Thursday, May 31, 2018

Amended 9th Cir. opinion reaffirms deceived consumer's standing to seek injunctive relief

Davidson v. Kimberly–Clark Corp., 889 F.3d 956 (9th Cir. 2018) (amended)

Previous discussion.  Previously misled consumers may properly allege a threat of imminent or actual harm sufficient to confer Article III standing to seek injunctive relief. “A consumer’s inability to rely on a representation made on a package, even if the consumer knows or believes the same representation was false in the past, is an ongoing injury that may justify an order barring the false advertising.” Here, Davidson paid extra for wipes labeled as “flushable” because she believed that flushable wipes would be better for the environment, and more sanitary, than non-flushable wipes. Davidson alleged that she “continues to desire to purchase wipes that are suitable for disposal in a household toilet,” and “would purchase truly flushable wipes manufactured by [Kimberly–Clark] if it were possible to determine prior to purchase if the wipes were suitable to be flushed.”

First, the court of appeals reversed the dismissal of the complaint under Rule 9(b). The district court had concluded that Davidson failed to adequately allege “why” the representation that the wipes were flushable was false. But Davidson didn’t have to allege that she experienced problems with her home plumbing or the relevant water treatment plant.  Her theory was simple: flushable means “suitable for being flushed,” which requires an item to be capable of dispersing within a short amount of time. This definition was supported by multiple allegations in the complaint, including dictionary definitions and Kimberly–Clark’s own statement on its website.

Davidson alleged that the actual wipes she purchased failed to “disperse and disintegrate within seconds or minutes.” For example, Davidson alleged that after using the wipes, she “noticed that each individual wipe felt very sturdy and thick, unlike toilet paper” and that “[s]he also noticed that the wipes did not break up in the toilet bowl like toilet paper but rather remained in one piece.” Her personal experience was supported by additional allegations, including Kimberly–Clark’s own testing.  This was enough.

Similarly, the district court’s conclusion that the complaint failed because Davidson didn’t allege damages to her plumbing, pipes, or septic system was wrong.  “Under California law, the economic injury of paying a premium for a falsely advertised product is sufficient harm to maintain a cause of action.”  Additionally, to the extent that the district court believed that it was important that “plaintiff has not alleged facts showing how she came to believe that the [Scott Wipes] were not flushable,” this was error; Rule 9(b) doesn’t require a plaintiff bringing a consumer fraud claim to allege how she “came to believe” that the product was misrepresented.

As for Article III standing for injunctive relief,

[k]nowledge that the advertisement or label was false in the past does not equate to knowledge that it will remain false in the future. In some cases, the threat of future harm may be the consumer’s plausible allegations that she will be unable to rely on the product’s advertising or labeling in the future, and so will not purchase the product although she would like to. In other cases, the threat of future harm may be the consumer’s plausible allegations that she might purchase the product in the future, despite the fact it was once marred by false advertising or labeling, as she may reasonably, but incorrectly, assume the product was improved.

Although the amended opinion made clear that practical considerations for enforcing state law weren’t vital to its analysis, this holding also preserved the federal-state balance, given that the primary form of relief available under the UCL for unfair business practices is an injunction, and federal courts shouldn’t be used to prevent relief under state law. 

Judge Berzon wrote a thoughtful concurrence, arguing that Lyons v. LA should not be read to impose separate Article III tests for each form of relief sought by a plaintiff. “[D]uplicating the standing analysis in this way does not give effect to the “case or controversy” requirement of Article III. Instead, it appears to be an artifact of the discredited practice of conflating the prerequisites for injunctive relief with the Article III prerequisites for entry into federal court.”  As Judge Berzon pointed out,

Davidson seeks restitution for the premium she paid for a falsely labeled product, and no one doubts that she has standing in federal court to do so. Under California law, if Davidson prevails on her false advertising claim and is entitled to restitution, she is equally entitled to an injunction. No further showing, equitable or otherwise, is needed to trigger her right to injunctive relief. It follows that we have a single dispute—a single case, a single controversy—giving rise to multiple forms of relief.

While conflating entitlement to relief with Article III standing didn’t matter much where the availability of injunctive relief was governed by federal common law, it “adds new elements to the entitlement to state-law relief” and was thus inconsistent with Erie and other federal-state principles. “[A] defendant should not be able to strip a plaintiff of remedies dictated by state law by removing to federal court a case over which there surely is Article III jurisdiction over the liability issues.”

Not close, no cigar: larger warnings on cigar packages and ads ok, court rules

Cigar Ass’n of Am. v. U.S. Food & Drug Admin., 2018 WL 2223653, -- F. Supp. 3d ---, No. 16–cv–01460 (APM) (D.D.C. May 15, 2018)

Cigar makers sued to invalidate a forthcoming warning requirement for cigars (which the FDA is currently seeking more information on; the court thought it was “grossly unfair” that the FDA didn’t agree to freeze this expensive regulation if it’s considering not imposing it at all, but concluded that it had no authority to direct the FDA to do otherwise). The new warnings, replacing warnings done pursuant to a consent agreement with the FTC, would take up 30 percent of the principal panels of a cigar product package and 20 percent of a cigar product ad.

The challenged disclosures were purely factual and there was no dispute about their accuracy. A disclosure is “controversial” when it is “subject to misinterpretation by consumers,” or “inflammatory.” The textual warnings here, unlike the visual warnings previously invalidated by the DC Circuit, were unambiguous and unlikely to be misinterpreted by consumers.  However, the cigar makers argued that the large size of the warnings made Zauderer inapplicable, arguing that the warnings crossed a line where “the compulsion to speak becomes more like a speech restriction than a disclosure” because the warnings “assault ... customers’ senses” with “blaring government pronouncements” on advertisements, and impose on the historically “distinctive, artistic, aesthetically pleasing” cigar packaging the “jarring juxtaposition” of the warning statements in black, bold font on a white background.

Nope.  The new warnings were “large[r] and stark[er]” than those required under FTC consent orders, and the FDA’s regime compelled use of a larger percentage of ads, but sellers retained sufficient space in which to communicate their messaging: 70% of cigar packages and 80% of ads. Being compelled to provide warnings in larger text on a greater surface area “than they might otherwise be inclined to present” was not enough to constitute suppression of speech.  

And under Zauderer, this was an easy case. A “purely factual” and “uncontroversial” disclosure requirement satisfies the First Amendment so long as it is (1) “reasonably related” to the government’s interest and (2) not “unjustified or unduly burdensome.”

Plaintiffs argued that the government didn’t identify a “substantial” government interest, which I find jawdropping but the DC Circuit has previously invited by expressing uncertainty whether decreasing demand for a lawful product can be a substantial interest.  I note that Central Hudson itself is about decreasing demand for a lawful product (energy consumption) and that the Supreme Court easily found that to be a substantial government interest, and the Court did likewise in Rubin v. Coors (alcohol content).  Here, the court accepted that the government had substantial interests in “‘help[ing] consumers better understand and appreciate the risks and characteristics of tobacco products’ ” and “help[ing] correct current misperceptions” about cigars—there was evidence that youth and adult cigar smokers mistakenly believe that cigars are less addictive, more natural, and less harmful than cigarettes. Likewise, as in AMI, health warning requirements for tobacco have a long history, and there’s a real health concern given that “tobacco products are dangerous to health when used in the manner prescribed.” Thus, the court rejected plaintiffs’ claim that the only legitimate interest relates to decreasing underage tobacco consumption.

Plaintiffs further argued that the goal of improving “information” and “consumer understanding” was not substantial.  In previous cases, when FDA argued that it had a substantial interest in “effectively communicating health information regarding the negative effects of cigarettes,” the DC Circuit said that was “merely a description of the means by which it plans to accomplish its goal of reducing smoking rates, and not an independent interest.”  But here, the FDA’s stated interest was in “actually” communicating health risks, not “effectively” communicating them, and the former was “decidedly” objective. [Um, ok.]  The risk that the DC Circuit saw, which was that an indeterminate interest in “effective communication” would allow the government to define its goal however it saw fit, wasn’t present here.  Also, the FDA wasn’t arguing that the particular formatting specifications it selected here constituted, in and of themselves, a substantial government interest, but rather argued that they were a means by which to “accomplish its goal” of providing accurate health information to the public.  And here, the interest in disclosure was based on far more than mere consumer curiosity; the information to be disclosed “bears on a reasonable concern for human health or safety.”

