Monday, October 14, 2019

incentivized reviews/targeted upvoting can be false advertising, court reiterates

Vitamins Online, Inc. v. HeartWise, Inc., No. 13-CV-982 (D. Utah Sept. 24, 2019)

Supplement industry behavior is wild.  

Vitamins Online sells dietary supplements online, including on Amazon, using the name NutriGold. HeartWise, aka NatureWise, competes with NutriGold, including on Amazon, with products that contain an extract of garcinia cambogia and green coffee. NatureWise had its employees upvote positive reviews on its product pages and downvote negative reviews, increasing the likelihood that potential customers would see positive reviews of its products first and negative reviews last. “NatureWise also encouraged customers to post or repost their positive reviews on Amazon by offering them free products or gifts cards.  NatureWise would review and, in some cases, make minor edits to the reviews before asking the customers to post them on Amazon.” Such reviews could affect NatureWise’s placement in results. Vitamins Online sued NatureWise for false advertising based on: (1) manipulating Amazon’s customer review system and (2) falsely advertising and misrepresenting the content and characteristics of its green coffee and garcinia cambogia products.

NatureWise counterclaimed, alleging among other things that VO’s principal bought over one thousand bottles of one of its garcinia cambogia products and then resold those bottles with an insert that was entitled “AS IS”:

The insert cautioned purchasers to read it before opening the bottle or else the purchaser would unable to return it for a refund. The insert then explained that the product did “not contain inside the bottle what is claimed on the outside label,” that a third-party laboratory had tested and concluded that the label did not entirely match the content of the bottle, and that NatureWise’s online product reviews were not genuine. The insert also claimed that the manufacturer was being sued for its scams and purported fraudulent practices.

Review claims: Rather than taking the relatively more simple path of saying that manipulating reviews can imply false facts and thus constitute a false or misleading representation of fact, the court instead (and ahistorically) seized on the word “device” in §43(a) to say that review manipulation could be a misleading “device.”  (As Graeme Dinwoodie has extensively documented, “device” to the Lanham Act’s drafters meant essentially “badge/logo.” I think the court’s holding is right but its statutory construction is both unnecessary and overelaborate.)

Could review manipulation be falsifiable instead of puffery?  The court pointed to a “well-established exception [to the rule that only factual claims are actionable:] that an opinion by a speaker who lacks a good faith belief in the truth of the statement is actionable.” And an intent to deceive can be presumed to have succeeded even for implied claims.  There was a genuine factual issue about whether NatureWise acted with the intent to deceive consumers. The evidence showed that NatureWise discussed contracting with individuals in the Philippines “to use a rotating IP service and multiple accounts to reduce the effect” of their competitor’s attempts to lower their market share, which could be effective because the conduct was “not connected to NatureWise.” A NatureWise employee expressed that he was “wary of tipping our hand to our customers that we have anything to do with interfering with reviews.” In response, NatureWise’s principal stated that his “only concern” was that Amazon would investigate the positive changes in NatureWise’s product reviews and realize that the accounts voting up NatureWise’s products may not belong to real people. He also expressed the importance of having more third-party sellers so that it would be impossible for Amazon to know which company was behind the up and down voting of reviews.

Second, even without a presumption of deception, Vitamins Online produced a survey that supported its claims. It showed that that a majority of consumers: read reviews when shopping for weight loss products; rely upon those reviews; and believe that product reviews are genuine and done by real customers. A review’s number of stars and its helpfulness rating play influential roles in a consumer’s purchasing decision.

NatureWise argued that these were all just opinions. But there was extrinsic evidence that the reviews mattered, and also some of the reviews might not have been from “real people,” making them literally false.

Injury: this wasn’t a comparative advertising case where injury could be presumed even though there was some evidence of NatureWise targeting VO and even though the parties’ products could appear against each other on Amazon. “[I]t would be unjust and improper for the court to apply a presumption of injury based on a third party’s conduct instead of the defendant’s. The comparison captions found on Vitamins Online’s and NatureWise’s Amazon product pages are a function of Amazon’s website—not a result of NatureWise’s conduct.” VO argued that a presumption of injury was appropriate because the parties dominated the market: one of its witnesses found 17 market participants on Amazon for the products at issue, but approximately 92% of the reviews appear on Vitamins Online’s and NatureWise’s product pages. That wasn’t enough to show market domination.

Although this issue is presently before the Supreme Court, the Tenth Circuit presently holds that either actual damages or willfulness must be shown for disgorgement; VO thus argued that it didn’t need to show actual damages to establish injury. But that conflates injury with entitlement to disgorgement, which only matters once liability has already been established.  That leaves the puzzling question: what is the burden for showing injury when the plaintiff seeks disgorgement? “Bearing in mind that there is a higher burden for seeking money damages and a lower burden for seeking injunctive relief, the court concludes that the standard for disgorgement is somewhere between the two.”

VO introduced evidence that sales plummeted after NatureWise entered the Amazon market, and argued that its survey showed injury.  There were genuine issues of material fact, but VO wasn’t entitled to summary judgment on injury. Outside a two-player market and in the absence of comparative advertising, the parties weren’t necessarily taking each other’s sales; this was better left for the finder of fact (though how the finder of fact is supposed to sort that out is a bit of a mystery).

