Tuesday, August 31, 2021

Renting legitimate goods isn't actionable, at least with disclaimer

Proactive Environmental Products Int’l, LLC v. Pine Environmental Servs., LLC, No. 8:21-cv-250-CEH-CPT, 2021 WL 3025481 (M.D. Fla. May 20, 2021) (R&R)

Proactive alleged that Pine infringed registered trademarks associated with Proactive’s groundwater sampling pumps and their components and engaged in counterfeiting. “Until recently, Pine served as one of Proactive’s licensed distributors for the pumps. The principal issue in this lawsuit is whether Pine can continue to rent Proactive’s pumps to its customers despite the termination of that license, particularly where Pine has made or will make repairs to the rented pumps.”

In a functioning system, this would be an easy question, but TM’s definition of confusion has expanded so far that it takes the judge work to conclude that Proactive probably shouldn’t get an injunction.

In prior litigation, Pine stipulated in a settlement that it would not rent or sell pumps containing parts not purchased from Proactive, including, but not limited to, “electrical contacts, contact blocks, and DC Electric Motors.” Pine continued to purchase pumps from Proactive, many of which it subsequently rented to end-users. The parties dispute how much Proactive approved of Pine’s repairs; it did complain about allegedly poor repair at least twice, but executed a new distributor agreement with Pine nonetheless.

Pine denied wrongdoing, but removed Proactive’s name from its website and sales catalog, stopped selling Proactive pumps, and “affixed to the Proactive pumps it rents a laminated tag, which notifies customers of the pumps’ used condition and disclaims any association between Pine and Proactive.”  Its rental inventory included over two hundred Proactive pumps, fifty-five of which it purchased after entering into the final distributor agreement.

The judge first found that Proactive wasn’t likely to succeed on its argument that Pine violated their earlier settlement agreement, so Pine was entitled to the benefit of that agreement’s covenant not to sue.

Proactive, which licensed the trademarks from the other plaintiff, did not have standing under §32 (which presumably also affects the counterfeiting claims), but did have standing under §43(a), applying Lexmark. A licensee of a trademark need not be expressly afforded a right to enforce the marks in order to bring a claim under § 43. Here, Proactive had an exclusive, oral license to use the Proactive trademarks and the licensor joined Proactive in filing this action. Thus, it had a valid right under §43.

First sale: Even tiny differences can defeat a first sale defense, including variations in quality control, and also first sale can’t protect against claims that consumers think the defendant is an authorized dealer, at least when there is a network of authorized dealers. The judge recommended that the court find that Proactive failed to meet its burden of showing that the doctrine didn’t apply at this stage.

As to material differences, rental mattered: “[C]ustomers who rent a pump (or any product for that matter) are likely to assume that it has been used before and therefore is not in pristine condition.” Pine disclosed the condition of its pumps and disclaimed any association with Proactive; Pine also provided evidence that differences between a rental pump and an unmodified Proactive pump “do not affect the pump’s operation, amount to normal wear and tear expected for a used rental pump, and/or were not caused by Pine.” As for Proactive’s quality control, the agreement between the parties didn’t address the degree to which Pine was authorized to make repairs, which was an open question. [And if quality control can defeat the fact that everyone knows the product is used, then there will be no more used goods market.]

Proactive argued that Pine couldn’t meet its quality control standards because it can no longer purchase replacement parts from Proactive. But Proactive failed to provide evidence about the current condition of the pumps in Pine’s inventory, or other evidence that Pine was presently renting pumps which do not meet Proactive’s standards, or evidence about the comparative condition of the pumps rented by Proactive’s authorized distributors. Without that, the judge couldn’t find harm to the trademarks.

Nor was the judge persuaded that consumers would think Pine was an authorized distributor, given the changes it made to its site and to the products.

Anyway, does renting cause likely confusion? Also not shown. Pine’s rentals were not equivalent to selling counterfeit goods or continuing to operate a franchise after the agreement expired. Pine operates under its own name and sells/rents other products, some of which directly complete with Proactive. And it bought most of the pumps it rents before the last distributor agreement, and discloses that they’re used. This didn’t create a “certainty of confusion” that would allow a court to skip over a multifactor analysis. Three key factors—actual confusion, similarity of the products, and similarity of the parties’ trade channels and customers—didn’t support an injunction.

Proactive failed to submit any evidence of actual confusion, which was “particularly noteworthy” given Pine’s anti-confusion steps. Product similarity didn’t support Proactive because of the differences between new and refurbished goods, which were analogous to rental goods (citing Champion Spark Plug). As Champion said: 

[I]nferiority is expected in most second-hand articles.... Inferiority is immaterial so long as the article is clearly and distinctively sold as repaired or reconditioned rather than as new. The result is, of course, that the second-hand dealer gets some advantage from the trade mark. But ... that is wholly permissible so long as the manufacturer is not identified with the inferior qualities of the product resulting from wear and tear or the reconditioning by the dealer. Full disclosure gives the manufacturer all the protection to which he is entitled.

The Nitro Leisure golf ball case likewise rejected the argument that material differences alone sufficed to defeat a first sale defense if the used and refurbished nature of the goods was disclosed. With the “re-sale[ ] of new goods,” material differences are vital and “any variation of the product from a new condition ... may signal imitation, counterfeiting, falsity or some other irregularity affecting a customer’s decision whether to purchase the product.” [Material differences can be disclosed for new goods too; courts often skip straight to presuming confusion regardless.]

By contrast, for “used or refurbished goods,” “ ‘material differences’ do not necessarily measure consumer confusion.” As Nitro Leisure noted, “consumers are not likely to be confused by—and indeed expect—differences in the goods compared to new, unused goods.” Thus, “the question of likelihood of confusion in the context of used goods is whether [they] are so different from the original that it would be a misnomer for them to be designated by the original trademark.”

Proactive attempted to distinguish these cases by arguing that “Pine’s replacement of genuine Proactive parts on Proactive’s pumps with unauthorized components ... will eventually [cause the pumps to] contain few of the characteristics of the original device.” Proactive’s Ship of Theseus argument was “both speculative and insufficiently supported at this stage.” Proactive didn’t show that the differences in pumps actually rented by Pine were anything more than would be expected for used pumps.

Proactive also attempted to use its network of authorized distributors to distinguish the cases, but there was no evidence showing consumer confusion about authorization or, indeed, about the condition of authorized dealers’ pumps.

Though similarity of trade channels/customers weighed “marginally” in Proactive’s favor, that wasn’t enough here.

innovative/"new technology" claims foiled by Dastar

Powerbahn, LLC v. Foundation Fitness LLC, 2021 WL 2689852, No. 1:19-cv-1678-AT (N.D. Ga. Ma.r 26, 2021)

POWERbahn alleged that defendant Wahoo made false representations in its ads by failing to disclose POWERbahn and its CEO as the source of the technology behind Wahoo’s KICKR products, and by representing “that its KICKR products were innovative and incorporated new technology when they in fact were not and did not.” PowerBAHN to plead around Dastar by arguing that Wahoo misrepresented the “inventive services” that “embody” the KICKR products as Wahoo’s own, when those inventive services are actually attributable to POWERbahn. That doesn’t work because Wahoo sold goods that it made, and Dastar clearly prevents attempts to protect ideas “embodied in” goods. The accused ads were clearly for goods, not services, let alone services “qualitatively different” from anything necessarily done in connection with selling the KICKR products.

False advertising: POWERbahn alleged that ads that the KICKR’s road feel relies on “innovative technology” and “new algorithms” “to improve responsiveness and better replicate the sensation of riding on the road” were literally false because: (1) in designing the KICKR control system, Wahoo followed the teachings of a patent application filed in the 1980s and (2) the algorithms in Wahoo’s KICKR infringe on POWERbahn’s patent published in the mid-2000s. 

Statements describing the KICKR technology as “innovative” were nonactionable puffery, unlike similar claims that were combined with specific claims about proprietary technology, “original,” or “first.” What about “new algorithms” and another ad touting “advanced algorithms that originated with the iconic KICKR smart trainer”? A claim based on failure to attribute the technology to POWERbahn was clearly foreclosed by Dastar. But POWERbahn further argued that the algorithms weren’t new and didn’t originate with the KICKR product. Those statements were falsifiable.

However, POWERbahn provided no evidence that they were actually false (even if pending patent infringement claims could show patent infringement)—it didn’t show that the KICKR flywheel didn’t “use[ ] new algorithms to improve responsiveness” or that the KICKR CORE does not use advanced algorithms that “originated with the iconic KICKR smart trainer.” Wahoo acknowledged that it built its products off of pre-existing technology, stating that it “based its design for the control system of the KICKR on the expired, prior art Sargeant patent.” But the court agreed with Wahoo that, “[e]ven if one aspect of a new product is based on something else, it does not mean that other aspects of the product, and the product as a whole, are not new and innovative.”

POWERbahn’s expert opined that Wahoo’s products infringed on the relevant patents, including by using equations disclosed by the patents. But he didn’t opine that the algorithms weren’t new.  POWERbahn could have created a jury question by comparing the algorithms in the KICKR with previously existing algorithms from other products. But it didn’t.

