Wednesday, July 25, 2018

Allegations of "copycatting" in high tech industry plausibly accuse target of patent infringement

Global Tubing LLC v. Tenaris Coiled Tubes LLC, No. 4:17-CV-3299, 2018 WL 3496739 (S.D. Tex. Jul. 20, 2018)

The parties compete in the market for coiled tubing products for the oil and gas industry. They and one other company allegedly dominate the “highly competitive” coiled tubing marketplace in the U.S. (Id.) Global Tubing characterizes that market as “a small, close-knit community,” in which “[e]verybody knows everybody.” Tenaris launched BlueCoil and Global Tubing subsequently launched Duracoil, both using a similar manufacturing process.

Global Tubing alleged false advertising based on several statements: (1) at “the primary industry trade show in Houston,” a Global Tubing employee asked Tenaris’s Chief Technology Officer whether he had seen Global Tubing’s product launch. He said he had, but could not speak with the Global Tubing employee because, in his words, ‘I can tell you right now we’re probably going to court.’ ” (2) At the trade show, attended by nearly all the customer base, Tenaris allegedly represented to existing and prospective Global Tubing customers that Duracoil was a “copycat” of BlueCoil. (3) A Tenaris employee allegedly told a Tenaris customer that Global Tubing “stole” the Duracoil name from Tenaris, which considered Duracoil as a possible name for the product that it eventually chose to name BlueCoil. (4) Tenaris’s CTO allegedly told a “coiled tubing sales representative”−not identified by name or employer that Tenaris had a patent that covered Duracoil, which was allegedly false because the relevant patent had not yet been issued. The rep allegedly responded by asking whether Tenaris would be owed royalties. Global Tubing also alleged that Tenaris accused Global Tubing of copying in filings to the PTO in responding to non-obvoiusness issues raised by the examiner.

The court declined to dismiss the false advertising claim.  Tenaris argued that the statements weren’t made in “commercial advertising or promotion.”  The key was whether Tenaris’s alleged statements were disseminated sufficiently to the relevant purchasing public, and the Fifth Circuit has said that “[w]here the potential purchasers in the market are relatively limited in number, even a single promotional presentation to an individual purchaser may be enough to trigger the protections of the Act.” Given the allegations, the complaint passed, though more specificity would be needed for summary judgment.  (The statements to the PTO weren’t “commercial advertising or promotion,” though.)

Tenaris argued that “copycat” was just puffery, which is exaggerated or vague. For 12(b)(6) purposes, the court disagreed:

Made in relation to a high-technology product used by a high-dollar industry, the suggestion of ‘copying’ could quite reasonably be interpreted as an insinuation of patent infringement. That a third-party customer sales representative thought Global Tubing might owe royalties to Tenaris indicates as much…. [T]he claim made here−that one company copied another’s technology−is one resolved frequently through patent litigation. It is therefore more appropriate to view the statement as one admitting of falsification and verification, rather than as one amounting only to bluster or opinion.

Tenaris argued that Global Tubing didn’t adequately plead injury or causation, given that it alleged that has received “very positive” feedback from customers.  Nonetheless, “[t]hough general, Global Tubing’s allegations sufficiently assert a plausible reputational injury from Tenaris’s statements.”

Friday, July 20, 2018

Plastic not so fantastic: video shot in medical facility didn't defame or infringe facility's TM rights

Weirton Medical Center, Inc. v. Introublezone, Inc., 2018 WL 3458261, J-A06003-18 (Pa. Super. Ct. Jul. 18, 2018)

Dr. Craig Richard Oser was a plastic surgeon with staff privileges at plaintiff WMC from 2009 to 2014, making him an employee according to WMC.  Dr. Oser entered into an agreement with defendants to create a reality show, “Drastic Plastic,” “intended to highlight the most salacious elements of Dr. Oser’s practice at WMC. Among other things, the production dubbed Dr. Oser ‘The Vagician’ because of his specialization in labiaplasty and vaginal reconstruction.”  A “sizzle reel” was filmed at WMC’s Medical Office Building, and included statements by individuals who identified themselves as Dr. Oser’s patients and employees. The video labeled the patients “crazy” and included offensive references to Dr. Oser’s work in breast augmentation, allegedly portraying the residents of West Virginia as uneducated and willing to waste money on unnecessary plastic surgery. The video allegedly appeared to include images of actual patient medical files. WMC alleged that it did not consent or authorize the use of its facilities for this purpose. The video was posted on Vimeo, as well as on Dr. Oser’s website and Facebook page.