The warning requirements were also reasonably related to the government’s substantial interest. While the government would have to provide evidence of a measure’s effectiveness to satisfy Central Hudson, “such evidentiary parsing is hardly necessary” under Zauderer. Thus, plaintiffs’ argument that the FDA didn’t examine whether the existing FTC warning scheme was insufficient to communicate health risks of cigars before promulgating the new rules was irrelevant.  As the Sixth Circuit has written, “constitutionality under [Zauderer ] does not hinge upon some quantum of proof that a disclosure will realize the underlying purpose. A common-sense analysis will do. And the disclosure has to advance the purpose only slightly.” Here, the record evidence included academic studies and international consensus “all supporting the commonsense notion that ‘[u]sers are more likely to recall warnings that are a larger size and that appear on the front/major surfaces of the tobacco product package.’” Thus, the size, format, and other design features of the warning statements were reasonably related to the government’s goal of providing accurate information about, and curing misperceptions regarding, the health consequences of cigar use.

Finally, the warnings weren’t so unduly burdensome as to chill protected speech. The disclosures weren’t so lengthy or cumbersome as to effectively rule out speech or “nullify” the message meant to be communicated. Cigar sellers could still “effectively communicate their desired message—whether that be the sense of the product’s ‘luxury and distinction’ through its ‘designs, symbols, and trademarks’ or information about the product’s ‘country of origin, seed varietal, [or] process of manufacture’” on the remaining 70% of cigar packaging and 80% of ads.

Attorney may violate right of publicity by naming client on website

Yeager v. Holt, 232 Cal. Rptr. 3d 693 (Ct. App. 2018)

Peter Holt and his law firm briefly represented Charles E. and Victoria Yeager and successfully sued Victoria Yeager to obtain his fees in an action known as Holt v. Yeager. Yeager then sued Holt, alleging professional negligence, misappropriation of name, and other claims. The court of appeals affirmed the rejection of Holt’s anti-SLAPP special motion to strike.

Yeager’s complaint alleged, among other things, that Holt failed to communicate about the costs and risks of further litigation, concealed facts and acted negligently in discharging professional obligations, such as by refusing to sign a declaration supporting a motion for attorney fees in Yeager v. AT&T Mobility, although Holt claimed in Holt v. Yeager that he was owed those same fees.  Yeager also alleged that Holt represented that the firm would work on a pro bono basis, but did not do so. The misappropriation claim alleged that Holt used Chuck Yeager’s name on the firm’s website without permission.  [The idea that the First Amendment allows the suppression of truthful statements about who was a client of a law firm, absent some agreement for confidentiality, is amazing to me, but apparently not to the California courts.]  The court in Holt v. Yeager rejected the claim that Holt had agreed to work pro bono.  The court here noted that this prior ruling might give Holt some pretty serious defenses, but not an anti-SLAPP victory.

Because the complaint referenced actions in the collection case, Holt argued that it was based on his protected right to petition, i.e., to sue for his fees. The trial court and the court of appeals disagreed.  The anti-SLAPP law only applies when the underlying action implicates protected speech or conduct. While suing someone is an aspect of the right to petition the government and is therefore a protected activity, “a claim is not subject to a motion to strike simply because it contests an action or decision that was arrived at following speech or petitioning activity, or that was thereafter communicated by means of speech or petitioning activity. Rather, a claim may be struck only if the speech or petitioning activity itself is the wrong complained of, and not just evidence of liability or a step leading to some different act for which liability is asserted.”

Holt argued that his refusal to sign a fee declaration for use in federal court was protected activity, but whether that decision was or was not malpractice wasn’t resolvable in an anti-SLAPP case. Nor did this case chill expressive conduct.  “[W]e find it difficult to see how suing an attorney for malpractice, breach of contract, and using a client’s name or likeness for commercial purposes, attacks expressive activity for anti-SLAPP purposes…. [A] typical attorney malpractice suit is not subject to the anti-SLAPP procedures.”  Worse from my perspective, the court reasoned that “the fact that General Yeager is famous does not mean his claim of misappropriation of his name or likeness is itself a matter of public interest.” It’s not clear to me that this holding precludes future defenses to the underlying claim; the logic of the anti-SLAPP statute suggests otherwise, but with the right of publicity, who knows?

“Although there may be sound reasons why this case will not succeed, … filing an anti-SLAPP motion was not an effective way to litigate it.”

Tuesday, May 29, 2018

height and weight claims for car seats are factual representations, not mere possibilities

Henryhand v. Dorel Juvenile Group, Inc., No. CV 17-00180 SJO (AGRx), 2017 WL 7806591 (C.D. Cal. Dec. 4, 2017)

Dorel allegedly falsely advertises its car seats for use by children whose weight is between 5-40 pounds and height is between 19-43 inches, when in fact the car seats become painful and even injurious to children substantially below those heights/weights due to the inadequate length and placement of the harness and buckle apparatus.  Plaintiffs brought the usual California claims and some nationwide claims.  They alleged that, before they bought their car seats, Dorel knew that its stated specifications were wrong through sources not available to consumers, including a NHTSA “Ease of Use” review for one model which concluded that the “[h]arness slots in the pad and in the shell are misaligned or small,”  pre-release testing data, early consumer complaints, and other internal sources. Because the height and weight limitations cannot be detected until a child reaches the maximum specifications, they alleged that they weren’t reasonably able to discover the problem until after purchase, and that any applicable statute of limitations has been tolled by Dorel’s knowledge and active concealment of the relevant facts.

The court refused to dismiss the claims.  Dorel argued that the height and weight specifications were “limits” or “maximums”, and not guarantees of subjective comfort. The court held that a “reasonable consumer” would believe that his or her child would fit in a car seat if the child’s height and weight was within the ranges represented by Dorel.  Plaintiffs also sufficiently alleged Dorel’s awareness of the defect at the time of sale through sources not available to consumers. This was sufficient to plead fraud and fraudulent omission with particularity.

Lexmark allows claims against direct competitor, but not against competitor's customers, absent special circumstances

Frompovicz v. Niagara Bottling, LLC, 2018 WL 2363475, No. 18-54 (E.D. Pa. May 24, 2018)

Frompovicz extracts spring water, and alleged that the defendants, who extract, bottle, label, and sell their water as “spring water,” thereby violated the Lanham Act and Pennsylvania’s unfair competition law by mislabeling their water as “spring water.” One of the Defendants extracts water and three of them bottle.

Spring water allegedly typically sells at a premium compared to other bottled water, such as well water or tap water, but spring water sites require substantially more resources to locate, develop, and maintain than other sources.  Defendants’ source comes from a facility whose DEP permit allegedly identifies the site as a “well water” site, and not a “spring water” site; the raw water extracted from the facility allegedly does not satisfy the FDA definition of “spring water”; the equipment or techniques used are allegedly inconsistent with a “spring water” classification; and water from the facility has allegedly tested as containing more particulates or trace elements than are otherwise permissible or recommended under industry standards for spring water.

The court rejected a challenge to the plaintiff’s Article III standing.  Injury in fact is pretty generous at the motion to dismiss stage, and the allegations that defendants’ marketing damaged his reputation and goodwill and hindered his sales sufficed.  DEP suspended plaintiff’s license to extract water in 2015, but the statute of limitations is 6 years, so he adequately alleged an injury within the relevant period.  However, the court dismissed his claim for injunctive relief because he wasn’t currently in business.

Traceability to the challenged conduct: ditto.  “Since consumers prefer spring water, it is reasonable to infer under the analytical rubric of a motion to dismiss that Defendant Land’s sales siphoned sales away from Plaintiff.”

But did he have a right to sue under the Lanham Act? Consumers of falsely advertised products don’t. Alleging that his spring water sales were depressed as a result of defendants’ misleading labels came within Lanham Act’s “zone of interests.” And he alleged proximate cause as to the defendant facility: he was a direct competitor of the defendant facility. There was no “intervening causal agent” between the defendant facility’s conduct – the “deceptive” sale to bottlers – and his diminished sales to bottlers; both were selling what they call “spring water” to bottlers.  [Actually, and relevant to the discussion below, there is an intervening cause—the reactions of bottlers who believe, or believe their consumers will believe, the “spring water” representation—it’s just not a legally relevant cause for Lanham Act purposes, as the Court said in Lexmark.]

