Thursday, November 12, 2020

advertiser can amend complaint against Facebook for click fraud claims

DotStrategy Co. v. Facebook Inc., No. C 20-00170 WHA, 2020 WL 6591366 (N.D. Cal. Nov. 11, 2020)

The court grants plaintiff’s motion for leave to amend its complaint in this putative class action alleging that FB’s statements about advertising on FB violated the UCL. “The main issue presented here is whether or not a reasonable advertiser would understand Facebook’s representation that it would not charge advertisers for ‘clicks that are determined to be invalid’ to mean that Facebook would not charge — or refund — advertisers for clicks made by fake accounts, if at all, which Facebook identifies and removes from its platform for violating its authenticity policies.” Plaintiff pled sufficient facts to support this theory.

FB’s agreement said:

When serving your ad, we use best efforts to deliver the ads to the audience you specify or to achieve the outcome you select, though we cannot guarantee in every instance that your ad will reach its intended target or achieve the outcome you select[.]

We do not guarantee the reach or performance that your ads will receive, such as the number of people who will see your ads or the number of clicks your ads will get.

* * *

We cannot control how clicks are generated on your ads. We have systems that attempt to detect and filter certain click activity, but we are not responsible for click fraud, technological issues, or other potentially invalid click activity that may affect the cost of running ads.

However, from 2013 through the present, FB’s Business Help Center page represented that advertisers would “not be charged for clicks that are determined to be invalid”: “If we detect or are alerted to suspicious or potentially invalid click activity, a manual review is performed to determine the nature of the activity. You will not be charged for clicks that are determined to be invalid.” Facebook defines “invalid clicks” as “[c]licks from people that do not indicate a genuine interest in the ad or show signs of ad testing. This includes repetitive or accidental clicks or visits from the Facebook corporate network” and “[c]licks generated through prohibited means, such as fake accounts, bots, scrapers, browser add-ons or other methods that don’t follow Facebook’s Terms.” FB’s terms of service and authenticity policy requires users to use their “real identities,” so fake accounts violate Facebook’s policies.

The proposed complaint had a bunch of other FB statements that were allegedly false and misleading, such as:

• “On Facebook, you’ll only pay to reach the right people who’ll love your business.”

• “Facebook is a community where everyone uses the name they go by in everyday life. This makes it so that you always know who you’re connecting with.”

Nonetheless, FB allegedly charged for invalid clicks, which includes “[c]licks generated through prohibited means, such as fake accounts, bots, scrapers, browser add-ons or other methods that don’t follow Facebook Terms.” When Facebook determined those clicks were generated through prohibited means, it failed to provide a refund to plaintiff and the class members. Plaintiff alleged that it reasonably believed that, because Facebook requires “everyone to provide their real names,” it would not be charged for advertising that interacted with fake accounts.

Plaintiff alleged that between 2013 and 2018, Facebook charged it for clicks that were made by thirteen different fake accounts. Facebook allegedly has since deleted eight of these thirteen accounts from its platform “likely for violations of its ‘authenticity policy.’ ”

FB argued that no reasonable consumer could have been misled by its allegedly false and/or misleading statements, particularly, in light of the contractual disclaimers in the self-serve ad terms. The key issue was whether, given FB’s statements, a reasonable advertiser would have believed that once Facebook determines and removes an account for violating its authenticity policies (e.g., a fake account), FB would then perform an audit to refund advertisers for any invalid clicks that that account may have made, and for which FB had charged advertisers for.

That is a question of fact not suitable for resolution on a motion to dismiss. Plaintiff plausibly alleged deceptiveness to a reasonable consumer.

The allegedly contradictory TOS stating that Facebook is not “responsible for click fraud” was ambiguous; a reasonable advertiser could construe that to mean that FB itself is not perpetuating any click fraud [and, I’d add, couldn’t itself be held liable for damages—but that doesn’t mean it’s clearly promising to hang on to the money it collected from the advertiser for fraudulent clicks]. And the Ninth Circuit “has recognized that a UCL fraud claim can be based on misleading representations in a solicitation even when the plaintiff later signed a contract with provisions contradicting the earlier falsehoods.” “The question, then, is not whether [Facebook’s] contractual terms corrected the false statements in its advertising, but whether dotStrategy’s reliance on the false advertising was reasonable even in light of the contractual disclaimers.” That was properly alleged.

FB argued that none of its statements mentioned refunds, so they couldn’t be deceptive. “But a refund is implied” for interactions FB knew involved invalid clicks. FB tried to distinguish fake accounts from invalid clicks, arguing that it only promised to provide manual review for “suspicious or potentially invalid click activity,” and no charges for “clicks that are determined to be invalid,” not audits every time a fake account was removed.

But the proposed complaint specifically alleged that Facebook charged it and other advertisers for invalid clicks, such as clicks by fake accounts and/or bots. “Second, a reasonable advertiser might also reasonably believe that once Facebook determines an account is fake, Facebook would be ‘alerted to suspicious or potentially invalid click activity’ and thus would conduct a ‘manual review’ to determine the nature of the activity.” After all, falsity/misleadingness “is analyzed from the perspective of a reasonable consumer, not from the perspective of an attorney splitting hairs.”