WMC sued for defamation, violation of the Lanham Act, and trespass.  The trial court watched the Video “three times” and found “nothing defamatory. Poor taste, yes; Defamation—No.” Nothing in nthe video identified WMC; plaques and pictures on the wall were illegible.  “That Dr. Oser is an employee of [WMC] is well known and [WMC] has advertised his employment by it. Nevertheless, this connection does not give rise to a cause of action for something he did, with others, that [WMC] doesn’t like but does not defame it.” The trial court dismissed all the claims.

WMC appealed, arguing that the trial court shouldn’t have watched the video when it wasn’t attached to the complaint. Under federal law, this is easy: the video is a document essential to understanding the claims.  The court of appeals here agreed (over a dissent): you can’t tell whether the video is capable of defamatory meaning without viewing the video.  Anyway, there was no prima facie case for defamation. Nothing in the video identified WMC.  WMC argued that the use of “WMC’s identifying characteristics, medical professionals and employees (most notably Dr. Oser), and facilities in the Video creates the reasonable likelihood that individuals will believe that WMC is associated with or otherwise endorses Drastic Plastic.” But WMC didn’t allege where in the video these uses were made, and the other material surrounding the proposed show had no mention of WMC.  Even if WMC had been identified in the video, WMC didn’t allege the defamatory character of the video as to WMC—defamation requires more than annoyance or embarrassment.

False association and/or false advertising under the Lanham Act: WMC didn’t allege a relevant trademark, only use of “names and likenesses of [WMC’s] medical professionals and employees (in particular, Dr. Oser), facilities, and confidential patient information.” There were no allegedly false statements about WMC’s medical services.

However, WMC did state a claim for trespass.  Dr. Oser’s apparent authority to authorize defendants to enter was a factual issue not suited for dismissal.  [Hmm… Too bad there’s no anti-SLAPP law here.] “WMC’s damages may be limited to two peppercorns, but it has pled a sufficient claim to get past the preliminary objection stage.”

Thursday, July 19, 2018

non-lawyer's purchase of "trademark attorney" as a keyword doesn't itself plausibly deceive consumers

LegalForce RAPC Worldwide P.C. v. Swyers, No. 17-cv-07318-MMC, 2018 WL 3439371 (N.D. Cal. Jul. 17, 2018)

LegalForce alleged that defendants operated “TTC Business Solutions,” providing “trademark related services,” and that they “engag[ed] in the unlawful practice of law” as well as in false advertising.  LegalForce further alleged that the USPTO prevented LegalForce from competing with defendants by enforcing its “regulations” and “rules” against LegalForce RAPC but not against defendants.

The false advertising claims had to satisfy Rule 9(b) because they used the words “false” and “misleading” [pause to note my disagreement with this idea, especially when trademark infringement claims don’t have to do so, but this is certainly a common result], and they didn’t because there wasn’t sufficient detail about where the statements were made (what part of the defendants’ website), etc. This disposed of claims based on the allegedly false “Created by Former USPTO Attorneys,” “Trusted by Over 100,000 Businesses Since 2003,”  and  “As featured in Time, Yahoo! Finance, and”

Additionally, the claim “#1 in Trademark Registrations,” absent further context, was puffery: a “general assertion[ ] of superiority” that lacks “the kind of detailed or specific factual assertions that are necessary to state a false advertising cause of action.” 

Claims based on defendants’ purchase of keywords related to the practice of trademark filing, including “trademark attorney” and “trademark lawyers,” were also dismissed.  Plaintiffs alleged that purchasing keywords including defendant’s website name “Trademarkia” led consumers to believe that they’d receive the same attorney-led trademark filing services from both parties. Again, the claims failed to satisfy 9(b) by, among other things, failing to identify the ad copy that allegedly misled consumers or falsely compared the parties.  Furthermore, plaintiffs’ theory that consumers who ended up on defendants’ website after searches for “trademark attorney,” “trademark lawyers,” or “Trademarkia” were likely to be deceived would require a a showing that the website was “likely to mislead consumers” into believing the website was affiliated with an attorney. But the complaint failed to allege sufficient facts to support such a finding, particularly given plaintiffs’ acknowledgement that the website states that the website operator “is not a law firm and,” that “its trademark filing service is not a legal service,” and that it “may not perform services performed by an attorney.”

The same fate awaited allegations that the “design” of the website has “substantially the same logo, look, feel, and trade dress” as a related entity’s website, which entity was a law firm, allegedly misleading consumers into “the false impression that the two websites are run by the same or similar entities or lawyers.”

Claims against the USPTO for deprivation of due process also failed.  Plaintiffs alleged that the USPTO has deprived LegalForce RAPC of its “right to engage in [its] chosen occupation,” which is “practicing trademark law,” by promulgating a number of regulations, and requiring LegalForce RAPC, but not defendants, to comply with them. Such a claim requires a plaintiff to show “first, that [it is] unable to pursue an occupation in the [chosen field], and second, that this inability is due to actions that were clearly arbitrary and unreasonable.” But LegalForce RAPC didn’t allege that it was unable to pursue the practice of trademark law; instead, plaintiffs alleged that it “has been the largest law firm filer of trademarks before the USPTO for the past five years.” So too with equal protection claims, which when based on an unequal enforcement theory require that “the selection was deliberately based upon an unjustifiable standard such as race, religion, or other arbitrary classification.” There were no such allegations.

