turnabout is fair play: undisclosed sponsorship of "objective" report could be misleading; overstatement of court holding could be defamatory

Pegasystems, Inc. v. Appian Corp., 2020 WL 2616280, No. 19-11461-PBS (D. Mass. May 22, 2020)

Pegasystems sued Appian for allegedly falsely touting a paid for report as independent; now the court deals with Appian’s counterclaims for false advertising under the Lanham Act and Mass. Gen. Laws ch. 93A; commercial disparagement; and defamation, in connection with four separate fact patterns, granting Pegasystems’ motion to dismiss in part and denying it in part. 

(1) In March 2011, Pegasystems posted “Pega BPM System z Benchmark Test Results” on its site, providing the results of testing done in collaboration with IBM to determine if Pegasystems’ platform could be “effectively deployed across an entire corporate enterprise ... with a servicing population of approximately 10,000 users.” The paper concluded that Pegasystems “met or exceeded all performance goals” for the testing. But the testing employed the IBM System z processor, “a $26-million machine — the highest-end and most expensive mainframe IBM sold in its class at the time.” Appian alleged that “extremely few (if any) Pegasystems customers would ever be using such a powerful supercomputer to run Pegasystems’ software” and that the paper was currently misleading because the testing was performed on a long-discontinued version of Pegasystems’ platform. 

But this was not misleading because the fact that the test used “a computer too expensive for most businesses to afford,” was “obvious” from the paper’s title and from the website’s description: Anyone would immediately know that the System z processor was used to conduct the test.  “Particularly given the technically savvy consumer base for the products at issue, a limitation contained in the title of the paper cannot give rise to a Lanham Act false advertising claim.” Likewise, the fact that the Pegasystems version that had been tested had long been discontinued didn’t amount to falsity/misleadingness, since any reader would see that the paper was published in 2011 and could take that date into account. 

(2) At Pegasystems’ 2019 annual conference PegaWorld, attended by over 6,000 people, Pegasystems allegedly made “false statements ... designed to exaggerate narrow claims regarding Pegasystems’ products by third parties and to present them as statements relating to broader areas of wider relevance to customers,” which are still available on video on Pegasystems’ website, included: Stating that Pegasystems has “40,000+ certified professionals globally” when that number included professionals whose certification had expired or whose certification was for an older version of Pegasystems’ software; and stating that Pegasystems “get[s] accolades from analysts” while displaying four charts, three of which Appian alleges were “falsely and misleadingly captioned.” 

Appian alleged that the second chart was labeled “Digital Process Automation” but came from a report on “Software For Digital Process Automation For Deep Deployments”; the third was labeled “Real-Time Decisions & AI” but came from a report on “Real-Time Interaction Management”; and the fourth was labeled “End-to-End Work Management” but came from a report on “Intelligent Business Process Management.” 

These changes to the graph titles were not plausibly material to “the sophisticated consumers who purchase business process management software.” So too with Pegasystems’ statement that it has “40,000+ certified professionals globally” when some of them have lapsed certificates or certificates for obsolete versions of Pegasystems. “It is implausible that the precise number of currently certified professionals, as conveyed in passing on a presentation slide, would be material to a consumer.” 

(3) In 2014, Jim Sinur published a six-page paper on Pegasystems’ website titled “Appian and Pegasystems – Head to Head Comparison”; it was removed in January 2019. The paper describes Sinur as “an author and independent thought leader in applying business process management (BPM) to innovative and intelligent business operations (IBO)” and refers to his prior experience at Gartner, a global research and advisory firm. “The paper does not explain its objective or methodology, beyond one reference to what Sinur ‘saw’ ‘[w]hile at Gartner.’” The final summary says: “If you are picking one over the other, you need to look at the nature of the processes you will attempt over time. If they are strategic, pick Pega. If you happen to own both tools, use Appian for tactical standalone processes that will not grow in performance needs and use Pega for strategic and wide impact processes.” That same year, a Pegasystems executive tweeted a link to the paper along with text reading, “Great comparison of @pega vs @appian via @JimSinur shows why our technology is better business software,” and a blog post by an Appian competitor, Bizagi, called the paper “a tongue-lashing from an industry analyst and thought leader, Jim Sinur” and noted that “[t]he report claims to ‘look objectively at the strengths and weaknesses of both vendors.’ ” 

Appian alleged that the Sinur Paper was commissioned by Pegasystems and that Pegasystems “influenced its content,” though it nowhere disclosed a commission. 

Was this claim untimely? For the Lanham Act claim, the most analogous statute of limitations was the four-year period under Chapter 93A. The laches period starts to run when “the plaintiff knew or should have known” of the defendant’s wrongful conduct. That’s hard to figure out on a motion to dismiss, and this one was no exception. For commercial disparagement and Chapter 93A, the limitation periods were three and four years, respectively. Under Massachusetts law, “a cause of action ... does not accrue until the plaintiff knew, or in the exercise of reasonable diligence should have known of the factual basis for his cause of action.” Appian alleged that it was unable to learn the factual basis for its claim until the discovery in this case; that was plausible on a motion to dismiss. 

Falsity: “[T]he presentation of a commissioned paper as the analysis of a neutral third party is at least misleading,” and Appian plausibly alleged this, such as in Pegasystems’ description of Sinur as an “independent thought leader.” Were consumers deceived? Given that a competitor described the Sinur Paper as a “tongue-lashing from an industry analyst and thought leader” who sought to “look objectively” at the two platforms, it was reasonable to assume that customers also thought Sinur was objective. Commercial disparagement claims also survived even without any allegations of skewed data beyond the representation of objectivity. 

(4) Finally, soon after the court denied Appian’s motion to dismiss (linked above), a Pegasystems executive published a post on LinkedIn that read, “We all encounter examples of business ethics we find questionable ... patent trolls, paid content promoted as ‘unbiased truth,’ and sometimes just blatant lies. I’m proud to work for a company that is not afraid to undertake the unpleasant action of litigating against those whose actions we believe are unlawful and unethical. If you’re thinking about Appian, you should read this first ...” The LinkedIn post shared a link to a post by the Boston-area community news blog Universal Hub, which discussed this Court’s motion-to-dismiss decision and wrote that “Pegasystems ... [had] shown enough proof” of its claims against Appian to “make its case to a jury.” Seven other Pegasystems employees on LinkedIn reposted or “echoed” this post. 

Defamation: Here, calling Appian’s business practice “unethical” was a protected opinion since ethical standards can vary. But accusing another party of being a “liar” has generally been held to be defamatory. Although the LinkedIn Post ostensibly relied on the court’s prior opinion, that opinion arguably does not support that Appian told “blatant lies.” As to scienter, the post’s author had access to the opinion and would have known that the opinion did not support an accusation that Appian told “blatant lies.” Appian wasn’t required to plead special damages because the LinkedIn Post’s statements are “actionable without proof of economic loss” as “statements that may prejudice the plaintiff’s profession or business.” Thus, the defamation claim was properly alleged.

Lanham Act and Chapter 93A: Was this “commercial advertising or promotion”? Though the LinkedIn post didn’t directly advertise Pegasystems’ products, it was “made with the intent of influencing potential customers to purchase [Pegasystems’] goods or services” over those of Appian, and targeted readers who were “thinking about Appian” as a vendor, so it was commercial advertising. And the falsity element was properly pled, see above.

another case says Google's "free speech" statements are puffery

Ugh, Google's new Blogger interface is terrible--will I be forced to decamp to Wordpress? Anyway:

Lewis v. Google LLC, --- F. Supp. 3d ----, No. 20-cv-00085-SK, 2020 WL 2745253 (N.D. Cal. May 20, 2020)

Plaintiff, an antifeminist, is sad that Google considered his YouTube videos to be hate speech. Ignoring the First Amendment/other state-action-requiring claims/claims barred by §230 (for the moment, I guess? Depends on what level of authoritarianism we graduate to), his Lanham Act/similar claims also fail. Lewis argued that YouTube’s statements that “everyone deserves to have a voice,” that it believes “people should be able to speak freely,” “everyone should have a chance to be discovered,” etc. constituted false advertising.

