Monday, October 29, 2018

We Buy Houses registration defeats fee award despite its genericity

Express Homebuyers USA, LLC v. WBH Marketing, Inc., No. 17-cv-00736, 2018 WL 5303327 (E.D. Va. Oct. 25, 2018)

Disappointingly, the court here treats assertion of registered trademarks as what seems like a complete defense to arguments that defendant should receive a fee award because of the exceptionality of the case.  This discounts any recognition that trademark examination is far from complete compared to the factual development at trial, and also any inquiry into what the registrations were for.  Here, Express initially sought cancellation of the “We Buy Houses” and “” marks, the former of which was registered for things like “printed instruction, educational, and teaching materials for real estate,” and the latter for “real estate and investment services, namely providing on-line information in the field of real estate procurement for others.”  Of course, both were used to attempt to control the advertising of services provided by—you guessed it—firms that buy houses.  I once wrote that “Applicants and the PTO spend much time and effort crafting the equivalent of an exquisitely detailed origami crane; rather than considering the details, courts then ask the equivalent of ‘is this paper folded?’ and move on.”  This case illustrates one of the consequences of that mismatch.

Despite the fairly clear genericity of the “marks” at issue, the court was decisive that “by no stretch of the imagination is this case ‘exceptional’; it is not a rare, extraordinary or otherwise unique trademark case. To the contrary, this case is a garden variety trademark case challenging two registered trademarks that use a phrase that is used in common parlance to signify a service.”  Except that most registrations aren’t of “a phrase that is used in common parlance to signify a service”!  Still, defendant WBH’s position that the marks weren’t generic could not be objectively unreasonable because “the fact that the PTO had registered the Marks gave defendant an objectively reasonable legal and factual basis to argue that the Marks were not generic.”  Note again the failure to continue the sentence: generic for what? 

Then the court says the registrations “weigh[] strongly against” a finding of exceptionality, though it seems to mean “decisively against” in the absence of abusive litigation practices.  The registrations created a presumption of validity, which made it “not objectively unreasonable for defendant to take the position that the Marks were valid. To find otherwise would undermine the policy of encouraging trademark owners to defend and enforce their presumptively valid trademarks.”  Again, the court doesn’t take into account the limited information available to the PTO and the special knowledge trademark claimants have about their own business, increasing the incentive to abuse the process—and note that the reasoning means that no case in which a party successfully claims for cancellation of a registration can be “exceptional” even though Octane Fitness (which the court applies) indicates that objective unreasonability of a defense can be considered in exceptionality. 

(Patent examination is much more rigorous than trademark examination, yet Octane Fitness pretty clearly stands for the proposition that objective unreasonability of a substantive claim by a patentee, not just unreasonable litigation tactics, can be exceptional. Given the presumptive validity of a patent, why would this be possible if the court is right about the objective reasonability of asserting a registered right?  One possible answer, though not the only one: it depends against what the plaintiff is asserting its registered right—but the court doesn’t consider that here, probably because the parties are direct competitors, which still shouldn’t excuse it from examining what the registrations were for, as well as whether the PTO had equal access to the information that market participants had.)

This case also wasn’t exceptional simply because WBH made erroneous claims about the law (arguing that clear and convincing evidence of genericity was required, and that the evidence of generic use was unauthenticated hearsay). A case should not be deemed “exceptional” simply because “snippets of the record or isolated arguments clearly lack merit.” So too, WBH’s futile motion for reconsideration of the summary judgment decision repeating arguments that were already made and rejected on summary judgment wasn’t enough, nor were its counterclaims about false advertising and actual harm therefrom.  WBH’s position that Express’s statements were factual and thus actionable was rejected only after careful consideration of the context of the statements. WBH’s position that it was harmed by Express’s advertising wasn’t sufficient for exceptionality, even though Verisign, Inc. v. XYZ.COM LLC held that a Lanham Act false advertising claimant must show actual rather than mere presumed damages. WBH acknowledged that it lacked evidence that any lost potential customers as a result of plaintiff’s allegedly misleading advertisements. “Still, defendant confronted and attempted to distinguish Verisign I at the motion to dismiss and summary judgment stages, which weighs against a finding that defendant’s position was frivolous even though that attempt was ultimately unsuccessful.”

Finally, this case wasn’t exceptional because of the need “to advance considerations of compensation and deterrence,” given that WBH acted as a trademark troll that bullied competitors to stop using an important marketing phrase—“we buy houses.” “This argument fails because courts have sensibly concluded that it is not appropriate for a district court to police the marketplace and punish so-called trolls who take steps to protect their presumptively valid rights in intellectual property. Indeed, plaintiff’s argument conflicts with the Fourth Circuit’s clear policy that trademark owners should be encouraged, rather than deterred, to enforce their presumptively valid trademark rights.”

That’s dispiriting enough, but it’s even more depressing that the court doesn’t think this case stands out from an ordinary trademark case even at the sub-fee award level. Does the court think that most trademarks are used to suppress useful information from competitors?  Suggestive, arbitrary and fanciful marks—which comprise the vast majority of registered marks—don’t pose even the risks of granting rights in descriptive terms, much less generic terms.  This failure to recognize that trademarks vary in the risks they pose to competition may explain why the court concludes that “if the proverbial bell curve representing the range of trademark cases was developed, this case would clearly fall in the middle, or at least within two standard deviations of the mean.”

Thursday, October 25, 2018

Cents and sensibility: NY Ct of Appeals weighs in on credit surcharge law

Expressions Hair Design v. Schneiderman, --- N.E.3d ----, 2018 N.Y. Slip Op. 07037, 2018 WL 5258853 (Oct. 23, 2018)

GBL section 518 states: “No seller in any sales transaction may impose a surcharge on a holder who elects to use a credit card in lieu of payment by cash, check, or similar means.” This allows differential pricing, but the circumstances under which that’s allowed are hotly disputed. The Second Circuit certified a question: “Does a merchant comply with New York’s General Business Law § 518 so long as the merchant posts the total dollars-and-cents price charged to credit-card users?” The court here answered yes (meaning that the merchant can use the label "surcharge" to describe the practice, but can't use percentages to describe the extra amount being charged for credit.)

Plaintiffs wish to tell their customers, for example, that “a haircut costs $10.00, and if you pay with a credit card you will pay 3% extra” or “a haircut costs $10.00, and if you pay with a credit card you will pay an additional 30 cents.”  The legislative history of the defunct federal version of the statute is paradigmatically concerned with “a completely undisclosed surcharge, discovered at the cash register.” It also operated to ensure “that consumers will be seeing at least the highest possible price they will have to pay when they see a tagged or posted price.” “GBL § 518’s legislative history demonstrates the identical concerns Congress had: a desire to allow differential pricing, but to avoid the duping of customers by posting or tagging low prices that turn out to be available for cash purchases only.”

Thus, the court concluded, GBL § 518, “like its federal precursor, permits differential pricing but requires that a higher price charged to credit card users be posted in total dollars-and-cents form. In that way, credit card customers are ‘exposed to the highest price when they see a tagged or posted price’ and, without further ado, apprehend the actual price they will pay. By contrast, single-sticker pricing would require a consumer to engage in arithmetic, which may be difficult depending on the cash price, in order to calculate the actual price for a credit card purchase.” I would say, and the majority seems to agree, that this is a disclosure rule, mandating “purely factual and uncontroversial disclosures regarding the product it is offering for sale.” This is significant because of what will happen in federal court: sellers shouldn’t be able to get Central Hudson’s harsher scrutiny just by positing another way they’d like to make the disclosure, especially when there’s a sensible reason (many consumers’ difficulty with math/difficulty making absolute to percentage comparisons) for the state’s decision.