This interpretation would not, as FB claimed, make it liable if its platform was 100% secure against fake accounts. Rather, the advertiser’s argument was that, once FB does stumble on fake accounts, it should then perform an audit to refund advertisers for any invalid clicks committed by such accounts, given what it said to advertisers.

FB then argued that, just because an account was fake in 2018 when plaintiff performed its survey, it doesn’t also follow that that account was also fake in 2017, for example, when it clicked or engaged with plaintiff’s ads. That was a factual issue, and the plausibility of the claims was bolstered by various news reports suggesting that fake accounts on FB “are rather ubiquitous.”

However, a number of the challenged statements hadn’t been sufficiently pled to be false or even non-puffery:

• “Connect with people. Ads help you reach the right people.”

• “Facebook can help you reach all the people who matter most to your business.”

• “Facebook ads are optimized to help you get more people to visit your website or increase conversion.”

• “Your business is for your customers. Built relationships with them, reach new people and drive sales using Facebook.”

• “Drive people to your website with one click from the most engaging place on Facebook.”

• “Find new customers. Boost sales. Facebook can help you meet your business goals.”

• “Meet the people who will love your business.”

A reasonable consumer “would understand that not all users on Facebook would adhere to Facebook’s authenticity policy or would be interested in its ads.” And even people who didn’t use “true and full names” might have provided accurate information concerning their age, gender, and location, among other things; “it cannot be said that such an account is categorically unable to be interested in plaintiff’s ads.”

But these statements were plausibly false/misleading:

• “On Facebook, you’ll only pay to reach the right people who’ll love your business.”

• “Facebook is a community where everyone uses the name they go by in everyday life. This makes it so that you always know who you’re connecting with.”

And the plaintiff plausibly pled economic injury: the cost of invalid clicks.


timeshare exit lawyer wins a round: no harm causation shown

Club Exploria, LLC v. Aaronson, Austin, P.A., No. 18-cv-576-Orl-28DCI, 2020 WL 6585802 (M.D. Fla. Nov. 10, 2020)

Another timeshare v. timeshare exit lawyer case that goes much better for the defendant than some others. Briefly, the plaintiff seems to have relied heavily on favorable precedents without developing enough evidence that this specific firm did the same bad things.

Defendant law firm specializes in timeshare owner grievances against developers; its websites contain colorful statements and media aimed at optimizing internet visibility, and clients are emailed a link to one of the sites when their retainer agreement is sent to them. Exploria alleged that Aaronson uses false and misleading website advertisements to convince timeshare owners that they can easily cancel their timeshare contracts if they hire Aaronson. Aaronson allegedly then advises owners to stop paying their loan and fee obligations.

An example of the website statements:

Timeshare ownership often feels like entrapment. At the Aaronson Law Firm, we know this because we hear our Clients’ stories.


But chances are good that your timeshare developer is exposed legally in ways that are relatively straightforward and provable. You owe it to yourself to hire experienced, competent counsel. At the Aaronson Firm, we have over 80 years of combined legal experience. And we are willing to sue, if necessary, in the interest of getting your timeshare cancelled….


If you need to cancel your timeshare, the timeshare Attorneys of the Aaronson Law Firm stand ready and able to help you!

The sites also explained that they would use formal demand letters to “initiate” recission, with an attached proposed civil complaint in a carrot/stick arrangement.

Its blog stated that “[q]uite often, one’s signature on a timeshare contract is obtained by fraud.… But to address it properly, it is imperative that you retain a licensed attorney.” Experienced counsel, it stated, “will know how to exploit other points of vulnerability. For example, the developer may well be perpetrating an ongoing conflict of interest. Improper handling of trust funds are [sic] also a major issue.”

Its websites contained videos purporting to be testimonials of Aaronson’s clients, but actors and Aaronson employees played the roles of lawyers and owners. “In both instances, the role players read statements of actual unhappy timeshare owners.” [Generally ok, if disclosed.] However, “[o]ne of the websites also included two printed testimonials that were written by the web designer and an Aaronson employee but attributed to timeshare owners.” [Not ok.] The websites did mention some timeshare developers by name, but not Exploria, and the court indicated that the focus of the criticism was the timeshare industry in general.

Aaronson represented at least 22 Club Exploria owners attempting to cancel their timeshare contracts, but Exploria sought damages for six in particular. The court found, based on deposition testimony, that the owners who stopped making payments did so of their own accord, without instruction from the firm or before hiring the firm.

Tortious interference: Aaronson knew of the contract between the parties, but Exploria didn’t show that defendants intentionally caused the contract to be breached. Whether Aaronson’s legal theories were good ones didn’t matter without causation. Exploria’s primary evidence was testimony given by a different person in an unrelated litigation who testified that Aaronson advised him to cease making payments as part of a legal strategy to terminate a timeshare with Diamond Resorts. The fact that two of the six owners stopped paying after hiring Aaronson wasn’t enough for a reasonable jury, especially given the testimony of the only owners deposed that no one from the law firm told them to stop paying, that they chose to stop paying for other reasons, and that letters Aaronson sent to Exploria on their behalf did not lead them to believe that they had been relieved of their payment obligations. Many Aaronson retainer agreements stated: “To avoid the possibility of a counterclaim, it is important that you remain current on your payments with the developer.”  Prior cases involved very different evidence, and indeed Aaronson fixed one mess made in the unrelated Westgate litigation.

