Friday, January 29, 2021

Book talk: global mandatory fair use via the Berne quotation right

Tanya Aplin & Lionel Bently, Global Mandatory Fair Use, AU Book Talk.

Based on their new book.

Art 10(1) Berne Convention: It shall be permissible to make quotations from a published work; mention shall be made of the source and name of author if it appears. This constitutes global, mandatory, fair use. Berne and TRIPS both require implementation of Art. 10. Meaning and purpose of quotation is broad. Fair because of the requirements: lawfully made available to the public, attribution, proportionality, consistent with fair practice. Mandatory language can be contrasted with other exemptions, which say “it shall be a matter for legislation in the countries” of the union. Drafting history includes vote to reject making 10(1) optional rather than mandatory.

Scope: applies to all Berne works, not just literary works, though optional for related rights b/c Rome Convention has no mandatory quotation right. Also does not apply to moral rights, b/c travaux suggested moral rights are reserved, and Art 10(3) provides different requirement for attribution of source.

What’s the meaning of “quotation”? Proposal to limit language by purpose were rejected; it was intention to leave language open because couldn’t agree on purposes to which it should be limited. Aplin & Bently argue: does not have to be short, can be of the whole work, need not be distinct, need not be used in another work; need not support or further an argument or critique. None of these individually are necessary conditions for “quotation.” Many fields use “quotation” to include use of a full work, no requirement of commentary, no requirement of “quotation marks.” Example: Cézanne’s Compotier, verre et pommes, 1878-79, shown in Maurice Denis’ Homage to Cézanne, 1900: group of painters standing around an easel representing the Cézanne: they’re admiring Cézanne’s work. It is (all but) the whole work; it is not distinct from the rest of the work; and one might question whether there’s any critique or dialogue: the dialogue seems to be “isn’t this a great painting and aren’t all those people admiring it.”

Similarly in architecture there is quotation: Konstantin Melnikov, Rusakov Club; quoted in James Stirling, Leicester Engineering Building. Architecture literature doesn’t hesitate to describe this as quotation w/common trapezoidal forms. Not distinct from the rest but still described as quotation. Similar examples from film, e.g., Francis Bacon, Study for the Nurse from the Battleship Potemkin.

In literature particularly, “quotation” is used routinely w/o any requirement of critique, which contrasts with EU requirement of dialogue with work being quoted. That’s not the ordinary meaning of quotation, which includes inscriptions on buildings that edify visitors.

Art 10(1) requirements help constrain the exception: lawfully made available to public, attribution, quotation doesn’t exceed that justified by purpose, and proportionality. Made available: wider notion than publication under Art 3(3); covers making available via compulsory license. Sticky issues about where the work has to be made available. Suggest that the better view is that it should be judged according to place of first making available. Not synonymous w/right of attribution b/c requires mention of the source and author if the latter appears thereon. As a result, should be viewed more flexibly, allowing attributions in abbreviated form, indirect, implicit attribution, or easily identifiable.

Proportionality: “the extent of the quotation does not exceed that justified by the purpose.” From human rights jurisprudence: suitability: is quotation capable of achieving purpose claimed; necessity: whether shorter quotation would be as effective in achieving the purpose and less restrictive of author’s rights. Counterbalances the removal of “short” before quotation.

Finally, “fair practice” requirement gives a lot of scope for considering fairness. Little guidance in the travaux. Reject of three possible approaches: (1) solely determined by national law, given that it’s mandatory and normative; (2) informed by relevant state practice; (3) synonymous with three-step test. Clearly seen as important mechanism of constraining exception. Fair practice should assess fairness, informed by notions of economic and moral harm (which may involve considering amount quoted as well as nature/purpose of quotation as well as size/proportion); freedom of expression (expressive purpose of quotation, including political v. commercial; nature of claimant’s work); distributive justice (educational uses, translations, poorly financed creators); and custom, to a limited extent (drawing on Kenneth Crews and Jennifer Rothman’s cautionary work on custom). Notions of bad faith wouldn’t fall within our meaning b/c it’s too vague: manner of obtaining work is better dealt w/ by other areas of law; commercial motive can be dealt with by considering economic harm; failure to ask permission is circular.

Differences from WTO’s approach to the 3 step test, which is very formalistic. 10(1) v. 3 step: latter is narrow in scope and reach, whereas quotation can be interpreted broadly. Normative value: 3 step in WTO panel view is fixated on rights holders interests, while fair practice brings a plurality of interests into play. 3 step test doesn’t require availability to public; doesn’t take moral rights into account. 3 step is cumulative in nature, while quotation elements have some overlap, e.g. proportionality and fair practice. Royalty-free exception while 3-step envisages paid but permitted exemptions. 3 step test is not the only lens through which to see exceptions: a powerful force alongside it. Despite TRIPS art. 13: TRIPS art 9(1) says that nothing in the relevant provisions shall derogate from existing obligations, and 10(1) is an existing obligation. Therefore TRIPS doesn’t override 10(1), though it can make 10(2) and 10bis subject to the 3 step test. Similar argument with WCT, as well as agreed statement to WCT which supports the argument further.

Consequences for US fair use: assessment according to 3-step test becomes redundant, but would need to pay attention to making available, attribution requirements, moral rights, and different emphasis for fairness factors. Also provides occasion to revisit quotation exceptions where they fall short by restricting purpose (Portugal), limited to types of works (Austria, Zimbabwe), restricted to short quotations (France, Greece, Serbia), or require dialogue/incorporation into other works (France, Germany). CJEU decisions are also incorrect/inconsistent by requiring intent to enter into dialogue with work, wrongly importing identifiability/recognisability requirement. Parody exceptions could also be seen through 10(1) and not just three step test: lets us worry less about definitional distinctions among parody, satire, pastiche, though that might be relevant to fair practice rather to whether exception kicks in at all.

Publisher guidelines could also be revisited through this lens; many publishers are incredibly narrow and risk averse in acceptable quotation.

Peter Jaszi: mentioned questions in Salinger cases about whether being made available in archives ought to count as available to public.

Bernt Hugenholtz: Shall is not the same thing as may, and it ought to have consequences. But note that Berne allows different treatment of nationals. Mentioned discussion in chat about the new EU snippet right as a related right that could override the quotation right.

Discussion: Because of the mandatory nature of the quotation right, it should override any related right where that’s necessary to exercise the quotation right (e.g., a broadcast treaty or special rights for press publishers that extend beyond the author’s right).

Discussion of what doesn’t count as quotation: perhaps intermediate copying (though may be required to avail oneself of some kinds of quotation), reverse engineering.

Monday, January 25, 2021

surveys/expert evidence of deception still not required in consumer protection claims

Hawkins v. Kroger Co., 2021 WL 210843, No. 15cv2320 JM (AHG) (S.D. Cal. Jan. 11, 2021)

Hawkins sued, with the usual California claims, because Kroger breadcrumbs said “0g Trans Fat Per Serving”  on the front and the nutrition label said “Trans Fat 0g”; the breadcrumbs included partially hydrogenated vegetable oil (PHO), which meant that they contained “trace amounts” of trans fat.

The use of PHO in food products was legal during the class period: the FDA allowed producers until June 18, 2018 to remove PHO after it was removed from the “generally regarded as safe” classification.

So the use of PHO was not unlawful, but was it unfair? During the class period, there was no public policy against it, and the FDA declined to prohibit its use then, weighing against unfairness. But the degree of harm associated with PHO was a material and genuinely disputed fact. “[D]espite the legality of the use of trans fat during the class period, reasonable jurors could disagree as to whether the danger of trans fat to human health was sufficient to render its use ‘immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers,’” so the court declined to grant Kroger summary judgment on UCL unfairness.

Labeling claims: The court rejected Kroger’s argument that a reasonable consumer would understand the breadcrumbs contained trans fat because the ingredient list included PHO. Not only are reasonable consumers not required to look beyond misleading representations on the front of the box, but here it was not clear that typical consumers understood that PHO necessarily meant trans fat. Moreover, no reasonable juror could find that interpreting “0g Trans Fat” to mean “no” trans fat was unreasonably “sweeping.” [The FDA did require rounding down for amounts under .5g, in contradiction to what reasonable consumers would think. As the court explains, the cases have therefore held that, “although the FDA mandates the disclosure of ‘0g Trans Fat’ on the nutrition label when the product contains less than 0.5 grams of trans fat, it does not mandate or allow for the product to be labeled ‘0g Trans Fat’ elsewhere.”]

