Friday, September 23, 2022

"white chips" plausibly misleading about chocolate content, Cal. court rules

Salazar v. Target Corp., 2022 WL 4298521, --- Cal.Rptr.3d ----, 2022 WL 4298521, No. E076001 (Ct. App. Sept. 19, 2022)

First of two white chocolate cases; unlike federal courts (and the court below), the court of appeals says that consumers were plausibly misled about whether Target’s White Baking Morsels contained white chocolate. The court of appeals found that a key fact was that the White Baking Morsels’ price tag describes them as “WHT CHOCO,” which could lead a reasonable consumer to reasonably believe that they contain white chocolate.

 

shelf, kind of unreadable

white baking morsels package

Salazar thought the White Baking Morsels contain white chocolate because (1) their label describes them as “white,” (2) their price tag says, ‘ “MP WHT CHOCO,’ ” (3) their label depicts the product, which look like white chocolate chips, and (4) the product is sold next to other chocolate products.

He brought the usual statutory claims. He also alleged that the results of a survey show that 88 percent of consumers are deceived by the White Baking Morsels’ advertising and incorrectly believe they contain white chocolate.

The court of appeals did reject his website allegations (that Target falsely advertises on its website that the “ ‘chocolate type’ ” of White Baking Morsels is “ ‘white chocolate,’ ” and places the product in the “ ‘Baking Chocolate & Cocoa’ ” category) because he didn’t see and therefore didn’t rely on the website.

By its plain terms, “WHT CHOCO” suggests precisely what Salazar alleges: that the White Baking Morsels contain white chocolate. At a minimum, a reasonable consumer could be confused about whether the morsels are made with white chocolate given the price tag’s description of the morsels as “WHT CHOCO” and the fact that the product’s label does not clearly state whether they contain white chocolate.

More significantly, “[e]ven without the price tag, a reasonable consumer could be misled by the White Baking Morsels’ label into believing that they contain white chocolate. A reasonable consumer might know there are white chocolate chips used for baking while not knowing that white-colored baking chips that do not contain white chocolate exist.”

Other cases relying on the dictionary definition of “white” were not persuasive; context can change meaning, so “white” “can sometimes describe the quality of the food, not just its color.” The packaging as a whole also contained “a picture of what appears to be a white-colored chocolate chip,” and Salazar also alleged that Target’s placement of the chips near other real-chocolate-containing chips was misleading.

Although there were no explicitly false representations about white chocolate, literally true statements “ ‘ “couched in such a manner that [are] likely to mislead or deceive the consumer ... [are] actionable.” ’ ” Indeed, “[d]eceptive advertisements often intentionally use ambiguity to mislead consumers while maintaining some level of deniability about the intended meaning.” California law doesn’t require reasonable consumers “ ‘to look beyond misleading representations on the front of [a product] to discover the truth from the ingredient list in small print on the [back of a product]’.... ‘The ingredient list must confirm the expectations raised on the front [of the product], not contradict them.’” Given that the ingredient list conflicted with the price tag’s “WHT CHOCO,” Salazar’s claims were plausible.

Salazar v. Walmart, Inc., 2022 WL 4299338, -- Cal. Reptr. 3d ---, No. E076006 (Ct. App. Sept. 19, 2022)

Same thing for Walmart. This time there is no “WHT CHOCO” price tag but the result is still the same, given the other contextual factors (the “white” in the product’s name, the label’s depiction of the product, and the fact that it is sold near other chocolate products) plus Salazar’s survey.

worse quality picture but you get the idea




recyclable doesn't mean likely to be recycled, court holds

Curtis v. 7-Eleven, Inc., No. 1:21-cv-06079 (N.D. Ill. Sept. 13, 2022)

Curtis sued over “recyclable” claims on 7-Eleven products; the court rejects theories based on the fact that most “recyclable” plastic isn’t recycled, but accepts theories based on claims that it wasn’t even recyclable for lack of appropriate marking of what kind of plastic it was (designations known as RIC labels that “give recycling facilities the necessary information to sort the products”).

"recyclable" bags

recyclable cups

"recyclable" foam plates

"recyclable" red cups

The court was broadly skeptical of the claims—though the “recyclable” label wasn’t “hard to spot,” the court wondered if 7-Eleven consumers “bothered to look at the packaging at all” when buying red party cups. But Curtis alleged that she read it and cared, which sufficed “for now.”

She allegedly “reasonably understood that the products would actually be recycled if she placed them for recycling with her municipal recycling service.” But they weren’t.

The court thought that the lack of actual recycling was “extrinsic” to the product—not the product’s fault (despite false advertising’s strict liability)—while the lack of RIC designations was “intrinsic.”

There’s also a label on the back of the package: “CHECK YOUR LOCAL MUNICIPALITY FOR RECYCLING GUIDELINES.” Curtis argued that this made things worse, by suggesting that this would work.

The court adopted the majority approach to class standing: “a plaintiff may have standing to assert claims on behalf of class members based on products he or she did not purchase as long as the products and alleged misrepresentations about a purchased product are substantially similar.” 1 McLaughlin on Class Actions § 4:28 (18th ed. 2021) (citations omitted). That factual, contextual inquiry could be carried out later.

She lacked standing to seek injunctive relief, though.

Since “recyclable” was literally true, the claims based on the absence of actual recycling/practical unrecyclability weren’t plausible. What about deceptiveness even absent literal falsity? “Recyclable” “is not a promise about the state of the recycling industry. It is not a prediction of what is likely to happen after a product hits the recycling bin.” “Recyclable” does not mean “destined for inevitable recycling.” And it does not mean “likely to be recycled.” How does the court know what consumers think? It doesn’t; the court just thinks it’s not reasonable for consumers to construe “recyclable” to mean “will be recycled if you put it in a recycling receptacle.” The court reasoned that, if you buy a bottle of water marked “recyclable” in Chicago, where there is recycling, and take it hundreds of miles away where there is not, nothing about the bottle changed, so it would be wrong to say that “recyclable” became untrue. “True, maybe consumers have unreasonable expectations about how often products are recycled. But that’s not on 7-Eleven.” Um. If these beliefs are widely held, why are they unreasonable? What is reasonable or ordinary about the hypothetical in which Chicago consumers travel hundreds of miles into recycling deserts?

The court was concerned that a different holding would have “sweeping” implications because so little plastic recycling is being done. But isn’t that kind of important for consumers who want to participate in recycling to know? The court: “[I]t is hard to see why a manufacturer should be on the hook for deception when the consumer brings misinformation or unrealistic expectations into the picture.” What is unrealistic about believing that a package that says “recyclable” means something meaningful by it?

The court’s other “-able” analogies include things like “drinkable” and “drivable”—terms used in fairly different contexts than advertising. If a package said its contents were “drinkable” I definitely wouldn’t think “well, it’s drinkable, but I’m unlikely to be able to drink it.” Other common “able” advertising words have no obvious gap between “it’s possible to do X” and “you will be able to do X”: returnable, refundable, redeemable, transferable. Where the consumer might not be able to return, get a refund, redeem, or transfer, we expect those limits to be disclosed in the ad!

In a footnote, the court asks: “If a consumer has an inaccurate understanding or an unrealistic expectation about the likelihood of recycling, is that person still a reasonable consumer?” This question should not be left to a footnote or left answered only implicitly; it is the central question. And neither the history of consumer protection law nor the meaning of “misleading” suggest that the answer is “if you don’t understand exactly how the world works in every detail, too bad for you.”

Ultimately, “[m]aybe the average consumer expects that ‘recyclable’ products will be recycled. But that’s not what that word means. Expectations are one thing; representations are another.” Note the absence of any discussion of misleadingness: only explicit falsity apparently counts as long as “7-Eleven did not create the unreasonable expectations through misrepresentations.”