FDUTPA prohibits “unfair or deceptive acts or practices in the conduct of any trade or commerce.” The court concluded that, though nonconsumers do have standing under FDUTPA, the practice of law was not “trade or commerce.” While lawyers are not per se exempt from FDUTPA, lawyers acting to exercise a legal remedy are typically not considered to be engaged in trade or commerce. That was the case here with Aaronson’s website ads and representation of clients. Aaronson actually went to litigation on a regular basis, unlike the lawyer in Westgate who, the court there found, “actively avoid[ed] judicial involvement through all of his work.”

Lanham Act: No showing of proximate causation: there wasn’t evidence that the website ads caused owners to withhold business from Exploria.

The court nonetheless addressed other elements of the Lanham Act claim. There were genuine issues of material fact on falsity/misleadingness. Rather than deeming the accusations against the timeshare industry as a whole to be puffery (“fraud,” “pack of lies,” “improper handling of trust funds,” sociopathic sales associates, “ongoing conflicts of interest,” and the owners “being taken for a ride”) the court found it couldn’t determine the truth of those statements at this stage. And there was record evidence that the sites’ claims that the timeshare developers are likely “exposed legally in ways that are relatively straightforward and provable” and that Aaronson’s strategies give timeshare owners “the best chance to have [their] timeshare successfully rescinded” were false. The evidence was that, of the 100–150 timeshare cases the lawyer has taken to litigation, the contracts were found unenforceable roughly six times. And there was no record evidence that any of the Affected Owners’ contracts were successfully rescinded. That didn’t show there were no legal grounds to dispute the agreements or that Aaronson was never successful, but a jury could find that Aaronson’s website “falsely or misleadingly stated timeshare developers’ legal vulnerability as well as the availability of remedies like rescission.” [There is a line of cases about when legal claims are falsifiable v. puffery, but the court does not cite them and might not have been directed by the parties to them.]

Likewise, a jury might find the claims literally false; if they found them misleading, the case would fail because Exploria had no evidence of consumer reaction.

However, Exploria’s failure to show materiality was fatal regardless. There was no expert testimony or other evidence that the website advertisements were likely to be material to consumer purchasing decisions. The record didn’t even show that every owner found Aaronson through its websites; only one of the 6 named did so, and she wasn’t deposed. The rest were referred by another lawyer. One had no recollection of visiting the site, and another’s spouse told her nothing about the site. “Clearly the website statements were not material to these owners even if they did indeed view them.”

Trade libel: also failed for want of materiality.

Peloton's music troubles give it consumer protection troubles over "ever-growing library" claim

Fishon v. Peloton Interactive, Inc., 2020 WL 6564755, No. 19-cv-11711 (LJL) (S.D.N.Y. Nov. 9, 2020)

Peloton streams live and on-demand fitness classes requiring a monthly subscription fee. Certain Peloton ads described the library of fitness classes as “ever-growing.” But in March of 2019, however, in response to a lawsuit from music publishers, Peloton removed approximately 5,739 classes, or nearly 57% of the total available classes, from its library. Plaintiffs alleged that the “ever-growing” claim was deceptive and misleading.

The court dismissed the NYGBL claim of the Michigan plaintiff, but not of the NY plaintiff.  

First, the terms of service, which authorized Peloton to remove content from its library at any time, did not protect Peloton. Statements buried in contracts can’t, in general, avoid false advertising claims. “A reasonable consumer, having viewed Peloton’s advertisements on its website and having decided to purchase a Peloton product based on the understanding that the library would grow ‘should not be expected to discover the truth’ and that such understanding was false from the Terms of Service.” Moreover, being able to remove content at any given time was not inconsistent with a promise of an “ever-growing” library, and so the TOS didn’t dispel the alleged falsity. “The Terms of Service do not disclose that Peloton might remove over half of its library without simultaneously replacing that half with even more classes.”

Puffery: “Ever-growing” was objective and testable. “The library either increased in size or it shrunk.”

Deceptive/misleading: This was a factual question not appropriately resolved on a motion to dismiss, despite Peloton’s argument that it was constantly adding new content, nearly 24 hours of live content per day. “Ever-growing” is not the same thing as “ever-changing.” “A consumer attracted to a grocery store by its advertisement of a growing selection of foodstuffs would be surprised to learn on each visit that the number of products on sale was decreasing, although the store was replacing the items it removed with a smaller number of new products…. A reasonable consumer thus would not understand as a matter of law when he or she purchased the Peloton product based on the representation that the library was ever-growing that the library was shrinking in size at the same time Peloton was adding new classes.”

Plaintiffs also properly pled causation even without alleging that they saw the misleading ads, since reliance isn’t required and Section 349/350 claims are not fraud claims that must be pled with particularity. “[A]n allegation that the defendant was injured because she relied on the misleading statement to her detriment is not a ‘[t]hreadbare recital[ ] of the elements of a cause of action,’ but rather “an allegation of fact as to how she came to be injured that—if proven—supports the establishment of that element…. The manner in which the plaintiff came to rely upon the deceptive act—and whether it can be proved—is a further issue of proof and not something that needs to be pleaded in detail for a complaint to proceed.”