As cleanup, the court held that, as long as the total dollars-and-cents price for credit card purchases was posted, merchants can use “surcharge” to describe the difference in price, because they won’t be imposing a surcharge as the law defines it (which is to say, a charge imposed without dollars-and-cents disclosure). Posting the dollars-and-cents price for credit card purchases means that “consumers see the highest possible price they must pay for credit card use and the legislative concerns about luring or misleading customers by use of a low price available only for cash purchases are alleviated.” Plaintiffs’ proposed single-sticker price, by contrast, was prohibited by the statute.

There was also a concurrence, a partial dissent, and a dissent.  The concurrence would have held that “all conduct complies with the law, because the law is unconstitutionally vague, and therefore cannot reasonably be said to prohibit anything.”  The dissent would have held that GBL § 518 isn’t a disclosure statute, but a law that regulates the seller’s description of differential pricing and bars credit card “surcharges” but not cash “discounts” because of the credit card industry’s interest in manipulating consumers’ decision framing.  A true disclosure requirement, the dissent thought, would have more requirements on how the requisite information has to be presented (e.g., type size). For this reason, the NY AG has historically used other laws targeting deceptive business practices and false advertising to fight undisclosed surcharges and similar bait-and-switch tactics.  “Under the majority’s disclosure-centric reading, GBL § 518 is effectively redundant of these existing provisions,” and similarly undermining its consumer protection goals, government entities are apparently exempt from GBL § 518 in many situations.  

I think the point about government treating itself better than other entities is a good one, but the redundancy point is mistaken: many other states' unfair trade practices laws list specific practices that are prohibited because of how likely they are to harm consumers through deception alongside a general prohibition on deceptive practices.  The point of having a specific prohibition is to relieve the state of the burden of showing likely deception in a specific case, given how likely it is that deception is to result, the lack of justification for the practice, and the costs and error risks of individualized determinations.  One could compare speed limits + dangerous driving prohibitions.  The general ban deals with the infinite capacity of fraudsters to invent new schemes, but the specific prohibitions provide clear guidance for situations that experience has shown are likely to be repeated.

Wednesday, October 17, 2018

Some Lanham Act/UCL claims against TM filing entities can proceed despite potential difficulties of proof

LegalForce RAPC Worldwide P.C. v. Swyers, No. 17-cv-07318-MMC, 2018 WL 4961660 (N.D. Cal. Oct. 12, 2018)

RAPC alleges that Swyers, an attorney, owns TTC and Trademark LLC, which provide “trademark related services,” and also owns Trademark PLLC, a law firm that provides “legal services in trademark related matters.” TTC allegedly made false statements on its website, and the defendants’ business is allegedly “built upon the foundation of the unauthorized practice of law” and involves “submitting or aiding and abetting their customers in submitting fraudulent specimens to the USPTO” in violation of the Lanham Act and California’s UCL.

The court partially granted defendants’ motion to dismiss, with limited leave to amend. In terms of standing, direct competition means that “a misrepresentation will give rise to a presumed commercial injury that is sufficient to establish standing,” and RAPC alleged it “compete[s]” with TTC to provide “small businesses” with “services that allow them to protect their marks through filings with the [USPTO].” As for proximate cause, RAPC alleged lost customers, supported by the allegation that, from the year TTC was formed until the lawsuit was filed, its market share declined from “nearly 2.4%” to “approximately 1.8%,” or “approximately 2670 trademark[ ] filings per year.” RAPC alleged that it had to reduce its prices from “$499 to $199 and lower to match the unfair competition of TTC.” Though proof might be difficult, these allegations were sufficient at the pleading stage.

As for specific challenged statements, most of them were actionable. “Created by USPTO Attorneys” and similar statements were allegedly false because TTC was created by just one former USPTO Attorney – Swyers, and statements that didn’t include “former” were also allegedly false because Sywers “was excluded from practice by the USPTO in January 2017” and cannot apply for reinstatement for “at least five years.” The court found Rule 9(b) satisfied given the specificity of the allegations.  “We’ve Prepared and Filed Over 20,000 Office Action Responses” was allegedly false because TTC hadn’t done this in the time since 2015, when it was formed. The defendants argued that its statement “may refer to TTC’s successor entities, or to other lawyers.” But the complaint made no reference to any such successors or predecessors, and defendants didn’t identify any mentions of such on its website. Thus, the court couldn’t find as a matter of law that a customer would reasonably understand “we” to refer more broadly to successors or predecessors in interest, or to “other lawyers” from TTC’s “Network of Independent Attorneys.” Indeed, the webpage the defendants cited “distinguishes between ‘we’ and ‘your attorney’” by stating “Depending on the package you select we, or your attorney you select through our Network of Independent Attorneys (NIA) will work with you to assemble your office action response ....” For similar reasons, “Trusted by over 100,000 Businesses Since 2003” was sufficiently alleged to be false, since TTC was only formed in 2015 and allegedly hadn’t had over 100,000 customers.

“Created by the Top Trademark Law Firm in the United States” was allegedly false because TTC was created by Swyers personally as a sole member, and that if Trademark PLLC, a law firm, created TTC, the reference to a “top” firm is false because Trademark PLLC’s owner Swyers was disbarred by the USPTO.  However, this statement was nonactionable. First, the pages on which the statement was found couldn’t reasonably be read to say that TTC was created by a law firm. Instead, TTC stated that one of its “packages” was “created” by the unnamed “Top Trademark Firm” and that the other two packages include “software” the unnamed law firm “created,” neither of which were alleged to be false.  Also, the use of “top” to describe the firm was puffery.

TTC’s website allegedly contained the false claim “As featured in,” under which were displayed “rotating banners showing logos” of a number of businesses, specifically, “Yahoo Finance,, CNBC, Compare LegalForms, Bank of America Small Business Community, Time,, the Wall Street Journal, and INC500.” But the allegation that “upon information and belief, TTC has never been featured on these websites” was not accompanied by a statement of the facts upon which the belief was founded, so it was dismissed.  

State law claims: RAPC alleged that TTC has violated § 17200 of the UCL by submitting to the USPTO “fraudulent specimens” and by engaging in the “unauthorized practice of law.”  However, RAPC lacked standing to bring the first claim; it failed to allege any facts to support a finding that its injuries occurred as the result of the submission of fraudulent specimens.  Plus, the allegations of fraud weren’t specific enough to satisfy Rule 9(b).  By contrast, RAPC had standing for the unauthorized practice of law allegations because it alleged that it “suffered losses in revenue and asset value and was required to pay increased advertising costs specifically because of the [alleged unauthorized practice of law],” even though the general purpose of the law is to protect the public and not to protect lawyers from competition.  Rule 9(b) didn’t apply because this part of the claim didn’t sound in fraud; rather than being based on advertising that defendants could engage in the practice of law, it was based on the unauthorized practice of law itself, which was sufficiently alleged in the complaint. Nor did primary jurisdiction bar the claim: “although the USPTO, as set forth above, has identified on its website conduct that, in its view, constitutes the unauthorized practice of law, the USPTO has made clear its position that ‘Congress has not authorized [it] to regulate entities such as TTC.’” However, RAPC was limited to seeking injunctive relief, not restitution because it failed to allege that TTC obtained any property from RAPC in which RAPC had an ownership interest.

§ 17200 claims against the Trademark defendants were dismissed because there were no allegations that the claims arose out of or resulted from California-related activities (e.g., submission of a fraudulent specimen or unlawful practice of law on behalf of a California customer).

