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 décor 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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