Six-year prison sentence for false advertising online

United States v. Arif, No. 17-1597, 2018 WL 3454467 (1st Cir. Jul. 18, 2018)

A reminder that false advertising can be subject to criminal penalties: Mustafa Hassan Arif sold non-prescription drug products that purported to treat or cure hundreds of different diseases and medical conditions from over 1,500 websites containing altered clinical studies, fabricated testimonials, and false indicia of origin (designed to make customers think they were buying from within their own Western countries, rather than from Pakistan) and made more than $11 million in revenues. He conditionally pled guilty to wire fraud in 2016 and was sentenced to seventy-two months of imprisonment.  The court of appeals affirmed the sentence.

Arif argued that he could only be prosecuted under the FTCA, not the wire fraud statute. But the wire fraud statute, even assuming that it was enacted before the FTCA (it was not, but it was based on the pre-FTCA mail fraud statute), wasn’t impliedly repealed by the FTCA to the extent of any overlap. The statutes addressed different activities—wire fraud, requiring the use of “wires,” versus only false advertising, but in any medium. Overlap isn’t enough to require the use of one statute instead of another where both are clear, as here. United States v. Batchelder, 442 U.S. 114 (1979), held that “when an act violates more than one criminal statute, the Government may prosecute under either so long as it does not discriminate against any class of defendants”:

This case provides a good example for why Congress has vested discretion in the prosecutorial agencies as to which statute to employ. The offense here was not a run-of-the-mill false advertising of a single product. Arif, in order to make millions, mounted an elaborate worldwide scheme to defraud: he deliberately posted numerous false and misleading statements on over a thousand websites that he created and maintained in order to gull those with medical ailments into purchasing his products. The FTCA penalties for first or second offenders would hardly have been an adequate deterrent for such egregious conduct. Crime must be made not to pay.

Arif also argued that the court should have allowed his defense that he did not commit wire fraud because he was pure of heart and mind as to the efficacy of his products. But Arif was not being charged “with selling drugs that did not work as intended ... or for harming his customers.” Rather, he was charged with “making misrepresentations on his websites,” which were designed to give false comfort to buyers, in order to induce their purchases. Arif knowingly misrepresented, among other things, that: (1) there was clinical research showing outstanding results for the drugs he sold, including specific cure rates; (2) actual customers attested to the efficacy of the drugs; and (3) his businesses were operating from various western countries.  That was more than enough for intent.  False statements in service of a subjective greater “truth” aren’t allowed.  [Ah, for such a rule in politics.]  The falsities here were material—indeed, they “went to the heart of his customer’s purchases.” 

Nor did the disclaimer on the third-party credit-card processor’s website suffice: “[T]he product(s) purchased are not intended to diagnose, mitigate, treat, cure or prevent any disease or health condition, and I will not use any information or statements contained on the website through which this product is purchased, or contained on or in such product(s), for such purposes.  Arif argued that any potential customer of “reasonable prudence” should have known not to rely on the other statements on his website after reading this statement.  But reliance is not an element of wire fraud, so that didn’t matter.

Wednesday, July 18, 2018

New on Jotwell: reviewing Virginia Eubanks, Automating Inequality

Rebecca Tushnet, The Difference Engine: Perpetuating Poverty Through Algorithms, JOTWELL (July 18, 2018) (reviewing Virginia Eubanks, Automating Inequality: How High-Tech Tools Profile, Police, and Punish the Poor (2018))

ASTM v. Trademark

American Society for Testing and Materials v. Public.Resource.Org, Inc., No. 17-7035 (D.C. Cir. Jul. 17, 2018)

Trademark: This was where the district court went very, very wrong—I consider the copyright issues difficult though I have a preferred outcome; the trademark issues should not have been.

ASTM has registrations for ASTM word marks and stylized ASTM logos, which they place on the cover pages of their technical standards. The first page of a standard introduces the name of the work by depicting the “ASTM International” logo and placing it next to the text.  Each subsequent page of the work includes a header that again displays the ASTM logo and places it next to text indicating a short title.

PRO copied these, which ASTM alleged constituted trademark infringement.  The district court found that PRO’s disclaimers didn’t work because they “do not mention [PRO’s] creation of the reproductions, [the SDOs’] lack of association or authorization, or that they are even reproductions or transcriptions.”  Thus, consumers would be confused about whether these were authentic copies of ASTM’s works, even though PRO “did not undertake the same quality control procedures,” which, in turn, would harm ASTM’s brand identity and goodwill.

