Thursday, June 27, 2019

Court formulates survey question in consumer protection case

Moorer v. Stemgenex Medical Group, Inc., No. 16-cv-2816-AJB-NLS, 2019 WL 2602536 (S.D. Cal. Jun. 25, 2019)

This “complex and troubling case” involves allegedly false advertising of stem cell treatments; the court found it “narrowly” certifiable and—unusually—specified the consumer survey questions to be asked by an expert seeking to test materiality/damages. Plaintiff brought the usual California claims, and an elder abuse claim, against defendants, alleging that they falsely and without support claimed that the treatments “effectively treat a multitude of diseases.” [Sounds like the FDA should be taking notice, too, as it has for other stem cell promoters.]  They allegedly advertised that “100% of its prior consumers are satisfied with its service” (“Patient Satisfaction Ratings” or “PSR”), while omitting material information about its services, including consumer dissatisfaction and complaints regarding the ineffectiveness of the treatments. Plaintiff Moorer, suffering from lupus, and plaintiff Gardener, suffering from diabetes, each allegedly relied upon the customer satisfaction statistics and paid $14,900 for the treatment, did not benefit from the treatment, and told defendants. They alleged that they would “not have paid for the Stem Cell Treatment had they known that the statistics on the StemGenex website regarding consumer satisfaction were false, and that StemGenex had no reasonable basis for its marketing claim that the Stem Cell Treatments were effective to treat diseases as advertised.”

Defendants sought to strike an expert report analyzing what effect the PSR had on a consumer’s decision to purchase the treatment. The court denied the motion; the expert had relevant expertise in consumer behavior and marketing.  The proposed survey to determine damages would ask, in essence, (1) how important is the recommendation of previous customers to your decision to pursue a medical procedure, and (2) how important are price differentials in out-of-pocket expenses for a procedure.  Then it proposed to ask:

Assume that there was a procedure that could substantially improve [their medical condition]. The procedure costs $14,900, all of which you would have to pay yourself. Everyone who has had the procedure (100% of all patients receiving the procedure) report satisfaction with the results, that is, all patients reported that the procedure met or exceeded their expectations and were satisfied or extremely satisfied with the outcome. Now assume that you are considering this procedure and learn that not all patients were satisfied. In fact, you learn that only 50% of all patients who obtained the procedure reported any major improvement. Would you still consider this procedure given what you now know about the potential benefit?

The proposed answers were: Yes, I’ll try anything that might help; Yes, if I were offered a discount on the price; No; or Don’t know. For those who indicated they required a discount, the respondents would then be asked how much of a discount they would want, starting with a minimum discount of 5% and up to “more than 65%.”

The court found that this was a relevant question, but directed that it be changed to match the actual language defendants used, with this as an example (it could be changed but had to follow the court’s basic directions):

Assume that there was a procedure that could substantially improve [their medical condition]. The procedure costs $14,900, all of which you would have to pay yourself. The providers of the procedure report that 100% of its prior consumers were satisfied with the provider’s service. Now assume that you are considering this procedure and learn that the patient’s statements of satisfaction were obtained in exit interviews following receiving the procedure. Further you learn that only 50% of all patients who obtained the procedure reported any major improvement following the procedure. Would you still consider this procedure given what you now know about the potential benefit?

Comment: The court didn’t explain the legal or factual basis for the change, but it might well have some interesting effects on the answers.  In particular, the revision makes it much clearer—without saying as much—that the providers misleadingly advertised satisfaction.  (“Satisfaction” itself can be misleading because reasonable consumers are likely to focus on the medical effects of the procedure, not on whether the procedure seemed to go as planned, which is the only question patients can answer at an exit interview.) The extra element of learning that the providers overclaimed might have independent effects on consumers’ willingness to trust the underlying procedure, as compared to a question (perhaps in a control group) in which the consumers are given the truth at the outset and the 100% satisfaction claim never appears.  There is no neutral baseline from which to assess the appropriate question; I definitely see the case for asking people whether it would matter that the provider misstated the truth, because that can and probably should matter to consumers in taking a chance on an unproven medical treatment.

Another expert report purportedly showed that a pie chart in defendants’ advertising was material and misleading.  In a survey, respondents were shown screenshots of the defendants’ web homepage on two different dates. One group saw four pie charts regarding satisfaction with overall experience, the medical team, if StemGenex was a trusted partner, and whether patients would recommend StemGenex. The other group saw a screenshot with nine pie charts, however, in this version all pie charts included a disclaimer stating, “patient satisfaction ratings above represent data received from patient exit surveys evaluating patient experience and care, accommodations, staff and facilities.” The survey asked respondents to rank various statements which appeared on the screenshots to show which statement “most generated [their] interest in StemGenex stem cell therapy.” There was only one specific option based from factual information, selected from the overall experience Pie Chart; the others were puffery. Anything ranked in the top four was considered material.

The next part of the survey asked respondents what they thought patients were referring to in the Overall Experience Pie Chart. Respondents were given five options, one of which being effectiveness of the product. Defendants argued that only 38% stated the Pie Chart meant effectiveness, though that would be a pretty big number in a Lanham Act case. Without a control group, defendants argued, the survey couldn’t determine causation.  Plaintiffs argued that the survey compared two versions of the same page—which is true; the survey does effectively test whether the disclaimer does any work to change the meaning consumers take away from the pie charts/diminish the message that the procedure is medically effective.  But they also argued that there was no control group (as to the pie charts) because the research goal was to examine “the presence or absence” of the patient satisfaction ratings to causally establish the impact the charts had on the consumers’ decisions whether to undergo stem cell therapy.  Plaintiffs, and possibly everyone, got a little mixed up about distinguishing what the control should be from whether there is a control.  As I noted above, choice of proper control is a normative decision; the best discussion is Richard Craswell, “Compared to What?”: The Use of Control Ads in Deceptive Advertising Litigation, 65 Antitrust L.J. 757 (1997).  Anyway, the court said that the report couldn’t be used to show causation, but could be used to show materiality of the pie chart.  “The simple fact is that Defendants put out an overly vague statement and created confusion where different interpretations might lie. Defendants cannot then turn around and use that confusion as a shield.”

As for certification, though there were concerns about variation among patients, “this is a marketing case, not a medical one,” and even though damages might differ that wouldn’t prohibit class treatment.  Similarly, defenses such as whether consent forms cured any misrepresentations before the treatment [consumer protection law answers no by prohibiting bait and switch techniques] were applicable to the entire class.  Defendants argued that consumer motivations for the therapy were highly varied and individualized, but the common questions weren’t affected by those motivations: (1) whether Defendants misrepresented the PSRs; and (2) whether the misrepresentation was likely to deceive a reasonable consumer.  Under the relevant laws, the plaintiffs only need to show that members of the public were likely to be deceived—no proof of individualized reliance would be necessary. Although there was varying testimony about what named plaintiffs remembered about the PSR/pie charts, only exposure was necessary classwide, not reliance. And under the CLRA, reliance is inferred for fraudulent and negligent misrepresentation claims if material misrepresentations are made to an entire class.

law firm raises significant 1A questions over nursing home-specific advertising law

Wilkes & McHugh, P.A. v. LTC Consulting, L.P., --- S.E.2d ----, 2019 WL 2570982 (Ga. Jun. 24, 2019)

Georgia revised its anti-SLAPP law to be more like California’s (though apparently without the exception for commercial advertising) and the state supreme court here interprets the revised version for the first time, sending the case back to the trial court for some actual findings about whether the law at issue violates the First Amendment.

LTC Consulting sued law firm Wilkes & McHugh, P.A. and one of its attorneys for violations of a Georgia statute governing nursing home-related advertising, deceptive trade practices, and false advertising after the defendants ran full-page advertisements in local newspapers targeting patients of plaintiffs’ nursing homes.

The ads arose “from acts that could reasonably be construed as acts in furtherance of the defendants’ right of free speech under the United States Constitution in connection with an issue of public interest or concern,” triggering the anti-SLAPP law and shifting the burden to the plaintiffs to establish that there was a probability that they would prevail on their claims. But “the parties and the trial court overlooked certain preliminary questions, which also have not been adequately briefed here.” Specifically, the trial court thought plaintiffs had sufficiently shown a likelihood of success on violation of the nursing home advertising law, but that law itself (1) might not cover defendants’ ads (though it sure looks like it would) and (2) might be unconstitutional if it did.  Those issues had to be resolved before likelihood of prevailing could be assessed. Back to the trial court they go!

I’m much more interested in the underlying First Amendment question than the anti-SLAPP part.  Defendants ran ads referring to specific nursing homes and to the results of one or more legally required government “surveys,” or inspections, of the nursing home named in the ad.  Each ad stated across the top in a large font and all capital letters, “THIS IS A LEGAL ADVERTISEMENT,” followed by a larger, reverse-background stripe stretching all the way across the page and containing the contrasting words “IMPORTANT NOTICE” in a still larger font.

