Wednesday, July 03, 2019

dueling fake "independent" websites leads to unclean hands finding, but some injunctive relief


Grasshopper House, LLC v. Clean & Sober Media LLC, 2019 WL 2762936, No. 18-cv-00923-SVW-RAO (C.D. Cal. Jul. 1, 2019)

Previous discussion. A jury found in plaintiff Passages’ favor on its claims under the Lanham Act about false reviews of its addiction treatment services and on the Lanham Act counterclaim asserted against it by defendants (Cliffside) about Passages’ advertisements representing the existence of a “cure” for addiction.

In 2013, Richard Taite, the former CEO of Cliffside Malibu, created the entity Clean & Sober Media LLC, which purchased the website The Fix at a bankruptcy auction. The Fix published a Mission Statement saying “The Fix is the world’s leading website about addiction and recovery …. We also offer rigorously reported Rehab Reviews, with input from thousands of alumni…. Our stated editorial mission – and sole bias – is to destigmatize all forms of addiction and mental health matters, support recovery, and assist toward humane policies and resources.”  Its Process Statement said “To create our reviews, we invite selected centers to solicit former clients to complete a detailed, 20-question survey. The Fix requires at least five completed surveys before a review is generated. The surveys include questions about accommodations, meals, residents, staff, activities, and more. Alumni respond anonymously and confidentially, and reviews are written based on their responses and follow-up questions where applicable.”

When the acquisition occurred, there was a preexisting review of Passages Malibu, written by the previous editorial staff of The Fix in 2011.  It included quotes from people described as an “alum,” “former resident,” or “former client.” The review gave Passages an overall rating of 1 out of 5 stars. Over time, this rose to 2.5 stars. Passages made unsuccessful attempts to get the page changed. In response to Passages’ complaints, The Fix tried to find records of the reviews on which the rating was based, but couldn’t.

In addition, shortly after acquiring The Fix, Taite manually changed the overall star rating for Cliffside Malibu from 4 to 5 stars, without conducting any additional surveys of former Cliffside clients. Taite exercised other types of control but didn’t want his fingerprints on anything. 

The Fix also began to display banner ads for Cliffside Malibu at the top of the Passages review page and displayed links to the corresponding Rehab Review page for Cliffside Malibu.  This review made the first page of Google search results (at least for Passages’ CEO), and internal Cliffside emails revealed that Cliffside urged prospective clients to read the Passages review before making a decision as to whether to enroll with Passages or Cliffside; some of these clients chose Cliffside Malibu after reading the Passages review. Cliffside characterized other clients it received as “stolen” from Passages, including one who had believed she was calling Passages Malibu but instead had called the number for Cliffside Malibu.

Defendants concealed the relationship between Taite, Cliffside, and The Fix, including from editors at The Fix. The EIC (who was later replaced) sent an email bemoaning Taite’s “intention to manipulate the reviews” of addiction rehab centers on The Fix and Taite’s efforts to “pick and choose who can advertise” on The Fix and warned, "the likelihood is it would permanently crash ad sales and may even invite FTC investigation and lawsuits.” Taite successfully instructed the new EIC to remove an entire paragraph of an article The Fix had written regarding Cliffside Malibu. That EIC admitted that The Fix intentionally did not disclose its affiliation with Cliffside because “if people knew [The Fix] was associated with the rehab [Cliffside Malibu], they might question our articles.” 

In 2017, The Verge website exposed the financial connection between Cliffside and The Fix. Shortly thereafter, The Fix added a disclaimer to its websites.

Between 2014 and 2018, Cliffside paid C&S Media approximately $5 million for banner ads throughout The Fix’s domain. During that period, there were over 192,000 organic visitors to the Passages review (arriving via organic search results, not ads). The number of visitors to the Passages review page sharply increased following C&S Media’s acquisition of The Fix, as did Cliffside’s net income. Only a few hundred people viewed both the Passages review page and the Process Statement, the Terms and Conditions Page, or the Mission Statement.

