Monday, March 18, 2019

can a retailer be directly liable for false advertising on packages?

two cases (out of several involving this plaintiff)

Outlaw Laboratory, LP v. Shenoor Enterprise, Inc., 2019 WL 1040644, No. 18-CV-2299-B (N.D. Tex. Mar. 4, 2019)

Outlaw, which makes male dietary supplements, sued convenience stores because they “advertise and offer for sale” competing male dietary supplements, the Rhino products, that were allegedly falsely labeled “all natural” and state they contain “no harmful synthetic chemicals.” (The FDA has announced that certain products, including the Rhino products, contained potentially dangerous hidden drug ingredients.) The court found that displaying and selling the products weren’t enough for [direct] Lanham Act liability. [Secondary liability seems like a potential theory, though.]

Standing: the court expressed concerns about Article III standing—whether plaintiff’s injury was traceable to the defendants’ alleged conduct—as well as Lanham Act standing—whether the injury was proximately caused by that conduct. I’m pretty surprised by the former, without more discussion; if plaintiff allegedly lost sales when a consumer bought the products defendants stocked, then defendants’ conduct was at least a but-for cause of those losses. But the court disagrees: “it is difficult to see how merely placing products on display and selling them qualifies as conduct that caused Plaintiff’s injuries under Article III or the Lanham Act.”

Can a defendant “who merely sells a product at a retail outlet” be held liable for false advertising under the Lanham Act? Start with the text:

Any person who, on or in connection with any goods or services, or any container for goods, uses in commerce any...false or misleading description of fact, or false or misleading representation of fact, commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or geographic origin of his or her or another person’s goods, services, or commercial activities, shall be liable in a civil action by any person who believes that he or she is or is likely to be damaged by such act.

The test has been reframed as requiring “that the defendant made a false statement of fact about its product in a commercial advertisement.” The court didn’t believe that it had been alleged that defendants “made” a false statement of fact by offering the falsely labeled products for sale; only the nonparty manufacturer “made” statements in commercial advertising or promotion, even with allegations that defendants knew of the falsity.

Outlaw argued that selling the products necessarily involved the “use[ ] in commerce” of a “false or misleading description of fact, or...representation of fact” “in connection with any goods or services, or any container for goods[.]” [A trademark case would have zero hesitation concluding that defendants made a “use in commerce” of the Rhino mark, which was on the very same packages as are at issue here.] But false advertising also requires a misrepresentation “in commercial advertising or promotion.”

Outlaw didn’t cite binding caselaw supporting its claim.  [Basically, the court rejects trademark cases as inapplicable because in trademark cases it’s retailers’ “use” (which is to say placing on sale) of an infringing mark that causes confusion.  The court doesn’t discuss any policy basis for the divergent treatment, and if the retailers are “causing” confusion in those cases even though they don’t create the infringing goods or copy the infringing mark, then why aren’t they “causing” deception here?  But the court understandably returns to its conclusion that the defendants must have “made” false statements.]

Another case, JST Distrib. v. CNV, et al., 2:17-cv-06264 (C.D. Cal. Mar. 7, 2018), was factually similar to this one, where the defendant argued that it hadn’t made the allegedly falsely advertised products or the ads, but just posted them on its website and sold the products. The district court held that the website owner could still be held liable because the plaintiff alleged that the website owner “disseminated the false advertising through its website.” The court agreed that placing products on sale in a brick-and-mortar store isn’t “disseminating” false advertising.

The court found other nonbinding cases more persuasive. Cohn v. Kind, LLC, 2015 WL 9703527 (S.D.N.Y. Jan. 14, 2015) (under NY law, retailers’ sale of allegedly falsely labeled power bars wasn’t advertising); Optimum Technologies, Inc. v. Home Depot USA, Inc., 2005 WL 3307508 (N.D. Ga. Dec. 5, 2005) (displaying a competitor’s product under signs labeled with the plaintiff’s product name wasn’t commercial speech for Lanham Act purposes); and a number of state false advertising law cases that hold “that a defendant should not be liable, whatever the cause of action, for merely selling a product affixed with a false label, so long as the defendant had no role in creating the label.”  These were only minimally persuasive because of the different legal regimes, but still better than plaintiff’s cases.  Burger v. Lowe’s Home Centers, LLC, 2016 WL 1182266 (Cal. App. 4th Dist., 2016), reh’g denied (Apr. 26, 2016) (“The trial court agreed with [the retailer’s] argument a retailer cannot be held liable for the statements of others by merely placing the product on its shelves for resale. The court determined the false advertising claim was based solely on the product’s packaging, which was produced by the manufacturer or distributor and not [the retailer].”); In re Hydroxycut Mktg. & Sales Practices Litig., 801 F. Supp. 2d 993 (S.D. Cal. 2011) (“Plaintiffs suggest that the Defendant Retailers can be held liable under the consumer protection laws for placing the falsely advertised Products on the shelf and failing to disclaim the Manufacturer Defendants’ representations. However, none of the cases cited by Plaintiffs...supports this legal proposition.”); Fagan v. AmerisourceBergen Corp., 356 F. Supp. 2d 198 (E.D.N.Y. 2004) (drugstore was not liable for negligent misrepresentation for selling mislabeled drugs without evidence that it “itself, made any false statement or material misrepresentation” or that it “affixed the label, which contained the alleged misrepresentation”).

