Tuesday, June 02, 2020

Just stocking a falsely advertised product isn't enough for contributory liability

In re Outlaw Laboratory, LLP, 2020 WL 2797425, No. 18-CV-0840-GPC (S.D. Cal. May 29, 2020) 

Plaintiff makes male enhancement products, allegedly in compliance with the DHSEA. It sued 51 convenience and liquor stores in the San Diego, California area; 23 of those defendants have been terminated, 20 are actively litigating, and eight haven’t appeared/answered. The defendants allegedly sold falsely advertised male enhancement products containing undisclosed pharmaceuticals; some of the accused products contain hidden ingredients including sildenafil, the consumption of which can cause “life-threatening hypotension” and greatly “increase[s] the risk of heart attack,” among other effects. 

The court applied issue preclusion to Outlaw’s argument for direct liability for the retailers under the Lanham Act, based on past litigation. Outlaw’s only allegations about the stores were that they sold the products, not that they advertised or marketed them beyond placing them on their shelves. Failing to disclose the bad ingredients was not itself actionable under the Lanham Act. 

Contributory liability under the Lanham Act is a cognizable theory, but wasn’t plausibly pled here. After all, courts accept contributory liability in §43(a)(1)(A) cases, and such claims arise from clauses that are “subpart[s] of a single statutory provision,” “share the same introductory clause,” “were motivated by a unitary purpose” to prohibit unfair competition, and are rooted in tort law (which, of course, permits contributory liability). POM Wonderful even recognized that, of these two provisions, false advertising is “the broader remedy.” 

The leading case, from the Eleventh Circuit, requires a showing that (1) there was direct false advertising, and (2) “the defendant contributed to that conduct either by knowingly inducing or causing the conduct, or by materially participating in it.” Duty Free Americas, Inc. v. Estee Lauder Companies, Inc., 797 F.3d 1248, 1277 (11th Cir. 2015). In other words, the plaintiff “must allege that the defendant...intended to participate in or actually knew about the false advertising” and “that the defendant actively and materially furthered the unlawful conduct—either by inducing it, causing it, or in some other way working to bring it about.” (Note that “material participation” in the initial description looked like it did not require knowledge, but apparently not.) Outlaw didn’t properly allege the required elements with specificity. 

Among other things, the complaint lacked allegations that the stores “actively and materially furthered the unlawful conduct.” For example, there were no allegations that they “controlled,” “monitored,” or even “encouraged” the false advertising. There was no reference to “a clear contractual power” to stop the false advertising, or any extensive communications with the unknown third parties who supplied the products “regarding the false advertising.” Even allegations of knowledge were unspecific, as if general FDA announcements put the stores on notice. 

Outlaw’s allegations also failed if the court applied the standard of ADT Sec. Servs., Inc. v. Sec. One Int’l, Inc., No. 11-CV-05149-YGR, 2012 WL 4068632, at *3 (N.D. Cal. Sept. 14, 2012): contributory liability can arise if the defendant “(1) intentionally induced the primary Lanham Act violation; or (2) continued to supply an infringing product to an infringer with knowledge that the infringer is mislabeling the particular product supplied.” Since we don’t know who the primary violator is, we can’t tell that they were “induced” by the stores. 

California’s FAL: also failed. Outlaw lacked standing because it didn’t rely on the misrepresentations. The majority approach requires the plaintiff to have lost money or property in reliance on the misrepresentations, not merely because other people relied on the misrepresentations, as was alleged here. Also, as with the Lanham Act claims, the stores weren’t personally responsible for the false advertising, and “[a] defendant’s liability must be based on his personal ‘participation in the unlawful practices’ and ‘unbridled control’ over the practices that are found to violate section 17200 or 17500.” (Citing Emery v. Visa International Service Ass’n, 95 Cal. App. 4th 952, 960 (2002).) And there’s no vicarious liability under California consumer protection laws. Nor is there a duty to investigate and disclose the falsity on the packaging. 

Also, “remedies for individuals under the FAL are limited to restitution and injunctive relief.”  There was nothing to restore to Outlaw; an injunction was permissible, but only if the claims had been properly alleged. 

UCL fraudulent/unlawful: Again, putting a falsely advertised product on a shelf is not itself “fraudulent” in the absence of acts to adopt and further the false advertising. (Citing Dorfman v. Nutramax Labs., Inc., No. 13-CV0873-WQH, 2013 WL 5353043, at *14 (S.D. Cal. Sept. 23, 2013) (finding retailer defendant could be liable under the UCL where the defendant sold the products in their stores, entered into sales agreements with the manufacturer, provided pictures of the deceptive packaging, and made statements on their website with misleading labeling).) And again Outlaw lacked standing. 

Unlawful: Outlaw alleged that it was unlawful to sell pharmaceuticals without a prescription, but didn’t identify any particular section of any statute that was violated, so it still failed to state a claim.

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