Friday, November 22, 2019

false advertising claims against competing media nonprofit can continue under broad theory of commercial speech

Tang v. Guo, 2019 WL 6169940, No. 17 Civ. 9031 (JFK) (S.D.N.Y. Nov. 20, 2019)

The previous complaint was dismissed for failure to sufficiently allege commercial speech; the court now finds it sufficiently alleged because the media defendant had a “donate” button and competes with the media plaintiff; query whether under this reasoning Fox could sue the Washington Post under the Lanham Act.

Plaintiffs alleged that defendant Kwok runs charitable organizations and a media platform that are designed to compete with Tang and his wife’s own nonprofit organizations and online, independent media outlet. Kwok allegedly made, and continues to make, numerous false and defamatory statements about plaintiffs “to garner attention for and ultimately drive donors away from Plaintiffs’ organizations to Kwok’s competing organizations.”

The court, unfortunately, set forth the post-Lexmark “commercial advertising or promotion” test, then commented that “[m]any courts have adopted a fourth requirement: a purportedly false statement must be made ‘by a defendant who is in commercial competition with plaintiff.’”  This has the historical sequence backwards; most courts to consider the issue have recognized that Lexmark’s logic eliminated the competition requirement. This error may be consequential here.

The prior complaint “failed to allege how Kwok had an economic motivation or intended to profit by attempting to gain viewers on his media platform at the expense of viewers on Plaintiffs’ platform.” The amended complaint, however, alleged a sufficient economic motivation for Kwok’s speech because Kwok allegedly added “DONATE” buttons to the video infomercials promoting his media outlets and fundraising organizations. In addition, the amended complaint alleged “that Kwok and the other named defendants intended to increase viewership on the Media Defendants’ platforms to encourage viewers to donate to the Rule of Law Defendants that compete with Plaintiffs’ own nonprofit organizations.” 

In addition, there were new allegations that the defendants violated the Lanham Act by misleading the public regarding the purported use of donated money, failing to disclose that (1) the donations are not tax-deductible and (2) the funds will be used for non-charitable lobbying efforts, to support the for-profit Media Defendants, and to fund Kwok’s application for asylum in the United States. And the complaint plausibly alleged that the parties compete for fundraising dollars, that Kwok’s false statements were made for the purpose of influencing viewers to donate to his charitable organizations instead of Plaintiffs’, and that the statements were sufficiently disseminated to the relevant purchasing public by being posted to public forums such as YouTube and Twitter.  That was enough.

I am dubious.  The commercial speech status of fundraising speech is itself hotly contested, though the defendants’ nonprofit allegedly seeking donations that aren’t deductible is a complicating factor. Still, if defendants are seeking donations based on their speech and not inducing consumers to buy some separate product or service, I don’t see why Tang couldn’t also sue the Washington Post for Lanham Act false advertising for similar reporting (given Lexmark), since the Washington Post also seeks readers to fund its reporting. It seems to me that this ought to be a defamation case.

The state law unfair competition claim survived for the same reasons. Tortious interference failed because the complaint didn’t allege specific facts about contracts with other donors breached because of defendants’ actions.

Defamation against Kwok: Kwok allegedly defamed plaintiffs by claiming they tried to lie to and “swindle” donors, steal money from donors, and use donated money for their own personal and illicit expenses. Kwok argued that these were opinions, and that Tang was a public figure. At the pleading stage, defamation of a public figure with at least reckless indifference to the truth was plausibly alleged. “Kwok’s assertions that Plaintiffs are secret agents of the Chinese government, rapists, or thieves, are statements that may be proven false and, thus, they are not mere statements of opinion.”

IIED: “IIED claims should not be entertained where the conduct complained of falls entirely within the scope of a tort claim such as defamation.” The claim failed because the conduct alleged wasn’t sufficiently “extreme and outrageous” for New York’s high standard. “Here, the gravamen of the SAC is a commercial dispute between competing high-profile public advocates and the use of false and defamatory statements by one advocate to obtain an unfair advantage over his competitor. This ‘cannot be said to shock the conscience of humankind.’” And it was duplicative of the defamation claim.