The ads stated, “If your loved one has been a resident at” [nursing home name/address, with the name very large], “[t]his facility has been cited for multiple deficiencies* including” multiple paragraphs, each beginning with the word “FAILURE.” The text “purported to recount the deficiencies for which each nursing home had been cited in a government survey conducted on one or more dates listed. The text also stated the date by which each deficiency was corrected and described the level of harm from each deficiency and the number of residents affected.” Then there was a “densely worded” asterisked paragraph “that, among other things, said that the ads were not authorized or endorsed by any government agency, provided information on the survey process and average numbers of cited deficiencies at nursing homes in Georgia and in the United States, and listed a government website where those interested could find additional information.”  The ad then said, in large font, “POOR CARE AND UNDERSTAFFING CAN LEAD TO: BEDSORES, CHOKING, FALLS, BROKEN BONES, DEHYDRATION, INFECTIONS/ SEPSIS, MALNUTRITION, OR UNEXPLAINED DEATH” and solicited people with loved ones who were residents to contact defendants.

Plaintiffs alleged that 91% of nursing homes surveyed are found to have “deficiencies” and that the defendants did not include in the ads all the information required by the law, and also that the ads deceptively omitted important facts and falsely implied that residents of the plaintiffs’ nursing homes had suffered “BEDSORES,” “BROKEN BONES,” and “DEATH” from the cited deficiencies. One ad allegedly falsely stated that four of the deficiencies “constituted minimal harm or the potential for actual harm,” when in reality those four deficiencies were cited at the “D” level, meaning that there was no actual harm.

Plaintiffs alleged violation of OCGA § 31-7-3.2’s recently enacted subsection (j), which imposes limitations on advertisements that use or reference the results of federal or state surveys or inspections of nursing homes, as well as Georgia’s Uniform Deceptive Trade Practices Act and two state false advertising statutes, one specific to ads for legal services.  The trial court granted a TRO, which enjoined the defendants from publishing “any false, fraudulent, deceptive and misleading advertisements concerning the Plaintiffs”; the existing ads, and other ads not complying with the nursing home-specific law.

The nursing home law says:

(j)(1) The results or findings of a federal or state survey or inspection of a nursing home facility, including any statement of deficiencies or reports, shall not be used or referenced in an advertisement or solicitation by any person or any entity, unless the advertisement or solicitation includes all of the following:

(A) The date the survey was conducted;

(B) A statement that the Department of Community Health conducts a survey of all nursing home facilities at least once every 15 months;

(C) If a finding or deficiency cited in the statement of deficiencies has been substantially corrected, a statement that the finding or deficiency has been substantially corrected and the date that the finding or deficiency was substantially corrected;

(D) The number of findings and deficiencies cited in the statement of deficiencies on the basis of the survey and a disclosure of the severity level for each finding and deficiency;

(E) The average number of findings and deficiencies cited in statements of deficiencies on the basis of surveys conducted by the department during the same calendar year as the survey used in the advertisement;

(F) A disclosure of whether each finding or deficiency caused actual bodily harm to any residents and the number of residents harmed thereby;  and

(G) A statement that the advertisement is neither authorized nor endorsed by any government agency.

(2) In addition to any other remedies and damages allowed by law, a party found to have violated paragraph (1) of this subsection shall be liable for attorney fees and expenses of litigation incurred in an action to restrain or enjoin such violation;  provided, however, that damages, attorney fees, and expenses of litigation shall not be recoverable against any newspaper, news outlet, or broadcaster publishing an advertisement or solicitation submitted by a third party for a fee.

RT: The newly enacted provision is pretty clearly enacted to protect nursing homes against negative reputational consequences from surveys/inspections, and I understand why—no one likes dirty laundry aired, and it is also the case that things labeled deficiencies might not necessarily be all that bad—risky, or diagnostic of imperfect procedures, which is itself not a great thing but may be common enough that no nursing home could expect to be above reproach. And one might further conclude that consumers are likely to overweight officially reported deficiencies compared to their actual seriousness—but that conclusion will have a hard time weathering current First Amendment scrutiny.  Doing this as a disclosure regime helps, but courts vary in the degree of rigor with which they evaluate how burdensome a disclosure like this can be. I wonder if the regulators could instead relabel minor deficiencies as “concerns” (or, heck, “fizzbins”), leaving the same regulatory consequences (if you don’t remediate concerns sufficiently, you can lose your license, etc.) without requiring as much regulation of advertising.

Anyway, lawyer advertising has some First Amendment protection, and “the alleged existence of serious injuries and deaths at local nursing homes resulting from deficiencies known to a government agency certainly qualifies as a public issue or an issue of public concern. Thus, running the ads could reasonably be construed as an act in furtherance of the defendants’ constitutional right of free speech in connection with a public issue or an issue of public concern,” so the anti-SLAPP law’s threshold requirements had been met.  Plaintiffs were thus required to demonstrate that their claims were both legally sufficient and supported by a sufficient prima facie showing of facts to sustain a favorable judgment if their evidence is credited. In doing that, the plaintiffs’ evidence is accepted as true, and the defendants’ evidence is evaluated only to determine if it defeats the plaintiffs’ showing as a matter of law.

The trial court said only that plaintiffs demonstrated a probability of prevailing “by submitting a verified complaint citing to the Georgia statute limiting the use of survey data and by prevailing on their temporary restraining order on the same issue before this Court.”  The transcript revealed no further explanation. That wasn’t enough.  First, the court thought that the law establishing Georgia’s regulatory framework for hospitals and related institutions was “an unlikely place to find a statute regulating attorney advertising” and might contemplate enforcement only by the AG, not private parties.  “If the most natural reading of the statutory text is that the cited statutes do apply to the defendants’ ads, there is a constitutional separation of powers issue that might require reading them not to apply. There is also a significant First Amendment issue with respect to the application of each statute here,” which wasn’t adequately addressed. Given that “the particular claims at issue in this case implicate complex and important questions of statutory interpretation and constitutional law,” the trial court should go back and do that.

Wednesday, June 26, 2019

failure to show causation dooms duelling flange false advertising claims

Boltex Mf’g Co. v. Galperti, Inc., 2019 WL 2568338, No. H-17-1439 (S.D. Tex. Jun. 21, 2019)

This is a false advertising and unfair competition case about normalization, “a costly heat treatment process that changes the physical composition of carbon steel to increase its toughness and ductility.” ASTM standards require heat treatment for certain types of flanges; normalization is one available method, and though the standards don’t require it,  many customers do.  Boltex alleged that defendants advertised their flanges as normalized when they aren’t. Galperti counterclaimed that: (1) plaintiffs Boltex and Weldbend falsely advertised their products as “Made in the USA” and/or “American Made”; (2) Weldbend made misrepresentations regarding the “traceability” of its flanges from manufacture in the US through to the customer and yield strength; and (3) Boltex made misrepresentations in the Reference Manual published on its website.

Defendants argued that plaintiffs couldn’t show harm. Plaintiffs argued that this was a comparative advertising case in which harm could be presumed, but it wasn’t enough to argue that Galperti sells the same type of flanges or uses “Boltex’s own price list in describing [their] flanges” in an email exchange, where there was no explicit comparison.  There was evidence that Boltex is one of the few companies that offers a price sheet and that many competitors may use Boltex’s price sheet as a guideline to set their prices.

Anyway, it wouldn’t make sense to presume harm here. The presumption exists because “[a] misleading comparison to a specific competing products necessarily diminishes that product’s value in the minds of the consumer.” There is no reason to suggest that the value of plaintiffs’ flanges was diminished by use of the price sheet.

There was no admissible evidence of injury. Plaintiffs offered only hearsay from their salespeople who said that customers told them they’d gone with defendants instead.  [Note that it’s not hearsay when the salespeople testify that customers told them that defendants had offered the same product for less, because those customer statements are not submitted for the truth of the matter asserted.]  Motion for summary judgment granted.  I find this result a bit surprising, assuming the underlying correctness of the falsity allegations, but it gives plaintiffs a hell of an advertising tool.

Fortunately for plaintiffs, I guess, defendants also couldn’t show causation in their counterclaims.  “In some cases, a party need not provide direct evidence of injury if the party provides evidence that the parties were competitors and that the plaintiff was in some way injured.” But the jury still needs sufficient evidence to make the inference.  [I would have thought that the vital materiality of normalization would have counted in this case; if there’s a real subset of customers that won’t buy without it, and if plaintiffs set the standards in the industry with their price sheet as the reference point, I would’ve let the jury see it.]  There wasn’t evidence that would allow a jury to infer that the parties compete in the market for US-sourced flanges [which is to say that the alleged misrepresentations most obviously harm other, truthful “made in the USA” advertisers—though that itself seems dubious; it’s easy to imagine people who prefer made in the USA if they don’t have to pay too much of a premium for it but do choose between multiple national origins.]  It wasn’t enough to have Boltex’s president’s statement that he “generally considers flanges that are made from U.S. material and flanges made from non-US material to be competing with each other.” [Again, seems like grist for an ad campaign, if the charges are accurate.]