Robinhood's newsletter isn't commercial advertising

Jackson v. Robinhood Markets, Inc., 2021 WL 2435307, No. 21-cv-02304-LB (N.D. Cal. Jun. 15, 2021)

Jackson, known professionally as Ice Cube, sued after Robinhood used his image and a paraphrase of a line from his song “Check Yo Self” to illustrate an article that it published about a market correction for tech stocks. In Robinhood’s hands, “Check yo self before you wreck yo self,” became “Correct yourself before you wreck yourself.” “Check yo self” is Ice Cube’s “catchphrase.” He sued for Lanham Act false endorsement, violation of California’s ROP, and unfair competition.

The picture (screenshot?) used to illustrate the newsletter article

“The court dismisses the complaint for lack of standing because the plaintiff did not plausibly plead that Robinhood’s use of his identity suggested his endorsement of Robinhood’s products.” This was in a newsletter, not a conventional ad.

The complaint called this an ad, and alleged that “Robinhood has a demonstrable pattern and practice of using established celebrities, such as Nas and Jay-Z, to endorse its products and services.” But the court could consider the accused material itself as integral to the complaint, and it was an article about market corrections. Using his picture/paraphrase to illustrate an article about market corrections doesn’t suggest that Ice Cube endorsed Robinhood, even if Robinhood uses celebrity endorsement in ads.  This was fatal to all of his claims.

The court characterizes this as a question of Article III standing, though it seems more like failure to state a claim. But I do wonder whether the sometimes outré theories of trademark harm we see can really survive current Article III scrutiny. And indeed the motion to dismiss the subsequently filed amended complaint, which alleges only a Lanham Act §43(a) claim, leans into the difference between alleging the defendant’s unjust enrichment and alleging that one has been harmed. The motion to dismiss also argues that the First Amendment precludes a Lanham Act claim against a newsletter, using both ROP precedents and a Rogers argument.

"Oregon" wine bottled in California might be confusing

Kay v. Copper Cane, LLC, --- F.Supp.3d ----, 2021 WL 2953241, No. 20-cv-04068-RS (N.D. Cal. Jul. 14, 2021)

Plaintiffs challenged the labels on a line of CC’s pinot noirs, alleging deception about the wine’s appellation of origin in Oregon generally and three valleys in Oregon specifically, as well as the grapes’ purported coastal roots.

The Alcohol and Tobacco Tax and Trade Bureau prohibits labeling likely to mislead a consumer and must approve all labels prior to use. It also has the authority to create appellations of origin for wine grapes and American viticultural areas. The TTB recognizes Oregon as an appellation of origin and the Willamette Valley, Umpqua Valley, and Rogue Valley as separate AVAs.

The labels describe the wine at issue here as an “Oregon Pinot Noir.” The 2016 label references the “coastal hills” of Oregon as an “ideal region to grow” this type of wine. The 2017 label also references the “coast” and includes a map of Oregon with leaves denoting the locations of the Willamette, Umpqua, and Rogue Valleys. It contains the phrase “Purely Oregon, Always Coastal.” Marketing materials related to the 2016 version designate the same three valleys as “Regions of Origin,” and describes them as “premiere growing regions along Oregon’s coast.” The boxes in which both vintages were shipped refer to the “Oregon Coast” and the three valleys.

Both back labels contain, however, two lines of text referencing California. On both labels, the first line provides: “VINTED & BOTTLED BY ELOUAN.” Below, the 2016 provides: “NAPA, CA • CONTAINS SULFITES.”; the 2017 reads “ACAMPO, CA • CONTAINS SULFITES.” Id.

In 2018, the federal government forced Copper Cane to alter the labels after determining that they were misleading. The new label omits any overt reference to any of the Oregon AVA valleys and replaces “Purely Oregon, Always Coastal.” with “Purely Elouan, Always Coastal.” It also clarifies that the wine is “[m]ade in California in the signature Copper Cane style[.]”

Plaintiffs brought the usual California statutory claims. First, the court dismissed the claim of a Louisiana citizen who purchased a 2017 bottle in New Orleans; applying California law would violate the presumption against extraterritorial application even though CC is based in California.

The court then refused to hold that California’s safe harbor doctrine precluded the claims claims because the labels at issue were previously approved by the TTB. “Safe harbor” is a common law doctrine insulating defendants from civil liability when the “[l]egislature has permitted [the challenged] conduct or considered a situation and concluded no action should lie.” Courts disagree about whether a COLA issued by the TTB carries the force of federal law to create a safe harbor, and the court here determined that, following the reasoning of the Supreme Court case Mead Johnson about deference to agency action, the COLA hadn’t been shown to justify application of the safe harbor rule.

Compared to the “rigorous” approval process for prescription-drug labels, the TTB process “hinges on self reporting” and reflects only the representations made to it by the distributor, not an endorsement of those claims. There’s no notice-and-comment rulemaking before processing COLAs and no reason to think they bind parties other than the government and the beverage distributor. CC argued that the TTB reviewed its labels three times, but didn’t show that they specifically reviewed for falsity, and “[t]he quantity of reviews does not guarantee the quality of review.”

Next, CC argued that the labels expressly disclosed that the wine was bottled in California. This couldn’t be resolved at the pleading stage, and the reference to California on the back-left corner of the label didn’t even use the word “in” to link “VINTED & BOTTLED” with “NAPA, CA • CONTAINS SULFITES.” “Whether the graphic design of the two lines of text are sufficiently clear such that no reasonable consumer would be deceived is thus a question of fact not properly resolved at this juncture.”

CC then contended that references to Oregon or its coast were too unspecific to mislead.  “This argument ignores the widely understood fact that the location where a wine is produced has special significance.” Thus, “a geographic reference on a wine label is understood to be an assertion about the origin of the product.”

Plaintiffs also had standing to seek injunctive relief. “Discovering via litigation the true nature of an allegedly mislabeled product is not analogous to gaining external information that contextualizes the label in a way that avoids deception.” Plus, plaintiffs never alleged that they were opposed to purchasing wine grown in Oregon but finished in California.

Monday, August 30, 2021

Rejected compliance offer to AG leads to fee shift after defense victory

State ex rel. Rosenblum v. Living Essentials, LLC, 313 Or.App. 176, A163980 --- P.3d ----, 2021 WL 2946172 (Jul. 14, 2021)

The state alleged that LE falsely advertised its 5-hour Energy drinks, misrepresenting (1) the effects of the noncaffeine ingredients in their products and (2) the results of a survey of physicians in several “Ask Your Doctor” advertisements, falsely implying that physicians recommended 5-HE to their patients. Not only did the state lose, the court of appeals found that the trial court erred in denying attorneys’ fees.

First, the trial court didn’t err in requiring materiality to prove an unlawful trade practice under Oregon statutes. The challenged claims were, for example, that 5HE “contains the powerful blend of B-vitamins for energy, and amino acids for focus. The two-ounce shot takes seconds to drink and in minutes you’re feeling bright, alert and ready for action. And the feeling lasts for hours—without the crash or jitters.” As for the doctors claim, the ads said, e.g. “We asked over 3,000 doctors to review Five-Hour Energy and what they said is amazing. Over 73% who reviewed Five-Hour Energy said that they would recommend a low-calorie energy supplement to their healthy patients who use energy supplements. 73%. … Is Five-Hour Energy right for you? Ask your doctor. We already asked 3,000.”

The court held that the state failed to prove materiality. As to the first, it found defendant’s expert more persuasive. That expert “offered a consumer survey demonstrating that the NCI blend in defendants’ caffeinated products is not a significant factor in consumer purchasing decisions; that most consumers were repeat customers who were satisfied with their experience with the product; that consumer buying was influenced by a multitude of factors, including product effectiveness, taste, convenience, and price.” And the court also found that the Ask Your Doctor campaign wasn’t misleading or material. It was persuaded that by expert and survey evidence “that advertising is not highly influential to consumer purchasing decisions in general; that, in particular, the cessation of the AYD advertising campaign did not cause a drop in sales; that consumers expect bias in a survey touted in advertising; and that the doctors’ survey was not represented to be conducted in a scientific or unbiased manner.”

The state argued that the legislature “did not intend to require specific proof of materiality in each individual case, which can be difficult and expensive.” This is not really the same thing as not requiring materiality at all, and the court of appeals was unpersuaded. Reading the statutory requirement that a practice “cause[ ] likelihood of confusion or of misunderstanding,” for example, it had to cause something, and that something must necessarily be material; if it weren’t material, it would be unlikely to create confusion or misunderstanding. Not only was that consistent with the history of unfair competition laws, a statute without a materiality requirement would risk running afoul of the state constitution’s protection for free speech.

The trial court also concluded that falsity about the non-caffeine ingredients would be material, so that didn’t entirely resolve the case. The trial court found was persuaded by the state’s view that those ingredients do not produce feelings of energy and alertness “during the five hours following consumption.” However, the specific presentation of each claim saved 5HE [as we all know that consumers read ads like they’re looking for perjury.] For example, “ ‘B-vitamins for energy,’ is not an inherently false representation, as the body does require B-vitamins in order to produce energy.”