The court also rejected an attempt to impose a survey/expert evidence requirement for determining reasonable consumer expectations in California consumer protection cases. Here in particular, “it is not clear what else the claim ‘0g Trans Fat’ would lead a reasonable consumer to believe other than the product contains no trans fat.” Certainly Kroger wasn’t entitled to avoid a trial.

Hawkins also got summary judgment on the argument that “0g Trans Fat” violated 21 C.F.R. § 101.62(a)(1)-(2), “[a] claim about the level of fat .... in a food may only be made on the label .... if ... (1) [t]he claim uses one of the terms defined in this section [or] (2) [t]he claim is made in accordance with the general requirements for nutrient content claims in § 101.13.” Section 101.13 then provides “the label or labeling of a product may contain a statement about the amount or percentage of a nutrient if .... [t]he statement does not in any way implicitly characterize the level of the nutrient in the food and it is not false or misleading in any respect (e.g., ‘100 calories’ or ‘5 grams of fat’)[.]” Previous cases have held that this provision doesn’t “authorize” a “No Trans Fat” claim on the label. Though this was in a preemption context, the logic held here: “No Trans Fat” outside of the nutrition facts panel was misleading, given that the conceded use of PHO and thus of “some” trans fat content was actual evidence the “0g Trans Fat” label was false or misleading. Thus, Hawkins established a predicate for her “unlawful” UCL claim.

However, even if Hawkins didn’t have to show that a reasonable consumer would be deceived, there was a genuine dispute of material fact on reliance/causation, so she didn’t win summary judgment on the entire claim.

Kroger’s statute of limitations defense also failed because Hawkins wasn’t required to look beyond the front of the box.

Also, the “0g Trans Fat” label was “too specific to be puffery.”

when is a publisher sufficiently beholden to a manufacturer to engage in commercial speech?

Ariix, LLC v. NutriSearch Corp., No. 19-55343 (9th Cir. Jan. 22, 2021)

Over a dissent, the court reverses the district court’s dismissal of a false advertising claim against a purportedly independent supplement guide that allegedly is linked, behind the scenes, with one producer, motivating its praise of that producer and refusal to praise others. On the facts alleged, the supplement’s relevant statements constitute commercial speech; there’s a remand to determine whether the statements are designed to encourage the purchase of relevant products as required by a remaining element of the “commercial advertising or promotion” test. There is no First Amendment protection for “a publisher of supposedly independent product reviews if it has secretly rigged the ratings to favor one company in exchange for compensation.” 

“NutriSearch publishes a widely used nutritional supplement guide.” It is allegedly “a trusted name among sales representatives in the direct marketing supplement industry.” It rates supplements comparatively; companies that get a five-star rating can get NutriSearch Medals of Achievement, which require compliance with the FDA’s pharmaceutical good manufacturing practices (GMP) and certification from an approved laboratory that its label claims are true. The medals are allegedly “described as a binary determination: either a company obtains [GMP] certification and laboratory verification of the label claims, or it does not.” In the sixth edition, Usana Health Science was the only company that obtained the highest ranking, the platinum medal.

NutriSearch allegedly “portrays itself as an independent company that presents only objective data and scientific analyses to the public,” claiming “it relies on scientific criteria to mathematically calculate the ratings.” The guide’s author, the former CEO, appeared on the Dr. Oz Show promoting the Guide as an evidence-based book that does not have any “particular bias.” The inside of every edition of the Guide through the fifth edition stated:

This guide is intended to assist in sorting through the maze of nutritional supplements available in the marketplace today. It is not a product endorsement and does not make any health claim. It simply documents recent findings in the scientific literature.

This guide was not commissioned by any public sector or private sector interest, or by any company whose products may be represented herein. The research, development, and findings are the sole creative effort of the author and NutriSearch Corporation, neither of whom is associated with any manufacturer or product represented in this guide. (emphasis added).

NutriSearch removed the second paragraph from the sixth edition, published after Ariix filed this lawsuit.

However, NutriSearch allegedly rigged its ratings to favor Usana under a hidden financial arrangement. The author/ex-CEO, MacWilliam, worked as a Usana sales representative and served on its scientific advisory board until another company exposed this affiliation. He allegedly told former Usana executives, “I should not be on the board or a representative anymore because it looks like I’m biased. I am going to create more of a third-party appearance, but I’d like you to use me for speaking and support me.” Usana allegedly agreed in exchange for the number one rating in the Guide, and uses it in marketing pitches.

Usana allegedly pays hundreds of thousands of dollars annually in speaking and promotion fees to NutriSearch and MacWilliam in exchange for being rated the top supplement company in the Guide, accounting for more than 90% of his income. In addition, NutriSearch allegedly “promotes certain scientific claims to dovetail with Usana’s marketing campaign, or emphasizes certain ingredients that Usana has added to its products to ensure that Usana attains the top ranking in the Guide.”

In 2008, Usana allegedly withdrew its support for NutriSearch after other companies obtained a medal certification in the Guide, causing NutriSearch and MacWilliam to suffer financially. Usana allegedly suggested that Usana would recommence providing fees and speaking engagements if Usana obtained a number one ranking in some way. NutriSearch released a new “Editor’s Choice” award and gave it to Usana, and MacWilliam then asked for and received a nationwide tour from Usana.

Ariix alleged it was wrongly denied a medal certification in the Guide, including through the use of metrics that exempted Usana from the same standards. NutriSearch initially rated one Ariix product 3.5 stars, “but after public criticism and incontrovertible evidence of quality, NutriSearch revised the rating to 5 stars.” When Ariix tried to get MacWilliam as a speaker, he allegedly admitted that “[t]hey [Usana] will cut me off the second I do this [speak for Ariix].”

Were the challenged statements commercial advertising or promotion? This is “(1) commercial speech, … (3) for the purpose of influencing consumers to buy defendant’s goods or services, and (4) that is sufficiently disseminated to the relevant purchasing public.” The omitted (2), everyone here agrees, is a competition requirement that was abrogated by Lexmark; one satisfies Lexmark by having a relevant commercial interest and showing proximate cause.

The complaint plausibly alleged that the Guide was commercial speech by plausibly alleging “that the Guide is essentially a sham marketing ploy intended to boost Usana products.” Under Bolger, “speech that does not propose a commercial transaction on its face can still be commercial speech.” Although the question was close, the majority agreed with Ariix.

Although the Guide lacked “the traditional form of an advertisement” and didn’t provide price or availability information,

this fact alone does not tell us much, especially given today’s sophisticated and subtle marketing campaigns. For example, companies now pay so-called “influencers” to issue posts on social media touting their products or services. While such social media posts may not have the indicia of a traditional advertisement, there can be little doubt that these paid posts are in fact advertisements. [citing FTC alert; footnote about how much Kim Kardashian West is paid per Instagram post according to publicly filed litigation documents]

The Guide also referred to specific products, though that is far from dispositive.

The Bolger test also asks “whether the speaker acted primarily out of economic motivation, not simply whether the speaker had any economic motivation.” Obviously, “not all types of economic motivation support commercial speech. A simple profit motive to sell copies of a publication or to obtain an incidental economic benefit, without more, does not make something commercial speech.” But at the same time, “economic motivation is not limited simply to the expectation of a direct commercial transaction with consumers.” Indirect benefits can also count, such as “benefits to employee compensation, improvements to a brand’s image, general exposure of a product, and protection of licensees’ interests.” The key is whether “the economic benefit was the primary purpose for speaking.”

FWIW, I think this point could be helpfully sharpened: the key is whether the hoped-for economic benefit involves people buying some product other than the speech itself. If you write a song with the intention of creating an earworm that will have a zillion plays on Spotify, that is not a commercial speech motivation: you want people to buy the speech itself. If you write a song with the intention of promoting a beer brand, and you are paid based on the beer company’s hope of success, then the results are commercial speech (though there may well be no regulable factual statements in the song). [My formulation has to do a bit of finessing when there are potentially falsifiable statements made about the speech itself—“this album costs $9.99” is commercial speech; that specific statement about the noncommercial speech on the album is separable from the content of the album, though the titles of the songs on the album aren’t—but I believe that it addresses the key distinction.]

Footnote: Not any economic benefit will suffice; “speech that is mainly motivated out of economic benefit can still be fully protected, such as in labor cases…. Rather, the question is context-specific and requires determining whether the speaker’s purpose primarily turns on the economic benefit that the speaker receives from the speech.” [Again, I think we can usefully distinguish “unions will increase employee pay” from “hire me to do this job because I have a JD” here, but reasonable minds might disagree.]