The probiotic worm turns: previous PI loser wins $15 million in Lanham Act case

De Simone v. VSL Pharmaceuticals, Inc., No. TDC-15-1356, 2019 WL 2569574 (D. Md. Jun. 20, 2019)

Previous discussions.  The parties compete in offering a probiotic product; De Simone used to license his formulation to VSL, then went out on his own.  VSL had done well in previous iterations of this case in preventing the De Simone parties from, among other things, truthfully referring to scientific studies of the De Simone formulation where the studies used the then-current VSL trademark to identify the object of study, a restriction I think violates the First Amentment.  But before a jury, De Simone did well, and the court declined to disturb that result. The jury awarded $15 million against Alfasigma for Lanham Act false advertising.  De Simone’s new partner, ExeGi, sought a permanent injunction against defendants Leadiant and Alfasigma, and they also asked for attorney’s fees, costs, and pre- and post-judgment interest.

ExeGi asked the jury to award it nearly $28 million, representing Alfasigma’s profits from sales of VSL#3 from July 1, 2016 through the end of trial.  A court has discretion to enter judgment for a “just” sum of the defendant’s profits, as long as it’s compensation and not a penalty.  Relevant factors, derived from trademark cases, are: (1) whether the defendant had the intent to confuse or deceive, (2) whether sales have been diverted, (3) the adequacy of other remedies, (4) any unreasonable delay by the plaintiff in asserting his rights, (5) the public interest in making the misconduct unprofitable, and (6) whether it is a case of palming off. The court declined to disturb the jury verdict.

The evidence established that the VSL parties’ senior management “knew that in producing a new version of VSL#3 in Italy (“Italian VSL#3”), they had not been able to precisely replicate the original proprietary mix,” so the false advertising was deployed with the intent to confuse or deceive. There was testimony supporting a finding of sales diversion, and the false advertising “had the effect of ‘palming off’ Italian VSL#3 as the same as the original VSL#3 product now sold by ExeGi as Visbiome.”  [VSL can’t truthfully advertise based on the older scientific studies; as I noted before, to say that ExeGi can’t use those studies either because the trademark no longer matches the formulation is perverse.]  ExeGi was a new company so its own lost profits weren’t adequate compensation; it didn’t delay in asserting its claims; there’s a public interest in not being misled “into believing that a particular product offered to address health needs will have the same efficacy as a trusted product when that has not been established.” However, there wasn’t definitive evidence that differences between the formulations rendered new VSL #3 “unsafe or clinically ineffective for all of its users,” which strikes me as a pretty high standard (would you be happy with a formulation switch that was unsafe/ineffective for 25% of users?).  The jury award wasn’t excessive, but was “sufficiently substantial,” given ExeGi’s status as a startup with limited marketing resources.

Permanent injunction: In passing off new VSL #3 as the De Simone formulation, defendants deprived the De Simone parties “of a legitimate competitive advantage and reduced consumers’ incentive” to purchase their product Visbiome, which actually contains the De Simone formulation, which constituted irreparable injury: it led consumers not even to consider switching. The monetary remedy was inadequate compensation, because past awards didn’t prevent the offender “from infecting the marketplace with the same or similar claims in different advertisements in the future.” Plaintiffs argued that Alfasigma continued to advertise a continuity between new VSL#3 and the De Simone formulation, and ExeGi’s CEO provided uncontradicted trial testimony that this false claim was hampering ExeGi’s ability “to leverage the benefits of the brand,” so money was inadequate.  The balance of hardships also favored an injunction; ExeGi, “cannot fairly compete” until Alfasigma and Leadiant “stop[ ] infecting the marketplace with misleading advertising.” And stopping false advertising is in the public interest, especially for health-related products.

However, defendants wouldn’t be required to make affirmative statements about ExeGi’s Visbiome and to issue corrective advertising. Instead, the injunction would target defendants repeated false assertions in their advertising that new VSL#3 continued to be composed of the De Simone formulation, including but not limited to statements claiming that VSL#3 continues to contain the “original proprietary blend” or the “same mix in the same proportions.”  This was false vecause new VSL#3 was an attempt to reverse engineer the original formulation and wasn’t an exact replication.  The VSL parties were also enjoined from citing any clinical study performed on the De Simone formulation or implying that any such study was conducted on new VSL#3.  [Thought experiment: assume the FTC/FDA argued that VSL couldn’t engage in such advertising.  What First Amendment standard would you expect a court to employ?  Should a court accept “they’re not the same” as enough evidence of falsity without proof that the differences made a clinical difference?]

Attorneys’ fees: ExeGi prevailed on its false advertising claims, and the VSL parties voluntarily dismissed their Lanham Act trademark/false advertising claims with prejudice, making the De Simone parties prevailing parties for all the Lanham Act claims in the case.  Still, under Octane Fitness, a fee shift was unwarranted; “there was no unusual discrepancy in the merits of the parties’ positions,” especially given that the VSL parties got two preliminary injunctions. And even though the jury didn’t credit the VSL parties’ evidence on the equivalence of the parties’ products, that didn’t mean their arguments were frivolous or objectively unreasonable, and the jury didn’t necessarily find bad faith.

As for the manner of litigation, neither party covered itself in glory.  Nor was a fee award necessary for compensation and deterrence given the damages and injunctive relief achieved.

De Simone v. VSL Pharmaceuticals, Inc., No. TDC-15-1356, 2019 WL 2570068 (D. Md. Jun. 20, 2019)

Here’s the related Rule 50/Rule 59 decision, rejecting defendants’ motions.  Along with the $15 million to ExeGi from Alfasigma, the jury awarded almost $1 million to De Simone from VSL for breach of contract and almost $1.9 million for unjust enrichment from VSL and defendant Leadiant, and rejected VSL’s counterclaim against De Simone alleging breach of fiduciary duty.

Rule 50: A district court may overturn a jury verdict by rendering judgment as a matter of law only if there is no “legally sufficient evidentiary basis to find for the [prevailing] party on that issue.”  Alfasigma argued that none of its challenged ads met all the elements of a Lanham Act claim. The claim turned largely on three challenged items: a page of the VSL#3 website entitled “VSL#3: new formula dairy-free,” a similar press release, and statements made on the VSL#3 Facebook page.  Viewed in the light most favorable to ExeGi, the evidence was enough to show that, at a minimum, the webpage satisfied all the elements of false advertising, since it claimed that the manufacturer had “revert[ed] back to an established process that removes all dairy while maintaining the original proprietary mix of eight strains of live bacteria.” Likewise, Leadiant’s letter to healthcare providers, which was sent to hundreds of doctors around the United States, also constituted false advertising when it stated that “VSL#3 is the same quality product, containing the same genus and species of bacteria, in the same proportions that you have come to expect.” Both the webpage and the letter “were disseminated in a manner sufficient to constitute commercial advertising placed in interstate commerce.”  There was sufficient evidence of literal falsity. ExeGi submitted expert testimony that the new version of VSL#3 had only seven strains of live bacteria, not eight, and that based on a fermentation analysis, the two products would degrade compounds differently and thus function differently. VSL’s president/CEO also acknowledged that in reverse engineering the formulation, “you can determine a certain range of the presence of the strains but you cannot precisely assess the exact quantity of the strains,” so its scientists were “not able to give a precise indication of the percentage of each strain[ ] contained” in VSL#3, or a “formal” range for such proportions, but instead could only measure the amount of each strain with a margin of error of 30 percent.

Alfasigma argued that, under the terrible In re GNC Corp., 789 F.3d 505 (4th Cir. 2015) decision, “when the statement underlying a Lanham Act false advertising claim is based on scientific representations, the statement cannot be found to be literally false unless ‘all reasonable experts in the field agree that the representations are false.’” VSL’s expert testified that VSL#3 had eight strains of bacteria, and that the relative ratios of strains was “indistinguishable within one percent,” but he didn’t testify that the ratio of the strains in Italian VSL#3 were the same as the “original proprietary mix” of the De Simone formulation.  The court misdescribed GNC as involving a Lanham Act false advertising claim—it was a California state law claim and thus GNC’s mangling of Lanham Act distinctions was dicta as to Lanham Act claims—but also emphasized the language that “[w]hen litigants concede that some reasonable and duly qualified scientific experts agree with a scientific proposition, they cannot also argue that the proposition is ‘literally false.’ ” The court here concluded: “GNC thus does not broadly hold that a false advertising claim based on a statement grounded in science must fail if the defendant presents an expert witness supporting its position. In the absence of a concession that the statement is the subject of reasonable scientific debate, that question is properly decided by the jury.” 