So too with injury: The complaint alleged that “Plaintiffs attributed value to Peloton’s promises regarding the nature and characteristics of its on-demand digital library and would not have purchased the hardware and corresponding Peloton Membership, or would not have purchased it on the same terms, if they knew the truth.” That was enough for now.


misbehavior in Amazon reviews + false ingredient claims = $9.5 million award

Vitamins Online, Inc. v. HeartWise, Inc. 2020 WL 6581050, No. 13-cv-00982-DAK (D. Utah Nov. 10, 2020)

This is a long-running supplement false advertising case involving both ingredient and “review” claims; here the district court resolves a number of issues, finding a fair amount of falsity. The plaintiff sells NutriGold supplements and the defendant sells NatureWise supplements.

I’m skipping a lot of detail on the ingredient specifics but will say a bit more about the review claims.

I should also note that, due to HeartWise’s failure to preserve evidence, the court drew a number of adverse inferences about failure to meet label claims.

The court found that, on Amazon, the number of positive reviews and even slight differences in star ratings are important to consumers, and good reviews improve search results and sales; it relied in part on VO’s survey expert and on “very extensive and consistent literature that online reviews are an important part of almost all online purchasing decisions.”

NatureWise’s First Green Coffee product page began receiving product reviews before the product even launched, including reviews stating that customers had been taking it for weeks/months, and losing pounds per week. Several of the reviews had red flags—they were from unverified purchasers, appeared within 14 minutes of one another, and gave the product 5 stars. Fourteen five-star unverified reviews appeared within 25 minutes of one another and had “a similar pattern of including an exclamation point in the title of the review.” Other NatureWise products followed the same general pattern.

VO’s statistics and computer science expert authored a joint report with its statistics and review manipulation expert; they were both credible. Based on this testimony, the court found that NatureWise’s unverified reviews had higher ratings than its verified reviews; the products had higher ratings than a random sample of similar products; the unverified reviews were significantly higher; there were an unusually high number of new reviewers; NatureWise reviewers had written more prior reviews than the typical reviewers; new NatureWise reviewers gave significantly higher ratings than customers who had previously written reviews on Amazon; NatureWise reviewers had significantly higher similarities compared to other reviewers; and there were periods in which the NatureWise products had an unusually large ratio of unverified reviewers and an unusually large ratio of reviewers that were highly positive.

NatureWise also manipulated reviews by (1) block voting on the helpfulness of reviews and (2) offering free products in exchange for reviews. Employees, at its direction, upvoted good reviews and downvoted bad reviews. NatureWise’s principal testified that this was only defense to attacks by unknown third parties, but he directed employes to downvote bad reviews without mentioning purported attacks or distinguishing between “attacking” reviews and legitimate reviews. “NatureWise management knew that their block voting was interfering with Amazon reviews, and they were worried about customers finding out,” and also worried about Amazon finding out, since they knew that this violated Amazon’s policy.

As for products in exchange for reviews: “On several occasions, NatureWise denied having offered free product in exchange for a review, even though that was not true.” It also asked customers “to review other products so that their reviews of NatureWise products would have more credibility and so Amazon would not think NatureWise reviews were fake.” The products-for-review scheme was also a violation of Amazon policies, and the court found that it deceived consumers because review independence is material to them. The court further found that review manipulation benefited NatureWise financially.

Since the parties’ products competed directly, and since for at least some part of 2012-end of 2013 they were the two major players in the Amazon marketplace for garcinia cambogia and green coffee products, with only “minimal” alternatives, this all hurt VO. NutriGold took the “#1 Amazon top seller” slots for both. By 2014, however, “the markets for green coffee and garcinia cambogia on Amazon were inundated with competitors such that Vitamins Online and NatureWise were no longer the two major players in the relevant marketplace.”

Falsity/ingredients: Based on the adverse inference mentioned above, the court found that certain claims were literally false and VO was entitled to a presumption of deception, wich was unrebutted. As for the products in general, NatureWise “failed to keep the necessary documentation to keep track of the Green Coffees and the Garcinias that it was selling.” At least as to certain lots, a number of claims about ingredients, ingredient amounts, vegetarian status, lack of fillers/binders/artificial ingredients, and clinical proof were literally false. “For much of 2012 and 2013, NatureWise’s claims … that (1) each ingredient it used was verified for purity through in-house testing; (2) it had implemented a strict set of FDA compliant manufacturing procedures; and (3) its facilities were regularly inspected by FDA officials were literally false because NatureWise did not know who was making those products.”

Even if these claims had been only implicitly and not explicitly false, VO would be entitled to a presumption of deception because the court found that defendants acted with the intent to deceive consumers.

Review claims: the court found that the practice of block voting was “the use of a device in connection with the commercial advertising or promotion of its products.” And as a result, the number of “helpful” votes on certain reviews were “artificially inflated and literally false.” NatureWise’s representations that it did not offer free products in exchange for reviews were also literally false. Even if this was only implicit falsity, again, there’d still be a presumption of deception because of the intent to deceive.

NatureWise failed to rebut these presumptions of deception.

Materiality: The court quoted the Second Circuit’s statement that, “in many cases the evidence and the findings by [a] court that a plaintiff has been injured or is likely to suffer injury will satisfy the materiality standard—especially where the defendant and plaintiff are competitors in the same market and the falsity of the defendant’s advertising is likely to lead consumers to prefer the defendant’s product over the plaintiff’s.” The court concluded that both ingredient and review claims were material, and also the court presumed materiality from literal falsity. Plus, because Vitamins Online and NatureWise were direct competitors in a sparsely populated market, the court presumed injury to VO. (Previously the court had declined to rely on this rationale, but the evidence at trial showed that the market was in fact sparsely populated during a key period.)