Inredient claims: VO argued that NatureWise made various false statements about its ingredients/efficacy/etc. Some of the products no longer had existing samples to test; the court concluded that NatureWise had destroyed those products; that VO was prejudiced by that destruction; and that NatureWise acted in bad faith. VO was thus entitled to an adverse inference instruction that this product subset bore all of the allegedly false ingredient claims and that they were false.

NatureWise sought summary judgment on certain challenged statements.

“100% Pure” and “Sourced, Formulated, . . . and Guaranteed to be the Highest Quality Available”: “Particularly in the context of health supplements, a claim that something is ‘100% Pure’ is a measurable statement of fact…. It seems likely that a reasonable consumer viewing such a phrase would expect exactly what the phrase suggests—an unadulterated product consisting purely of the listed ingredients.”  The “sourced etc.” claim was a closer call. In context, however, it immediately followed NatureWise’s label claim that its garcinia cambogia consisted of “Vegetarian Capsules and Absolutely Nothing Else! ZERO Fillers, ZERO Binders, and ZERO Artificial Ingredients.” And there were genuine issues of material fact about whether NatureWise’s products had fillers, binders, and artificial ingredients.

So too with other challenged claims: “For each remaining statement, NatureWise employs an exercise of identifying specific words within each statement that it claims can be interpreted or defined, by dictionary or otherwise, in multiple ways thus rendering the entire statement ambiguous.” The court found that this ignored the requirement of considering the ad context. Combined with the other label statements, “the alleged ambiguities dissipate.”

Moreover, “NatureWise’s exercise of suggesting that several of its own statements are ambiguous seemingly cuts against what a corporation would want when promoting and advertising its health supplement products. That a company deliberately markets its products in an ambiguous and difficult-to-understand manner is anomalous to say the least ….”

The court also found that NatureWise wasn’t entitled to summary judgment on VO’s request for disgorgement.  NatureWise argued that VO didn’t show what sales were attributable to false advertising. But “[t]he language of the Lanham Act is clear: ‘In assessing profits the plaintiff shall be required to prove defendant’s sales only; defendant must prove all elements of cost or deduction claimed.’” “To require Vitamins Online to not only distinguish all sales based on false advertising from all sales based on legitimate conduct, but also require it to apportion its sales among all the various categories and subsets of its claims, would be to violate the plain terms of the statute.”  VO had provided evidence of NatureWise’s sales, as well as some evidence of willfulness, as discussed above, and evidence that NatureWise “discussed stealing the design of Vitamins Online’s labels.”

NatureWise relied on Retractable Techs., Inc. v. Becton Dickinson & Co., 842 F.3d 883, 901 (5th Cir. 2016), but even that case accepted the district court’s finding that some of the defendant’s profits were attributable to its false advertising. The appropriate rule: “a plaintiff need only demonstrate that the defendant has benefitted from the alleged false advertising (which Vitamins Online has done), then the defendant has the burden to reduce its profits by the elements of cost and deduction, which will result in the plaintiff recovering only those profits attributable to the false advertising.”  That’s a pretty generous reading of Becton Dickinson, but ok.  NatureWise argued that disgorgement would result in a penalty instead of compensation, but the defendant “has the power to ensure that the plaintiff does not recover any profits that are not attributable to the false advertising” by meeting its burden; the alternative gives a windfall to the wrongdoer. And the court in its equitable discretion can further protect against bad outcomes.  False advertising cases should be treated no differently than trademark infringement cases for purposes of disgorgement.

By contrast, NatureWise wasn’t entitled to disgorgement on the counterclaims because it neglected to produce evidence of VO’s sales. It also failed to show that it could get injunctive relief. On irreparable injury, although its sales of garcinia cambogia fell after VO sent out the “AS IS” flyer, “NatureWise returned to the top sales ranking on Amazon for garcinia cambogia within only a few months.”  Money damages might well have been sufficient, but for NatureWise’s choice to withdraw its claim for actual damages. Without evidence relating to the only remaining remedies it sought, the counterclaims were dismissed.

The court also struck VO’s jury demand because the only remedies left in the case, disgorgement and injunctive relief, were equitable in nature. VO argued that disgorgement was a surrogate for damages and thereby a legal remedy, but that’s not what the cases say. But even if damages and profits are related, they have distinct purposes and natures; disgorgement focuses on unjust enrichment/deterrence, while damages redress an injury.

Some courts have held that “an accounting of profits can act as a proxy for a legal claim in some circumstances.” The idea is that, “because proving actual damages is difficult, trademark law creates an alternative form of relief—profits as a proxy for damages— which is governed by a less challenging evidentiary regime.”  Under this theory, a plaintiff may be entitled to a jury trial if “1) the case involves similar products, 2) there is no adequate remedy at law and 3) the products compete directly.” The court was unpersuaded.  Anyway, even under this theory, the market would have to be such that a loss for one party was almost automatically a gain for the other, and the market here wasn’t a two-player market.

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