Harassment: Kwok allegedly engaged in a course of conduct that served no legitimate purpose and which alarmed and seriously annoyed plaintiffs in violation of N.Y. Penal Code § 240.26. New York law “recognizes an implied private right of action for criminal harassment in violation of the Penal Law.” So it was allowed. (But has to be subject to the same limits as defamation in this situation where the speech is all public, right?)

False light: not actionable in NY. Plaintiffs argued that they were California residents and the harm was suffered in California, but that wasn’t enough where the false light claim was wholly duplicative of their New York harassment and defamation claims.

Monday, November 18, 2019

(c) profits expert excluded for failure to tie profits to specific photos copied, instead of photos in general

Yellowpages Photos, Inc. v. YP, LLC, 2019 WL 6033084, No: 8:17-cv-764-T-36JSS (M.D. Fla. Nov. 14, 2019)

YPPI sued YP alleging infringement of YPPI’s copyrights, and sought disgorgement of the profits derived therefrom. Its expert, Brown, was offered to opine on whether revenue received from the sale of ads containing one or more of YPPI’s copyrighted images was reasonably related to the use of the YPPI copyrighted images. “Brown is the principal of a graphic design firm specializing in yellow page advertising, production, billing, data management, and pagination software. Brown has worked for and on behalf of small publishers and large independent yellow page publishers.” He reviewed “samples of advertisements that appeared in YP-branded yellow page directories, which ads contain one or more of YPPI’s copyrighted images.”

Brown’s expert report explained that the yellow page industry considers multiple factors in creating ads, one of which was “illustration and photos,” which “relates to creating impact and visually telling a story about the business and what it sells.” Advertisers value using images because photos and illustrations “give an ad the opportunity to create interest, show off products, demonstrate services, and convey emotions that can be seen with just a quick glance by a browsing user.” Brown stated that “[w]ithout images, an ad is not useless, but it is certainly disadvantaged by competing ads with supporting illustrations and photos found in the same heading.” He explained that customers don’t want lengthy ads, especially where an image can quickly convey the relevant information, and opined that images sell ads.

Brown opined that “[b]ased on the advertisements presented showing the inclusion of YPPI’s photographs, [he could] state without a doubt, that th[e images] played a key supporting role in the overall ad composition and assisted in telling the story behind products and services offered by the advertiser.” Defendants’ customers, in approving the ads, “certifie[d] that the advertisements presented would serve to promote their company in a way that is in-line with their business practices, offerings and identity.” In Brown’s experience, even where the customer already signed an advertising contract, the customer is always promised “an ad proof where [the] customer has a chance to approve an ad’s design and content or even cancel if [the customer] feel[s] it d[id] not represent their business.” Thus, he opined that “the use of YPPI’s images in the advertisements is related to the revenue that Defendants received from their customers for Defendants’ publication of the advertisements.”

The court excluded this testimony. He could rely on his experience to be designated an expert, but that didn’t mean that his opinion was based on sufficient facts and data. He testified that he didn’t review any comparable images available for licensing in the marketplace, didn’t compare the quality of YPPI’s photos to those available from any other company, had no personal experience with defendants’ sales process, didn’t know whether defendants’ customers saw mockups of ads before purchasing them, didn’t review ads by defendants that didn’t have YPPI images, and didn’t review information regarding how Yellow Pages prices its ads. He didn’t have any evidence that any customers would not have purchased an advertisement if it did not contain a YPPI image, didn’t know of any instances in which a customer purchased an advertisement because it had a YPPI image, or where the YPPI image helped sell the ad, or where a customer requested a YPPI image.  He didn’t any of the customers whose ads he reviewed to learn whether the YPPI image influenced the customer’s decision to buy the ad.

The court found that there wasn’t enough knowledge underlying the opinion. Even if it had been impractical to interveiw all defendants’ customers, he could have interviewed some. He could have looked at non-YPPI images available to defendants.  He didn’t know whether YPPI’s images played any part in any of defendants’ sales, so his opinion wasn’t supported by sufficient facts or data.