After all this, the court insists that it’s applying the reasonable consumer standard, and says that consumers aren’t expected “to parse packaging like lawyers.” Even though “consumer-protection laws must meet consumers where they are,” “there are limits on the pliability of words.” But what are those limits? Apparently, they are not created by reasonable consumers’ beliefs. At some point, words can’t be stretched “so far.” [Puffery/falsifiability should do that work, though: does the claim communicate a specific message to reasonable consumers? Adding some extra element beyond that just makes the law unpredictable and leaves consumers exposed to deception.]

The complaint also relied on the FTC’s Green Guides, which do tell sellers to take into account whether recycling facilities are actually available, though they don’t purport to bar the sale of recyclable-labeled products in areas where they aren’t as long as facilities are available in most areas. They also suggest additional labeling where availability is patchy. But the court didn’t find the Green Guides very “useful” “when evaluating the views of a reasonable consumer at a convenience store. Your average consumer at 7-Eleven probably doesn’t have the FTC’s policy statements at his or her fingertips when picking up a bag of foam plates for the backyard BBQ.”

[But the FTC’s approach, unlike the court’s, is based on empirical research about what consumers actually think when they see “recyclable.”]

Claims based on the lack of RIC designations survived, though, because they were consistent with lack of recyclability: without the markings, the products can’t be recycled. Thus, Illinois Consumer Fraud Act, warranty, and unjust enrichment claims survived only as to the RIC-based allegations.

Monday, September 19, 2022

A little more than kin and less than kind: KIND bar "All Natural" class action fails

In re Kind LLC “Healthy and All Natural” Litig., 2022 WL 4125065, 15-MD-2645 (NRB), 15-MC-2645 (NRB) (S.D.N.Y. Sept. 9, 2022)

Plaintiffs alleged that KIND products displaying an “All Natural/Non GMO” label were deceptive or misleading. Previously, the court allowed NY, Florida, and California classes to proceed. But, because they abandoned any claims based on the non-GMO part, the court found that they lacked a viable claim that “All Natural” was misleading and decertified the classes.

In 2015, FDA issued a warning letter to Kind about its “healthy and tasty” claims, stating that the language was an “implied nutrient content claim” and that certain KIND products did not meet the FDA’s saturated fat content requirements necessary to describe food as “healthy.” “In response, KIND argued that many universally recognized healthy foods such as almonds, avocados, or salmon contain saturated-fat levels exceeding [FDA’s] limits.” 

All Natural/Non GMO label, L, and revised Non GMO only label

The resulting lawsuit was paused because the FDA pretended that it might actually do something about “natural” represenations. It didn’t, so eventually the case was unpaused. Other developments “sharply contracted” the scope of the claims to the “All Natural” claim on three product lines.

For all the claims, an objective reasonable consumer standard applied. The court adopted a relatively new proposition—imported from the Lanham Act and not traditionally part of consumer protection cases—that “[t]o satisfy the reasonable consumer standard, a plaintiff must adduce extrinsic evidence—ordinarily in the form of a survey—to show how reasonable consumers interpret the challenged claims.” Thus, the claims required evidence showing a reasonable consumer’s understanding of “All Natural” plus evidence that the Kind products fell outside that understanding. Plaintiffs failed at both points.

The earlier definition used in the case was heavily dependent on now-abandoned “Non GMO” claims. “Non GMO” might give context to the “All Natural” right in front of it on the label, but now there’s no falsity claim about that. Without the GMO context, the court found that there was no objective definition of “all natural.” FDA has some guidance, but its application would depend here on what a consumer would expect to be in the food, which is precisely what’s at issue. Plaintiffs’ own statements offered a variety of understandings, which if not inconsistent were not all coextensive: “that is, a product can meet the criteria in the FDA guidance that it does not contain unexpected artificial ingredients without meeting the criteria in the dictionary definition proffered by plaintiffs that it is ‘existing in or caused by nature; not made or caused by humankind,’” and so on. “Given this diversity of views, none of these definitions supplies, or purports to be, a reasonable consumer’s definition of ‘All Natural.’” [Note: That’s not logically true: each could be a reasonable consumer’s definition, but reasonable consumers could be all over the map. For completeness, it would be useful to ask whether, given all these definitions, Kind didn’t qualify according to a substantial number/percentage of reasonable consumers.]

Nor did plaintiffs’ survey report provide a way to define a reasonable consumer’s understanding of “All Natural,” because the court excluded it.

The survey presented individuals with “a mock-up of a product, that, in many respects, resembled the packaging of a KIND bar.”


Note the omission of the non-GMO representation.

Then it asked them about whether they agreed, disagreed, or didn’t know/weren’t sure about whether “All Natural” products would contain “artificial or synthetic ingredients.” The survey found that 86.4% of consumers said no.

The survey also asked consumers to select one of the following options regarding their expectations of an “All Natural” product: (1) that it is not “made using these chemicals: Phosphoric Acid, Hexane, Potassium Hydroxide, Ascorbic Acid”; (2) that it “is made using these chemicals: Phosphoric Acid, Hexane, Potassium Hydroxide, Ascorbic Acid”; or (3) that they were “Not sure/No expectation.” The court really didn’t like this question, considering it misleading (e.g., Vitamin C is another name for ascorbic acid; some of the chemicals aren’t in Kind bars) and found that the surveyor’s “decision to blindly include items listed by plaintiff’s counsel in the complaint, without any investigation or consideration of the appropriateness of those items, only underscores his survey’s lack of reliability.”

The court found the survey inadmissible because it was biased and leading.  The first question asked only about one potential definition and only allowed participants to select whether they agreed, disagreed, or didn’t have an expectation. There was no contrast with other possible meanings, and there were no open-ended questions. At deposition, he said he was “test[ing]” the plaintiffs’ theory of liability, but the court interpreted his answers as showing that his questions were designed to support that theory. Relatedly, he chose to display the “All Natural” claim in isolation, rather than as part of the “All Natural/Non GMO” statement, as it always appeared on KIND labels, out of concern that the two “would interact.” This made his survey less relevant.

Likewise, his second question listed “chemicals” drawn from plaintiffs’ complaint, “without personally reaching any understanding of what those ‘chemicals’ were, or whether they were ingredients that cannot be considered ‘All Natural.’” [If the court had liked the theory better, he probably would have been able to rely on other experts/facts provided by the client for these points.] The word “chemicals” was leading, given “the common-sense intuition that, when prompted by the word ‘chemicals,’ consumers’ consideration of the listed substances described as chemicals is tainted by the connotation that ‘chemicals’ carries.” The failure of the survey to define the terms and including Vitamin C under the name “ascorbic acid” to parallel “phosphoric acid” was “a clear attempt to manipulate consumers into selecting the answer that plaintiffs preferred.”

Even without the leading questions, the court concluded that the survey profided “no useful information” about how a reasonable consumer understands “All Natural.” The survey didn’t define “artificial” or “synthetic,” or what it means for a product to “contain” or be “made with” those ingredients. So, for example, the survey required further inquiries:

• What processing, if any, does a reasonable consumer believe can occur to an ingredient or product before that ingredient or product is considered artificial or synthetic?

• Are ingredients that do occur naturally, such as Vitamin A or C, but potentially manmade in the specific form that appears in KIND products, artificial or synthetic?

• Are trace or residual amounts of chemicals that were used in processing ingredients in KIND bars enough to cause the KIND products to contain “artificial or synthetic ingredients”?

Here, the answers to those questions were “central” to plaintiffs’ theory of falsity. But the survey left a factfinder guessing at them.

Plaintiffs argued that they didn’t need “a universally accepted definition of ‘All Natural’ ” as long as they showed that a reasonable consumer would interpret the claim to mean that the product didn’t contain those specific artificial and synthetic ingredients. But they didn’t show that; all they showed was that, “when provided with the definition of ‘All Natural’ that plaintiffs’ counsel constructed for this litigation,” respondents would click a check box saying that they agree to it. That wasn’t enough to show that reasonable consumers would be deceived when they saw the label.

Contra the FTC’s position on claims like “environmentally friendly,” the court further held: “Nor can defendant be held responsible for a host of possible, even if potentially reasonable, consumer beliefs about the meaning of ‘All Natural.’ Such multiplicity distorts the reasonable consumer standard.”