Monday, October 15, 2018

FDCA doesn't preempt false advertising suit based on claims about protein source

Durnford v. MusclePharm Corp., --- F.3d ----, 2018 WL 4938190, No. 16-15374 (9th Cir. Oct. 12, 2018)

Durnford brought the usual California consumer claims against MusclePharm for making false or misleading statements about the protein in one of its supplements. The district court dismissed Durnford’s action as preempted by the FDCA, reasoning that any declarations of protein content anywhere on a product label could not be false or misleading if the listed amount of protein reflected measurements made in accordance with federal regulations concerning the federally mandated nutrition panel. The court of appeals reversed: the FDCA and its implementing regulations governed the calculation and disclosure of protein amounts, but Durnford could still base state-law claims on allegedly false statements about the source or composition of protein.

The supplement is marketed as a muscle-building or weight-gain product, with a focus on its “revolutionary 5-stage mass delivery system.” The second stage is described as “Muscle plasma protein technology: 40g of a potent blend of hydrolyzed beef protein and lactoferrin protein.” The fourth stage is described as “Performance growth & muscle volumizer: Creatine and BCAA nitrates help promote muscular strength, size and endurance.” The ingredients correspond to the stages, including the “Muscle Plasma Protein Matrix,” consisting of “Hydrolyzed Beef Protein, Lactoferrin” and the “Performance Growth & Muscle Volumizer,” consisting of “Creatine Monohydrate, L-Glycine, BCAA Nitrates (Leucine, Iso-Leucine, Valine) ... , D-Ribose” respectively. The nutrition panel states that a single serving of the supplement contains 40 grams of protein, or 72% of the recommended daily value.

Durnford alleged that MusclePharm engaged in “protein spiking” or “nitrogen spiking” — the practice of inflating measurements of a supplement’s protein content using non-protein substances, specifically creatine monohydrate and free-form amino acids (l-glycine, leucine, iso-leucine, and valine), and that its true protein value was not 40 grams per serving, but 19.4 grams per serving.  MusclePharm also tweeted that product reviews accusing it of nitrogen spiking were “fake …. We don’t do anything like that. All products legit and scientifically backed[.]”

FDA regulations allow a manufacturer to use nitrogen content as a proxy for protein content, thus permitting the practice of nitrogen spiking, and the FDCA preempts non-identical state law requirements, so that was it, according to the district court.

The court of appeals began with a presumption against preemption for areas of traditional state police power such as consumer protection. Nonetheless, Durnford’s protein content theory of misbranding—that he was misled by the 40-gram figure on the nutrition panel—was foreclosed by the FDCA, which requires the disclosure of the total amount of protein; FDA regulations set out the proper means of calculating that amount, using nitrogen as a proxy, so it doesn’t matter whether doing so is misleading. (The court noted that Durnford didn’t challenge the regulation under Chevron for authorizing an inherently misleading means of calculating protein.)

However, Durnford’s “protein composition” theory of misbranding was that the label misled him into believing the protein, in whatever amount, came entirely from genuine protein sources — hydrolyzed beef protein and lactoferrin — rather than nitrogen-spiking agents. The court of appeals found his premise correct: the label twice identifies specific protein sources, then apparently distinguishes those protein sources from nitrogen compounds, which are listed and identified separately not as protein, but as “performance growth and muscle volumizer.” The label continues that the proteins are present in the amount of “40g of a ... blend of ... beef protein and lactoferrin” — the same amount of protein claimed per serving on the nutrition panel. The ingredients list repeats the distinction: hydrolyzed beef protein and lactoferrin are part of the “protein technology,” and the free-form amino acids are “muscle volumizer.”

Durnford’s theory was thus that the label falsely disclaimed nitrogen spiking. This adequately alleged misbranding, and was not preempted by rules about how protein was to be measured, though the complaint didn’t sufficiently connect the one tweet to Durnford’s injury and was thus on its own inadequate.

RipoffReport review isn't "advertising or promotion," without more evidence of reception

Wilson v. AdvisorLaw LLC, No. 17-cv-1525-MSK, 2018 WL 4932088 (D. Colo. Oct. 11, 2018)

Wilson and defendant Kennedy allegedly did business through corporate entities, Wilson Law Ltd. and AdvisorLaw LLC, respectively. The relationship ended badly, with Kennedy accusing Wilson, via email, of “competing with my business” and asserting that Wilson was using AdvisorLaw without authorization and to its detriment. The day of that last claim, a “Patrick Erickson” posted a negative review of Wilson Law on the website claiming that Wilson “lied to me with no reservations,” that Erickson had needed an experienced lawyer for FINRA and IRS issues from a divorce, and that Erickson paid over $15,000 before learning that Wilson lied about his expertise/progress; when confronted, Erickson said, Wilson told him “good luck getting any money back” and “I am very good at hiding from judgments and collections.”  Forensic evidence indicated that the review came from Kennedy’s home, though the parties dispute whether Kennedy or another person posted the review.

The court granted summary judgment to defendants on the Lanham Act claim and declined supplemental jurisdiction over the coordinate state law claims.  I was a little surprised that the court accepted the argument that a widely available post on the internet wasn’t “commercial advertising or promotion” because there wasn’t enough evidence that it was “sufficiently disseminated to the relevant purchasing public such that the industry would consider it advertising,” though perhaps the court would have reacted differently to a single, standard paid-for ad.  Still, to be actionable, the dissemination “must reach some significant number of actual or potential customers of the parties’ products.” Evidence of that dissemination didn’t come from the number of AdvisorLaw’s clients compared to those of Wilson, because the mere fact of defendants’ success didn’t show that the review was a causal factor.

Nor were general facts about helpful:

[T]he mere fact that is a heavily-trafficked site does not mean that the Review itself was broadly seen by the Plaintiffs’ potential customers. Just as opening a storefront on a busy street does not guarantee a steady flow of actual customer traffic, the fact that may attract millions of visitors does not guarantee that any of those millions of viewers went looking for reviews of the Plaintiffs’ services in particular, much less that such visitors saw the Review in question. And even if they did, the Plaintiffs offer no evidence to show that the visitors reading the review were otherwise potential customers of the Plaintiffs’ services, rather than, for example, disinterested internet scamps vicariously enjoying particularly scathing poison-pill notes.

Nor was Wilson’s own opinion that he had difficulty getting clients after the review was posted, absent facts indicating that this happened and that the review was the cause.  Nor was it helpful that internet searches using 12 different search terms (e.g. “wilson law, ltd.”; “mark h. wilson attorney”; “mark wilson finra”) routinely yielded a link to the review on the first page. That didn’t prove that the review was seen; even Wilson’s expert report didn’t provide evidence of how potential customers of the parties’ services typically investigated those services.  “It may be that the Plaintiffs’ potential client base consists of unsophisticated and credulous individuals who might be influenced by an anonymous internet review, or it might be that the client base consists of sophisticated businesspeople and investors who would likely ignore such scurrilous material, were they to even encounter it in the first place.” The expert could not estimate how many people likely read the review.

Friday, October 12, 2018

Former supplier can sue supplement maker for falsely implying FDA approval & making claims based on old ingredients

In re Elysium Health-Chromadex Litig., 2018 WL 4907590, No. 17 Civ. 7394 (CM) (S.D.N.Y. Sept. 27, 2018)
Elysium, which makes dietary supplements, sued Chromadex, a former supplier, for false advertising under the Lanham Act, trade libel, deceptive business practices under New York General Business Law § 349, and tortious interference with prospective economic relations.  Chromadex argued that entertaining Elysium’s lawsuit would violate the Noerr-Pennington doctrine, which protects a party’s right to petition the government for redress, and filed a mirror image complaint.

