Wednesday, November 13, 2019

Colorado labeling doesn't dispel potential falsity of "Kona" for coffee

Corker v. Costco Wholesale Corp., 2019 WL 5887340, No. C19-0290RSL (W.D. Wash. Nov. 12, 2019)

Plaintiffs, coffee farmers in the Kona District of the Big Island of Hawaii, alleged that defendant Boyer’s falsely designates the geographic origin of its coffee products as “Kona,” prominently placing the word Kona on the front of its packaging despite the fact that the product contains little to no coffee from the Kona District. One of Boyer’s coffee products is labeled “CafĂ© Kona” and another is labeled “Kona Blend.” In lab tests, ratios of various metal (strontium to zinc, barium to nickel, cobalt to zinc, and manganese to nickel) are allegedly well outside the range of that which is found in authentic Kona coffee. Even if there were some Kona coffee in Boyer’s products, it is allegedly not the meaningful percentage that a consumer would expect based on the packaging.

Boyer’s argued that the Lanham Act false advertising claims should fail because plaintiffs didn’t allege that that they, individually or as a group, have a protectable trademark in the word Kona. But “false designation of origin,” even before its expansion to cover unregistered trademarks, always covered geographic origin.

Boyer’s then argued that the claims were implausible because its packaging clearly showed that it was a Colorado company. But none of the statements about the Colorado-ness of the company “dispels the notion that the coffee roasted or crafted in Colorado was grown in the Kona district, a notion that is arguably conveyed by the use of the otherwise gratuitous word ‘Kona’ in the name of the product.” (Does anyone think, even with climate change, coffee roasted in Colorado is grown there?)

Finally, Boyer’s argued that the mere presence of a geographic reference on its packaging cannot give rise to claim for false designation of geographic origin. If, in context, the use of “Kona” was plausibly misleading, which it was, the claim could proceed.  (Citing Pernod Ricard USA, LLC v. Bacardi USA, Inc., 653 F.3d 241(3rd Cir. 2011)), which rejected a claim based on “Havana Club” for rum that clearly, to the court, also said it was from Puerto Rico).

Monday, November 11, 2019

claims for ab exercise device going beyond FDA clearance are actionable

Loomis v. Slendertone Distrib., Inc., 2019 WL 5790136, No. 3:19-cv-854 - MMA (KSC) (S.D. Cal. Nov. 6, 2019)

Loomis brought the usual California claims based on ads for the Flex Belt, a purported ab-exercise device. While denying standing for injunctive relief and finding a bunch of the challenged claims to be puffery, there was still enough to continue, and the court also rejected an FDA preemption argument.

Preemption: Slendertone argued that the Flex Belt had been FDA cleared [NB: not approved] “for Toning, Firming and Strengthening the stomach muscles,” and thus the claims were preempted. States can adopt FDCA rules for their own law, but parallel state “consumer protection laws, such as the UCL, FAL, and CRLA, are nonetheless preempted if they seek to impose requirements that contravene the requirements set forth by federal law.” But Loomis didn’t challenge whether the FDA should have cleared the Flex Belt or whether the specific FDA-cleared statement is misleading, and this was a case involving a Class II medical device, not FDA approval.

Actionable statements: because the FDA cleared the Flex Belt as an EMS device for toning, firming, and strengthening abdominal muscles, “such representations cannot be deceptive to a reasonable person.” But it would be deceptive to market an EMS device as cleared by the FDA “for weight loss, girth reduction, or for obtaining ‘rock hard’ abs.” Much of the advertising Loomis cited was puffery, such as the testimonials:

With my schedule I can’t do an ab workout every day, but with The Flex Belt® I’ll put it on every day because I’m doing things at the same time. So it’s really just being smart. It’s easy, I wear it every day and my abs are there to show for it! My abs feel like I’ve had the most amazing workout and I just wore The Flex Belt® around the house for 30 minutes.
The Flex Belt® tightens, tones, and strengthens my stomach without me even having to think about it. It has taken my abs to a whole new level... it does all the work, and I get the results.