Passages, meanwhile, ran its own unbranded website campaign.  A principal expressed his intent to “overcome” Cliffside’s alleged tactics and proposed that Passages “create our own referral sites, and get Fix off our back.” In response, an employee proclaimed, “We’ll beat them at their own game.” One of the unbranded websites Passages created was “baltimorehealth.org,” a webpage purporting to be the Baltimore Health Resource Center that included a picture of the seal of the City of Baltimore. Another was “denverijournal.com,” which purported to be an independent newspaper and published an article entitled “Passages Malibu – Revolutionizing Addiction Treatment.” There were a number of others; some provided directories of phone numbers to rehab centers and even included supposed referral services for addiction treatment, which were actually phone numbers connected to Passages. One such site received more organic traffic than Passages’ website for Passages Malibu as of October 2009.

Most of Passages’ unbranded websites didn't mention Cliffside at all, but one featured an article entitled “Top 5 Luxury Rehab Centers in Malibu, California”; its list of treatment centers was allegedly “[b]ased on reviews” but did not claim to rank the five centers from best to worst. The only comparison was the assertion that Cliffside’s facilities are “home-like and attractive without aspiring to the heights of interior d├ęcor you’ll find at the super-smart Passages center.” After Cliffside filed its counterclaims, Passages added disclaimers to their unbranded websites to disclose Passages’ ownership. 

In the post-trial briefs, the parties argued four equitable issues: (1) whether laches applies to bar any of Passages’ claims on timeliness grounds; (2) whether Passages is precluded from relief due to unclean hands; (3) whether and to what extent Passages is entitled to injunctive relief; and (4) whether Passages has provided sufficient evidence to recover equitable monetary relief.

Laches: The analogous California statute of limitations period, for claims of fraud, is three years. The central question was how much information a plaintiff must “know” about the existence of a Lanham Act cause of action to trigger the statute of limitations period. Generally, it is enough for the plaintiff to know about the general “essence” of its claim.

Laches didn’t bar the claims based on the Passages review not actually being based on alumni surveys; based on the review not complying with the site’s Process Statement; or based on The Fix’s claim of editorial independence. Passages didn’t have actual or constructive knowledge that Cliffside owned The Fix until 2017, and sued shortly thereafter. This is important because it is key to whether The Fix’s statements were made “in commercial advertising or promotion.” “[I]f The Fix maintained its status as an independent journal, unaffiliated with Cliffside, it is unclear to the Court how any false or misleading statements made by The Fix could ever be considered actionable ‘wrongdoing’ under the Lanham Act.”  It might be true that Passages could have sued for defamation in 2011, but “the focus is not on when the plaintiff knew that the defendant generally engaged in some ‘wrongdoing’ in the abstract,” but rather on the wrongdoing “at the heart of the particular cause of action to which the statute of limitations period applies,” which is false advertising.
Cliffside took the position that even an independent review could be “commercial speech,” but the court didn’t agree. Demetriades v. Yelp, Inc., 228 Cal. App. 4th 294, 310 (2014), held that the defendant’s representations about a review filter software, used to ensure that webpages for restaurants and other public establishments only showed customers “the most trusted reviews,” constituted commercial speech for purposes of an exception to California’s anti-SLAPP law because the statements were designed to get customers to use the defendant’s website and businesses to buy ads on the website. That wasn’t a Lanham Act case, and not all “commercial speech” is “commercial advertising or promotion.” [Even if The Fix’s statements about its own editorial policies were in some relevant sense commercial speech, that wouldn’t have made the statements about Passages—the key source of harm—commercial speech.]
And “even if Passages could have been more diligent in its investigation, Cliffside’s fraudulent intent in its efforts to conceal its affiliation with The Fix constituted clear and convincing evidence of unclean hands in reference to Cliffside’s laches defense.” Even though Passages suspected that there was something fishy about The Fix before 2017, “[h]ad Passages hastily sued The Fix under the Lanham Act and named many Doe defendants in the hopes of identifying The Fix’s ‘co-conspirator’ through discovery, a federal court rightfully would have dismissed Passages’ case on a motion under Rule 12(b)(6), because The Fix would not be a proper defendant to a Lanham Act cause of action as merely an independent journal not engaging in commercial advertising or promotion.”
Anyway, Cliffside didn’t show prejudice from the delay; had Passages sued in October 2017—three years from the publication of the Process Statement—no evidence would have been lost compared to when it did file, in February 2018, given that the core problem was that defendants couldn’t remember anything about/had no records of the surveys on which they claimed the review had been based.