Likewise, YPPI didn’t show that his opinion was the product of reliable or accepted methods. “Simple reliance on experience … is not sufficient to meet the Court’s gatekeeping requirement.”  Brown didn’t explain how he determined that use of YPPI images was related to defendants’ profits. For example, he didn’t review other available images and conclude that YPPI’s were better.  He didn’t even state that certain photo features, like color or angle, were particularly useful, and that YPPI photos had those feartures. He didn’t argue that being able to draw from YPPI’s pool of images increased the database of potential images available, attracting customers who desired a large number of options. This wasn’t a methodology.

[The real question here is about baseline. Are we being asked whether the presence of images is important to ads, or whether the presence of these images is important? I have to admit, I’d be a bit more inclined to give the copyright owner the benefit of the doubt on this one, assuming infringement is shown.  It may well be that a different image would have been just as good as the infringed image, but the fact of the matter is that the infringing image was the one used. If images in general are important to ads, shouldn’t the defendant bear the risk here?  At the very least, why wouldn’t the burden on the defendant to show that the expressive characteristics of the infringing image weren’t relevant to the profits from the ad?]

general allegations of harm to Legalforce from TM scammer sufficed for Lexmark standing

Legalforce RAPC Worldwide P.C. v. Glotrade, No. 19-CV-01538-LHK, 2019 WL 6036618 (N.D. Cal. Nov. 14, 2019)

Legalforce “offers services including trademark preparation and prosecution, patent preparation and prosecution, copyright registration and counseling, international trademark and patent filings, and corporate formation and stock and equity structuring.” Mailer companies allegedly “use publicly available trademark filer information to send targeted ‘solicitations’ to...trademark applicants.” The “ ‘solicitations’ are constructed to [deceptively] make the trademark applicant believe that an official U.S. government agency or the [United States Patent & Trademark Office (“USPTO”) ] itself is sending a letter to them, raising fear among the unsuspecting public that they must pay large amounts of money or forfeit trademark rights.” These “Mailer Defendants” provide no real services and “result in no value to trademark owners.”

Defendant is allegedly one such “Mailer Defendant,” listing a Washington, D.C. address for its business, but actually located in Hungary. It allegedly sends out unsolicited offers and directs recipients to pay a $980 registration fee to have the recipients’ trademark (worthlessly) listed in its publication. The unsolicited offer is “deliberately constructed to deceive recipients into thinking the unsolicited offer is a bill so the recipient will send a check as a payment for something they think is already owed to protect a trademark.” Legalforce allegedly “has received over 40 unsolicited offers from [Defendant] in the past year, directed to both RACP’s clients and to individuals employed by RAPC.” It alleged that “significant business” was deceptively diverted, and that its business reputation was harmed because it “received inquiries from its clients confused about the unsolicited actions by the Mailer Defendants and worried that [Plaintiff’s] services to the clients were somehow deficient.” Legalforce alleged that it spent “valuable time and expenses to investigate the facts to appropriately advise its clients.”

Legalforce sued for violation of the Lanham Act, California’s UCL and FAL, and intentional interference with prospective economic advantage. Although the court found no personal jurisdiction over the defendant, it did find Article III standing/Lexmark standing. The defendant conflated the two.

Under Lexmark, “allegations of lost sales and damage reputation” are sufficient to “give [a plaintiff] standing under Article III to press [a] false-advertising claim.” Legalforce’s allegations, while “admittedly general,” sufficiently alleged damage to its business reputation caused by the alleged false advertising.

More Kona coffee: false designation claims under 43(a)(1)(A), but not (B), can target retailers

Two more opinions here, one about the meaning of "origin" in 43(a)(1)(A) and one about the liability of retailers for false advertising and false designation of origin.

Corker v. Costco Wholesale Corp., No. C19-0290RSL, 2019 WL 5895430 (W.D. Wash. Nov. 12, 2019)

The difference in treatment of claims against retailers of third party products under trademark and false advertising (43(a)(1)(A) and (B), respectively) appears to have hardened: here, plaintifs get to use (A) to bring their false designation of geographic origin claim against the retailers, but not (B), although the opinion is less than clear about the interaction between working parts.

Plaintiffs, coffee farmers in the Kona District of the Big Island of Hawaii, alleged that the moving defendants sell coffee products that falsely designate the geographic origin of the coffee as “Kona.”
Kroger's house blend

Magnum Exotics "Kona blend"

The retailer defendants challenged the plausibility of the Lanham Act claims and argued that Section 230 precluded claims against them.  