Although Dastar was itself about the creation of an unauthorized derivative work, the court of appeals said that Dastar might well preclude a claim based on reproduction of identical copies of the standards, but that allegations of creation of unfaithful copies “through scanning and re-typing, with resultant errors and differences,” didn’t fall within Dastar.  The reason was that consumers who downloaded copies from PRO’s website might attribute the digital files, and their errors, to ASTM, risking confusion about “the tangible product sold in the marketplace.” Thus, the court of appeals reasoned, “post-Dastar cases where courts have found trademark claims foreclosed involved instances of virtually identical copies,” which is descriptively untrue as well as failing to account for the facts of Dastar.  [The court’s flawed distinction does highlight the difficulty Dastar poses when the copying is of material that (allegedly) has secondary meaning—it’s notable that what’s missing in the identical copy situation, in the court’s reasoning, is not the confusion, which could well be unabated; it’s just the harm to ASTM’s goodwill from the confusion.  And in an alternate scenario where the defendant was selling copies, there could well be substitutionary harm, as there could well have been in Dastar itself, since some consumers will not be like my son and will buy only one series about WWII campaigns in Europe.  If we let plaintiffs plead around Dastar by alleging confusion over the source of the copies, then Dastar becomes a dead letter.  The better solution would be to say that when the alleged confusion stems from the content itself, error-filled or otherwise, Dastar is triggered.]

The question then was the relevant likelihood of confusion test, which is usually the multifactor test. However, nominative fair use accommodates situations where it would be “virtually impossible to refer to a particular product for purposes of comparison, criticism, point of reference or any other such purpose without using the mark.” The district court declined to consider nominative fair use because it had already found that consumer confusion was likely; this was error.

There is a robust split about how to evaluate nominative fair use—as a substitute for the usual confusion test, an affirmative defense, or [ugh] as add-on factors—but the panel didn’t make a decision today for the DC Circuit. “Where, as here, there is a claim of nominative fair use, the likelihood of confusion analysis remains incomplete without at least some discussion of these factors.”  Given that PRO can reproduce some of the standards under copyright fair use, “it is hard to see how PRO could fulfill that goal without identifying the standard by its name—the very name also used in the incorporating law.”  And as for whether only so much was used as reasonably necessary, “it may well be that PRO overstepped when it reproduced both ASTM’s logo and its word marks but, as it told the district court, it is not wedded to using the logo.”  So this might point to a narrower remedy. 

And as to whether the user suggested sponsorship or endorsement, PRO’s disclaimers “may well fail to adequately eliminate the possibility a consumer would assume sponsorship or endorsement by ASTM, but that hardly means that no disclaimer could cure that risk.”  [Of course, case after case in the 9th Circuit (and some elsewhere) has held that disclaimers aren’t required; the question under nominative fair use is whether the defendant has done anything else affirmatively, other than use the mark, to suggest sponsorship.  I also have some words I could say about the DC Circuit’s attitude towards disclaimers generally, but I shall resist.]  PRO had already modified the disclaimers to disclose that it’s the one doing the scanning, that errors are its own, and that it wasn’t affiliated with any organizations. “[E]ven if the district court ultimately concludes that the record supports an infringement finding, it should consider whether its previous grant of an injunction barring all unauthorized use is still warranted or whether it ‘may order defendants to modify their use of the mark so that all three factors are satisfied’ and a narrower remedy would suffice.”

ASTM v. Copyright

American Society for Testing and Materials v. Public.Resource.Org, Inc., No. 17-7035 (D.C. Cir. Jul. 17, 2018)

The panel, citing “serious constitutional concerns,” vacated the district court’s finding of trademark and copyright infringement based on PRO’s copying of privately drafted standards that have been incorporated into law in various jurisdictions.  Finding errors in the district court’s dual fair use analyses, the court left for another day “the far thornier question of whether standards retain their copyright after they are incorporated by reference into law.”  The court also left it to the district court to re-apply copyright fair use after further factfinding, and to determine how to apply nominative fair use.

Incorporation into law varies across jurisdictions, as do the legal consequences thereof, across thousands of technical standards (over 1200 ASTM standards in the CFR alone).  Some incorporated standards define legal obligations, while others are “mere references” that “have no direct legal effect on any private party’s conduct,” and there are others in the middle, e.g. that trigger agency obligations or establish eligibility for federal programs.  The court of appeals disagreed with the district court’s blanket treatment of standards for fair use purposes, thus allowing it to avoid the larger constitutional question for some or perhaps all of the infringement claims.