Elysium’s Basis is sold as an anti-aging product, and has two main ingredients: nicotinamide riboside (NR) and pterostilbene (PT). Chromadex sold these as Niagen and pTeroPure, respectively. In 2017, after the parties’ relationship soured, Chromadex filed a citizen petition with the FDA. A citizen petition is “a means afforded by the FDA for raising concerns about products the FDA reviews; any individual may file such a petition concerning scientific or legal issues before or while the product is on the market.” Chromadex asserted that it was the only NR supplier in the US, and that Niagen was sold under a New Dietary Ingredient Notification (NDIN) filed with the FDA and has obtained generally recognized as safe (GRAS) status. The petition further alleged that Elysium was using a new, unknown supplier “for which no [NDIN] has been filed with the FDA and which does not have GRAS status.” Chromadex claimed that it had analyzed samples of the new Basis and found the solvent toluene in them, but not in old Basis; this (and the lack of NDIN) made the new source of NR “adulterated” in contravention of the law. The FDA hasn’t set any allowed levels of toluene, but a CDC publication states that “Single exposures to toluene or repeated exposures over a few weeks can cause headaches and sleepiness, and can impair your ability to think clearly.”

Elysium’s suit alleged that the petition was false and misleading and that it was filed for the sole purpose of harming Elysium, rather than bringing any genuine concerns about Basis’ safety to the FDA’s attention. In particular, Chromadex allegedly knew (or, as a regulatory consultant, should have known) that the FDA does not grant citizen petitions like this one seeking the commencement of enforcement actions. In addition, Elysium alleged that Chromadex’s own Certificates of Analysis showed that its pTeroPure contains similar levels of toluene, so Chromadex could not actually have believed that Basis was unsafe. Further, the levels of toluene allegedly found in Basis were “far below the allowable levels” accepted by the FDA. Finally, Elysium alleged a coordinated effort to distribute claims in the citizen petition via an investor alert listserv available on Chromadex’s website. 

The court declined to dismiss the complaint under Noerr-Pennington or under New York’s anti-SLAPP law or litigation privilege. At this point, the court couldn’t reject the sham exception: petitioning activity that is objectively baseless and is a “mere sham to cover an attempt to interfere directly with the business relationships of a competitor.” Chromadex itself, in its exhibits attached to its motion to dismiss, submitted evidence in the form of a letter from the FDA that it knew that the action it sought in its petition—a seizure order/injunction against distributors—couldn’t be had through a petition; the letter was dated well before the petition. Other courts have ruled that a petition is objectively baseless when the petitioned agency lacks authority to take the action requested or has a policy against doing so.

Chromadex argued that its petition could be granted in part, by getting some other order or action from the FDA.  Elysium argued that a motivation to inform the FDA of a potential health issue could have been carried out by a (nonpublic) trade complaint; again, Chromadex’s filings demonstrated its awareness of this possibility. That wasn’t enough to make the petition a sham. But more “damning” was the allegation that pTeroPure contained comparable levels of toluene, which if true would be good evidence of objective baselessness.  The court wanted that question resolved on summary judgment; otherwise there was enough for the complaint to proceed under the sham exception to Noerr-Pennington immunity.

Chromadex alleged false advertising by Elysium about the scientific research, chemical composition, clinical testing, purported health benefits, and FDA approval of Basis.  To the extent the claims were based on toluene content, the court seemed to decline to exercise jurisdiction because it wasn’t in a position to judge, and the FDA could weigh in on, the precise acceptable level of toluene in a dietary supplement. That alone doesn’t seem like a good enough reason to not resolve the claim before the court in the absence of preemption/preclusion; courts judge scientific matters like this all the time.

Other statements did survive the motion to dismiss, though not a statement that Basis was now “even purer” and “consistently white” instead of having color variations, which was made in response to a consumer email inquiry and then posted to a Yahoo! message board by an anonymous poster. That wasn’t enough to constitute advertising or promotion.

Chromadex alleged that Elysium misrepresented its FDA approval. Elysium’s “Our Mission” page on its website says that all its products go through various steps, including the “FDA NDI Submission” stage: “We conduct rigorous safety studies for new dietary ingredient (NDI) submissions to the FDA. The Federal Food, Drug, and Cosmetic Act (FD&C) requires that we submit studies to demonstrate the safety of “new dietary ingredients.” It then goes on to describe the “Safety Testing” stage (“Typically characterized as a ‘Phase 1’ clinical trial, this stage determines the safety and pharmacokinetics of the compound in healthy individuals,”) and the “Efficacy Testing” phase (“Typically characterized as a ‘Phase 2’ clinical trial, this human study looks at the safety and efficacy of a given molecule.”). Chromadex argued that these statements were misleading because they indicated that Basis – Elysium’s only consumer product – has received FDA approval. The court agreed: “Statements relating to the government approval process of nutritional supplements, coupled with the fact that Elysium only sells one consumer product, gives rise to the plausible conclusion that Elysium’s sole consumer product has undergone that process.”

Chromadex also challenged statements touting the scientific support for Basis, including a report of an Elysium-sponsored banner ad on Facebook celebrating Basis as “the world’s first cellular health product informed by genomics” and an interview with one of Elysium’s founders published by Allure magazine quoting him: “With regard to Basis, the pill seems simple, but the amount of science behind it is quite extensive…. [The science behind Basis] began almost 30 years ago. The research progressed from studying aging in yeast to the discovery of a family of proteins called sirtuins that control aging. That led to the identification of two compounds, [PT] and [NR], that activate sirtuins.... [Those sirtuin-stimulating compounds are the main ingredients in Basis].”

Elysium argued that statements in news articles aren’t commercial speech, but that’s not always true.  Specific factual statements might still be actionable, and here the statements “give rise to a plausible inference that they were part of a broader advertising campaign intended to mislead consumers into believing that Elysium developed the science behind a one-of-a-kind product.” Elysium’s statements on its website celebrating the work of its Scientific Advisory Board and its “Research Partnerships” could also create “an implied endorsement” about the research undergirding Basis.

Similarly, Chromadex alleged that statements on Elysium’s website about clinical trials conducted on Basis were misleading because the only clinical trials were conducted while Basis was being produced with Chromadex’s NR and PT products. This too supported a plausible inference that Elysium misrepresented the clinical testing of the actual product it was now selling.

The court also found that competitive injury was plausibly pled—so statements made by a former customer can now provide Lanham Act standing, under appropriate circumstances. Chromadex could also bring a NY GBL § 349 claim for the same sets of statements. However, its § 350 claim failed because that required the plaintiff to show actual reliance, which Chromadex didn’t and couldn’t plausibly plead.

Tortious interference: Elysium allegedly interfered with Chromadex prospective economic relationships by negotiating and enforcing an exclusivity provision in the parties’ supply agreement, only to then “sabotage” Chromadex by “refusing to pay for extraordinarily large orders of NR and conspiring” with Chromadex employees.  But that wasn’t enough: Chromadex needed to plead that Elysium “direct[ed] some activities toward[ ] [a] third party and convince[d] the third party not to enter into a business relationship” with Chromadex.

