Wednesday, September 16, 2020

expert testimony isn't always required for literal falsity or even misleadingness

Ecore Int’l, Inc. v. Downey, No. 11-6843, 2020 WL 5501206 (E.D. Pa. Sept. 11, 2020)

The court denies Ecore’s motion in limine seeking to exclude any evidence related to the falsity or misleading nature of its advertising for purposes of defendant Pliteq’s Lanham Act/common law unfair competition counterclaims. (There are about 20 claims and counterclaims “related to a hotly contested commercial dispute between the parties.”) Ecore allegedly made false and misleading statements about Pliteq’s “GenieMat” products and its own “QT” products, which are competing sound dampening products: (1) claims of equivalence as to quality, performance, and testing; (2) wrongly implying that Pliteq’s products use a rubber cleaning and processing method involving sulfur, and that the products accordingly have an unpleasant odor; and (3) claims that Ecore “originated the new method of using two layers of floor underlayment, when this is not the case.” That last sounds Dastar-problematic, but the court doesn’t address that aspect of the claim.

Ecore argued that expert testimony was required on falsity and likely confusion. The court agreed that lay witnesses might be able to do so, including with the testimony of defendant Downey, “who has extensive experience in the sound insulation field and can testify as to these issues based on his personal knowledge and observations,” although he hadn’t been identified as an expert on these issues.

The court noted that “[t]he type of proof needed to prove literal falsity varies with the type of advertising claim being made,” and further that whether expert testimony is necessary to a literal falsity claim is also case specific, which seems all but self-evident.  Pliteq might be able to show literal falsity of these particular claims without evidence that “requires scientific or technical knowledge not appropriate for a lay witness.” The allegedly false statements “do not refer to any scientific tests and do not otherwise contain such technical implications that expert testimony would be needed to establish their falsity. To the contrary, information regarding a product’s odor and who came up with an idea is perfectly amenable to lay testimony.”

Second, even without literal falsity, an expert or consumer survey isn’t absolutely required to prove deception. Courts have mentioned “consumer surveys, market research, expert testimony, or other evidence,” even if surveys are the “usual[]” method. [Imagine a very small market where all the customers testify they were deceived—clearly no survey would be required.] Without a full evidentiary record, the court wasn’t going to reject Pliteq’s theories or prohibit Pliteq from attempting to prove its claims via lay witnesses.

5th Circuit reiterates stringent standard for injury in Lanham Act false advertising cases

Boltex Mfg. Co. v. Galperti, Inc., --- Fed.Appx. ----, 2020 WL 5506404, No. 19-20440 (5th Cir. Sept. 11, 2020)

Boltex and Weldbend sued Galperti and its Italian affiliate for Lanham Act false advertising and state unfair competition. Galperti counterclaimed for false advertising, false designation of origin, and unfair competition. The court of appeals affirmed the grant of summary judgment on all claims.

The parties make flanges used to connect equipment in the oil and gas, petrochemical, and construction industries. ASTM standards may require a heat treatment process to increase the carbon steel’s toughness and ductility; normalization is one such process and it makes flanges costlier than non-normalized flanges.

Boltex and Weldbend alleged that defendants adertise their flanges as normalized, even though they are not. Galperti counterclaimed that Boltex and Weldbend falsely advertised their products as American-made and misrepresent their quality, characteristics, and technical standards. The district court found that neither side had enough evidence of injury to survive summary judgment.

Principles: “A claimant seeking actual damages must prove that he has been injured in some way,” though actual losses need not necessarily be shown. “A plaintiff must nevertheless put forth ‘competent summary judgment evidence that indicates that consumers would have bought [plaintiff’s] products instead of the [defendant’s products] in the absence of the defendant[’]s[ ] allegedly false ... statements.” Plaintiffs argued that they also sought injunctive relief and disgorgement, and should have been required only to prove likely injury. Their evidence: (1) they were direct competitors; (2) deposition testimony from plaintiffs’ executives that defendants’ statements caused plaintiffs to lose sales; (3) customer statements the district court deemed inadmissible hearsay; and (4) plaintiffs’ damages expert report and testimony.

Initially, the court excluded consideration of two emails to customers because they weren’t “advertising or promotion.” The “relevant purchasing public” here consisted of as many as 81 customers, and there was no evidence that the targeted two “wield outsized purchasing power.” This wasn’t sufficient dissemination.

First, there was no precedent supporting the claim that, because both sides were “among the market leaders … within a limited pool of competitors, there should be a presumption that they were injured.” Second, the deposition testimony from executives was speculative/inadmissible hearsay. One witness speculated about losing a few customers before concluding, “I have no idea the number of people.” Another named four customers that had allegedly purchased defendants’ flange instead of plaintiffs’; when counsel asked how he knew that, he responded, “I’m pretty sure we’ve been told that they placed orders with Galperti or ULMA, because their—their customers are now requesting it.” Statements made by customers to a Weldbend salesperson and then at some point relayed to the executive by an unidentified source was “classic hearsay.” Boltex’s sales manager testified that two customers told Boltex that it had lost sales to defendants, which was also “plainly” hearsay, and the testimony didn’t specify the reason for the lost sales/relate them to normalization. “[T]he business records exception does not apply here because the evidence in question is deposition testimony about supposed customer reports, not the actual customer reports themselves.”

Testimony from a distributor who switched from Galperti to Boltex didn’t indicate that it would have bought Boltex/Weldbend flanges instead of Galperti’s in the absence of the allegedly false statements. An executive at another distributor testified that they relied on Galperti’s representations that it normalizes its flanges, and further that, hypothetically, if they couldn’t get a flange from Galperti, they’d get it from another core supplier. Puzzlingly, the court dismissed this as insufficiently decisive about whether they would actually use it, and anyway there’s a fourth “core”, nonparty supplier and some other suppliers to which any potential diverted sales could have gone. This wasn’t enough for a “real and immediate threat of future or continuing injury apart from any past injury.”

And plaintiffs didn’t rely on their expert report to show causation in the district court, so they couldn’t do it now.

Counterclaims: “Because of the type of relief it sought, Galperti was not required to prove actual injury, but had to at least prove the likelihood of injury.” However, even that failed because Galperti didn’t offer any evidence that would allow a factfinder to infer that the parties are competitors in the market for U.S.-sourced flanges. Galperti doesn’t produce flanges made in the USA; the court couldn’t see how it was likely to be injured by not falsely advertising “made in the USA” while plaintiffs did. “[A]ny profits Plaintiffs gain from their allegedly false advertising would not be at Galperti’s expense unless Galperti too competes in the market for U.S.-sourced flanges.” [Of course Galperti could be injured without participating in that market! If some consumers trade off price/other characteristics with “made in the USA,” then Galperti could offer an otherwise superior package and lose out in the competition. Only if no amount of price/other feature superiority can overwhelm “made in the USA” are the markets independent of each other. Maybe that’s true—but that’s a different thing than what the court of appeals says.] It also wasn’t enough to argue that some of the steel Galperti uses is of US origin.   

There similarly wasn’t sufficient evidence on the other alleged types of unfair competition.

 Comment: now do injury in trademark cases.

consumer disillusionment with D isn't evidence that deception injured P

3B Medical, Inc. v. SoClean, Inc., No. 19 Civ. 3545 (KPF), 2020 WL 5440440 (S.D.N.Y. Sept. 8, 2020)

3B makes devices that automatically sanitize continuous positive airway pressure (“CPAP”) machines using UV-C light. It sued SoClean, which makes similar devices but use ozone as a sanitizing agent, for violating the Lanahm Act, but failed to sufficiently plead injury. SoClean has 90% of the market for CPAP machine cleaners, while 3B holds only 5%; the other 3 competitors also use ozone. The devices are sold as an alternative to handwashing CPAP equipment.

The complaint alleges that ozone is a toxic gas that can have a variety of serious health consequences to humans when inhaled, and that defendant’s devices produce ozone at concentrations well above the limits allowed by the FDA. Defendant’s marketing materials allegedly obscure SoClean’s use of ozone as a sanitizing agent and mislead consumers about the health risks:

• statements that its devices use “activated oxygen,” instead of ozone;

• statements that its devices do not use “chemicals” or “harsh chemicals”;

• the terms “safe” and “healthy”;

• statements that its devices use the same sanitizing process as that used in hospitals;

• statements that the charcoal filter cartridges that accompany its devices are able to convert “activated oxygen” into “regular oxygen”; and

• statements that its devices are closed-loop systems, out of which no “activated oxygen” escapes.

Consumers have allegedly reported adverse experiences with SoClean’s devices due to the devices’ use of ozone, and chose 3B’s product specifically because it does not use ozone. 3B alleged that more consumers would learn of, and purchase, its products if not for SoClean’s false advertising.

Under Lexmark, “a plaintiff in a false-advertising case must demonstrate injury by way of lost sales or damage to business reputation.” Injury can be presumed from false comparative statements. But where the allegedly misleading advertisement “tout[s] the benefits of the products advertised but ma[kes] no direct reference to any competitor’s products[,] ... some indication of actual injury and causation” is necessary “to ensure that a plaintiff’s injury [is] not speculative.” This is because “injury in such cases accrues equally to all competitors; none is more likely to suffer from the offending broadcasts than any other.”