The court thus found that Decaf 5HE’s claims had false implications, but only one case of the product came to Oregon. It found that civil penalties weren’t allowed because the falsity wasn’t willful and thus entered a verdict in favor of 5HE. The state argued that the court should have found a violation even if civil penalties weren’t appropriate. But the state didn’t show explicit falsity, only false implications, so its theory of the case (that the other ingredients had no effect at all, as opposed to no effect for 5 hours after consumption) failed.

The statute also provides: “If the defendant prevails in [an action brought by the prosecuting attorney under the relevant statute] and the court finds that the defendant had in good faith submitted to the prosecuting attorney a satisfactory assurance of voluntary compliance [AVC] prior to the institution of the suit ***, the court shall award reasonable attorney fees at trial and on appeal to the defendant.” Defendants qualified. They submitted an AVC commiting not to make false/misleading material representations and offering $250,000 be used by the State of Oregon as allowed by law, including, but not limited to, restitution and consumer education.

The state rejected the AVC on the grounds that “it does not provide restitution for Oregon consumers and because it does not provide sufficient assurances that [defendants] will not re-offend.” It was merely a restatement of the legal prohibition on false/misleading claims, and relative to defendants’ size and income, the proposed payment was “insufficient to provide meaningful deterrence to future misconduct.” Although defendants won at trial, the trial court agreed that the AVC was not satisfactory “given the state’s claims and the relief that they were seeking at the time.” Noting that the UTPA is subject to various interpretations and “not a lot of developed case law,” the trial court found that, despite not prevailing, not all of the state’s claims were unreasonable, there were contested legal theories involved, and the case was one that “probably needs to be litigated.”

But even if it was reasonable for the state to litigate, defendants were still entitled to fees. The AVC was concededly submitted in good faith; was it “satisfactory”? This assessment must be made by a court based “on the circumstances existing at the time the AVC was submitted, not through the lens of hindsight.” The legislative history indicated that the mandatory attorney fee provision was intended to protect sellers by deterring the state from bringing “unjustified” actions. A later amendment specified that the prosecuting attorney could reject as unsatisfactory any AVC that didn’t promise specific restitution for people who lost ascertainable money/property or that didn’t include certain recordkeeping or other requirements necessary to ensure cessation. But that’s not exclusive; there can be other reasons for an AVC to be unsatisfactory.

This one, however, was satisfactory. It did offer restitution, even though the sum it offered could also be used other ways at the state’s discretion. Given that the case involved “a small-scale consumable product, in which it may be difficult, if not impossible, to identify specific individuals who may have been injured by the alleged violation, and in the absence of any argument by the state that the restitution amount promised was inadequate,” this offer was fine. Nor was the offer contrary to Oregon law—even assuming that 5HE’s promise not to make material misrepresentations or omissions about 5-HE that consumers would reasonably rely on to their detriment “would hold defendants to a less demanding standard than what is required under the UTPA,” the AVC contained other provisions promising to obey the UTPA in its entirety.  Even if it was “reasonable” for the state to have rejected the AVC and proceeded to trial, the statute didn’t have a reasonableness test.

Pom Wonderful applies to pharmaceuticals, but "implied FDA approval" claim still fails

Belcher Pharms., LLC v. Hospira, Inc., 1 F.4th 1374 (11th Cir. 2021)

Belcher alleged that the labels for two of Hospira’s drugs falsely implied that the products and their uses were FDA-approved. The district court rejected that claim on the grounds that resolving it would invade the FDA’s enforcement authority under the FDCA. And anyway, it held, Belcher had failed to show that Hospira made misleading statements.

Belcher appealed, and the court of appeals found that its claim wasn’t precluded, but it also wasn’t sufficiently supported by a showing of misleadingness, so summary judgment was appropriately granted.

Injectable ephinephrine is (for purposes of this litigation) grandfathered into the US market, though there are also actual FDA-approved ampules; they just didn’t push the grandfathered products out of the market.

Because Belcher submitted an NDA to the FDA, its indications for use were limited to those the FDA approved: for hypotension associated with septic shock; during intraocular surgery; and emergency treatment of allergic reactions. Hospira, being grandfathered (again, for purposes of this litigation), “listed additional historical uses, claiming, among other things, that its products could be used to treat cardiac arrest and to prolong the effects of anesthetics.”

Belcher argued that Hospira’s inserts gave the false impression that Hospira’s epinephrine products (along with their indications) were approved by the FDA. The district court held that, to avoid FDCA preclusion, Belcher needed to “show more than the mere fact that a drug has been placed on the market with standard packaging and inserts.” Also, though Belcher offered evidence that “some consumers believed Hospira’s epinephrine products were FDA-approved,” it was “unable to tie those beliefs to actionable acts by Hospira.”

Does the greater regulation of pharmaceuticals mean that Pom Wonderful applies differently to them than to food and beverage labels? “[N]othing in the text of the Lanham Act or the FDCA suggests a different rule for drug products.” Nor is the extensiveness of FDA’s regulatory role matter—FDA’s role in food/beverage labels is already detailed. But Pom Wonderful stated that the FDA “does not have the same perspective or expertise in assessing market dynamics that day-today competitors possess,” and the Lanham Act harnesses that expertise by motivating competitors to challenge certain misleading labels. “Nothing about those two points is different in the drug industry.”

There are some reasons a court might “disallow label challenges involving certain drug claims that call on courts to contradict a conclusion of the FDA or to make an original determination on an issue committed to the FDA’s discretion.” In particular “an original determination that is committed to the FDA,” such as “whether a drug is ‘new,’ and whether it can be lawfully marketed under the FDCA, may be for the FDA alone. But this case wasn’t like that.

For one thing, these labels hadn’t been preapproved by the FDA. Nor was Belcher asking for an original determination “that only the FDA could make—such as whether the indications for use are safe or effective, or whether Hospira’s drug is approved or grandfathered.”

So, contrary to some previous cases, the court found that whether the package inserts falsely implied FDA approval was cognizable under the Lanham Act.

But the claim still failed: “Hospira’s inserts never claimed FDA approval, nor does Belcher point us to any language that hints at it. As best we can tell, Belcher relies solely on the existence of the drug and its inserts on the market. That is simply not enough.” There was no consumer evidence. [Query what kind of survey would have been appropriate. What if you showed relevant consumers the inserts with a clear disclosure of lack of approval as a control—would that be ok?]



FTC fails to show lack of substantiation because court reads ASTM standards as nonrestrictive

Federal Trade Comm’n v. Innovative Designs, Inc., 2021 WL 3086188, --- Fed.Appx. ----, No. 20-3379 (3d Cir. Jul. 22, 2021)

Another FTC loss, this time for failing to prove that IDI’s claims about its Insultext House Wrap were false or unsubstantiated. Insultex (which I can’t help reading as “insult-ex”) is “a weather-resistant barrier used in building construction.” IDI’s ads tout its R-value, a measure of the product’s ability to restrict the flow of heat. The higher, the better it is at insulating. The standard test for insulation is set forth in ASTM C518. 

“IDI advertises that ASTM C518 testing revealed that Insultex has an R-value of either R-3 or R-6, but “standard” ASTM C518 testing conducted on Insultex has not yielded those results.” Instead, IDI used “modified” ASTM testing. “IDI also advertises that Insultex provides energy savings to its users based upon its claimed R-values, but it has conducted no energy savings studies.”

The district court held that R-value testing results could be admitted only with expert testimony explaining them; it then held that the FTC’s expert’s opinions weren’t reliable or fit under Daubert. Because the FTC couldn’t show that the modified testing didn’t conform to ASTM standards, it hadn’t shown falsity, and because of that, it hadn’t shown that the energy savings claims were unsubstantiated, because IDI relied on the Federal Register statement that a high R-value leads to energy saving.

At the time IDI made its advertising claims, relevant regulations provided that R-values in labels and promotional materials “must be based on tests done under the methods listed below.” The regulations stated stated one of those methods is “ASTM C 518[ ],” and that such a test “must be done on the insulation material alone (excluding any airspace).” (The modified test used an air gap.)

When the FTC brings a lack-of-substantiation claim, it must show materiality and must also “(1) demonstrate what evidence would in fact establish such a claim in the relevant scientific community; and (2) compare [ ] the advertisers’ substantiation evidence to that required by the scientific community to see if the claims have been established.” If an advertising claim “states a specific type of substantiation,” as some of IDI’s claims at issue here, the “advertiser must possess the specific substantiation claimed.”

The problem here was that the FTC failed to prove “that use of a modified ASTM test is not ASTM C518 testing.” The standard itself “sets forth a standard test and explicitly contemplates that variations of the standard method may be acceptable,” nor does it bar alternative tests with air gaps. [It doesn’t actually say that variations would satisfy ASTM: The exact language is “[s]tandardization of [the ASTM C518] test method is not intended to restrict in any way the future development of improved or new methods or procedures by research workers” (emphasis added). That plus the "must" be done "excluding airspace" would have led me to the opposite conclusion. I suppose the rationale is that one needs an expert to interpret ASTM standards--no matter what?]