First, Lewis didn’t allege that he was within the Lanham Act’s zone of interests. Even assuming that he was a competitor to YouTube because YouTube also makes videos, his injury was suffered as a consumer and the challenged statements were not about YouTube’s own videos but about the forum YT provides. He didn’t explain how YT’s statements about itself, as opposed to shutting down/demonetizing his videos, caused him harm.

Plus, the Prager case teaches that YT’s statements about its welcoming arms are puffery.

Fraud/fraudulent omission claims also failed. Lewis alleged that Google “failed to disclose that they wrongfully censor hate speech and do so at the behest of foreign governments in contravention of American Constitutional free speech.” But YT discloses that it reviews flagged content and prohibits “hateful content” and other things from being monetized. There was no properly pled omission contradicting the TOS; any reliance on the alleged omissions wouldn’t be reasonable; and Lewis didn’t allege any facts showing that the ability of foreign governments to flag videos was material.

Unsurprisingly, there was also no breach of the implied covenant of good faith and fair dealing, given the TOS, nor tortious interference with prospective economic advantage.

Sam's Club exposed to disgorgement for potential warranty differences in grey goods it sold

Monahan Prods. LLC v. Sam’s East, Inc., 2020 WL 2561255, No. 18-11561-FDS (D. Mass. May 20, 2020)

Plaintiff makes UPPAbaby strollers. Sam’s is a chain of membership-only retail warehouse stores and, despite not being an authorized retailer, it sold actual UPPAbaby strollers, and it can’t get out of a trademark infringement claim because basically anything can be a material difference.

Although UPPAbaby characterized the strollers as “gray market” goods—intended for distribution and sale in foreign countries—they were physically identical. But UPPAbaby argued that there were three post-manufacture differences that would consumer confusion and injure its brand. “First, it contends that it maintains strict quality control in its domestic distribution chain, while Sam’s Club does not. Second, it contends that only its authorized retailers provide appropriate customer support, and that Sam’s Club is not such a retailer. Third, the warranty protection provided by UPPAbaby does not apply if the product is sold by an unauthorized retailer such as Sam’s Club.” (Amazon is an authorized retailer, if you thought that there might actually be customized support services involved.)

Cross-motions for summary judgment were mostly denied. Europeans think of the US as more freewheeling than the EU on trademark, but I really have to wonder if that’s true for first sale given the costs of litigating issues like this when the products are physically identical.

Despite being sold by Amazon, one of the company’s founders testified that the UPPAbaby “brand and [its] products have a reputation and an assumption by a consumer of certain quality and services”—a reputation that she said could be harmed if the strollers were sold by unauthorized retailers who lack “the same level of knowledge and service” as authorized retailers or who sell the strollers at lower prices.

The parties disputed whether the strollers were unpacked or re-packaged by Sam’s Club along the way, by which UPPAbaby apparently includes the allegation that Sam’s employees may have removed them from their original shipping pallets and put them on different pallets; Sam’s disputes that there was any re-packaging.

Unlike authorized retailers, Sam’s Club does not provide replacement parts or repair services for UPPAbaby strollers. Sam’s Club employees are not specially trained on how to sell or service the strollers. Under the terms of the warranty, strollers sold by Sam’s were not covered, though on several occasions, UPPAbaby allowed customers who said they had bought a stroller at Sam’s Club to register for the warranty, and Sam’s also argued that UPPAbaby’s warranty limitation was illegal under NY law.

Sam’s Club offered its own warranty on the strollers—a “100% Merchandise Satisfaction Guarantee” promoiing that “[i]f the quality and performance of member’s purchases don’t meet their expectations, [Sam’s Club will] replace it or give them a refund in most cases.” For some time, the Sam’s Club website represented that the strollers were covered by a “6 month manufacturer warranty,” but Sam’s removed the reference after the complaint was filed and replaced it with its own “100% Merchandise Satisfaction Guarantee.”

First sale does not bar trademark enforcement when “genuine, but unauthorized, imports” “differ materially from authentic goods authorized for sale in the domestic market.”

Sam’s argued that these weren’t even gray market goods, given that they came into the US with UPPAbaby’s consent and then were dispatched to Sam’s, some allegedly by round trip to Canada; at least some of the strollers never left the country. UPPAbaby argued that nonetheless, they weren’t authorized to be sold in the US. The court found that UPPAbaby’s definition—a grey-market good is one unauthorized for sale in the United States, whether or not it was originally imported with the consent of the trademark holder—was better supported by the case law.

So the remaining question was whether there were material differences between the strollers sold by Sam’s and the authorized versions. The “threshold of materiality” is “always quite low” in gray-market goods cases and covers “any difference between the registrant’s product and the allegedly infringing gray good that consumers would likely consider to be relevant when purchasing a product.” If a material difference does exist, it “creates a presumption of consumer confusion as a matter of law.”

While the existence of differences is a factual question, materiality may be a matter of law. Quality control: The case law says (interestingly without any particular evidence, as compared to what may be required in a false advertising case) that “[d]ifferences in quality control methods, although not always obvious to the naked eye, are nonetheless important to the consumer” and that “substantial variance in quality control” constitutes a material difference.

Here, the quality-control procedures at issue didn’t involve the actual manufacture of the product. UPPAbaby argued that it ensures that the strollers “reach the customer with as few supply chain steps as possible and maintain[s] close quality control at all steps in its distribution.” Sam’s contends that there was no evidence that this affected the strollers. Such evidence isn’t strictly necessary because quality control measures “may create subtle differences in quality,” but “‘quality control’ is not a talisman the mere utterance of which entitles the trademark owner to judgment.” There was a factual dispute: “on one occasion, Sam’s Club shipped a stroller to a customer that was different from what it had advertised,” and it was possible that this was caused by different inventory tracking procedures. [How this could affect the reputation of the manufacturer is left as an exercise for the reader.] And “due to supply chain differences, the strollers sold by Sam’s Club were likely to have been shipped several more times than those sold by authorized UPPAbaby retailers,” though there was no evidence that Sam’s shipping precautions were any different from those taken by UPPAbaby or its authorized retailers, especially Amazon. Other than number of shipping instances (which might not differ for Amazon), UPPAbaby didn’t show what specific actual quality-control procedures it observed, or how they differed from those used by Sam’s Club or its suppliers. “On this record, a jury could reasonably conclude either that there are important differences between UPPAbaby’s and Sam’s Club’s quality-control procedures or that there are no (or only trivial) differences.”

Customer support: “The question here is whether the advice and information that is available for UPPAbaby strollers sold by Sam’s Club differs materially from what is available for strollers sold by UPPAbaby’s authorized retailers.” It wasn’t clear that there were any differences; Sam’s customers seemed to have the same access to the UPPAbaby support team as anyone else, and there was evidence that those customers called and received help from UPPAbaby’s customer-support team on several occasions.