Anyway, Ariix “plausibly alleged that NutriSearch and MacWilliam published the Guide mainly with the economic goal of furthering their own self-interests beyond simply benefiting from sales of the publication,” given the facts alleged above. [Emphasis added because this gets at how I would phrase the distinction.]

The court noted that it wasn’t relying only on alleged payments. “Many of Ariix’s allegations raise significant doubts about whether the Guide is an objective compilation of product reviews and suggest that the Guide is instead a sham marketing scheme intended to benefit Usana,” such as the allegedly false disclaimer in the first five editions.

The district court noted that the factual allegations do not show that the defendants should be treated as a single entity subject to the same conflicts of interest. But showing that the defendants are so closely related as to constitute a single entity is not required to plausibly allege that the Guide was published primarily for economic benefit. We are not asking whether MacWilliam’s actions influence NutriSearch or vice versa, but whether allegations involving either defendant reveal the primary purpose of the Guide.

…. Usana even uses MacWilliam as part of its image advertising; the complaint includes an image of MacWilliam that states that “I have full confidence that USANA will once again stand out as an industry leader and will continue to receive an elite standing in the new Comparative Guide.” That NutriSearch and MacWilliam chose such a strongly worded yet false disclaimer — disclaiming any association with all manufacturers in the Guide despite having obvious ties to Usana — raises substantial questions about the Guide’s true purpose, if the allegations in the complaint are true.

The court cautioned that its decision was “narrow.” Consumers face so many choices that they often seek out independent reviews. “But when someone falsely claims to be independent, rigs the ratings in exchange for compensation, and then profits from that perceived objectivity, that speaker has drowned the public trust for economic gain. Society has little interest in protecting such conduct under the mantle of the First Amendment.” Ultimately, the majority embraced “a common-sense distinction between protected speech and commercial speech — in this case, legitimate product reviews versus paid product promotion …. Simply put, paid promotion is commercial speech.”

This wasn’t just an allegation of bias and inaccuracy—and here comes a line defendants may well quote: “A mere failure to disclose bias or financial interest would not necessarily make speech commercial.”

Here, though, we face allegations that the defendants conceived the Guide to juice sales of Usana products, actively misled the public about their supposed independence, and fiddled with their own ratings criteria to boost a favored company that lavishes them with hundreds of thousands of dollars in compensation. Put another way, it is more paid promotion than product review, according to the complaint. It is not controversial to conclude that “liability can arise under the Lanham Act if websites purporting to offer reviews are in reality stealth operations intended to disparage a competitor’s product while posing as a neutral third party.”

Nor was this speech “inextricably intertwined” with fully protected speech. The Guide also “describes the benefits and science of nutritional supplements.” But the commercial, specifically, the allegedly rigged ratings “are not so connected to this informational section to lose their commercial character. On the contrary, they seem easily separable.” The Guide even allegedly comes in two parts, informational and ratings; the first could easily be published separately. “[T]he Guide does not gain full First Amendment protection simply because it includes a distinct summary of scientific ideas as a prelude to its supposed product reviews.”

But was the Guide “intended to influence consumers to buy the defendants’ goods,” as required by a remaining factor of the “commercial advertising or promotion” test? The advertising was allegedly intended to help Usana’s goods, not NutriSearch’s product. The parties didn’t brief the issue and the district court didn’t rule on it, so the court of appeals remanded. Though the dissent made good points on this element, the district court should address it. “In considering this question, though, it may be useful to determine whether the defendants and Usana had an agency relationship; for example, it might be the case that the defendants were acting as agents of Usana and therefore had a vested interest in the goods that Usana sold, which might be enough to satisfy this element.” [Also, the false claims of neutrality might well be helping sell the Guide, too.]

Final element: was the Guide allegedly sufficiently disseminated to the relevant purchasing public? Sure. Ariix alleged that the “professional edition [of the Guide] is specifically designed for and marketed to tens of thousands of Usana sales representatives, who are told that referring prospective customers to the guide is one of the most effective ways to sell Usana products.” The district court mistakenly looked at whether statements within the Guide were sufficiently disseminated.

The district court also found that Ariix didn’t sufficiently allege misrepresentations; the court of appeals disagreed. The comparative five-star ratings were non-actionable statements of opinion; even though the Guide purported to rely on scientific and objective criteria, “there is an inherently subjective element in deciding which scientific and objective criteria to consider.” However, the disclaimer of independence was a factual, falsifiable statement. And the failure to award Ariix a medal certification presents specific and measurable statements about Ariix, given that it was allegedly based on two falsifiable criteria: compliance with the FDA’s pharmaceutical good manufacturing practices and certification of product labels’ claims from an approved laboratory. “By not awarding Ariix a medal certification — despite Ariix being eligible for such an award — the Guide falsely implies to consumers that Ariix did not comply with the FDA’s GMPs or that it did not obtain the appropriate laboratory certification.”

The district court wrongly found that compliance with the GMPs wasn’t a statement of fact because consumers would merely “conclude that perhaps a manufacturer did not follow practices that the FDA considered good.” But whether Ariix followed those practices was itself a question of fact.

Judge Collins dissented.

First, he would not give any weight to allegations that defendants falsely advertised the Guide itself, rather than Usana’s products. But “advertisements that accurately reprint[] false claims contained in the advertised works [are] protected from tort liability to the same degree as the underlying works.” Anyway, Ariix didn’t plausibly plead that its injuries were proximately caused by the advertising of the Guide, as opposed to the product reviews contained in the Guide. [FWIW, I disagree: Independence is what makes such claims more credible; consumers may discount claims made by a party with an economic interest, which is why disclosure is so important to the FTC. Proximate cause is an issue of legal causation, not a matter of counting steps in the chain.]

Rather than stretching the Lanham Act in ways that threaten the First Amendment, the dissent would have relied on the remaining prongs of the “commercial advertising or promotion” test. The dissent agreed with everyone else that Lexmark abrogated the “competition” requirement in older versions of the test. “Given that (1) a competitors-only limitation similarly lacks any textual grounding in the phrase ‘commercial advertising or promotion,’ (2) Gordon & Breach derived this atextual limitation from its review of pre-Lexmark caselaw; and (3) Lexmark’s emphatic rejection of a competitors-only limitation would be wholly undone by continued adherence to this aspect of Gordon & Breach, the conclusion is inescapable that Lexmark precludes limiting ‘commercial advertising or promotion’ only to the commercial advertising and promotion of a direct competitor.”

Lexmark left the sufficient dissemination requirement intact; this was adequately pleaded.

What about “for the purpose of influencing consumers to buy defendant’s goods or services”? This too

flows from the statutory language and remains valid after Lexmark. By referring to representations that a “person” makes “in commercial advertising or promotion,” the Lanham Act clearly refers to commercial speech promoting sales of goods that may fairly be said to be those of that “person,” i.e., the defendant. We do not normally think of third-party product reviews or endorsements as being that person’s “commercial advertising”—at least when they are not done on behalf of the product’s manufacturer or seller.

That last qualification seems to be at issue here; also it’s interesting that the dissent doesn’t discuss the nearby statutory language making clear that statements in commercial advertising or promotion are actionable if they “misrepresent[] the nature, characteristics, qualities, or geographic origin of his or her or another person’s goods, services, or commercial activities” (emphasis added). Even if, as the dissent says, independent reviews are fully protected speech, that’s not the situation alleged here, and the concerns governing the lesser protection for deceptive commercial speech are clearly implicated.

The dissent recognized that the statute extends beyond advertising by manufacturers and distributors themselves. “[W]hen an entity acts as an agent of a manufacturer in making a product review, then that entity acts on behalf of the manufacturer and is in that sense advertising its own product. ‘[P]aid publicists’ speech’ about their payor’s products is commercial speech.” Likewise “there may be other endorsers who have such a direct financial stake in specific sales of a product—such as a cut of each sale—that it may likewise be fair to say that they are thereby advertising their own product.” But being cautious here avoids difficult constitutional questions. [It is notable that those difficult questions have generally involved regulation of truthful speech, like information about contraceptives; where the speech is deceptive, there is less reason to be concerned for the free flow of information.] The dissent thought that the majority created “a substantial amount of uncertainty as to the scope of First Amendment protection for product reviews, a result that I find doubtful and disquieting.”

