumers rely on the certification mark or listing, and base their purchases on the belief that every product containing a mark or that is listed actually complies with the applicable written safety standards. According to UL, “it is the responsibility of the manufacturer to ensure that all of the products it sells bearing the UL mark actually comply with the standards tested for, not just the samples that were tested.”

Board-Tech alleged that tested samples of UL 20-labeled switches sold by Eaton from the 7500, 7600, and 7700 series, and that all eight sets of six light swiches, 48 in total, failed the UL 20 standards.  However, the court dismissed the complaint for failing to specify the precise products at issue from the relevant series.  Board-Tech alleged that it had sufficiently alleged testing of a sample, but the court disagreed, because Board-Tech failed to specify what it had sampled.  Nor had it explained why it was plausible to extrapolate from a few non-specific switches to entire product lines—more than 125 of them.  Failure to provide any allegations as to which product(s) within a broader product line failed was also necessary in order for defendants to investigate the claim and prepare a defense. “If allowed to proceed in such a broad manner, plaintiff would no doubt seek access to the internal design of competitive products as well as highly sensitive technical data. Damages discovery would involve all of defendants’ sales of this series of products.”  The court wasn’t willing to let that happen without more specifics.

Separately, the court didn’t think Board-Tech could bring claims based on failure to meet the UL’s standards when the UL certification concededly existed.  “[P]laintiff’s claim is that even if defendants are authorized to use the mark, they are deceiving customers by using it.”  But Board-Tech didn’t allege there had been post-certification changes to the product, or that the UL had found Eaton non-compliant.  The authorized use of the mark was not “capable of being a deceptive use.”  The mark was limited by the scope of its registration, and it certified merely that (manufacturer-designated) representative samples conformed to UL’s safety requirements.  [Do consumers know this?  Why would they?]  Board-Tech conceded that Eaton’s switches had been through that process.  “[I]f defendants are authorized to apply the mark (which plaintiff concedes they are), then plaintiff is simply policing the mark. It is up to United Laboratories to police the mark.”  Board-Tech could only challenge UL’s policing by seeking to cancel the mark for failure to police. 

The court was unwilling to allow a competitor to police the use of a certification mark by a competitor, because “[p]rivate testing of a product against standards could be used to commence a lawsuit that could expose competitive design and information to precisely the entity that should not have it. While there are many cases in which competitors are proper plaintiffs – and do obtain discovery – one should not open the floodgates to such litigation without careful consideration.” Comment: Compare to the cases finding that claims requiring interpretation of FDA rules, or policing of compliance with the “organic” standard, can’t be brought under the Lanham Act because the enforcement of those rules has been delegated to an entity other than the court.

"look like new forever" might not be puffery in context of technological innovation claims

EP Henry Corp. v. Cambridge Pavers, Inc., 2017 WL 4948064, No. 17-1538  (D.N.J. Oct. 31, 2017)

Disclosure: I consulted on this case. 

EP Henry and Cambridge compete in the market for concrete pavingstones. Cambridge made superiority such as “only Cambridge pavingstones have ArmorTec - a unique process that guarantees the color will never fade, backed by our fully transferable, lifetime guarantee.” Cambridge also claimed that ArmorTec pavers would “always look like new,” they’d would “look like new forever,” and that their color “will never fade.” EP Henry alleged that consumers had told EP Henry distributors that they were misled, and that after purchase they discovered that the pavingstones didn’t continue to look like new and weren’t fade-proof.

The court ruled that, in context of additional claims about advanced technology, phrases like “they’ll look like new forever” and “the color will never fade” weren’t puffery as a matter of law, even though they would be without additional context. “[C]ourts around the country regularly find that, standing alone, language suggesting perpetuity or an indefinite period of time constitutes non-actionable puffery,” but Cambridge’s ad campaign allegedly touts its breakthrough technology, telling potential customers that ArmorTec is a “unique process.”  It was “plausible that a potential customer could reasonably come to the conclusion that Cambridge is not puffing, but has actually found the ‘secret sauce’ to enable pavingstones to ‘look like new forever’ or ensure that ‘the color will never fade.’”

With that out of the way, the New Jersey Consumer Fraud Act claim (if any) failed because the NJCFA only grants standing to consumers and commercial competitors “who are acting as consumers” or who are involved in a “consumer transaction,” but not to commercial competitors generally. Negligent misrepresentation and common law fraud claims failed because EP Henry couldn’t allege reasonable or justifiable reliance on the alleged misstatements. Though EP Henry argued that it reformulated its advertising campaign in response to Cambridge’s alleged misrepresentations, it didn’t allege that it relied upon or believed Cambridge’s alleged misstatements in doing so. The common law unfair practices claim wasn’t recognized by New Jersey, which limits common law unfair competition to (1) the “passing off” of goods or services; (2) unprivileged imitation; and (3) tortious interference.

The Lanham Act false advertising claim, however, survived.  EP Henry didn’t allege “a specific instance of a consumer choosing to purchase pavers from Cambridge over EP Henry because of Cambridge’s false advertising statements,” but that wasn’t required before discovery.  It sufficiently pled that, as a direct competitor, it suffered harm to its reputation and sales by losing customers as a result of Cambridge’s alleged misstatements. Without evidence from third parties and discovery, however, Cambridge could still be entitled to summary judgment.