UPPAbaby argued that only its authorized retailers had invested the time and money to train their employees on how to display its strollers properly, recommend a suitable model for each customer, and answer maintenance questions. There was some evidence that Sam’s Club’s customer-support staff was less than fully informed about UPPAbaby’s strollers. “On one occasion, a member of its customer-support staff called UPPAbaby’s own support hotline to ask about a stroller.” But it wasn’t clear that authorized retailers were substantially different, only “broad statements” by UPPAbaby’s employees. Given that UPPAbaby sold through Amazon, the court was dubious “whether Amazon trains its employees on how to display UPPAbaby strollers properly and recommend suitable models to customers, or how it would even go about doing so.” Still, this created a factual dispute. [Sometimes I imagine false advertising claims being treated with this level of deference. Sometimes I don’t.]

Warranty differences: It was unclear whether a difference in warranty protection, standing alone, could be material in the absence of functional product differences. The court rejected Sam’s argument that UPPAbaby’s voluntary extension of its warranty to some Sam’s purchases made this putative difference arbitrary and immaterial. Though UPPAbaby did seem to have done this, “[i]t would frustrate the purpose of federal trademark law to require UPPAbaby to refuse warranty protection, risking further harm to its goodwill, in order to preserve its trademark claims.” [How this is material to consumers if the warranty is honored is again left as an exercise for the reader.] Anyway, UPPAbaby doesn’t always honor the warranty for Sam’s purchases. Nor does state law requiring warranty coverage to be extended change things. New York law, for example, prohibits manufacturers from limiting warranty coverage “solely for the reason that such merchandise is sold by a particular dealer or dealers.” But there was no evidence UPPAbaby ever complied, and its violation of NY law (if violation there be) was a different issue. [Again, how this could be material to NY customers, at least, is not clear.]

Sam’s argued that the difference in warranties was not material because its own “100% Merchandise Satisfaction Guarantee” was superior. But the question was whether the products it sold were materially different, not whether they were inferior. “Thus, even a product covered by a more generous warranty may still be materially different if that warranty is substantially unlike the one that applies to authorized versions.” Again, whether the differences were material were not clear on this record. On paper, the differences would likely to matter, since UPPAbaby’s warranty allows for repairs and replacement parts for a broken stroller, but not an entirely new stroller or a refund, while Sam’s is vice versa. However, that difference might be only theoretical; UPPAbaby apparently never actually repaired a stroller under its manufacturer’s warranty. “Its own employee admitted that the warranty primarily serves as “marketing,” rather than to provide real product support.” And UPPAbaby’s implementation of its warranty also apparently does allow refunds.  

The court noted that the fact that several Sam’s customers apparently contacted UPPAbaby to ask whether their strollers were covered by the manufacturer’s warranty. While that tended to show confusion about which warranty applied, it didn’t show that there were ultimately real differences in those warranties that would have mattered to them.

“[O]n this record jurors could reasonably disagree as to whether any of the alleged product differences meaningfully exist in a way that would likely be relevant to consumers.”

Sam’s moved for partial summary judgment on whether UPPAbaby could get money damages. Under First Circuit rules:

(1) a plaintiff seeking damages must prove actual harm, such as the diversion of sales to the defendant;

(2) a plaintiff seeking an accounting of defendant’s profits must show that the products directly compete, such that defendant’s profits would have gone to plaintiff if there was no violation;

(3) the general rule of direct competition is loosened if the defendant acted fraudulently or palmed off inferior goods, such that actual harm is presumed; and

(4) where defendant’s inequitable conduct warrants bypassing the usual rule of actual harm, damages may be assessed on an unjust enrichment or deterrence theory.

UPPAbaby sought: (1) the costs of future corrective advertising; (2) compensation for extra personnel expenses incurred; and (3) the disgorgement of Sam’s Club’s profits.

UPPAbaby hadn’t done any corrective advertising; courts occasionally award prospective corrective advertising costs, but with reservations, given the “substantial potential for inaccuracy.” Such awards are appropriate “only if it compensates the injured party for identifiable harm to its reputation.”

There was some evidence of identifiable harm to UPPAbaby’s brand in the record because some Sam’s customers called the UPPAbaby support hotline or communicated online, unsure about whether their strollers were under warranty. Another customer called to report that Sam’s Club had advertised a different model year stroller than what it had for sale, possibly due to quality-control differences, and that he or she felt “confused” and deceived. “Any harm to UPPAbaby’s brand caused by this consumer confusion is compensable, and therefore, at least in theory, it could recover the costs of a corrective advertising campaign that would effectively repair that harm.” [I really don’t understand the harm story here. How is harm done to the “brand”? Ok.]

Still, Sam’s got summary judgment on this, because UPPAbaby’s marketing expert based his corrective advertising cost estimate at least in part on the fact that Sam’s sold the strollers cheaply. “But even if such harm occurred, sales at discounted prices do not violate the Lanham Act. … [A]ny harm to UPPAbaby’s brand caused simply by discount sales is not recoverable.” Indeed, the court noted in a footnote—something that bears on the discussion above—“[E]ven if Sam’s Club’s versions had unavoidable material differences—for example, because they were not covered by the manufacturer’s warranty—Sam’s Club could still legally sell them if it effectively disclaimed those differences.” Nor did UPPAbaby show that its proposed remedy would actually redress harm to its brand. The expert proposed “an unspecified message—either by mail or by digital advertising—to as many consumers who may have seen Sam’s Club’s advertising as is possible. He did not identify the contents or layout of that message, let alone explain how it would remedy the consumer confusion arising from any material differences in the strollers sold by Sam’s Club.” Without that, UPPAbaby was just seeking a free ad campaign, which was not an ok way to measure damages.

Damages for personnel expenses: UPPAbaby sought compensation for the time spent by its employees investigating the sale of its strollers by Sam’s Club and addressing related complaints by customers and retailers. Sure, “additional personnel expenses arising from unauthorized sales in violation of the statute are recoverable as a general matter.” But “[o]ne obvious issue is that most, if not all, of those employees were salaried, so the company would have paid them regardless, and therefore it has not suffered any incremental out-of-pocket losses.” Still, it was theoretically possible to prove lost opportunity costs; had UPPAbaby provided sufficient factual evidence to create a factual issue as to whether there was a reasonable likelihood of actual harm to the company? Some of UPPAbaby’s employees who worked on this issue may have been compensated on an hourly basis, so their efforts might be compensable, and even for the salaried employees, “using the number of hours those employees spent on remedial efforts is not an unreasonable approximation” of lost opportunities, given that wrongdoers bear the risk that the harm they do will be hard to quantify. So no summary judgment on this kind of damages.

Disgorgement: Romag doesn’t matter much here because the First Circuit already allowed disgorgement: “(1) as a rough measure of the harm to plaintiff; (2) to avoid unjust enrichment of the defendant; or (3) if necessary to protect the plaintiff by deterring a willful infringer from further infringement.” To recover under (1), a plaintiff must prove both actual harm and direct competition. But the parties weren’t direct competitors, because Sam’s is a retailer selling directly to consumers and UPPAbaby is manufacturer that doesn’t (also, UPPAbaby also got paid for these strollers!). True, consumers might instead have bought from an authorized distributor, but that wasn’t the same thing as direct competition, and it thus wasn’t inherently plausible that “defendant’s profits may be presumptively similar to what plaintiff would have earned on the sale.”

Fraud or willfulness could still justify disgorgement even without direct competition. A jury could reasonably conclude that Sam’s Club acted willfully or in bad faith. “Its supplier informed it in writing that the UPPAbaby warranty would not apply to the strollers if sold in the United States.” But Sam’s nonetheless allegedly put the strollers on the website as having a manufacturer’s warning. “A jury could reasonably conclude either that it was a mistake, or that it was done willfully and with the intent to mislead consumers.”