Although a plaintiff doesn’t need to name specific lost customers, “some indication of actual injury” is needed to survive a motion to dismiss. The allegations of injury here were merely conclusory and speculative. The only specific statements from customers recommended the 3B product because it doesn’t use ozone, which doesn’t show injury to 3B. E.g., “I owned a So Clean cleaner and because of the ozone I developed a rash around my nose and chin that would itch. I contacted So Clean and they told me to use wipes and I did but the problem persisted. I also read that the ozone itself was very bad for respiratory conditions such as COPD of which I have. Do the research. I would no[t] recommend the So Clean device for these reasons. I decided to try [3B’s] Lumin. No Ozone.”  [Compare the hypothetical: “I bought the SoClean product because they promised me it was safe and sealed so that no ozone would reach me. I’m so bummed!”]  “At most, the statements could be said to support § 1125(a)’s causation requirement, but that requirement is distinct from the need to show actual injury.”

What about a presumption of injury from the fact that 3B was the only non-ozone product in the market? That wasn’t enough without implicit reference to 3B’s products, and the market wasn’t a two-player market, including other ozone users and handwashers. The Second Circuit has suggested, without deciding, that the presumption might be applicable where the parties “are direct competitors in a sparsely populated market,” but the court wasn’t going to extend that here, where SoClean was the original market creator, and thus wasn’t inherently diverting consumers from the plaintiff’s preestablished market, and where there were alternatives. Given the other market players, there was no reason to presume that the alleged misrepresentations were “targeted at diverting consumers away from the Lumin or its associated devices. Indeed, to allow the presumption in this context would incentivize any upstart competitor in a market to claim, without proof, that a dominant player’s long-time marketing statements are causing injury.”

NY state claims failed for the same reason.

Tuesday, September 15, 2020

a rare freestanding UCL unfairness claim re: service termination that rendered cameras nonfunctional

Soo v. Lorex Corp., 2020 WL 5408117, No. 20-cv-01437-JSC (N.D Cal. Sept. 9, 2020)

Plaintiffs brought California and New York consumer protection claims based on what happened to their home security Flir cameras; defendants moved to compel arbitration, which was denied because defendants failed to prove by a preponderance of the evidence that plaintiffs agreed to arbitrate. Defendants’ motion to dismiss was partly granted and partly denied.

Lorex made Flir cameras, which had the ability to upload security footage into cloud storage and a “Rapid Recap” feature, with which users could see a condensed, time-stamped video of activity observed by the camera. Cloud storage and Rapid Recap were made possible by applications managed by Lorex. After selling Flir cameras since 2015, in mid-2019 Lorex announced it was changing technology providers for the apps, rendering the cameras unable to connect to the apps and thus nonfunctional. Lorex then offered consumers a “Lorex Active Deterrence Wi-Fi replacement camera” or a Lorex.com store discount of US $120.00, which plaintiffs alleged were inadequate substitutes.

Defendants contended that the Warranty inside the box that plaintiffs’ cameras came in contained a binding arbitration provision. For purposes of this motion, it was undisputed that Lorex provides a hard copy of the Warranty in the box of every Flir camera it sells. The Warranty in the box advised plaintiffs that if they kept the cameras they were agreeing to the Warranty as well as to binding arbitration.

This was a “shrinkwrap” license [I can hear Eric Goldman sighing from 3000 miles away]. But Lorex’s warranty, unlike that in previous cases, didn’t give consumers any amount of time to examine the product and return it instead of accepting the arbitration agreement, and the included written materials did give the consumer the right to return the camera. “At a minimum, without evidence that Mr. Lauinger had the right to return the camera and thus reject the arbitration provision there can be no agreement to arbitrate formed by ‘keeping the [camera.]’”

Another plaintiff, Soo, “activated” his warranty online. Was that enough? Under California law, “silence or inaction cannot constitute acceptance of an offer,” unless an exception applies, such as “when the offeree has a duty to respond to an offer and fails to act in the face of this duty.” However, even then, a contract offeree’s silence cannot constitute consent to a contract “when the offeree reasonably did not know that an offer had been made.” California courts have held that “even if a customer may be bound by an in-the-box contract under certain circumstances, such a contract is ineffective where the customer does not receive adequate notice of its existence.” Previous case shad held that titles like “Product Safety & Warranty Information” aren’t enough to provide notice of “a freestanding obligation outside the scope of the warranty.” So too here. His online activation doesn’t support a finding that had to or should have been aware of the arbitration agreement. He “could have registered for warranty protection without ever seeing the in-the-box Warranty that contained the arbitration provision in the section entitled ‘State/Provincial Law.’”

Unfairness under the UCL: Courts are divided on how to assess unfairness, but plaintiffs invoked the balancing test: it asks whether the alleged business practice “is immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers and requires the court to weigh the utility of the defendant’s conduct against the gravity of the harm to the alleged victim.”

Defendants argued that it wasn’t right to impute an underlying P2P service provider’s cessation of service to them. But plaintiffs alleged that “Defendants changed technology providers knowing that such a decision would cause the Flir Cameras to cease functioning.” And, after changing providers, defendants “have not created their own P2P software to replace OzVision that would continue to provide support for Flir Cameras, or otherwise partnered with another third-party vendor.” The harm could plausibly outweigh the utility of the conduct to defendants.  The cost-benefit analysis of unfairness was “not properly suited for resolution at the pleading stage.”

Fraudulent omission under the UCL: This was predicated on defendants’ failure to disclose that app support for the Flir cameras was contingent on Defendants’ contract with OzVision, and that there was no guarantee OzVision would continue to provide service. Plaintiffs alleged that had defendants disclosed such a fact, they would not have purchased their Flir cameras at all or on the same terms. However, the complaint didn’t plausibly support an inference that, at the time they sold the cameras, defendants knew that the functionality issue existed. This also disposed of the NY consumer protection claims.

California unjust enrichment: It was plausible that the failure of defendants’ replacement program to properly compensate Plaintiffs for the lost value of their cameras with adequate replacement cameras or a comparable store credit may sustain a claim for unjust enrichment at the motion to dismiss stage.

Trespass to chattels: perhaps surprisingly, also survives.  Defendants argued that OzVision, not they, rendered the cameras nonfunctional. But plaintiffs sufficiently pled that it was defendants’ acts that “substantially harmed the functioning” of their devices, which “significantly impaired the devices’ condition, quality, and value.”

Expedia's unavailability claims sometimes literally false, maybe misleading; materiality is contested for trial

Buckeye Tree Lodge v. Expedia, Inc., 2020 WL 5372246, No. 16-cv-04721-VC (N.D. Cal. Sept. 9, 2020)

The court denies cross motions for summary judgment on whether Expedia violated the Lanham Act by suggesting that plaintiffs’ hotels could in theory be booked on Expedia’s site but lacked available rooms (except as to allegedly misleading phone numbers) and whether the plaintiffs are entitled to a permanent injunction. Expedia also failed to decertify the plaintiff class, but did get a clarification in the class definition.

There were genuine disputes of fact over whether (1) Expedia’s unavailability messages and Google ads were misleading; and (2) any deception was material to consumers’ purchasing decisions. “[A] small number of Expedia’s unavailability messages—most noticeably, ‘We are sold out’—are literally false when used to describe availability at hotels for which Expedia never had any beds to sell.” Also literally false: “Sorry, the [Hotel name] is not available for your travel dates. You may choose alternatives dates OR select from the properties below.”; and “Fully booked! We’re sold out for your travel dates on our site.”

Most of the other unavailability messages weren’t literally false but nonetheless could be misleading, e.g., “Your dates are popular! Rooms are unavailable for your trip dates on Expedia. Try new dates to check availability.” “This message seems intuitively to imply that rooms are unavailable because of the particular dates selected, rather than because Expedia is entirely incapable of booking rooms at that hotel.” “Many of the other messages are similar, e.g.: ‘This property has no availability for your travel dates on [Expedia, Travelocity, or Orbitz]’; ‘[Hotel name] has no availability for your travel dates on Hotels.com.’” Indeed, I think it would have been reasonable to at least the first false by necessary implication; similarly, the attribution of “no availability” to the hotel, instead of to the website, in some of these other statements is pretty significant. The court thought other messages might be less likely to mislead, such as  “Wait a minute. There is no availability for this hotel on Hotels.com. Please amend your search.” The court found some “quite unlikely to have been misleading, e.g. ‘Sorry, we aren’t taking reservations for this property on our site.’” [Once again, there’s a huge gap between what courts find plausible in trademark cases and what they find plausible in false advertising cases.] Overall, Expedia “raises fair concerns about the reliability and probative value of the plaintiffs’ survey evidence, and the question of whether these phrases were misleading cannot be answered at summary judgment.” [Seems like plaintiffs would be entitled to an instruction about falsity for the literally false statements, but it looks like this will be a bench trial.]

There was also a genuine dispute over materiality: Expedia presented evidence “suggesting that the messages were not material in the actual context of how consumers make travel decisions,” conflicting with plaintiffs’ evidence.

Expedia did win summary judgment for claims related to “Expedia’s allegedly misleading display of telephone numbers,” because plaintiffs offered “no actual evidence that the phone number displays were false, misleading, or material to consumers’ purchasing decisions.” That seems like a shame, because it sounds like evidence could have been developed: proximate to the hotel name, Expedia apparently put up a phone number that went instead to Expedia and offered reservations to other hotels. An internal Expedia document “acknowledging that the placement of phone numbers on the sites often confuses consumers” was in the class certification record, but plaintiffs didn’t introduce it on summary judgment or even cite it, and anyway that showed misleadingness rather than materiality. [If properly used, the bait and switch character would itself be the materiality: if consumers dialed the number because they thought they’d reach the hotel in the listing, that belief affected their decision to act; having been diverted to the Expedia line, many consumers might not search further. That’s the classic reason bait and switch is actionable.]