These statements were “highly subjective to the individuals giving the statements,” although I think they’re misleading. There was nothing actionable about the claims on Amazon to “stimulate all your major stomach muscles at the same time providing you with the perfect abdominal contraction ….You don’t have to worry about your form or come up with the time to get it done.” That didn’t claim that the Flex belt alone will result in weight loss, girth reduction, or an attractive appearance. [I don’t think it’s “alone” that’s the problem. I think the problem is that the Flex belt doesn’t produce a marginal effect on any of these, and the implication is that it does.]  “GREAT ABS START HERE,” “Maximum Core Strength,” and “Ultimate Toning Technology” were also puffery.  [But if it doesn’t work at all, then it’s not exaggeration, it’s just … not true.]

In the ads, “any reference to fat loss is accompanied by disclaiming language that the Flex Belt is insufficient to achieve weight loss and that a more attractive abdominal area requires proper diet and exercise,” e.g., the “Flex Belt does not remove inches of fat but it tones, tightens, and strengthens your stomach muscles. Using The Flex Belt in conjunction with your dedication to Diet, Nutrition and Exercise can help you achieve your goals of a more attractive stomach as well!”

Still, there were specific statements, in context, that were plausibly deceptive to a reasonable person.  E.g., “Who Should Use the Flex Belt®?...Anyone that wants more attractive abs, regardless of current fitness levels”; “With The Flex Belt®, it doesn’t matter what your current exercise status is because there will always be time to build firmer, stronger abs. This product is perfect for … anyone that wants more attractive abs, regardless of current fitness levels”; and touting the product “[f]or those looking for a convenient way to tone, strengthen and flatten the abdominal area.”

These claims made it “probable that a significant portion of the general consuming public or of targeted consumers, acting reasonably in the circumstances, could be misled” to believe the Flex Belt could help consumers achieve more attractive abdominal muscles. It was contradictory to make misleading statements as to improved abdominal appearance while simultaneously disclaiming that “The Flex Belt does not remove inches of fat.” In addition, although the testimonials and pictures of six-pack abdominal muscles were puffery, they “contribute[d] ‘to the deceptive context of the packaging as a whole.”

UCL unlawful and unfair claims also survived, as did claims for breach of express warranty, despite a limited warranty addressing product defects stating that “THIS LIMITED WARRANTY IS THE ONLY WARRANTY FOR THE PRODUCT, AND THERE ARE NO OTHER EXPRESS WARRANTIES, ORAL OR WRITTEN, PROVIDED BY [Slendertone].”

Under California law, “[w]ords or conduct relevant to the creation of an express warranty and words or conduct tending to negate or limit warranty shall be construed wherever reasonable as consistent with each other.” Limitation of warranties are allowed “only by means of [w]ords that clearly communicate that a particular risk falls on the buyer.” Further, disclaimers or modifications “must be strictly construed against the seller.” “Noting the presumption of construing warranties as consistent with one another, the burden against the seller, and the fact the limited warranty was included in the packaging for the Flex Belt after Plaintiff purchased it, the Court finds that the limited warranty does not upset Plaintiff’s alleged express warranty cause of action.”

Thursday, November 07, 2019

nontestifying students are entitled to relief from for-profit's false advertising

State v. Minnesota School of Business, Inc., --- N.W.2d ----, 2019 WL 5778078, No. A17-1740 (Minn. Nov. 6, 2019)

How do you decide whether nontestifying members of a class have been harmed? A majority here, over two dissenting Justices, finds that it was appropriate to conclude that nontestifying victims of a fraudulent educational scheme were harmed.  If there are to be fraud class actions at all, this is a necessary rule, and changing the common law rules that prevented such inferences was the basic reason that states enacted consumer protection laws in the first place. I have to admit, I find it depressing that even AG-led efforts against frauds that left students with thousands of dollars in debt for worthless credentials, diverting their life plans, couldn’t convince an appellate court and a full slate of state supreme court justices to infer that the natural consequence of the fraud occurred for each victim.  The dissenters also try to turn the recent FTC losses on the scope of section 13 relief into reasons not to award relief under state law; expect more of this, too.

