Wednesday, July 10, 2019

Competitor's false advertising case against MLM income claims can proceed

Youngevity Int’l v. Smith, No. 16-CV-704-BTM-JLB, 2019 WL 2918161 (S.D. Cal. Jul. 5, 2019)

This Lanham Act case involves, among other things, alleged misrepresentations relating to the MLM aspects of defendants’ business pitched to potential “affiliates.” 

First, defendants argued that plaintiffs failed to establish any damages, justifying summary judgment. But there was some evidence of decreased Youngevity sales during defendants’ false advertising and an expert willing to link that with defendants’ sales generated by ex-Youngevity distributors; also, “an inability to show actual damages does not alone preclude a recovery under section 1117 [of the Lanham Act],” and plaintiffs were also seeking injunctive relief. 

Second, defendants argued that they couldn’t be held liable for statements made by their distributors. There was sufficient evidence for a jury to find that these people (known as Wakaya Ambassadors) were agents for Lanham Act purposes, making defendants vicariously liable.  Their classification as independent contractors in Wakaya’s own Policies and Procedures wasn’t enough to avoid a material issue of fact.  Moreover, defendants didn’t dispute that the Ambassadors “engaged in the allegedly false advertising for the purpose of attracting distributors and increasing sales,” squarely within the scope of their roles. And defendants reserve the right to terminate Ambassadors’ accounts for unapproved conduct. That was enough to go to the jury.

The false advertising claims included allegedly false claims about the potential income of a typical Wakaya distributor, e.g., Wakaya Ambassadors can earn “$6,200 bucks residually in the next three to six months” and “[w]e plan to build several leaders to 10K a month in the next 6 months.” [Ugh. It’s so clear that the US lacks sufficient protections against pyramid schemes. We shouldn’t be relying on competitors to do this, especially not competitors that are themselves MLMs with their own dubious claims.]  One individual defendant (Vaughn) claimed, on behalf of the company, that “when—you get a thousand people joining [Wakaya] a day, that’s $85,000 in a day. If you wanna do it in a week, that’s $85,000 in a week. [Etc.]”  Smith, Wakaya’s owner, observed in deposition that the statement is “inaccurate” because “it claims that Wakaya Perfection pays income for the joining of new people, for new people joining the organization.” Smith also testified that he could not recall any distributor in Wakaya ever making $85,000 in a month and that Vaughn himself does not make $8,500 in a week based on his work as a Wakaya distributor. There was evidence that Vaughn repeatedly asserted that Wakaya Ambassadors could earn a million dollars in their first year. Smith himself stated, “I’m telling you right now you’re going to earn a lot of money....[T]he amount[s] of money you’re going to earn in this program...right now you won’t even be able to imagine. They’re almost incalculable.” There was evidence that other Wakaya distributors also made false statements: one claimed that he was making up to $1700 in one day, then testified that, in fact, he made less than $550 in any single month. Expert evidence showed that, in reality, about 1% of Wakaya’s active associates earn $1000 per month in commissions and less than 3% even earn $500 per month.  There was [at a minimum] a genuine issue of material fact on falsity.

Defendants argued that these claims didn’t relate to Lanham Act-covered “commercial activities,” but of course they did. As the Tenth Circuit has said, “[i]t is [ ] apparent, in the context of the Act’s broad purpose of proscribing unfair competition and the 1988 amendment of § 43(a), that Congress did not intend to narrowly limit the term ‘commercial activities,’ but rather intended to encompass those activities which do not solely involve the provision of services or the production of goods. Proctor & Gamble Co. v. Haugen, 222 F.3d 1262 (10th Cir. 2000). Here, “[a]ttracting distributors is at the core of Defendants’ business model and is a practice with a substantial impact affecting commerce.”

The income claims here were literally false, either on their face or by necessary implication; materiality and misleadingness could be presumed:

The claims are specific, conclusive assertions that a Wakaya distributor will make at least the income that in reality, only 1% of distributors make. Even Defendant Smith’s statement, while not stating a particular dollar value, implies that earning a large amount of income as a Wakaya distributor is an inevitability. Moreover, because the claims are highly specific and present the likelihood of earning unrealistic amounts of money as a foregone conclusion when becoming a Wakaya distributor, the income claims are far outside the scope of mere puffery or opinion.

The relevant consumers were “anyone who might be convinced to become a Wakaya Ambassador based on claims of earning potential above a certain threshold,” and the relevant purchasing decision was to become an Ambassador—which after all, is how defendants make their money.

However, Youngevity’s [rather chutzpadik] argument that Wakaya is an unlawful pyramid scheme was not separately actionable under the Lanham Act, even if operating a pyramid scheme fraud under federal antifraud law. False income claims alone didn’t show that the “rewards” or income that Wakaya Ambassadors received were unrelated to the sale of Wakaya products.