As for the bottler defendants, they weren’t in direct competition.  While suits against non-competitors aren’t completely precluded, “in cases alleging liability based on indirect injuries, more particularized allegations are required” and such a claim is only viable in “relatively unique circumstances” such as those in Lexmark.  Plaintiff’s injury from the bottlers was indirect because, as in Lexmark, he was one step removed in the distribution chain. There was an intervening causal agent between the bottler defendants’ actions and plaintiff’s lost sales: consumers’ purchases of the allegedly mislabeled water. But the plaintiff didn’t sell to consumers; he sold to bottlers.  To allege additional facts as necessary here, he’d need something like a one-to-one correspondence between loss to direct competitors and loss to the plaintiff, or like direct disparagement. Those allegations weren’t present, so the claim against the bottlers was dismissed with leave to amend.

The remaining defendant also argued FDCA preclusion, which Pom Wonderful made unfruitful.  The court’s summary of defendant’s argument makes it look like one of the worst attempted distinctions I’ve ever seen: “Defendants assert that POM Wonderful is distinguishable because it dealt with the definition of juice mixtures and the present case involves the definition of spring water.”  However,  a Lanham Act claim might be precluded if it conflicted with “an agency judgment.” There was no allegation of such an affirmative judgment about the facility’s water.

Claims to assist in filing for TM registrations are puffery, not claims about practicing law

LegalForce RAPC Worldwide, P.C. v. Trademark Information Int’l LLC, 2018 WL 2387637, No. 17-cv-07354-MMC (N.D. Cal. May 25, 2018)

LegalForce alleged that defendant TM411,, offers trademark filing services and engages in false advertising.  Two challenged statements, “Why Pay More?” and “America’s #1 Trademark System,” were puffery. LegalForce argued that the statements implied that TM411 provides its customers with legal advice, but didn’t plead facts supporting the claim that this inference reasonably would be drawn by consumers, particularly given its acknowledgement that TM411 “represents on its website that it does not practice law.”

As for that no-practice-of-law statement, LegalForce argued that it was false because TM411 has “list[ed] its email address as a trademark correspondent on at least 7,247 trademark applications, but failed to allege facts indicating that the use of “correspondent” is a representation that the user is an attorney or that consumers would think so.

LegalForce also challenged “[w]e guarantee your trademark gets filed, or your money-back [sic]” as allegedly misleading consumers that TM411 could file “any and all trademarks including ones that the customer does not own and fraudulent trademark applications.” This wasn’t literal falsity, but LegalForce failed to allege facts indicating that consumers had been deceived into believing that TM411 would submit fraudulent applications to the PTO.

Finally, LegalForce alleged that the statement that “your information is protected” was misleading because it “misleads consumers to believe that communications with [TM411] are protected by the attorney client privilege or attorney work product privilege.” Again, LegalForce failed to allege facts indicating consumer deception.

That took care of the Lanham Act claims; to the extent that state law claims were based on other conduct, as TM411’s having bought LegalForce’s “Trademarkia” as a Google AdWord; submitting “fraudulent specimens” to the USPTO; failing to maintain an IOLTA account for customers; and failing to regulate its non-practitioner assistants’ conduct, the court declined to exercise supplemental jurisdiction.

Friday, May 25, 2018

Damage causation in false advertising can't assume that all harm was caused by falsity

Dependable Sales & Service, Inc. v. TrueCar, Inc., --- F.Supp.3d ----, 2018 WL 2356658, No. 15-cv-1742 (S.D.N.Y. May 9, 2018)

Plaintiffs, 108 individual automobile dealerships, alleged false advertising by TrueCar’s ads promising a “no-haggle,” no-negotiation car-buying experience, thus diverting business from the plaintiff dealers to TrueCar-affiliated dealers. Here, the court granted TrueCar’s motion in limine to exclude the expert report of plaintiffs’ damages and causation expert, mostly because he reasoned that 100% of TrueCar’s sales from buyers located in a plaintiff dealer’s geographic market were caused by the company’s “no-haggle” claim, and that this claim was always false (even if the buyer bought the exact car he or she wanted at the exact price quoted by TrueCar), without accounting for other factors that could have caused the sales. 

TrueCar’s ads touted multiple other features, including research tools showing what other consumers paid for a vehicle’s make and model, “transparency” about dealer fees and “[g]uaranteed savings.” Nor did the expert’s analysis account for the possibility that a consumer might have been influenced by other considerations in deciding to purchase from a TrueCar-affiliated dealer, such as their past interactions with that dealership or the plaintiff dealership, personal recommendations, or non-TrueCar promotions.  He testified that the industry knew that negotiations were a “pain point” and “that telling people that they could save money without negotiating was a magic bullet, that that really penetrated to consumers,” referring to a study done for TrueCar in which respondents reacted favorably to messages touting “[a] negotiation-free way to save thousands off MSRP on a new car” (70% of respondents), free price reports showing what “others paid for the car you want” (65%), upfront pricing information (56%), the ability to “[s]ave time, save money, and never overpay for your next car” (52%), and average savings of $3,078 off the manufacturer’s suggested retail price (48%). But to the extent that he relied on that study, it contradicted his assumption that 100% of buyers bought because of the no-hassle claim. 

Further, TrueCar only used the no-haggle claim in part of its selling history, and TrueCar’s own expert found “no discernable, systematic, and/or persistent changes in these TrueCar-related sales” on either end of the promotion. This evidence was “open to some legitimate challenge as to its duration and significance,” but it still didn’t support plaintiffs’ expert report.  Likewise, his causation analysis also failed to weigh that a significant percentage (2/3 in 2014) of new vehicles sold through TrueCar were transacted through “affinity partners” such as American Express and the United Services Automobile Association, who made TrueCar’s services available through their own customer websites and smartphone apps, using their own branding and giving the no-haggle claim less emphasis. The expert treated those sales as 100% caused by the no-haggle claim, which the court found to undercut the reliability and relevance of his causation analysis and weigh against its admissibility.

Separately, the analysis also concluded that any sale made to a TrueCar-affiliated dealer would necessarily have gone to a plaintiff dealer, as opposed to some other dealer in the same geographic market. But some plaintiffs were in densely populated areas with heavy competition, and dealers also often sell vehicles to consumers outside of that dealer’s defined market, and likewise lose sales to consumers who buy from dealers in an adjacent market. Plaintiffs’ analysis didn’t adequately weigh the likelihood that sales made to a TrueCar-affiliated dealer might have otherwise gone to some other competing dealer, other than a plaintiff.

One final embarrassment was that 23 plaintiff dealers were, at some point, TrueCar-affiliated, and 19 of those sought damages based on sales that they themselves made through TrueCar’s allegedly false ads, which “weighs heavily against the reliability and relevance” of the report.

The expert also attributed $1,602 in lost-profits damages per car, the average profit per car calculated by the National Automobile Dealers Association. But the evidence showed it varied a lot between various plaintiff dealers, both above and below that average; he didn’t persuasively show that this “cookie-cutter approach” was reliable.  Relatedly, the court denied a motion to redact individual dealers’ net profits, holding that the public interest in judicial access outweighed dealers’ privacy interests:

Evidence on this issue was highly relevant to the performance of the judicial function and the judicial process, and the parties seek to redact information that the Court has discussed and relied upon in this Memorandum and Order. The presumption of public access to this information is high because it played a direct role in the adjudication of TrueCar’s motion. The plaintiff dealers may have an interest in the privacy of certain commercial data, but they are the ones who elected to bring this action and to pursue a damages theory that turned on net profits per sale.

Thursday, May 24, 2018

5th Circuit requires use as a mark, but finds Krusty Krab restaurant in SpongeBob qualifies

Viacom Int’l, Inc. v. IJR Capital Investments, L.L.C., No. 17-20334 (5th Cir. May 22, 2018)

The Fifth Circuit here adopts a “use as a mark” requirement, though not a very vigorous one, indicating once again that the concept is too useful to abandon, however much the Second Circuit might like us to think otherwise (at least, when it’s not using the concept itself, as in the Louboutin case).

Viacom sued IJR for infringing its common law trademark of The Krusty Krab— a fictional restaurant in the popular “SpongeBob SquarePants” animated television series—by taking steps to open seafood restaurants using the same name. The court of appeals affirmed summary judgment for Viacom.