Thus, “the use of such testing could provide substantiation that satisfies ASTM C518.” The FTC would have had to prove that consumers believed otherwise to prevail, and, in the absence of expert or even lay testimony, it couldn’t. The FTC argued that the modification-permitting language of the ASTM Guidance was intended to cover future standards developed by “standard-setting bodies” and “research workers,” not any modifications that “individual marketers” might wish to make.  That does seem to be the far more natural reading of the guidance, but the court found that the FTC didn’t meet its burden of proof, which I guess means that admissible expert testimony about what ASTM C518 means could have fixed the problem.

The burden was on the FTC to show that IDI’s substantiation evidence would not satisfy the relevant scientific community, not on the defendant to do more than possess evidence that plausibly was sufficient to satisfy the relevant community.

Thus, both the falsity and substantiation theories failed. The FTC failed to show that the modified ASTM C518 unit did not accurately measure Insultex’s R-values.

Duelling results in Mexican origin cases

Rodriguez v. Olé Mexican Foods Inc., 2021 WL 1731604, No. EDCV 20-2324 JGB (SPx) (C.D. Cal. Apr. 22, 2021)

Rodriguez alleged that Olé’s La Banderita tortillas falsely advertised Mexican origin based on  a Mexican flag front and center on the packaging, the phrase “El Sabor de Mexico!” or “A Taste of Mexico!”, the brand name “La Banderita” (“the flag”), and the Spanish phrase “Tortillas de Maiz” on the label of the Corn tortillas. Some of the products also contain a circular logo with the Mexican flag and the word “Authentic,” as well as other Spanish words and phrases.  

Olé argued that its products merely invoked the “spirit” of Mexico and didn’t make any specific geographic references (other than “MADE IN U.S.A.” and “Manufactured by: Olé Mexican Foods, Inc., Norcross, GA 30071” at other places on the package, which properly disclosed origin). The court disagreed. Although a previous case found that “The Taste of Jamaica” wasn’t plausibly misleading, that product was prominently marked “Jamaican Style Lager,” and style or type language strongly affects the meaning of a geographic term used on food or drink.  Here, there was no such indication about “style.” Moreover, deception was still plausible here in context, even if some reasonable consumers would not be deceived. Though the back disclosed the true origin, a reasonable consumer is not “expected to look beyond misleading representations on the front of the box to discover the truth.” 

from the complaint; disclosure: I have purchased these and I have never given a second's thought to their geographic origin one way or another

version with the "authentic" graphic

Govea v. Gruma Corp, 2021 WL 1557748, No. CV 20-8585-MWF (JCx) (C.D. Cal. Mar. 1, 2021)

The packaging here wouldn’t plausibly mislead a reasonable consumer into believing that Guerrero Tortillas are produced in Mexico, though the court granted leave to amend.

One of the accused packages
Plaintiffs allegedly saw and relied on the word “Guerrero” (the name of a Mexican state, also “warrior”) and the Spanish phrases on the packaging, which included: “Un pedacito de México” and “Calidad Y Frescura” (“a piece of Mexico” and “quality and freshness” respectively). They also allegedly relied on the Spanish descriptions of the products they purchased: Tortillas De Maiz Blanco, Riquisimas Tortillas De Harina, and Tortillas De Harina Integral. The rule is that “the language or imagery of a product’s packaging is actionable if it falsely indicates a specific place that the product is purportedly made.” “Originated in Germany,” “Born in Brazil,” and “Belgium 1926” were plausibly false and misleading statements of origin where the products at issue were not made in those countries and lacked a visible origin disclaimer. In contrast, if the packaging merely evokes the spirit of a generalized location or culture in a vague and non-specific manner, such claims are properly dismissed at the 12(b)(6) stage.”

Here, there were no “born in” statements, and “un pedacito de México,” was “a vague and meaningless phrase” that is meant to “evoke the spirit or feeling of [Mexico].” Nor did the packaging expressly describe the tortillas as Mexican. All the packages disclosed that the Gruma Corporation was based in Irving, Texas, and at least some of the Packaging also stated that the Tortillas are “[l]ocally baked and delivered fresh from your Guerrero Bakery.” Nor did the package name a specific address, city, or location in Mexico where the tortillas were purportedly baked or invite a visit.

One of the prior cases refusing to dismiss a complaint also noted allegations of survey evidence that more than 85% of a “demographically representative U.S. sample of over 1,000 adults” who viewed the accused beer or its packaging believed that it was produced in Japan. There was no such evidence here. While the court was dubious that it could be done, it did give plaintiffs a chance to augment their allegations with a similar consumer survey, which might or might not alter the court’s overall impression.

Friday, August 27, 2021

Lexmark allows direct and contributory false advertising claims against certifier

U.S. Structural Plywood Integrity Coalition v. PFS Corp., No. 19-62225-CIV-ALTMAN, 2021 WL 810279 (S.D. Fla. Mar. 3, 2021)

Sometimes I worry that judicial writing is tending too much towards the flip as it moves away from prolixity, but this is a lovely example of how clear language can be deployed:

If you want to build with plywood in the United States, you generally need a certification— called a PS 1-09 stamp. The Plaintiffs are a coalition of ten American structural-plywood mills who manufacture and sell their plywood in the United States. The Defendants are two companies that inspect structural plywood and, if it conforms to the PS 1-09 standard, stamp the wood as PS 1-09-compliant. According to the Plaintiffs, the Defendants have been certifying 36 Brazilian plywood mills with the PS 1-09 stamp—even though the Defendants know (or should know) that the Brazilian wood doesn’t comply with the PS 1-09 standard. In the Plaintiffs’ view, this sham certification process has allowed the Brazilian mills to sell their cheaper, non-compliant wood all over the United States—thus displacing the Plaintiffs’ stronger, better, more expensive products.

Plaintiffs brought negligence and Lanham Act claims.

After a settlement with one defendant, the two remaining defendants “are the sole licensors of the PS 1-09 stamp to 36 Brazilian plywood mills that export structural plywood to the United States.” The US standards for structural plywood are voluntary at the federal level, but customary, and “construction codes across all 50 states require builders to use PS 1-09 structural-grade plywood.” The stamps thus allegedly operate as powerful advertising, allowing Brazilian plywood companies to market their products as conforming to an important American safety standard. But, plaintiffs allege, “it is impossible to consistently manufacture PS 1-09 compliant plywood from the extraordinarily fast-growing loblolly and slash pine plantations in southern Brazil which are the source of the raw materials for all of the Brazilian plywood producers in southern Brazil.” Such accelerated growth rates allegedly “inevitably result in weaker (and less dense) plywood, even when the plywood panels are produced from the same pine species that are commonly found in North America.” These cheaper imports drove down sales and profits of domestic manufacturers, causing the plaintiffs some $75 million in alleged annual losses.

A few years back, the American Plywood Association, the non-profit organization to which all of the plaintiffs belong, announced that defendants’ Brazilian licensees failed its PS 1-09 testing. Plaintiffs commissioned a second test at Clemson University which, again, allegedly revealed shocking failure rates.

Plaintiffs allegd both direct and contributory false advertising, which requires (1) that the “third party in fact directly engaged in false advertising that injured the plaintiff” and (2) “that the defendant contributed to that conduct either by knowingly inducing, or causing the conduct, or by materially participating in it.”

Were there allegedly false or misleading statements by the defendants? Yes, the defendants made representations about the quality of the Brazilian products by giving the Brazilian mills the authority to certify their plywood with the defendants’ PS 1-09 stamps. And without the stamps, the mills wouldn’t be able to sell in the US. This wasn’t like Google running a search engine that putative locksmiths abused to sell fraudulent services. Google didn’t attest to anything about the locksmiths; it was like a building that rents space to business owners. Defendants, “by contrast, are like a state medical-licensing board, which tests the doctors’ qualifications and, by issuing them their licenses, allows them to practice medicine within the jurisdiction. In doing so, the licensing board is making a powerful statement—some would say, the most important statement—about the doctors’ qualifications.”

Defendants argued that they weren’t making any statements at all, because it was the Brazilian mills stamping the wood. “But the Brazilian plywood companies didn’t steal or forge the Defendants’ stamp. The Defendants gave them the stamp and authorized them to use it…. These stamps are thus unquestionably statements of the Defendants.” Even if the mills are the ones touting the certification, the certification came from defendants, and it was disingenuous to say otherwise, given that outside of this litigation, it would be awful for defendants’ business for them to say that they weren’t doing the certifications. “What value … would the certification hold if it were just the self-affixed manifestation of any-old mill’s efforts at self-policing? No. The Defendants’ stamps only have value—and the Defendants’ certification businesses only exist— because the stamps are statements of the Defendants.”

Anyway, even if the stamps weren’t “statements” within the meaning of the Lanham Act, plaintiffs also alleged other false statements by defendants, such as letters to clients reassuring them about the APA report.