Court presumes failure to comply w/FDA labeling rules to be misleading

Campbell v. Freshbev LLC, 322 F.Supp.3d 330 (E.D.N.Y. 2018)

Campbell bought several bottles of Freshbev juices at Whole Foods, allegedly relying on misrepresentations (1) that the juices were unpasteurized; (2) that the juices were cold-pressed; (3) that the juices were fresh; and (4) that the Cranberry Apple juice had more cranberry juice than apple juice.

Initially, the court declined to resolve at this stage whether Bristol–Myers Squibb Co. v. Sup. Ct. of Cal., ––– U.S. ––––, 137 S.Ct. 1773 (2017), meant that federal courts, not just state courts, lacked personal jurisdiction for claims by out-of-state plaintiffs against an out-of-state defendant that had no connection to the forum state, or whether that even applied to nationwide classes. Without a motion to certify a nationwide class, the issue wasn’t squarely before the court.

The court found Campbell hadn’t shown standing for injunctive relief, because he didn’t plead a willingness to buy the juice again if he could be confident about the truth.

Freshbev argued that the challenged statements weren’t materially misleading. Campbell’s first argument was that “unpasteurized” was misleading because the juices were treated with high pressure processing (HPP), which was allegedly equivalent to pasteurization.  Freshbev responded that FDA regulations treat pasteurization and HPP as two separate treatments and allow “unpasteurized” on HPP-treated juice. The FDA has issued nonbinding guidance on treating juice safely, and a proposed rule (1998!) that allowed an “unpasteurized” label as long as that was truthful and nonmisleading. The problem was that “unpasteurized” might be misleading insofar as it didn’t distinguish between “a product that may contain harmful pathogens that could result in serious disease and one that is treated using a method (other than pasteurization) that is capable of achieving a 5–log reduction in the target pathogen.”  Thus, additional information was required on such a label. Here, two of the labels showed that the juices were treated with pressure, providing the requisite additional information, and the claim was preempted. One label didn’t, so the claim was unpreempted. [Freshbev submitted a graphic that allegedly represented the full label and had pressure information, but that couldn’t be considered on a motion to dismiss.]

Cold-pressed: Campbell alleged that this was misleading because the juices were treated with HPP after being cold-pressed. It was implausible that a reasonable consumer would think that nothing had been done to the juice except cold-pressing, in the absence of an “only” or “exclusively” or similar modifier.

Fresh:  21 C.F.R. § 101.95 governs use of the word “fresh” on a label.  Of course there’s no private right of action under the FDCA and its regulations, but NY “forbids the misbranding of food ‘in language largely identical to that found in the FDCA.’” And also, “if FDA regulations provide that a claim on a product’s label is misleading, that is evidence that a reasonable consumer might be misled by the packaging.”  21 C.F.R. § 101.95(a) states that “[t]he term ‘fresh’ [in labeling] in a manner that suggests or implies that the food is unprocessed, means that the food is in its raw state and has not been frozen or subjected to any form of thermal processing or any other form of preservation....” Syllogistically, HPP is a form of preservation, and thus juice products treated with HPP shouldn’t be advertised as “fresh.”

There’s an exception if “the term [fresh] does not suggest or imply that a food is unprocessed or unpreserved.” The FDA’s example was pasteurized whole milk, which consumers understand to “nearly always” be pasteurized; by contrast, “fresh” cannot be used to describe pasteurized pasta sauce because pasta sauce is not always pasteurized, so consumers would assume that “fresh” sauce is unprocessed.  Because juice is widely sold with and without processing, the exception didn’t apply here.  Freshbev argued that the labels’ disclosure of “pressure” would avoid any consumer confusion, but “because the term ‘fresh’ is misleading in isolation, it is not clear as a matter of law that confusion generated by the misuse of the term would be resolved by additional statements elsewhere on the label.”

“Cranberry Apple”: Campbell argued that this was misleading because the product had more apple juice than cranberry. Freshbev argued that that the name of the product wasn’t plausibly read as a proportion claim, and that any confusion could be resolved by reading the ingredients list.

21 C.F.R. § 102.33(b) states that names “must be in descending order of predominance by volume unless the name specifically shows that the juice with the represented flavor is used as a flavor (e.g., raspberry-flavored apple and pear juice drink).”  Defendants’ label was a pretty clear violation of this rule without the “flavored” caveat. “Because it violates FDA labeling requirements, a reasonable consumer may be misled into believing that Cranberry Apple juice has more cranberry juice than apple.”

However, a common law fraud claim against the failure to put an unpasteurized warning label on the bottles failed; the most plausible reason Whole Foods failed to do so was not an intent to defraud, but an understanding that HPP avoided the risk of untreated, unpasteurized juice.

Third Circuit holds that misrepresentation of safety isn't actionable false advertising for consumables that didn't cause individual harm

In re: Johnson & Johnson Talcum Powder Products Marketing, Sales Practices & Liability Litig., 903 F.3d 278 (3d Cir. 2018)

Plaintiff Estrada alleged that perineal use of Johnson & Johnson’s Baby Powder can lead to an increased risk of developing ovarian cancer.  Over a dissent, the court of appeals held that a plaintiff suffered no Article III injury when she bought a product that she now believes she should never have bought: buyer’s remorse is not cognizable, and a purchase is itself not an economic injury where the buyer got the benefit of the bargain.

Estrada didn’t allege even an increased risk of cancer, or emotional injury from the fear of developing cancer, or medical monitoring costs.  Nor did she allege that the product didn’t live up to its claims: “designed to gently absorb excess moisture,” “keep[ ] skin feeling soft, fresh and comfortable,” and “reduce the irritation caused by friction.” Nor did she allege that she still possessed a durable but now-useless product; she’d consumed what she’d bought, so she also didn’t allege transaction costs associated with reselling or returning Baby Powder. The core allegation was that, if she’d known of the risk, she wouldn’t have bought the powder in the first place.

She might have successfully pled economic injury by pleading that she’d have bought a less expensive alternative, and her complaint did suggest that alternative cornstarch-based products existed that didn’t pose the same risk. But she failed to allege that cornstarch-based products would have been cheaper, or that there was a price premium associated with J&J’s superiority claims for its products.

On appeal, she argued that she hadn’t received the benefit of the bargain: she paid for a product that didn’t increase the risk of ovarian cancer but received one that did, which was worth less than what she paid. But she got baby powder that “successfully did what the parties had bargained for and expected it to do: eliminate friction on the skin, absorb excess moisture, and maintain freshness.” But wasn’t she also, at least implicitly, promised that the product would do that safely?  To have Article III standing, a plaintiff has to allege “facts that would permit a factfinder to value the purported injury at something more than zero dollars without resorting to mere conjecture.”

Although courts often “credit allegations of injury that involve no more than ‘application of basic economic logic,’ … there is a difference between allegations that stand on well-pleaded facts and allegations that stand on nothing more than supposition.” References to future expert opinions weren’t enough to establish constitutional standing, even though the majority also said that “a plaintiff need not develop detailed economic models at the pleading stage to establish that she has standing.”  Here, all Estrada alleged was that, although she bought the product at a given price, she later wished that she hadn’t.

But what about that implied promise of safety? Why not presume that Estrada would pay more for safe than unsafe powder?  First, to presume that “would turn the standing question on its head” because federal courts lack jurisdiction unless the record shows that it exists. [That’s a weird move. Not all allegedly implied promises are promises of safety; especially since we can rely on other economic theories in the standing inquiry, it seems very commonsensical to infer the relevance of safety, which wouldn’t provide standing in every case even if it would provide standing in every case about safety.] “[O]ur refusal to leap to such a conclusion is supported by Estrada’s apparent desire to continue purchasing Baby Powder in the future despite being aware of its alleged health risks.” That desire apparently wasn’t conditioned on receiving a price discount in the future.