Minnesota’s AG sued two for-profit universities, the Minnesota School of Business, Inc. and Globe University, Inc., alleging that they misled prospective students about the value of criminal justice degrees offered by the schools in violation of the Minnesota Consumer Fraud Act (MCFA) and the Uniform Deceptive Trade Practices Act (DTPA). Most prospective students who signed up for such degrees wanted to be a probation or police officer.  The schools targeted people interested in policing careers. As advertised, the curriculum focused on police work like crime scene investigations and many classes were taught by former or current police officers. “In marketing materials and through admissions practices, the Schools made statements to prospective students that graduates of their criminal justice program were qualified to become a police officer, or at least qualified to enter programs providing the additional training required to become a police officer.… The Schools also advertised that an associate’s degree from their criminal justice program qualified a student for a career as a probation or parole officer.” E.g., “.... And you can be sure, as a graduate of a Globe University/Minnesota School of Business criminal justice program, you will have those qualifications.” But that wasn’t true. The schools didn’t provide the credentials necessary for police jobs in Minnesota, and their credits didn’t transfer to any school that offered the relevant certification; similarly, the associates’ degree in criminal justice didn’t provide the bachelor’s degree required for probation officers.

To prevail, the AG had to establish a “causal nexus” between the uncontested violations of the MCFA and the harm suffered by students. Fifteen students testified, out of about 1200 affected. The trial court and the Supreme Court majority agreed that was enough. “For example, one student testified that he transferred into the criminal justice program because the school ‘assured him that the program would allow him to become a Minnesota police officer’ and that he would not have pursued that program had he known the school was not [relevantly] certified.”

The district court found a knowing violation of the MCFA both in affirmative misrepresentations and in failure to disclose material facts. The economic harm inflicted on students “is an inevitable and foreseeable consequence of the misrepresentations and obfuscations in [the Schools’] marketing of the program.” Thus, the AG proved a causal nexus between the Schools’ misrepresentations and the harm suffered by the criminal justice program students, as required under the MCFA. “There can be no question that [the Schools’] fraudulent practices caused significant public injury to any students ... who enrolled in the criminal justice program with the goal of becoming a Minnesota police or probation officer.”  The court rejected the schools’ argument that it could not consider the nontestifying students to be similarly situated to the testifying students.

The court issued an injunction, imposed civil penalties, and ordered equitable restitution requiring the schools to disgorge the tuition collected from the criminal justice program students. Claimants who represented that they enrolled in the program based on an understanding they could become a police officer in Minnesota or a parole or probation officer in Minnesota with an associate’s degree would be entitled to a rebuttable presumption of injury and causal nexus. The restitution would cover tuition; payments to the schools for books, enrollment or student expenses or fees; and any interest or finance charges incurred by the claimant for student loans taken out to pay for tuition, expenses, or fees.

The court of appeals upheld the restitution order for the students who testified at trial but reversed as to nontestifying students for failure to prove a causal nexus to their harm.  When the AG sought review, the schools argued that even the testifying students didn’t deserve restitution.

The parties agreed that the schools made false claims, and that “enrolling in, and paying tuition for, a degree that does not provide what is promised is harm.” So was there a causal nexus between the falsity and the harm? This is a factual question that a district court is best positioned to assess. Causal nexus/reliance can be established by direct or circumstantial evidence.