Unclean hands: For a false advertising claim, “the defendant must demonstrate that the plaintiff’s conduct is inequitable and that the conduct relates to the subject matter of its claims.” A finding of “inequitable” conduct requires clear and convincing evidence that the plaintiff engaged in “wrongfulness, willfulness, bad faith, or gross negligence.” The defendant must also show that the plaintiff’s inequitable conduct caused injury to the defendant; harm to the public interest isn’t enough, but may be considered. “Factual similarity between the misconduct that forms the basis for an unclean hands defense and the plaintiff’s allegations in the lawsuit is not sufficient.” Instead, the plaintiff’s misconduct must be “directly related to plaintiff’s use or acquisition of the right in suit.”

Passages was indeed, by clear and convincing evidence, guilty of unclean hands as to the third Lanham Act theory (misrepresentations of independence) because of its own manipulation of internet sites. “Passages willfully intended for its websites to accomplish the same thing as what Passages correctly perceived The Fix to be—a purportedly independent website providing addiction treatment resources that was actually owned and operated by a competitor in the addiction treatment industry.” [I think the court overweighted the fact that Passages hid the ownership of the domain names rather than using its own or the names of people associated with Passages; even if it had done that, it would have fooled ordinary consumers who don't check things like that.] The success of these techniques—outstripping visits to Passages’ branded website in some months—was enough to establish some injury to Cliffside; no quantification was required. The late-added disclaimers weren’t enough to solve the problem.

However, unclean hands didn’t apply to the claims related to the review of Passages’ facility on The Fix and the representations in the Process Statement about how reviews were written. Nothing Passages said about Cliffside, or about how its sites created their reviews, was sufficiently similar to those misrepresentations. Although Passages behaved badly, it didn’t engage in the same level of culpable conduct as Cliffside. In addition, there was no evidence that there were even any visitors to the particular pages that actually mentioned the names of both Passages and Cliffside.

Injunctive relief was justified; the court found that the harm to Passages was irreparable, without further discussion.  Cliffside invoked the First Amendment, but there’s no First Amendment right to advertise falsely.  Passages’ unclean hands didn’t defeat the equitable considerations in favor of injunctive relief. 

Scope of relief: Cliffside was enjoined from continuing to publish the review of Passages’ facility on The Fix and all Cliffside-owned sources, but not enjoined to ensure that the review is not posted anywhere on the internet, which might be infeasible or outside of Cliffside’s control. In addition, the URL formerly associated with the review should contain no substantive content and instead should display a 404 error message “to communicate unequivocally to visitors that The Fix does not maintain any review of Passages Malibu whatsoever.”  However, Cliffside should be able to publish a future review that didn’t otherwise violate the representations it made in the Process Statement.  [What if it disavows the Process Statement? Can it make stuff up then?]  Nor was Passages entitled to an injunction about Cliffside’s use of metadata keywords, which wasn’t part of the jury’s findings.

Passages sought to recover its damages in the form of lost profits and to force Cliffside to disgorge its profits and pay attorneys’ fees.  But its damages expert had been excluded.  The only issue was disgorgement of Cliffside’s profits.  Passages showed willful violation of the Lanham Act as to journalistic independence but, because Passages acted with unclean hands with respect to that claim, it would be inequitable to award Passages any disgorgement for such a violation.