Second, Estrada’s own allegations indicated that the powder she received was safe for her, given the absence of allegations about risk to her.

The majority clarified that there was no conflict with its reading of Kwikset Corp. v. Superior Court, 51 Cal.4th 310, 120 Cal.Rptr.3d 741, 246 P.3d 877 (2011), which held that, “[f]or each consumer who relies on the truth and accuracy of a label ... the economic harm is the same: the consumer has purchased a product that he or she paid more for than he or she otherwise might have been willing to pay if the product had been labeled accurately.” The key language was “paid more”: in Kwikset, there was a sufficient pleading that the plaintiffs didn’t receive the benefit of their bargain.

Thus, Estrada’s claim for restitution also failed.  And her claims were “further weakened by her alleged desire to purchase Baby Powder in the future despite knowing of its alleged health risks,” which suggested that other consumers might want to do so too. Also, “consumers are already highly informed of the alleged health risks associated with Baby Powder given the numerous publicly available studies and publications that she cites in her complaint. Estrada’s complaint refers to, inter alia, … a pamphlet allegedly distributed ‘to all ovarian cancer patients at nearly every medical facility in the United States.’ Wouldn’t such widespread knowledge already have been factored into the current market price of Baby Powder? And if so, how did Johnson & Johnson earn unlawful profits by withholding information that the market might have already taken account of?” [This argument is unworthy of a circuit court.  As far as I can tell, Estrada never alleged that consumers of baby powder are “highly informed” of the health risks, even if other people know (ovarian cancer patients strike me as finding out too late, for example).]

And for injunctive relief, Estrada’s knowledge of the risks made her unlikely to suffer future injury; the court wouldn’t allow a “stop me before I buy again” claim.  “The law affords Estrada the dignity of assuming that she acts rationally, and that she will not act in such a way that she will again suffer the same alleged ‘injury.’”

Judge Fuentes dissented, beginning with the possibly relevant fact that juries around the country have found J&J liable for its powder’s propensity to increase ovarian cancer risks. Estrada alleged that, if she’d known that, she wouldn’t have bought the powder. In the abstract, it was correct that a plaintiff who gets the benefit of her bargain can’t claim injury in fact. But the majority ignored key terms in that bargain, in the dissent’s view, specifically safety. Estrada alleged that J&J held the product out as safe.

The powder need not be unsafe as to Estrada in order for safety to be part of her bargain. Her economic harm wasn’t an increased risk of cancer. Her harm was the economic harm caused by purchasing a product due to J&J’s misrepresentation about safety.  She alleged that she wouldn’t have bought the product had she known the truth, and that’s an Article III injury in fact.  Its actual safety as to her was non-economic harm, not at issue.

The dissent addressed the majority’s hypothetical—what if J&J had been able to go back in time 50 years, when Estrada first started buying the product, and reassure her (based on what we know from her allegations) that she personally wouldn’t be among the people harmed by the product? The majority concluded that this “legal fiction” proved that she hadn’t been harmed. 

But safety representations have two related meanings: First, “is this going to hurt and/or kill me?” That was the realm of products liability.  Second, “is this product safe in general?”  Consumers might want to know this because, among other things, they might be buying the product for others’ use.  And they also might want to know this simply because it’s among the reasons to choose one product over others.  Kwikset showed why Estrada did suffer injury: she wanted something that she didn’t get, despite the alleged misrepresentation that she would get it. “I see no reason we should devote ourselves to understanding why a plaintiff values what she values.”  We don’t ask whether an observant Jew’s preference for kosher meat represents anything real, or a Rolex consumer’s preference for a real Rolex over a substantively identical counterfeit. All they had to do was plausibly allege that they wouldn’t have bought a properly labeled product, or wouldn’t have paid as much for it.  So too here. Estrada alleged that she valued “safety.” That should be enough. [There is a real basis for this preference, too.  Time-travel fantasies aside, I want to know what general risks products pose when I buy them. I don’t expect Dr. Who or J&J to pop out and reassure me that I'll dodge a bullet, and I doubt I’d believe them if they did.]  There was no attenuated causal chain here; she alleged that she wouldn’t have bought the product had she known the truth, making the injury the total sum she paid.

The dissent would further hold that injury was “no more than application of basic economic logic.”  “Dealing only with the allegations of the pleadings, it seems sufficiently elementary that a product held out as safe will command a higher price than a product held out as markedly increasing a woman’s risk of developing ovarian cancer.”  As for allegations about willingness to purchase again, the majority read her pleadings to state that she was willing to buy the product as-is, but it made more sense that her pleaded desire to buy baby powder in the future was contingent on J&J credibly offering a product that met the terms of her bargain.  “She is only unlikely to suffer future economic injury if we presume that Johnson & Johnson has lied and will continue to lie in its labeling, or that Estrada will assume that any label offered by Johnson & Johnson is untruthful.”

Plus, the majority’s interpretation of lack of standing to seek injunctive relief essentially struck down a part of California’s UCL, which was not a good idea.

Thursday, October 04, 2018

it's not defamatory to conflate 2 legally distinct entities when unity is what they wanted consumers to perceive

RainSoft v. MacFarland, No. 15-432 WES, 2018 WL 4696737 (D.R.I. Sept. 30, 2018)

MacFarland runs, where he blogs about companies who provide consumer products and services. He and his wife “sat through an in-home demonstration of RainSoft’s water-treatment products.” The demo was  conducted by Oster, an employee of Basement Technologies (a local RainSoft dealer) who used a script that was written by RainSoft that didn’t mention Basement Technologies; the Basement Technologies/RainSoft agreement was intended to foreground RainSoft’s brand name and reputation.

MacFarland’s first RainSoft post, “Is Home Depot’s Water Test from RainSoft a Scam?” the post mixed narration – “The salesman was super nice, and very friendly with our dog.” – and critique. McFarland called the in-home presentation a “magic show”: the demo ostensibly showed RainSoft’s products purifying McFarland’s tap water, but McFarland wondered if the bottles used in the demo might have been doctored—“I’m not saying they were, but it’s possible.” He also accused RainSoft of making “false promises,” using “high-pressure sales tactics,” and other “slightly deceptive practices.”  The putatively “false promises” included that RainSoft’s filtration system would save him $20,000 in appliance-replacement costs over 20 years – this MacFarland “highly doubt[ed].”  The “high-pressure sales tactics” included offering five years of free soap if MacFarland purchased a RainSoft system on the spot. Because it did not include the cost of labor, MacFarland also found RainSoft’s lifetime warranty deceptive. His first post concluded that the products weren’t worth their price: “I don’t want to say that the RainSoft EC4 product doesn’t work.... From what I’m reading though, the quality is closer to midlevel, but it is really high-priced ....” He ended by asking his readers for more feedback on water purification systems, including any RainSoft experiences. Despite his skepticism, MacFarland and his wife – who MacFarland “recognized ... was impressed by the product” – gave Oster a $100 check to keep the free-soap option open.

His second post, “RainSoft Scam? (Part 2),” recounted a conversation he had had with a “RainSoft representative” in which he haggled $1,000 off the price Oster quoted him.  He told the story of a trip he made to Lowes where a “representative in plumbing was shocked” that Home Depot, where he learned of RainSoft, would “only connect [MacFarland] to this shady RainSoft company,” rather than show him “a range of filtration systems from various manufacturers.” The post again mentioned Oster’s “magic tricks” and “bad logic,” before answering the scam question by saying he was “leaning towards yes, but you are free to make your own decisions.”