Consumer protection statutes “are remedial in nature and are to be liberally construed in favor of protecting consumers.” E.g., State by Humphrey v. Alpine Air Prods., Inc., 500 N.W.2d at 788, 790 (Minn. 1993) (“In passing consumer fraud statutes, the legislature clearly intended to make it easier to sue for consumer fraud than it had been to sue for fraud at common law. The legislature’s intent is evidenced by the elimination of elements of common law fraud, such as proof of damages or reliance on misrepresentations.”). The MCFA “ ‘reflects a clear legislative policy encouraging aggressive prosecution of statutory violations’ and thus should be ‘generally very broadly construed to enhance consumer protection.’ ” It allows the AG to seek restitution.

Past precedent established that “proof of individual reliance” is not needed to prevail under the MCFA “where a defendant’s misrepresentations were directed at and affected a broad group of consumers.”  The nexus requirement “is a more relaxed requirement than the strict showing of direct causation required at common law…. [T]here are times when the materiality and pervasiveness of consumer fraud is relevant to support a court’s finding that a causal nexus exists between the fraud and the consumer’s decision to purchase the product.” (This isn’t a fraud on the market theory, the court said; fraud on the market is just another example of where individual proof requirements are relaxed.)  Likewise, the seller’s own intent can be “decisive” in substituting for proof of direct reliance by each individual purchaser.  If the defendant intends potential consumers to rely on the representations, that is itself “important and relevant evidence to establish a causal nexus.”  This is especially true for AG-brought cases.

Similarly, the FTCA (a broad statute, even if it doesn’t explicitly authorize restitution in section 13(b)), doesn’t require proof of individual reliance by each consumer.  The FTC presumes reliance “where the FTC has demonstrated that the defendant made material misrepresentations, that they were widely disseminated, and that consumers purchased the defendant’s product.” “The reason is plain: ‘requir[ing] proof of each individual consumer’s reliance on a defendant’s misrepresentations would be an onerous task with the potential to frustrate the purpose of the FTC’s statutory mandate.’”  So too here.

Instead of directly proving reliance for each individual, “all the facts surrounding the consumer fraud should be taken into account: Was the fraud longstanding, pervasive, and widespread in communications directed to consumers of the product? Did the seller intend and understand that consumers would rely on the misrepresentations? Was the information of a kind on which consumers would typically rely?”  This wasn’t a matter of “judicial notice,” as the dissent accused. Instead, “a district court sitting in equity and as a factfinder may broadly consider several common-sense factors when assessing whether a causal nexus exists under the MCFA.”

There was thus sufficient evidence of a causal nexus both for the testifying students and for the non-testifying students.  The false advertising was widespread and pervasive; the schools intended for students to rely on it and targeted prospective students who wanted to be a police officer or a probation officer. “The Schools would not have spent a total of $120 million in advertising and made law enforcement marketing materials available where they did if they did not believe that prospective students would rely on them.” The false advertising was “precisely the type of information a reasonable prospective student would rely on in deciding whether to pursue a criminal justice degree at the Schools. And the evidence at trial showed that prospective students did so rely.”

Choosing a school is a serious decision:

We reasonably expect a person to look at materials provided by a potential school to assess whether the education program is consistent with his or her career objectives. It is reasonable to conclude that a person who wants to become a police officer or a probation officer will make such an investment of money and time only if the person believes that the classes will provide the requisite qualifications for that career. Moreover, the record shows that the Schools took advantage of the “unwary”—nontraditional, first-generation college students who usually attend for-profit schools.

The evidence established a causal nexus between the misleading statements and the harm suffered by the nontestifying students. “The Schools should not profit from fraudulently providing a useless degree to their students.”

The majority also rejected challenges to the restitution process established by the district court. There was no need for a “rebuttable presumption” of reliance—the AG satisfied the causal nexus requirement without the need for any presumption.  And the district court had broad discretion to order equitable restitution and to fashion the appropriate restitutionary remedy. The goal of such remedies is “to force a wrongdoer to divest money improperly gained at the expense of another party. It is aimed as much (or more) at preventing the wrongdoer from profiting from its misdeeds as it is to make the injured party whole.”