The retailers argued that it was the product producers who made a false statement of fact, not them, and that putting the third-party vendor’s product on their shelves or websites wasn’t a false statement of fact.  The court agreed, finding that “the policy implications of imposing liability for false advertising on all downstream participants in a retail chain are troubling.”  Quoting another court: “Defendants undoubtedly sell many products—should they be responsible for scrutinizing and determining the veracity of every claim on every product label in their stores simply because they sell the product?” The answer is no, even though it’s yes for trademark and copyright infringement, which are not obviously easier to detect--indeed, given the result on 43(a)(1)(A), it appears the very same claims get to proceed against the retailers as false association claims despite the policing difficulties thereby created.  

Without clarifying whether it was discussing direct or secondary liability, the court suggested that retailers could be liable for false advertising if they “control[] or participate[] in the creation of the offending label or create[] additional marketing materials for a product that amplify the manufacturer’s misrepresentations.”  That sounds direct; what about contributory liability?  Regardless, “false advertising claims against the retailer defendants, acting solely in their roles as retailers, may not proceed.”  However, claims based on private label coffees from Cost Plus and Kroger could continue.

False association: plausibly pled (apparently also against the retailers as retailers of third party products), because “origin” has always been understood to include geographic origin, even if it also expanded over time.  (The court rejected Sugai Prods., Inc. v. Kona Kai Farms, Inc., 1997 WL 824022 (D. Haw. Nov. 19, 1997), to the extent that it held that a false association of origin claim under 43(a)(1)(A) protects only against misrepresentations as to the identify of a product’s manufacturer.) No protectable ownership interest in a mark is required under §43(a)(1)(A) where the claim was based in false designation of geographic origin.

The claims were pled with sufficient particularity. For example, plaintiffs alleged that Costco “sells a variety of deceptive coffee products, including but not limited to Magnum Exotics.” Magnum Exotics products were marked with the word Kona on the front of the packaging and allegedly used deceptive taglines, slogans, and imagery that imply, falsely, that the coffee in its “Kona” products originated in the Kona District; the plaintiff provided examples of the offending text and images.  The use of exemplar products didn’t “invalidate or make unclear the allegation that Magnum Exotics products marked with the word Kona and sold by Costco contain a false designation of origin.” That was enough information for Costco to defend itself.  At one point, plaintiffs alleged that “[s]ampling has shown that nearly every product labeled ‘Kona’ in [the supplier defendants’] product lines misrepresents the origin of the coffee beans contained in the package.”

Defendants argued that plaintiffs were therefore not challenging every product labeled “Kona” and they had no way of knowing which products were at issue. But the immediately following allegations clarified that plaintiffs were alleging a consistent practice of false designation of origin,

even if a few Kona beans made their way into an individual package. Given the scarcity of authentic Kona coffee (… Kona coffee represents on 0.01% of the worldwide supply of coffee) and the high profitability of marketing commodity coffee as if it were Kona coffee, it is no surprise that any defendant that is willing to engage in such deceptive practices would consistently practice their deception across all product lines. An unscrupulous merchant selling counterfeit Rolex watches on a street corner tends not to mix a real Rolex into inventory every once in a while.

(Side note: Now that’s complaint drafting.)

CDA immunity: The relevance of CDA immunity was unclear. It doesn’t apply to goods stocked and sold in a physical store, even though the defendants have websites, and it also doesn’t apply to private label products sold on those sites (as to which the retailers are the providers of the accused content).  Plaintiffs also argued that, once an online sale is made, physical-world acts to deliver the accused products to the purchaser wouldn’t be covered by the CDA, and defendants didn’t respond to that argument. The court was apparently willing to accept plaintiffs’ argument, which should deeply worry many online retailers, but the court also said in its concluding paragraph that the claim against the retailers was “barred by the CDA to the extent their conduct is limited to making a product available for sale on a website.” Because even the false designation claim under 43(a)(1)(A) isn't an IP claim, I guess that means that sales of the non-house brand stuff on the websites are immunized.  (To the extent that the retailer defendants are advertising the other products on their websites, aren’t they doing more than making them available for sale? The other advertising content on the page is separate from that which is on the physical products themselves, and may or may not come from other sources—thus it could trigger secondary or even direct liability for false advertising, at least in the absence of the CDA.)