Without expert testimony, plaintiffs failed to show how a reasonable consumer would understand “All Natural” on Kind products. Internal KIND documents, statements of KIND’s founder, and a survey referenced in the FDA’s solicitation of comments regarding the “All Natural” claim were insufficient substitutes. The internal statements “just represent the views of KIND employees or internal KIND survey data,” not reasonable consumers’ beliefs. [I don’t understand why the internal survey data aren’t about consumer beliefs.] And the FDA noted that “consumers regard many uses of this term as non-informative.”

Even if the survey did establish a reasonable consumer’s understanding, the plaintiffs failed to develop evidence that any KIND product claiming to be “All Natural” contained “artificial or synthetic” ingredients or any of the chemicals the survey listed, due to deficiencies in that area of proof. To the extent that three ingredients were lab-made—Vitamin E acetate; ascorbic acid (Vitamin C); and Vitamin A acetate—they were only present in a bar that displays prominetly on the front of the packaging that it is a KIND bar “plus” “50% DV Antioxidants,” namely, “Vitamins A, C, and E.” “As such, no reasonable consumer could have been deceived by the addition of added vitamins…. No reasonable consumer could believe that they would receive 50% of their daily value of vitamins from a single bar without an artificial or synthetic vitamin being added to the product.”

Antioxidant bar

Given all this, the court also decertified the class.

Tuesday, September 13, 2022

"unfair trade practices" insurance exclusion covers antitrust, not consumer protection

G-New, Inc. DBA Godiva Chocolatier, Inc. v. Endurance Am. Ins. Co., C.A. No. N21C-10-100 MMJ CCLD, 2022 WL 4128608 (Del. Super. Ct. Sept. 12, 2022)

An insurance coverage case about a false advertising claim that doesn’t turn on “advertising injury”! Godiva had insurance from defendants when it was accused of misleading consumers with the “Belgium 1926” label on its products. The settlement, still pending final approval, in the underlying case obligated Godiva to pay: (i) a maximum of $15 million in monetary relief; (ii) a maximum of $5 million in attorneys’ fees; (iii) all settlement notice and administration costs; and (iv) up to $10,000 in class representative service awards. The insurers refused Godiva’s demand to cover the claim.

Other matters appear, but of most relevance: an exclusion for civil money penalties imposed for “knowing or willful” conduct did not apply in the absence of “evidence or admission that the violation of law was knowing or willful.” “[T]he Settlement Agreement is a covered loss within the meaning of the term ‘Loss’ as explicitly defined to include settlements in the Policy.”

There was also an exclusion covering claims “based upon, arising out of or attributable to an actual or alleged violation of the Sherman Anti-Trust Act, the Clayton Act or the Federal Trade Commission Act, as amended, or any other federal, state, local, common or foreign laws involving anti-trust, monopoly, price fixing, price discrimination, predatory pricing, restraint of trade, unfair trade practices or tortious interference with another’s actual or prospective business or contractual relationships or opportunities.”

Did the undefined term “unfair trade practices” include consumer protection and false advertising? No. “Generally, consumer protection involves violations of statutes, regulations, and common law standards. The Endurance Policy does not explicitly exclude consumer protection actions from coverage.” Other than the ambiguous term “unfair trade practices,” the rest of the terms in the exclusion were antitrust-based. “The Court questions whether unfair trade practices are the equivalent of consumer fraud. Defendant insurers have presented no authority demonstrating that these terms are interchangeable or legally equivalent.” Nor did the settlement specifically say that it provided monetary relief for “unfair trade practices,” though it was possible that some of the settlement could be covered.

A similar result occurred with an exclusion for “fines or penalties imposed by law, other than civil money penalties expressly referenced in the definition of Loss above....” Godiva argued that the settlement amount constituted restitution for the alleged price premium paid for Belgian chocolate, not a penalty; the court again found that at least some of the settlement could be covered.

Monday, September 12, 2022

Amicus brief in Washington v. TVI (Value Village)

I joined an amicus brief in this case, being heard by the state supreme court, with Truth in Advertising, Inc., and the UC Berkeley Center for Consumer Law & Economic Justice. We argue that the court of appeals misapplied First Amendment doctrine to hold that misleading claims that a for-profit company’s sales went to charity were “inextricably intertwined” with charitable endeavors and thus protected by the First Amendment.

Warzone is artistically relevant/not explicitly misleading for wargames

Activision Publishing, Inc. v. Warzone.com, LLC, 2022 WL 4117035, No. 2:21-cv-03073-FLA (JCx) (C.D. Cal. Aug. 15, 2022)

Applying Gordon v. Drape, in response to Activision’s request for a declaratory judgment, the court finds that Activision’s use of “Warzone” in connection with Call of Duty is protected by the First Amendment despite the gaming .com’s reverse confusion claims.

In 2020, Activision released a stand-alone multiplayer game, Call of Duty: Warzone, “a first-person shooter game that features a large computer-generated battlefield, or warzone, that accommodates up to 150 payers, and sometimes 200 players, at one time.” Meanwhile, Warzone is a free-to-play, turn- and strategy-based game available on Warzone.com since 2017 (through the browser, not a console). “Players shift numbers, which represent armies, across a map of the world to take control of countries or territories” and the marketing pitch is “Better than Hasbro’s RISK game.”

Activision sought to register trademarks for WARZONE and CALL OF DUTY WARZONE, which Warzone.com opposed. Eventually, this declaratory judgment/counterclaims for trademark-related claims resulted.

Although this is a title-v-title case, Rogers applies to it in the Ninth Circuit, and CODWZ is clearly an expressive work. Just as clearly, “Warzone” had artistic relevance to the game, even if Activision could have chosen other names—lack of alternatives isn’t part of the artistic relevance test, nor is reference to the trademark owner.

But “explicitly misleads” has been distorted in the Ninth Circuit, essentially to handle title-v-title conflicts, which seems like it could have been bad for Activision. As the court explained, the cases say that, ordinarily, “the mere use of a trademark alone cannot suffice to make such use explicitly misleading,” but this principle “does not extend to instances in which consumers would expect the use of a mark alone to identify the source.” How do you know what consumers would expect on a motion to dismiss? Good question! In addition, “identical usage could reflect the type of ‘explicitly misleading description’ of source that Rogers condemns.” But misleadingness is “generally [not a problem] when the mark is used as only one component of a junior user’s larger expressive creation.”

Activision argued that “Warzone” couldn’t be explicitly misleading because it is a common English word with general meaning independent of Warzone.com’s game, and that its marketing made clear that CODWZ was part of the broader Call of Duty franchise. Warzone.com rejoined that Activision’s use of “Warzone” was explicitly misleading because consumers searching for its video game are diverted to Activision’s game, and that it sufficiently alleged confusion, which proved explicit misleadingness.

The court disagreed with Warzone.com. Confusing consumers is not the same thing as explicitly misleading them, which requires “an explicit indication, overt claim, or explicit misstatement that caused such consumer confusion.” Now the magic happens, and I invite you to identify the difference between this case and Gordon:

Warzone.com alleges Activision uses an identical mark to offer similar goods and services, saturating the market and overwhelming Warzone.com, resulting in actual consumer confusion. However, nothing in the allegations plausibly suggest that Activision’s use of the term “Warzone” is explicitly misleading.

Also, Rogers can be applied both to reverse confusion and on a motion to dismiss.

Rogers also barred California claims. Given this result, the court had no authority to decide whether Activision’s pending applications should proceed to registration.

Query: Since Rogers applies to game titles, what rights if any should Activision’s registrations, if issued, confer on it?

Friday, September 02, 2022

court rejects illegal lottery and CLRA claims against Coinbase Dogecoin sweepstakes

Suski v. Marden-Kane, Inc., 2022 WL 3974259, No. 21-cv-04539-SK (N.D. Cal. Aug. 31, 2022)

This is a lawsuit arising from Coinbase’s $1.2 million Dogecoin (DOGE) sweepstakes in June 2021. The court dismisses some of the claims despite rejecting arbitration and deeming the class waiver in the contest rules unconscionable. In essence, plaintiffs alleged that the sweepstakes was misleading about whether buying/trading was required to enter, and asserted claims based on California Penal Codes §§ 319 and 320 regarding unlawful lotteries as well as UCL, FAL, and CLRA claims.