SpongeBob SquarePants is “a sea sponge that wears square shorts, lives in an underwater pineapple, and works at the fictional [you don’t say] The Krusty Krab restaurant as a fry cook.” His show has been the most-watched animated television series for 15 consecutive years, with over 73 million viewers in the second quarter of 2016 alone. One-third of all viewers are 18 or older.  The Krusty Krab “played a prominent role in the pilot episode of the series and has appeared in 166 of 203 episodes,” as well as in two feature films, Viacom’s mobile app “SpongeBob Moves In” (seven million global downloads), a play called The SpongeBob Musical, and ads and online outreach (about seven million page views per week). The press has also referenced The Krusty Krab many times when discussing the show.

The Krusty Krab is also licensed to third parties, including for Krusty Krab playsets ($1.4 million in royalties since 2009), the video game “SpongeBob SquarePants Creature from The Krusty Krab” (over one million units), The Krusty Krab aquarium accessories (187,000 units), and The Krusty Krab shirts sold at The SpongeBob Store at Universal Studios in Florida. Viacom has never attempted to license The Krusty Krab mark to a restaurant, though its subsidiary did license Bubba Gump Shrimp Co. for seafood restaurants based on the fictional business from the 1994 movie “Forrest Gump.”

In 2014, IJR’s owner decided to open seafood restaurants in California and Texas. He claimed that he was describing the crusted glaze applied to cooked seafood when he chose The Krusty Krab. Nonetheless, an IJR investor mentioned SpongeBob “out of the blue” while discussing the restaurant.  Though the owner became aware of the fictional Krusty Krab, he didn’t find an actual restaurant using the mark, and IJR filed an ITU trademark application, which was allowed.  IJR’s business plan makes no reference to the SpongeBob franchise or the fictional restaurant The Krusty Krab. IJR postponed its plans during this lawsuit.

Viacom’s survey found that 30% of respondents thought The Krusty Krab was connected with Viacom and 35% of respondents associated the hypothetical restaurant with Viacom.

Viacom, the court reasoned, would have a protectable mark “if it establishes ownership by demonstrating that it uses The Krusty Krab as a source identifier. Often this court has bypassed the use inquiry and conducted only a distinctiveness analysis. However, the two issues are separate questions,” since the Lanham Act requires that a symbol be used or intended to be used “to identify and distinguish” goods and services; use as a mark is a question of fact.  It was clear that The Krusty Krab appeared on goods in the market. The question was whether Viacom used The Krusty Krab “to indicate origin.”

Elements from within a television show can be valid marks.  The court pointed to an earlier case affirming a judgment against the junior use of Conan the Barbarian—the title character of a comic book series—in a restaurant concept, as well as to the Second Circuit’s Warner Bros., Inc. v. GayToys, protecting the General Lee—an orange muscle car with a Confederate flag emblem that was “prominently featured” on the “The Dukes of Hazzard.”  [Just some good ol’ boys, celebrating treason.]
If a TV show element serves as a source identifier, then protecting it serves the purposes of trademark, which are to protect goodwill/producer investment against free riding and “to protect consumers against confusion and monopoly.”  Still, use within a popular TV series isn’t necessarily use as a source identifier.

If the matter “creates a separate and distinct commercial impression...[it] performs the trademark function of identifying the source.” Thus, the role of the element in the show must be evaluated, not the overall success or recognition of the show itself. “When an element only occasionally appears in a successful television series, the indication-of-origin requirement may not be met.” The court gave the example of Paramount Pictures Corp.v. Romulan Invasions, which declined to protect “Romulan” for a fictional alien race in the “Star Trek” series that was featured in episodes, movies, books, licensed plastic spaceship models and dolls, puzzles, games, etc. The TTAB reasoned that the term was “only” used “from time to time” and held that Paramount “failed to establish any use of the term a mark to distinguish its services.” The court here commented that “Star Trek fans may vehemently disagree with this analysis as a factual matter.” [No, no we don’t!]

Elements playing a more central role can “ordinarily” get trademark protection.  The example here was “The Daily Planet,” which “has over the years become inextricably woven into thefabric of the Superman story.” So too with Kryptonite, “a staple of the Superman character and story,” which “is immediately recognized or associated with the character Superman.”

The court found The Krusty Krab analogous to these protected marks, deeming it “integral” and “central” to SpongeBob, given its prominence in the material. This centrality was itself “strong evidence” that “The Krusty Krab” was “recognized in itself as an indication of origin for Viacom’s licensed goods and television services.” Viacom’s licensing, which has generated millions of dollars, “provides further evidence that Viacom uses The Krusty Krab as a source identifier and therefore owns the mark.” Even though it typically appears alongside the SpongeBob mark, that didn’t prevent it from being a mark too because it created a distinct commercial impression, “signifying to consumers that products like Krusty Krab playsets or aquarium ornaments originate from the famous fictional restaurant that employs their beloved sea sponge character.”  Nor did it matter that the term was used in varying styles, fonts, and sizes on the licensed products, because the mark was a word mark, not a design mark, “so the focus is whether the words themselves are consistently used as an indicator of source.”

It’s interesting that this factual question seems in the court’s view to be completely about what Viacom does, not what consumers perceive in response.  This is perhaps the only way to distinguish use as a mark from distinctiveness, but does it make sense?

Speaking of distinctiveness, the evidence showed distinctiveness, even without a survey or direct consumer testimony.

Confusion: given the standard for summary judgment, the evidence of intent couldn’t be weighed against IJR, but there was still enough to find confusion as a matter of law.  Strength and similarity easily favored Viacom for any reasonable jury, as did relatedness of goods/services.  For relatedness, the court of appeals compared the fictional hamburger restaurant, not a TV show/aquarium accessories/playsets, to the planned seafood restaurant.  This seems technically erroneous but practically understandable. “While there is little evidence of thematic overlap between the restaurants, IJR nevertheless plans to open a restaurant, and given the success of SpongeBob, that indicates a likelihood of confusion.”  Plus, affiliation or sponsorship confusion are more likely “when the junior user’s services are in a market that is one into which the senior user would naturally expand.” The Conan case said that “today’s consumers expect [cartoon character] endorsements and act favorably toward them” in the restaurant setting, and “Viacom could naturally develop a real The Krusty Krab restaurant based on the fictional eatery, as its subsidiary did when it licensed Bubba Gump Shrimp Co.”

Identity of retail outlets and purchasers: IJR intended to target “the general public,” particularly “families, singles, and students . . . as well as the area’s work force.” “At this general level of abstraction, Viacom also targets the general public,” but though the district court found that this factor favored Viacom, there were “substantial differences in the retail outlets and the predominant purchasers that mitigate the possibility of confusion.”  Viacom “presumably” targeted TV viewers, toy stores, and online retailers, versus brick-and-mortar restaurants.  There was some overlap in purchasers, since one third of SpongeBob viewers are “technically” adults [ouch], but the core consumers were dissimilar. Though it was reasonable to infer that some SpongeBob fan children would influence decisions to eat at a Krusty Krab restaurant, and that adult fans “might well dine at a Krusty Krab restaurant, at least once, due to the name,” the extent of the overlap wasn’t clear on the record.  Likewise, similarity of advertising media couldn’t be judged on this record.

The district court specifically erred in weighing intent against IJR, even after acknowledging that it was “not clear” whether IJR intended to derive benefits from Viacom’s reputation, because a principal “associated” the phrase with SpongeBob and IJR’s owner was aware of Viacom’s use before he applied to register the mark. Word association, without more (such as using more elements of the show, rather than just one unregistered term), couldn’t establish bad faith at summary judgment, and “‘mere awareness’ of the senior user’s mark does not ‘establish[]...bad intent.’” There was enough to create a genuine issue, but it didn’t matter.

Evidence of actual confusion: the survey plus anecdotal evidence of association by principals/investors. The key question was whether the survey was “substantially defective”; there was no problem of the representativeness of the sample, but “parts of the survey resembled a word-association test. … [T]he survey asked if ‘THE KRUSTY KRAB restaurant [is] affiliated or connected with any other company or organization.’ This invites word association, and ‘a mere word-association test is entitled to little weight.’” But this went only to weight, so the district court didn’t err in admitting the survey.  The bar on actual confusion is low; the probative value of the survey plus the anecdotal evidence [of word association] weighed in favor of finding confusion. [Interestingly, the court of appeals doesn’t say that a reasonable jury would have to so find—and I would think it wouldn’t have to.]

Overall, there was no genuine issue of material fact on likelihood of confusion.