Mootness: “The named plaintiffs have standing to seek injunctive relief because the alleged Lanham Act violations were ongoing at the time the complaint was filed (or at the time the additional plaintiffs intervened).” And “voluntary cessation of allegedly unlawful conduct ordinarily does not suffice to moot a case” and Expedia “bears the formidable burden of showing that it is absolutely clear the allegedly wrongful behavior could not reasonably be expected to recur.”

This it did not do, despite arguing that it had “resolved any errors” causing class member hotels to appear on its websites and has implemented “proactive measures” to prevent these “errors” from reoccurring. References to “investigations” conducted by its “Health and Safety team” and to contractual obligations it imposes on the bed banks it works with were “too vague and conclusory to meet the high burden of showing mootness.” It portrayed other measures, such as preventing Expedia from bidding on Google ads for hotels that do not have availability for a certain period of time, as business decisions, “while failing to show that there is anything to keep it from reversing these decisions if business considerations change. Indeed, Expedia’s repeated assertions about the dynamic and complicated nature of the online travel industry suggest that business considerations in fact frequently do change, and undercut its arguments that the changes are permanent or will prevent any future misrepresentations from occurring.”

There was a genuine question whether class members were likely to be harmed in the future absent an injunction “that either bars Expedia from making misleading statements about hotels it is incapable of booking or requires Expedia to institute reforms designed to minimize the chances of such statements inadvertently appearing,” and whether these harms were irreparable.

Clarification: The class consisting of “hotels that do not have booking agreements with Expedia and are not capable of being booked through Expedia, but appear on Expedia’s websites” includes “hotels that appeared on Expedia’s websites when they were not capable of being booked through Expedia at some point during the class period, regardless of whether they previously had booking agreements with Expedia or later entered into agreements with Expedia that gave Expedia booking capabilities.” Also, it includes “hotels about whom Expedia will make similar statements in the future despite being incapable of booking rooms at those hotels.”

escalated materiality requirement precludes class certification

Oddo v. Arocaire Air Conditioning & Heating, 2020 WL 5267917, Nos. 15-cv-01985-CAS Ex, 18-cv-07030-CAS(Ex) (C.D. Cal. May 18, 2020)

These are consolidated putative class actions alleging that defendants’ HVAC systems have faulty thermal expansion valves (TXVs). A TXV is “a precision valve that controls the expansion of refrigerant central to the cooling process[.]” Because it’s a bottleneck in the system, “[a]ny contaminants or impurities that may be flowing through the system are likely to collect around the TXV pin,” which can harm its function. “Ryconox,” a chemical rust inhibitor, allegedly “reacts with the refrigerant and/or oil and causes a tar or sludge to form when the systems are put into service.” As such, “within just weeks or months of installation of a brand-new HVAC system, the tar can cause the TXV to become stuck, rendering the system inoperable.” Also, “even a partial clog can impact system performance and efficiency, … such that the defective HVAC systems are not capable of performing to the efficiency standards advertised ….”

Defendant Carrier allegedly took various unsuccessful steps to remediate the problem.

Previously, the court dismissed warranty-based claims and claims based on affirmative misrepresentations. Not previously dismissed: California unjust enrichment, negligent misrepresentation, fraudulent concealment, UCL, CLRA, and FAL claims; Missouri fraudulent concealment, negligent misrepresentation, and Missouri Merchandising Practices Act (MMPA) claims to proceed; and Massachusetts unjust enrichment and Massachusetts Consumer Protection Act (MCPA) claims. The court also previously denied a motion for class certification without prejudice. Because the gravamen of the fraudulent omission claims is failure to disclose, those plaintiffs failed to show that people who bought a home with a Carrier HVAC suffered the same injury as people who just bought a Carrier HVAC. Homebuyers “may have never been exposed to any Carrier materials during the homebuying process, much less attached the same level of importance, if any, to a disclosure of the alleged defect as would a purchaser of an HVAC unit.” The court rejected plaintiffs’ contention “that virtually any class can be certified in an omissions-based case as long as the defendant could have, in theory, ensured that a disclosure would reach its consumers.”

Carrier moved to exclude the opinions of plaintiffs’ survey expert, Dr. Maronick. Previously, the court had reasoned that “[p]laintiffs do not explain how homebuyers could have suffered an injury in the form of paying a premium price for their HVAC units when they purchased a home that already had the Carrier HVAC system installed” and “it appears that homebuyers, if they suffered any injury at all, suffered an injury of a different nature than purchasers of new HVAC units.” Based on his consumer survey, Dr. Maronick opines that: (1) “most consumers who purchased a new air conditioner saw the air conditioner itself prior to payment ... regardless of whether the air conditioner was acquired in connection with [buying a home or just a unit]”; (2) “the vast majority of consumers who purchased a new air conditioner obtained information about the air condition from the seller prior to purchase ... regardless [etc.]”; (3) “aside from the brand name, the efficiency rating of their air condition was the most common piece of information purchasers learned from their seller or homebuilder prior to purchase”; (4) “most consumers would have considered a disclosure about the alleged defect in this case to be an important, if not decisive, factor in their purchasing decision, regardless of whether they were purchasing an air conditioner alone or a new home”; and (5) “if the alleged defect had been disclosed prior to sale, the vast majority of consumers would have demanded a unit that did not contain the rust inhibitor, or a price discount equal to the cost of removing the rust inhibitor.”

This was relevant to the issues of classwide exposure, materiality, and injury, and addressed deficiencies that the court previously identified. Carrier challenged the survey because it: (1) failed to survey “the relevant target universe”; (2) asked the wrong questions “because the survey did not ask whether purchasers reviewed any labels on the product itself prior to deciding the unit”; (3) failed to approximate market conditions and asked ambiguous, leading questions; and (4) “failed to provide a control to isolate the effect of the disclosure of the alleged defect.” These criticisms didn’t require exclusion; they all went to weight rather than admissibility. Maronick used a nationwide universe of sample individuals who had purchased a central air conditioning system for their residence in the previous three years (including respondents who bought a new construction home with a new AC). Questions about “the relevant target universe” generally go to weight, not admissibility, as do attacks on the framing of questions and the absence of a control.  Even though the court had its doubts, it denied the motion to exclude. (So too with plaintiffs’ damages expert.)

Carrier offered its own expert testimony, based on a consumer survey, which Carrier believes “confirms that individual inquiry would be necessary to determine both whether consumers would have reviewed information from Carrier prior to purchase and the materiality of that information.” Dr. Dhar’s contrary opinions that “exposure to and consideration of product information from an HVAC manufacturer is highly variable across consumers,” were relevant, proper rebuttal and plaintiffs’ criticism of his survey went to weight, not admissibility.  (So too with the other experts.)

On to certification: “Resolution of plaintiffs’ fraudulent concealment claims and plaintiffs’ related consumer protection claims … turn, in part, on factual questions such as, inter alia: (1) whether the presence of Ryconox in Carrier’s HVAC systems caused a defect; (2) whether Carrier knew of the defect; (3) and whether Carrier concealed the defect.” Thus, commonality was satisfied.

Typicality: the California and Missouri named plaintiffs had bought new HVAC units, not new houses with HVACs installed, and their claims were thus only typical of the former subset. The Massachusetts named plaintiff bought a new house, but testified during deposition that he “was not exposed to any of Carrier’s materials until after he had already negotiated and agreed to the purchase price of his new home” and that “he would have not tried to renegotiate the price of his home based on anything he learned during the course of this inspection.” Even if that was just a snippet of his testimony—and he also testified that if there’d been a defect disclosed, everything would have changed—his vulnerability to a unique defense made him nontypical.

Predominance: all the theories require that Carrier had a duty to disclose the alleged defect. Plaintiffs had three arguments for such a duty: (1) Carrier had exclusive knowledge of material facts not known or reasonably accessible to them; (2) Carrier actively concealed material facts; and (3) Carrier made partial representations (i.e., the energy efficiency labels) that were misleading because other material facts had not been disclosed.

California: “Even assuming arguendo that California law recognizes a duty to disclose where an alleged defect does not present a safety hazard but instead relates to a product’s central function, plaintiffs fail to establish the existence of such a duty to disclose in this case is capable of class-wide proof.” [That seems weird. The central function of an HVAC unit seems invariant across purchasers; why wouldn’t its centrality be capable of classwide proof? The court cites Ahern v. Apple Inc., 411 F. Supp. 3d 541 (N.D. Cal. 2019), in which Apple’s failure to install “fans and vents” in its computers allegedly allowed the fans to “suck in dirt and debris” which resulted in the dirt and debris “getting stuck behind the screen, causing permanent dark smudging to appear in the comers of the screens.” But smudging at the corners (and another case about security flaws in microprocessors) is pretty different from “the HVAC system may choke and die.”] Since plaintiffs’ expert did not opine that all, or virtually all, of the affected HVAC units would suffer acute failure as a result of the problem, or be rendered incapable of use, the alleged defect didn’t go to their central function. The expert also opined that “the evidence shows that consumers have experienced performance loss and do not know it.” If many victims didn’t know that they were suffering, then the units hadn’t been rendered “incapable of use” such as to trigger a duty to disclose under California law.