Nor did the process violate due process. A special master would oversee the determination of the overall amount of restitution, which would be a product of the number of students who sought a criminal justice degree and the total tuition, fees, and other costs they paid to the schools. There were procedural safeguards, including requiring students to declare under penalty of perjury “that they were enrolled in the Schools’ criminal justice program based on an understanding that they could become (a) a police officer in Minnesota or (b) a parole or probation officer in Minnesota with an associate’s degree.” The schools could contest that. Disputes not resolved by the parties would go to the special master and thence to the district court for final decision.  That satisfied due process.

Justice Anderson dissented in relevant part (and the Chief Justice agreed): It wasn’t right to conclude that the nontestifying students had been harmed, despite the “appalling” conduct of the schools (at least as to the testifying students):

The court implicitly adopts a rebuttable presumption based on assumptions about intent, i.e., the existence of pervasive fraud or an intent that consumers would rely on the misrepresentations. Alternatively, the court appears to deploy a form of judicial notice based on assumptions about what information consumers typically rely on or the importance and cost of the purchase decision. Then, the court endorses the use of “mini trials” to determine the amount of restitution, if any, owed by the Schools to the nontestifying students. I cannot join this decision because even defendants who engage in appalling behavior are entitled to require the Attorney General to prove his claims. The Attorney General did not do.

Note: rebuttable presumptions aren’t proof-less; they’re ways of using probabilities to determine what is likely true in an individual case.  That might be accurate or not, depending on your other beliefs, but it’s not a wild innovation.

The dissent said that there wasn’t evidence that all program participants saw the ads offered as evidence or that, even if they did see them, the ads affected their decisions. “There is simply no basis to presume that just because 15 individuals relied on deceptive practices, 1,200 other individuals also relied on the same practices and suffered injury accordingly.”  (Other than the content of the ads, the knowledge of the advertiser that the claims mattered to potential students, and the usual reasons that people seek the relevant degrees.)

The FTCA also wasn’t helpful because the consumer protection laws in Minnesota are different. Also, the FTCA comparison favors a reversal because the Seventh Circuit has held that the FTC doesn’t allow restitutionary relief under section 13(b).  The Lanham Act is also different and anyway there was no evidence in the form of “actual consumer testimony,” “other than for 15 former students” (!) [what does the dissent think “actual consumer testimony” means?], and no consumer surveys, tests, or market research. [Given that the claims here were literally false, if you did apply the Lanham Act, no evidence of consumer reaction would be required.]

The majority wrongly assumed that no student would enroll in the criminal justice program unless they wanted to become a Minnesota police or probation officer.  This was essentially to take judicial notice of the defendant’s liability. [Query how this standard for what counts as factfinding would work in a standard trademark case. I do think courts do a lot of ad hoc factfinding in Lanham Act cases, but here it doesn’t seem like an assumption; it seems like a conclusion based on the evidence of how the programs were marketed and how the students who did testify reasoned—if they weren’t aberrations, then their experiences can be generalized, and I think it is possible to determine that a witness isn’t aberrant.]

The dissent didn’t want to do “mini restitution trials” at the restitution stage. There were legitimate due process concerns about the restitution process.  But other courts routinely hold that disputes about the amount of damages can be resolved individually after class treatment on liability.

Wednesday, November 06, 2019

pleading falsity can be done even with sophisticated consumers

10x Genomics, Inc. v. Celsee, Inc., 2019 WL 5595666, No. 19-862-CFC-SRF (D. Del. Oct. 30, 2019) (magistrate)

Skipping the patent parts.  “10x is a life sciences technology company that markets and sells its Chromium product line, which provides researchers with the ability to measure gene activity on a cell-by-cell basis for large numbers of cells in a single experiment.” Celsee’s Genesis System “is designed to capture and isolate single cells, … allowing the user to track a molecule and the cell of origin for that molecule.”