Also, Passages didn’t show the amount of Cliffside’s sales or profits that were attributable to Cliffside’s Lanham Act violations with respect to the Process Statement/the Passages review. And it didn’t show that Cliffside’s violation with respect to the Passages review was willful—Cliffside didn’t author the original review, which was written before Cliffside acquired The Fix. True, Cliffside actively maintained the Passages review and affirmatively changed Passages’ star rating in the review on several occasions, indicating that Cliffside deliberately intended to keep the Passages review on the website as a bona fide, factually-supported review. But that didn’t mean that Cliffside intended to deceive; “willfulness is measured in terms of whether Cliffside deliberately published a negative review of Passages’ facility without having a factual basis to support the statements made in the review, with the intent to cause harm to Passages’ brand.”  In response to Passages’ repeated requests for The Fix to remove the review, the then-EIC attempted to look for the original surveys but couldn’t find evidence they existed.  “The fact that [she] actually performed a search for surveys supports the conclusion that The Fix did not simply maintain the Passages review without caring about whether surveys were actually conducted, weighing against a finding that Cliffside deliberately intended to publish false statements in connection with the Passages review.” At most, leaving the review up was negligence, perhaps even gross negligence, but didn’t rise to the level of deliberateness required to find willfulness.

The strongest evidence was the email from Taite stating that he knew that Cliffside’s competitors “are trained to simply talk shit about Cliffside and why Cliffside is a piece of shit why they are better, … because before I had a commercial, I did the same thing, to promises and passages, that’s how I filled Cliffside!” This email was admission that Taite may have disparaged Passages in order to promote Cliffside, but the timeframe of Taite’s actions was unknown and couldn’t be attributed to the review. Although The Fix had actual knowledge that the Passages review didn’t conform to the Process Statement, its refusal to take down the Passages review after Passages’ repeated requests to do so wasn’t shown to have the deliberate intent to harm Passages and deceive visitors to The Fix as to the nature of the Passages review; it wasn’t required to believe Passages’ claims about who to ask for a review.

For now anyway (pending Supreme Court guidance), without willfulness, disgorgement wasn’t an available remedy. For extra certainty/guidance if there’s an appeal, the court went on to discuss causation. Although a plaintiff need only show defendant’s profits from the false advertising, shifting the burden to the defendant to show what wasn’t caused by the false advertising, a disgorgement award is limited to “the financial benefit [the defendant] received because of the advertising” constituting a Lanham Act violation.

Passages argued for a presumption of causation, arguing that the Passages review was comparative. The court didn’t agree, which I think is exceedingly strange.  It’s true that “the review itself did not juxtapose Passages’ services against those of Cliffside to conclude that Cliffside’s services are comparably better,” but it did directly disparage Passages’ services, and the webpage also included ads for Cliffside and links to (better) reviews of Cliffside—I can’t see why you wouldn’t analyze the webpage as a whole, at a minimum.  To do otherwise rewards Cliffside for feigning The Fix's independence.  Not every comparative ad succeeds—and yet the Ninth Circuit presumes causation in comparative advertising cases, even though it’s theoretically possible that the consumer would decide to go to a third party, or patronize the defendant for independent reasons.  The court pointed out that The Fix also reviewed other addiction treatment centers in its Rehab Reviews section aside from Passages and Cliffside, which is certainly worth considering, but I would say that’s what burden shifting is for. The court also rejected Passages’ argument that they were “functionally” the only two competitors in the local addiction treatment market; the parties repeatedly elicited testimony from witnesses during trial about Promises Malibu, a third treatment center.