Lottery claims: It was not enough to allege that plaintiffs individually and reasonable consumers generally didn’t understand that free entry to the contest was available. Even allegations that defendants “objectively conceal[ed] from those consumers and from the public at large that the consumers [could] obtain free chances to win” were insufficient. “Because California penal statutes are construed strictly and because no California court has held that being unaware of the free method of entry is sufficient to demonstrate the required consideration, the Court finds that Plaintiffs have not and cannot allege a violation of California Penal Code § 320.”

CLRA: Failed because the CLRA covers only goods and services, which are defined, respectively, for CLRA purposes as “tangible chattels bought or leased for use primarily for personal, family, or household purposes,” and “work, labor, and services for other than a commercial or business use, including services furnished in connection with the sale or repair of goods.”

The California Supreme Court previously held that the CLRA’s protections do not extend to the sale of life insurance. Life insurance contracts are not “tangible chattels.” Helping consumers select insurance policies, assisting policyholders to maintain their policies, and processing claims were “ancillary services” that weren’t covered; to do so “would defeat the apparent legislative intent in limiting the definition of ‘goods’ to include only ‘tangible chattels.’ ” Subsequent courts applying California law reasoned similarly with respect to mortgage loans or the ancillary services connected with servicing home loans.

Cryptocurrency is “an intangible good outside the purview of the CLRA.” Facilitating trading in cryptocurrency was not a standalone “service” even if Coinbase doesn’t also buy or sell cryptocurrency; it was still “ancillary” in the relevant sense.

Thursday, September 01, 2022

Amicus brief in Martinez v. ZoomInfo

 With Mark Lemley, available here. It argues that strict scrutiny applies to right of publicity claims against noncommercial speech, and that it does not violate the right of publicity to advertise the existence of a work of information that involves no invasion of privacy, invasive data collection, or defamation.

Friday, August 26, 2022

comparison charts might infringe if lacking a disclaimer

Penn Engineering & Mfg. Corp. v. Peninsula Components, Inc., 2022 WL 3647817, No. 19-513 (E.D. Pa. Aug. 24, 2022)

This seems like a silly result to me, shifting the burden to comparative advertisers, but it's often much harder to get summary judgment in a trademark case than in comparable cases.

The parties compete in the industrial fastener market. PennEngineering claims a PEM family of marks and sued Peninsula for trademark infringement, counterfeiting, false advertising, and unfair competition.

The court denied Peninsula’s motion for summary judgment except for pure keyword buys, counterfeiting (based on resales of PEM goods), and claims based on marks Peninsula didn’t use. That left for trial claims based on some online ads that used PEM in text and on cross-reference charts used for comparison, as well as trade dress claims based on a “square-in-square” clinching nut.

keyword ads, no use in text

Bizarrely calling keyword buys “keyword conquesting,” PennEngineering sought summary judgment based on alleged sales diversion. The court pointed out that “diverting customers is a key aspect of competition. … Here, there is no dispute that the links are clearly labeled as belonging to Peninsula and there is no likelihood of confusion where the use of trademarks as trigger words is hidden from the consumer.” 

However, allegedly according to vendor mistake, some ads did show PEM in display text. The court found that the requisite intent is intent to confuse, not intent to use, and that a factfinder would have to decide whether these ads were confusing. “[A] reasonable jury could conclude that there is a likelihood of initial interest confusion from the visible use of ‘PEM’ in Peninsula’s advertisements because the advertisement is not clearly labeled. On the other hand, a reasonable jury weighing the Lapp factors could instead conclude that that there was no intent to confuse (rather, a vendor mistake) and that the average Internet user’s ability to understand the difference between ads and direct search results diminishes the likelihood of confusion in these limited instances.”

keyword ads with mark in text

Because nominative fair use is the defendant’s burden in the Third Circuit, the court let claims based on cross-reference charts continue, even though it seems hard to understand why these comparisons would be confusing about source. Peninsula’s charts “identify Peninsula products that are available as substitutes for [PennEngineering’s] products.”

cross-reference chart

Although the customers are sophisticated, the fasteners cost only pennies per unit; the parties also disputed whether “a handful of emails sent to Peninsula—which PennEngineering interprets as attempting to reach PennEngineering instead—constitute more than de minimis evidence of actual confusion.” So there might have been confusion, though the court didn’t explain why there’d be confusion because of the comparison charts.

The court said that it could be necessary to use the plaintiff’s mark for comparison purposes even if fasteners are “staple items” (commodities). [Notably, plaintiff apparently has two-thirds of the relevant market.] “[I]t is clear that a party may use comparative advertising for any items, including ‘staple’ items.” Although the court rejected the claim that a cross-reference chart comparing types of Bob’s Burgers to McDonald’s burgers would constitute trademark infringement, because “there is no likelihood of customers confusing Bob’s Burgers and McDonald’s from looking at such a chart,” the charts here were apparently different.

The strongest argument I can find for this result is plaintiff’s argument that “the absence of disclaimers on the cross-reference chart ‘suggests a manufacturer-distributor relationship, or that [Peninsula] is a division of PennEngineering or a division of a common parent.’” Why would the relevant consumers think that? What makes Bob's Burgers different? The court thought that this constituted a factual dispute over whether the chart portrayed the true relationship between the parties.

The court also declined to grant summary judgment on whether the claimed double square trade dress, which was registered, was functional—the registration meant the burden was on defendant, and while its evidence created a factual dispute, the registration also weighed in favor of nonfunctionality.

the design

Peninsula, like PennEngineering, makes floating fasteners with square-in-square designs.

A floating fastener uses an outer retainer that allows an interior nut some “float” to accommodate minor misalignment. “Double squares” refers to a fastener with an interior square that rotates with a screw and is stopped by an exterior square, within a certain amount of “float” between the outer square’s corners for misaligned parts, as shown below:

PennEngineering’s VP of Product Development testified about the way the smaller square provides some float while the larger square prevents rotation, which is “necessary for the functionality of the part.” PennEngineering’s expert also opined that the interaction between the two square shapes “is a functional feature of” the product. And Peninsula cited a prior trademark prosecution by PennEngineering for admissions that the product design is functional.

The Third Circuit very clearly doesn’t require that a feature be “essential” to be functional.  Nor did the existence of other designs disprove functionality. “Further, PennEngineering does not show that these alternative shapes would allow the same amount of float in both directions.”

Nonetheless, Peninsula didn’t meet its burden of proving functionality, because it didn’t introduce its own expert report or explain exactly how the design “affects the cost or quality of the article,” or how “the ‘exclusive use of [the feature] would put competitors at a significant non-reputation-related disadvantage.’ ” PennEngineering’s expert opined that the method of manufacturing the shape “entails the same cost and produces the same quality for any shape, although ‘some shapes may be marginally easier to form than others.’” That was enough to avoid summary judgment.

Counterfeiting through reselling legitimate PennEngineering products: Protected by first sale. There’s an exception when goods are “materially different,” which [supposedly, though not always in practice] requires consideration of “whether the allegedly infringing products are likely to injure the goodwill developed by the trademark owner in the trademarked goods.”

PennEngineering argued that resold products were “materially different” because they weren’t covered by PennEngineering’s warranty or customer service. But this wasn’t a material difference where no reasonable person would ever claim on a warranty for a two-cent fastener (the warranty did not cover consequential damages), and where its own VP of quality was unaware of any warranty claims from reseller sales and even stated that, if such a claim did occur, PennEngineering would likely honor its warranty the first time for a given customer. PennEngineering also apparently was unpersuasive in analogizing to an unauthorized used car dealer selling a Ford truck.