Treating this case as one involving fair use rather than copyrightability also “limits the economic consequences that might result from the [plaintiff] SDOs losing copyright—which they repeatedly emphasize would jeopardize the continued development of high-quality standards—by allowing copying only where it serves a public end rather than permitting competitors to merely sell duplicates at a lower cost.”  And it avoids difficult questions about what happens, for example, when a newer version of a standard becomes incorporated—would older versions regain any lost copyright?  If necessary, these issues might have to be reached on a fuller record.

Fair use: The district court found that the purpose of PRO’s copying was “for the direct purpose of undermining [the SDOs’] ability to raise revenue.” The record didn’t support that conclusion: “by all accounts, PRO distributed these standards for the purpose of educating the public about the specifics of governing law.” Further, the district court failed to consider each standard on its own facts.  This might not require individual factual development as to each standard, but rather might allow for groupings that are fair use-relevant.

As for the commerciality of the use, the district court found that PRO’s use had commercial elements because it distributed identical standards in the same consumer market.  This was too broad a definition of commerciality.  [Happy sigh.]  Although PRO’s copies might serve as substitutes, “little, if anything, in the record indicates that PRO stands to profit from its reproduction.” Even if distributing the standards is part of PRO’s fundraising appeal, “that hardly rises to the level of making this a ‘commercial’ use.” [Happier sigh.]

As a general matter, freely distributing standards incorporated by reference into law furthers the purposes of fair use. Transformativeness is important, and format change isn’t transformation for these purposes, but a purpose to facilitate public access could be transformative without altering the original work. (Citing A.V. ex rel. Vanderhye v. iParadigms, LLC, 562 F.3d 630 (4th Cir. 2009), and Swatch Group Management Services Ltd. v. Bloomberg L.P., 756 F.3d 73 (2d Cir. 2014)).

Exact copying can be important to understand, say, one’s legal obligations, and where this is so, “this factor would weigh heavily in favor of permitting a nonprofit seeking to inform the public about the law to reproduce in full the relevant portions of that particular standard.”  For example, federal law’s incorporation of ASTM specifications to “dictate” whether a retailer of diesel fuel needs to provide additional fuel labels likely favors PRO’s copying, while using ASTM standards as a reference procedure for determining whether gasoline without ethanol has an “[e]vaporated initial boiling point” of “75- 95[°F],” likely doesn’t.  Copying the version that is incorporated in federal law is also likely to be favored over copying a later edition that is not so incorporated (though the court doesn’t here discuss copying prior versions so that the public can see what’s changed over time—something of particular interest as this administration dumps ever more once-public information down the memory hole).

“[W]here knowing the content of an incorporated standard might help inform one’s understanding of the law but is not essential to complying with any legal duty, the nature of PRO’s use might be less transformative and its wholesale copying, in turn, less justified” because paraphrase or summary might be adequate to serve the purpose.  [Would paraphrase avoid an infringement claim based on structure, sequence, and organization? The court seems to assume the answer is yes, and I think it should, but I’m not confident it would.  Query also how much room there is to rephrase a reference procedure for determining an initial boiling point; that sounds a little merger-y to me.]  Purpose has to be assessed use by use, even though that may be difficult.

Factor two: “All of the works at issue here fall at the factual end of the fact-fiction spectrum, which counsels in favor of finding fair use.”  But the district court found that because technical standards “are vital to the advancement of scientific progress in the U.S.,” they are “exactly the type of expressive work that warrants full protection under . . . the Copyright Act.” If these were “ordinary technical standards used for no public purpose,” the court of appeals might have agreed. [Though it shouldn’t have! Patent and copyright are different, and “science” now means something very different than it did in “Science and Useful Arts.”]  But these standards have all, in some capacity, been incorporated by reference into law, and, “the express text of the law falls plainly outside the realm of copyright protection.” Standards incorporated by reference into law are thus, “at best, at the outer edge of ‘copyright’s protective purposes,’” though just how far at the edge depends on the degree of incorporation, as above.

Factor three: Must be considered standard by standard, in light of PRO’s purpose.  “If PRO limits its copying to only what is required to fairly describe the standard’s legal import, this factor would weigh strongly in favor of finding fair use here, especially given that precision is ten-tenths of the law.”  So where specific provisions are incorporated into law, maybe you can only copy those provisions [and I presume any provisions required to understand those provisions—the court of appeals doesn’t mention cross-references, but given its discussion, definitional and other foundational provisions would have to be fair game as well].  Where the law refers generally to a standard’s specifications, by contrast, a greater amount of copying would be allowed. “And where the incorporation merely makes reference to an external standard, but that standard does not govern any conduct, perhaps the copier’s purpose could be achieved with only a paraphrase or a summary.”