Anyway, even if this were a comparative advertising case, Passages still had an obligation “to establish some causal link between the conduct underlying Cliffside’s Lanham Act violations and Cliffside’s profits for which Passages seeks disgorgement.” [I would think the testimony about reps using the review to convince customers to choose Cliffside should probably suffice to establish some causal link.] It wasn’t enough to show a sharp increase in Cliffside’s net income after the acquisition, since that was attributable at most to the overall acquisition, not specifically to the Passages review and the Process Statement. There was no evidence showing how much of Cliffside’s net income was derived in any way from The Fix compared to other sources of acquiring clients, and Cliffside advertised in other media and mostly got clients from sources other than The Fix. Nor was it enough to point to Cliffside’s ad expenses on The Fix (again, for the website as a whole rather than for the false parts).

The court also rejected a theory based on how much it would theoretically have cost in advertising to reach the same number of consumers as there were visitors to the Passages review. There was testimony that the average cost per click Passages paid for the keywords “Passages Malibu” since March 2017 was $40.00 per click. But it wasn’t correct to conclude that every visitor to the review was a consumer of an ad for Cliffside; there was no evidence suggesting how many people who read the review would have clicked on an advertisement for Cliffside Malibu had the viewer instead searched for “Passages Malibu” on Google. And this calculation had nothing to do with falsity; even if the review was truthful, it would still rely on the same assumption that Cliffside was benefitting from the Passages review the same as if a viewer had clicked on a link for a Cliffside advertisement.  Separately, the range of bids for a “top tier” advertising placement for “Passages Malibu” was between $7.99 and $35, and a bidder might be able to receive a lesser advertising placement for “a couple of dollars,” so the $40 amount wasn’t fair. 

What about adjusting the award, if the amount of recovery otherwise would be excessive or inadequate, to reflect “such sum as the court shall find to be just, according to the circumstances of the case”?  Well,  “Cliffside undoubtedly profited from its Lanham Act violations regarding the Passages review posted on The Fix in some manner.” Its expert testified that The Fix’s average revenue from a visitor to The Fix was always below $0.30 per click from 2014 to 2018. [This seems to be based on The Fix's ad revenues rather than Cliffside's revenues, but I'm not clear on that.] Multiplying that figure by the 192,434 organic visitors to the Passages review between 2014 and 2018, “The Fix could not have benefitted more than $60,000.” This was a sensible number: if Cliffside hadn’t violated the Lanham Act, “the Passages review would not have been posted at all during that time period, so any visitors to that website were unjustly benefitting The Fix.” Thus, the court awarded Passages $60,000 in disgorgement of The Fix’s profits.

No attorneys’ fees, though.  Cliffside’s defense wasn’t frivolous and its legal arguments weren’t objectively unreasonable. Nor were its (non-unclean hands-barred) violations willful.  (The court also noted that Passages had its own unclean hands and also didn’t litigate in the most pristine of ways, which further supported denying attorneys’ fees.)

Disturbingly, the court commented that “the public’s interest implicated in this case is less significant than a typical false advertising case” because the ads weren’t presented in a way that consumers couldn’t avoid, but instead could only be found by internet searches or deliberately clicking on links to the article.  This has to be wrong, since consumers performing searches are likely to be particularly interested in the subject matter rather than passively exposed to things they don’t care much about and thus more vulnerable to material deception; moreover, addiction treatment is a pretty significant topic.  The court concluded that “very few visitors to the Passages review on The Fix were exposed to a false advertising statement against their will,” but that’s silly—given the factual findings, they neither knew it was advertising, which is itself a problem, nor did they know that the review was false.  Both those problems violated consumers’ autonomy by interfering with their ability to decide for themselves what weight to give factual claims, and the fact that they could have not searched for addiction treatment should be no defense.  The court’s ultimate conclusion—that injunctive relief adequately protects the public—is sounder, but makes even clearer that the weird statements about the public interest were unnecessary. 

I was a bit surprised that there were remaining, un-tried state law claims for libel per se, false advertising under Cal. Bus. & Prof. Code § 17500, and unfair competition under Cal. Bus. & Prof. Code § 17200; the court remanded those claims to state court, which means that the parties can apparently go again if they want to.

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