Wednesday, May 23, 2018

visiting a website without buying through it binds user to arbitration for offline purchase, court finds

Himber v. Live Nation Worldwide, Inc., 2018 WL 2304770, No. 16-CV-5001(JS) (E.D.N.Y. May 21, 2018)

In this decision, the court compels arbitration because the plaintiff had (1) previously purchased tickets from Live Nation’s website and, perhaps more surprisingly, independently because he had (2) visited the website, though not purchased tickets, to find the ticket prices for the relevant transaction.  Himber saw that the tickets he wanted were $49.50 each, but that there was a $15.25 online-service fee added to the price of each ticket. He decided to go to the box office, which was 20 minutes away, to buy the tickets and avoid the fee. But at the box office was charged an additional $6 per ticket, a charge that was not disclosed on the website. Given that it is impossible to avoid the $6 charge at the box office, he argued that the true price of a ticket was $55.50, and that Live Nation’s advertising was deceptive under GBL §§ 349 and 350.

The court found that the homepage and virtually all interior pages of the website state that use of the site is subject to the Terms of Use, with each page advising users that they agree to abide by those terms if they continue past the page and use the site, and with each page providing a hyperlink directly to the Terms of Use.  “[I]n the context of agreements made over the internet, New York courts find that binding contracts are made when the user takes some action demonstrating that they have at least constructive knowledge of the terms of the agreement, from which knowledge a court can infer acceptance.” In other words, “[w]here there is no evidence that the offeree had actual notice of the terms of the agreement, the offeree will still be bound by the agreement if a reasonably prudent user would be on inquiry notice of the terms,” a determination turning on the “ ‘[c]larity and conspicuousness of arbitration terms.’ ”  Himber didn’t “sufficiently contest that the layout and language of the website provided reasonably conspicuous inquiry notice of the arbitration provision when he used the website to purchase tickets.” The court gave short shrift to the argument that a user who only used the website to find out what shows were available would have no reason to read the ToU far enough to understand their claim to cover every interaction, online or off, between the parties, even though the beginning of the ToU states: “Welcome! The following are the terms of use (‘Terms’) that govern your use of the Live Nation sites and applications where this appears (collectively, the ‘Site’).”

The court found that Himber manifested assent to be bound by the Terms of Use when he used the website, which gave reasonable notice of the terms, whether or not a user ultimately purchased tickets. “A user who actually notices the Terms of Use … would not be reasonable in believing that provisions following the first paragraph apply only to users purchasing tickets online, not at the box office,” given the language that the terms “govern your use of the [website]” (emphasis added) unqualified by later language stating or reasonably suggesting that the terms apply only to users making online purchases. [Is that what an ordinary consumer would expect “use” to mean in the context of a ticket sales website?  Somehow I doubt it.]

Anyway, even if the scope of the arbitration provision were an issue for the court and not the arbitrator, it was broad enough to cover these claims because it covered “Any dispute or claim relating in any way to your use of the Site, or to products or services sold or distributed by us or through us.”  Himber’s claims depended on the conflict between the prices advertised on the website and the true, unavoidable price, so his claim was related to the use of the website.

Himber also failed in his argument that Live Nation was judicially estopped from taking this position because Ticketmaster, its affiliate, took a contrary position in two earlier, unrelated cases. In those cases, Ticketmaster argued that its arbitration clause wasn’t unconscionable because a customer was free to buy tickets at a box office without being bound by the arbitration clause.  But here, the claims were based on the use of the website to get information + going to the box office, not going to the box office alone, so there was no conflict.

Nor did Himber’s argument that any agreement to arbitrate was induced by misrepresentation get any traction.

Amicus brief in FanDuel right of publicity case

Mark McKenna & I wrote an amicus brief in the FanDuel case, in which the Indiana Supreme Court is being asked to interpret its state's right of publicity law.  We argue that the First Amendment precludes right of publicity laws that go beyond advertising and Zacchini-style unauthorized recording of live performances.

It takes an Empire to hold Dr. Seuss back: court revisits TM claim and rejects liability for mashup

Dr. Seuss Enterprises, L.P. v. ComicMix LLC, No. 16-CV-2779-JLS, 2018 WL 2306733 (S.D. Cal. May 22, 2018)

Twentieth Century Fox Television v. Empire Distribution, Inc., 875 F.3d 1192 (9th Cir. 2017), interprets and applies the test from Rogers v. Grimaldi, 875 F.2d. 994 (2d Cir. 1989), and convinced the district court to grant judgment on the pleadings to defendants here, who are trying to produce a Star Trek/Dr. Seuss mashup, Oh! The Places You’ll Boldly Go.  Previously, the district court relied on a footnote in Rogers indicating that the Second Circuit wouldn’t apply Rogers to confusingly similar titles.  But in Empire, the Ninth Circuit held that the Rogers test was applicable to titles generally, there being no point in changing the rule when the plaintiff asserted rights in a title and some danger in doing so, given that the First Amendment interests at stake come from the defendant’s expressive use and that titles are inherently less likely to convey association, authorship, or endorsement than other “marks.”

Dr. Seuss argued that the title wasn’t chosen for artistically relevant reasons but was chosen to “borrow from the rights holder or avoid the drudgery of creating something fresh.”  But the bar for artistic relevance is low, and it couldn’t be said that the title wasn’t at all relevant to the content; rather, it described the content of the book.

Nor was the title explicitly misleading.  Even survey evidence isn’t sufficient to show explicit misleadingness. “To be relevant, evidence must relate to the nature of the behavior of the identifying material’s user, not the impact of the use.”  There was no statement that Dr. Seuss endorsed or was involved in Boldly, and in fact the copyright page states that “[t]his is a work of parody, and is not associated with or endorsed by CBS Studios or Dr. Seuss Enterprises, L.P.” “Although the effectiveness of these disclaimers is disputed by Plaintiff, what cannot be disputed is that there is no statement in Boldly to the contrary.”  Nor was copying the lettering and font of the title and many characters relevant—that wasn’t enough to be an “explicit misstatement.”

However, the court clarified and limited its holding (which is just going to lead to more motion practice, this time based on ESS (the Pig Pen/Play Pen case)).  Last time, the court didn’t address the plaintiff’s claimed trademark rights in fonts and illustration style on the cover and in the contents of the book.  These remain for further litigation.  (Where Rogers and Dastar will meet, along with the various Sleptone cases).

Three stripes, three strikes: 9th Circuit wades into irreparable harm in TM again

The court of appeals affirmed a preliminary injunction against one Skechers shoe for infringing the unregistered trade dress of the Adidas Stan Smith shoe, but reversed the grant of an injunction against another shoe that allegedly infringed and diluted the Adidas three-stripe mark.  [PS: I don’t care that Adidas doesn’t capitalize its name; while I will respect the wishes of natural persons on this, Adidas lacks any comparable dignity interest.  I’m not a full prescriptivist, but I have standards.]

“The Stan Smith has become one of adidas’s most successful shoes in terms of sales and influence since its release in the 1970s.” It was called “ultimate fashion shoe” by i-D magazine and received other extensive media coverage, including appearances on lists of the most important or influential sneakers of all time, which are apparently things that exist, and earned industry accolades such as Footwear News’s 2014 “Shoe of the Year.” The Stan Smith is Adidas’s top-selling shoe of all time, selling more than 40 million pairs worldwide.

Adidas also claimed several hundred million dollars in annual domestic sales of products bearing the Three-Stripe mark, which is heavily advertised and promoted.
Skechers Cross Court shoe
Adidas defined its Stan Smith trade dress as having: (1) “a classic tennis-shoe profile with a sleek white leather upper”; (2) “three rows of perforations in the pattern of” adidas’s Three-Stripe mark; (3) “a defined stitching across the sides of each shoe,” (4) “a raised mustache-shaped colored heel patch, which often is green”; and (5) “a flat tonal white rubber outsole.”  The court found that the district court’s finding of secondary meaning was supported by ample evidence, including Skecher’s own copying and its use of [ugh] “metadata tags on its website that directed consumers who searched for ‘adidas Stan Smith’ to the page for the Onix shoe.… We agree with the district court that ‘the only reason “adidas Stan Smith” is a useful search term is that consumers associate the term with a distinctive and recognizable shoe made by adidas.’ ”  

Likely confusion was also supported by substantial evidence, given the high degree of similarity between the shoes and the other Sleekcraft factors. “Minor differences, including the use of Skechers’s logo, do not negate the overall impression of similarity between these two shoes.” The court also agreed that the copying and the use of metatags supported the inference that Skechers intended to confuse consumers. The court distinguished Multi Time Machine because that case involved a retailer and not the competitor itself, so Amazon’s “use of the metadata was not probative of its intent to exploit the existing secondary meaning of a competitor’s mark or trade dress,” which doesn’t make a lot of sense.  Eric Goldman has more to say about this.