However, Mass. Gen. Laws ch. 93A claims failed because the statute expressly provides that no action may be brought under the statute unless the complained-of conduct occurred “primarily and substantially within the Commonwealth.” The critical inquiry is “whether the center of gravity of the circumstances that give rise to the claim is primarily and substantially within the Commonwealth.” It was undisputed that the actionable conduct was not centered in Massachusetts, but was throughout the US. It didn’t matter that UPPAbaby’s strollers are stored in its warehouse in Massachusetts and sold by several authorized retailers in Massachusetts, because that wasn’t the relevant conduct. A place of injury within Massachusetts is not a sufficient basis for finding that conduct occurred “primarily and substantially” within the Commonwealth.

burden is on Ds to show unprotectability of what they copied

Compulife Software Inc. v. Newman, 2020 WL 2549505, No. 18-12004, No. 18-12007 (11th Cir. May 20, 2020)

The opinion sums up:

The very short story: Compulife Software, Inc., which has developed and markets a computerized mechanism for calculating, organizing, and comparing life-insurance quotes, alleges that one of its competitors lied and hacked its way into Compulife’s system and stole its proprietary data. The question for us is whether the defendants crossed any legal lines—and, in particular, whether they infringed Compulife’s copyright or misappropriated its trade secrets, engaged in false advertising, or violated an anti-hacking statute.

The court of appeals reversed the magistrate judge (which held a bench trial on consent) on copyright infringement and trade secret misappropriation, though it upheld the finding of no false advertising.

Compulife sells access to a database of insurance-premium information, the “Transformative Database,” which contains up-to-date information on many life insurers’ premium-rate tables and thus allows for simultaneous comparison of rates from dozens of providers. “Although the Transformative Database is based on publicly available information—namely, individual insurers’ rate tables—it can’t be replicated without a specialized method and formula known only within Compulife.” Insurance agent clients can input demographic information and get insurance rate estimates from the database; Compulife also licenses a “web quoter” that allows the licensee to offer quotes directly to prospective purchasers who enter their own demographic information on the licensee’s site. And Compulife sells a more expensive license that allows licensees to create addons and sell access to other Compulife licensees. It also gives consumers direct access to life-insurance quotes on its own website, referring prospective life-insurance purchasers to agents who pay Compulife for the referrals.

The defendants are also in the business of generating life-insurance quotes at naaip.org. “NAAIP” stands for National Association of Accredited Insurance Professionals, but as the court below found, “NAAIP is not a real entity, charity, not-for-profit, or trade association, and is not incorporated anywhere.” The defendants offer a service similar to—and at least partially copied from—Compulife’s web quoter, which they call a “Life Insurance Quote Engine,” and any agent can sign up for a post-domain path on the site. If a visitor to an NAAIP site uses its link to buy insurance, the defendants receive money for the referral. Defendants also operate beyondquotes.com, which generates quotes and then generates revenue by selling referrals to affiliated insurance agents.

I have to admit that the process by which Compulife creates its database sounds either useless or actively harmful to truthful comparison to me, though I don’t have all the details. To create the database, Compulife’s CEO “draws on insurers’ publicly available rate information, but he also employs a proprietary calculation technique—in particular, a secure program to which only he has access and that only he knows how to use.” But if he inserts a proprietary calculation technique, why are his results predictive of rates that insurers would actually quote for given demographics?

Anyway, Compulife argued in one case that the defendants gained access to the Transformative Database under false pretenses by purporting to work for licensed Compulife customers. Defendants undoubtedly copied some of Compulife’s HTML source code. In the other case, Compulife alleged that defendants hired a hacker, Natal, to “scrape” data from its server via programming a bot to send automated requests, creating a partial copy of the database, in particular all the insurance-quote data for two zip codes—one in New York and another in Florida, for every possible combination of demographic data within those two zip codes. The total was more than 43 million quotes. “The HTML commands used in the scraping attack included variables and parameters—essentially words (or for that matter any string of characters) used to designate and store values—from Compulife’s copyrighted HTML code. For example, the parameter ‘BirthMonth’ in Compulife’s code stores a number between one and twelve, corresponding to a prospective purchaser’s birth month.)” [That … really sounds unprotectable by copyright.] Compulife alleged that defendants used the scraped data to generate quotes, though defendants claimed they didn’t know the source of the data, which was contested by other evidence.

Copyright infringement: the defendants had the burden to show that what they took wasn’t protectable, so the magistrate judge erred. The usual requirement is substantial similarity “between the allegedly offending program and the protectable, original elements of the copyrighted works.” The higher standard of virtual identicality was not the standard here; that standard is limited to “analyzing claims of compilation copyright infringement of nonliteral elements of a computer program.” Copying source and object code, “even nonliterally,” is subject to substantial similarity analysis.

Still, unprotectable elements have to be filtered out.  But the magistrate “improperly placed the burden on Compulife to prove, as part of the filtration analysis, that the elements the defendants copied were protectable; we hold that he should have required the defendants to prove that those elements were not protectable.” There’s lots of stuff that’s unprotectable, including “ideas, processes, facts, public domain information, merger material, scènes à faire material, and other unprotectable elements.”

The magistrate wrongly faulted Compulife for having “made no attempt to identify the protectable elements of the 2010 HTML Source Code.” But, the court of appeals held, “after an infringement plaintiff has demonstrated that he holds a valid copyright and that the defendant engaged in factual copying, the defendant bears the burden of proving—as part of the filtration analysis—that the elements he copied from a copyrighted work are unprotectable.” Nimmer says so, and it would be unfair to make the plaintiff prove a negative, since “[p]rotectability can’t practicably be demonstrated affirmatively but, rather, consists of the absence of the various species of unprotectability.” [I thought protectability was a function of creativity, not the absence of unprotectability.] A plaintiff couldn’t be expected to present the entire public domain to show that her work was new! Nor could she “reasonably introduce the entire corpus of relevant, industry-standard techniques” just to prove that none of the material copied was scènes à faire. Placing the burden on the defendant allows the plaintiff to just respond. [That seems to conflate the burdens of production and proof.]

Resulting approach:

Once the plaintiff has proven that he has a valid copyright and that the defendant engaged in factual copying, the defendant may seek to prove that some or all of the copied material is unprotectable. If the defendant carries this burden as to any portion of the copied material, that material should be filtered out of the analysis before comparing the two works. After filtration is complete, the burden shifts back to the plaintiff to prove substantial similarity between any remaining (i.e., unfiltered) protectable material and the allegedly infringing work…. [W]here the defendant’s evidence is insufficient to prove that a particular element is unprotectable, the court should simply assume that the element is protectable and include that element in the final substantial-similarity comparison between the works.

In a footnote, the court commented that the defendant wouldn’t always need to introduce evidence; argument alone might suffice. “For example, no evidence would be necessary to convince a court that alphabetization is an entirely unoriginal method of arranging data and thus unprotectable as a structural element of a work. But where evidence is required to determine whether some element is protectable, it is the defendant who must advance it or risk abandoning the issue.”

In addition (at least for software?), plaintiffs can concede unprotectability by providing a list of program features it believes to be protectable, which constitutes an implicit concession that elements not included on the list are unprotectable. [Perhaps the court is thinking that, for cases of alleged comprehensive nonliteral similarity, the plaintiff will have to provide a list, and the defendant may well be able to say--without providing further evidence--"those are just ideas," and the defendant will often be right. I still think "the burden is on the defendant" is a real overstatement given the variety of ways infringement claims are stated.]