Injury: A “heightened level of ... proof of causation and specific injury” is required when the plaintiff is seeking money damages. And the standard of proof required when a plaintiff is seeking disgorgement, as VO was, is “somewhere between the standards for money damages and injunctive relief.”

For the years 2012 and 2013, VO was entitled to a presumption of injury because of the sparsely populated market, but only of economic injury and not of reputational injury. As to the remaining years, VO failed to show economic or reputational injury proximately caused by NatureWise’s misrepresentations once the market was flooded with competitors. At that point, “a sale for NatureWise could have meant a lost sale for any of the other Amazon competitors.”

The Utah common law unfair competition claim went the same way.

Applying Romag Fasteners, Inc. v. Fossil, Inc., 140 S. Ct. 1492 (2020), the court noted that willfulness is still “a highly important consideration in determining whether an award of profits is appropriate.” Other equitable considerations may include, among other things, “(1) the degree of certainty that the defendant benefited from the unlawful conduct; (2) availability and adequacy of other remedies; (3) the role of a particular defendant in effectuating the infringement; (4) plaintiff’s laches; and (5) plaintiff’s unclean hands.”

Here, disgorgement of NatureWise’s profits from 2012 and 2013 was an appropriate remedy, given the clear benefit NatureWise received: it “quickly rose to the top of Amazon sales rankings and made millions of dollars in a matter of months despite having no previous experience in the industry.” And, even though VO wasn’t seeking actual damages, those are difficult to calculate accurately in a false advertising case. VO didn’t delay, and NatureWise’s actions were willful. Indeed, “as a result of testing, NatureWise had knowledge that certain lots of the Products did not match their label claims. Yet, even with that knowledge, NatureWise continued selling those products and never issued any recalls.” NatureWise’s discovery improprieties additionally favored disgorgement.

NatureWise’s sales from the period were over $9.5 million, and it didn’t provide reliable evidence of cost or other deductions, so the court awarded the entire amount plus prejudgment interest. The award was the same (not doubled) for the Utah common law claim.

The court declined to enhance the damages/profits awarded. The disgorgement was adequate compensation, and enhanced profits would constitute a penalty.

The court also declined to grant VO a permanent injunction, since the disgorgement was adequate compensation. And VO’s requested relief that NatureWise be compelled to remove all its product reviews on Amazon would be against the public interest because “legitimate reviews of actual consumers would also be removed.” [What about compelling NatureWise to remove/request removal of all paid-for reviews and employee helpfulness votes? Would Amazon do that?]

The court also awarded attorneys’ fees and costs “in light of NatureWise’s actions in willfully deceiving consumers, failing to produce pertinent evidence, and abusing the discovery process” and in order to deter NatureWise from further willful conduct.

Tuesday, November 10, 2020

Amicus brief in Stouffer v. Nat'l Geographic (a title v title infringement case)

With Mark Lemley, Mark McKenna, and a number of other IP professors, I submitted this amicus brief arguing that the 10th Circuit should adopt Rogers v. Grimaldi (without any exclusion for title v title claims) for assessing trademark claims against noncommercial speech such as TV shows.

Wednesday, November 04, 2020

230 defense fails where speaker's ownership/control of D is sufficiently alleged

Tang v. Guo, 2020 WL 6414371, No. 17 Civ. 9031 (JFK) (S.D.N.Y. Nov. 2, 2020)

Further on this case about a dispute between a political activist and a rival. Plaintiffs sued defendants including Guo a/k/a Kwok and four entities that Kwok allegedly founded and controls, collectively the media defendants and the ROL defendants (“Rule of Law” Society and Foundation). A media defendant and the ROL defendants moved to dismiss the claims against them under §230 and the court denied the motion because it was properly pled that they were owned/controlled by the speaker who posted the challenged content on their websites, and thus not third parties for §230 purposes.

Plaintiffs allege that Kwok owns, directs, and/or controls the media Defendants and ROL defendants, which he allegedly created to promote certain for-profit endeavors of his under the guise of advocating for greater human rights and democracy in China. Each entity operates out of Kwok’s residence; and Kwok is the sole agent and promoter of the corporations’ services, which are allegedly designed to compete with plaintiffs’ nonprofit organizations and media outlet, which also advocate for greater human rights and democracy in China.

Kwok, via the media defendants and other outlets such as YouTube and Twitter, allegedly made and continues to make available, false and defamatory statements about plaintiffs, as well as false or misleading statements about the purported use of funds donated to the ROL defendants, in order to garner attention for Kwok’s nonprofit and media organizations and ultimately drive donors away from plaintiffs’ competing organizations.

After an initial dismissal, the court allowed plaintiffs leave to file an amended complaint alleging Lanham Act, unfair competition, defamation, and harassment claims to move forward, and adding media defendant SMG and the ROL defendants to be added to this action. Relevant allegations: (1) that the ROL defendants, which are owned and controlled by Kwok, use the media defendants to publish Kwok’s false and misleading statements; (2) that the ROL defendants engaged in false advertising regarding the foundations’ non-tax exemption for certain charitable donations, and the foundations’ lobbying efforts and non-charitable expenditures; and (3) that the media defendants promote Kwok’s and the ROL defendants’ false statements and advertising by receiving funding from the ROL defendants and publishing Kwok’s misleading infomercials on their platforms.