And again with redactions on facts that determine the outcome! Carrier’s internal documents disclosed a redacted failure rate on certain smaller units. Assuming that was a rate sufficient to impose a duty to disclose [sure would be nice to know what that was!], plaintiffs’ expert also argued that the evidence showed problems with larger units, though he acknowledged that [redacted]. Given that the failure rate may differ among the range of units making up the proposed classes, there might be a duty to disclose as to some, but not all, of the proposed class members’ HVAC systems. Plaintiffs offered no method to determine which class members’ HVAC systems will suffer acute failure. Thus, individualized inquiries would be necessary.

The court then doesn’t discuss plaintiffs’ theory (3), which I think is a misreading of the governing law. If you make an affirmative representation that is misleading because of failure to disclose important related information, the statement as a whole is misleading and there’s no “central function” requirement for that basis for a duty to disclose, predicated as it is on the specific affirmative statements that were made and thus on the message that affirmatively reached consumers.

In Missouri, a “duty to disclose arises from a classical fiduciary relationship, from a partial disclosure of information, or from particular circumstances such as where one party to a contract has superior knowledge and is relied upon to disclose this knowledge.” “Unlike California law, then, Missouri law does not appear to necessarily limit a manufacturer’s duty to disclose to circumstances where a defect presents a safety hazard or where the defect fatally compromises a product’s central functionality.” [Again, this appears to be an overly constrained reading of California law, which has never been known for its plaintiff-unfriendliness.] The court assumed without deciding that whether a duty to disclose existed, given evidence that Carrier was aware of the problem, was susceptible to common proof.

Reliance/materiality: In California, “[a]n essential element for a fraudulent omission claim is actual reliance.” “A plaintiff need not prove that the omission was the only cause or even the predominant cause, only that it was a substantial factor in his decision,” and this can be inferred if the omission is material. “Missouri law follows a similar approach with respect to MMPA claims,” since it too uses the reasonable consumer standard. “If a statute uses a reasonable person standard, it is more likely to be subject to common proof because the inquiry into materiality is objective.”

Thus, the relevant claims allowed for class-wide inferences of reliance and causation. What about the specific omissions here? The court previously rejected as insufficient (1) Carrier’s surveys showing that, generally, ‘reliability’ and ‘quality’ are the two most important factors considered by purchasers” and (2) Carrier’s own purported belief that the defect was material. Plaintiffs added the Maronick survey, which asked, inter alia, how consumers would have reacted to learning about a defect that would  “cause the air condition to fail in some cases within either a few weeks or a few years, and, even if the unit doesn’t fail, the chemical can cause loss of performance and efficiency of the system” and which cost $1000 to fix at the time of installation. Results: “It would have been a decisive factor in my decision to purchase or not purchase that central air conditioner”: 72.2%. “It would have been important information to know but not a decisive factor …”: 13.9%.  “It would not have been an important factor …”: 8.3%. “Don’t know/Not sure …”: 5.6%.

Similarly, in response to a question regarding what, if any, respondents likely would have done had they learned about the defect prior to completing a purchase, “41.0% of the respondents would have ‘demanded a replacement that didn’t have the chemical in it,” and 22.2% would have ‘demanded the chemical be removed before accepting the unit.’ Another 12.5% would have demanded a price reduction of $1,000, which is described as ‘the cost of removing the chemical.’ ”

Carrier argued that the survey didn’t actually test materiality or causation, criticizing the questions and format, especially how it focused on and described the alleged defect. The court agreed: the survey didn’t “question respondents about which, if any, of these attributes [about which respondents received or sought information] respondents found important when making a purchasing decision.” To the extent that the questions above don't address that (which they seem to do), I think the court conflates materiality and deceptiveness—materiality is about the kinds of claims or omissions that matter. The court found the survey insufficient to establish, on a class-wide basis, “how the challenged statements, together or alone, were a factor in any consumer’s purchasing decisions.”

Because the survey didn’t indicate how consumers “valued” Carrier’s alleged omissions “compared to other attributes of the product and the relevant market generally,” “the Court is not convinced that the question of materiality”—whether reasonable consumers would view Carrier’s failure to disclose the alleged defect in this case as material to the consumers’ purchasing decision—“is susceptible of classwide proof.”

Thus, no certification.

Selling two products together doesn't plausibly cause confusion as to their source

General Motors LLC v. KAR Auto Gp., Inc., No. 20-CV-2039-CJW-KEM, 2020 WL 5371717 (N.D. Iowa Sept. 8, 2020)

When a court can’t give a doctrinal reason for its decision, that can signal a deep indeterminacy in the doctrine that can only be resolved by fiat. Here, the indeterminacy is that confusion theory has very few doctrinal brakes even when any harm of confusion seems minimal and the anticompetitive consequences of plausible threats of suit seem great.

KAR (which made me hear the Knight Rider theme, child of the 80s that I am) is an auto dealer in Iowa. The parties entered into dealer agreements allowing KAR to sell Chevrolet and Cadillac vehicles at its GM dealership. KAR formerly operated a separate automobile dealership adjacent to its GM dealership which sold Chrysler, Dodge, Jeep, and Ram made by Fiat Chrysler. KAR merged its operations in June 2020.  “The practice of selling vehicles from two different manufacturers at a single dealership is called ‘dualing’ in the car dealership industry.”

GM sued for breach of contract claims and trademark infringement, alleging that, as a result of the unauthorized dualing, consumers will be confused, make mistakes, or be deceived as to the “source, affiliation, or sponsorship” of its marks.

The court granted the motion to dismiss and denied leave to amend.

Even under the very broad notion of infringement that allows infringement when “a legitimate mark [is used] in a confusing manner,” GM failed to state a claim. GM argued that KAR’s dualing “will cause less knowledgeable consumers to confuse which vehicle brands are manufactured by plaintiff and Fiat Chrysler respectively.” It didn’t plead any infringing advertising, promotion, or marketing, only that GM marks would be present at the dualed facility.

Although likely confusion “is a factual inquiry that is seldom resolved at the motion to dismiss stage,” this was the “rare” case of inadequate allegations.

As to the factors (which of course are a bad fit here), the GM marks are strong; there was no “infringing mark or infringing product” because the marks were undisputedly being used to identify GM products. There were no allegations of intent to confuse the public about who made which vehicles. “lthough it can reasonably be expected that consumers will do their homework on a given vehicle before purchasing it, many consumers may not know or care which particular manufacturer made any given vehicle.” [Materiality as spackle! Courts tend to mention materiality when they are explaining why trademark confusion theories shouldn’t expand even further.] There was no actual confusion alleged, though “extensive discovery” had yet to be conducted.

At the end, though, all GM alleged was that KAR sold and serviced both GM and Fiat Chrysler vehicles at the same location. “The existence of two competing products in the same building does not reasonably signal that they are connected or related in any way. The mere fact that some consumers may not know which entity manufactures which vehicle model is of little consequence.” There was no authority for the idea that offering competing goods side by side is infringing just because some consumers may not know the difference [in source].

[Given that knowledge of the specific source is not required for trademark validity, per Congress’s intervention to overrule the Anti-Monopoly case, it would seem that sauce for the goose is sauce for the gander: a consumer’s lack of knowledge, or even potential confusion, about corporate parenthood of two completely dissimilar marks isn’t infringement. More strongly: a survey that found that consumers thought that Snickers and Reese’s Peanut Butter cups came from the same manufacturer because they’re found together in thousands of stores across the country should be disregarded. One version of the insight here: any confusion about whether there’s a shared corporate source of Snicker’s and Reese’s comes not from mark similarity, as required for infringement, but from marketplace structure. So too with dualing (even dualing in breach of contract). This is only hard to explain in doctrinal terms because false association theories have metastasized beyond any conceivable consumer protection interest.]

The court continued: “The Lanham Act does not require sellers to segregate products by manufacturer to affirmatively reinforce brand identity to consumers.” In a footnote, the court offered the example ofa restaurant that served both Coca-Cola and Pepsi products. “Consumers may not know that Fanta is a Coca-Cola product and Sierra Mist is a Pepsi product. That the restaurant offers both beverages, however, does nothing to confuse consumers into mistaking that they are connected in any way or originate from the same source.” Thus, GM failed to plead a use of a mark “in a false, misleading, or confusing manner.”

In addition, “[d]ualing itself is not confusing. To the contrary, it is a well-established practice in the car dealership industry.” Without more than the mere simultaneous presence of two automakers’ marks, GM didn’t allege facts that would make consumer confusion likely. Dualing itself could not be “a misleading representation. Although a representation can be made via conduct, dualing alone does not assert any fact.”

In its moving papers, GM referred to KAR’s advertising, marketing, and promotion, though not any specific items thereof; it argued that “advertising and selling both GM and Fiat Chrysler vehicles from a building branded with both GM Marks and CDJR trademarks” constituted infrignement, and speculated that “combined, misleading advertising may occur.” This wasn’t enough, and any further amendment of the complaint would be futile.

Monday, September 14, 2020

insurer must defend Expedia because its false advertising exclusion didn't cover false claims about hotels

National Union Fire Ins. Co. v. Expedia, Inc., 2020 WL 5369261, No. C19-0896RSL (W.D. Wash. Sept. 8, 2020)

While receiving bad news in the underlying false advertising claims (watch this space), Expedia did manage to keep its insurer involved in the defense, despite a false advertising exclusion that turns out not to have been broadly worded enough.