On reassessment/retrial (the original magistrate retired), some filtration would be warranted; some unprotectable elements were so obvious that no proof was necessary, such as the need to collect a consumer’s state of residence, and alphabetization of the states/assignment of a corresponding number. “A closer question, however, is whether Compulife’s inclusion of the District of Columbia in the list of states and the bifurcation of New York into business and non-business categories are protectable elements of structure.” [Did the underlying insurance companies include the District of Columbia or divide NY into business and non-business? If they do, how could the decision to do so be protectable for Compulife? Also, as a DC native, this is pure discrimination: why isn’t the choice not to exclude the tinier Vermont and Wyoming just as choice-y? Does being able to vote for Senators and Representations make you more entitled to life insurance? Later, the court of appeals says the NY business/non-business decision was “obsolete” by the time that defendants copied it, but was it original to Compulife or based on past insurance company practice? Although based on this description, even if defendants copied the HTML, did they copy any underlying database structure?]

The court of appeals vacated & remanded to give the district court a chance to make the missing findings.

The magistrate also erred by evaluating “the significance of the defendants’ copying vis-à-vis their offending work, rather than Compulife’s copyrighted work” in assessing substantial similarity. After all, “adding new material to copied material doesn’t negate (or even ameliorate) the copying.” And finally, the magistrate didn’t provide sufficient factual analysis to allow meaningful appellate review. This would require the magistrate to indicate unprotectable elements in more detail; evaluate the importance of copied protectable elements as part of a substantial-similarity analysis; and identify, at the threshold, which elements of Compulife’s code the defendants had copied as a factual matter.

The court noted that the burden was still on Compulife to show either the quantitative or qualitative substantiality of the copying, but it provided at least some evidence of both: it provided the texts of both works, which allowed the quantitative significance to be evaluated, and qualitative significance “is often apparent on the face of the copied portion of a copyrighted work.” Moreover, a witness “testified that part of the code copied by the defendants includes variable names and parameters that must be formatted exactly for the web quoter to communicate with the Transformative Database at all. At a minimum, this testimony is some evidence of the qualitative significance of the copied portion of Compulife’s work.” [Or of merger/functionality, I suppose, though perhaps we’ll learn more about this after Google v. Oracle.]

Trade secret: that’s remanded too. Probably the most broadly applicable holding: the public availability of quotes on Compulife’s consumer-facing site didn’t preclude a finding that scraping those quotes constituted misappropriation. “[W]hile manually accessing quotes from Compulife’s database is unlikely ever to constitute improper means, using a bot to collect an otherwise infeasible amount of data may well be—in the same way that using aerial photography may be improper when a secret is exposed to view from above.” However, the court of appeals said it wasn’t expressing an opinion about whether enough of the database was taken to amount to acquisition of the trade secret, nor as to whether the means were improper; it’s just that public availability of quotes didn’t resolve that question.

False advertising: affirmed. Compulife didn’t identify any particular statement alleged to constitute false advertising. Compulife asserted that “[e]nticing ... users” with “quotes for term life insurance where the source of those quotes is infringing software and stolen trade secrets is ... unquestionably unfair competition and false advertising.” But hosting a website without disclosing that Compulife was the ultimate source of the quotes, “doesn’t imply the existence of any advertisement, let alone a false one.”  [Dastar!]

NAAIP may have advertised that its quote engine was a “key benefit,” but that had no capacity to deceive and wasn’t material to any purchasing decision. “[M]erely claiming to have a quote engine is unlikely to mislead anyone into assuming anything about the ultimate source of the software or the quotes that it generates.… Consumers have good reason to care about the quality of the quote engine, but not the identity of its author or the host of the server with which it communicates.”

The Florida Computer Abuse and Data Recovery Act states: “A person who knowingly and with intent to cause harm or loss ... [o]btains information from a protected computer without authorization ... [or] [c]auses the transmission of a program, code, or command to a protected computer without authorization ... caus[ing] harm or loss ... is liable to ... the owner of information stored in the protected computer.” A “protected computer” is one that “can be accessed only by employing a technological access barrier.” But Compulife didn’t attempt to argue that the defendants penetrated a “technological access barrier.”

court rejects HomeAdvisor's First Amendment defense of its misleading ads

People ex rel. Gascon v. HomeAdvisor, Inc., A154960, 2020 WL 2486970 (Cal. Ct. App. May 14, 2020)

HomeAdvisor appealed an injunction barring it from broadcasting certain ads (except with a disclaimer, for a limited time). HomeAdvisor argued that the order was vague, indefinite, overbroad, and unconstitutional; the court disagreed.

San Francisco’s DA sued HA for violating the FAL and UCL, alleging that its ads were “false and misleading because they are likely to deceive consumers into believing that all service professionals hired through HomeAdvisor who come into their homes have passed criminal background checks. That is not the case. The only person who undergoes a background check is the owner/principal of an independently-owned business.”

For example:

In “Carl,” a middle-aged man explains he can’t always be there when his mother needs help: “So when her roof started to leak I went to HomeAdvisor and found the right pro to help. They are background checked.”

In “Happy Homeowners,” a woman standing with two young children states: “As a single mom, I love that HomeAdvisor does background checks on pros.” The words “background checks” appear on the screen, and then the advertisement cuts to a man who says, “Gives me peace of mind.”…

In “TV Ad Featuring Jason Cameron,” a television show host tells the viewers, “With HomeAdvisor you know that you’ll get a reliable pro because they must pass criminal and financial background checks before they’re listed.” Then a woman says, “As a single mom I have to be careful with who I invite to my home.”

In “HomeAdvisor Testimonials,” another television show host, Amy Matthews, states: “HomeAdvisor pros pass criminal and financial background checks before they’re listed.” In “Pros You Can Trust,” the same host states HomeAdvisor “instantly connects you with top-rated pros who have passed criminal and financial background checks.” In “HomeAdvisor Testimonials,” a woman standing in her bathroom says, “I love the fact that they have been background-checked—that’s a great feeling.” In the same advertisement, another woman standing in her kitchen says, “You can feel safe with them coming into your home.”

HomeAdvisor’s mobile application also stated, “Nationwide, we have a network of hundreds of thousands of background-checked pros specializing in more than 500 home renovation projects.”

However, HA only performs a background check on the “owner/principal” of the businesses that are members of its network. Its terms & conditions stated that HA performs no background check when the businesses are “employees, franchisees, dealers, or independent contractors ... of larger national or corporate accounts.” HA also screened “ (1) the license holder if there is a state-level license, and (2) anyone whom the [business] adds to the account for administrative purposes (e.g., putting the account on hold).” However, if a “franchisee or a dealer is a corporate account,” then they are not subject to HomeAdvisor’s background check policy.  Extending the background checks to all employees would be expensive and difficult, and HA has no plans to do it.

The court found that the ads were misleading, but that “the statements on the website cure that misleading nature except that they’re not in the ads themselves and they’re not conspicuous.” The People proposed a disclaimer: “HomeAdvisor background checks business owners but not employees.” HA objected that some employees, albeit a “limited” number, are checked. The court adopted the People’s proposal over “ ‘HomeAdvisor background checks business owners and limited employees,’ ” or “ ‘HomeAdvisor background checks business owners and account manager employees.’ ”

Along with enjoining specific ads, the court enjoined HA from “[i]ncluding in the description of the HomeAdvisor App in the Apple App Store and the Google Play store words that state or imply that all service personnel who come to consumers’ homes as a result of consumers’ having used the HomeAdvisor service have been background-checked.” However, there was a safe harbor for ads that didn’t state or imply that all service personnel have been background-checked, and for advertisements with disclaimers. HA could continue broadcasting eight of the enjoined advertisements for a period of over four months, and nine of the enjoined advertisements for a period of over seven months, “as long as a clear and conspicuous visual disclaimer appears in each television and Internet advertisement that states: ‘HomeAdvisor Background-Checks Business Owners But Not Employees.’ ”

HA complained that the direction not to “imply” that background checks were conducted on all personnel was impermissibly vague and overbroad, so that it couldn’t tell the difference “between advertisements that ‘state or imply that all service personnel’ are background-checked and those that merely mention the phrase ‘background checks.’ ” Not so. The district court reviewed a lot of ads and modified versions and approved some for a certain period of time with a disclaimer. The injunction was “sufficiently definite to provide a standard for HomeAdvisor to use in developing new advertisements, and for the court to ascertain any alleged violations of the injunction.” The mere mention of background checks wasn’t enjoined, but rather ads that refer to “background-checked pros,” or its variants, such as background-checked or prescreened “ ‘home-improvement professionals’ ” or “ ‘home-improvement pros,’ ” because these terms imply that the person who comes to the consumers’ home has been background-checked.