Such a truck would not have the original Ford warranty and dealer services but would have the Ford logo and all original parts without physical alteration. According to PennEngineering’s theory of counterfeiting, the truck is “not a Ford.” Yet, a material differences claim requires showing “differences that are likely to damage the goodwill developed by the trademark owner.” Unlike a fake Gucci bag that falls apart and injures an unsavvy, label-anxious customer’s goodwill toward Gucci, a used Ford truck is still a Ford. PennEngineering’s “ceci n’est pas une Ford” theory of counterfeiting falls flat.

False advertising: PennEngineering argued that Peninsula’s use of cross-reference charts and copied performance data constituted false advertising, because PennEngineering had test results supporting its performance data and Peninsula’s comparisons were based only on its expectations that the results would be the same.

The court declined to grant summary judgment on literal falsity. In the Third Circuit, “although the plaintiff normally has the burden to demonstrate that the defendant’s advertising claim is false, a court may find that a completely unsubstantiated advertising claim by the defendant is per se false without additional evidence from the plaintiff to that effect.”

So, were these claims completely unsubstantiated? “Peninsula admitted that it reverse-engineers the parts and then assumes that the performance ‘should’ be the same as the PennEngineering products.” By contrast, “PennEngineering describes a time-consuming and expensive process to test each of its products for performance ratings (e.g., how much weight each fastener can secure).” Peninsula “publishes performance data on thousands of products that show identical performance but … only independently tested around 51 of its products,” and PennEngineering argued that it “sometimes disregards its own test results to publish PennEngineering’s data instead.”

PennEngineering’s expert opined that the way in which the fasteners are manufactured affects the final performance properties. Peninsula’s Director of Product Development admitted that Peninsula does not know how PennEngineering manufactures each part and does not specify manufacturing processes for its manufacturing vendors.

However, PennEngineering did not actually show that any particular performance rating published by Peninsula was incorrect.

For summary judgment purposes, Peninsula’s testimony that the goal of the reverse-engineering program was to follow the “form and function” to achieve the same performance, plus its expert test results showing that the performance characteristics of a subset of the products tested were the same, would allow a reasonable jury to conclude that Peninsula’s performance data has a “semblance of support,” which would defeat the per se falsity theory. PennEngineering also failed to show actual deception, as required because it was seeking both injunctive relief and damages.

Likewise, the court denied summary judgment on the argument that the charts would mislead consumers based on an expert’s opinion (apparently not backed by a survey) that the cross-reference charts were likely to mislead customers “into believing that the corresponding [Peninsula] products are equal in quality and all other respects.”

Thursday, August 25, 2022

antitrust claim against Suboxone, including false advertising, survives summary judgment

In re Suboxone (Buprenorphine Hydrochloride and Naloxone) Antitrust Litig., --- F.Supp.3d ----, MDL NO. 2445 13-MD-2445, CIV. A. NO. 16-5073, 2022 WL 3588024 (E.D. Pa. Aug. 22, 2022)

The court here allows an antitrust claim to proceed based in part on allegedly false/misleading statements because they form part of the alleged anticompetitive product-hopping scheme and because the unique characteristics of the drug market make market-based responses to false advertising difficult. (That difficulty is not really unique, but the court is forced to make distinctions because of the unwarranted exclusion of many false advertising claims from antitrust consideration.)

The issue here involves Reckitt Benckiser’s switch of Suboxone, a drug commonly used to combat opioid addiction, from tablet to sublingual film. This made it difficult-to-impossible for generic tablet sellers to succeed in the market because they weren’t AB-rated (therapeutically equivalent) to the remaining branded product.

Reckitt’s scheme had many alleged parts, one of which was safety claims for film over tablets. Unfortunately for Reckitt, based on the findings in Reckitt’s clinical trial data, the FDA concluded that “expanded use of this product [film] will result in significant abuse and diversion that needs to be considered.” FDA noted a “high incidence of drug unaccountability in subjects who completed the trial and those who were discontinued in each of the three clinical sites. This is predictive of the likely occurrence of diversion after the drug is approved and marketed.” Because the FDA found that Reckitt’s clinical study was poorly designed and conducted, it found that it was “not useful for demonstrating any difference in the safety profile or abuse potential of these two formulations [tablet and film].”

Reckitt also received reports that film could be dissolved in water and ingested through the nose, allowing misuse or diversion, but did not study whether users could inject or were injecting it. The employee responsible for collecting and reviewing data on abuse, misuse, and diversion, and pediatric exposures, told several Reckitt executives: “I am not aware of any data to indicate any differences in the abuse/diversion of Suboxone tablets versus Suboxone film.”

Nonetheless, Reckitt’s witness “testified that, despite the information in its possession, Reckitt’s objective was to get 100% of the highest ranking doctors to accept that the film is less abusable than the tablet because it could not be snorted.” At the time it released its marketing statements, Reckitt didn’t have any statistically significant evidence that film reduced the risk of misuse and diversion compared to tablets. There was also conflicting evidence about the risks of pediatric exposure specifically; FDA “specifically rejected any notion that film was safer than tablets with respect to pediatric exposure,” noting among other things that “because the film cannot be spit out (unlike a tablet) it is possible that a child who obtains access to even one dose might be more adversely affected than a child who obtains access to a single tablet.” A senior brand manager for Reckitt said internally that, based on subsequent studies by Reckitt, “[u]nder no circumstances can we make the claim that Suboxone Film is safer or better at reducing pediatric exposures than Suboxone Tablet.” Reckitt, of course, claimed that it had other evidence suporting safety superiority to tablets.

The Third Circuit has used the rule of reason to assess product hopping antitrust claims, and commented that “courts may need to be cognizant of the unique separation between consumers and drug manufacturers in the pharmaceutical market, especially in cases where there is evidence of extreme coercion of physician prescribing decisions or blatant misrepresentation about a generic manufacturer’s version of a drug.”

For purposes of summary judgment argument only, Reckitt conceded that it did everything that plaintiffs alleged and that its conduct was anticompetitive in nature, but that the purchaser classes’ claims still failed. The court disagreed.

Part of the successful theory was that, even though generic tablets have been cheaper than film for years, “Reckitt has retained its share of the market through its disparagement campaign.”

Because the Third Circuit has not presumed that false advertising inflicts de minimis harm as some circuits do, instead considering it as part of the broader picture of an antitrust case, the court evaluated the claims without any such presumption. The court also rejected Reckitt’s argument that actionable statements had to be “clearly or demonstrably false” or “blatant misrepresentations.”

Although “wrong, misleading, or debatable” statements can indicate competition on the merits, it doesn’t always do so: The Third Circuit has clarified that some falsities can destroy competition, including “making false statements about a rival to potential investors and customers.” Indeed, “in some cases, such defamation, which plainly is not competition on the merits, can give rise to antitrust liability, especially when it is combined with other anticompetitive acts.” Although that court referred to “blatant misrepresentation” in its prior discussion of pharma antitrust, “[n]o fair reading of these cases suggests that the Third Circuit was opining that only ‘blatant misrepresentations’ could be anticompetitive.”

A reasonable jury could find that Reckitt’s alleged false “safety story” campaign was plainly not competition on the merits, particuarly given that this wasn’t a stand-alone deception claim but part of conduct constituting an alleged illegal product hop, “an actionable scheme under the Sherman Act.”

Also, the court pointed out that the concerns in the out-of-circuit cases are about difficulties of proof of materiality/harm, but the regulatory context here offered a “unique separation between consumers and drug manufacturers.” “Given this separation, and unlike other industries where consumers can credit or discredit disparagement as they see fit, the ultimate consumers of the drug at issue did not have the opportunity to evaluate the statements and decide whether or not to rely upon them.” [Of course, I don’t think that matters—if the deception was material and harmful, then the theoretical possibility that doctors or ultimate consumers could evaluate the claims didn’t materialize and the market as a whole was harmed.]