Media defendant SMG argued that §230 shielded it from any liability, and the ROL defendants argued that the complaint didn’t plausibly allege a principal-agent relationship between Kwok and the ROL defendants, and even if it did, the complaint didn’t allege how the ROL defendants’ purportedly false advertising caused any harm to Plaintiffs.

Previously, the court found Lanham Act/unfair competition claims permissible because the complaint plausibly alleged (1) a sufficient economic motivation for Kwok’s speech based on the “DONATE” buttons he included in certain video infomercials as well as the plausible allegation that Kwok sought to increase viewership on the media defendants’ platforms in order to encourage donations to the ROL defendants; (2) that Kwok and the entities he controls have misled the public regarding the use of donated money; and (3) that Kwok’s false statements were made for the purpose of influencing donors to make contributions to his charitable organizations instead of to Plaintiffs’ competing organizations. [I suspect there’s a greater noncommercial speech problem here than litigated out here, given Riley & progeny.]

CDA:  “[I]mmunity pursuant to the CDA is generally only available where the complained of content is provided by a third-party.” The complaint plausibly alleged that defendant SMG itself published the false statements, because plaintiffs plausibly alleged that Kwok owns and controls SMG and used it to violate the Lanham Act and unfairly compete with plaintiffs’ fundraising efforts.

The ROL defendants: The complaint alleged that the two organizations are essentially the same except that one is a 501(c)(4) entity which is allowed to engage in lobbying, and the other is a 501(c)(3) entity which is not, and that the two organizations compete with plaintiffs for donations, gifts, and other contributions intended for promoting human rights and democracy in China. They allegedly engaged in false advertising by soliciting charitable contributions without distinguishing between the two or disclosing to potential donors that the ultimate use of the funds was for non-charitable purposes, such as lobbying efforts, funding Kwok’s personal asylum application, and funding his for-profit media organizations, the media defendants.

The ROL defendants could be held directly liable based on the plausible allegation that they failed to disclose that the use of certain donations was for purposes other than the organizations’ stated objectives. And proximate cause was plausibly pled because plaintiffs alleged that they derived income from the same types of donations and gifts that were redirected to the ROL defendants based, at least in part, on their false advertising.

Comment: Not every court would be so generous with this proximate cause allegation—why would money be diverted from plaintiffs in particular? Are there literally no other organizations doing similar work?

press release in supplement battle could be false advertising

ThermoLife Int’l LLC v. NeoGenis Labs Inc., 2020 WL 6395442, No. CV-18-02980-PHX-DWL (D. Ariz. Nov. 2, 2020)

Plaintiff/counterdefendant ThermoLife and defendant/counterplaintiff HumanN both hold patents related to the use of nitrate technology for supplements. ThermoLife alleged that HumanN engaged in false advertising and false marking by, among other things, marking three of its nitrate-related products with inapplicable patent numbers. HumanN’s counterclaims were based in part on a previous, unsuccessful lawsuit that ThermoLife filed against HumanN, in part on a press release that ThermoLife’s principal Kramer issued after this lawsuit was filed, and in part on ThermoLife’s alleged interference with HumanN’s business relationship with

This decision deals with ThermoLife’s motion to dismiss the counterclaims.

The prior litigation was stayed when the PTO instituted proceedings to reexamine the ThermoLife patent asserted in the suit. During reexamination, Kramer allegedly sent a letter to HumanN to “open a dialogue for possible resolution” of the litigation. He “threatened to bring a false advertising suit” and another infringement suit based on two additional patents if “HumanN did not...negotiate a deal.” Kramer and ThermoLife allegedly “promise[d] to stifle competition for HumanN if HumanN agree[d] to a sub-license, and alternatively threatened to drive HumanN out of business entirely if it [did] not.” ThermoLife voluntarily dismissed the infringement suit, but allegedly continued to demand that HumanN pay licensing fees despite HumanN’s contention that it didn’t practice the patent.

ThermoLife also told Amazon that HumanN’s products infringed another of ThermoLife’s patents, as a result of which Amazon took down some of HumanN’s product listings. This allegedly caused HumanN to expend “significant efforts to restore its product pages,” rendered HumanN “unable to sell three of its top selling products on Amazon” for one month, and diminished HumanN’s seller ranking.

ThermoLife ultimately sued again, and issued a press release entitled “ThermoLife Serves HumanN A Beet Down For Selling Falsely Advertised And Misbranded Products Including SuperBeets, BeetElite, And Neo40.”  

The Sherman Act attempted monopolization counterclaim was dismissed because of failure to sufficiently define the relevant market, albeit with leave to amend.

Lanham Act false advertising: This was based on the “Beet Down” press release, which disclosed that ThermoLife had filed this action and described ThermoLife’s basis for doing so.

ThermoLife argued that because the press release simply repeated the allegations contained in its complaint in this action, while prefacing each set of allegations with the phrase “has alleged,” the press release was truthful. Not so. The headline was not qualified and affirmatively stated that HumanN “sell[s] falsely advertised and misbranded products.” “Resolving all reasonable inferences in favor of the non-movant, this is a statement of fact.” Also, a quotation from Kramer included an assertion that “HumanN relies on false representation after false representation to deceive consumers into purchasing HumanN’s products.” This was also plausibly a statement of fact rather than a statement of opinion.