Nor did the preliminary injunction violate the First Amendment. Commercial speech that is actually or inherently misleading can be banned outright, while potential misleadingness requires the state to try correction by disclaimer (at least initially). HA claimed that references to “ ‘background-checked pros,’ ” or “ ‘prescreened’ pros” were “entirely truthful information about HomeAdvisor’s business” because HomeAdvisor “maintains a network of approximately 200,000 service professional businesses that have been background-checked.”

Nope.

The enjoined advertisements and descriptions are inherently likely to deceive because they exploit the ambiguity of the term “pro.” According to HomeAdvisor, it offers a service that connects “consumers with providers of home services such as plumbers, painters, [and] contractors,” but, when HomeAdvisor uses the term “pros,” it means “service professional businesses,” not the plumbers, painters, or contractors working for these businesses.

But a “professional” “is commonly understood to be a person, not a business.” [citing dictionary] A reasonable consumer “would likely understand ‘pros’ to mean the persons or professionals coming to their home, not the businesses for whom they work.” HA argued for the first time in its reply brief that even if the phrase was misleading, it was nonactionable puffery.  This is a contradiction in terms, but the court declined to address the new argument on the (un)merits.

The court noted that other aspects of the ads made deception even more likely. Many of the TV ads showed search results, which included images of individuals, not businesses. “Pros You Can Trust” refers to pros “who” have passed background checks, not pros “that” have done so. And a number of the ads implied that consumers can feel more comfortable about the people who come into to their homes because of the background checks. True, “Pros You Can Trust” was discontinued, but the trial court took that into account in granting HA time to continue broadcasting non-discontinued ads with disclaimers to give it time to make new ads/lessen financial harm to HA.

HA argued that there was no evidence that its ads caused actual harm. But that’s not required for a finding of inherently deceptive commercial speech. On a de novo review of the record, the court of appeals agreed that HA’s references to “background-checked pros” or its variants were inherently likely to deceive reasonable consumers, and nothing more was required for a preliminary injunction. [Nothing more should be required for a permanent injunction, either!]  When a government entity seeking the statutorily authorized remedy of injunctive relief shows a reasonable probability of success on the merits, “a rebuttable presumption arises that the potential harm to the public outweighs the potential harm to the defendant.” The trial court found that HA failed to rebut the presumption.

Nor was the order an unconstitutional prior restraint on speech. “The special vice of a prior restraint is that communication will be suppressed, either directly or by inducing excessive caution in the speaker, before an adequate determination that it is unprotected by the First Amendment.” But once specific speech is properly ruled unprotected, there’s no problem with an injunction. When it comes to commercial speech, “[t]he government may ban forms of communication more likely to deceive the public than to inform it.” While an injunction may not be “broader than necessary to provide relief to plaintiff while minimizing the restriction of expression,” the injunction here was fine.

HA argued that the safe harbor disclaimer was misleading and was unconstitutional compelled speech. These arguments were moot. The safe harbor expired in January 2019, over a month before the opening appeal brief was filed.

Descriptive fair use on a motion to dismiss

Outhouse PR, LLC v. Northstar Travel Media, LLC, No. 19-cv-05979-NRB (S.D.N.Y. May 15, 2020)

A motion to dismiss granted on descriptive use: impressive! Outhouse is a digital media company that runs womenyoushouldknow.net, which “posts editorial content, such as interviews and profiles of women with various backgrounds,” and it also posts links to its content on social networking platforms. It has a registration for WOMEN YOU SHOULD KNOW for: (1) online social networking services and (2) entertainment services, including provision of continuing segments featuring news and commentary delivered by the internet.

 

Outhouse registration

as shown on website

Northstar publishes Business Travel News. In 2016, it published an article, “2016 WOMEN YOU SHOULD KNOW” on its website, featuring this banner as well as “photos and biographical information of some women participating in the travel industry”:

In 2017, it published “2017 WOMEN YOU SHOULD KNOW” featuring a different set of women and this banner:

Outhouse sent a C&D, to which BTN didn’t respond. In 2018, BTN published “2018 WOMEN YOU SHOULD KNOW” with another set of women and a banner, which was also posted to BTN’s Facebook and Twitter pages.  

Outhouse sent two more C&Ds and a proposed complaint in 2019; BTN responded that Outhouse had no viable claim and that it would seek its attorneys’ fees and costs in the event of a suit. It then published “2019 WOMEN YOU SHOULD KNOW” with another set of women and a banner, which it also shared on its Facebook page:

On the same page, it created “Check Out Other Years” tab with a list of buttons that would redirect the readers to BTN’s “WOMEN YOU SHOULD KNOW” article for a particular year.

Despite the “extremely lenient pleading standard,” the court was skeptical that confusion was adequately pled, but it didn’t matter because this was descriptive fair use.

Use other than as a mark: The articles were published on a website that displayed a sizable and conspicuous “BTN” masthead at the top to identify its source:

The social media pages also unambiguously identified BTN as the source:

The “ways by which defendant presented” the phrase further undermined an intent to indicate source. The visual presentations differed, including the dominant “making connections” in 2016, and the size was smaller than BTN’s masthead. The 2019 version was “BUSINESS TRAVEL NEWS’ 2019 WOMEN YOU SHOULD KNOW,” suggesting an intent to identify BTN as the source.  

You might wonder whether, as Outhouse argued, Kelly-Brown v. Winfrey, 717 F.3d 295 (2d Cir. 2013), warrants a different conclusion. In that case, Kelly-Brown “plausibly alleged that Oprah was attempting to build a new segment of her media empire around the theme or catchphrase ‘Own Your Power,’” particularly that “defendants were trying to create, through repetition across various forms of media, … association between Oprah and the phrase ‘Own Your Power.’” True, this case involved one time per year for four years, but it was different: the alleged uses “do not even remotely approach the level of ‘wide-ranging and varied’ use of the trademark at issue by the defendants in Kelly-Brown,” which included various events and not just articles.  Use in the headline of articles under a prominent masthead display of its own mark “falls far short of establishing an effort by defendant to create an association between the Mark and defendant that would serve as a symbolic identifier of any article that contains the phrase ‘WOMEN YOU SHOULD KNOW.’”

Outhouse argued that In re Scholastic, Inc., 23 U.S.P.Q.2d 1774, 1992 WL 215313 (T.T.A.B. 1992), supported its claim. That proceeding found that the phrase “THE MAGIC SCHOOL BUS” could be registered as a trademark despite that the phrase constituted only a portion of the title of each book in a series. But registrability determinations are different. (I see why Outhouse cited this; the real question is whether there is any normative limit on claims that the defendant is using a term “as a mark” even if book series and even newspaper column titles are registrable. Rogers v. Grimaldi has a title-v-title exception, but it’s actually not clear to me that the Second Circuit would (or should) consider “website title” to be the same thing as “article title” for purposes of applying that exception. As my reference to Rogers suggests, lurking First Amendment concerns support the court’s application of this defense on a motion to dismiss.)