National Union provided Special Risk insurance to defendant Expedia which included “Special Professional Liability” and “Media Content” coverage. In 2016, a class action lawsuit was filed in the Northern District of California against Expedia by four hotel operators, accusing Expedia of “a bait and switch marketing scheme whereby it advertises deals at hotels with which it had no contractual relationship and, when a customer attempts to make a reservation at one of those hotels, Expedia gives the impression that there are no rooms available on the requested dates and drives the traffic to its contracting partners.” When Expedia tendered defense of the lawsuit to National Union, National Union agreed to defend while reserving its rights, then filed this action for a declaration of its obligations.

National Union didn’t dispute that the coverages applied; it had the burden of showing that an exclusion nonetheless bars coverage.

The underlying lawsuit alleges, that when customers search for their hotels on Google or one of Expedia’s websites, Expedia displays the hotels as if it the customer were able to make a reservation through its websites. But, because Expedia has no ability to book rooms at their hotels, it allegedly switches them to other hotels by falsely implying that the chosen hotel is sold out or that rooms are unavailable for the selected dates. The remaining claim is false advertising in violation of the Lanham Act: “Expedia made false or misleading statements in on-line travel and booking services which misrepresented the nature, characteristics, and qualities of the hotels’ services and commercial activities” (emphasis added).

“Exclusions from coverage are strictly construed against the insurer because they are contrary to the protective purpose of insurance.” The Media Content coverage covers “any act, error or omission, negligent supervision of employee, misstatement or misleading statement” in any form of media content which results in, among other things, an infringement of trademark or trade dress. There is an express exclusion for claims “alleging, arising out of, based upon or attributable to (1) false advertising or misrepresentation in advertising of an Insured’s products or services . . . or (3) any infringement of trademark or trade dress by any goods, products or services, including any goods or products displayed or contained” in any form of media content. (The Specialty Professional Liability policy covers “any negligent act, error or omission, misstatement or misleading statement in an Insured’s performance of Professional Services for others....” There are exclusions for claims “alleging, arising out of , based upon or attributable to any misappropriation of trade secret or infringement of patent, copyright, trademark, trade dress or any other intellectual property right....” and claims “alleging, arising out of, based upon or attributable to false advertising or misrepresentations in advertising.”)

For the Media Content exclusion, the parties disagreed about whether the phrase “of an Insured’s products or services” mattered. “National Union argues that anything and everything Expedia says in its advertising is in furtherance of its own business interests and is therefore uncovered.” Expedia argued that the exclusion was limited only to misrepresentations about its own products or services, not those of another, contrasting it with the SPL exclusion which had no such additional language.

The court agreed with Expedia. As written, the false advertising must be “of an Insured’s products or services,” and if National Union truly intended to exclude all false statements Expedia made in advertising, there would be no need to add the phrase “of an Insured’s products or services.” Citing a practice guide to insurance litigation, the court noted that the exclusion “is generally thought to refer to inaccurate and misleading representations...concerning the insured’s own product, rather than that of another entity.” “Otherwise, protections expressly granted, such as coverage for claims arising out of disparaging comments aimed at the another’s product, would be negated by the exclusion. Such an interpretation would be unreasonable.”

Nor did the trademark exclusion apply, given that “the hotel operators’ Lanham Act claim can succeed without having to show that they have a protectable trademark or that Expedia infringed on their intellectual property rights.”

closing SeaWorld during pandemic didn't make "unlimited" entry passes deceptive

Kouball v. SeaWorld Parks & Entertainment, Inc., 2020 WL 5408918, No.: 20-cv-870-CAB-BGS (S.D. Cal. Sept. 9, 2020)

Kouball failed to state a claim under the usual California statutes and common law causes of action by alleging that SeaWorld deceptively failed to disclose that it intended to keep charging her for her annual pass while its amusement and water parks were closed due to the pandemic. The parks closed in March; in April, Kouball was charged the full amount of her monthly payment of $48.99 for her annual passes. Kouball alleged that she would not have paid for the membership had she known that she would not have access to the park and that SeaWorld continues charging its customers monthly fees while the parks remain closed.

Kouball failed to identify an affirmative misrepresentation of “unlimited access,” but pled only her own subjective belief in such access.  “The complaint does not identify when and where she purchased the annual membership passes, nor does it identify any specific statement that SeaWorld made that she read, viewed, or heard, that led her to a belief that she would have unlimited access to the parks.” (She did cite the website where annual pass options say “unlimited omission” but didn’t allege reliance on the website or on this statement. This seems easily fixable. Under each annual pass option it also states, “Restrictions may apply...hours and services are subject to change or cancellation without prior notice.” Would reasonable consumers think the park could be completely closed under these terms?)

Nor did she successfully plead a deceptive omission. Since she relied on her own subjective belief, disclosure wouldn’t have helped, and also she didn’t allege that SeaWorld had a duty to disclose. “Under California law, an allegedly fraudulent omission is actionable only if the omission is ‘contrary to a representation actually made by the defendant, or an omission of a fact the defendant was obliged to disclose.’” In particular, “SeaWorld, like the rest of the world, would not have been aware it would need to temporarily close its parks due to an unprecedented global pandemic. Moreover, such temporary closures were likely required under state or local orders and the decision on how to charge customers or provide other relief would be dependent on the agreements between them.”

Also, the CLRA covers only “goods or services,” and an unlimited entry pass is neither.


Thursday, September 10, 2020

sunglasses reseller liable for (c) infringement, maybe TM/false advertising/tortious interference

Maui Jim, Inc. v. SmartBuy Guru Enters., No. 1:16 CV 9788, --- F.Supp.3d ----, 2020 WL 4435320 (N.D. Ill. Feb. 24, 2020)

Maui Jim alleged that the defendants sold non-genuine Maui-Jim-branded sunglasses while using its copyrighted photographs to falsely advertise that they are an authorized retailer. The defendants counterclaimed that Maui Jim’s statements about their legitimacy constituted defamation or, alternatively, unjust enrichment. The court partly granted and partly denied cross-motions for summary judgment, because first sale is now so narrow a defense that it is almost unavailable for non-used goods; MJ established liability on its copyright claims outright but must go to a jury on trademark/false advertising. Also, there are a troubling number of redactions here, including for facts that the court relies on in its holding; hard to see how this can properly inform the public of the legal basis for the decision.

Defendants sold a redacted number of non-prescription and prescription pairs of Maui-Jim-branded sunglasses into the United States between 2009 and 2019. The prescription sunglasses contained third-party prescription lenses glazed into a Maui-Jim-branded frame. Maui Jim alleged that its sunglasses incorporate patented technology to “wipe out glare and UV rays, and boost[] color via lens treatments.” Its sunglasses have earned the Skin Cancer Foundation’s Seal of Recommendation as an effective UV filter for the eyes and surrounding skin. Maui Jim has registered trademarks, and registered copyrights for the 93 professional photos at issue here, each issued within five years of Maui Jim’s first publication. 

Maui Jim averred that it required all Maui Jim sunglasses be sold with authentic Maui Jim lenses, frames, and parts, and not modified in any manner. Defendants disputed this, noting that nothing in Maui Jim’s European authorized retailer agreements stated that its warranty would be voided if an authorized retailer sold Maui Jim sunglasses to third parties or if third-party lenses were glazed into its frames, and claiming that Maui Jim authorized retailers in the U.S. had glazed third-party lenses into Maui Jim’s frames without consequence.

The parties disputed whether their warranties differed, and whether Maui Jim’s warranty was an integral part of its product offering. Along with some redacted information, Maui Jim’s representative indicated that customers used Maui Jim’s repair department for, on average, three to four non-Maui Jim prescription lenses per week between 2015 and 2018.

Defendants ship all their Maui-Jim-branded sunglasses sold to the United States from Hong Kong, , and some number of shipments of Maui-Jim-branded sunglasses contained a packaging slip that identified a different party as the manufacturer, which defendants blamed on faulty computer coding. Defendants also admitted that they wrongly included a Maui Jim’s 2009 Drop Ball Certification (a certification that lenses comply with certain regulatory requirements) in a limited number of shipments to U.S. consumers. Defendants additionally admitted to at least twenty examples of delayed shipments to its purchasers of Maui-Jim-branded sunglasses, thirteen of which were delayed due to FDA or customs issues.

Defendants’ webpage touts the supposed authenticity of eyewear that it sells from “some of the world’s leading eyewear manufacturers” and their “relationships with some of the world’s leading suppliers.” It oece contained a diagram indicating that their supply chain is direct from the manufacturer to the customer rather than the “traditional supply chain” that routes from the manufacturer to an exporter to an importer to a wholesaler to a shop and then to a customer. An accompanying sentence said: “By offering the world’s largest range of authentic designer eyewear, sourced directly from the world’s leading eywear [sic] suppliers, we are here to help you find what you love.” Defendants argued that this “was accurate and consistent with SmartBuyGlasses’ practice for the majority of its sales including manufacturers/brands – such as [redacted] and [redacted] – from which it buys genuine products from the manufacturer of the brands and ships it to its consumers.”

MJ alleged that the FAQ falsely answered “Can I trust the authenticity of the products?” with “All of our products have a 100% Authenticity Guarantee, no exceptions. SmartBuyGlasses takes great lengths to ensure the high quality and product authenticity that our customers have come to expect, and all products are accompanied with official tags and manufacturer warranties.”