As for the contributory false advertising claim, it too was well pled. Plaintiffs “allege that the Defendants knew or should have known about the Brazilian mills’ lack of compliance; that, despite this knowledge, they failed to stop it; and that they conspired with the mills to facilitate the dissemination of faulty plywood throughout the United States.” Because it was undisputed that the mills needed the stamp to sell in the US, “looking the other way” “easily” sufficed as material participation.

Defendants argued that, because they neither stamped the plywood nor profited directly from plywood sales, their stamps weren’t “commercial advertising.” But “commercial speech encompasses not merely direct invitations to trade, but also communications designed to advance business interests.” And the stamps unquestionably “advance” their “business interests,” since their entire certification business depended on the message conveyed by the stamps.

Defendants then argued that the stamps were mere statements of opinion. But “subjective assessments by third-party entities that had no control over market entrants” involved in other cases were not the same as “a series of engineering tests susceptible of objective examination,” as here. A licensor’s certification is a statement of fact—that the aspirant has met the relevant standards—whereas a third-party evaluator that purports to assess competency would just be offering an opinion. It’s true that a licensor, like a medical board, can get it wrong. “But the possibility that the certifier might get the tests wrong—or apply the tests improperly—doesn’t somehow render the tests subjective. We can all agree that the answers to questions of math are objective, even if, from time to time, a young student may erroneously believe that two and two is five.”

Plus, plaintiffs weren’t merely alleging failure to meet the PS 1-09 standards. They alleged that use of the stamp certified that defendants had subjected the mills to certain quality-control processes—even though they allegedly did no such thing. That isn’t subjective. “Either the Defendants tested the wood—or subjected it to quality-control review—or they didn’t. In all these ways, then, the stamp is an actionable statement of fact— not a mere safety rating.” The court also noted that other professionals must of necessity rely on the stamp for verification of quality, since they don’t test it themselves. This too supported the characterization of the stamp as factual.

Next, defendants argued that their certification wasn’t the proximate cause of the plaintiffs’ injuries. But Lexmark teaches that direct sales diversion isn’t the only cognizable injury. Because (and only because) of the allegedly false certification, the Brazilian mills can sell their wood in the United States at a far lower price point, causing major losses. This was proximate cause.

Finally, defendants argued that plaintiffs didn’t sufficiently allege control or participation in the Brazilian mills’ noncompliance. But the plaintiffs adequately alleged close relationships with Brazilian clients, including exclusive inspection service deals. And they alleged that defendants knew or should have known of the defects based on biological facts and independent studies.

The court also refused to dismiss the negligence claim.

class action certified with adequate price premium model for "nutritious" claims

McMorrow v. Mondelēz International, Inc., 2021 WL 859137, No. 17-cv-2327-BAS-JLB (S.D. Cal. Mar. 8, 2021)

Consumers in California and New York who purchased belVita breakfast biscuits, brought a putative class action alleging that MDLZ labeled the breakfast biscuits as “nutritious,” despite the biscuits’ high added sugar content. Showing how plaintiffs’ lawyers adapt to barriers to class certification, the court granted a renewed motion for class certification because their class-wide damages model matches their theory of liability in compliance and because no other individual issues predominate over common ones.

Plaintiffs’ expert opined that a conjoint analysis could measure the relevant price premium. MDLZ argued that the price premium cannot be estimated without considering supply-side and competitive factors, but conjoint analysis can do so if the prices used in the surveys underlying the analysis reflect actual market prices in the class period, and the quantities used in the calculatiosn reflect actual quantities sold during the class period. That was the case here. Other criticisms of conjoint analysis went to weight rather than admissibility.

A similar fate befell MDLZ’s objections to the proposed survey. Debates over whether the survey should include taste; include only belVita purchasers or include breakfast biscuit purchasers generally; account for repeat purchases where a consumer might not scrutinize the label; etc. went to weight and not admissibility.

The court also declined to exlcude MDLZ’s experts. It relied on one consumer expert to argue that different interpretations of the term “nutritious” meant that individualized issues predominated over common ones. The court disagreed. The expert’s survey sought to measure, in relevant part, whether and to what degree “consumers associate the term ‘nutritious’ with a variety of attributes including calorie content, whole grains, and vitamins and minerals.” However, plaintiffs wouldn’t need to prove individual reliance, but rather that members of the public are likely to be deceived, so some variation isn’t fatal. Plaintiffs “need only make an objective showing of a probability that a significant portion of the relevant consumers acting reasonably could be misled by the challenged statements.”

Plaintiffs used internal MDLZ documents to show that reasonable consumers can understand “nutritious” to mean food conducive to health. This was enough to get to a jury. Similarly, it wasn’t important that the health effects of sugar varies among consumers; that’s irrelevant to misleadingness.

NYGBL statutory damages: Plaintiffs sought to recover statutory damages for the NY class. For violations of section 349, the statute allows a plaintiff to recover “actual damages or fifty dollars, whichever is greater” For violations of section 350, a plaintiff may recover “actual damages or five hundred dollars, whichever is greater.”

MDLZ argues that statutory damages were unavailable absent class-wide proof that consumers suffered an “actual injury” in the form of a price premium, and that an award of statutory damages would result in disproportionate recovery for the New York class as compared to the class members’ actual injury. It is true that the GBL has injury and causation elements, requiring them to prove a price premium, which they were prepared to do. And as for disproportionate recovery: “It is well settled that statutory damages under the relevant sections of the GBL are available as a class-wide remedy in class actions brought in federal courts under Federal Rules of Civil Procedure, irrespective of New York legislature’s limitation of class actions to causes of actions brought under statutes with specific authorization of class recovery.” That didn’t bear on whether certification was “superior” to alternate methods. (Citing, inter alia, a case pointing out that “[i]f the size of a defendant’s potential liability alone was a sufficient reason to deny class certification, however, the very purpose of Rule 23(b)(3)—‘to allow integration of numerous small individual claims into a single powerful unit’—would be substantially undermined.”) “In the Court’s general experience, the prospect of recovering $550 (the maximum statutory damages for each violation under the New York GBL, for example) is not enough to incentivize individual litigation.”

Diamond hands: timeshare entity's alleged misconduct towards consumers didn't allow exit company to assert unclean hands

Diamond Resorts U.S. Collection Development, LLC v. Wesley Financial Group, LLC, No. 3:20-CV-251-DCLC-DCP, 2021 WL 3277260 (E.D. Tenn. Jul. 14, 2021) (R&R)

In this timeshare v. timeshare exit company case, the judge recommended tossing the exit company’s unclean hands defense.  An analogy between trademark and false advertising arguably would have supported allowing unclean hands: the exit company pointed out that, without the allegedly false solicitation of timeshares, the timeshare company would have nothing for the exit company to interfere with. This matches pretty well with the trademark standard that unclean hands requires that the plaintiff must have secured the right upon which it sues by inequitable conduct.

But the judge here quoted another case with approval: “allowing Defendants to assert the affirmative defense of unclean hands may serve to confuse the issues and prejudice Plaintiffs.” The timeshare company’s allegedly inequitable conduct was harmed a third party, not the exit company.

false association wasn't plausible given clear comparative statements

Dynatemp Int’l, Inc. v. R421A, LLC, No. 5:20-CV-142-FL, 2021 WL 3284799 (E.D.N.C. Jul. 30, 2021)

Dynatemp and another company sued defendants for false advertising and related claims; defendant RMS counterclaimed similarly.

Notable holdings: RMS didn’t plausibly allege that plaintiffs falsely designated their goods. Instead, it alleged that their customers displayed a Dynatemp R421A product and the Dynatemp brand alongside RMS’s trade dress and trademarks. But RMS failed to allege any facts that allow the court to infer that these plaintiffs controlled the content on those websites. RMS alleged that their behavior “confused even their own customers,” but this was a conclusory assertion.

The allegations were particularly speculative in light of Dynatemp statements that RMS attached to its counterclaims, such as, “for a number of years we have distributed the Choice® R421A product with a lubricant additive. Recently, we began a transition to producing and distributing our own Dynatemp R421A™ product. It contains a different lubricant that we believe you will find works even better.” Also: “Our new proprietary Dynatemp R421A™ contains a different premium lubricant than Choice® R421A, and it is sold exclusively under our own Dynatemp brand.” And: “[a]s we make our transition to producing and distributing our new Dynatemp R421A™ product and phasing Choice® R421A out of our product line-up, we are continuing to sell our remaining inventory of Choice® 421A.” These statements “reflect an effort to distinguish its products from RMS’s products, to associate its products with the Dynatemp R421A™ brand, and to associate RMS’s R-421A product with RMS’s trade dress and trademarks.”


Thursday, August 26, 2021

statements about legality of service were factual/falsifiable

Allied Servs., LLC v. Smash My Trash, LLC,  2021 WL 3354839, No. 21-cv-00249-SRB (W.D. Mo. Aug. 2, 2021)

Allied, aka Republic, “provides waste and recycling services to business and residential customers in the Kansas City metropolitan area.” It supplies dumpsters and open top roll-off waste containers to its customers. This equipment is designed and constructed only to collect a customer’s ordinary waste. Their agreements with customers provide that the equipment is Republic’s property and that the customer is liable for any loss or damage to it.