The dissent would thus have concluded that Ariix failed to plausibly plead that the statements promoted NutriChoice’s own products. The complaint didn’t allege “Usana’s advance direction and control in preparing the content of the Guide,” which might have sufficed. The dissent wanted Usana to have changed or put “specific content” in the Guide—a standard that would likely free many influencers from regulation. It wasn’t enough to allege that “Defendants produced biased reviews in the craven hope that Usana would then act in ways that were economically favorable to Defendants.” [That really seems like a misdescription of the allegations—it might be a fair characterization if the parties had never before interacted and the first contact was when MacWilliam reached out to say “look how well I rated you!”]

The dissent thought that the allegations merely showed “that Usana liked favorable reviews and that Usana promoted the Guide and its author when the reviews were distinctly superlative and did not do so when they were not…. That Defendants wrote obsequious reviews in the hope that Usana would be pleased and buy more Guides or give MacWilliam speaking engagements does not make them Usana’s agents in writing those reviews.” Sure, MacWilliam was Usana’s agent when he did paid speaking tours expressly promoting Usana’s products, but the complaint didn’t rest on that theory. [Surely it is relevant to what MacWilliam was doing with the Guide, though.]

Nor was there anything else justifying the conclusion that  Usana’s products were in any relevant sense NutriChoice’s products, such as an entitlement to a cut of each sale, or other links to profit if consumers chose particular supplements.

Wednesday, January 20, 2021

Happy inauguration day to Redbubble in particular: 9th Cir. affirms functionality in Lettuce Turnip the Beet

LLTB LLC v. Redbubble, Inc., No. 19-16464 (9th Cir. Jan. 20, 2021)

LTTB LLC sells t-shirts and other goods bearing its registered trademarks, the words and design, “LETTUCE TURNIP THE BEET.”  LTTB sued Redbubble for infringing by selling products containing the same words and design. The district court granted summary judgment in favor of Redbubble on grounds of aesthetic functionality/failure to function. The court of appeals affirmed in a nonprecedential opinion, holding (contrary to what INTA wanted) that Job’s Daughters is still good law even though its “broad language was soon clarified and narrowed.”

Anyway, under Au-Tomotive Gold, the symbols here were functional. Although “the t-shirts, tote bags, and other products bearing the LTTB mark would still function as t- shirts and tote bags without the mark” and use of the mark doesn’t alter the cost structure of production or add to the [physical] quality of the products, but the question of aesthetic functionality is whether the marks “perform some function such that the exclusive use of the marks would put competitors at a significant non-reputation-related disadvantage” (cleaned up).

Without explicitly interpreting what “significant” means here, the court reasoned: “It cannot be disputed that competitors would be unable to sell products bearing the phrase if LTTB’s marks were protected.” And the Ninth Circuit disfavors monopolization of “a design feature which, in itself and apart from its identification of source, improves the usefulness or appeal of the object it adorns.” There was no evidence that consumers bought LTTB’s goods because they identify LTTB as the source, rather than because of the aesthetic function of the phrase, “LETTUCE TURNIP THE BEET.” LTTB’s evidence of the popularity of its goods didn’t raise a triable issue on source identification. Indeed, almost all of LTTB’s products bore the phrase “LETTUCE TURNIP THE BEET” on them, “indicating that the phrase acts as an aesthetic design, not as a symbol for the company.” Unlike high fashion brands, LTTB presented no evidence “that consumers buy the goods because the design associates the goods with the company LTTB rather than because they want goods bearing the phrase.” Thus, it didn’t raise an issue of fact on aesthetic functionality. [Although the court also doesn’t say anything about this, here the fact that no evidence of secondary meaning was required to register the marks cuts against LTTB: it was never required to develop such evidence, and the fact that a symbol could be inherently distinctive if used in the right way doesn’t do anything to rebut evidence that consumers are looking for the aesthetic effects of displaying the symbol prominently on goods.]

LTTB’s registrations, and even incontestable registrations, couldn’t overcome the defenses listed in statute, including “[t]hat the mark is functional.” “Because, on this record and when used on the allegedly infringing products that are the subject of LTTB”s complaint, LTTB’s marks are functional, they are not protectable against any type of allegedly infringing activity.”

So, is the court actually recognizing pure defense-side functionality? Sort of. Footnote: “[W]e do not hold that LTTB’s marks are per se invalid.” Instead (?), the uses here—including on Redbubble’s website and in online advertising—could not be infringing. But also: “Because LTTB’s mark is functional and therefore not protectable on this record, there is no need to address the issue of likelihood of confusion.” Nor did the district court err in not addressing LTTB’s design marks separately; trademark isn’t supposed to protect originality or creativity, but rather to protect source identification. “Like the sweater designs in Wal-Mart, LTTB’s marks are primarily aesthetic on this record, not source-identifying.” [This reiteration of “on this record” is confusing. Is the court suggesting LTTB can try again if it develops evidence as to front-of-product uses? Why? While there are a couple of cases allowing terms that had distinctiveness, then became generic, to reclaim that earlier distinctiveness, I’m not aware of cases allowing a once-functional product feature to become nonfunctional.]

The district court also didn’t err in looking at the PTO’s initial rejection of LTTB’s application on failure to function grounds; TrafFix looked at the prosecution history of an expired patent in addressing trade dress functionality.

We end with some vagueness about whether LTTB owns anything:

LTTB’s marks do not function as trademarks because they are aesthetic only and do not identify the source of the goods. The allegedly infringing activity does not deceive or mislead consumers about the source of the goods but copies the designs themselves…. Because functionality is a defense to the validity of the marks and to LTTB’s exclusive right to use the marks, the district court properly granted summary judgment to defendant Redbubble ….

Tuesday, January 19, 2021

Dastardly DoorDash fails to get restaurant complaint dismissed, including under UCL/FAL

Lona’s Lil Eats, LLC v. DoorDash, Inc., No. 20-cv-06703-TSH, 2021 WL 151978 (N.D. Cal. Jan. 18, 2021) (magistrate)

This case addresses a topic that’s received broader media coverage than most advertising issues. The magistrate finds that Lona’s sufficiently alleged false advertising by DoorDash about its availability, diverting potential consumers from Lona’s to restaurants that were DoorDash partners. (The practices considered are why I always start with the restaurant’s own website and order from that.)

This putative class action alleges violations of the Lanham Act, the FAL, and the UCL, alleging that DoorDash “misrepresents to consumers that it provides delivery and pick-up services for non-partner restaurants and then misrepresents the restaurants are closed, do not offer delivery services, or are unavailable for pick-up orders.” The complaint alleges that, especially given the pandemic, “DoorDash’s market power is such that restaurants are put in a difficult situation: they can become partner restaurants and pay exorbitant fees and commissions to Defendant, or they decline to do so and risk losing out on sales.”

Even worse,

DoorDash pressures non-partner restaurants by setting up “landing pages” for them, which in some instances still are available on its website and on its mobile app. … DoorDash’s marketing power is such that the landing pages are often prioritized on internet search engines and displayed even before the restaurants’ own websites. These landing pages are complete with DoorDash branding and usually show a restaurant’s full menu, even if the restaurant has no affiliation with DoorDash and has not authorized the use of its information. This façade of a connection signals to consumers that the landing page for the non-partner restaurant is legitimate and can be relied upon.  

On these landing pages, DoorDash publishes false and misleading information about restaurants that are not its partners, including restaurants being “closed” when they were in fact open; being “unavailable” as “too far away” for delivery; and being “unavailable” for pick-up orders when the restaurant is in fact accepting pick-up orders. Each of these false and misleading statements steers would-be customers of non-partner restaurants’ to DoorDash’s partner restaurants.

Lona’s alleged that a search for “Lona’s Lil Eats delivery” in June 2020, “as a result of DoorDash’s market power and internet marketing strategies,” would display a link for Lona’s on a DoorDash website as one of the first results. "Clicking through the link for Lona’s would bring a consumer to a page with DoorDash branding and Lona’s’ complete menu, as if it were possible to place an order through the site:" 


“DoorDash’s site would let the customer go through the process of placing an order, including the opportunity to customize the order, adding credibility to the idea that Lona’s had partnered with DoorDash and that placing an order was possible:” (not cool, DoorDash)

“The order, however, could not be completed, and no matter what the user’s proximity to Lona’s—even as close as only 200 feet away—the site would say that ordering from Lona’s was ‘unavailable’ on account of being ‘out of the delivery area’ and ‘too far.’”