Arizona’s state-law litigation privilege also didn’t bar HumanN’s Lanham Act claim. And the press release wasn’t protected by Noerr-Pennington immunity. It accused HumanN of falsely marking HumanN’s products with patents the products do not practice; it didn’t mention ThermoLife’s patents except for in Kramer’s quote, “ThermoLife holds the patents for the technology in HumanN’s products, not HumanN.” But that seemed to be about ThermoLife’s earlier contention that “contrary to HumanN’s false advertising, none of [the] patents that HumanN licenses and falsely marks on its products protect ‘patented Nitric Oxide technology.’ ” ThermoLife couldn’t claim Noerr-Pennington immunity for asserting its patent rights “in a press release about a lawsuit that has nothing to do with enforcement of its patents.”

The substantive analysis was the same for Arizona unfair competition and trade libel claims, but the court had to analyze Arizona’s litigation privilege. At this stage, ThermoLife hadn’t shown that it was entitled to a qualified privilege. Although the general rule is that “[a]nyone may describe what transpired at a public proceeding so long as the publisher provides a fair and accurate rendition...[o]ne exception to this wide application is the speaker who by design uses the privilege to republish defamation he previously made during the public proceeding.” This was because “[t]he privilege does not sanction self-serving re-publication.” That was exactly the scenario alleged here. Arizona also holds that a speaker can forfeit its entitlement to the qualified privilege via “abuse of that privilege,” such as by “excessive an unprivileged recipient not reasonably necessary to protect the interest upon which the privilege is grounded.” Given the posture, it was vital that “whether the occasion for the privilege was abused is a question of fact for the jury.”

Tortious interference with relations with Amazon: Federal patent law preempts state tort law where the state tort is based on “conduct that is protected or governed by federal patent law.” Thus, “patentees do not violate the rules of fair competition by making accurate representations, and are allowed to make representations that turn out to be inaccurate provided they make them in good faith.” HumanN didn’t sufficiently allege that plaintiffs acted in bad faith when they told Amazon that HumanN’s products infringed. “HumanN has not identified any authority suggesting that a judicial determination of infringement is a prerequisite to notifying a potential infringer (or a third party) of infringement.” And, while HumanN alleged specific facts suggesting that ThermoLife was aware that HumanN’s product didn’t infringe the initially asserted patent yet chose to file suit anyway, it didn’t provide any comparable allegations concerning the report to Amazon, which involved different patents.

Arizona also has a Patent Troll Prevention Act (PTPA), which prohibits “an assertion of patent infringement in bad faith.” The statute expressly exempts civil actions “that include[ ] a demand or assertion of patent infringement.” But HumanN sufficiently alleged that ThermoLife “threaten[ed] HumanN with sham litigation, even after [ThermoLife] dismissed its sham infringement suit.” As for bad faith, ThermoLife argued that the challenged communications contained “a detailed infringement analysis” and that there is “no dispute” that it provided information set out in the PTPA as relevant to the bad faith analysis: the patent number, contact information of the patent owner or assignee, infringement facts, and an explanation of standing. But on a motion to dismiss HumanN plausibly alleged bad faith. HumanN alleged that ThermoLife’s infringement analysis was unsupported, contradictory, and without merit and that, after ThermoLife dismissed its infringement suit, ThermoLife still “insisted” that HumanN grant a $1 per unit licensing fee and pay $1 million in “back damages” within 10 days. Those could plausibly show bad faith, and providing the information listed in the statute isn’t automatically sufficient to defeat a PTPA claim. The statute made clear that the factors are “nonexclusive”—a court may consider “[a]ny other factor that the court determines to be relevant.”

The court found it unnecessary to resolve whether federal law preempted the PTPA because ThermoLife raised the issue only in passing in a footnote.

Tuesday, November 03, 2020

solar flareup: Panasonic and Tesla successor in interest in false advertising battle

I know you want to read about a false advertising dispute that, for once, tries to work around the restrictions of trademark law and not the other way around!

Kinect Solar, LLC v. Panasonic Corp., No. 1:20-CV-378-LY, 2020 WL 6385292 (W.D. Tex. Oct. 30, 2020) (magistrate R&R)

Panasonic entered into a partnership with Tesla to manufacture a line of solar panels known as “SolarCity” solar panels. Tesla began liquidating its SolarCity panels in 2019, and Kinect bought them. It began selling the SolarCity panels “through its normal channels” at a price that was “substantially discounted” compared to the solar panels that Panasonic sells directly through its own distribution network. Panasonic calls these “grey market” sales, even though they … aren’t? And one reason we know this is that there is no trademark counterclaim, despite trademark claims being much easier to win than false advertising claims.

Kinect allegedly contained Panasonic’s authorized installers “claiming that they were selling discounted SolarCity modules that were backed by and warranted by Panasonic.” Panasonic allegedly received messages from its authorized installers “inquiring whether the SolarCity solar panels were subject to the same warranties as Panasonic solar panels and whether these panels were part of Panasonic’s authorized installer program.”

A Panasonic rep told Kinect: “I just want to make sure that you guys understand that these panels do not have Panasonic Warranty and only Tesla is responsible for their warranty on those panels so the fact that we make them has not value to them [sic]. We’ll soon communicate to all our authorized installers about this to make sure they are aware of it.”