The court also analogized to Baldino’s Lock & Key Serv., Inc. v. Google, Inc., 88 F. Supp. 3d 543 (E.D. Va. 2015) (Google not liable for misrepresentations made by third parties in ads), aff’d, 624 F. App’x 81 (4th Cir. Dec. 4, 2015), and Lasoff v., Inc., 2017 WL 372948, at *8 (W.D. Wash. Jan. 26, 2017) (Amazon could not be held liable for “truthfully depict[ing]” products of third-party sellers that were labeled with false representations). Lasoff involved a party, Amazon, who was actually selling the third-party products, like the defendants here, though it was also a summary judgment case and might not have reached the same result if Amazon had actual knowledge of the falsity, as alleged here. [Which is why secondary liability is a better theory.] But Lasoff involved little or no record evidence, and the allegations of knowledge here were conclusory.

The court was more convinced by the policy implications: “Defendants undoubtedly sell many products—should they be responsible for scrutinizing and determining the veracity of every claim on every product label in their stores simply because they sell the product?”  [Who should be?  In a globalized economy, are we so sure that we can always grab the manufacturer?]  The court answered “no” for false advertising.  It’s not that retailers or sellers can never be held liable for false advertising, but they can’t be held liable based solely on display and sale of the Rhino products in their stores.
“[I]f these claims are permitted, the scope of the Lanham Act would be dramatically expanded. False-advertising cases like this one would turn retailers into the guarantors of manufacturers that falsely label their products. The Court declines to construe the Lanham Act so broadly.” [Note that it’s all right for some: contrast the trademark rule.]

The court allowed leave to replead, but cautioned that “re-litigating the issues raised in the instant motions through future frivolous, repetitive filings will result in the imposition of sanctions, including dismissal, monetary sanctions, and restrictions on the ability to file pleadings in this court.”

Outlaw Laboratory, LP v. Trepco Imports & Distribution, Ltd., 2019 WL 1173347, No. 18-cv-00369-JAD-CWH (D. Nev. Mar. 11, 2019)

Outlaw sued two wholesalers and eight retailers of competing male-enhancement products for falsely advertising “all natural” composition while containing synthetic ingredients like sildenafil nitrate, aka Viagra.  The remaining defendants moved to dismiss on standing grounds. The court found standing, but also that Rule 9(b) hadn’t been satisfied, and dismissed the complaint without prejudice.

In the abstract, defendant-wholesaler Trepco could be sued under the Lanham Act even though it didn’t  manufacture or make packaging. Disseminating the false advertising on the products’ packaging could fall within the language of the Lanham Act (relying on Grant Airmass Corp. v. Gaymar Indus., Inc., 645 F. Supp. 1507, 1512 (S.D.N.Y. 1986) (finding that defendant who independently distributed and presented false report that it used against plaintiff competitor could still be liable for false advertising)), a contributory infringement case not cited by the other Outlaw opinion above.  Nonetheless, the specific allegations here weren’t enough; the complaint lumped the defendants together too much and didn’t specify which claims are made by which product or what products Trepco allegedly sold.

Claims against the retailer defendants failed for similar reasons, though the court also rejected their Article III standing argument. “In a false advertising suit, a plaintiff establishes Article III injury if some consumers who bought the defendant’s product under a mistaken belief fostered by the defendant would have otherwise bought the plaintiff’s product.” To do so, a plaintiff may “provide direct proof such as lost sales figures, or may rely on ‘probable market behavior’ by establishing a ‘chain of inferences showing how defendant’s false advertising could harm plaintiff’s business.’”  Outlaw’s allegations that the sales of the accused products hurt sales of its competing products sufficed, even without “solid data,” at the pleading stage.  It properly alleged that the retailer-defendants’ acts of putting the accused products out for sale harmed its own sales.  Likewise, Outlaw pled statutory standing, even though the parties aren’t direct competitors.  (Actually, it sounds like they are—Outlaw alleged that it both made and sold its products directly to consumers, which sounds like it’s in competition with anyone in the chain.)  The court accepted that, as manufacturer of these sexual performance supplements, Outlaw was in direct competition with “those who manufacture, sell, distribute[,] and market sexual performance enhancement products” and targeted the same customers, which allegations were enough for Lanham Act standing.

Outlaw, however, made insufficiently specific allegations about how it knew the retailer-defendants sold the products, when the retailers stocked them, or how they disseminated the allegedly false messages: “were the products merely on a shelf available for purchase, or did the retailers display them in some prominent way?” Rule 9(b) required more.

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