Smash provides mobile waste compacting services in the Kansas City metropolitan area using “Smash Machines,” 25,000 pound trucks with hydraulic booms and three-ton spiked, rotating metal drums. (Awesome.)

Republic alleged tortious interference, trespass/conversion, and false advertising claims.

Lanham Act false advertising: Smash’s website FAW said:

Will my waste company let me Smash my trash? It’s not their waste, it’s yours. Well established legal doctrines protect your rights to manage your waste while under your control at your facility. This includes the right to Smash your trash.

First, the complaint adequately alleged that the challenged statements weren’t merely opinion. “Statements about the status of a case or one’s ... property rights are not necessarily subjective opinions and are generally verifiable ... [t]hat a court of law need ultimately determine the truth or falsity of these statements does not render them ‘opinion’ statements.”

Second, Republic adequately alleged literal falsity by alleging that Missouri law does not recognize this purported “right.” Republic also alleged falsity by necessary implication: Republic’s customers were allegedly “led to believe that they are legally entitled to utilize Republic’s containers to have their waste compacted by Smash’s mobile compaction service.”

Materiality: It was sufficient to allege that “Smash has falsely led Republic’s business customers to believe that the company is both aware of and has no objection to Smash’s misuse of the Equipment and also that Republic’s customers nevertheless have the unfettered ‘right to Smash their trash’” along with allegations that “Republic’s business customers have contacted it to cancel and amend Agreements, and in some instances, they have refused to follow Republic’s direction that the Equipment may not be used by Smash for its mobile waste compaction services.”

Causation/injury:  Again, it was adequately alleged that the statements “caused Republic’s customers to breach their Agreements, have resulted in the denial of access to its Equipment, have interrupted regularly scheduled hauls, have led to damage to its containers, and have harmed its reputation with its customers.” Only that last one is traditional false advertising damage—the others don’t really seem to fall within the usual zone of interests—but ok!

affiliation claim true when sent out to consumers can't be false endorsement

Klayman v. Judicial Watch, Inc., --- F.4th ----, 2021 WL 3233953, No. 19-7105 (D.C. Cir. 2021)

Larry Klayman founded and ran the conservative activist group Judicial Watch, but the relationship ended badly in 2003. “During the fifteen years of ensuing litigation, Klayman lost several claims at summary judgment and then lost the remaining claims after a jury trial. The jury ultimately awarded Judicial Watch $2.3 million.” The court of appeals affirmed.

Based on the trial evidence: “Klayman’s time at Judicial Watch came to a close after a meeting in May 2003 with two Judicial Watch officers,” at which he showed them his then-wife’s divorce complaint and admitted he was pursuing a romantic relationship with a Judicial Watch employee. “Negotiations over Klayman’s departure ensued over the next several months. Meanwhile, in September 2003, Judicial Watch began preparing its October newsletter, which was mailed to donors along with a cover letter signed by Klayman as Judicial Watch’s ‘Chairman and General Counsel.’ After Klayman reviewed the newsletter, Judicial Watch sent it to the printer.”

They executed a severance agreement while the newsletter was at the printer; Klayman agreed to resign effective Sept. 19, 2003.

Klayman alleged, among other things, that the newsletter was a false endorsement or advertisement under the Lanham Act because it identified him as “Chairman and General Counsel” after he had left Judicial Watch. The court of appeals affirmed the rejection of this claim. “There was no genuine dispute of material fact that Klayman authorized the use of his name in the newsletter, so it was neither a false endorsement nor a false advertisement…. As proven by his handwritten edits on a draft, Klayman edited the newsletter at issue, which Judicial Watch approved for printing while Klayman still worked there.”

Klayman argued that he didn’t authorize the use of his name after he left, but the Lanham Act focuses on “false or misleading statements of fact at the time they were made.” When Judicial Watch wrote the newsletter identifying Klayman as “Chairman and General Counsel,” that’s what he was. “His subsequent resignation does not render the newsletter a false endorsement or advertisement.”

[Note that if they’d continued to call him that in material they distributed after he was gone, the cases could counsel a different result on this particular issue—you generally can’t continue an active ad campaign after it becomes false. And some cases even require products on shelves to be altered if their labels become false, which makes sense as a consumer-protective measure;  but even those cases probably wouldn’t require reaching out to consumers who’d already taken the products home, as these newsletters were. First Amendment considerations, too, could play a role in the court’s conclusion, though that might be in some tension with the Lanham Act counterclaims the jury heard about Klayman’s subsequent fights with Judicial Watch.]

Lanham Act counterclaims: evidence of Klayman’s forced resignation and name-calling of his ex-wife was relevant to Judicial Watch’s Lanham Act unfair competition counterclaim, which alleged that Klayman falsely represented in his Saving Judicial Watch campaign that he left Judicial Watch to run for U.S. Senate. Evidence about his forced resignation was introduced to prove falsity, and the court of appeals agreed that the risk of prejudice didn’t outweigh its probative value. [I have questions about whether the First Amendment really allows a Lanham Act false advertising claim about an advocacy organization slapfight, but unfortunately neither side had an incentive to press this point.]

Klayman also argued that the district court failed to properly instruct the jury on Judicial Watch’s trademark infringement claims alleging infringement of “Judicial Watch” and “Because No One is Above the Law.” Klayman argued that the court erred by failing to instruct the jury that likelihood of confusion requires confusion by an “appreciable number” of consumers. But the instructions, viewed as a whole, fairly presented the applicable standard, based on a model instruction. (The court noted that it had never actually adopted a particular multifactor test, though it had cited other circuits’ with approval.) “Neither our sister circuits nor the model instruction mention the number of consumers likely to be confused. No instruction on the number of consumers was required for the district court to fairly present the applicable legal principles on the confusion element.” [I have my doubts about this too—not needing to mention a “number” is not the same thing as not needing to meet some requirement of substantiality, or even nontriviality. Suppose the jury is absolutely convinced that confusion is likely among .5% of relevant consumers. What should it do?]

Cal. statutory false advertising isn't fraud and individual reliance isn't necessary

Peviani v. Arbors at California Oaks Property Owner, LLC, 2021 WL 1264423, E073950, --- Cal.Rptr.3d ---- (Ct. App. 2021)

Plaintiffs sought to represent a putative class, bringing claims against a landlord for (1) false advertising; (2) breach of the implied warranty of habitability; (3) nuisance; (4) breach of the implied covenant of good faith and fair dealing; (5) bad faith retention of security deposits; and (6) unfair competition. The court of appeals held that the trial court erred by denying certification.

Plaintiffs alleged, inter alia, that defendants’ ads falsely depicted renovated interiors, “quality plush carpeting,” “sparkling swimming pools,” heated spas, cabanas and lounges, a tennis/basketball court, a fitness center, a rock climbing wall, a community game room, a Wi-Fi café, barbeque grills, a picnic area, a dog park, a playground, a garden, a carwash area, central heating and air conditioning, assigned covered parking, a 48-hour maintenance commitment, granite countertops, hardwood floors, full size washers and dryers in the apartments, controlled access to the property, and a smoke-free property.

However, the apartments were not newly renovated and carpeting was not plush. For example, one set of renters “had mushrooms growing out of their carpet.” Plaintiffs alleged “the fitness equipment was dirty and broken; the swimming pools were dirty and diseased; the hot tubs were green with algae; the assigned parking rules were not enforced; the 48-hour maintenance promise was not kept; there was violence, crime, and drug use in the area of the barbecues, playground, and dog park; the property was not smoke-free; and the water connection in the carwash area was non-functioning.”

Defendants argued that common questions didn’t predominate for false advertising. “For example, Peviani claimed her apartment had rust stains on the countertop, Judy claimed there was a mushroom growing out of her carpet, Lubbock asserted his toilet was broken, and Caicedo-Valdez claimed there was a stain on the bathroom vanity.” The trial court reasoned that putative class members learned of the property in different ways: “some read defendants’ website, some toured the property, some read a brochure, and some drove by the property.” It reasoned: “One class member’s a claim [sic] might be based upon an oral representation while another’s might be based upon something stated in a brochure. And the representations could be about different amenities or services.” There were too many alleged misrepresentations—each one would have to be assessed for factuality, materiality, and reasonable reliance.

The court of appeals reversed. Statutory false advertising is not common law fraud. It does not require literal falsity, knowing falsity, reasonable reliance, or even damages (since restitution and injunctive relief are the only available remedies). The standard is objective: that “members of the public are likely to be deceived.” Likewise, materiality is assessed objectively: if a reasonable person would attach importance to the falsity or omission. The trial court conflated false advertising with fraud; there was no need for individualized reliance inquiries, and the trial court failed to discuss the reasonable person standard, which is relevant to deception and materiality.

This error also infected the habitability/nuisance claims, which were based on the common areas (allegedly full of dog feces, trash, and pests) and could thus be assessed as a common question. Because the unfair competition claims didn’t get separate analysis, the court of appeals also sent those back.

false designation claim doesn't require distinctiveness, court wrongly holds

Simpson Strong-Tie Company Inc. v. MiTek Inc., 2021 WL 1253803, No. 20-cv-06957-VKD (N.D. Cal. Apr. 5, 2021)

The plaintiff benefits from very generous treatment of its false designation and copyright claims, in the process stripping false designation of anything other than a prohibition on copying/vitiating both Wal-Mart and Dastar.