Indeed, the court [unnecessarily] gave a defendant-friendly jury instruction that: “If an alleged false statement states a scientific proposition, and you find that there is a reasonable difference of scientific opinion about that proposition, that is, duly qualified experts in the field have a reasonable disagreement about the accuracy or validity of the proposition, the challenged statement is not ‘literally false.’” The jury could reasonably conclude that to the extent there was a disagreement about the number of strains in Italian VSL#3, or whether Italian VSL#3 contained the same original proprietary mix as the De Simone formulation, it wasn’t a reasonable disagreement. The plaintiffs presented other evidence and experts beyond those already described: an expert in the field of proteomics, the study of how genes produce proteins and what proteins they produce, stated that based on his comparative proteomic testing of VSL#3 and Visbiome, “the two products were very different,” with a 25 percent difference in the protein expression of new VSL#3 and Visbiome, meaning that of the approximately 4,000 proteins identified in the two products, about 1,000 of them were different. The expert concluded that this difference in protein expression would “result in different performance.” A Professor of Gut Physiology and Pediatric Gastroenterology at Harvard Medical School who testified as an expert in the use of probiotics for the management of gastroenterological and immunological disorders stated that based on his review of various scientific studies comparing the De Simone formulation with new VSL#3 that “the new formulation from Italy is not ... comparable to the formulation that is from the United States.”

Plus, the jury could have concluded that the number of strains or the proportion of those strains were different based on “non-scientific evidence,” to wit, regulatory filings made by VSL to Health Canada in 2013 and 2018 describing the composition of VSL#3 differently (with eight strains and seven strains respectively).  What makes this “non-scientific”?  GNC is nonsense, and nonsense decisions create nonsense distinctions.

Anyway, there was also evidence that the challenged materials were literally false when they said that the manufacturing of VSL#3 would be “moving back to “the original manufacturing facility in Italy,” and produced “in the same facility that [VSL#3] was originally produced,” since VSL#3 had “always” been produced for commercial sale in manufacturing facilities in the United States.

Materiality: The false statements on the number and proportions of strains were “plainly” material because they related to an “inherent quality or characteristic” of VSL#3. Plaintiff’s expert testified that new VSL#3 was not comparable to the De Simone formulation; that, based on those differences it was “not appropriate” to conclude that Italian VSL#3 is the same product studied in prior clinical trials; and that no doctor would prescribe a product that was not itself the subject of clinical tests. And the jury could reasonably infer that the false claim that new VSL#3 was being made in the “original manufacturing facility” could influence purchasing decisions by causing purchasers to mistakenly believe that new VSL#3 and the De Simone formulation were actually the same and that new VSL#3 was supported by the history of clinical trials relating to the De Simone formulation.  Because of the literal falsity, deception was presumed.

Injury/proximate causation: The jury could reasonably find this too. ExeGi’s CEO testified that Alfasigma’s advertising made it hard for ExeGi to leverage the fact that it had the “real” De Simone formulation.  Plaintiff’s expert testified that the change in manufacturing locations for VSL#3 and the move to a dairy-free formulation meant it was neither appropriate nor accurate to claim that VSL#3 continued to be the “same quality product containing the same genus and species of bacteria in the same proportions that you have come to expect,” and that to make such a claim would require VSL#3 to be subjected to efficacy testing to ensure continuity of outcomes. In total, it was reasonable to conclude that false advertising about the continuity between original VSL#3 and new VSL#3 was leading physicians to continue to prescribe VSL#3, and thereby fail to prescribe ExeGi’s product.

Alfasigma argued that ExeGi showed only correlation, not causation.  But the evidence about doctors’ demand for clinical trials, and evidence that it was important to dieticians to know what strains of bacteria were in VSL#3 and whether those strains matched up with the product that was the subject of clinical tests so that they could make informed recommendations to her clients, was enough for the jury to reasonably find injury/likely injury.  Unlike in cases cited by Alfasigma, there was no evidence from purchasers about other reasons they chose new VSL#3 over Visbiome, or other competitors over Visbiome.  More fundamentally, unlike in those cases, the false statements at issue weren’t just one reason among many to buy the product; they were “passing off” of one product for another. The jury could conclude that there was demand for the De Simone formulation specifically and that Alfasigma falsely promised to satisfy that demand.

The profits award was also ok.  A plaintiff who seeks defendant’s profits must show that the defendant benefited from the false advertising, and the evidence supported such a finding.

The court likewise upheld the unjust enrichment verdict based on continued sales of original VSL#3 past the exclusive license date. Under Kimble v. Marvel Entertainment, LLC, 135 S. Ct. 2401 (2015), licensing provisions providing for “post-expiration royalties are allowable so long as tied to a non-patent right—even when closely related to a patent.” Here, the situation was exactly like Kimble’s example of a post-patent royalty tied to trade secrets. De Simone’s exclusive licenses covered first his patent and later his know-how even after the expiration of the patent; although the royalty amount didn’t decrease post-patent, at most that would render the royalty provision unenforceable. But the jury found defendants liable not for breach of contract, but for unjust enrichment, because they were able to continue to sell VSL#3 without paying royalties to De Simone for his know-how.

For similar reasons, the court declined to grant defendants’ motion for a new trial. Alfasigma argued that it was error for ExeGi’s false advertising claim to be submitted to the jury because, as ExeGi sought disgorgement, the claim was equitable in nature. But Dairy Queen, Inc. v. Wood, 369 U.S. 469 (1962), held that the plaintiff in a trademark infringement claim who sought the remedy of an “equitable accounting” of the defendant’s profits was entitled to a jury trial. “Although disgorgement may have some history in equity, ExeGi’s claim required nothing more than the adding up of unjustly earned profits, a task well within the ken of the jury.”

Tuesday, June 25, 2019

The Supreme Court and the Tone Argument (Iancu v. Brunetti)

Iancu v. Brunetti, No. 18–302, 588 U.S. --- (Jun. 24, 2019)

Unlike in Tam, we get an opinion for the Court (and unanimity that the bar on registering “immoral” marks is unconstitutionally viewpoint-based), which manages to find consensus by (1) not saying very much and (2) backing away from some of the things in Tam that treated the case like one involving a penalty for an applicant’s speech rather than a failure to give a government benefit to the applicant.  Still doesn’t mention unconstitutional conditions, but because it goes off on viewpoint discrimination the majority doesn’t have to; the concurrence/dissents could have but don’t.  In my opinion, this was the best result given Tam: the Court recognizes, at least implicitly, that much of what the various opinions in Tam said was corrosive of trademark registration generally, and it would have been really ugly to declare that disparagement (which protected all sorts of groups) was viewpoint-based while scandalousness (which protected the sensibilities of the majority only) wasn’t.

Some observations: The distinction the concurrence/dissents would like to make between whether the core message of the applied-for mark is scandalous, or whether the manner of conveying the message is scandalous, could be made, but could benefit from grappling with what registration is.  That is, in theory we’re looking for symbols that perform a source-identifying function.  To the extent that we are distinguishing between FUCT and HAD SEX WITH, however, it’s not their ability to perform a source-identifying function that differs.  Implications: (1) The government’s interest in tone policing isn’t related to the basic purpose of trademark law; this might matter if we did an unconstitutional conditions  analysis, but might not if the Court, as the concurrence/dissents suggested, was willing to accept “incentivize the use of decorous marks” as a legitimate interest.  (2) As a number of others have noted, if we took functioning as a trademark more seriously, many of the parade of horribles that the Court wouldn’t even mention shouldn’t be registrable anyway because their semantic (“informational” or “ornamental”) content overwhelms their ability to serve as source identifiers.

Relatedly, I think it matters that nobody on the Court was willing to say “fuck” or even “the n-word,” resorting to linguistic workarounds that probably do as much as anything else to prove that specific words can have outsized power.  Did they expect a lot of kids to be reading?  And this prurience has doctrinal implication, as multiple opinions shied away from offensive words while insisting that non-offensive versions would convey the same (non-trademark) meanings, such that a ban on registering those words wouldn’t affect meaning.  Although I call bullshit on that as a factual claim, I also don’t think the factual claim is the end of the story.  Only the Sotomayor (partial) dissent cited Cohen v. California, and that was to make the point that Cohen involved a content-based restriction rather than a viewpoint-based restriction.  This is a reasonable argument, but it’s not the end of a real analysis of when a government program of allocating speech rights can engage in content-based restrictions.  And since the Court didn’t bother to reject the Federal Circuit’s reasoning—which relied on the bars at issue being content based and subject to intermediate scrutiny—we are far from done with this issue.

Specific thoughts on Kagan’s opinion for the Court: The opinion rejects the government’s attempt to rewrite the statute to focus on whether the way in which the applicant’s (non-source-identifying) message is expressed is scandalous, regardless of whether the message itself gives wide offense.  It’s perhaps not surprising that the opinion doesn’t discuss deference to executive branch interpretations of long standing; instead, it suggests that the PTO wasn’t mistaken to interpret the bar more broadly, given the facially broad language of the Lanham Act.  The majority doesn’t opine on a hypothetical statute that covered only “marks that offend by their mode of expression” or “lewd, sexually explicit, and profane marks.” Note that these aren’t the same thing—in particular, the n-word is probably not included in the latter, under an ordinary meaning of profane or profanity (probably a better word given the religious meaning of profane).