Kinect argued that this and related statements to installers were false, because Panasonic issued an “OEM Warranty” on the SolarCity panels. Panasonic acknowledged that Panasonic owed a 10-year workmanship warranty to Tesla for the SolarCity panels.

Panasonic then sent a letter to “certain of its business partners,” stating that the SolarCity panels “were not covered under any warranty by Panasonic Life Solutions of America,” and allegedly disseminated the letter to PV Tech, “an online news and trade company,” which published an article titled “US solar installers of Tesla designated panels [are] on the market with no warranties.” This allegedly harmed Kinect’s sales, and Kinect sued for business disparagement, defamation, tortious interference with prospective business relations, and unfair competition.

Panasonic counterclaimed for Lanham Act false advertising and tortious interference with business relations. Panasonic alleged that “there are significant differences in warranties and benefits associated with the two brands of solar panels including the entity issuing and administering the consumer warranty.” The Panasonic warranty only applies where the SolarCity panels are included in a photovoltaic systems sold by SolarCity/Tesla. And the SolarCity panels provide purchasers a 10-year limited warranty for workmanship by Tesla, while Panasonic-brand panels are provided a 25-year workmanship warranty. Kinect allegedly “knew that the limited warranty associated with the SolarCity panels was provided to end consumers by Tesla,” but nonetheless marketed the SolarCity panels under the Panasonic brand name and failed to disclose the differences between the brands of panels, including the warranties. Panasonic “is now inundated with installer and consumer questions and complaints directly associated with the misinformation being spread by Kinect.”

The magistrate largely recommended refusing to dismiss the claims/counterclaims, with the exception of an undeveloped common-law unfair competition claim.

Kinect’s business disparagement claim: Requires “(1) publication of disparaging and false words, (2) with malice, (3) which cause special damages, and (4) lack of privilege.”

Panasonic argued that it was literally true that the SolarCity panels were not covered by warranties issued by Panasonic Life Solutions Company of America, as it said, but Kinect sufficiently alleged implied falsity because the panels were backed by another Panasonic entity/division, and omitting that fact from the Panasonic letter created a false impression that Kinect was falsely advertising the presence of a Panasonic warranty. Kinect also sufficiently alleged the other elements, including special damages by alleging that sales representatives “have had prospective purchasers decline to purchase the [SolarCity panels], citing the reason that they were informed that the panels were not covered by a Panasonic warranty.”

Defamation: Requires that “(1) the defendant published a false statement; (2) that defamed the plaintiff; (3) with the requisite degree of fault regarding the truth of the statement (negligence if the plaintiff is a private individual); and (4) damages, unless the statement constitutes defamation per se.” Similarly, the challenged statements were capable of a defamatory meaning. A plaintiff can bring a claim for defamation “when discrete facts, literally or substantially true, are published in such a way that they create a substantially false and defamatory impression by omitting material facts or juxtaposing facts in a misleading way.”

Tortious interference with prospective business relations: Here, Kinect didn’t identify specific prospective or existing clients with which it would have done business but for Panasonic’s conduct, so the magistrate recommended dismissal.

Panasonic’s false advertising counterclaim: Also facially plausible. The court couldn’t resolve whether Panasonic was right on a motion to dismiss. Panasonic alleged that Kinect marketed the solar panels with “a doctored spec sheet … which completely removes the Tesla name and refers to the SC-Series as “Panasonic SC Modules.” In fact, the only company identified on the spec sheet is Panasonic with the words ‘manufactured by Panasonic’ at the top of the sheet.” Although this was literally true, Panasonic plausibly alleged misleadingness because “the panels were manufactured by Panasonic for Tesla in accordance with Tesla’s specifications” and the original spec sheet “clearly identified Tesla as the seller issuing the end consumer warranties.” The revised specification sheet could plausibly lead a reasonable consumer to believe Panasonic would be their contact for the warranties covering the SolarCity panels. [Given what I said above, I should say that this does strike me as a perfectly coherent false advertising claim, and grey goods cases would benefit from being framed as false advertising cases so that courts would take materiality seriously, as they do in false advertising cases.]

The court’s own examination of the marketing spec sheet—integral to the complaint and thus properly considered on a motion to dismiss—showed that the words “Manufactured by Panasonic” had been added, while this was deleted:

Modules are manufactured by Panasonic to the specification of SolarCity. Modules are only warranted by Panasonic if the modules are included in a PV system sold by SolarCity or Tesla. SolarCity and Tesla make no warranties related to the modules, which are sold as-is. SolarCity will handle any warranty claims on behalf of any purchaser.

Also, a reference to the module technology replaced “Manufactured by Panasonic for SolarCity” with “Panasonic SC Series Modules.” This was enough for a motion to dismiss.

Panasonic’s tortious interference claim was also sufficient, which seems a little contradictory since Panasonic didn’t identify specific customers, but it did allege that, “[w]hen the end-consumers and installers discovered that Kinect misrepresented the product affiliation, warranties, and benefits associated with the SolarCity panels, the end-consumers looked to Panasonic to remedy the mistake. In order to protect the goodwill of the Panasonic brand and maintain the loyalty of its customers, [Panasonic] assisted with the replacement of the SolarCity panels with Panasonic branded panels for these end-consumers,” which sufficed.