Corker v. Costco Wholesale Corp., No. C19-0290RSL, 2019 WL 5893291 (W.D. Wash. Nov. 12, 2019)

Same facts. These supplier defendants argued that, whatever the original interpretation of “origin” was, it no longer applies. Prior to 1989, Section 43(a) of the Lanham Act prohibited “false designation[s] of origin” generally. In 1989, Congress split 43(a) into two separate subsections, “the first of which covers false designations of origin that cause consumer confusion and the second of which covers false designations of geographic origin in advertising.” The suppliers argued that, because a misrepresentation of “geographical origin” in advertising or promotion is specifically prohibited by Section 43(a)(1)(B), a claim based on false designations of geographical origin cannot be brought under Section 43(a)(1)(A) even there’s a likelihood of consumer confusion.

The court disagreed. The more general term “origin” can still cover claims based on geography.  (Sure, but at heart this is a false advertising claim, and probably should have the false advertising requirements—commercial advertising/promotion and materiality.  That said, those seem easily satisfied by the labels here, especially given the prominence of the “Kona” claim.)  Subsequent cases have continued to talk about “origin” as encompassing geographic origin. (Citing Dastar and Two Pesos as well as Kehoe Component Sales, Inc. v. Best Lighting Prods., Inc., 796 F.3d 576, 587 (6th Cir. 2015) (“As Dastar makes plain, an entity makes a false designation of origin sufficient to support a reverse passing off claim [under Section 43(a)(1)(A) ] only where it falsely represents the product’s geographic origin or represents that it has manufactured the tangible product that is sold in the marketplace when it did not in fact do so.”).)   Sugai Prods., Inc. v. Kona Kai Farms, Inc., 1997 WL 824022, at * 11 (D. Haw. Nov. 19, 1997), held that only (a)(1)(B) applied to false designation of geographic origin, but the court here disagrees.

Pot site's negative report on CBD from hops wasn't commercial speech

Peak Health Center v. Dorfman, 2019 WL 5893188, No. 19-cv-04145-VKD (N.D. Cal. Nov. 12, 2019)

Peak allegedly sells plant-based pharmaceuticals and supplements, including an exclusive strain of Humulus yunnanensis, a hops plant, as a source of cannabidiol (CBD). This source of CBD is potentially valuable given the constraints on hemp and cannabis, the typical sources. At the time of the relevant events, Dorfman was the editor-in-chief and a writer for PotNetwork, which distributes cannabis and hemp products, including CBD, and also publishes industry news on its website.

In 2019, Dorfman contacted a Peak principal to ask questions for an article he was writing; his attitude was allegedly disdainful. Peak allegedly provided documents proving that Peak’s CBD came from the hops plants, documents showing lab results supporting its claims, and patent filings for related inventions.  Dorfman published an article titled “A PotNetwork News investigative report: Bomi Joseph’s ‘hops-derived’ CBD was a world-changing cannabis alternative fought over by Isodiol and Medical Marijuana, Inc. But he lied about his discovery—and his identity.” The article asserts that Peak’s hops variant does not exist, that the alleged discoverer’s research publications about Humulus kriya and CBD were plagiarized from others’ legitimate peer-reviewed publications, that he is a convicted felon who served prison time for defrauding various banks of $20 million in the early 2000s, and that he pled guilty in January 2019 to using a false name on a passport application. It allegedly defamed him by stating that  “This time around [Mr. Joseph] may very well have stolen from little old ladies, or the sick and injured—from anyone who purchased ImmunAg or Real Scientific Humulus Oil or one of its derivatives in hopes of curing some pain.” So too for quoting Dr. Volker Christoffel, one of the people whose work Mr. Joseph allegedly plagiarized, e.g., “ ‘The whole story with CBD from hop is insane,’ Dr. Christoffel told PotNetwork via email. ‘By the phylogenetic relatedness it MIGHT be possible, that some hop varieties may have genes and express i.e., form cannabinoids—the biochemical pathways are not so different and there is a theoretical possibility I would not exclude a priori. BUT these are definitively only traces.’ ” This was allegedly reckless because Christoffel never performed or reviewed chemical analysis of Peak’s CBD. And the article failed to disclose that Christoffel was a managing director of a competing cannabis pharmaco, not an independent expert.