Here, too, there was “evidence that Reckitt actively sought to deprive consumers of the ability to actively evaluate safety claims and make the choice between film and tablets.” Reckitt’s own expert “testified that, in the relevant period of 2010, physicians were less mindful of and more reliant on statements made by pharmaceutical companies and their representatives.”  Its own documents showed that many physicians viewed Reckitt as a “trusted advisor” and “relied upon Reckitt’s sales representatives for information and training.” Reckitt campaigned to convince doctors to stop giving patients a choice in the form of Suboxone and warned physicians to distrust patients who preferred tablets because those patients could be misusing or diverting the tablets.

Likewise, while other cases say that false advertising merely provides an opportunity for a competitor to counteradvertise (without ever requiring any empirical testing of that proposition), “the unique characteristics of the pharmaceutical market” made that unworkable. When Reckitt engaged in its campaign, the only relevant products on the market were Suboxone tablets and Suboxone film; there were no generic products and none could be legally advertised. “Reckitt remained the lone voice pitting one of its products against the other and controlling the entire flow of information to physicians, insurers, and the public. Accordingly, unlike in the cases upon which Reckitt relies, the alleged false advertising at issue actually eliminated the forum for competition in the advertising market.”

In addition, the regulatory context always matters. (Citing Trinko in what is perhaps an unusual way?) Given the FDA’s marketing rules, unsubstantiated safety statements (lacking substantial evidence or statistically significant data from head-to-head clinical trials) were deemed false/misleading. And plaintiffs produced evidence that Reckitt lacked the necessary evidence, and that its executives were aware of this when they made the claims. At the time, it hadn’t performed any clinical tests and had “only a subjective belief based on the characteristics of film, including unit dose packaging, dissolution rates, and strong adherence to the sublingual mucosa.” Nor did Reckitt have any data to suggest that film had less pediatric exposure potential. FDA disagreed with the safety claims. This allowed plaintiffs to survive summary judgment.

Reckitt argued that unsubstantiated statements didn’t violate antitrust law and weren’t “false” or “blatantly misleading” because there wasn’t definitive expert evidence either way.

Applying this reasoning in the context of the pharmaceutical market would make little sense. In the real world, pharmaceutical manufacturers must perform adequate studies and provide sufficient data to substantiate marketing statements about its drug. Reckitt’s legal construct would flip that burden and require that an antitrust plaintiff disprove the validity of marketing statements by the manufacturer. In other words, a pharmaceutical manufacturer could, as part of an antitrust scheme, make unsupported claims about its drugs without doing any studies to substantiate those claims but be insulated from potential antitrust exposure because no contrary studies exist.

Plaintiffs had evidence that Reckitt, experienced in pharma, understood the regulatory requirements, including the substantial evidence/substantial clinical evidence standard. “Yet, taking the facts in the light most favorable to Plaintiffs, Reckitt made the safety statements to the pharmaceutical industry disregarding whether they were true, thereby creating the false perception that it actually had statistical support for the claims.” A jury could believe that it wasn’t Reckitt’s technical violation of the FDA regulation that was anticompetitive, “but rather Reckitt’s false representation to the pharmaceutical community that it actually had scientific support for its claims.”

crypto lender plausibly violated UCL via unlawfulness and deceptiveness

Jeong v. Nexo Capital Inc., 2022 WL 3590329, No. 21-cv-02392-BLF (N.D. Cal. Aug. 22, 2022)

Nexo’s Crypto Credit service allows users to take out loans against cryptocurrency collateral. Jeong alleged that, in response to SEC action targeting Ripple/XRP and the cratering price, Nexo limited the use of Ripple on its platform, causing customers to default on loans taken out against XRP collateral. This allegedly breached Nexo’s duty of good faith and fair dealing and constituted a violation of California’s UCL. The court partially granted/denied Nexo’s motion to dismiss.

The false advertising parts: Jeong alleged that Nexo advertised to consumers that it does not own users’ collateral (e.g., “Clients retain 100% ownership of their digital assets.... Nexo’s clients can enjoy their crypto wealth immediately, without having to sell their digital assets.”) while acting otherwise—eventually invoking its ownership right over users’ collateral to justify liquidation of that collateral (e.g. “Taking into consideration the fact that ... Nexo acquires the ownership of the collateral while the Nexo crypto credit is outstanding, when liquidations are effected, Nexo disposes of its own digital assets rather than rendering services to its clients, as it is the case with the repayments and the standard Nexo exchange service.”).

In addition, Jeong alleged that Nexo violated the unlawful prong of the UCL by offering loans in California despite lacking a California Finance Lender (CFL) License.

Previously, the court had dismissed a CLRA claim without leave to amend, finding that it was not plausible that Nexo offered “services” under the CLRA. However, it found that Jeong sufficiently pled misleadingness claims about “ownership.”

The court now found the breach of contract claim sufficiently pled.

UCL unlawful due to lack of license theory: Sufficiently alleged. Recall that the UCL’s “coverage is sweeping, embracing anything that can properly be called a business practice and that at the same time is forbidden by law.” The UCL “borrows violations of other laws and treats them as unlawful practices that the unfair competition law makes independently actionable.” While Nexo argued that the CFL only covered “money” loans, with money defined as “a medium of exchange that is authorized or adopted by the United States or a foreign government,” that argument was pointing to the wrong section of the law. The CFL provides that “[n]o person shall engage in the business of a finance lender or broker without obtaining a license from the commissioner”:

Nothing in this provision suggests that engaging in the “business of a finance lender or broker” requires lending “money” according to a particular statutory definition. Under the CFL, a “finance lender” includes “any person who is engaged in the business of making consumer loans or making commercial loans.” “Consumer loan” is defined as “a loan, whether secured by either real or personal property, or both, or unsecured, the proceeds of which are intended by the borrower for use primarily for personal, family, or household purposes”—which again provides no insight on whether a loan must be in fiat currency. The definition of “finance lender” indicates that “[t]he business of making consumer loans or commercial loans may include lending money,” (emphasis added), but this is an inclusive definition—it does not suggest that a loan must be in fiat currency.

In keeping with the CFL provision that it should be “liberally construed and applied to promote its underlying purposes and policies,” one of which is “[t]o protect borrowers against unfair practices by some lenders,” Jeong wasn’t required to plead that his loan was in fiat currency. And he sufficiently alleged that his injury was at least in part due to Nexo’s lack of licensure.

This also allowed a UCL unfairness claim to proceed.

UCL false advertising: “Plaintiff has plausibly pled that a reasonable consumer would have been deceived by Nexo’s public statements about lack of ownership over users’ collateral given its alleged invocation of ownership to liquidate that collateral[.]” Nexo argued that it didn’t claim to own any collateral if a user wasn’t in breach of the loan-to-value collateral requirements, and owning users’ collateral after an LTV breach was consistent with a “traditional understanding of collateral under U.S. law.” The court was unimpressed and found Nexo’s position to clash with the alleged conduct and the language of the contract, which did claim ownership while the loan was outstanding. The court thus didn’t reach plaintiff’s other theories of false advertising, including that Nexo allegedly advertised that there are “#ZeroFees” associated with its services, but Jeong allegedly was charged fees when Nexo liquidated his XRP collateral.

But Nexo succeeded in keeping its class action waiver intact.

Monday, August 22, 2022

California Supreme Court reaffirms strict liability for false advertising in Serova

Serova v. Sony Music Entertainment, --- P.3d ----, 2022 WL 3453395, S260736 (Cal. Aug. 18, 2022)

Not bound by Article III, the California Supreme Court issued a ruling despite the parties’ settlement.

Serova bought Michael, “an album of music billed as Michael Jackson’s first posthumous release,” which promised “9 previously unreleased vocal tracks performed by” Jackson. Serova alleged that some of these tracks featured a Jackson imitator. She sued under the UCL and CLRA for misrepresentations on the album’s packaging and in a promotional video.

The Court of Appeal upheld an anti-SLAPP motion because the statements were noncommercial speech “directly connected to music that itself enjoyed full protection under the First Amendment” and “concerned a publicly disputed issue about which [the speaker] had no personal knowledge.” The California Supreme Court reversed.