The opinion seems on particularly solid ground when it points out that overbreadth analysis is a bad fit for viewpoint-based laws. “Once we have found that a law ‘aim[s] at the suppression of’ views, why would it matter that Congress could have captured some of the same speech through a viewpoint-neutral statute?”

Alito’s concurrence: Vague reference to “viewpoint discrimination” being tolerated in other countries (insert your own example) and “increasingly prevalent” in this country, which is pretty perplexing if you think he’s talking about viewpoint discrimination with the force of law.  (Though perhaps he thinks it’s viewpoint discrimination if the government removes Christian crosses from public memorials or bans discrimination against LGBTQ+ people.)  He’s concurring not because of “moral relativism” (did anyone think he was?) but because “a law banning speech deemed by government officials to be ‘immoral’ or ‘scandalous’ can easily be exploited for illegitimate ends,” so he’s not done treating a registration bar like a speech ban.  FUCT could be denied registration under a more targeted statute, because “fucked” “is not needed to express any idea and, in fact, as commonly used today, generally signifies nothing except emotion and a severely limited vocabulary. The registration of such marks serves only to further coarsen our popular culture.”  So, some content-based regulations are cool.

Roberts, concurring (on “immoral”)/dissenting: Would accept the government’s rewrite of “scandalous” to bar marks that offend only because of their mode of expression.  Notices now, as he didn’t in Tam, that denial of registration is not denial of a right to use—it’s not even a denial of a right to use as a mark—and thus a registration bar requires different First Amendment treatment than a ban on “vulgar” or “profane” marks.  Argues now that the government “has an interest in not associating itself with trademarks whose content is obscene, vulgar, or profane,” without explaining what “associating itself” means in this context, again contra Tam.  Does not want to give “aid and comfort” to those using such marks.

Breyer, concurring (on “immoral”)/dissenting: Would do the same thing, but writes separately to be more of a technocrat and less of a moralist.  Consistent with his long-held views, wouldn’t put as much emphasis on the line between content and viewpoint based regulation, commercial and noncommercial speech, etc.  He would ask whether the regulation at issue “works speech-related harm that is out of proportion to its justifications.”

Maybe trademark registration is simply commercial speech regulation, but he’s not sure, because trademarks have “an expressive component in addition to a commercial one,” though the statute regulates the commercial function of trademarks. Registration isn’t really government speech, though the government “may be loosely associated with the mark because it registers the mark and confers certain benefits upon the owner.”  [Hey, did you know there’s actually empirical research on this by Daniel Hemel & Lisa Larrimore Oullette?  Ordinary citizens apparently are roughly split on whether registration is endorsement, which puts it in the middle of their reactions to what the case law says is clearly government speech and to what is clearly not government speech.]  Also, registration isn’t really a limited public forum, though it has some vague resemblance to one, and also it resembles cases involving government subsidies for private speech.  It’s all a big pudding.

Anyway, he didn’t think that a bar on registration of highly vulgar or obscene words discriminated based on “viewpoint.”  Though these words “often evoke powerful emotions,” they don’t “typically convey any particular viewpoint.”  And though such a bar would be “arguably” content-based, trademark law is content-based (citing Sonia Katyal, Trademark Intersectionality). A registration bar wouldn’t harm First Amendment interests much, because businesses would remain free to use the terms, even as marks, and could still register other marks.  Anyway, trademark is already highly regulated because its mission is to help consumers identify the source of goods or services, which requires limits on speech.  “For that reason, an applicant who seeks to register a mark should not expect complete freedom to say what she wishes, but should instead expect linguistic regulation.” [Have to admit, I find this a non sequitur: it regulates speech for a particular purpose, so it can add in limits for other purposes?  This is the strength of unconstitutional conditions analysis: it asks for a program-related justification rather than just allowing the government to disincentivize speech it doesn’t like because of the accident of having a benefit to hand out.]

What, then, are the government’s competing interests?  (1) Registration makes the government “necessarily ‘involv[ed] in promoting’” the mark. “The Government has at least a reasonable interest in ensuring that it is not involved in promoting highly vulgar or obscene speech, and that it will not be associated with such speech.”  (2) “[S]cientific evidence suggests that certain highly vulgar words have a physiological and emotional impact that makes them different in kind from most other words….  These vulgar words originate in a different part of our brains than most other words. And these types of swear words tend to attract more attention and are harder to forget than other words.”  [Citing a book about swearing (which, in fairness, may have actual citations) and a study, since this is not in the record.] Such words may today include “race-based epithets.” He continues:

These attention-grabbing words, though financially valuable to some businesses that seek to attract interest in their products, threaten to distract consumers and disrupt commerce. And they may lead to the creation of public spaces that many will find repellant, perhaps on occasion creating the risk of verbal altercations or even physical confrontations. (Just think about how you might react if you saw someone wearing a t-shirt or using a product emblazoned with an odious racial epithet.) The Government thus has an interest in seeking to disincentivize the use of such words in commerce by denying the benefit of trademark registration.
Finally, although some consumers may be attracted to products labeled with highly vulgar or obscene words, others may believe that such words should not be displayed in public spaces where goods are sold and where children are likely to be present. They may believe that trademark registration of such words could make it more likely that children will be exposed to public displays involving such words. To that end, the Government may have an interest in protecting the sensibilities of children by barring the registration of such words.

Thoughts: (1) if your goal is deterrence, then ordinary First Amendment jurisprudence does ask (a) does the government have a legitimate interest in deterring, as opposed to not being associated with, the speech at issue? and (b) will it work?  The parenthetical explicitly collapses the freedom to use the term with the freedom to register the mark—and imagines what is likely a non-trademark use, to boot.  Given that Breyer has already rested a lot of weight on continued freedom of use, and also argued that private companies have incentives to use these terms to attract attention to their wares despite overall harm to society, this reasoning is incoherent.  I am generally sympathetic to Breyer’s desire not to be so rigid in categories, but there is a point to asking about whether the speech suppressive measure at issue actually addresses the harm the government has posited.  (2) The second paragraph is even worse.  Some people “may believe” normative and causal claims—well, are they right?  Even if they’re not right, did we come to have the “scandalous” bar by some process in which the legislature reasonably accepted their arguments or evidence, to which the Court should defer?  [Answer: No, that’s not what happened because that’s not what Congress thought it was doing or needed to do.]  

Anyway, he would’ve accepted the government’s narrowing construction for this facial challenge, trusting to internal agency review to make sure that the PTO didn’t fall back on its old, bad ways of considering meaning.

Sotomayor, concurring (on “immoral”)/dissenting, joined by Breyer: Would have accepted the government’s proposal to limit “scandalous” to obscenity, vulgarity, and profanity/terms that are offensive because of their mode of expression and not their content (because she’s outvoted, she doesn’t need to reconcile the differences between these or explain how the n-word would be covered).  I don’t have much background in the law of limiting constructions; the opinion reads to me as coherent and plausible on this point even if I don’t find the specific project to be worth very much.

Sotomayor recognizes that these would be content-based limits, with possibly incidental effects on viewpoints, but that is ok when the content is sufficiently bad (e.g., a ban on fighting words). [More to the point, it can also be ok when there’s a government program involved.]  “Governments regulate vulgarity and profanity, for example, on city-owned buses and billboards, on registered vessels, and at school events.”  Cohen v. California was no help to Brunetti because that was a content-based speech prohibition.  It’s true that “without the profanity, the message is not quite the same,” but that just gets profanity into the loving arms of the First Amendment.  [Sotomayor’s excellent discussion of past precedent highlights why Tam didn’t involve viewpoint discrimination: it prohibited disparagement of anyone, rather than aiding a particular side in any debate, just as she explains that other restrictions of “mode” are content-based rather than viewpoint-based.]

Once we aren’t talking about viewpoint-based discrimination, it matters that registration is a discretionary government program.  Although four Justices in Tam [wrongly] refused to analogize to other government subsidy programs, we can usefully understand registration as a “beneficial, noncash governmental program,” or as something like a limited public forum.  Either way, “reasonable, viewpoint-neutral content discrimination is generally permissible under either framework.”  (Footnote: not every registration system would deserve the same treatment, “whether because not every such system invites expressive content like trademarks or simply because other forms of registration may not be so ancillary as to qualify solely as a ‘benefit.’”  I’d think this was aimed at copyright in particular, but the reference to “expressive” is unfortunate for that.)

What are the government interests making this content-based regulation reasonable?Apart from any interest in regulating commerce itself, the Government has an interest in not promoting certain kinds of speech, whether because such speech could be perceived as suggesting governmental favoritism or simply because the Government does not wish to involve itself with that kind of speech. While ‘there is no evidence that the public associates the contents of trademarks with the Federal Government,’ registration nevertheless entails Government involvement in promoting a particular mark. Registration requires the Government to publish the mark, as well as to take steps to combat international infringement. The Government has a reasonable interest in refraining from lending its ancillary support to marks that are obscene, vulgar, or profane.”