Defendants’ website does say that “SmartBuyGlasses is not affiliated with nor an official re-seller for Maui Jim ....” when consumers select a MJ-branded frame, and it has small, grey type on the bottom of the pages, stating that it is “a leading independent retailer of the world’s best designer eyewear since 2006 and is not owned by or affiliated with the brands it sells unless stated otherwise.” MJ, however, commissioned a survey that allegedly found that 40.1% of respondents, net, took away the false impression that SmartBuyGlasses is an authorized MJ retailer. Also, the MJ-specific language, which goes on to say “therefore we provide our own comprehensive 24 month warranty, as Maui Jim do not support their own 24 month warranty with us,” was added after litigation began. The parties also disputed whether defendants’ website adequately informed consumers that they were purchasing third-party prescription lenses rather than MJ lenses.

MJ also argued that the website falsely suggested that defendants had an “operation centre” in New York. Although defendants don’t have physical location or physical office in New York, they do have an “operational dropship location in New York.”  [Query how MJ plans to show this misrepresentation, if it is one, harmed them.]

Authenticity: There was a material dispute over the authenticity of (some of) the MJ branded sunglasses based on MJ’s claim that it hadn’t sold enough pairs to the third parties from whom defendants bought to make up their supply, though MJ apparently wasn’t able to determine from test purchases that there were any counterfeits or stolen products.  Since the burden was on defendants to show that first sale applied, they weren’t entitled to summary judgment on that ground alone.

Separately, there were issues about material difference, which would prevent a first sale defense. At least twice, a MJ CSR told a customer that Defendants’ omission from Maui Jim’s authorized retailers list didn’t automatically mean that defendants’ Maui-Jim-branded sunglasses were inauthentic. But MJ still argued that none of defendants’ MJ sunglasses had been subject to an authorized first sale by Maui Jim. Its digital marketing manager told CSRs to respond to customer inquiries about unauthorized retailers “that these sites are not listed and therefore are selling diverted, used, damaged or counterfeit goods and they void our 2 year warranty by purchasing on these sites.”

The court first addressed the burden of proof for a first sale defense: the party asserting the defense has the burden to “show ownership through lawful acquisition.” “Defendants are best suited to know who gave them the Maui-Jim-branded sunglasses they sell on their website.” And “blanket self-serving testimony and testimony from third-parties” was insufficient to grant summary judgment, at least in light of MJ’s own evidence that it hadn’t sold (enough) pairs to the identified third party sources. But nor was MJ entitled to summary judgment, because there was a material question of fact on sourcing.

What about material differences?

The first sale doctrine does not apply to products that have been materially altered from their original form. It is incumbent upon the reseller to show that the differences are not of the kind that consumers would likely consider in purchasing the product. An alteration is material if it changes something about a product that is relevant to consumers’ decision to purchase the product.

I note that the application of this rule has made first sale defenses almost unwinnable for unused goods, despite Supreme Court precedent recognizing that used goods are subject to first sale even though they are basically always materially different from unused goods. For used goods, proper disclosure of their used status is sufficient to avoid actionable consumer deception despite material differences. Though courts occasionally gesture at disclosure for unused goods too, they don’t take it seriously, I guess because they think cutting off the used-goods market would be more socially detrimental than allowing total trademark owner control of initial sales channels, which seems like a competition policy decision that trademark law should not be making. Even this relatively balanced opinion is willing to countenance this control.

MJ identified three alleged material differences, two of which the court accepted as creating material factual issues. (1) Defendants’ sunglasses customers experience inordinate delays; (2) Defendants’ sales do not qualify for Maui Jim’s warranty program; (3) Defendants “sold MAUI JIM-branded sunglasses after removing the original lenses and mounting in the frames prescription lenses that did not come from Maui Jim” but rather were “manufactured using a process over which Maui Jim had no control.”

Shipping delays: Although case law holds that “a physically identical product is nevertheless ‘materially different’ from the genuine article if ‘the bundle of services’ that attach to that genuine article is not available to the consumer,” shipping delays are different from other alleged service differences because they would naturally be attributed to the seller, not the manufacturer, and “are wholly unrelated to the product’s brand.”

Warranty: MJ argued that its warranty didn’t apply to sunglasses purchased outside of its authorized dealers; defendants argued that MJ’s “own communications with customers belie that contention.” The court disagreed: Instances where MJ told customers that they would repair and replace a customer’s sunglasses as long as they were authentic didn’t indicate that the repair would be made pursuant to a warranty. 

So the next question was whether MJ’s warranty was materially different from defendants’ own warranty. “[A]bsence of or a different warranty has been held to be a material difference.”

The court relied on a prior case about Hyundai equipment, which illustrates Jeremy Sheff’s point about the damage that post-sale confusion reasoning has done to direct infringement doctrine. In that case, the defendant’s customers agreed that they knew they were purchasing a product without a warranty, but the defendant still lost on summary judgment because, “[w]hile it may have been [his] intention to warn all of his customers ... this would not protect subsequent customers who may purchase the equipment from [his] customers.” (How often are sunglasses resold compared to large vehicles, by the way?)

It was undisputed that the parties have received inquiries from both present and potential customers about their respective warranty coverages. But whether their respective warranties were identical was disputed. Defendants argued that their warranty was identical or better, but: (1) Maui Jim’s warranty offers repair in addition to replacement, while SmartBuyGlasses’ does not; (2) Maui Jim’s warranty is tracked from the date the customer receives the product, whereas SmartBuyGlasses’ tracks it from the order date, meaning that Maui Jim’s is longer (without even accounting for alleged slower shipping speeds); and (3) both warranties only cover manufacturer’s defects, so MJ, as manufacturer, was “logically better suited to determine whether an issue is a manufacturer’s defect or not.”

These differences must be material to overcome first sale. It was defendants’ burden to show the absence of materiality. Defendants hadn’t done so: (citation to redacted materials) and there was evidence that the warranty did matter “as highlighted in consumer complaints and consumer inquiries directed to both Maui Jim and SmartBuyGlasses.” And “the fact that warranties and repair services were ranked [redacted] in consumer priorities when choosing premium sunglasses could support a finding that Maui Jim’s warranty is a material part of a consumer’s purchasing decision, especially given Defendants do not offer repair services.” [Look, if the court is relying on this for its legal conclusion, it should not be redacted—I have no idea what the justification for this is. Any concept of trade secrets that covers this information is appallingly overbroad.]

In addition, “a jury could find that the difference in warranty provider alone could warrant a material difference even if the warranties’ terms were identical. For example, we conjecture that a warranty from an institutional manufacturer would certainly be perceived more valuable to a consumer than the same warranty term provided by a discount retailer.”

Quality control: MJ argued that, even if the glasses were “once authentic,” MJ’s inability to control their quality once they arrived in defendants’ hands constituted a material difference. Of course, this rationale, taken seriously, would make the unauthorized resale of any used product unlawful—my Toyota has been out of Toyota’s control for over ten years! Anything could have happened! (And admittedly, much has.) However, the court reasoned that “[q]uality control measures may create subtle differences in quality that are difficult to measure but important to consumers.” Thus, courts don’t require trademark owners to show differences in actual quality. That would be too hard! But “quality control” also isn’t a magic phrase. “Rather, the test is whether the quality control procedures established by the trademark owner are likely to result in differences between the products such that consumer confusion regarding the sponsorship of the products could injure the trademark owner’s goodwill.” MJ needed to show that “its quality control procedures create a likelihood that their sunglasses are different from those that it does not control,” in particular that it stops enough substandard product from reaching a consumer “to create a material difference between the categories of authorized and unauthorized sales.” That wasn’t clear on this record.  

Finally, MJ argued that the “sponsorship exception” to first sale applied because defendants falsely indicated that they were authorized resellers. “Thus, use of a plaintiff’s trademark in promotional materials such as advertising or displays is not protected by the first sale doctrine, but use of a plaintiff’s trademark solely to identify a product up for sale is protected.” [This is a weird way to phrase it: advertising or displays are often ways to identify a product for sale. If a used car dealership truthfully advertises that it has Toyotas for sale, that can’t itself falsely imply sponsorship.] The court rephrases: “conduct that goes beyond the mere resale of trademarked goods and its incidental advertising may not be protected by the first sale doctrine.”

“Maui Jim chiefly takes issue towards SmartBuyGlasses.com’s representation that it works directly with leading eyewear manufacturers and suppliers,” such as the diagram showing a supply chain direct from the manufacturer. Even SmartBuyGlasses’ VP testified that this diagram was a poor representation of SmartBuyGlasses’ procurement model. Also, MJ submitted [redacted] instances where defendants’ customer service representatives supposedly indicated that they were an authorized Maui Jim dealer. One example: a customer asked “Are you an authorized Maui Jim’s dealer?” and a CSR responded: “Yes, we are.” The court also worried about the statement “all our products are 100% authentic[ ] [w]e source the authentic items through authorized distributors,” even though that doesn’t say that defendants are authorized distributors. That statement was in response to the following message: “your section ‘Authenticity’ says you work directly with the manufacturers, in this case Maui Jim, so why is it that they don’t know where you get your MJ sunglasses from.” More plausibly, a customer asked how defendants can “guarantee authenticity when [its] not an authorized dealer of Maui Jim products?” The CSR stated that it “source[s] it from the manufacturer itself.” When the customer responded by telling the representative that Maui Jim had told that customer that they “aren’t supplying you guys with glasses,” the representative changed course: “we do not source the item from Maui Jim brand, we source it from the factory or manufacturer on where they also ordered their items.” While defendants called these statements mere mistakes, they at least created a factual issue.