The statements were “commercial advertising meant to sell a product, and generally there ‘can be no constitutional objection to the suppression of commercial messages that do not accurately inform the public.’” Not all marketing of artistic works is noncommercial speech. Specifically, and dealing with the most serious error in the lower court’s reasoning,

a seller’s purported lack of knowledge of falsity does not tell us whether that seller’s speech is commercial or noncommercial, and commercial speech does not shed its commercial nature simply because a seller makes a statement without knowledge or that is hard to verify. The First Amendment has long coexisted with no-fault false advertising laws.

There was also no copyright preemption.

Serova alleged that people familiar with Jackson’s voice, including family members (some of whom performed with him in The Jackson 5), disputed the authenticity of three of the album’s tracks. Sony, the publisher, allegedly offered the public “complete confidence in the results of our extensive research as well as the accounts of those who were in the studio with Michael that the vocals on the new album are his own.” The Jackson estate, urging the authenticity of the tracks, offered the opinions of “six of Jackson’s former producers or engineers, who reviewed raw vocals at a listening session; one of Jackson’s previous musical directors; one of Jackson’s vocal directors; two hired forensic musicologists; and two other industry professionals with connections to Jackson.” (The estate’s letter is not part of the case any more but provides context for Sony’s claims.)

Based on the parties’ arguments, the court considered only whether Sony’s speech was noncommercial. The parties agreed that the CLRA and UCL “can constitutionally restrict speech properly classified as commercial.” [The court did not need to resolve whether Sony could be compelled to say that the tracks “might not” contain Jackson vocals as a remedy.]

So, were Sony’s statements, “a brand new album from the greatest artist of all time” with “9 previously unreleased vocal tracks performed by Michael Jackson,” commercial speech?

The speaker—a seller promoting sales of an album—and the audience—potential buyers—supported categorizing the speech as commercial. Content is typically commercial if it makes “representations of fact about the business operations, products, or services of the speaker (or the individual or company that the speaker represents) ... for the purpose of promoting ... the speaker’s products or services.” This includes identifying “those affiliated with a product or service.” Whether there was a public controversy was not relevant; commercial speech routinely “relates to a matter of significant public interest or controversy,” and is not immunized from regulation thereby. As the US Supreme Court said in Bolger, “[a] company has the full panoply of protections available to its direct comments on public issues, so there is no reason for providing similar constitutional protection when such statements are made in the context of commercial transactions.” Here, the content of the statements, made in traditional advertising contexts, was commercial, touting “Jackson’s vocal contributions” to increase sales.

Sony argued that its statements were noncommercial because they pertained to art and identified an artist, whose identity “can be an important component of understanding the art itself.” “But if Sony’s assertion that Jackson contributed lead vocals affects consumers’ experience of Michael, this illustrates how misrepresentations about an artist’s contributions can harm consumers in ways that matter to them.” [Citing Dastar and Rogers; noting in a footnote that Dastar suggested that Lanham Act false advertising claims might sometimes govern statements about artistic provenance without raising any First Amendment concern.] As Rogers noted, artistic works “are also sold in the commercial marketplace like other more utilitarian products, making the danger of consumer deception a legitimate concern that warrants some government regulation.”

“Relief has long been available in California to unwitting purchasers of imitation art who relied on false representations about authenticity.” [Citing Smith v. Zimbalist, 38 P.2d 170 (Cal. Ct. App. 1934) (finding unenforceable the sale of a violin represented as a Stradivarius when buyer and seller were both mistaken and the violin was a cheap copy).] And, while Dastar took out the statutory foundation for some Lanham Act claims, “numerous courts have entertained false advertising claims premised on statements about creative contribution.” [citing both UCL and Lanham Act claims, including false advertising claims.]

“The reasons commonly given for why commercial speech is subjected to greater regulation — a commercial speaker’s close relationship to a product or service, profit motive, and the government’s traditional role in preventing commercial harm— still have relevance when an artistic product is marketed.” And there was no evidence of a chilling effect from allowing false advertising claims.

True, “[t]here may be instances where statements about artistic contribution, or artistic works more generally, are not offered to convey product information but are themselves part of an expressive enterprise, possibly parody or satire.” [citing Hustler v. Falwell and Mattel v. Walking Mountain] “And it is conceivable that an album seller might include, in liner notes, an essay theorizing about artistic contributions that is itself an expressive work.” Also, “artists might choose to obscure their identities for expressive reasons through pen names or pseudonyms.” But this case didn’t implicate those scenarios; it instead involved “an explicit promise of a superstar’s vocal contributions to a product,” which was commercial. [The distinction here, despite the framing as being about commercial speech, doesn’t seem to be about commerciality; it seems to be about falsifiability/materiality.]

In addition, Sony’s claims weren’t inextricably intertwined with or adjunct to an expressive work. True, several California cases have held that “the truthful use of a name and likeness to promote an expressive work cannot support a claim for violation of the right of publicity,” but another held that, where advertisements “did not reflect any character or portion of” an expressive work and instead “contained a fictitious critic’s favorable opinion,” the advertisements were not entitled to heightened protection as adjuncts to an expressive work and were instead subject to consumer protection laws. [citing Rezec v. Sony Pictures Entertainment, Inc., 116 Cal.App.4th 135 (2004); cf. Keimer v. Buena Vista Books, Inc. 75 Cal.App.4th 1220 (1999) (holding that “even promotional materials on book cover reflecting false claims of book could be commercial speech”). A footnote noted that Keimer, which concerned material directly excerpted from the underlying book, “has been criticized as insufficiently protective of free speech,” but given that Sony’s ads didn’t reproduce the music from Michael, the court declined to address that criticism “or, for that matter, address the full contours of a doctrine governing the promotion of expressive works.”].

Charles v. City of Los Angeles, 697 F.3d 1146 (9th Cir. 2012), also held that “although a television program was itself noncommercial, expressive speech, a billboard advertising the program was commercial speech, because “speech inviting the public to watch” a program “is not inherently identical to the speech that constitutes the program itself.” [This was in the context of billboard time/place/manner regulations, which don’t involve truth/falsity as the relevant line between lawful and unlawful speech, and thus pose different questions about the risks of liability.] Charles pointed out that “the principle motivating California’s protection of advertisements adjunct to expressive works ‘is the need to protect advertisers from tort actions that would otherwise threaten the ability of publishers to truthfully promote particular works’ by accurately conveying the content of those works, even when that content is itself false.” Protecting advertisements for protected works is “justified only to the extent necessary” to achieve this purpose.

But Sony’s identification of Jackson as lead vocalist wasn’t covered by this principle. “No legal command nor law of nature compelled Sony to include what, for present purposes, it concedes are false claims ….” The alleged falsehoods were “distinct from, rather than adjunct to or reflective of, any artistic expression on Michael. Serova is not suing because Michael’s artistic expression has spilled over into promotional advertising, but because she believes Sony falsely advertised the lead vocalist.”

Sony offered an even broader argument, one that I think should be rejected even if you think that this opinion is wrong about the relationship between the artistic content and the claims here. Sony argued that its statements couldn’t be commercial because their truth was not “readily verifiable,” and that Sony’s knowledge of the controversy didn’t give it knowledge of falsity. The Court of Appeal adopted this argument, which is why it is very important that the California Supreme Court rejected it.

False advertising laws cover representations of fact made to promote products or services, without requiring that covered representations be made with personal knowledge or be readily verifiable. True, the traditional justifications for regulating commercial speech include that it is relatively more verifiable than noncommercial claims “in that ordinarily the advertiser seeks to disseminate information about a specific product or service that he himself provides and presumably knows more about than anyone else,” as Kasky said (emphasis added). But that doesn’t mean that personal knowledge or ready verifiability is always required. The court here pointed out that the statements held regulable in Kasky were about subcontractors’ operations, not its own—it was the connection to Nike’s own operations that made Nike’s speech commercial. Nike was likely in a position to verify those statements, but that wasn’t required.