Likewise, DoorDash’s mobile app allegedly (as of Nov. 2020) misrepresents that Lona’s is not available for delivery and also not accepting pick-up orders:

If the consumer clicked on the information button immediately next to “Unavailable too far away,” then the app displayed options of “Switch to Pickup” or “See other stores.” But if a consumer chose “Switch to Pickup,” DoorDash would then misrepresent that pickup wasn’t an option, even though Lona’s does offer pickup: 


At that point, the only other option, “See other stores,” switched consumers to DoorDash’s partner restaurants.

Lona’s alleged that several customers were, in fact, misled by DoorDash’s misrepresentation that Lona’s was closed. Some allegedly reached out to Lona’s to ask if they were actually open. Although the false “closed” designation was removed, Lona’s allegedly lost business because of DoorDash’s misrepresentation, and nothing stopped DoorDash from doing it again.

Applying Rule 9(b), the court found that Lona’s pled the existence of a “false statement” with particularity; sufficiently pled that the statement was in a “commercial advertisement”; sufficiently pled actual deception/tendency to deceive; and adequately pled injury.

Two literal falsehoods were pled: that Lona’s was closed and that pickup from it was unavailable. And one misleading statement: that pickup was unavailable because the customer was “too far away.”

The judge understandably rejected DoorDash’s argument that Lona’s needed to allege who at DoorDash made the statements: “DoorDash points to no legal authority suggesting that an individual employee must be named in the complaint, and it’s hard to see how Lona’s could get that information at this point or who even at DoorDash would be considered the maker of the statement in lieu of the company itself.” Nor did any authority suggest that Lona’s must identify specific deceived customers at the pleading stage. “In this case, where the plaintiff has alleged that a statement was made to the purchasing public and that at least some of the public communicated that they were misled by those statements, that is enough specificity at the pleading stage.”

Commercial advertisement: The judge clearly explained how the Gordon & Breach test, which was adopted by the Ninth Circuit, has been modified by Lexmark, making the “by a competitor” element of the test no longer good law.

Accordingly, for representations to constitute “commercial advertising or promotion” post-Lexmark, they must be: (1) commercial speech; (2) for the purpose of influencing consumers to buy defendant’s goods or services; and (3) disseminated sufficiently to the relevant purchasing public to constitute “advertising” or “promotion” within that industry.

DoorDash argued that pages on its website or app where customers complete orders aren’t “commercial speech.” But it waived that argument through failure to do more than gesture at it (and anyway they obviously are; Lona’s even alleged the economic motive: increasing its commissions and strong-arming Lona’s into partnership). Even if you accepted that the statements were not in “advertising format” (which in my opinion they clearly are, given how internet advertising works), that’s not dispositive.

DoorDash argued that the complaint failed to allege that “closed” or “unavailable” designations were made to convince customers to purchase DoorDash’s products because DoorDash does not sell food. That was irrelevant, given Lexmark and given that DoorDash “makes money in fees and commissions whenever a consumer orders food from a partner restaurant …. [B]y allegedly misleading consumers and re-directing them away from non-partner restaurants to partner restaurants, DoorDash allegedly gains at non-partner restaurants’ expense.” That was all that was required at the pleading stage.

DoorDash also argued that Lona’s didn’t allege sufficient dissemination because Lona’s “does not identify, or even estimate, how many potential customers saw” the statements. “[A]t best,” DoorDash argues, “only those customers who attempted to place an order for food from [Lona’s] would have come across such statements.” But that was sufficient, since “the primary focus is the degree to which the representations in question explicitly target relevant customers.” Lona’s alleged that DoorDash targeted all relevant customers, and that, as a result of its market power and marketing strategies, it was “one of the first results” that such customers would encounter.

Finally, DoorDash argued that the alleged misrepresentations only occurred after multiple clicks, on a final checkout page. But so what? “The reasonable takeaway is that by luring would-be Lona’s’ customers onto its landing pages, taking them through a Lona’s’ menu, and then ‘redirect[ing] [them] to [ ] Partner Restaurants by suggesting that Lona’s is not an option,’ DoorDash was promoting its own services. Why else go through the trouble?” Bait and switch, indeed.

Deception/tendency to deceive: Evidentiary proof of actual or likely deception is not required at the pleading stage, and deception can be presumed from literal falsity.

Injury: Lona’s sufficiently alleged both short-term and longer-term harm: “[N]ot only do [putative class members] miss out on orders in the short term, but they are less likely to attempt to order from them in the future, since they are represented to be closed or not available.” General allegations of resulting monetary damages and “other irreparable injury, including loss of market position, loss of reputation, loss of goodwill, the ability to continue as a going concern, and other damage for which there is no adequate remedy at law” were sufficient. The fact that DoorDash wasn’t a direct competitor didn’t matter after Lexmark. Although DoorDash argued that “alleged injuries ‘still require sufficiently detailed allegations,’ ” it didn’t offer suggestions of what more Lona’s needed short of lost customer names. For purposes of the pleadings it was sufficient that Lona’s alleged that “[s]everal customers were, in fact, misled by DoorDash’s misrepresentation that Lona’s was closed, and they did not know whether Lona’s was actually open,” and that “[s]ome of these customers reached out to Lona’s to ask if they were actually open.”

FAL/UCL claims: While a number of California federal district courts have held that Proposition 64 meant that plaintiffs have to allege their own reliance on the defendant’s false claims, which obviously would exclude Lona’s as a proper plaintiff, the magistrate rejected that line of cases.

In re Tobacco II Cases and Kwikset held that Proposition 64 narrowed the reach of fraud-based claims under the UCL and FAL. Now, a plaintiff’s economic injury must “come ‘as a result of’ the unfair competition or a violation of the false advertising law.” “The phrase ‘as a result of’ in its plain and ordinary sense means ‘caused by’ and requires a showing of a causal connection or reliance on the alleged misrepresentation.” Recognizing that “ ‘reliance is the causal mechanism of fraud,’ ” the California Supreme Court held that in consumer claims based on fraud under the UCL or FAL, a plaintiff “ ‘must demonstrate actual reliance on the allegedly deceptive or misleading statements.’ ” Courts have extended this to “unlawful” and “unfair” claims when the claims are based on misrepresentation.

But Tobacco II “emphasize[d] that our discussion of causation in this case is limited to such cases where, as here, a UCL is based on a fraud theory involving false advertising and misrepresentations to consumers,” and the court noted that “[t]here are doubtless many types of unfair business practices in which the concept of reliance, as discussed here, has no application.” And Kwikset elaborated that “as a result of” means “caused by” and requires “a showing of a causal connection or reliance on the alleged misrepresentation.” (emphasis added). The judge here reasoned that this language “suggests strongly that there are situations where the element of causation can be proved without showing actual reliance, so as long as there’s sufficient causation.” If every plaintiff in every situation had to prove reliance, “it would be hard to imagine when a competitor would be able to assert a false advertising claim,” which would conflict with the California Supreme Court’s clear statement in Kwikset that the purpose of the false advertising laws “is to protect both consumers and competitors by promoting fair competition in commercial markets for goods and services.”

In addition, Proposition 64 was passed to prevent abusive UCL claims where plaintiffs had not been injured in fact. But unlike such plaintiffs, competitor[ish] plaintiffs do suffer injury in fact as a result of false advertising: lost market share and sales. “Proposition 64’s purpose of preventing actions by plaintiffs who have not suffered an actual injury is not served well by extending Kwikset to all cases, and a rule requiring all plaintiffs to prove actual reliance would in fact defeat the UCL and FAL’s purpose of protecting consumers and competitors alike.”

Finally, DoorDash argued that Lona’s lacked standing for injunctive relief, but this was rebutted by the complaint’s allegations. Lona’s alleged that it was realistically threatened by a repetition of the violation; it even alleged that the “out of range” misrepresentation persisted at least through a month after Lona’s sued.  This wasn’t a case where the defendant’s purported reform was “irrefutably demonstrated [ ] and comprehensive.” “The fact that Lona’s had to wait over a month for DoorDash to remove the content adds plausibility to Lona’s’ allegation that ‘there is nothing to prevent [DoorDash] from reinstating such misrepresentations as to Plaintiff or any member of the putative class.’”