Sotomayor, less a technocrat than Breyer, would want courts and not just the PTO to police refusals for overextension of “scandalousness” on an as-applied basis. Sotomayor also identified some other provisions that could be next on the chopping block: §1052(b) (no flags or insignias); §1052(c) (no unapproved markers of deceased U. S. Presidents during the lives of their spouses).  But since the majority goes off on viewpoint discrimination, they’re likely safe from the Supreme Court’s holding here, if not from the Federal Circuit’s reasoning below.

Thursday, June 20, 2019

lack of specifics, even with certification involved, dooms falsity claim

Hydro-Blok USA LLC v. Wedi Corp., 2019 WL 2515318, No. C15-671 TSZ (W.D. Wash. Jun. 18, 2019)

Wedi and Hydro-Blok compete in the market for construction materials and sealants for use in bathroom systems, including showers. Wedi accused Hydro-Blok of infringing a patent in 2014; Hydro-Blok filed a declaratory judgment of non-infringement; this was dismissed after Wedi represented that it didn’t own and wasn’t a licensee under the patent.  Meanwhile, Wedi sued defendants for breach of contract and a variety of other claims. The parties were directed to arbitrate claims for breach of contract, breach of fiduciary duty, civil conspiracy, and unjust enrichment claims, and also arbitrated a claim under Washington’s Uniform Trade Secrets Act, which is, delightfully, known as WUTSA. The arbitrator mostly found against Wedi, and awarded it $1 in nominal damages on its contract claim.

What remained were tortious interference, Lanham Act, abuse of process, and Consumer Protection Act claims against various related defendants.  Wedi’s abuse of process claims failed.  Among other things, given its attorneys’ “repeated representations that wedi owned the ’900 Patent and intended to take legal action to protect ‘its patent rights,’ Hydro-Blok was not, as a matter of law, required to independently investigate whether wedi owned or was a licensee under the ’900 Patent before initiating the declaratory judgment action. Moreover, in asking wedi and wedi GmbH to identify the owners or licensees of the ’900 Patent, refusing to dismiss the declaratory judgment action in the absence of a covenant not to sue, and waiting until after wedi and wedi GmbH declared under oath that they did not own and were not licensees under the ’900 Patent to forego the litigation, Hydro-Blok did not, as a matter of law, engage in acts ‘to accomplish an end not within the purview of the suit.’” Gotta admit, none of that sounds even noticeably aggressive, much less an abuse of process. Nor was it abuse of process to counterclaim for abuse of process.  (This sounds like a fun litigation.)

False advertising under state and federal law:  The key issues here were puffery and falsity.  The following claims were puffery: “Cutting of product is dust free and quick”/“Environmentally friendly lightweight products with CFC-free XPS foam core”—both of which had to be understood as relative claims, since cutting mostly produces some dust or debris, and “environmentally friendly” implied a comparison as opposed to a promise to have no negative impact on the ecosystem.  [These seem like reasons to go for possible misleadingness over falsity, not reasons these claims are unprovable or even unbelievable.]  Also puffery because not measurable: “modified cement coating for maximum adhesion of tile & stone”/“When laid on a floor with your favourite tile or stone, it is commercially rated.”  I was a little surprised by the last—there was declaration testimony that “commercially rated” had meaning in the industry relating to specific ASTM standards and that the Hydro-Blok products were never tested using the relevant standard, which would indicate it’s not puffery, but the court concluded that more was required, since the claim didn’t say outright that it had passed ASTM testing and didn’t include the quantified rating language used by other competitors (indicating how many cycles of testing the tile survived), and there was no evidence that customers had been misled.

Other claims were puffery because they were general opinions of superiority: “the easiest, quickest and most user-friendly way to build a water-proof shower or tub surround at a price you can afford.”/ “the better, easier & more cost-effective way to build complete shower systems”/ “the most efficient, light-weighted [sic], 100% water-proof, tile-ready shower system, which can be installed within [sic] couple hours instead of days, by one person”/. “Speed and ease of installation for commercial applications can not [sic] be beat”/ “The BETTER Shower System.”

The remaining factual assertions, “All HYDRO-BLOK products are IAPMO tested & certified” and “100% WATERPROOF • HCFC-FREE XPS CLOSED-CELL FOAM CORE,” weren’t proven false. Although the IAPMO certification claim was made before the certification was officially issued, it did issue before any Hydro-Blok products arrived in the US.  Wedi didn’t show deception or injury associated with the premature announcement.  Nor did Wedi show that the IAPMO certification was either obtained or maintained improperly; the certification agreement barred Hydro-Blok from making any “substantial change” without prior written approval, which was defined as any change that would make any of the information on the IAPMO certification documents false or misleading, or would reasonably be deemed to cause the product to fail to conform to the applicable standards.  Wedi provided evidence of quality control issues and use of some different equipment and components, but didn’t show (or provide expert testimony) that they resulted in a “substantial change.”  With a later certifier, Wedi argued that it was false/misleading for the new certifier to rely on IAPMO testing and not its own independent testing, but the certification did in fact issue.  A “challenge to the method by which certification was granted does not form a basis for a false advertising claim under the Lanham Act or the CPA.”

HCFC-FREE XPS: Hydro-Blok products contain HBCD, a fire-retardant banned in Canada, but not in the United States, but HCFC seems to stands for hydrochlorofluorocarbons, substances composed of hydrogen, chlorine, fluorine, and carbon. HBCD or hexabromocyclododecane contains bromine and no chlorine or fluorine, and it is not an HCFC. Thus, the presence of HBCD didn’t make “HCFC-FREE XPS” false or misleading.  One test report did show testing for 62 CFCs and HCFCs; the test came back “not detected” for all but two, which had levels of 1.0 and 7.3 μg/g. “Although these levels are above the detection limit of 0.1 μg/g, they are nominal amounts,” and the testing entity concluded that the product had “—” ozone-depleting substance, making it “essentially ‘HCFC-free.’” 

There was still a triable issue on tortious interference, given that one individual concededly shared with some of the defendants confidential information, including financial data and customer lists, that he acquired while serving as Wedi’s sales agent.

variety in superiority claims can add up to disparagement

Deerpoint Group, Inc. v. Agrigenix, LLC, 2019 WL 2513756, No. 18-CV-0536 AWI BAM (E.D. Cal. Jun. 18, 2019)

Deerpoint sued Agrigenix for violating the Lanham Act and California’s UCL via false advertising, violating California and federal trade secret law, and related claims. Deerpoint allegedly provides chemical water treatment solutions for agriculture irrigation, using custom-blended fertilizers and patented precision feeding equipment.  Its former CEO allegedly took confidential information, sued Deerpoint/filed an administrative complaint with the California Department of Fair Housing and Employment, and formed a competitor, Agrigenix.  Its fertilizer blends were allegedly copied from Deerpoint and it allegedly installed at least four devices that copy the feeding equipment. Agrigenix allegedly told Deerpoint’s customers that it is “the same as Deerpoint with a twist,” and four large clients of Deerpoint, representing $2.4 million in revenues, switched to Agrigenix. The parties settled the ex-CEO’s case with an agreement including a provision that acknowledged that his obligations to keep Deerpoint’s trade secrets secret were still in force.  Unsurprisingly given the posture, the trade secret claims were not dismissed.

Intentional interference with prospective economic advantage: defendants argued that the requisite independently wrongful act alleged, disparagement, wasn’t sufficient because the alleged statements were puffery, opinions, too vague, or hyperbole and invective from a competitor.

The challenged statements: (1) Agrigenix is the same as Deerpoint with a twist; (2) Deerpoint is failing and will lose all of its customers to Agrigenix; (3) Mahoney is not obligated to maintain Deerpoint trade secrets; and (4) Agrigenix’s products are 20% better than Deerpoint’s while being 20% cheaper. Deerpoint argued that these were necessarily claims that “Agrigenix had superior products when, in reality, it only had copies of Deerpoint’s proprietary products.”  Viewing the allegations in the light most favorable to Deerpoint, statement (2) could be disparaging. “While some courts have held that statements about a company’s future financial stability are non-actionable opinions, the statement alleged in the FAC is alleged in current terms – Deerpoint is failing. Moreover, given [the ex-CEO’s] past connection with and knowledge of Deerpoint’s operations, Deerpoint’s customers may have been more likely to believe the statements were true ….” 

Perhaps more surprisingly, (1) and (4) when read together could be disparaging.  By themselves, they were either opinion or puffery, given the meaninglessness of “with a twist” and the uncertainty of what it would mean to be “20% better.”  But read together, they reasonably indicated superiority when in fact they were the same.  [The problem that other courts would find is that the nature of the superiority is still completely undefined.]