Moreover, it seems problematic to assess the commercial or noncommercial content of speech by measuring a speaker’s level of personal knowledge. For example, if we correlate knowledge with commercial speech, then two identical promotional statements might face differing regulations because of something invisible to consumers: the speaker’s mental state. Also, if actual knowledge were the standard, that knowledge could be easily avoided.…

Looking at the speech’s ease of verifiability, as opposed to its falsifiability/not being puffery, was similarly mistaken. Consumer protection laws incentivize commercial speakers to verify their claims. “And it is when statements about products or services are hard to verify that the need for consumer protection may be strongest.”

Moreover, whether Jackson sang lead vocals “may be more easily verifiable” by Sony “in exactly the sense that justifies commercial speech regulation more broadly. … Few were likely better positioned to identify the Cascio tracks’ singer than Michael’s producers and sellers, who had not only profit motive, but also access to and business dealings with the album’s primary creators.” Sony had an incentive to secure any necessary licenses and warranties, and it allegedly claimed to have “overwhelming objective evidence” of authenticity, “a message at least in tension with its present claim that verifiability was unattainable.” Expert disagreement about product characteristics doesn’t change the fact that sellers can be presumed to know relatively more about the product than anyone else. Difficulties of proof at trial don’t render promotional speech noncommercial.

Sony could argue that its speech was not sufficiently false or misleading to be regulable, but that’s a separate liability question, not a speech classification question. [In other words, even puffery is commercial speech—as Charles implicitly accepts, at least for billboard regulation.]

The court rejected Sony’s related argument that strict liability for its speech would wrongly chill expression, a revival of a claim made in Kasky. Strict liability regulation of commercial speech is common and has been for a hundred years. It exists in the CLRA, the UCL, the FTC Act, and the Lanham Act. Fault requirements have been applied to torts that cover noncommercial speech, but “the leeway for untruthful or misleading expression that has been allowed in [these] other contexts has little force in the commercial arena.” As the US Supreme Court has said, “[a]ny concern that strict requirements for truthfulness will undesirably inhibit spontaneity seems inapplicable because commercial speech generally is calculated. Indeed, the public and private benefits from commercial speech derive from confidence in its accuracy and reliability.”

Penultimately, what about the album title, Michael, and artwork, featuring images of Jackson? These might be expressive and inextricably intertwined with the underlying work, but the court didn’t need to reach that issue given the framing of the case.

Finally, Sony’s answering brief to the state supreme court raised, for the first time, copyright preemption, arguing that challenges to a court’s subject matter jurisdiction can be raised at any time. Whether or not this was true, the underlying argument was wrong. Consumer deception was an extra element avoiding preemption, and Serova’s claims didn’t depend on who owned what, nor did she seek to enjoin reproduction or distribution of the sound recordings. [§1202 preemption might have made for a more interesting argument there.]

Thursday, August 18, 2022

Court reduces NY GBL statutory damages award to avoid unreasonableness in Joint Juice case

Montera v. Premier Nutrition Corp., 2022 WL 3348573, No. 16-cv-06980-RS (N.D. Cal. Aug. 12, 2022)

Montera sued Premier on behalf of a class for its marketing of Joint Juice. A jury found Premier liable for violations of NY GBL sections 349 and 350 and found actual damages to the class of nearly $1.5 million, representing full refunds of the money they paid for Joint Juice. Plaintiff then sough statutory damages in the amount of $50 per unit sold for violations of GBL § 349 and $500 per unit sold for violations of GBL § 350, as well as prejudgment interest. “A reduction of statutory damages is permitted under Supreme Court and Ninth Circuit law, and is warranted in this case because the calculated amount of statutory damages, $91,436,950, is ‘so severe and oppressive as to be wholly disproportioned to the offense and obviously unreasonable,’” especially given that statutory damages can’t be obtained in class actions in NY state court. The court thus reduced statutory damages to a bit over $8.3 million, but awarded prejudgment interest of nearly $4.6 million, calculated as class members’ claims accrued.

The court also refused to decertify the class or grant judgment as a matter of law. “[D]espite the possibility of recoveries in the thousands of dollars for class members, the class action remains a superior device for resolving claims in this case.”

The court had previously ruled that statutory damages would be calculated on a per-unit basis, since a violation of the law

occurs when a consumer views the label and purchases the product. This means a plaintiff may experience multiple violations of the statutes. Indeed, Premier marketed its product to encourage consumers to drink the product regularly and to make multiple purchases. Consumers were repeatedly exposed to the label, and repeatedly made the choice to buy the product.

Much of Premier’s argument was that statutory damages would be so high as to be unconstitutional in this case, but that couldn’t show that an award of statutory damages on a per unit basis would be unconstitutional in every instance. “Indeed, it is easy to imagine products for which the statutory damages to be awarded on a per unit violation would be much closer to the actual unit price, such as some smartphones or car tires.”

The parties also disputed whether Montera had to present evidence of actual damages; because the statutes allow a plaintiff to recover the greater of actual damages or statutory damages, that meant that both had to be determined and compared, so Montera was directed to prove actual damages at trial, which also assisted in the constitutional argument. The jury was only asked about actual damages, since statutory damages were a question of law for the court.

When it comes to statutory damages, “[a] statutorily prescribed penalty violates due process rights ‘only where the penalty prescribed is so severe and oppressive as to be wholly disproportioned to the offense and obviously unreasonable.’ ” Relying heavily on Justice Ginsburg’s dissent in the case that directed federal courts to apply federal class action rules to NY state claims for statutory damages, the court reasoned that “the New York legislature views the aggregation of those penalties across a class as a punitive measure.” Thus, this case was different from others involving high statutory damage awards, where the legislature had intended statutory damages to be available to classes.

But how is a district court supposed to adjust the damages? There isn’t much guidance, just some arbitrary numbers. The court looked at the Seventh Circuit’s direction “to start from harm rather than wealth, then add an appropriate multiplier, after the fashion of the antitrust laws (treble damages) or admiralty (double damages), to reflect the fact that many violations are not caught and penalized.” United States v. Dish Network L.L.C., 954 F.3d 970 (7th Cir. 2020).

Because the NY legislature wanted to avoid punitiveness, it was appropriate to consider punitive damage award precedents, which consider: “(1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.” Montera’s request for over $91 million would be more than 61 times greater than actual damages, and grossly excessive. This was so despite “significant evidence of reprehensibility,” included repeated actions/continued marketing of joint health benefits to people seeking relief from joint pain and arthritis, despite evidence of Premier’s awareness of “numerous” studies pointing to lack of benefit. However, the harm was “purely economic”—consumers wasted money but weren’t physically harmed. [The court didn’t consider whether they might have delayed other treatments.] The court did mention “the intangible harm of lost hope.… Premier Nutrition may not have targeted people with financial vulnerability, but it did target people in pain who were desperate for relief. Thus, the reprehensibility factors point in both directions.”

The ratio of statutory to actual damages was “immense,” not near the single-digit ratio the Court has decided is okay. And the third due process consideration is “not quite applicable here,” because it is, in fact, “civil penalties authorized or imposed in comparable cases,” which would seem to be applicable-but-pro-plaintiff, but again, NY didn’t want that to happen, and it was arbitrary to allow higher recoveries in federal court.

So the court awarded $8.3 million, corresponding to GBL § 349(h), $50 per unit sold. “This award of statutory damages is approximately 5.59 times greater than the amount of actual damages.”

While federal courts have declined to impose prejudgment interest for statutory damages, those cases mostly involved federal causes of action; NY law provided for it regardless of the source of the damage award.

In its renewed motion for decertification, Premier’s only new argument was superiority: now that it was on the hook, individual claimants (if they bothered to sue) could get more in statutory damages on a per transaction basis because—as Premier requested—the court limited the statutory damages available in a class action. But “[e]ven a recovery in the tens of thousands of dollars would not necessarily be sufficient to pursue an individual claim in this litigation, as such a recovery still ‘pales in comparison with the cost of pursuing litigation.’” Montera was required to provide “significant amounts of scientific evidence and retain numerous experts. It is unclear how an individual plaintiff would be incentivized to undertake those costs, even if the possible recovery was in the tens of thousands of dollars.”