His third post, “Yep. RainSoft Scammed Me Out of $100,” reported that Oster cashed the $100 check that had held open the free-soap option, contrary to MacFarland’s expectations. He warned, “if you suspect a company to be a scammer, don’t even give them an inch, they’ll take a mile.” He later added an update to the top of this post: “RainSoft’s parent company, Aquion, saw this and ... sent me a $100 check to make it right.”

Finally, “How to Get Clean, Purified Water (at [t]he Best Price)” “recounted a spat MacFarland had, in the comments section of one of his other RainSoft posts, with someone he suspected was, though who denied being, a RainSoft dealer. MacFarland called that glowing review a “comment scam.” The post reiterated MacFarland’s previous complaints about RainSoft and added another about the vagueness of RainSoft’s guarantee that if a customer finds a better-performing product, the customer keeps the RainSoft system gratis. (“There’s no real fine print[,] ... and the terms are ambiguous ....”).) MacFarland then summoned “a little common sense” to piece together a “formidable water purification system” – hyperlinking to other companies’ products – “[t]hat’s less than 1/6th the cost of what RainSoft was going to charge.”  “I’m not a water purification expert,” MacFarland wrote, “but I know basic problem solving, scientific process, and consumer scams ....”

MacFarland also reiterated in comments his position that “RainSoft salesmen” were “selling fear” via “scammy sales tactics” and “magic shows.”

After RainSoft sued, MacFarland posted “What is a Scam Anyway?” stating that when he uses the word ‘scam’ he does not necessarily mean to connote illegal activity, but instead, more colloquially, a “confidence trick.” MacFarland’s reluctance to make legal claims stems, he said, from the fact that he does not “possess a 100% understanding of all laws.” Discovery revealed that he wrote this post to “cover [his] ass,” which is to say, to circumvent MacFarland’s understanding of Illinois precedent (the original location of the case) that treated the word ‘scam’ as “libel per se.”  Viewed in the light most favorable to RainSoft, the evidence showed that MacFarland always knew that Basement Technologies and RainSoft were distinct entities. He thought RainSoft had “a point” when it attempted to educate him on the finer points of its relationship with Basement Technologies, but that its argument was “most[ly] … bullshit.”

The court found that MacFarland’s negative statements could be divided into two categories: nonactionable epithets (“scam,” “shady,” “magic tricks,” “bad logic,” etc.) and “more-sober assessments” (“false promises,” “high-pressure sales tactics,” and “slightly deceptive practices,” as well as the implication that Oster worked for RainSoft, not Basement Technologies). The first category was protected by the First Amendment as “imaginative expression” or “rhetorical hyperbole.”  “Any reader of his RainSoft posts would reasonably understand these as metaphor.” Though MacFarland’s post on the meaning of “scam” had no legal import, it accurately described some of the word’s many meanings. First Circuit precedent establishes that “the assertion ‘X is a scam’ is incapable of being proven true or false.”

Category two was protected by “other First Amendment overlays: the concept of false ideas, issues of public concern, and substantial truths.” In particular, “[a]n opinion whose factual basis is expressed and (substantially) true is protected speech.” Minor inaccuracies about an issue of public concern are fine if the gist or sting is true. Here, MacFarland’s opinions about “false promises,” “high-pressure sales tactics,” and “slightly deceptive practices” were all accompanied by their factual bases. RainSoft didn’t materially challenge MacFarland’s account of Oster’s presentation, and thus failed to create a disputed factual issue on material falsity. Without challenges to the factual account, “the law acts a bulwark against liability for the opinions MacFarland draws from these facts, no matter how unwarranted.”

As for the Basement Technologies/RainSoft distinction, the court still found substantial truth. A statement is substantially true unless “it would have a different effect on the mind of the reader from that which the pleaded truth would have produced.” Just as the difference between being a member, rather than a mere friend, of the white supremacist Aryan Brotherhood was immaterial to a reasonable member of the law-abiding contemporary community, Bustos v. A & E Television Networks, 646 F.3d 762 (10th Cir. 2011) (even though this distinction was life-threatening to the wrongly portrayed Hispanic inmate involved), the difference between Basement Technologies and RainSoft was also immaterial.  “Basement Technologies was under contract to sell only RainSoft products, and to ‘protect,’ ‘embrace,’ and ‘promote’ the RainSoft brand ‘in every customer facing opportunity” to ensure that someday ‘every person in the world [would] recognize the RainSoft® trademark.’ … Basement Technologies was basically a de facto arm of RainSoft.” The legal differences were “just too fine to have piqued public concern.”

False advertising: This wasn’t commercial advertising or promotion. MacFarland sold ad space (and there was no evidence that his alleged misrepresentations deceived those customers), and gained revenue from affiliate links, but his own “product” was free advice, which hadn’t been shown to be commercial speech. Running ads and receiving promotional kickbacks isn’t enough to turn content into commercial speech.  The affiliate links “were clearly incidental to his objective of providing consumers information.” Overstating the matter (at least as to commercial speech), the court concluded that “[t]he First Amendment … protects us while we freely discuss how we should live and love, how to wage war and keep peace, how best to govern ourselves. And equally, or almost, how to filter tap water on a budget.”

allegedly perfidious salesman protected from passing off liability, but might have engaged in false advertising

Burton v. Label, LLC, No. 15-CV-5793 (VSB), 2018 WL 4759735 (S.D.N.Y. Sept. 30, 2018)

Label, founded by the Millers, sells bespoke and custom men’s clothing throughout the United States. Schwartzman (for whom Burton is the trustee) worked for Label as Vice President of Sales. While employed at Label, he established his own bespoke tailoring and made-to-measure men’s clothing company, named Trusgan, and thereafter provided his services to Label as an employee of, and through, Trusgan. Label hired a company called ADP to automate its employee payroll system, and began paying Trusgan for Schwartzman’s services through ADP. Allegedly, as a result of an error, ADP began paying Schwartzman’s salary twice through two payroll accounts, and blamed him when it was discovered (after he told Label he was leaving). The Label defendants allegedly began a “campaign of calumny” accusing Schwartzman of fraud and embezzlement, and telling customers that Schwartzman’s claim that he could offer Label’s products at a cheaper price is false because they’d received commitments from their suppliers not to do business with Schwartzman.

Label counterclaimed, alleging various claims against Schwartzman, including violation of the Lanham Act. The Millers allegedly began receiving customer complaints about Schwartzman’s quality of service, and he allegedly tried to steal customers for his own side business during Label work hours and using Label resources. He allegedly surreptitiously contacted Label clients, misrepresented that he was placing orders for them through Label, and instead placed the orders through his own company. In one case, a supplier asked whether the “orders were still under Label,” to which Schwartzman replied, “all these orders are under me not Label,” and “I was only sending them to you because I can’t risk them accidentally being sent through Label.” A client allegedly complained to Label about the fit of the order, delivery times, and customer service, believing that Label had been responsible. Schwartzman allegedly told Label customers that he was opening up his own business and that “he could continue to service these customers at this new business where he would provide better customer service and pricing than Label, while offering the same exact product.” The counterclaims told the alternate story in which the salary double-dipping was indeed Schwartzman’s doing.

After Schwartzman left Label, Label allegedly discovered that Schwartzman “represented ... that he could easily handle former Label clients through Trusgan, because Schwartzman had these Label clients’ measurements and other information regarding their previous orders from Label” and that “he can beat LABEL’s pricing ... by 20% to 30% while offering the exact same product, from the same manufacturers and using the same fabrics.”