Simpson sells structural connectors for use in building construction. Each product has an individual alphanumeric product name including a “part name” consisting of a letter or combination of letters designating the product line, and a “model number” consisting of additional numbers and letters appended to the part name to distinguish between various models of a particular part with different attributes. Its Wood Construction Connectors Catalog contains an alphabetical product index and various charts specifying various attributes of Simpson’s products, listed by product names. It registered copyirghts in its catalog and supplements.

Simpson alleged that MiTek’s products were “knock-offs or close copies” of Simpson’s products that are not equivalent to or substitutes for Simpson’s products due to the patented nature of some of Simpson’s technology. MiTek’s 2020 Catalog allegedly uses Simpson product names as a basis for MiTek’s own product names and includes an alphabetical reference index using Simpson product names as reference numbers, deceiving consumers into believing that the companies’ products are equivalent and interchangeable when they are not, or that MiTek’s products are actually Simpson’s products.

MiTek argued that a product name cannot be proven true or false, but the court agreed that Simpson had sufficiently pled that placing the parties’ products next to each other in this way created a false impression that the parties’ products are “equivalent or otherwise interchangeable.”

Passing off: MiTek argued that Simpson didn’t plead inherent or acquired distinctiveness, and Simpson responded that the Lanham Act protects even generic marks from “false designation of origin.” [You know it’s going to be bad when a court says “generic marks,” a noncategory.] The court agreed! It was enough to allege that (1) MiTek’s use of Simpson product names as MiTek’s own product names falsely identifies MiTek products as Simpson products, and (2) MiTek’s use of Simpson’s product names as reference numbers for MiTek’s own products in MiTek sales and marketing literature creates a false impression that MiTek’s products are in some way connected to or associated with Simpson. Comment: this is entirely junk reasoning, since there can be no false identification without distinctiveness (that is, identification)--the genericity cases require "de facto secondary meaning" in the absence of legally protectable secondary meaning, and they also limit the available remedies to clear disclosure. 

Copyright infringement: MiTek argued that the portions of the catalog it allegedly copied—Simpson product names and the alphabetical index of Simpson products—were not protectable. Although originality is a question of fact, sometimes you can just look at the accused and accusing work. Though there were “serious questions” about the originality of the product names and alphabetical index, it wanted a fuller record before saying that the names and alphabetical index weren’t sufficiently original as a matter of law.

The state law claims also survived; as a competitor, Simpson didn’t have to plead its own reliance under the UCL.

Wednesday, August 25, 2021

pharma database isn't commercial speech about listed products

Alfasigma USA, Inc. v. First Databank, Inc., 2021 WL 930453, No. 18-cv-06924-HSG (N.D. Cal. Mar. 11, 2021)

Previous opinion. Alfasigma makes medical foods, which are allegedly not properly described as OTC. It sued First Databank for coding implemented in the latter’s pharmaceutical database:

Historically, the “class value” field in the MedKnowledge database indicated whether manufacturers identified their products as prescription-only. Code “F” identified product labels that indicated a prescription was required, and “O” identified when the product label did not contain any dispensing limitations. Plaintiff alleges that subscribers “universally understand[ ] that a product designated ‘O’ is an [over-the-counter (“OTC”) ] drug, available over-the-counter and without physician supervision.”

Although Alfasigma’s products were historically designated as F, First Databank reclassified them as O.

This allegedly falsely represented that they were available OTC, “when in fact they are available by prescription, and should not be taken by a patient without physician supervision.” Then First Databank created a new class value, Q. Q was to be for “Products that are neither drugs nor devices, such as dietary supplements (including prenatal and other vitamins), medical foods, herbal preparations, and bulk flavorings or colorants.” This was allegedly still false and misleading, and First Databank allegedly falsely advertised that it “compile[s]” the relevant information in its database and for its coding determinations from the FDA and from manufacturers, such as Alfasigma.

Alfasigma sued for false advertising and contributory false advertising under the Lanham Act and related state law claims. Previously, the court denied First Databank’s anti-SLAPP motion because Alfasigma had shown a reasonable probability of success on the merits of its state law claims, but had not plausibly alleged that the coding changes were made for the purpose of influencing subscribers to purchase First Databank’s own products or services, as required under the Lanham Act. Alfasigma amended its complaint.

The 9th Circuit applies the motion to strike and attorneys’ fees provisions of the anti-SLAPP statute to state law claims in federal cases because there is no “direct collision with the Federal Rules,” but the court still expressed the concern that this interpretation of the statute “vastly understates the disruption when federal courts apply the California anti-SLAPP statute,” particularly as it interacts with Rule 12 and its plausibility standard.

Alfasigma continued to allege that the recoding decisions were false and misleading, and that First Databank misrepresented that the FDA and manufacturers were the source of the information in the database.

Previously, the court found that Alfasigma sufficiently alleged that the database constituted commercial speech for purposes of surviving the motion to strike, but (1) now there are additional allegations, and (2) Ariix, LLC v. NutriSearch Corp., 985 F.3d 1107 (9th Cir. 2021), provided further guidance, so the law of the case did not control.

The database provides information about third-party pharmaceutical products, not First Databank’s own products. Other third parties then use this information to determine which products to prescribe and dispense, and to decide whether to reimburse for these pharmaceutical products. This isn’t a traditional ad; representations about the database may be ads, but that doesn’t make the database itself an ad. There were product references in the database, but that didn’t establish that it was commercial speech, so the court turned to defendant’s motivation for the speech.  Alfasigma alleged that it was commercial because (1) “pharmaceutical product manufacturers and distributers have...come to rely on [the] database as a crucial promotional channel for their products”; (2) the database is directed toward third parties “to influence their decisions whether to prescribe, purchase, dispense and/or pay for” Plaintiff’s products; and (3) Defendant collaborates with its subscribers in making changes to the database.

Alfasigma persuasively alleged that the database is critical to the billion-dollar pharmaceutical industry. “These allegations, however, only underscore that third parties—not Defendant—use the information contained in the database as part of their own commercial transactions.” First Databank didn’t make any of these economic decisions itself. Alfasigma maintained that First Databank’s editorial decisions in maintaining and updating the database were driven by subscribers’ feedback, and that Defendant “generates revenue by selling subscriptions to MedKnowledge.” First Databank allegedly decided to change the class value of Alfasigma’s products at least “[i]n part to satisfy the preferences of certain customers....” But a profit motive didn’t distinguish First Databank from a newspaper.

Ariix, which found that a guide to supplements was commercial speech, emphasized that its decision was “a narrow one that is tied specifically to the troubling allegations in this case,” involving payments to the CEO for better reviews and similar pay-to-play allegations making the guide a disguised ad rather than true editorial content. Here, by contrast, there was no allegedly hidden financial arrangement; First Databank just made more money from more sales. Alfasigma argued that many pharmacy benefit manager customers preferred to have products O-rated so they didn’t have to reimburse patients for their costs, so at least some subscribers wanted medical foods recoded. But which products were covered by which insurance wasn’t within First Databank’s control, nor did Alfasigma allege that it was compensated more based on whether specific claims were paid or denied. Under Alfasigma’s logic, “any speech could be commercial if eventually relied on by third-party actors who conduct business.” That was too extensive, so the claims all failed.

Even if the database were commercial speech, the coding-based Lanham Act claims independently failed for want of “commercial advertising and promotion.” After Lexmark, the test seems to be: “(1) commercial speech, (2) for the purpose of influencing consumers to buy defendant’s goods or services, and (3) that is sufficiently disseminated to the relevant purchasing public.” The failure here was on (2): Alfasigma didn’t plausibly allege that the database was created for the purpose of influencing consumers to buy First Databank’s goods or services. The court saw an inconsistency in Alfasigma’s theory that sounds more like heterogeneity to me: while some subscribers would benefit financially if the coding changed, Alfasigma alleged that other subscribers were confused, and “did not know that [Plaintiff’s] recoding was a commercial decision intended to enhance the profits of PBM and insurance company customers, rather than based on information from the FDA or [Plaintiff].” The FDA’s medical director even “expressed concern” that “patients...are losing or have lost insurance coverage for their products marketed as medical foods” because “their insurance providers belie[ve] that the products are over-the-counter (OTC) drugs....”

The allegation that First Databank inaccurately changed its coding to promote its own services wasn’t plausible given that, as Alfasigma acknowledged, “[i]t is important for [Defendant’s] customers that the compendia services and products they purchase be accurate.” Confusing subscribers and providing them with false information that was later challenged by the FDA itself wouldn’t plausibly promote First Databank’s own products or services. Anyway, “[a]ny publication would be deemed an advertisement if the defendant had an interest in encouraging others to purchase it,” so that definition is too broad. Ariix suggested that something like an agency relationship would be vital, and there was no indication here that there was such a relationship with the PBMs or other financial stake in specific sales of a product. “The database does not list any of Defendant’s own products or additional services. Rather, the database itself is Defendant’s product.”