As to the Stan Smith injunction, the court of appeals reiterated that “[e]vidence of loss of control over business reputation and damage to goodwill [can] constitute irreparable harm,” “so long as there is concrete evidence in the record of those things.” Here, Adidas’s Director of Sport Style Brand Marketing “testified to the significant efforts his team invested in promoting the Stan Smith through specific and controlled avenues such as social media campaigns and product placement,” and Adidas presented evidence regarding “its efforts to carefully control the supply of Stan Smith shoes and its concerns about damage to the Stan Smith’s reputation if the marketplace were flooded with similar shoes.” Adidas also presented survey evidence showing that approximately 20% of surveyed consumers believed Skechers’s Onix was made by, approved by, or affiliated with adidas. (The court also reiterated its conclusion about Skecher’s bad intent because of metatags.) 

This extensive marketing and tight control of supply demonstrated that Adidas had built a specific reputation around the Stan Smith with “intangible benefits.” The surveys demonstrated that those intangible benefits would be harmed if the Onix stays on the market because consumers would be confused about the source of the shoes.  [I still don’t understand this reasoning. The testimony discussed goes to brand value, not to damage to brand value through greater availability of knockoffs, which even this court just calls a “concern” and which Adidas doesn’t seem to have provided evidence about. The benefits of the Stan Smith reputation also aren’t intangible, though they may legitimately be hard to measure.  In addition, there is indeed a market for scarcity in itself—Veblen goods—but I have to wonder if something that has sold 40 million pairs can really qualify.]

Anyway, the court of appeals also affirmed the finding of likely success on the merits for confusion and dilution [ugh] of the three-stripe mark by the Cross Court shoe, but not the preliminary injunction. Though there were differences between the designs, “the district court was permitted to discount these differences in conducting its factual determination regarding similarity,” especially given the closely related products. There was no clear error in finding that Skechers’s intent in selecting its mark [NB query whether this is a “mark” at all] weighed in Adidas’s favor. “When one party knowingly adopts a mark similar to another’s, reviewing courts presume that the defendant will accomplish its purpose, and that the public will be deceived.” That also supported the district court’s finding that Skechers intended to deceive the public.  

[So a presumption of copying from knowledge + similarity leads to a presumption of confusion and of intent to deceive.  I understand why this view developed, but it is highly circular and seems to double-count similarity, which is more problematic the less exact the similarity is, as here.  Skechers presumably thought it was far enough away from the three-stripe mark, and while we might fear its own self-interest distorting its judgment of distance, we should probably be focusing on the distance and not Skechers’ hypothetical mental state.]

The court of appeals reasoned similarly about dilution—so similarly that it noted that there was “substantial overlap between [the dilution] factors and the Sleekcraft factors.” Actually, there is mostly overlap between the dilution factors and the factors that help determine whether a mark is famous, but that’s a story for another day. For the same reasons that the district court didn’t clearly err in finding likely confusion, it didn’t clearly err in finding likely dilution.

The majority then parted ways with the dissent on the preliminary injunction, specifically the issue of irreparable harm.  Adidas argued that the Cross Court harmed its ability to control its brand image because consumers who see others wearing Cross Court shoes would associate the allegedly lesser-quality Cross Courts with Adidas and its mark. But the record didn’t support that theory (as opposed to a different theory, mentioned by the dissent, that Adidas could somehow have suffered if the Skechers buyer could benefit from others believing she was wearing Adidas shoes).

The Adidas theory of harm relied on the notion that Skechers was viewed by consumers as a lower-quality, discount brand, and Adidas as a premium brand. Even assuming the latter, the former wasn’t shown by the record. The only evidence was from Adidas employees, who testified that Skechers sold at a lower price point, but not that the price point was because of lower quality.  One employee testified that, within Adidas, Skechers was viewed as inferior, but that didn’t show how the general consumer viewed them, even assuming that employee testimony was reliable evidence of the reputation of a competitor.

Further, Adidas’s theory of harm was in tension with its post-sale confusion theory.  It would be implausible to argue point of sale confusion, given the Cross Court’s numerous Skechers logos and other identifying features. Instead, the only theory was  that someone else looking at a Cross Court shoe “from afar or in passing” might not notice the Skechers logos and thus might mistake it for an Adidas. But how would such confused consumers “be able to surmise, from afar, that those shoes were low quality? If the ‘misled’ consumers could not assess the quality of the shoe from afar, why would they think any differently about adidas’s products? How could adidas’s “premium” brand possibly be hurt by any confusion?”

By contrast, Adidas presented evidence of irreparable harm in the form of its extensive marketing efforts for the Stan Smith and its careful control of the supply of Stan Smiths. “Thus, even post-sale confusion of consumers from afar threatens to harm the value adidas derives from the scarcity and exclusivity of the Stan Smith brand.” [How?  With forty million pairs, minus losses from wear, in circulation, how would a consumer infer anything about exclusivity even if every other person she saw were wearing something like the Stan Smith design?  I remember when everyone in my seventh grade class wore Benetton, but even I knew that was a concentrated environment and not widely representative.  The more you talk this scenario out, the more classist and ugly it gets, although it is sadly not an implausible theory of human behavior.] But there was no comparable argument or evidence for the Cross Court.

Judge Clifton dissented as to the three-stripe mark injunction, agreeing with INTA that infringement is the loss of control over reputation, and the loss of control is irreparable harm.  [On its own terms, this is fallacious.  The scenario perhaps equivalent to negligence—something may happen to the reputation due to the infringer’s behavior, and it would be the infringer’s fault—but it’s just a chance, rather than a realized event, until the lost control actually affects the reputation, just as negligent driving may not cause any harm.]

The dissent also argued that lost prestige from diminished exclusivity due to post-sale confusion was irreparable injury, as was customer diversion in itself.  And here we learn the source of the dissent’s conviction: his firm’s past representation of LV!

About thirty years ago, when I was in private practice, my law firm was retained by Louis Vuitton to combat the sale of cheaper imitations. Some were … knock-offs, such as bags with a similar looking “LW” mark or products that Louis Vuitton probably wouldn’t dream of making, such as baseball caps coveredwith dozens of “LV” marks. Many of the items were sold at locations, like swap meets and flea markets, where few would expect to find real Louis Vuitton products. Prices were often a tiny fraction of what the real thing cost, and it was unlikely that the purchasers thought that they were walking away with genuine Louis Vuitton merchandise. Leaving the legal arguments aside, it wasn’t a surprise to me (and still isn’t) that Louis Vuitton was concerned and was willing to expend considerable effort to protect its trademark. As Professor McCarthy described, if the prestige of carrying a bag with the Louis Vuitton trademark could be obtained at a fraction of the price, and if viewers could not tell the difference, the value of the trademark would be in jeopardy. And, if someone did confuse the cheap imitation for the real thing, the lesser quality of the imitator could further imperil the perceived value of the Louis Vuitton products and trademark.

Though the majority [rightly] considered this reasoning counterintuitive in the post-sale confusion scenario, the dissent found it perfectly logical and “well established in the law as a basis for a claim of dilution.” [See also: one reason dilution isn’t a real thing.]  The dissent would have honored the district court’s finding of blurring: “Skechers’ infringement undermines adidas’s substantial investment in building its brand and the reputation of its trademarks and trade dress” and that “Skechers’ attempts to ‘piggy back’ off of adidas’s efforts by copying or closely imitating adidas’s marks means adidas loses control over its trademarks, reputation, and goodwill.”

The dissent also argued that the district court’s reliance on the testimony of Adidas employees to establish Skecher’s market reputation wasn’t clearly erroneous. “A marketing professional has to be knowledgeable about consumer perceptions of his own brand, in this case adidas, and also of competitors, including Skechers.”

But the dissent’s real disagreement was with the majority’s view that Adidas had to show that there was a difference in reputation.  “Instead, the loss by adidas of control over its mark was by itself irreparably harmful.” The district court should have been given discretion to so find.

Suck and blow: surgical device ads lead to $12 million in compensatory and punitive damages for competitor

SurgiQuest v. Lexion Medical, Inc., No. 14-382-GMS, 2018 WL 2247216 (D. Del. May 16, 2018)

The parties, which make medical equipment, sued each other for false advertising.  A jury returned a verdict in favor of Lexion under the Lanham Act and Delaware’s Unfair Competition Law, and awarded $2.2 million in compensatory damages and $10 million in punitive damages. Here, the court rejects various motions.