Monday, January 18, 2021

WVa SCt immunizes religious schools and camps for false advertising about services

State ex rel. Morrisey v. Diocese of Wheeling-Charleston, 851 S.E.2d 755 (W.Va. 2020)

In response to a certified question, the West Virginia Supreme Court, over a dissent, held that the AG could not sue the Diocese and a former bishop for violating the deceptive practices provisions of the West Virginia Consumer Credit and Protection Act, reasoning that the law didn’t apply to educational and recreational services offered by a religious institution.

The allegations of deception related to the Diocese’s knowing employment, for decades, of people who admitted to sexually abusing others or who were credibly accused of sexual abuse at its schools and camps. The Diocese allegedly neither disclosed that material information to consumers nor warned them of the alleged dangers inherent to the educational and recreational services it provided, and also falsely represented that it conducted background checks (an allegation of affirmative misrepresentation that is buried in a footnote of the main opinion). The alleged deceptive practices were advertising services not delivered and failing to warn of dangerous services.

The relevant statute says: “Unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce are hereby declared unlawful.” “ ‘Trade’ or ‘commerce’ ” is “the advertising, offering for sale, sale or distribution of any goods or services and shall include any trade or commerce, directly or indirectly, affecting the people of this state.” “ ‘Services’ include[ ] ... ‘privileges with respect to ... education[ and] recreation.’ ”

Nonetheless, West Virginia Code §§ 18-28-1 to 7 created a conflict by imposing requirements on “private, parochial or church schools or schools of a religious order” (church schools), such as observance of a 180-day instructional term, maintenance of attendance and immunization records, compliance with the West Virginia school bus safety regulations, administration of a nationally-normed standardized achievement test, and establishment of a school specific crisis response plan. If a church school meets those requirements, then the Legislature has directed that it “shall [not] be subject to any other provision of law relating to education except requirements of law respecting fire, safety, sanitation and immunization” (emphasis added). The majority held that, though church schools might not be exempted from the entire CCPA, this preemptive provision barred “the regulation of educational services offered by a church school under the deceptive practices provisions of the CCPA.” [Are living circumstances part of “educational services”?]

The deceptive practices provisions were “provisions of law relating to education” when the AG tried to apply them to educational services. “[W]hile the deceptive practices provisions may regulate the commercial relationship between a church school and consumers, its enforcement depends on the assessment of the qualities of the education actually supplied by the church school.” Finding a violation would require “passing judgment upon the substantive educational services actually provided.”

Because of this preemption and because of West Virginia’s public policy of freedom of religion in education, there was also implied preemption of any regulation of educational and recreational services by a religious institution, because it was silly to preempt regulation as to only school-related services, thus allowing the AG to regulate false statements made by a church about a trip it sponsored but not false statements by a church-affiliated school about the same trip. [I’m not sure that argument proves what the majority wants it to prove, and it’s also pretty odd as a theory: explicit preemption is usually limited to what it explicitly covers.] Thus, and despite the fact that the CCPA is a remedial statute intended to be liberally construed, “[i]t would also be absurd to conclude that the Legislature intended to exempt a church school’s representations about its educational services from regulation under the deceptive practices provisions of the CCPA, but not those same representations when made by the affiliated religious institution regarding its recreational services.”

The majority ended by commenting that the allegations were nonetheless “deeply troubling,” and might have allowed liability under other legal theories, such as a violation of mandatory reporting law, which definitely covers religious institutions and their schools and camps.

Justice Workman’s dissent was persuasive:

The majority opinion is transparently result-oriented which explains its logical incoherence and sins of omission. The issue before the Court is one of fairness and honesty in commercial communications to the public---potential purchasers of goods and services. The fundamental question involves matters of unfair or deceptive acts or practices in advertising or selling and in advertising based on false promises. That is all. Nothing else is at issue. This case has absolutely nothing to do with the free exercise or expression of religious thought and nothing to do with regulating religious institutions in the sense of excessive State entanglement. As brought and pled by the State, what is at issue is alleged false promises and deceptive advertising promoting a safe environment aimed at getting students and campers to attend for-fee-based schools and camps, when alleged facts indicated the contrary to be true.

As the dissent pointed out, the yearly fees ranged from $6,000 to $8,000. “The Diocese also provides partial scholarships, arranges financing through third parties, and uses in-house installment payment plans. Just as any other creditor may act, the Diocese has availed itself of the courts and legal system to enforce credit agreements.” The Diocese advertises to the public at large with no faith-based restrictions for either schools or camps. Starting in 2002, it advertised its “Safe Environment Program for the protection of minors from abuse by religious and lay employees of the Diocese and volunteers,” which plainly sought to “attract consumers away from competitors that did not advertise similar safety measures.” 

In the dissent’s view, truthful advertising and safety are purely secular concerns. The majority agreed that “services” encompassed the activities here, and that should have been enough.

Instead, the majority wrongly asserted that enforcing the deceptive practices provisions would require “assessing the qualities and substance of the education actually provided.” But the allegations here did not require anything of the sort. “Requiring fairness when selling advertising and selling educational and recreational services simply does not interfere with the services themselves. Rather, it is the marketing of the services that is at issue.” Given the CCPA’s specific coverage of educational services, this manufactured conflict was even more unjustified; the legislature has exempted other institutions from the CCPA, such as lawyers, accountants, stockbrokers, and licensed pawnbrokers, but not religious institutions.

The majority approach authorized religious schools to advertise one tuition but, halfway through the year and as a matter of policy, demand more or the student will be expelled. Religious schools could advertise ten-to-one student/teacher ratios and deliver forty-to-one. This freedom would provide them an unfair advantage over nonreligious schools.

I share the dissent’s view that “most incredible is the sophistry exhibited in the opinion’s bootstrapping into its unfounded conclusion the issue of recreational services.” As it pointed out, the supposedly preemptive code provisions simply do not cover recreational services or camps, but now religious institutions can advertise whitewater rafting or other dangerous activities, promise fully certified instructors, and deliver nothing of the sort. This results both in consumer danger and competitive disadvantage to regulated camps.

“[N]othing about religious freedom, thought, or instruction is infringed upon by virtue of enforcing an act mandating that entities offering services for-fee tell the truth about the services.” Fear of overly broad enforcement actions wasn’t a justification for disallowing these specific claims, even if remedies would have to be carefully crafted to avoid infringing on religious freedom.

 

Friday, January 15, 2021

Rogers v. Grimaldi and the TMA

The legislative history of the TMA, just enacted into law, includes several paragraphs blessing Rogers v. Grimaldi and saying it's what Congress understands the Lanham Act to mean. I'd be interested to know how that got in there, and I wonder if there are any judges left who care.

H.R. Rep. No. 116-645, pp. 19-20:  

In providing that a plaintiff is entitled to a rebuttable presumption of irreparable harm following a court’s finding of trademark infringement, or upon a finding of likelihood of success on the merits in the case of a motion for preliminary injunction or temporary restraining order, the Committee acknowledges the need to take special care to ensure that the interests protected by the Lanham Act do not encroach on the rights to free speech and expression enshrined in the First Amendment. Courts have long been appropriately circumspect in applying the Lanham Act so as not to interfere with the First Amendment rights of creators and distributors of ‘‘artistic works’’ (sometimes called ‘‘expressive works’’), including without limitation movies, television programs, songs, books, plays, video games, and the like, which may depict or reference third-party marks within such artistic works or in such artistic works’ titles.59 It is the intent of the Committee that this legislation will not in any way affect that jurisprudence.

The standard for accommodating First Amendment interests in the Lanham Act context for infringement and unfair competition claims was first articulated in Rogers v. Grimaldi,60 which has been widely adopted by courts across the nation in the subsequent three decades. As a threshold matter under the Rogers test, a plaintiff cannot state a viable trademark claim in the context of an artistic work (1) unless the defendant’s use of the mark ‘‘has no artistic relevance to the underlying work whatsoever,’’ or (2) ‘‘if it has some artistic relevance, unless the [use of the mark] explicitly misleads as to the source or the content of the work.’’ 61 The ‘‘no artistic relevance . . . whatsoever’’ standard sets an extremely low bar, requiring only that ‘‘the level of relevance must merely be above zero.’’ 62 ‘‘This black-and-white rule has the benefit of limiting [the court’s] need to engage in artistic analysis in this context.’’ 63 When that bar is met and any level of artistic relevance to the underlying work is present, the use may be actionable only where the creator explicitly misleads consumers. This test appropriately recognizes the primacy of constitutional protections for free expression, while respecting a trademark owner’s right to prevent unauthorized use of its mark and the public’s interest in avoiding confusion.