Factor four: first, the district court erred in presuming market harm based on PRO’s [nonexistent] commercial purpose. The record didn’t show how serious any adverse impact on the SDOs’ market might be.  On remand, the district court should consider that (1) the SDOs already make copies of their standards freely available online (in “controlled reading rooms”), presumably “without entirely cannibalizing sales of their standards.”  How much additional harm could PRO’s copying cause?  (2) The market harm question has to be addressed with reference to the legal alternatives—that is, if PRO were only to reproduce the portions of a longer standard that were actually incorporated into law, “would there still be a vibrant market for the standards in their entirety?” [There are a couple of ways to read this, but I think one significant point is this: suppose that partial copying had the same effect on the market as full copying.  Given that such partial copying is fair use, then the marginal market impact of PRO’s infringing use would be zero.  Of course, partial copying might not have the same effect on the market.]  (3) What’s up with derivative works?  Because SDOs routinely update their standards, “in many cases, the edition PRO posts to the internet—and, indeed, the one incorporated into the law—is long outdated.” Does PRO’s copying of old standards harm the market for updated, unincorporated editions?  If the SDOs are to be believed, the primary purpose of technical standards is “to have them used by private industry and other non- governmental users to address technical issues or problems,” indicating that “market demand for the most up-to-date standards would be resilient.”  Does the SDOs’ ability to market derivatives provide an adequate incentive to continue producing standards even with PRO’s copying?  Even after Veeck v. Southern Building Code Congress International, Inc., 293 F.3d 791 (5th Cir. 2002), the successor SDO remains profitable both through sales of codes and of “program services, including consulting, certification, and training.”

Ultimately, genuine issues of material fact precluded summary judgment on copyright fair use.

Judge Katsas concurred to emphasize that law cannot be copyrighted and that the majority opinion was pretty clear that “[W]here a particular standard is incorporated as a binding legal obligation, and where the defendant has done nothing more than disseminate it, the Court leaves little doubt that the dissemination amounts to fair use.” 

Thursday, July 12, 2018

Unclean (but collagen rich) hands in a false advertising case

Certified Nutraceuticals, Inc. v. Avicenna Nutraceutical, LLC, 2018 WL 3361142, No. 16-cv-02810-BEN-BGS (C.D. Cal. Jul. 10, 2018)

A rare unclean hands victory in a false advertising case.  Certified alleged that Avicenna, its competitor in the market for collagen products used as ingredients in other products, falsely advertised its products as “patented” or processed using “patented formulas and production methods” while Avicenna never held any relevant patents.

To prevail on a defense of unclean hands, a defendant must demonstrate by clear and convincing evidence: (1) “that the plaintiff’s conduct is inequitable;” and (2) “that the conduct relates to the subject matter of [the plaintiff’s] claims.” Even in such cases, unclean hands isn’t automatically a defense; the plaintiff’s wrongdoing must be balanced against the defendant’s, considering the substance of the plaintiff’s rights.

In the Ninth Circuit, “only a showing of wrongfulness, willfulness, bad faith, or gross negligence, proved by clear and convincing evidence, will establish sufficient culpability for invocation of the doctrine of unclean hands.”  Here, Avicenna established that Certified falsely claimed patent protection for its competing product, over a year before the PTO granted any Certified patent.  Certified argued that its product was covered by a different patent, but Certified wasn’t an owner, assignee, or licensee of that patent at that time or since, perhaps because of a permanent injunction against a Certified principal enjoining him from transferring, enforcing, or otherwise affecting the title to that patent.  Certified’s only other evidence that the statements weren’t false or misleading was a false statement that the principal was the assignee of a patent that was a continuation of the enjoined patent.  Thus, the court found that Certified knowingly made statements about the patented nature of its product—either because it knew the later patent hadn’t been issued, or because it knew it had no right to manufacture, distribute, offer for sale, or sell any goods under the continuation patent.  Avicenni showed Certified’s wrongfulness, willfulness, and bad faith in engaging in inequitable conduct with clear and convincing evidence. [I’m not sure courts would find that claiming patent protection when the patent was pending always meets this standard, though it would usually have to be knowing.]

Did this inequitable conduct relate to Avicenna’s false advertising claim? Unclean hands should only be applied “where some unconscionable act of one coming for relief has immediate and necessary relation to the equity that he seeks in respect of the matter in litigation,” which means that the plaintiff dirtied its hands “in acquiring the right” presently asserted or “the manner of dirtying renders inequitable the assertion of such rights against the defendants.” Even though the statements were now years old, there was still an immediate and necessary relationship to the equitable remedies sought, because they were about the patented status of the directly competing products.

Summary judgment on Lanham Act claims granted; coordinate state-law claims dismissed for want of supplemental jurisdiction.

TM/False advertising issue of the day

Seen on the street in NYC; the candies have no marijuana content--they're sold as "adult" candies, furthering the impression. My daughter also asked "Could the owners of Scooby Doo sue?" and then, because I have taught her well, corrected that to "Could the owners of Scooby Doo win?"

