9th Circuit panel divides on evidence of injury in false advertising case

VBS Distribution, Inc. v. Nutrivita Laboratories, Inc., --- Fed.Appx. ----, 2020 WL 2086557, No. 18-56317 (9th Cir. Apr. 30, 2020)

The parties compete in the market for nutritional supplements and television programs. VBS sued for Lanham Act and California state unfair competition law violations, as well as other claims, and the district court granted summary judgment to defendants on everything. The court of appeals affirmed on false advertising over a dissent, affirmed on trade dress claims, and reversed and remanded on trade secret/related claims.

One of the big post-Lexmark questions was: while Lexmark made clear that disparagement was actionable, would the standard it articulated for harm make it harder for non-dominant firms to challenge competitors’ false, but nondisparaging, claims about themselves?  The answer, I think, is yes, it’s somewhat harder.

The district court granted summary judgment on VBS’s false advertising claim because it found “no evidence [that VBS] suffered any economic or reputational injury” from defendants’ claim that their supplement was “100% natural herbal” (translated). It was not enough to submit a declaration from the CEO stating “These false Advertisements have deprived us from being able to fairly compete in the marketplace, and have diverted sales away from us. When customers see the two similar products they will be persuaded by the content on the packaging, such as the false claims made in the Advertisements. The false claims cause consumers to believe their product is superior to ours, and that causes consumers to purchase their product over ours.” It was a “conclusory, self-serving affidavit, lacking detailed facts and any supporting evidence, … insufficient to create a genuine issue of material fact.” Moreover, the CEO’s declaration wasn’t specific to the “100% natural herbal” statement, but referred collectively to various allegedly false statements, most of which were no longer at issue.  This wasn’t the kind of evidence required (citing cases involving testimony from consumer survey and economics expert, or evidence of a wholesale distributor switching products). “The dissent’s contrary approach would enable every Lanham Act plaintiff to survive summary judgment, which is not correct.”

Trade dress: the district court found that VBS didn’t show that its claimed trade dress (a TV show format) was nonfunctional. The court of appeals affirmed.

Trade secret: reversed, because there were disputed issues of fact as to whether VBS took reasonable measures to ensure the secrecy of its customer lists. Although VBS admitted that it shared the identity of its customers with its vendors, “[p]roviding alleged trade secrets to third parties does not undermine a trade-secret claim, so long as the information was ‘provided on an understanding of confidentiality.’” And VBS’s CEO testified that he orally conveyed VBS’s confidentiality policy to vendors; one vendor’s declaration confirmed this even absent a provision in their written agreement. Also: “Multiple declarations from VBS employees confirmed that VBS’s customer lists are stored on computers that are password-protected,” VBS required its employees to sign confidentiality agreements, and its employment agreements with one of the appellees obligated her to keep VBS’s “customer lists” confidential.  Reversed for further proceedings, along with VBS’s breach of fiduciary duty and civil conspiracy claims.

Judge Bybee partially dissented on the false advertising claim: The plaintiff’s burden on injury at the summary judgment stage is “quite lenient,” given that “an inability to show actual damages does not alone preclude a recovery under” the Lanham Act. Damages may be awarded “even without a showing of actual consumer confusion” as long as there is evidence tending to show that the false advertisement “likely” caused injury. VBS’s “sparse” evidence should have been sufficient to survive summary judgment. The dissent pointed out that the parties seem to be competing for the same subpopulation.  “VBS’s evidence shows that, where JN-7 Best is sold, Arthro-7 is sometimes the only competing product and is displayed alongside JN-7 Best on the same shelf.”  VBS also provided evidence of falsity and materiality to the target population (Vietnamese individuals who “value vegetarianism”), as well as evidence that the falsity appeared in multiple ads, including a well-circulated Vietnamese newspaper, making it “reasonably likely that the false statement induced some consumers to purchase Arthro-7 rather than JN-7 Best.” 

This case was distinguishable from cases where there wasn’t “any” evidence of injury.  “At trial, VBS may well lose if it is unable to provide anything stronger. But at this stage of the proceedings, we are not permitted to ‘weigh the evidence.’” The dissent’s approach wouldn’t let every plaintiff survive summary judgment—there has to be a material issue on all the elements of a Lanham Act claim, including falsity/misleadingness and materiality. “Although our precedents have applied a more lenient standard to the element of injury, no such leniency has been applied to the other four elements. Thus, my approach is relevant only when, as here, the plaintiff has already demonstrated a genuine dispute as to those other elements.”