(3) was a statement about the ex-CEO’s own obligations, and it didn’t disparage Deerpoint or indeed say anything about Deerpoint.

The UCL claim survived because it was based on the intentional interference claim, which is a little backwards (why not just go for false advertising directly?) but ok.

Trade dress question of the day, all out of bubble gum edition

Do the makers of Bazooka have a valid claim against this ... whatever it is?  (Toy handed out at a birthday party, apparently known by preteens as a "squishy.")

Monday, June 17, 2019

Uncommon sense on the presumptions granted by registration

Uncommon, LLC v. Spigen, Inc., No. 18-1917 (7th Cir. Jun. 11, 2019)

The PTO has sometimes found “capsule” merely descriptive of cellphone cases, but it also allowed Uncommon to register CAPSULE for such cases in 2013.   (A prior registration for “capsule” for such cases was cancelled in 2015 for failure to renew.)  Uncommon sued a rival, Spigen, that also used the term and had done so since 2010, with no knowledge of Uncommon’s use. Spigen applied to register “Capsule Capella,” “Capsule Solid,” and “Air Capsule,” but the PTO decided that “capsule” was descriptive. Capsule Solid ended up on the Supplemental Register, and the PTO required Spigen to disclaim “capsule” for Capsule Capella.  It also initially refused “Rugged Capsule” and “Capsuled Ultra Rugged” on grounds of descriptiveness and confusion with Uncommon’s mark; those applications had been suspending pending this litigation. The district court granted Spigen summary judgment and the court of appeals affirmed, saying some things about registration.
the accused cases

Uncommon's cases

Spigen produced a survey to prove that consumers didn’t associate “capsule” with Uncommon’s cases, and it erroneously disclosed the person who conducted the survey as a “non-testifying expert.” Admitting the survey anyway wasn’t an abuse of discretion on these “unusual” facts, because Uncommon gamed the system by not seeking discovery or other corrective measures when the error became manifest, and it was reasonable to call the error harmless.  (The court suggested that it also would’ve been fine to exclude the survey: survey evidence generally requires a foundation, which will require expert testimony.)

With the survey, there was no genuine issue of material fact: the registration was invalid and there was no mark to protect, or any likelihood of consumer confusion.

The registration was prima facie evidence of validity.  It allowed one of two presumptions, but not both: if the mark was registered without a requirement of showing secondary meaning, it would be presumed inherently distinctive; if it was registered as descriptive with secondary meaning, it would be presumed to have such meaning. Since Uncommon didn’t register under §2(f), the presumption was of suggestiveness.

The Seventh Circuit has said that the presumption is “easily rebuttable, since it merely shifts the burden of production to the alleged infringer.” The presumption “evaporates,” or “burst[s],” when the challenger presents evidence of invalidity.  Some have criticized this approach; though the Seventh Circuit doesn’t say so explicitly (somewhat surprisingly, given the general frankness of that court’s approach), the PTO’s inconsistent practice here demonstrates the wisdom of the Seventh Circuit’s rule. Fundamentally, examination is not nearly as rigorous as the testing provided by litigation, and where B&B preclusion doesn’t apply, it makes sense to take another look once the challenger has provided reason to do so.  (Of course, this doesn’t help much for incontestable registrations, whether or not registered under §2(f), but you do what you can.)  But anyway, even if Spigen had both burdens, production and persuasion, it would win here.

A descriptive mark “need not describe the product completely, but it must depict an important characteristic of the product.” By contrast, a suggestive mark “requires the observer or listener to use imagination and perception to determine the nature of the goods.” Drawing the line can be done by looking at “how, and how often, the relevant market uses the word in question.” The answer is a lot, and descriptively.  At least ten competitors used the word in their case names; one was even named Capsule Case Corp.  Previous cases have used the prevalence of “bliss” in the beauty care market and “platinum” in the financial services market to deem those terms descriptive; so too here.

Uncommon argued that these were all infringers “freeloading on Uncommon’s good reputation with consumers.” But there was no evidence of such a good reputation, or even evidence of copying. Uncommon also argued that, in the internet age, people throw lots of words into their product names to get hits, so competitors’ use of the term should be discounted.  That didn’t make sense; in fact, the example showed lots of descriptive terms packed into a long name.

Likewise, using the imagination test, “capsule” was descriptive.  “The mark directly conveys an idea: coverage, storage, protection—encapsulation—all of which the cellphone cases provide, according to Uncommon’s registration.” It didn’t depend on the technical meaning of capsule.  The Seventh Circuit is also dubious about using dictionaries, “because dictionaries often cite historical and dated definitions.”  But the dictionary here reaffirmed what the market’s use and imagination test already revealed: “capsule” describes cellphone cases. Spigen’s evidence included definitions like: “a small case, envelope, or covering,” “any object that can be used to hold things,” and a “small container.” “A cellphone case obviously fits the bill.”  The district court shouldn’t have relied heavily on them, but they weren’t “obscure, functionally irrelevant, or out-of-date” and could legitimately constitute “a piece of the puzzle.” Thus, “if, hypothetically, consulting dictionaries revealed that they do not define ‘capsule’ in a manner that so easily fits cellphone cases, Uncommon might have evidence in its favor. A factfinder could potentially infer from such omissions that ‘capsule’ does not describe cellphone cases.”

The court of appeals declined to rely on third-party registrations.  The PTO granted Vatra’s registration and Uncommon’s, but “more often than not, and more recently,” it decided that “capsule” was merely descriptive.  “[G]iven the internal inconsistency, we find little that can be reasonably gleaned from the Office’s registration decisions.”  [Which is why the bubble-bursting presumption is a good one.]

Uncommon had one more bad argument, which was that, because “capsule” could describe an array of products, it couldn’t be descriptive. Although some circuits—including, appallingly, the Second—have endorsed this reasoning, the Seventh has it right.  “A term need not ‘bring to mind the product in question’ to be descriptive, nor must it ‘depict the [product] itself.’ It is enough that the mark in fact ‘refers to a characteristic of the’ product.” 

Uncommon relatedly pointed to the survey, which showed that consumers don’tt often associate “capsule” with cellphone cases (only 14 percent of the time). Again: “A descriptive mark need not immediately invoke in the consumer’s mind the product itself; it must directly convey a characteristic of the product.” Thus, “Work-N-Play” as a name for vehicles with convertible interiors was descriptive not because consumers quickly associate “Work-N-Play” with interior-convertible vans, but because the vans were in fact “usable both for work and for play.” “Consumers may not immediately think ‘cellphone cases’ when they hear ‘capsule,’ but ‘capsule’ describes a quality of cellphone cases all the same.”  [Other courts, please take heed. Big is descriptive for every one of the many, many things that are big.]

With the registration’s presumption of inherent distinctiveness rebutted, the court turned to secondary meaning.  Since it wasn’t a §2(f) registration, there was no presumption here.  Spigen submitted one of the more “helpful” kinds of evidence: the survey, which showed that very few customers (six percent) were familiar with “capsule” as a brand name; only slightly more (14 percent) could connect the mark to cellphone cases when prompted; and barely any (less than one percent) associated “capsule” with Uncommon. Even assuming that manner and length of use favored Uncommon, no factfinder could reasonably decide that a substantial number of consumers think of “capsule” as the product of one cellphone-case maker.

Uncommon argued that, because “capsule” had a similar amount of consumer recognition as a few other brands in the survey, it had “reached a level of distinctiveness.” No, because none of the “capsule” comparators had much recognition either (citing McCarthy and past judicial requirements of at least 37% recognition).

Confusion was also unlikely. “[V]iewing the record in  Uncommon’s favor, as we must, the similarity of the marks favors Uncommon, albeit slightly,” as did product similarity and area/manner of use (they’re sold nationwide through online retailers).  “But the inference to which Uncommon is entitled is not a strong one. Selling through Amazon and eBay is ubiquitous, and it is hard to devise a more generalized customer base than nationwide cellphone owners.”  The products were cheap, meaning consumers wouldn’t exercise much care.

But the remaining factors decisively favored Spigen, particularly strength.  The court of appeals called “capsule” a “weak mark,” but of course, lacking inherent or acquired distinctiveness, it is not a mark at all.  There was no other evidence of the marketing power of the mark, and neither party’s cases featured “capsule” prominently.”We fail to see how there is a likelihood of confusion caused by a mark that is hardly featured.” There was also no evidence of actual consumer confusion or an attempt to pass off. “The marks are, at most, barely similar, and they are too weak to confuse any purchaser, especially in the absence of evidence of any intentional freeloading.” 

[On this record, they’re not marks!  You were doing so well!  I suspect the desire to call these terms “marks” has to do with the abandonment of passing off as a separate tort, as indicated by the repeated reference to intentional copying—the court of appeals has in the back of its collective mind that maybe sometimes intentionally confusing copying (as opposed to copying to achieve some non-reputation-related reason, like the fact that “capsule” is a useful descriptive term) should be actionable.  But you don’t actually need a “mark” to make that tort work, as Mark McKenna often reminds us.]