If I understand the technology correctly, the parties’ devices are used during surgery to manage the gases that enter the patient’s body.  Lexion’s Insuflow device heats and humidifies gas, which reduces hypothermia by preventing the removal of moisture from the patient. In 2010, SurgiQuest told the FDA that the AirSeal System removed moisture from the patient and keeps tissues moist. SurgiQuest instructed its sales representatives that AirSeal did “essentially the same thing” as Lexion’s Insuflow system. However, SurgiQuest did humidity tests in 2012, and its engineer concluded that the AirSeal “dehydrates the abdominal cavity . . . chilling the patient,” which is the exact opposite of Insuflow. Even after SurgiQuest’s CEO and head of marketing learned about the test results, SurgiQuest still instructed its sales representatives to state that AirSeal performed essentially the same function as Insuflow.

There was evidence that SurgiQuest knew that AirSeal would suck air into the abdomen, and that gas, and surgical smoke when present in the abdomen, would leak out of the trocar (a surgical instrument used for withdrawing fluid from a body cavity).  Surgical smoke is a dangerous byproduct of energy-based surgical instruments.  SurgiQuest called its product an “AirSeal” despite its knowledge that the AirSeal didn’t preclude the passage of fluids, even though surgeons expected that trocars had seals to preclude fluid passage. SurgiQuest claimed that the AirSeal maintained stable pneumoperitoneum when it had advertised that this meant no gas could escape during a procedure.

SurgiQuest trained its sales representatives that the AirSeal did not suck air into the abdomen and that gas and smoke did not escape from the AirSeal trocar due to the “AirSeal” functionality. When customers inquired, the sales representative did demonstrations to show that no air could get sucked into the abdomen. Evidence at trial indicated that SurgiQuest knew that this capability was an important selling point and if they told the truth there would be “doctors that look at you like you just ran their mother over in a car” and it would lead to a decline in sales. A potential acquirer backed out of a potential acquisition of SurgiQuest, calling the air entrainment issue a “serious problem,” indicating that their sales numbers would be much less if people knew the truth.

SurgiQuest also knew that air could exacerbate subcutaneous emphysema, and altering the concentration of carbon dioxide gas in the abdomen is “typically undesirable for the safety of the patient” and even increases the risk of a fire or explosion.

SurgiQuest also knew that smoke could escape through the top of the trocar and that its filter was a particle filter that could not filter out toxic and carcinogenic gasses. Nonetheless, SurgiQuest trained its sales reps that AirSeal removed carcinogenic gasses from the smoke and advertised that AirSeal provided “smokeless laparoscopy,” and that surgeons and operating personnel were protected from the danger of surgical smoke.

However, the court indicated that concerns over patient safety were “baseless,” given that the FDA reviewed and approved a number of the statements Lexion pointed to at trial and that surgeons from top hospitals use the AirSeal device routinely, including top robotic surgeons at the hospital at which Lexion’s own expert practiced.

SurgiQuest argued that no reasonable jury could have awarded monetary damages because Lexion failed to provide sufficient evidence that its false statements had a causal link to Lexion’s lost sales.   But Lexion presented a witness who testified that, as a result of being “misled” by SurgiQuest’s false statements that its AirSeal product wouldn’t draw operating room air into the abdoment, he stopped using Lexion’s Insuflow product and switched to AirSeal product. Though he stopped using the AirSeal immediately once he learned the truth, Lexion never got the account back. Similarly, a “robotic coordinator” [great job] at a hospital testified that she was told AirSeal did not suck air into the abdomen, which partially affected the hospital’s purchasing decision.  Another witness identified multiple consumer accounts that believed AirSeal heated and humidified, and stopped buying or reduced their purchases from Lexion as a result; a witness who testified that his hospital system purchased fewer Insuflow devices because they were using AirSeal, which did the exact same thing as Lexion’s products; and a SurgiQuest sales representative who testified SurgiQuest targeted Lexion’s customers by telling them AirSeal performed identically to Insuflow, and that they could justify the cost of their purchase by getting rid of Insuflow. At one hospital, Lexion lost an account that produced revenue of $100,000 per year.  Thus, the evidence at trial was sufficient to support a verdict that the false advertising had a causal connection to Lexion’s loss.

The court also rejected challenges to the jury instructions.  These included: “[i]f literal falsity is found, Lexicon does not need to prove actual deception of consumers to recover damages for false statements made by SurgiQuest.” SurgiQuest argued that this wasn’t a correct statement of the law for money damages, but the court noted that Lexion provided evidence of actual deception and of a causal connection between the false statements and damages.

The court also instructed that “[e]vidence of actual[ ] confusion is difficult to find and even a few incidents may[,] therefore[,] be probative,” relying on analogous trademark cases.  Even if that wasn’t ok (which it should be), this wasn’t a damages instruction but a liability instruction for misleadingness, and SurgiQuest was only challenging the damages award. Likewise, the instruction “[i]f a party demonstrates that the defendant has intentionally set out to deceive the public and its conduct in this regard is of an egregious nature, a presumption arises that consumers are, in fact, being deceived” was also about misleadingness, and Lexion showed literal falsity, making presumptions irrelevant.

SurgiQuest also argued that the court improperly allowed Lexion sales representatives to testify about what customers told them, but this wasn’t hearsay because the statements weren’t provided for the truth about the AirSeal’s capabilities, but rather for what consumers thought the AirSeal could do (which evidenced their confusion).  Likewise, the court instructed the jury that evidence that SurgiQuest sales reps misunderstood the device’s capabilities “may be probative to establish customer or purchasing deception or other evidence.”  The court again reasoned that trademark precedents could apply, making salesperson confusion probative of consumer confusion because salespersons are in the position to influence a purchasing decision.  Given the evidence, the jury didn’t need to infer confusion, though: the  salespersons made literally false statements.

Under Delaware law, punitive damages are available when the defendant’s conduct exhibits a wanton or willful disregard for the rights of the plaintiff, which requires a conscious indifference or an “I don’t care” attitude.  SurgiQuest argued that there was little evidence of deception, particularly given the disclosures about the product to the FDA and in the Instructions for Use (“IFU”) provided to customers. SurgiQuest argued that most of the challenged statements were isolated incidents, from a handful of sales representatives to a very limited number of customers.  Given the evidence of knowing falsity recited above—and the harm that falsity could cause—the court found the evidence sufficient for punitive damages.

However, the court denied Lexion a permanent injunction.  Lexion argued that its loss of market share was sufficient evidence of irreparable harm, but SurgiQuest rejoined that because the jury found that it did not violate the Delaware Deceptive Trade Practices Act, which requires that there be a pattern of deceptive conduct not merely isolated statements or conduct, that the false statements couldn’t be the cause of on-going or irreparable harm. The court agreed, even though those two things (isolated statements and hard-to-measure lost market share) don’t contradict one another.  [Compare to the recent Adidas v. Skechers case, which does accept lost market share as irreparable harm.]

The balance of hardships also weighed against the injunction because enjoining the use of the tradename “AirSeal” would require SurgiQuest to change the registration of the device with government agencies, including the FDA, and the registration and use of the name dates back to 2009, but Lexion did not plead any claims on this tradename until 2016, nor any damages before 2013.

Lexion argued that the public interest would be served by an injunction because the false advertising related to patient and OR staff safety. SurgiQuest responded that prominent laparoscopic surgeons in top United States hospitals use AirSeal, and that an injunction could impact the surgical community’s access to the relevant equipment, which could impact the quality of laparoscopic surgeries, including robotic surgeries that are performed with the AirSeal each day. “Because surgeons across the country are using both products, the court finds this factor weighs against a permanent injunction.”

The court also denied disgorgement of profits. The Third Circuit considers: “(1) whether the defendant had the intent to confuse or deceive, (2) whether sales have been diverted, (3) the adequacy of other remedies, (4) any unreasonable delay by the plaintiff in asserting his rights, (5) the public interest in making the misconduct unprofitable, and (6) whether it is a case of palming off.” Intent and public interest in making misconduct unprofitable weighed in favor of disgorgement, and palming off was inapplicable, but sales diversion weighed against disgorgement. “Lexion’s trial evidence showed a wide variety of reasons completely independent of SurgiQuest, such as cost, contracts, product failures and surgeon preference that contributed to Lexion’s declining revenues.” And the fact that the parties’ products were incompatible “is a legitimate and lawful business fact, which cannot support damages or a theory of diverted sales for false advertising.” Moreover, testimony from both parties’ witnesses demonstrated that the selection of which device to use was a matter of surgeon preference.  