The Lanham Act counterclaims had two theories: first, while employed by Label, Schwartzman sold what he represented to be Label products but were not in fact Label products; second, after leaving Label, he told customers that he could offer the same product, but cheaper. The court rejected both claims on the pleadings.

False association: As an example, Schwartzman placed an order with a Label supplier, explaining that the order was for Schwartzman, not Label. Schwartzman’s client subsequently mistakenly complained to Label about “the fit of the order, delivery times, and customer service.” Assuming that Schwartzman was indeed using his position as a Label salesman to sell items represented to be Label goods by placing orders with Label suppliers, “he was simply unlawfully pocketing proceeds that belonged to his employer; he was not falsely representing the origin of his own goods. Selling trademarked goods under its trademarked name is not a violation of the Lanham Act.” Basically first sale, except not quite.

Label argued that it offered not just clothes, but customer service, but that theory didn’t work here. While “distribution of a product that does not meet the trademark holder’s quality control standards” may result in devaluation of the mark and thus not a genuine product, the trademark holder must allege that “(i) it has established legitimate, substantial, and nonpretextual quality control procedures, (ii) it abides by these procedures, and (iii) the non-conforming sales will diminish the value of the mark.” Here, the quality-of-service argument “makes no sense in light of the fact that Schwartzman was the Vice President of Sales at Label, making the quality of service he provided one and the same as the quality of service Label provided.” The complaint even alleged that customer gripes about “the fit of the order, delivery times, and customer service,” were of the type that “had become routine with respect to Schwartzman’s work.” “Thus, there is no distinction between the goods Schwartzman sold as Label goods and actual Label goods supplied under Schwartzman’s watch.”

The false advertising claim had more purchase in theory, but was inadquately pleaded. First, commercial advertising or promotion wasn’t pled, merely “isolated disparaging statements” that “do not have redress under the Lanham Act.” Label “makes no attempt to define the relevant market, but claims to have over 750 clients,” and didn’t specify the number of the clients Schwartzman allegedly contacted.  Likewise, the allegations of falsity would need more specificity to proceed; Label’s briefing indicated that it could replead to state that Schwartzman lacked access to their fabrics and suit styles.

Amazon not liable for use of TM in review

Sen v., Inc., 2018 WL 4680018, No. 16-CV-01486-JAH-JLB (S.D. Cal. Sept. 28, 2018)

Sen owns the trademark “Baiden” for skin-exfoliation products. Amazon bought “Baiden” through Google’s AdWords program and on other search engines. In 2012, Sen sued Amazon for this conduct and settled; the parties couldn’t agree on the terms of a long-form agreement, but the court enforced the terms of a settlement Memorandum of Understanding.

Now Sen sued again for infringement and false designation of origin/false advertising, alleging the unauthorized use of the Baiden mark in advertising as well as in an online review that promoted a competing product.  The infringement claim based on keyword/pay-per-click ads was barred by claim preclusion.

Contributory/vicarious liability for use in a review: Amazon user “Nanners” wrote that she initially purchased the Baiden Mitten, but she declared that a competing product is cheaper and delivers similar benefits.  This claim was barred by nominative fair use. Nanners’s review used the trademark to identify her subject; she used it “only to the extent necessary to identify the product she is reviewing” and didn’t use Baiden’s logo [query: could she have posted a picture of the product she received? I think the answer has to be yes].  Nothing else in the review suggested sponsorship or endorsement and indeed the idea that there are “monumentally cheaper” competitors suggested the opposite.

Tortious interference based on pay-per-click ads: precluded; the claim shared a transactional nucleus of facts with the initial trademark claim.  Tortious interference based on the review: barred by CDA §230.

Defamation, but not false advertising, claim survives against niche publisher that added wrong info about allegations of wrongdoing

MiMedx Group, Inc. v. DBW Partners LLC, No. 17-1925 (JDB), 2018 WL 4681005 (D.D.C. Sept. 28, 2018)

MiMedx, a seller of medical products, sued DBW, which offers business and regulatory analysis to paid subscribers, for libel, slander, defamation, false light invasion of privacy, tortious interference with business relations, and false advertising under the Lanham Act after defendants published articles that questioned MiMedx’s sales practices.  One article, “MiMedx: Channel Stuffing Accusations Resurface in Recent Counterclaim; Former Employees Corroborate Allegations; A Close Look at Potential Risk,” outlined allegations MiMedx’s former employees made in court filings against MiMedx claiming that the company had artificially inflated its sales and revenue figures by distributing more products to retailers than the retailers could sell. An email described the article: “we detail channel stuffing allegations and recent counterclaims which may pose as a regulatory risk for the company. The article examines the allegations made by customers & former employees, the company’s response to these claims, and the potential legal risks for MiMedx” and ended with an invitation to “schedule a call” with DBW for more information. DBW now acknowledges that the reference to “customers” was a mistake.

As part of its “ongoing examination of allegations of channel stuffing made by former MiMedx employees,” DBW also submitted a FOIA request to the Department of Veterans Affairs, Office of the Inspector General (OIG), and dermined that an OIG investigation “involve[d] documents related to MiMedx.” MiMedx allegedly informed DBW “off-the-record that MiMedx had initiated contact with the OIG, that MiMedx was voluntarily working with the OIG, and that MiMedx was specifically not a target of the investigation.” DBW published another article titled “VA Office of Inspector General Confirms Investigation Involving MiMedx Documents,” relaying DBW’s conclusions from its FOIA request, and also promoted the article via email. Both emails reached at least some MiMedx shareholders.

DBW allegedly served “as a ‘shill’ for bearish traders in MiMedx stock” including “friends, family, affiliates, and/or even ... [DBW] themselves.” MiMedx’s stock price declined after the two articles were published.

Libel, slander, defamation: DBW argued that falsity wasn’t pled; the single word “customers” wasn’t defamatory in that it didn’t render the first email substantially false and it didn’t cause any incremental harm compared to the unchallenged bulk of the publication. MiMedx argued that “the use of the word ‘customers’ ... substantively changed the meaning of the entire communication” because “there is a significant difference between allegations by a company’s customers and its disgruntled former employees” and further because it “made it appear that the article contained new or additional allegations that might corroborate the former employees’ allegations.”

The court concluded that adding “customers” was at least “capable of defamatory meaning” under DC law and allegations of wrongful commercial practice would “tend[ ] to injure” MiMedx’s “trade, profession or community standing.” Under Georgia law, whether the statement was defamatory was ambiguous, when construed in context of the entire publication as required.  Either way, this survived a motion to dismiss.  DBW argued, citing case law, that “[c]orporate plaintiffs are treated as public figures as a matter of law in defamation actions brought against mass media defendants involving matters of legitimate public interest,” but MiMedx argued that DBW wasn’t a mass media defendant and the court declined to judicially notice otherwise. MiMedx might be able to show facts indicating that it was a private figure for these purposes.

The court didn't specifically address the FOIA related allegations; it seems to me that those should have to go, as not reporting MiMedx's preferred interpretation of what seem like uncontested facts doesn't seem defamatory.

False light: a corporation has no personal right of privacy and therefore no cause of action for false light invasion of privacy.

Tortious interference: this requires allegations of specific lost business.  Pleading “customers, investors, and creditors” isn’t enough, so this claim was also dismissed.

Lanham Act false advertising: MiMedx failed to allege a competitive injury related to MiMedx’s commercial interests, such as customers withholding trade or lost revenue; it didn’t even allege that the misleading communications reached customers (as opposed to shareholders).