10x successfully alleged false advertising: Celsee advertised a 70% cell capture rate. Unconvincingly, Celsee argued puffery. And it argued that 10x failed to show an industry standard for making cell capture rate calculations, and that it didn’t specify how the 70% figure was calculated.  10x nonetheless sufficiently alleged literal falsity by alleging that “market participants evaluate the performance of single cell systems based on the cell capture rate, which the complaint defines as ‘a measure of the percentage of input cells that are assayed in each experimental run.’” 10x claimed to have a 65% capture rate. Celsee advertised using the tagline “Because every cell matters,” and Celsee ads and brochures claimed “[d]eep and accurate view of cell populations with >70% capture of input cells.” This figure allegedly measured only the percentage of cells caught in the teeny little wells it used that were actually analyzed, while not counting the cells put into the system that never make their way into the wells.   It was plausible that this was literally false because the calculation failed to account for all the cells put into the system, and that this was objectively inaccurate.

This was also plausibly misleading, since 10x alleged that cell capture rate is “[a] key criterion on which market participants evaluate the performance of single cell systems.” [Not to mention Celsee’s own tagline.] It was plausible that targeted consumers would presume the parties’ advertised cell capture rates were directly comparable, and that Celsee’s advertised 70% rate was intended to make its product seem superior.

Celsee argued that 10x didn’t sufficienly plead materiality “because researchers purchasing single cell technology would not plausibly base their purchase decision on a non-specific statement of capture efficiency without first understanding the method of calculation.” Nope. If (as alleged) there was a superiority misrepresentation that confused consumers, and if cell capture was a key criterion for customers, that was enough.

multimillion-dollar verdict in false advertising case, but no fee shift

Boltex Manufacturing Co. v. Ulma Piping USA Corp., No. 17-CV-1400, 2019 WL 5684201 (S.D. Tex. Nov. 1, 2019)

Previous coverage. A jury found in favor of plaintiffs Boltex and Weldbend on their flange-related false advertising claims.  The court noted that the Lanham Act has no statute of limitations and so borrows state law.  The majority of cases in Texas borrow the four-year period for common law fraud, but, because “a very credible argument could be made that the closest parallel in Texas law to a Lanham Act unfair advertising claim is Texas’ common law cause of action for unfair competition,” which has a two-year period, the jury verdict form asked the jury to separate out the relevant periods for damages purposes.

The jury awarded damages for federal false advertising and state unfair competition; the court required plaintiffs to elect (and based on the numbers they’re going to choose federal).  In addition, the jury findings supported disgorgement.  Ulma’s profits were found to be $26 million, but the court wasn’t going to award that entire amount, since plaintiffs had less than 25% of the flange market even after Ulma was hypothetically removed from the market. Using plaintiffs’ own experts, their share of the flange market in which they all competed was 11.6% for Boltex and 10.4% for Weldbend. Thus, the court determined to award a bit over $3 million to Boltex and a bit over $2.7 million to Weldbend in addition to the Lanham Act damages if they opted for Lanham Act damages.  The total was nearly $3.7 million/a bit over $3 million for the Lanham Act respectively, or $1.2 million/$600,000 under Texas common law.

The court also found that the case wasn’t exceptional, even though the falsity part of the case may have been easy, because the existence damages was reasonably litigatable:

Defendants quite legitimately argued and produced a fair amount of evidence that the Plaintiffs and Defendants did not compete and consequently Plaintiffs were not damaged by any actions of the Defendants and if damaged at a substantially lesser amount than claimed. While the jury did not totally agree with Defendants’ position, it did not completely agree with the amount of damages claimed by the Plaintiffs. Defendants have the right to litigate liability and damages and it is not an unreasonable litigation position—even in the face of what some might consider overwhelming evidence of liability—to vehemently contest whether a plaintiff has actually suffered any damages due to its alleged misconduct.