Adequacy of other remedies also weighed against disgorgement. Lexion never achieved more than a 4-5% market share, even when SurgiQuest was not on the market. Only 1-2% percent of surgeons even want the heated and humidified gas that Lexion’s accessories provide. Thus, the jury rejected Lexion’s claim for 95% of SurgiQuest’s revenue as damages.

Plaintiff’s delay also weighed against disgorgement. Lexion didn’t plead any false advertising claims concerning air entrainment (including the trademark AirSeal) or smoke statements until May 2016, more than 2 years after the litigation began, yet claimed that the false statements began at least as early as 2012, and relied on information publicly available in 2009-2010.

Nor was this case exceptional in terms of the substance or SurgiQuest’s litigation behavior. “While the case has been hotly contested, and has been marked by a tremendous number of disputes, these are typical realities of high-stakes litigation between competitors in a market presenting an opportunity for enormous profits. For the most part, both sides defended their respective positions throughout this litigation in apparent good faith.” For similar reasons, there was no prejudgment interest award.

Wednesday, May 16, 2018

Is this "diet" soda script too close to Diet Coke's?

I have to admit, I might expect it to be a Coca-Cola product.  What's more, it's made in the US, not Brazil, and seems to be a copy of Guarana Antarctica, a Brazilian beverage.

But in that sleep what dreams of liability may come?

When you sue a competitor for false advertising, be prepared to get sued back.  In this pair of opinions, most of the parties’ claims against each other survived, paving the way for a messy trial.

GhostBed, Inc. v. Casper Sleep, Inc., 2018 WL 2213002, No. 15-cv-62571-WPD (S.D. Fla. May 3, 2018)

GhostBed and Nature’s Sleep (hereinafter GhostBed), owned by the same family, sued Casper, a competitor in the online mattress business, for various causes of action.  Nature’s Sleep alleged that it was among the first in the mattress business to deliver a “bed in a box” concept direct to consumers: a mattress vacuum-sealed in a box, which inflates when the packaging is open, though Casper did well after its launch in 2014.  In 2015, Nature’s Sleep launched a competing DTC company, GhostBed.

Casper argued that GhostBed copied many of its product features, website design, and marketing techniques, down to the name, GhostBed, “designed for customers to associate the ‘ghost’ name with Casper based on the popular cartoon character ‘Casper the Friendly Ghost.’” Casper thus sued for trademark infringement and false advertising under the Lanham Act, along with related state law claims.

GhostBed accused Casper of intentionally infringing Nature’s Sleep’s “BETTER SLEEP FOR BRIGHTER DAYS” and false advertising; in this opinion, the court granted Casper partial summary judgment on the false advertising claims.

GhostBed registered (with two ‘s’s). ICS, apparently a known cybersquatter, registered (one s). In 2015, Casper allegedly arranged for users who visited the one-s site to be redirected to Casper’s website. GhostBed argued that this constituted direct or contributory infringement and violated ACPA.  Casper argued that it didn’t register or use the domain name.  AdMarketplace, “a company hired as part of an advertising campaign by Casper, had some role in the redirection” to Casper’s site.  The ACPA claim only imposes liability for using a domain name if a person “is the domain name registrant or that registrant’s authorized licensee.” Multiple factual issues, also including damages, precluded summary judgment on these claims.

Likewise, alleged infringement of Nature’s Sleep’s unregistered mark, BETTER SLEEP FOR BRIGHTER DAYS, couldn’t be decided on summary judgment.  Whether Casper’s use of BETTER SLEEP in commerce preceded Nature’s Sleep’s use was disputed.

GhostBed also alleged that Casper engaged in false advertising by: (1) posting false and misleading comments about GhostBed on the internet; (2) coercing mattress reviewers into posting fake, favorable reviews of Casper mattresses on the internet; (3) utilizing search engine optimization techniques to increase visibility of favorable Casper content on the internet; and (4) entering into settlement agreement with three mattress reviewers that resulted in elimination of negative reviews of Casper content.

These claims failed because, first, GhostBed didn’t provide evidence that Casper posted false/misleading comments about GhostBed. GhostBed argued that Casper’s use of affiliate relationships with online reviewers was “part of a concerted effort to reward reviewers to post favorable reviews and ‘strong-arm’ reviewers into posting fake positive reviews of Casper’s mattresses.” However, GhostBed didn’t prove that this conduct involved false or misleading statements that deceived consumers.  Casper also purchased the Google Ad Word “Ghostbed” and directed that an ad saying “Why Buy a Copycat?” and “Surely you Meant Casper” would appear as a sponsored link in search results when users googled “GhostBed.” “Here, the Lanham Act claim fails because these are not false or misleading statements of fact. Instead, these are advertisements suggesting Casper’s opinion that GhostBed is a copycat and that the consumer should also investigate Casper’s mattress.”

GhostBed argued that Casper manipulated search results with negative SEO techniques that caused favorable Casper mattress reviews to appear higher in search results and unfavorable Casper reviews to appear lower.  But this “common marketing strategy” wasn’t an actionable false or misleading “statement.”  So too with entering into settlement agreements with online mattress reviewers to remove negative reviews of Casper mattresses.

Ghostbed, Inc. v. Casper Sleep, Inc., 2018 WL 2213008, No. 15-cv-62571-WPD (S.D. Fla. May 3, 2018)

Here, the court denies GhostBed’s motion for summary judgment on Casper’s claims for trademark infringement/false advertising.

Casper alleged that GhostBed used Casper’s name in social media posts, creating a likelihood of customer confusion and that a Google AdWords campaign stating “GhostBed vs. The Competition—Pick your Ghost Carefully” contributed to consumer confusion by associating Casper with “Casper the Friendly Ghost.” Use of the trademark “GhostBed” also allegedly caused consumer confusion with the trademark “Casper.” Given Casper’s numerous allegations of consumer confusion. GhostBed’s argument that the confusion is de minimis was a question for trial.

Whether GhostBed’s use of the phrase “SuperNATURAL Comfort” misled consumers into believing that Ghostbed mattresses are made from all-natural fibers, or just suggested a connection with the “ghost” in “GhostBed,” was a question of fact for the factfinder at trial.  So too with whether GhostBed’s claim of being in business for 15 years was true because it could legitimately attach its length in business to that of its related company, Nature’s Sleep. There were also factual issues about whether GhostBed falsely represented reviews as “Verified Purchaser[s]” on when GhostBed practically gave the product to the reviewer for free (at a 99% discount) in violation of the terms of use defining a “Verified Purchaser.”

In a slightly different scenario, GhostBed’s “GhostBed vs. Casper Mattress Review” stated that Casper didn’t offer a matching mattress foundation. This statement was initially true when made, in April 2016, and was updated at some point after GhostBed became aware that the statement was no longer true, but it was unclear whether GhostBed timely corrected the statement once it became false. “While Plaintiffs do not have an obligation to monitor a competitor’s offerings minute-to-minute to correct a comparison that may later become untrue, Plaintiffs do have an obligation not to make misleading statements in advertising. A fact finder could find that a substantial delay, if there was one, in correcting a statement that became untrue, was misleading.”  This is actually more defendant-favorable than other rulings on the subject, which do find falsity the moment the claim becomes false (although of course the amount of damages from a short-term falsity may be limited).

Finally, an image GhostBed’s website depicted the Google logo and falsely reported that GhostBed had a 4.99 rating (a non-existent rating). The creator stated that it was designed to poke fun at Casper’s purported 4.9 rating—“they have a 4.9 rating. I put ours at 4.99.” Misleadingness and damages were factual issues.

Other claims were only raised as state law (FDUTPA) claims. Casper targeted an article written by non-party Ryan Monahan of Honest Reviews, LLC, a purported affiliate of GhostBed: “Casper’s Newest Product Might Be at the Expense of Animal Cruelty.” The article could suggest that Casper sources its down feathers from suppliers who “live pluck” birds, but again this was a factual issue, as was whether GhostBed “used social media to harass Casper’s customers who posted comments about Casper’s mattresses online” in a way that was unfair or deceptive under FDUTPA.