Is defendant’s use descriptive? Yes. Ridiculously, Outhouse argued that BTN’s use wasn’t descriptive because “no reader of defendant’s articles is under an obligation to know the women presented therein.” The court pointed out what “should” reasonably means.

Good faith: This is about whether defendant intended to create confusion, but, given the nature of the question, “the same contextual considerations that apply in considering the likelihood of confusion and assessing the similarity of two marks— namely, the overall context in which the marks appear and the totality of factors that could cause consumer confusion—also apply to a court’s analysis of good faith in the context of fair use defense.” Assuming the truth of the allegations in the complaint, there was good faith, given the literal descriptiveness of the use and conspicuous BTN masthead. Moreover, the phrase appeared in “a font and shape that are completely dissimilar to the plaintiff’s presentation of it to the public.”

The repeated use of the phrase and knowledge of Outhouse’s ownership weren’t evidence in support of an inference of bad faith. Given the descriptive nature of the use, repetition was insufficient to infer bad faith. (Kelly-Brown didn’t refer to repetition in its reasoning on bad faith, and without use seeking to create a source-related association between the phrase and the defendant, there was no reason to infer bad faith.) “Inferring bad faith from descriptive uses of word mark for being repeated would be inconsistent with the fundamental framework of trademark law.” Nor did knowledge of Outhouse’s ownership support a bad faith finding. “Failure to perform an official trademark search . . . does not, standing alone, prove . . . bad faith,” and “simply sending a cease-and-desist letter cannot create trademark rights that do not otherwise exist and, therefore, cannot by itself constitute a basis for finding bad faith.”       

Navigating NAD's new fast track program for challenging advertising

“Navigating SWIFT – An Inside View of NAD's Fast-Track Process”, presented by Laura Brett, Vice President, NAD, BBB National Programs, and moderated by David Mallen, Co-Chair, Retail and Consumer Brands, Loeb & Loeb LLP.

[Despite its cutesy name, I am hopeful that NAD’s SWIFT (Single Well-defined Issue Fast Track) will be able to address some common claims more expeditiously than ordinary NAD proceedings.]

Eligible claims: (1) prominence/sufficiency of disclosures including in influencer marketing, native advertising, and incentivized reviews; (2) misleading pricing and sales claims (e.g., “free” that has persisted for 3 years and is thus just part of the price of the package; discounts that don’t adequately explain/account for the claimed discount); (3) misleading express claims that don’t require review of complex evidence or substantiation (not whether or not that specific claim can be substantiated with sufficient evidence). 20 business days to decision. If advertiser is claiming to cure coronavirus, that could be reviewed under (3) even though actual substantiation would require complex evidence.

Requirements: provide advertiser’s contact info (can be very hard to find the right person at the advertiser if they’re a first time participant in NAD—marketing counsel or other right person would be ideal; can delay start of case); copy of challenged ads w/date/platforms; brief statement of SWIFT appropriateness; brief description of facts showing how ad is likely controlled by advertiser; exhibits to show challenged claim is not substantiated (if applicable). So for coronavirus, you’d say “virus has not been around long enough for this claim to be substantiated.” 5 pages, no more than 5 supporting exhibits (not including the advertising itself).

Day zero: case starts when NAD determines SWIFT is appropriate. Advertiser has 4 days to object to SWIFT process; if objects, NAD will decide in 2 days. Should not delay preparing substantive response—objecting to jurisdiction doesn’t toll time to substantive response. Substantive response is due day 10, limited to 5 pages/5 additional exhibits. Phone/video meetings held at NAD’s discretion, and they’re usually held—though they may not need to be for some SWIFT cases. Decision will not be held up if meetings can’t be scheduled.

Day 20: decision sent to both parties at same time; advertiser statement is optional. Assume compliance; if they don’t comply, there will be referral to FTC. Press releases issued afterwards; anticipate releasing them in bulk. Will be available in the online archive.

Q: Is 20 days aspirational or a promise?

A: we are confident we can deliver.

Q: how will NAD evaluate whether the issue is simple? Will decisions provide written guidance?

A: we will look at that twice. If advertiser shows us complexity of substantiation required, and it’s not as simple as challenger said, we’ll close it as a SWIFT case. If that happens either at the outset (challenger’s initiation) or when advertiser objects, challenger can either close case/refile or transfer to a standard challenge.

Q: if there’s a transfer, can the challenger add claims?

A: you’d have us close the SWIFT case, return the filing fee (or use it as part payment of standard track fee), and refile.

Written decisions will explain why case was accepted into SWIFT. We anticipate that we might be able to include some analysis in transferred cases about why it was inappropriate for SWIFT.

Q: is SWIFT appropriate for challenging an influencer campaign across multiple platforms?

A: potentially. If the advertiser just requires #spon for all influencers, that’s a single issue. If some of the influencers are good and some are bad and have different problems, that could get beyond a single issue.

Q: how much detail will appear in the ultimate decision? Will it have the same kind of precedential value?

A: we have removed party positions from regular NAD decisions, and will do so for SWIFT too. Will be in database and separately searchable as SWIFT cases. But we will lay out the arguments on both sides in order to allow guidance/precedential value. Competitors should be able to get guidance.

Q: tension b/t speed and voluntariness. What will happen if advertiser seeks extension?

A: will entertain requests. But are committed to 20 days on our end. Shouldn’t need consumer perception studies, though extenuating circumstances do matter. NAD would have to shorten its window for decision. FTC is very supportive of process and remains willing to be the “stick.”

Q: will press releases be the same?

A: Different. Plan is monthly release of all SWIFT cases resolved that month. Wary of competitor shaming given speed of process.

Q: why can’t you decide all your cases this quickly?

A: we’re committed to improving that, learning from this.

Q: any insights on what’s not appropriate for SWIFT/whether this might expand?

A: we thought about different categories, e.g. implied claims. Implied claims are more complicated, may require legal analysis/consumer perception surveys. Didn’t want to start w/something controversial to regular NAD users. We also considered “clear violations of FTC Guidelines,” but that seemed too open to argument to start.

Q: how do you get advertisers to participate?

A: we generally see 5-10% refusal/noncompliance; does not expect that to change. Companies even unhappy w/process often see tremendous value in having a level playing field; new participants often bring challenges of their own once they see the process.

Q: stats?

A: two cases so far, both determined appropriate. One resolved so far, on consent of both parties.

Q: do you have the resources to do this w/o delaying other cases?

A: potentially will hire more, after we see how users respond. Can retask attorneys.

Q: will there be a special SWIFT department?

A: that’s our intent. One person will oversee appropriateness of SWIFT.

Q: what feedback have you heard so far?

A: positive so far. See what happens in 6 months.

Q: any difference in appeals? Advertiser won’t be able to appeal appropriateness decision, but when you reach decision, what then?

A: similarly 20 days. 3 person panel, remote hearings (which we now have experience w/). Even issues that don’t require complex substantiation may be hard cases.

"100% Natural" might be deceptive as applied to food w/bioengineered ingredients

Lee v. Conagra Brands, Inc., No. 17-2131 (1st Cir. May 7, 2020)

Lee alleged that Wesson’s supposedly “100% Natural” vegetable oil contained GMOs, which she regarded as “quite unnatural,” in violation of Mass. Gen. Laws ch. 93A.  She also alleged that surveys showed that many scientists and consumers don’t consider GMO-containing products to be natural. The district court found that the term wasn’t actionable because it conformed to FDA standards. The court of appeals reversed. Given Lee’s allegations, it was plausible that the label could have deceived a reasonable consumer.