Another alleged falsehood involved the role of alleged billionaire/Fiji Water founder David Gilmour, who Wakaya advertising touted as the founder, owner, and CEO.  The ownership/CEO claims were concededly literally false, and the depositions indicated that Smith was the founder.  Yet “Defendants persist in claiming that Mr. Gilmour founded Wakaya Perfection,” including by claiming that he was an investor (though apparently not in the company itself, but in the island named Wakaya from which some Wakaya ingredients come). The court found that Wakaya’s [implausible] colloquial or symbolic use of “founder” “to refer to one who acts as a kind of figurehead of a venture or project” could be literally false, and there was also evidence that it was likely to mislead consumers, making summary judgment for defendants inappropriate.

However, Youngevity’s claim that Wakaya and its Ambassadors made false claims about the status of Youngevity’s finances failed for want of sufficient evidence; one email written as personal correspondence between associates wasn’t enough to be commercial advertising or promotion.  Two other emails didn’t themselves make negative statements “but rather discuss disparaging communication that the authors allegedly heard about or were on the receiving end of,” which also failed to show sufficient dissemination.

One social media post by “Dave and Barb Pitcock with Wakaya” “certainly disparages Youngevity” but didn’t falsely advertise Youngevity’s financial status. Instead, it described issues the Pitcocks claim they experienced with Youngevity and attempts to explain Youngevity’s alleged behavior by stating, “perhaps [Youngevity] desperately need[s] money.” “While the post does operate to promote Wakaya, it is personal in nature as griping by disgruntled former employees and does not amount to an advertisement about Youngevity’s finances.”

Finally, a former distributor declared that, “[A]fter I joined Wakaya, Barb Pitcock told me in approximately June 2016 on the telephone that Youngevity was struggling financially and would go out of business.” But the distributor had already ended her involvement with Youngevity and became a Wakaya distributor, so that wasn’t a commercial advertisement.

False claims of the origin of Wakaya products: Wakaya’s YouTube page claimed that “Wakaya Perfection is a suite of wellness products by David H. Gilmour, the founder of Fiji water. The uniquely organic products are hand cultivated on the pristine island of Wakaya and made of 100 percent certified organic ginger powder and Dilo oil.”  Smith testified that while this description was accurate when it was first written, it became “untrue” or “not fully accurate” after Wakaya Perfection, LLC acquired the YouTube page and introduced products that included ingredients not sourced from the island of Wakaya. This was enough to create a genuine issue of material fact on literal falsity.

False advertising with respect to safety and health benefits: Wakaya claims that its clay product has “well known benefits,” “may remove toxins from the body,” and is “known” to “neutralize and balance acidic conditions,” “relieve digestion,” and “boost the immune system,” among other benefits. Youngevity’s expert reports that “[t]here is no scientific evidence that would support any therapeutic effects or claims of the consumption of bentonite clays” and that the clay may pose a health hazard because “use of unapproved chelating agents is dangerous and pose a serious risk to human health” and because those who consume the clay may be exposed to unsafe levels of lead and arsenic. This was enough to create a genuine issue of material fact.

Wakaya also advertised that its turmeric product contains six times more curcumin (5.96%) that traditional turmeric (0.92%), but Youngevity’s expert reports identified 2.45% and 3.10% instead via testing, creating a triable issue of fact.  In addition, the only quantitative data supporting the claim to have “a whopping five times more curcumin, the therapeutic agent in turmeric, above all conventional turmeric powders” was based on a test comparing Wakaya’s product with one other brand. Youngevity’s expert tested five other products with ranges from 1.72% to 3.92%.  Wakaya’s rebuttal expert opined that, because levels of organic compounds naturally vary in spices, test results of the percentage of certain compounds in products will also vary, so the testing wasn’t definitive; Wakaya argued that its claims were therefore at best unsubstantiated. [I disagree with this interpretation. There are two facts in evidence, not just one: (1) the percentage in the sample it tested, and (2) that there’s variation, whose range/average deviation is not established—the best understanding of the truth, based on those two facts, is that there is not the claimed percentage in the other lots being sold.  Part of this is an attempt to create epistemological uncertainty: how do we know what’s in any given bottle of a supplement, really? I think the best answer is that you shouldn’t advertise consistency if your own claim is that there’s variation.]  Anyway, the court agreed that the claims were unsubstantiated, but maybe they weren’t false, so Youngevity didn’t get summary judgment on falsity here.

Youngevity also didn’t create a genuine dispute on weight loss: “while the evidence includes testimonials of weight loss during specific periods of time, no promotions or advertising presented by Youngevity promise that users would or will lose weight.”  It’s notable that the FTC would consider these claims to promise that these claims are representative and thus they’d be at least implicitly false, e.g., “So far 100% of People have lost weight on our #Keto #BulaFIT Program” and “While we can’t say that 100% of the people will get results, so far we do have 20 out of 20 that have lost weight.” But Youngevity’s expert report just opined that the claim was “unrealistic, unsubstantiated, and very misleading,” which wasn’t enough under the Lanham Act.  Among other things, the ad claimed weight loss, not that the weight loss would be maintained for any period, and “[c]laims about weight loss are not inherently misleading just because they fail to include data about weight loss maintenance.”

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