Monday, July 02, 2018

False designation damages require proximate cause, dooming $250 million jury award

ZeniMax Media Inc. v. Oculus VR LLC, No. 14-cv-01849 (N.D. Tex. Jun. 27, 2018)

After trial of this case, the jury returned a verdict, finding in relevant part that defendants were liable for false designation of origin, basically about the origins of Oculus’s technology with a lagniappe of use of ZeniMax’s trademarks in a Kickstarter promotion. The jury awarded actual damages of $250 million in total for the false designation of origin. The court granted judgment as a matter of law because the record lacked legally sufficient evidence of injury causation in that or any amount. [Pointing to another part of Dastar’s practical wisdom: it’s rare that false designation of origin of ideas makes a difference. The court was sensitized to the Dastar problem in that its analysis focuses on unauthorized use of ZeniMax’s marks, but the trial theory, and thus the jury’s award, seems to have focused on claiming credit for the technology. The mismatch between the allowable scope of §1125 and the theory is likely part of what accounts for the lack of evidence of damages.]

Under Lexmark, damages must be proximately caused by the act of the false designation: “[A] plaintiff suing under § 1125(a) ordinarily must show economic or reputational injury flowing directly from the deception wrought by the defendant’s [actions]. . . .”

Plaintiffs’ damages expert testified only as to damages resulting from stolen trade secrets, not to reputational injury, or any defendant gains from false designation. For reputational damages, ZeniMax cited the testimony of Todd Hollenshead, former President of plaintiff id Software, that he was “concerned” about “the use of preleased software in any public demonstration that id Software was not controlling.” Without specifically noting that the existence of a risk isn’t evidence that the risk to reputation materialized, the court concluded that this wasn’t evidence of damage to reputation based on false designation. ZeniMax also pointed to three other items that supposedly showed reputational injury: (1) false representations Oculus made in the press about“collaborat[ion]” when “there was no actual affiliation between ZeniMax and Oculus”; (2) Oculus leading Mark Zuckerberg to believe that Oculus, not ZeniMax, “was miles ahead of everyone else” as to virtual reality technology; and (3) Zuckerberg’s testimony that ZeniMax “came out of the woodwork” when the Facebook purchase was announced. These were “even further from being evidence of reputational injury” than Hollenshead’s testimony.

ZeniMax pointed to excerpts from the damages expert’s testimony where he calculated a reasonable royalty for ZeniMax’s technology. But none of this testimony referenced false designation, let alone how the damages calculation he computed for trade secret violations also related to false designation and any resulting injury to ZeniMax. Defendant Carmack also wrote an email saying that “Oculus wouldn’t exist as a funded company if it weren’t for [Plaintiffs’] involvement.” That didn’t provide evidence that defendants “were massively and unjustly enriched” in relation to the false designation.

ZeniMax argued that defendants were unjustly enriched by their act of false designation when Facebook bought Oculus for approximately $2 billion. [Unjust enrichment of this type isn’t damages—it’s a disgorgement theory.]  Standing alone, the purchase price was legally insufficient evidence to prove damages from false designation. Facebook didn’t buy Oculus until 2014, almost two years after Oculus used promotional items containing ZeniMax’s marks without authorization in a Kickstarter video and investor materials. There was no causal evidence linking the two.

Even if there had been evidence of damages, plaintiffs failed to show proximate cause between those damages and the unauthorized use of their marks. Plaintiffs argued that the jury is vested with “broad latitude to infer proximate cause.” However, there was no evidence that Facebook believed the parties were somehow associated and that this led to the purchase. [Materiality as a proximate cause requirement….] Also, “[t]he time and intervening facts between these events alone makes the approximately $2 billion purchase price too remote to have been the proximate result of Defendants’ acts of false designation.” During those two years, millions of dollars were invested into Oculus by multiple investors, and others invested substantial time and effort, taking the Oculus Rift from a prototype device into a functioning device with market potential. That was the product that attracted Facebook to acquire Oculus. “There was simply no evidence presented that the purchase price Facebook paid for Oculus proves any of the harms against which Section 1225 protects.”

The only other evidence arguably proving proximate cause of harm flowing from the false designation was the money Oculus raised from investors in direct connection with the use of the promotional materials containing ZeniMax’s marks. However, there was no evidence about how much money was actually generated from these specific efforts using ZeniMax’s marks without permission. Also, the display of ZeniMax’s marks and the endorsement by Carmack, who was employed by ZeniMax at that time, was “merely a minor portion of the entire video.” By contrast, the video spent a substantial amount of time discussing the invention and technological improvements of the Oculus Rift without making any reference to ZeniMax or displaying of any of ZeniMax’s marks. The video also contained references to and endorsements from other companies and people in the industry unconnected to ZeniMax, such as USC’s MxR Lab, Epic Games, Unity, and Valve. The unauthorized use of ZeniMax’s marks was “diluted” by these endorsements of others as well as the support of ZeniMax’s competitors.