Peak sued Dorfman for (1) trade libel; (2) intentional interference with prospective economic advantage; (3) negligent interference with prospective economic advantage; (4) unfair competition under the Lanham Act; and (5) unfair competition under California Business and Professions Code § 17200 et seq.  It alleged harm to its reputation and lost business opportunities worth at least $10 million.

Trade libel, intentional and negligent interference with prospective economic advantage: These all require pleading special damages. A plaintiff must “identify particular customers and transactions of which it was deprived.” Peak did not.

Lanham Act: No false association claim, obviously, and this wasn’t false advertising because the article wasn’t “commercial advertising or promotion” because it wasn’t commercial speech. On its face, the article didn’t look like an ad; it purported to be an “investigative report.”  It didn’t have anything that plausibly promoted PotNetwork’s own products, or anyone else’s.  Allegations of a competitive relationship between Peak and PotHealth weren’t sufficient.  I am nervous about this result but see why the court here reached it; query whether allegations that the news reported on defendant’s site was consistently biased against competitors and thus worked as a disguised ad for defendant would have changed anything.

First Amendment standards: The general tenor of the article was fact-like: it described itself as an “investigative report” “based on an in-depth review of Mr. Joseph’s research, a trove of confidential documents, and interviews with people familiar with the events....” There was, however, figurative or hyperbolic language throughout the article. Defendant described one of Mr. Joseph’s purported collaborators, Donish Cushing, as “a ghost,” because he does not appear in social media or Internet searches, and because “it’s hard to find anyone who has met the man.” The Christoffel quotes also included colorful language: “This is total bullshit”; “The whole story with CBD from hop is insane”; etc.  Use of “figurative and hyperbolic language” weighed in favor of First Amendment protection. 

Some of the statements in the article were susceptible of factual proof: specifically, whether the CBD in Peak Health’s products comes from a hops plant, or specifically a hops plant called Humulus kriya. Dorfman argued that his statements were protected opinion based on fully disclosed facts, but it was the truth of those facts that was at issue. “Dorfman disclosed the facts on which he based his assertion that Peak Health’s hops-derived CBD is a sham: Mr. Joseph’s history of plagiarism, attempts to assert new identities, criminal fraud record, and purchases of large quantities of CBD despite allegedly possessing the ability to produce that CBD from hops, as well as statements from scientists concluding that hops-derived CBD is unsubstantiated and not credible.” Nonetheless, his conclusion about the lack of hops-derived CBD wasn’t a statement of subjective opinion or interpretation; it was “an assertion of fact based on other asserted facts.”

In addition, the complaint flunked Rule 9(b) because it failed to allege why the challenged statements were false.  With respect to the Christoffel statements, Peak alleged only that the statements were unreliable because he didn’t test Peak’s products himself and because he’s involved with a competing business, but Peak didn’t plead facts from which it could be inferred that the CBD in its products came from a specific hops plant. At most, it alleged that its public relations agency provided “proof” of its CBD-related claims to Dorfman, but the complaint didn’t explain why the statements were false.

Peak could, in theory, amend its complaint to remedy these deficiencies as to the falsifiable statements, including the failure to plead special damages and the failure to plead commercial advertising/promotion.

Anti-SLAPP motion: the Ninth Circuit has cautioned against the application of procedural state laws if such application “would result in a direct collision with a Federal Rule of Civil Procedure.” Thus, “granting a defendant’s anti-SLAPP motion to strike a plaintiff’s initial complaint without granting the plaintiff leave to amend would directly collide with Fed. R. Civ. P. 15(a)’s policy favoring liberal amendment.” Dorfman could renew his motion if Peak included amended state law claims in its second amended complaint (or, apparently, if the time for pleadings passed or he otherwise prevailed).

right of publicity question of the day, RBG edition

Right of publicity question of the day: leopard print shirt made of Ruth Bader Ginsburg portraits. Discuss.

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.