In enacting this legislation, the Committee intends and expects that courts will continue to apply the Rogers standard to cabin the reach of the Lanham Act in cases involving expressive works. The Committee believes that the adoption by a court of a test that departs from Rogers, including any that might require a court to engage in fact-intensive inquiries and pass judgment on a creator’s ‘‘artistic motives’’ in order to evaluate Lanham Act claims in the expressive-works context would be contrary to the Congressional understanding of how the Lanham Act should properly operate to protect important First Amendment considerations, and upon which the Committee is relying in clarifying the standard for assessing irreparable harm when considering injunctive relief.

 

Tuesday, January 12, 2021

American Merck and German Merck's TM battle doesn't involve covered "advertising injury"

EMD Millipore Corp. v. HDI-Gerling Am. Ins. Co., 2021 WL 66441, No. 20-cv-10244-ADB (D. Mass. Jan. 7, 2021)

Is trademark infringement (or similar) “advertising injury” because a trademark is an advertising idea? I’ve always thought that’s the core of what a trademark is, which makes many insurance policies seem conflicting to me, but the exclusions for trademark are often pretty clear. In this case growing out of underlying German Merck v. US Merck litigation, the court finds that the TM-like claims don’t involve covered advertising injury because the parties’ campaigns weren’t allegedly similar, only their names.

One of the plaintiffs here is Merck KGAA (aka MKGD), the German Merck (the US government split US Merck off in WWI). The relevant policies covered “personal and advertising injury,” including “[o]ral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services” and “[t]he use of another’s advertising idea in [an insured’s] ‘advertisement.’ ” The policies didn’t define “disparage” or “advertising idea.” There was also an exclusion for “‘personal and advertising injury’ arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights.” The exlusion further states that “such other intellectual property rights do not include the use of another’s advertising idea in [an insured’s] ‘advertisement,’ ” and that the exclusion “does not apply to infringement, in [an insured’s] ‘advertisement,’ of copyright, trade dress or slogan.”

US Merck sued MKGD for trademark infringement, trademark dilution, unfair competition, false advertising, and cybersquatting, and New Jersey state law claims for trademark infringement, trademark dilution, unfair competition, deceptive trade practices, and breach of contract. The two Mercks have entered into coexistence agreements around the world, under which MKDG cannot use the trademark “MERCK,” or attempt to acquire rights in any trademark containing “MERCK,” in the United States or Canada. They’ve fought over this agreement for internet and other uses.

MKDG is permitted to use the word “Merck” as part of a firm or corporate name in the United States but only in the phrase “E. Merck, Darmstadt, Germany,” and only if the four words are given equal prominence. Nevertheless, MKDG allegedly used the trade names “MERCK,” “Merck KGaA,” and “Merck KGaA, Darmstadt, Germany” in the United States, including on a website and social media, and allegedly used “Merck KGaA” and “MERCK” in ways so “prominent and widespread that they function as a trademark.” This included promotion and sale of products called “SedalMerck®,” “Merckognost®,” and “MRCKβ Protein,” as well as signs at kiosks at multiple industry conferences.

Merck also alleged that MKDG engaged in two marketing campaigns “specifically intended to confuse consumers as to MKDG’s history”: MKDG’s “Original” campaign, referring to MKDG as “the Original Merck” and Merck as MKDG’s “younger brother/sister.” Likewise, its “125 Years” campaign allegedly touted that it has been in the United States for 125 years, even though, in reality, MKDG has been re-established in the United States only since 1971. Finally, MDKG allegedly registered a number of domain names virtually identical to Merck’s registered “THE MERCK MANUAL.”

Prior Massachusetts cases have interpreted “advertising idea” broadly, including use of the name of an athlete: A “wide variety of concepts, methods, and activities related to calling the public’s attention to a business, product, or service constitute advertising ideas.” Here, MKDG argued that the advertising idea was using the “MERCK” name, in connection with the “Original” and “125 Years” campaigns, to draw attention to the business and attract customers. But the court agreed with the insurer that Merck didn’t allege that it had used either “Original” or “125 Years,” and thus the advertising idea allegedly used was not “another’s.” “To the contrary, the few allegations in the NJ Litigation complaint about Merck’s advertising efforts are so vague that it is impossible to divine anything about the content of its advertisements or the style, manner, or method in which it advertises.”

Likewise, the underlying complaint didn’t plausibly allege disparagement. Most of the statements identified were about MKDG, not about Merck, and they didn’t say anything bad about Merck. A restaurant that advertised “fresh” and “delicious” food would not disparage competitors by implication. Even if “younger” was pejorative, that didn’t reference any specific good or service and thus wasn’t disparaging. Also, the policies could have included false advertising or publications that harmed another’s reputation if this kind of conduct was supposed to be covered, instead of using “disparage.” Anyway, the gravamen of the claim was false association: using Merck’s good reputation for itself. “While harm resulting from badmouthing would be an injury covered by the policies, harm resulting from falsely implying an affiliation is not.”

 

literal falsity as Q of fact v. law and other important issues in a dueling ladder case

Wing Enters., Inc. v. Tricam Indus., Inc., No. 17-cv-1769 (ECT/ECW), 2021 WL 63108 (D. Minn. Jan. 7, 2021)

After remand because the court of appeals concluded that a materiality survey was wrongly excluded, the court here tries again in this false advertising case between competing sellers of articulated ladders, also known as multi-position (or MPX) ladders. Given the inclusion of the survey, a reasonable jury could find both that Tricam made a literally false statement and that Wing suffered cognizable commercial injury. One thing worth noting here is the relevance of greater availability of disgorgement of profits, creating the potential for an award even when damages can’t be proven with reasonable specificity.

Wing’s claims all revolve around ANSI A14.2, a voluntary industry standard that “prescribes rules governing safe construction, design, testing, care and use of portable metal ladders of various types and styles.” The standard says, inter alia, that when a ladder uses particular types of rungs those rungs “shall have a step surface of not less than 1 inch, either flat or along a segment of 3 inches or greater radius.” The outer rungs on Tricam’s multi-position ladders are greater than one inch deep in the middle, but they are crimped and less than one each deep at each end, where the rung meets the rail. Wing argued that they therefore fail to comply with the standard, despite (1) the label affixed to each ladder containing an oval icon that bears the text “MANUFACTURER CERTIFIES CONFORMANCE TO OSHA1 ANSI A14.2 CODE FOR METAL LADDERS”; (2) the portion of each product’s page at Home Depot’s website that provides: “Certifications and Listings: ANSI Certified”; and (3) the portion of each product’s page on Tricam’s website that provides: “CERTIFICATIONS: ANSI A14.2 OSHA.”

Tricam argued that it couldn’t be held responsible for statements on Home Depot’s website. The court found a jury issue (which is a gift to Tricam). “The gist of this argument is that Tricam only made this statement to Home Depot—not to the public—and that Home Depot was the one to disseminate it.” Thus, it wasn’t Tricam’s statement. Wing pointed out that Tricam “expected and intended that [statements to Home Depot] would be used in commercial advertising.”

How did the statements get on the website? Home Depot uses an Item Data Management (IDM) system vendor portal for “managing online content relating to products Home Depot sells (or that vendors hope Home Depot will sell)”:

Home Depot chooses what fields a vendor can or must populate within the IDM system, reviews the content vendors submit through the IDM system, may reject content that does not follow Home Depot’s requirements, must approve any changes requested by the vendor, and may itself change content on a product page without prior notification to the vendor.

Tricam knew that if it did not select some type of ANSI certification from a drop-down menu in the IDM system, Home Depot would not issue a SKU number for the product, and the product would likely not be sold at Home Depot. A Home Depot representative testified that the “IDM is the source of truth for all content as it relates to Home Depot” and that Home Depot relies on its suppliers, like Tricam, to make sure the content it enters into the IDM system is accurate.

Home Depot doesn’t independently audit that information, and Tricam warranted that its marketing materials were accurate, including specifically ANSI statements. Deposition testimony unsurprisingly confirmed that Tricam expected and intended that the information it entered would appear on Home Depot’s website and that customers would use it for comparison when ladder-shopping.

Tricam monitors Home Depot pages for Tricam ladders; it can request content changes by submitting a ticket in the IDM system. It considered doing so after this lawsuit was filed, when it removed the ANSI-certification language from its own website, but didn’t, “in part because it wanted customers to be able to differentiate its products from other articulated ladders on Home Depot’s site.”