Chapter 93A interpretation is guided by FTC interpretations; the FTC has an agreement with the FDA to let it take the lead on food.  Conagra argued that a GMO disclosure obligation would contradict FDA policy that (1) GMO products may be advertised as natural; and (2) the unannounced presence of GMOs in a product never causes the product’s label to mislead a reasonable consumer. “Conagra mischaracterizes Lee’s complaint and the FDA’s views.”

As to the complaint, it sought damages and an injunction against deceptive marketing, not an injunction requiring disclosure; Conagra could most obviously comply with a verdict against it by removing “100% Natural.”

As for the FDA: “The FDA has not said that GMOs are natural and may be advertised as such. Conagra does not cite any binding FDA guidance defining ‘natural,’ nor could it -- that guidance does not exist.” The FDA does have a policy that a product may not be labeled as “natural” if it contains anything “artificial or synthetic (including all color additives regardless of source).” See Food Labeling: Nutrient Content Claims, General Principles, Petitions, Definitions of Terms; Definitions of Nutrient Content Claims for the Fat, Fatty Acid, and Cholesterol Content of Food, 58 Fed. Reg. 2,302, 2,407 (Jan. 6, 1993); see also Food Labeling: Nutrient Content Claims, General Principles, Petitions, Definition of Terms, 56 Fed. Reg. 60,421, 60,466 (Nov. 27, 1991) (noting that the “FDA has not attempted to restrict the use of the term ‘natural’“ and that its informal policy has been to interpret natural “to mean that nothing artificial or synthetic . . . is included in, or has been added to, the product that would not normally be expected to be there”).

An informal policy “not to restrict the use of the term ‘natural’” is not a rule defining that term. “Where, as here, an agency has issued no binding rule defining a term, the agency’s pronouncements do not dictate whether a representation has the capacity to deceive a reasonable shopper under Chapter 93A.” Indeed, the FDA’s “far more recent request for comment as to whether GMOs are natural implicitly acknowledges that the agency has not yet ruled that they are.” In a footnote, the court pointed out that the comment period closed nearly four years ago, but nothing has happened yet.

Nor has the FDA blessed “wholesale nondisclosure.” Its nonbinding statements don’t say that, but rather say that “food labelers have no general freestanding duty to disclose on a product’s label whether it contains GMOs.” That is not the same thing as saying “labelers never need to disclose whether their products contain GMOs, even when those labels might otherwise violate generally applicable consumer protection laws.” FDA’s draft guidance says that “the use, or absence of use, of bioengineering in the production of a food is not a fact that is material either with respect to consequences resulting from the use of the food or due to representations on the labeling.” But “[e]ven if that guidance generally blesses silence regarding GMO ingredients, it falls far short of blessing an affirmative misrepresentation concerning the presence of such ingredidents.” 

Indeed, the FDA also suggested that labels indicating GMO absence could be misleading, for example “if they imply that the food is superior because the food is not bioengineered.”  Lee’s argument was that Conagra “misled customers in an analogous way, with a similar—albeit somewhat vaguer—representation.”

Conagra also tried to rely on the National Bioengineered Food Disclosure Standard (NBFDS): in 2016, Congress required USDA to come up with a method for disclosing “bioengineered” ingredients in food products. The Final Rule establishes that, where “[a refined] food does not contain detectable modified genetic material,” bioengineered disclosure is not required. Additionally, “some oil refining processes may effectively eliminate all DNA” in the product, so “degummed refined vegetable oils and various other refined ingredients are unlikely to require [bioengineered] food disclosure . . . .”  

But, even assuming that the USDA rule frees Conagra of any disclosure obligation, “it says nothing of representations suggesting GMOs’ absence.” The rule specifically says that it covers “mandatory and voluntary bioengineered . . . claims,” and that there is no authority for an “absence claims regime,” over which FDA retains authority.  True, the NBFDS forbids states from directly or indirectly establishing “any requirement relating to the labeling of whether a food . . . is genetically engineered . . . or was developed or produced using genetic engineering.” But Lee wasn’t seeking a disclosure requirement and the NBFDS doesn’t cover absence claims, so there was no preemption.

[I see the preemption argument, but do we really think that states could not act against literally false "not bioengineered" claims on food that was concededly made with bioengineered ingredients?  That seems an extreme reading of the statute, which was designed to prevent states from requiring disclosure of bioengineering (even on the theory that failure to disclose was inherently a misleading omission), not from regulating falsity in general. If we think that states could act against such claims, then the question is whether "100% Natural" means "not bioengineered" to a substantial number of reasonable consumers.]

A few thoughts on the Booking.com argument

The Justices were engaged and asking the right questions, despite everyone's use of "trademark" as a verb to mean "register." With a putatively generic term the equation is perhaps understandable since if it is unregistrable it will also be unprotectable as a trademark, albeit unfair competition remedies may still be available to constrain the way in which it is used by others.

At a post-argument discussion, the EFF's lawyer pointed out some important things: (1) in the past, Booking.com has argued that "booking" is legally identical to booking.com for purposes of tacking. While it may have gotten religion on the narrowness of its claimed mark now, the lateness of its conversion is a bad sign for the future--and for what other claimants in .com marks may assert, especially in contexts like C&D letters that are harder to regulate. (2) The Freecycle Network, after losing a genericity battle on "freecycle," apparently obtained a trademark registration for Freecycle.org and is now using that to argue that Facebook groups--which only use the "freecycle" part and not the .org--are infringing. So the idea that the matter behind the dot is some sort of constraint is unlikely to hold.

I still can't get any comfort with Booking.com's position that there is nothing that is definitively unregistrable--applicants would always get to argue that things have changed in the market. And the fact that the PTO doesn't do its own surveys (not to mention the Federal Circuit's pro-applicant interpretations) means the PTO is structurally disadvantaged in dealing with survey evidence. 

Speaking of surveys, I appreciated the government's focus on the "washingmachine.com" example in the survey.  This was a group of respondents who'd been trained on the generic/nongeneric distinction; they'd successfully distinguished Kellogg/cereal in the screening question, and none of them got supermarket wrong--no one was even unsure about its status. Yet even among this trained group, 33% thought washingmachine.com was a trademark, and an additional 6.3% weren't sure.  When over 1/3 of the qualified survey participants get the answer that all the lawyers agree is wrong, the survey is not asking ordinary people a question they are in a good position to answer: surveys may simply be the wrong form of evidence.

No problem, Booking.com says: just remove those nearly 40% of people from the analysis, and they still show high secondary meaning in the remainder. I see a couple of problems with that approach: (1) Those people don't disappear from the market.  Ordinarily removing a small percentage of people who flunk the survey's integrity checks (whether out of deliberate choice or misunderstanding) doesn't substantially change the population of interest. Here, it pretty clearly does. It's like saying "sixty percent of geometry students got this question right, therefore more than half of math students got it right." (2) Relatedly, these people were deemed qualified by the training/screening questions that supposedly assessed understanding of the relevant distinction; to remove them now smacks of result-oriented manipulation.  (3) The justification for doing this given in the surveyors' amicus brief is that a genericity evaluation is noncausal, so no control is necessary. I don't get that. We are interested in whether it's actual secondary meaning or conflation of .com with trademark status that triggers consumers' response "this is a trademark," which seems pretty causal to me.

That being said, I really do wonder what a screening question that had been washingmachine.com/Amazon.com would have done to the results. And I wonder: if that produced a high percentage of initial disqualification of respondents, how should we think about that fact? Trademark law is not a purely empirical endeavor!