I’m not sure why this misrepresents sponsorship as opposed to misrepresenting the quality of the product, but defendants also at least sometimes included “Maui Jim’s 2009 Drop Ball Certification,” which certified that the lenses had been tested for impact resistance, which was not true.

What about the website disclaimers? First, “SmartBuyGlasses may have confused customers with its contradictory statements throughout its website that it is authorized by ‘all’ brands rather than a more accurate word like ‘most’ or ‘many’ brands.” Second, the survey showed 40% net deception, though 60% didn’t perceive sponsorship. Too many disputed material facts!

Likely confusion: also disputed. If the goods were in fact counterfeit, there would be a presumption of confusion. MJ’s digital marketing manager oversaw secret test purchases and testified that some were not manufactured by MJ. MJ’s VP of Marketing also testified that he could tell that some of the glasses sold through SmartBuyGlasses.com were counterfeit because they were sold “without our Maui Jim lenses.” Is that counterfeiting? Well, there’s a question of material fact over whether defendants adquately notified customers about the lenses.

As to the multifactor test, the analysis here is wonky because the usual multifactor test is not suited to the question of whether actual Maui Jim frames sold by someone else confuses people about source, which is why first sale and nominative fair use and other defenses are important. Interestingly, the court finds degree of care to be neutral, because “Maui Jim sunglasses are both premium (and so relatively expensive) and widely accessible on the internet.” MJ’s alleged instances of actual confusion, though disputed, were admissible hearsay because they were business records of a regularly conducted activity that were made at or near the time they transpired.

Dilution: summary judgment also denied (no discussion of fame).

False advertising claims covered four (or maybe five) things: (1) Defendants’ CSRs’ statements in response to customer inquiries about authenticity, (2) the website’s authenticity guarantee, (3) the website supply chain image, (4) the alleged statement that defendants have a U.S. location, and (5) the non-MJ lenses inserted in MJ frames.

CSR statements: Were these “advertising or promotion”? No; they were individual statements made in response to customer inquries,  not “promotional material disseminated to anonymous recipients.”

Website authenticity guarantee: Defendants pointed to their disclaimers, including “With some of the brands that we sell, the manufacturers’ warranty will be available worldwide however for other brands the official warranty may not be available in your country due to territorial limitations and/or brand policies. To cover all scenarios, we offer our own exclusive 24-month warranty against all manufacturers’ defects without exception” and the MJ-specific disclaimer it added. There was a question of material fact on falsity, despite the existence of the survey, given the disclaimers and other questions discussed in the trademark section. The survey wasn’t enough because it didn’t specifically evaluate the effects of the disclaimers.

comparative supply chain graphic

Supply chain image: There was a factual dispute over the misleadingness of showing a direct supply chain from manufacturer to consumer, rather from manufacturer to an exporter to an importer to a wholesaler to a shop and then to a customer. Defendants argued that the diagram was accurate and consistent with their practice for the majority of sales including [redacted] brands, and that disclaimers took care of remaining uncertainty.

Operations graphic showing NY "operation centre"

U.S. location: Also a material question over whether the U.S. dropship location made this truthful.

one prescription lenses statement

another, including ridiculous redaction from public website

Third-party lenses: These were less than 1% of defendants’ sales. MJ argued that defendants advertised that their prescription lenses were manufactured by MJ, but defendants used words like “our” rather than “Maui Jim’s prescription lenses” to describe them; this question was for the jury.

Reverse passing off: At one point, defendants incorrectly identified [redacted] as the manufacturer of MJ branded sunglasses on commercial invoices it sent to its customers. Defendants attributed this as a computer coding error and there was no evidence that there was any benefit to them from doing so, but regardless it wasn’t reverse passing off as defined by Dastar because they didn’t represent the goods as their own. Following the “precise words” used by the Supreme Court and the Seventh Circuit, “Defendants must have substituted its own name for the true manufacturer to be liable for reverse passing off.” Even without binding law, the court would still reject reverse passing off, because MJ didn’t show likely damage based on the invoices, though the result might be different if the mislabeling had been in ads.  

Illinois Uniform Deceptive Trade Practices Act claims survived for the reasons discussed above.

example of MJ photo compared to image on defendants' site

As for the copyright claim, the court easily rejected a fair use defense: the use wasn’t transformative, the modest creativity of the photos was enough, they were used in their entirety, and there was a licensing market for the photos insofar as “a benefit of contracting to act as one of Maui Jim’s authorized retailers is the right to use these copyrighted photographs in advertisements.” And the court found infringement:

 “Although Defendants ask us to infer that this is merely the same pairs of sunglasses shot at standard angles against a standard white background, we hold that no reasonable jury would find these photos are anything but identical.” Damages were a factual issue for trial.

Tortious interference: Whether Maui Jim produced enough evidence to establish the existence of its contracts with third parties was a disputed issue. However, the court rejected the argument that those contracts were unenforceable under European law: “the European Court of Justice squarely addressed the legality of authorized retailer contracts and distribution networks … in the context of luxury or high-end goods and ruled such contracts are not prohibited when three conditions are met: (1) the product necessitates a selective distribution system because it is high quality or technical; (2) resellers must be chosen on the basis of objective criteria; (3) the criteria defined must not go beyond what is necessary. Case C-230/16, Coty Germany GmbH v Parfumerie Akzente GmbH, 2017 EUR-Lex CELEX LEXIS 62016CJ0230, at ¶ 24.” [I don’t really see the court analyzing whether (2) and (3) were satisfied, especially given the factual issue about whether there were such contracts.]

Also, there was no question of material fact that defendants were aware that Maui Jim contracted with authorized retailers and that authorized retailers were prohibited from selling to other retailers (like defendants). In 2008, Maui Jim wrote to defendants: “By purchasing Maui Jim sunglasses from any authorized Maui Jim account, you are inducing that retailer to breach its contract with Maui Jim, which will subject you to civil liability for interference with a contractual relationship.” Defendants acknowledged receipt.

And there was evidence that Maui Jim incurred financial harm from the interference. So defendants’ summary judgment motion was denied.

Counterclaims for defamation: Defendants alleged that Maui Jim’s corporate headquarters and customer service representatives “falsely instructed potential SmartBuyGlasses’ customers that SmartBuyGlasses sells counterfeit goods, that the Maui-Jim-branded sunglasses they sell are ‘fake’ or ‘not authentic,’ and that SmartBuyGlasses ‘is not an authentic website,’” as well as falsely telling customs officials that Maui-Jim-branded sunglasses shipped by SmartBuyGlasses to U.S. Consumers were “not genuine,” causing U.S. customs to seize their authentic sunglasses. Since truth is a defense, the court denied summary judgment here.


"made with aged vanilla" can be misleading even if not the main ingredient

Sharpe v. A&W Concentrate Co., --- F.Supp.3d ----, 2020 WL 4931045, No. 19-cv-768 (BMC) (E.D.N.Y. Aug. 24, 2020)

Plaintiffs alleged that defendants violated NY GBL §349 by misleadingly labeling their root beer and cream soda beverages as “MADE WITH AGED VANILLA,” even though the vanilla flavor comes predominantly – if not exclusively – from an artificial, synthetic ingredient called ethyl vanillin. Although the court found that plaintiffs lacked standing for injunctive relief because they knew the truth now, it rejected defendants’ argument that a reasonable consumer couldn’t be misled because the products contain real vanilla and were conspicuously labeled as “Natural and Artificially Flavored.”

The complaint alleged that, even if the products contain any aged vanilla, “it is in trace or de minimis amounts not detectable by advanced scientific means.” Therefore, defendants’ misleading message that the drink contains “aged vanilla” wasn’t dispelled by the information that the beverages are “Natural and Artificially Flavored,” “which fails to communicate that the quantity of the artificial flavoring far exceeds the quantity of natural vanilla.” Plaintiffs alleged that they relied on the label, believing flavor of the product was vanilla and that any flavor came from macerating the bean and infusing/extracting the flavor. They also alleged that, in a March 2020 survey of 411 consumers, around 89% of the consumers stated this representation led them to believe that the product was vanilla flavored:

These consumers also interpreted the representation to mean that the vanilla flavor came exclusively (if not predominantly) from the natural vanilla – not artificial sources. Specifically, around 68% of surveyed consumers believed that the statement meant that the vanilla flavor “comes from a vanilla plant, such as a vanilla extract, which is made from vanilla beans from the vanilla plant.”

Scientific testing by an independent laboratory allegedly revealed that the vanilla flavoring of the products does not come from the vanilla plant. Instead, testing allegedly disclosed that the predominant, if not exclusive, source of the vanilla flavor derives from an artificial, synthetic ingredient – ethyl vanillin. This is allegedly a cheap and inferior substitute for real vanilla, and plaintiffs alleged that they wouldn’t have paid a premium price for the beverages if they’d known the truth, though they also alleged that they’d buy the drinks again in the future if they were reformulated with real vanilla or no longer deceptively labeled.