The court found no previous authority addressing “whether and when a supplier’s Lanham Act liability is cut off after the supplier passes on an allegedly false statement to a retailer expecting and intending that the statement will reach the purchasing public.” Tricam made the novel but too clever by half argument that it could only be contributorily liable, and Home Depot was not alleged to be primarily liable (and Wing might lack standing against Home Depot).

I would have rejected this claimwashing attempt out of hand given the evidence of both intent and effect—the claim reached the consumer just as if Tricam had paid the transit authority to put posters up on buses—but the court was more sympathetic. Wing pointed out that false advertising precedent indicates that retailers can’t be liable for statements from manufacturers, which indicates that the manufacturers are the appropriate target for primary liability, but the court thought that was irrelevant to whether Tricam could be liable, apparently comfortable with the idea that nobody could be liable for a false ad. The court reasoned that because it’s possible that both manufacturer and retailer could be liable, authorities that retailers weren’t liable for transmitting false advertising to consumers didn’t bear on whether manufacturers were liable. This seems to me like a logic error.

The court found that, with reference to the language of the Lanham Act, which requires “use” of a false statement in commerce, the relevant question was “whether the business has ceded so much control that it is no longer ‘using’ the ad.” [Even under the court’s own terms, the issue should be whether the business is controlling the statement at issue. Extensive editorial control by the publisher over the format or other non-false portions of the ad should be irrelevant.]

The court held that there was a genuine dispute of material fact over “whether the degree of control Home Depot exercised over its website means that Tricam did not ‘use’ the online ANSI-certification statement in commerce”:

The evidence that Home Depot could change the content on its webpage without notifying Tricam could suggest that Tricam effectively surrendered control over the allegedly false content. But there is also evidence that Home Depot relies on its vendors to enter accurate information in the system without independently auditing that information; that Tricam expected and intended that customers would use the information it entered into the IDM system to make purchasing decisions; and that Tricam could request changes to the information after it was posted on the website.

I don’t understand how Home Depot’s “potential” control could allow a reasonable jury to conclude that Tricam didn’t “use” this information.

Anyway, a reasonable jury could also find literal falsity. Literal falsity requires a clear answer to the question “what message is being conveyed?” because “[o]nly an unambiguous message can be literally false.” Is this a question of fact or of law? The Eighth Circuit cases are not clear, with at least one case treating it as a factual question by applying the clearly erroneous standard of review to an appeal of a preliminary injunction, and another stating that “[a] literally false statement can be determined as a matter of law, but whether a statement is misleading is considered a matter of fact.” The majority approach in district courts and other circuits is to treat what message is being conveyed as a question of fact, like the question of whether that message is false. The court found that the better approach was that potential ambiguity is a question of fact; the former Eighth Circuit case was decided first and the weight of authority was on this side.

Again, the court gives weight to what I would have dismissed as mere chutzpah: Tricam argued that the only reasonable reading of its statements was that its ladders were tested for ANSI compliance, not that they passed, and they undisputedly were tested. This was a genuine dispute over what it means to “certify” ANSI conformance or to claim an ANSI “certification.” Although Tricam thus posited competing meanings, there would only be ambiguity if there were multiple “reasonable” interpretations of the advertisement, and a jury could find that all reasonable interpretations were just different ways of saying the same thing: ANSI conformance.

Actual deception: The Eighth Circuit has held that once a plaintiff has proved that a statement is literally false, “the court may presume that consumers were misled ... without requiring consumer surveys or other evidence of the ad’s impact on the buying public.” Tricam argued that this rule only applied to comparative statements, but cases saying this are talking about presumptions of harm to the plaintiff/irreparable injury, not presumptions of consumer deception.

Injury: “Relying primarily on cases involving money damages, Tricam asserts that the record lacks evidence to support Wing’s claimed injuries—diversion of sales, price erosion, and loss of business opportunities—and that Wing has not adequately tied those injuries to Tricam’s statements, as opposed to other market factors.” But the nature of a plaintiff’s burden on the injury-and-causation element depends on the type of remedy that it seeks. There’s no presumption of causation when the parties compete directly, though courts will presume injury and causation “in comparative advertising cases where money damages are sought and where there exists proof of willful deception.” The plaintiff’s burden is highest when it seems money damages, and lower (now of course presumptive) when it seeks injunctive relief. Given the congressional policy in favor of protecting consumer rights, “courts are not and should not be reluctant to allow a commercial plaintiff to obtain an injunction even where the likelihood of provable impact on the plaintiff may be subtle and slight.”

Important move: “The burden is similarly low when a plaintiff seeks the equitable remedy of disgorgement of profits. That is because, rather than aiming to compensate the plaintiff for specific, identifiable losses, this remedy ‘exists to deter would-be infringers and to safeguard against unjust enrichment.’” Once a plaintiff has shown the likely harm necessary to establish an underlying Lanham Act violation—and remember, a plaintiff also seeking injunctive relief now gets a presumption of irreparable harm, so courts now have to decide whether that counts— the plaintiff must “prove defendant’s sales only; defendant must prove all elements of cost or deduction claimed.” Willfulness, while a relevant factor, is not an “inflexible precondition to recovery” of profits under the Lanham Act—the court quoted McCarthy for the proposition that Romag should also apply to false advertising claims.

Wing seeks injunctive relief and disgorgement, and thus “does not need to meet the heightened injury-and-causation burden that applies when a plaintiff seeks money damages.” Although Wing didn’t provide sufficient evidence of its alleged lost opportunity to sell ladders in Home Depot stores, it created a genuine issue of material fact on lost sales/market share and price erosion. (It didn’t show lost opportunity to sell ladders because the evidence showed a previous falling out between Wing and Home Depot leading Home Depot to blacklist Wing. Even though this dispute provided Tricam “an opportunity to get back into the business” of multi-position ladders, and even though Wing eventually returned to Home Depot with some other products, Home Depot’s former ladder merchant declined to speculate about whether she would have invited Wing back into Home Depot’s retail stores if Tricam had not represented itself as conforming to ANSI A14.2, saying only that she “would probably reach internal, to existing suppliers, before [she] reached external, to new suppliers.” Under these circumstances, including the fact that Home Depot merely accepted Tricam’s offer rather than conducting a search for a new supplier, the causal chain was too speculative.)

Sales/market share: Wing argued that Tricam could not have entered the market if it had not represented that its ladders conformed to the ANSI standard, and that such ANSI-certification statements made customers more likely to purchase Tricam’s ladders than Wing’s. There was a close but triable issue of fact. The parties were in direct competition, including on Home Depot’s website, and Tricam sold over 565,000 ladders in the first year and a half that they were on the market. “The combination of the competitive relationship between the two companies and the volume of Tricam’s sales led Wing’s expert … to conclude that the introduction of Tricam’s ladders cost Wing sales and market share.” Add to that testimony that Home Depot likely would not have continued selling Tricam’s ladders if it had attempted to change its ANSI-compliance statements and the evidence of materiality accepted by the Federal Circuit, and you get a triable issue.

There was evidence in the record pointing the other way; Wing had higher sales on the Home Depot website than projected, and, after Tricam’s ladders had entered the market, Wing obtained a substantial new line of business by selling its ladders at Lowe’s. But Wing does not need to identify “specific damage,” and the jury should resolve the question.

So too with Wing’s evidence of price erosion:

[A] reasonable juror could find that Tricam’s false ANSI-compliance statements allowed it to enter and remain in the market by selling its ladders at Home Depot. Once in the market, Tricam consistently charged a lower price than Wing for its ladders. One of the reasons Tricam was able to do this was that the crimped design of its ladder rungs—the source of the dispute over ANSI compliance in this case—made its ladders cheaper to manufacture.… And this led several of Wing’s retail partners, particularly Lowe’s, to repeatedly pressure Wing to lower its prices to compete with Tricam. On one occasion, Wing agreed, at the urging of Lowe’s, to a 27% promotional discount on 75,000 ladders in order to compete with Tricam, and the “[e]very day” price of Wing’s ladders “[e]asily” dropped by $40 or $50.

The court cautioned that, while Wing was entitled to go to the jury, “there is no guarantee that Wing will ultimately be able to obtain the monetary relief—disgorgement of profits—that it seeks,” given courts’ broad discretion under the principles of equity. The Eighth Circuit recently suggested that disgorgement is only appropriate in “exceptional” cases. (Does that survive Romag?) Given the new presumption of irreparable injury, however, and the possibility that ANSI certification is necessary in this market, an injunction alone might be worthwhile for Wing.