Here’s the Dastar hook: “The invention and technology of the Oculus Rift was a major issue in dispute in this matter” but those issues “play no role in a proximate cause analysis as to the false designation claims because the Lanham Act is intended to protect from harm related to the improper use of a mark and not intended to protect inventor’s rights.” The invention issues “add nothing to further a finding of proximate cause of a harm related to the money raised by this Kickstarter video.”

the perils of default judgments against speech: showing up late can prove onerous

Lokosky v. Gass, No. 1 CA-SA 18-0101, 2018 WL 3150499 (Az. Ct. App. Jun. 28, 2018)

Respondents (not Gass, who’s the judge, named for procedural reasons) sued Lokosky for false advertising and related claims seeking to compel Lokosky to "remove from the internet all material pertaining to Respondents and their business,” and obtained a default judgment. Next, they compelled the transfer of ownership of Lokosky’s website to themselves. Lokosky then applied for a restraining order seeking to have ownership of her website returned to her and moved to vacate or set aside the judgment. The superior court granted the TRO and ordered Lokosky to “remove any and all material and/or references pertaining to each Plaintiff” on her website and “refrain from publishing or republishing on the Internet any and all materials and/or references pertaining to each Plaintiff.” Well, that’s incredibly overbroad. Then:

In March 2017, the superior court held the first day of an evidentiary hearing on Lokosky’s motion to vacate judgment. During the month in between hearing days the superior court placed both parties under an order forbidding the parties from engaging in speech regarding each other, counsel, and the instant lawsuit. ... In April 2017, the superior court held the second day of the evidentiary hearing and vacated the default judgment against Lokosky. 

Lokosky filed a motion to dissolve the TRO because there was no longer a default judgment to justify the restraint on her speech. In a sequence of events that would have fit well in Jarndyce v. Jarndyce, the superior court declined to act, waiting on the result of respondents’ pending appeal of the vacation of the default judgment. So Lokosky filed a separate notice of appeal about the superior court’s decision not to decide the motion to set aside the TRO; the court of appeals determined that it lacked jurisdiction. Lokosky then requested that the court of appeals dissolve the TRO by way of a filing in respondents’ appeal. The court of appeals denied the motion because the request was more appropriately raised as a special action. Lokosky then filed a special action petition, and finally her claim was heard on the merits. [Eugene Volokh could use this as a cautionary tale about granting speech restraints in default judgments. They can be very hard to reverse, as it turns out!]

The TRO was a prior restraint on speech and violated the First Amendment. Before any TRO against future speech can issue, the court has to determine that the future speech is unprotected by the First Amendment. “Although the superior court indicated its intent to prevent the parties from engaging in speech which might later increase their own liability in this litigation, the record is devoid of any support for the notion that Lokosky’s speech is not protected.” Respondents argued that they competed with Lokosky and that her speech was commercial (allowing prior restraint). Even assuming that, her speech hadn’t been determined to be misleading and thus couldn’t be restrained, even temporarily.

search results labeled as results aren't confusing

Carter v. Oath Holdings, Inc., No. 17-cv-07086-BLF (N.D. Cal. Jun. 21, 2018)

Carter allegedly owns a trademark registration for “The House of Figurine” Defendant is Yahoo!, which runs a search engine.  The complaint alleged that Yahoo! uses “two active counterfeit marks identical to Plaintiff[’s] genuine mark” titled “The House of Figurine Sculptures - Image Result” and “More The House of Figurine Sculptures Images”:

Carter alleged that he has no connection to “those goods and services sold” and that Yahoo!’s “counterfeit marks misrepresent [the] designation of origin” of the goods and services. The court dismissed the trademark infringement, false designation of origin, and counterfeiting claims. First, the complaint failed to sufficiently plead “use” of the mark. “Courts have held that an online provider does not ‘use’ a mark under the meaning of the Lanham Act when its search engine returns a search result based on an input of a consumer. As such, merely returning search results to purportedly display a trademark does not show that Defendant is liable under the Lanham Act.”

Second, the complaint failed to sufficiently allege a likelihood of confusion. Mere allegations that Yahoo!’s “counterfeit marks misrepresent [the] designation of origin” and that their “counterfeit marks [are] deceptive, confusing, and is likely to cause mistake on the part of [the] consuming public” were conclusory and insufficient. [Note that if more plausible facts were alleged leading up to this (e.g., that defendant was selling identical goods/services in direct competition with plaintiff, using the same mark), the very same allegations would not be treated as conclusory but as plausible inferences from the other alleged facts.]