The parties used competing images of the products; the images plaintiffs used show the products prominently displaying the “MADE WITH AGED VANILLA” label and from an angle from which the “Natural and Artificially Flavored” disclosure defendants relied upon is not visible, while plaintiffs shot the product from a different angle, in which the “MADE WITH AGED VANILLA” statement was masked and unintelligible, while the statement “Natural and Artificially Flavored” was clearly visible. The court considered both images, while drawing all reasonable inferences in plaintiffs’ favor.

plaintiffs' image
defendants' image

Even if plaintiffs conceded that the products contained aged vanilla (which they did not), that was not enough to conclude that reasonable consumers wouldn’t be misled. The key case is Mantikas v. Kellogg Co., 910 F.3d 633 (2d Cir. 2018), which held that prominent “WHOLE GRAIN” and “MADE WITH WHOLE GRAIN” labeling could mislead a reasonable consumer on a product that was predominantly enriched white flour, even when the ingredients list accurately disclosed “enriched white flour” as the first ingredient and disclosed the number of grams of whole grain per serving.  The Second Circuit held that “a reasonable consumer should not be expected to consult the Nutrition Facts panel on the side of the box to correct misleading information set forth in large bold type on the front of the box.”

So too here. The court emphasized that “the use of the word ‘aged’ suggests to consumers that the vanilla content is naturally derived and has acquired a desirable quality upon the passage of time.” In Mantikas, whole grain was “at least present in a discernable quantity,” while plaintiffs alleged that vanilla wasn’t, making this a stronger case. And the Nutrition Facts panel in Mantikas was undisputedly accurate, while here “the existence of ethyl vanillin, the substance plaintiffs allege is exponentially present compared to natural vanilla, is never explicitly disclosed to consumers.” Advanced scientific testing was required to reveal its presence.

Plaintiffs plausibly alleged that the “MADE WITH AGED VANILLA” representation – “prominently displayed underneath the A&W logo and on front of the bottle or box, bolded and in all capital letters” – falsely implied that any vanilla content derives “predominantly” from the vanilla plant. The court said that “the persuasive extrinsic evidence that the overwhelming percentage of consumers share this misconception” bolstered this conclusion.

True, the labels disclose that the beverages are “Natural and Artificially Flavored.” “A consumer, however, does not know if this is referring to vanilla or to the host of other ingredients present in the drinks, including the root beer or cream soda flavoring.” And more importantly, Mantikas says that consumers don’t have to rotate the package to correct misleading information in large bold type on the front.

Nor was Mantikas distinguishable on the basis that the case involved a misrepresentation as to the cracker’s primary or main ingredient. The Second Circuit did mention this fact, but the court found that Mantikas actually rejected the argument that only primary ingredients count:

[T]he rule that [d]efendant contends emerges from these district court decisions – that, as a matter of law, it is not misleading to state that a product is made with a specified ingredient if that ingredient is in fact present – would validate highly deceptive advertising and labeling. Such a rule would permit [d]efendant to lead consumers to believe its Cheez-Its were made of whole grain so long as the crackers contained an iota of whole grain, along with 99.999% white flour. Such a rule would validate highly deceptive marketing.

This principle is equally true when dealing with a “preferred, non-primary ingredient”:

A chocolate chip cookie may not necessarily be comprised predominantly of chocolate (one can only dream), but it would still likely be misleading to label it as “Made With Natural Chocolate” if the cookie’s chocolate’s content is 99.999% artificial and synthetic. Likewise, a frozen pizza manufacturer that labels its products as “Made with Real Pepperoni” likely cannot prevail at the motion to dismiss stage under Mantikas by unabashedly using 99.999% artificial or synthetic meat fillers and simply arguing a pizza’s main ingredient is dough.

Keratindose hair products may be misleading about keratin content even without a survey

Price v. L’Oréal USA, Inc., 2020 WL 4937464, No. 17 Civ. 614 (LGS) (S.D.N.Y. Aug. 24, 2020)

Plaintiffs brought California and New York claims against L’Oréal based on its Matrix Biolage Advanced (MBA) haircare product. This includes the Keratindose system of three products: the Pro-Keratin + Silk Shampoo, the Pro-Keratin + Silk Conditioner and the Pro-Keratin + Silk Renewal Spray “Keratindose” appears on the front with the first seven letters of the word in bold. But:

Keratin is a protein that is found in human hair and is also a treatment that customers administer to their hair. The Products do not and have never contained keratin as an ingredient, and the ingredients lists on the back labels of the Products do not include keratin.

The court partially granted and partially denied L’Oréal’s motion to exclude the testimony of Bruce Silverman as a marketing, advertising and branding expert. He opined, inter alia, that “a reasonable consumer would fully expect a family of hair care products named Keratindose to include keratin, just as they would expect of any product that includes a well-known ingredient as part of its name.” L’Oréal argued that his expertise was inadequate because his “career has provided him with no experience in in-salon hair care products or the salon channel generally.” However, “Silverman has an impressive fifty years of experience in advertising,” including reviewing thousands of studies, interviewing thousands of consumers, and attending thousands of focus group sessions, many devoted to health/beauty aids. His opinions premised on his own experience were admissible, including that a reasonable consumer “would expect [ ] any product that includes a well-known ingredient as part of its name” to include that ingredient, and “consumers would see the Challenged Claims as branded ingredient(s) that differentiate the Challenged Products from competitive products.” However, his opinion that keratin is a well-known ingredient in hair products, and that “many women ... are already aware of (or have ample opportunity to be aware of) the restorative properties of keratin” in hair products was not based on his experience, nor is it based on a reliable methodology, just on an internet search and a review of emails and testimony from L’Oréal employees and the PTO ruling on L’Oréal’s trademark application.  Thus, his opinion on consumers’ awareness of keratin as an ingredient in haircare products and consumers’ resulting perception of the challenged terms were excluded as unreliable, including his opinion that “many shampoos actually contain keratin and feature that word on their labels,” and the subsequent conclusion that “[c]learly, keratin is a desirable ingredient that many consumers would believe to be a valuable component in a shampoo, and if they see that word on a label, they would expect it to be in the product.”

The court also excluded plaintiffs’ expert’s damages calculation. The presently unchallenged model concluded that 21% of the price reflected keratin content claims or a price premium of 7% of the price charged. Defendants do not seek to exclude this opinion in their current motion. But the calculation of aggregate economic damages was excluded. The expert used the formula:

Aggregate Economic Damages = (# bottles) × ($ price) × (% damages)

But the actual retail price of the products was not produced, so the expert used the low end of the range of the manufacturer suggested retail prices (MSRP). And L’Oréal doesn’t report bottle sales by state, so he used the percentage of conjoint survey respondents who reported that they had purchased a Matrix Biolage Advanced Keratindose “shampoo/conditioning product,” and who also reported that they were residents of California or New York, to apportion bottle sales to the two states. Also, because L’Oréal only provided wholesale data, and because in practice not all wholesale bottle sales will be resold to consumers, he proposed either a shrinkage rate of 5% or, alternatively, using only wholesale orders that have a corresponding re-sale order at a later date, on the assumption that re-sale orders occur only when customers have sold their previous inventory.

This was excluded because certain of the assumptions about quantity and price were are unreliable. The evidence about MSRP was that, though L’Oréal believed that "the MSRP lists represent good proxies for the prices that salons charge consumers for L’Oréal Products," non-salon retailers charged widely varying and unpredictable prices. Since the class here wasn’t restricted to salon purchasers, MSRP could not be used as an accurate substitute for the actual prices paid by Class members. 

This unreliable methodology for calculating price was exacerbated by questionable assumptions about number of bottles. The proposed shrinkage rate of 5%, “more than two to three times the average of reported shrinkage rates in the United States,” wasn’t sufficiently justified; just being “conservative” wasn’t enough. Nor was there enough information about reorders for that measure to be accurate. In addition, the conjoint survey was initially designed to measure consumer preferences and economic damages as a percentage of actual price charged, and for that purpose had a sample size of one thousand respondents. It wasn’t appropriate to retro-fit that to determine the percentage of the total sales that occurred in California and New York, especially given the small sample size (105) for the damages calculation, and there was no confidence interval provided, which was significant “since the addition or subtraction of a single survey respondent living in California or New York stating they had purchased the shampoo could account for hundreds of thousands of dollars in class damages, and millions in statutory damages under the GBL.”

However, defendants weren’t entitled to summary judgment based on the claim that reasonable consumers wouldn’t be fooled. Plaintiffs offered an expert opinion, and there was also anecdotal evidence showing that keratin was a known ingredient among consumers; the named plaintiffs each testified that they believed, at the time of purchase, that the products contained keratin based on the labeling. This was enough to go forward. (However, emails between L’Oréal employees and the PTO ruling weren’t evidence of deception because they didn’t show the perspective of a reasonable consumer—which would make the PTO sad to hear, I think.)

“In essence, Defendants are arguing that, because that the Challenged Terms are not false on their face, Plaintiffs must proffer extrinsic evidence to show consumers’ understanding of the terms in the form of consumer data or a survey.” But California courts have expressly rejected a survey requirement for misleadingness, and there was no authority that an expert opinion was insufficient under the GBL.

L’Oréal also wasn’t entitled to summary judgment for failure to show damages. The expert formula for  calculating aggregate class-wide damages wasn’t excluded, and non-expert evidence might be applied to this formula to prove aggregate class-wide damages (citing precedent that classwide damages calculations under California law are “particularly forgiving” and require only “some reasonable basis of computation”).

Equally, plaintiffs weren’t entitled to summary judgment on deceptiveness. The meaning of the claims was ambiguous. “ ‘Pro-Keratin’ has no clear meaning, and consumers could understand “Keratindose” to mean that the product is designed to deliver ‘a daily dose of keratin’ as Plaintiffs allege, or understand it to mean that the product is designed to treat hair that has undergone a keratin treatment as proposed by Defendants, or understand it to mean something else entirely.” A reasonable jury could reject Silverman’s expert testimony and agree with L’Oréal.