Contributory false advertising: First Databank’s representations allegedly induced its subscribers to falsely advertise that Alfasigma’s products were “OTC drugs.” “It is unclear in this Circuit if contributory false advertising can apply to non-commercial speech in any context because the Lanham Act, as a whole, applies only to commercial speech.” Anyway, because the database wasn’t commercial speech, this claim also failed; it also failed because Alfasigma didn’t allege that First Databank knowingly or intentionally induced, or materially participated in, its subscribers’ alleged false advertising. To the contrary, Alfasigma alleged how PBMs and insurers have their own incentives to code its products as “O” and to refuse coverage.

Information source allegations: Rule 9(b) applied because Alfasigma alleged that the false statements were knowing or intentional. And the complaint failed to meet the heightened pleading standard because it was “devoid of specifics about when and where the alleged ‘source’ misstatements were made.” It wasn’t enough to identify some specific statements like brochures that told manufacturers, “You tell us. We tell the world,” and undated statements that it made the changes to be “in alignment with [ ] FDA standards.”

"implied gov't approval" claims don't work

ImPACT Applications, Inc. v. Concussion Management, LLC, 2021 WL 978823, No. GJH-19-3108 (D. Md. Mar. 16, 2021)

ImPACT provides training and software, including a proprietary evaluation system. Immediate Post-concussion Assessment and Cognitive Testing “provides a neurocognitive test battery that offers healthcare professionals objective measures of neurocognitive functioning.” Healthcare professionals, including in schools, teams, and the military, use it to aid assessment and management of concussions in individuals between the ages of 12 and 59. ImPACT Pediatric is for patients ages 5-11. They are “the only software-based neurocognitive tests that have been cleared and designated … as Class II medical devices for use as an aid in the assessment and management of concussions.”

XLNTbrain seeks to “assess[] neurological activity in athletes in order to enhance their performance,”  and sells its products to schools, medical professionals, and sports teams in direct competition with ImPACT.

There are 1.6 to 3.8 million concussions in sports and recreational activities annually. Traumatic brain injuries account for more than 2 million emergency room visits per year in the US and contribute to the deaths of more than 50,000 Americans. In 2019, the FDA issued a safety communication, recommending that “people who may be tested for a head injury, parents and caregivers of people who may be tested, coaches and athletic administrators, sports medicine specialists and athletic trainers, and health care providers who assess or diagnose head injuries” should “use only cleared or approved medical devices to help assess or diagnose a head injury, including a concussion.” It warned that uncleared products marketed for “assessment, diagnosis, or management of a head injury, including concussion” violate the law.

While ImPACT’s products are on the FDA’s list of approved medical devises for assessing head injury, XLNTbrain’s products are not.

Nonetheless, it allegedly falsely advertised with claims such as:

• XLNTbrain offers “The First Complete Online Concussion Test and Management Program for All Sports and Levels.”

• “[C]linical-caliber post-concussion evaluations to monitor severity and the recovery progress.”

• “XLNTbrain Sport provides clinical-caliber concussion care giving subscribers a complete solution that’s easy to use, affordable and adds a ‘virtual neurologist’ for the team.”

• “XLNTbrain offers a complete feature set when compared to other solutions.”

• XLNTbrain “helps answer the most common question, ‘when can I play again?’ Dr. Kerasidis created a tool that guides the decision-making process, giving all-involved individuals a recovery care plan that includes daily monitoring of symptoms, progressive physical and cognitive exertion exercises and a timeline to safely return to gameplay.”

Perhaps surprisingly given the seriousness of the claims, the court found that ImPACT didn’t allege any actionable statements. It grouped the statements into three categories: (1) false implications of FDA approval; (2) misleading suggestions that XLNTbrain products possess the qualities of FDA-approved devices; and (3) statements of superiority. But these were “exactly the type of claims that are non-actionable under the Lanham Act.”

Courts do not recognize implied government approval claims in the absence of explicit claims. ImPACT didn’t identify anything explicit about FDA review or approval in the statements. The Lanham Act can’t be used to enforce the FDCA.

What about suggestions that XLNTbrain’s products have qualities that only exist in medical devices cleared by the FDA in providing screening, return-to-play assessments, diagnosis, and care? Unfortunately, ImPACT failed to specify what qualities unapproved products can’t have. “Is it impossible for XLNTbrain’s post-concussion evaluations to be clinical-caliber? Can only FDA-approved devices provide a Daily Symptom Checklist?” The court didn’t see why an unapproved product could have the qualities of an FDA-approved device, especially since ImPACT admitted that FDA approval wasn’t necessary to compete in the parties’ field. The court could not interpret and apply the FDCA as part of a Lanham Act case.

Finally, the statements of superiority, e.g. “Beyond Baseline Concussion Tests” and “The First Complete Online Concussion Test and Management Program for All Sports and Levels,” weren’t sufficiently alleged to be false. ImPACT didn’t allege that XLNTbrain wasn’t “beyond” baseline testing, or that it wasn’t complete. Instead, the argument was that these statements necessarily implied superiority to ImPACT, which couldn’t be true because the latter was FDA-cleared. The court didn’t think that followed. “Moreover, XLNTbrain has not been denied approval by the FDA—rather it never sought approval—so the FDA has not declared XLNTbrain inferior in some measurable way.” Also, it was likely that these statements were puffery.

State-law claims therefore failed too.

"non-toxic" plausibly means "not harmful to people, animals, or environment"

In re S.C. Johnson & Son, Inc. Windex Non-Toxic Litig., 2021 WL 3191733, No. 20-cv-03184-HSG (N.D. Cal. Jul. 28, 2021)

Plaintiffs alleged that SCJ used false and misleading labels that certain of its Windex products have a “non-toxic formula.” The products allegedly contain ingredients that are toxic to humans, animals, and/or the environment: they can allegedly cause “severe ocular irritation,” “skin and eye irritation,” “damage to certain plants and seedlings,” “conjunctivitis and corneal damage,” “headaches,” “breathing difficulties,” “erythema, desquamation, and drying of the skin,” and “fissuring.” They brought the usual California claims.

The court determined that the products were similar enough to be grouped together despite having some varying ingredients, and that plaintiffs had standing for injunctive relief. Factual issues about what counts as toxic—and whether, as the FTC says, a product could be labeled non-toxic if it had small amounts of an ingredient at a level that is not harmful to humans or the environment—were not for the motion to dismiss stage.

The key question is whether a reasonable consumer would be misled by the term “non-toxic” into thinking that the Products “[do] not pose any risks to humans or the environment, including household pets.” SCJ relied on a definition of “toxic” from the Merriam-Webster Dictionary, and contends that it “means that a substance is ‘poisonous’ or ‘capable of causing death or serious debilitation.’ ” And the FTC’s Green Guides explain that:

[T]here is no allowance for “de minimis” or “trace” toxicity. However, a non-toxic product could contain a toxic substance at a level that is not harmful to humans or the environment. For example, apple seeds contain cyanide. Although a marketer could not claim that cyanide itself is non-toxic, the amount in an apple is so low that it is not harmful to humans or the environment, and so the marketer could claim the apple is non-toxic.

Plaintiffs responded that even the Merriam-Webster Dictionary offers an alternative definition of toxic, defined as “harmful.” They argued that a reasonable consumer could believe that “non-toxic” means “not posing a risk of harm.” And the Green Guides say:

A non-toxic claim likely conveys that a product, package, or service is non-toxic both for humans and for the environment generally. Therefore, marketers making non-toxic claims should have competent and reliable scientific evidence that the product, package, or service is non-toxic for humans and for the environment or should clearly and prominently qualify their claims to avoid deception.

As it happens, the NAD evaluated one of the products at issue in this case—Windex Vinegar Non-Toxic Formula Product—and recommended that SCJ “discontinue the claim ‘non-toxic’ on the package.” It found that non-toxic, as used on the product, “reasonably conveys a message that the product will not harm people (including small children), common pets, or the environment.” “Importantly, NAD noted that a reasonable consumer’s understanding of the concept of ‘will not harm’ is not limited to death, but also various types of temporary physical illness, such as vomiting, rash, and gastrointestinal upset.” SCJ appealed to the National Advertising Review Board, which upheld the decision and “express[ed] concern that an unqualified non-toxic claim will lead reasonable consumers to conclude not only that a misused cleaning product does not pose a risk of death or serious consequences, but also that product misuse poses no health risks, even those that are not severe or are more transient in nature.”

Likewise, the Environmental Working Group  considered two of the products at issue in this case—Windex Ammonia-Free Non-Toxic Formula and Windex Original Non-Toxic Formula—and determined that the former was “[c]orrosive” and “[m]ay contain ingredients with potential for respiratory effects; chronic aquatic toxicity; [and] developmental/endocrine/reproductive effects” while the latter “[m]ay contain ingredients with potential for acute aquatic toxicity; respiratory effects; skin irritation/allergies/damage.” Thus, this wasn’t plaintiffs’ idiosyncratic “personal understanding of non-toxic.”