Friday, June 14, 2019

A Celebration of the Work of Wendy Gordon, part 4

A Natural Right to Copy by Glynn Lunney, Texas A&M University School of Law
Thanks to the great women who encouraged intellectual honesty in topics and analysis of topics, not just Gordon but also Litman, Samuelson, others.  Gordon doesn’t agree w/how far Lunney takes her argument, but that’s ok.  Gordon’s “A Property Right in Self-Expression” shows that Lockean arguments for authors’ rights also provide limits on those rights that are themselves in the nature of natural rights.  Lockean proviso: there has to be enough and as good left over for others in order for property claims to be justified. Is copying right or wrong?  There is dispute! 

He thinks natural rights are nonsense on stilts; natural laws would exist without people.  He thinks it’s often just hidden utilitarian balancing.  Kant’s Categorical Imperative: if the Nazis ask you if you’re hiding Jews in your attic, should you tell the truth?  Utilitarian balancing would give us a very different answer.  A natural right should also be technologically independent, which seems inconsistent with © and its recency.  He thinks of natural rights as rhetorical tools.  Rhetoric, though, matters. [Lunney characterizes natural rights arguments about fairness as “utilitarian arguments for people unable to do math”—but of course none of us can really do math, in the sense required for doing utility calculations that would take into account all the knowns and unknowns, especially at the level of detail required to distinguish two fairly similar policies from one another.  Thus the appeal of rule utilitarianism and so on. Obviously this is a much bigger debate than any of us can do justice to right here!]

Judges sometimes equate copying with stealing, but he thinks this is wrong.  Moses smashed the original tablets from the mountain; we only have the Seventh Commandment because Moses copied them and plenty of others did too. Copying is never stealing and an expansion of the no-harm principle that equates them is difficult for him.  No-harm principle: Locke says no one ought to harm another in life, health, liberty or possessions—but there’s nothing in there about economic harm/deprivation of royalties.  Mixing labor as justification for property seems inconsistent w/counting economic harm—if value alone justified a property right, we wouldn’t care about how I got a pile of apples.  This is relevant because of the well established principle of damnum absque inuria: harm without legal injury, as when competition decreases profit.  Gordon does distinguish harm from wrongful harm, but not all free riding is wrongful harm—Kellogg copying Nabisco shredded wheat and automakers copying the idea of the minivan are both desirable forms of competition based on free riding. 

Gordon suggests that utilitarian balancing can trump deontological concerns when the costs are too great. How do we know when they’re bad enough? Who decides?  Category error: even if you could use Locke to justify initial ownership of the song, what does that mean when you’ve shared access w/another? Locke is about initial ownership, not what rights you retain even once you’ve transferred in the absence of an express or implied contract.

Contributions to value to a novel other than the novelist’s own work: the people who taught her to read and write; the people who created moveable type and all the other distribution elements; people involved in creation of market demand, such as people who paid workers enough to have money left over to buy the novel. Once you do but-for or even proximate causation all of those matter.  He thinks what’s efficient and fair is a cost-based allocation.  Inefficient and unfair to have a rule that’s cost based for everyone but the © owner who gets a value based reward.

What should be the default rule? What’s more important to society, copying or creativity? To him, it’s copying. We talk today b/c we share a language that neither of us came up with or decided to adopt. We both copied the language and its structure.  What we’re doing in © is important but what’s more important is the right to copy and talk.

Commentary by Richard Stallman, Free Software Foundation

Defaults are tremendously important. “IP” is both wrong descriptively and an overgeneralization about the very different regimes lumped together under that term. It gives you a bad way of thinking by default.  Law professors can probably overcome that but if you don’t spend a lot of time with it, that will mislead you. Natural rights have to be about morality; natural rights imply natural responsibilities, though that doesn’t mean you have to do a recommended act every time. E.g., sharing is good/feeding the hungry, but you don’t have to do so every time you’re asked; it’s instead that if you never do it then you’re not a good member of society. Respect natural rights and permit people to carry out their natural responsibilities to share.  You don’t “consume” published works. They don’t disappear as your eyes pass over them. It’s an economic metaphor that also changes your default thinking. The idea that you have to compensate a business for not being able to make money from something that it bought is planetary suicide when it comes to resources, and this relates to © as well.  Would also distinguish software from creative works; software as a set of instructions needs to be free or it subjugates users.

Syed: Lunney was careful and crisp in discussing deontology, but lumped utilitarianism together.  If you’re truly a maximizer, do you believe that fair distribution plays no role?

Lunney: people would choose fair distribution over unfair, because we’re risk averse; distribution is a utiltiarian consideration. 

Gordon: it’s true that Locke justifies right to use more than right to exclude. But what he’s describing is one of many ways of saying, all else equal, if someone has invested a lot of himself into a project, you have an obligation not to disrupt that project without a good reason, though we can then talk about what good reasons might be.

Lunney: prefers the defaults reversed. Who has to justify a change in the default and what does it take to do so?

Unfair Use as Market Failure by Ariel Katz, University of Toronto Faculty of Law
Fair Use as Market Failure’s contributions include: theoretically coherent framework for understanding fair use, at the time a mess; pioneering economic analysis of copyright; offering economic justification for fair use; showing how broad fair use conception is economically consistent w/©’s premises. Alas, misunderstood as implying that fair use should only exist when transaction costs are high and should disappear if transaction costs become low enough to allow negotiation b/t © owner and user. Instead, looking at whether there is a reason we can’t be confident that deferring to the © owner’s self-interest will also lead to overall social benefit? If we can’t, then there is reason to go to fair use. But this logic presumes that we can ordinarily be confident that deferring to self-interest will serve social goals, and if and only if that isn’t true, such as market failure, then it might make sense to refuse to defer to © owner’s veto.

But should we ordinarily be confident of this? Why not require © owners to show that their self-interest aligns with the public interest?  What creates pull to overly narrow fair use: (1) market supremacy premise: in general, social welfare will be maximized if market transactions b/t © owners and users would precede as many uses as possible bc the market is in general the best way of doing things; (2) broad entitlement: © owner is ordinarily entitled to revenue for all substantial uses of the work; (3) when economic value is at stake, we ordinarily want a potential user to seek permission from © owner and pay a negotiated price.  Begins with the assumption that © markets are efficient, but they are usually understood as deviations from static efficiency done in order to create incentives (keeping prices above marginal cost). Copyright by design undermines the perfect efficiency of the market.

Relatedly, do we want as many uses as possible to be market transactions? The opposite: social welfare is maximized if we have as few uses as possible as market transactions.  Nor should we agree with (3)’s broad entitlement: fair use isn’t an infringement and not part of the owner’s entitlement, and a © owner shouldn’t get more than necessary to generate works. It is, in other words, unfair uses that present market failures. Copyright is against natural rights; it is a legal monopoly and a creature of positive law only.

Commentary by Chris Sprigman, NYU School of Law: Microsoft antitrust litigation was how he started to learn ©: Microsoft’s argument was that it owned the © so nothing it could do with the © could violate antitrust law. Court says: saying you own the © so you can’t violate antitrust law with it is like saying that because you own a baseball bat you can’t be held liable for killing someone with it.  Monopolies and market supremacy: this is the key idea, that property structures markets and that the markets are run by private transactions by default.  Broad entitlement then follows from that: © owner is entitled to all rents that market supremacy makes available.  So is the idea that we ordinarily want transactions to take place b/t © owners and users of the works.  Combination: strong deference to © owner, which then leads to overly narrow reading of Gordon’s work on fair use. 

Katz’s first best solution where goods are nonrival: competition.  Katz would presume fairness until unfairness is demonstrated. But what’s Gordon’s first-best world?  Have to think about static v. dynamic efficiency. The holy grail would be to optimize static + dynamic efficiency. Gordon’s first-best would be a copyright system that does this. If you believe that copying causes long term welfare loss, you should end up with “efficient copyright.” Under that scheme, Gordon’s premises hold.  Rights with appropriate scope, term, and limitations. But we don’t seem to have that, e.g., it’s hard to understand the point of © for fine art. Balancing static + dynamic efficiency seems unlikely given how much lumping together Congress has done, even if you ignore problematic political economy.

What is to be done? Should judges interrogate the static/dynamic balance, the scope, the limitations that Congress has enacted?  Care is warranted, but Congress has left open some room, viz. fair use. Even if fair use is a defense, it isn’t an affirmative defense: the P should, once raised, have the burden of going forward—Lydia Loren’s article and the reasoning in Lenz in the 9th Circuit.  Skeptical about judges doing other things in ©; we don’t have a different term for motion pictures than for software, even though we probably should, and judges would have a hard time doing that.  [I would note that anywhere else in speech regulation judges have no problem saying things like this and performing their own static/dynamic/other analyses—that’s what strict scrutiny does.]