Wednesday, November 23, 2022

Retailer has standing to assert Lanham Act false advertising claims against its own supplier

AHBP LLC v. Lynd Co., No. SA-22-CV-00096-XR, 2022 WL 17086368 (W.D. Tex. Nov. 18, 2022)

Lexmark provides standing to a purchaser because the harms it alleged are “commercial” harms. In summer 2020, AHBP began negotiating with the Lynd defendants for the exclusive license to market and sell a surface disinfectant/cleaner known as “Bioprotect 500” in Argentina. The Lynd defendants allegedly made false representations about the quality of the product, including that it was effective against the virus that causes COVID-19 and that it would meet the governmental standards for approval required to sell it in Argentina. Lynd issued a press release, “LYND To Disinfect & Protect Apartments with BIOPROTECTUs System.” Lynd advertised the Product as effective against the coronavirus.

Ultimately, AHBP took an exclusive license to sell the product in Argentina, with purchasing and advertising/marketing spend minimums. Defendants allegedly repeatedly promised to provide AHBP with information supporting the product’s purported two-year shelf life and identifying its composition, manufacturing and quality controls, and toxicology. In reliance, AHBP allegedly hired employees and designers, consulted with lawyers, accountants, biologists and virologists, rented warehouse and office space, and entered into contracts with buyers in Argentina. Then defendants allegedly provided a lab report that had been altered by defendants and that was run on a different disinfectant with nearly 15 times as much of the active ingredient. In early 2021, the EPA issued a Stop Sale, Use or Removal Order to defendant Via Clean ordering it stop marketing the product with claims that it was effective against public health-related pathogens, including coronavirus.

AHBP alleged that it was therefore unable to sell the product where it was licensed to do so. Its buyers allegedly refused to continue doing business with it because it couldn’t fulfill its obligations to deliver the product, it suffered severe harm to its business reputation, and its pursuit of the media campaign was rendered a total loss, causing $90 million in damages (mostly lost sales).

Unsurprisingly, fraudulent inducement, common-law fraud, and negligent inducement claims survived.

More surprisingly (perhaps the court wanted to be sure it retained jurisdiction regardless of diversity?), the Lanham Act false advertising claim survived. Lexmark says that “to come within the zone of interests in a suit for false advertising under § 1125(a), a plaintiff must allege an injury to a commercial interest in reputation or sales.” As the court here paraphrased: “Consumers or businesses that are misled into purchasing an inferior product are generally not considered within the zone of interest,” even a business misled by a supplier. Likewise, a plaintiff must show proximate cause: “ordinarily … economic or reputational injury flowing directly from the deception wrought by the defendant’s advertising; and that occurs when deception of consumers causes them to withhold trade from the plaintiff.”

First, the injuries alleged here—“lost profits and loss of goodwill”— “are injuries to precisely the sorts of commercial interests the Act protects. AHBP is suing not as a deceived consumer, but as a ‘perso[n] engaged in’ ‘commerce within the control of Congress,’ whose position in the marketplace has been damaged by the [defendants’] false advertising as to the quality of their product.”

The Third Circuit has said that businesses don’t have standing when misled by suppliers, relying on Lexmark, including that latter case’s statement that “[a] consumer who is hoodwinked into purchasing a disappointing product may well have an injury-in-fact cognizable under Article III, but he cannot invoke the protection of the Lanham Act—a conclusion reached by every Circuit to consider the question.”

But here, the court said, it was “neither bound nor persuaded by this apparently categorical rule that a business entity can never assert a claim for false advertising under the Lanham Act against one of its suppliers.” It seems to me that the court is at least bound by it, given the direct quote from Lexmark, though the gloss given here is not illogical. I can see why the court says that this isn’t an ordinary disappointed consumer case because plaintiff alleged that its goodwill was harmed as a result of the disappointment, and that doesn’t usually happen when a business buys a product for consumption, not for resale. But see The Knit With v. Knitting Fever, Inc., 625 F. App'x 27 (3d Cir. 2015) (finding no standing where supplier’s false representations allegedly damaged retailer’s reputation with its own consumers).

A blanket rule “disregards the economic realities of modern supply chains in favor of a shallow and artificially narrow understanding of the distinction between consumers and competitors.” The key was not “place in the supply chain” but “the manner in which [an entity’s] interests have allegedly been harmed.”

And proximate cause? Ordinarily requires “economic or reputational injury flowing directly from the deception wrought by the defendant’s advertising; and that that occurs when deception of consumers causes them to withhold trade from the plaintiff. That showing is generally not made when the deception produces injuries to a fellow commercial actor that in turn affect the plaintiff.”

The court distinguished the facts alleged here from other businesses-as-consumers cases. A restaurant could not recover under the Lanham Act for harm to its commercial interests

arising out of its purchase of an inferior sanitizer based on false advertising about its quality and efficacy. Even assuming that business slowed down after several instances of food poisoning, the restaurant’s injuries—in the form of lost profits and reputational harm—would not fall within the scope of the Lanham Act because it was harmed, like any other consumer, by its use of the product. Conversely, a co-distributer of the sanitizer that suffered losses as a result of the supplier’s overstatements of the product’s quality would suffer lost profits and reputational harm as a distributer rather than as a consumer.

[That’s really got to be proximate cause in disguise, because the type of harm—commercial reputation—is the same either way.] The complaint alleged that both sides were “distributors in the market for sanitizing products” and thus competitors. Even if that weren’t true, the plaintiff would have standing under the Lanham Act because it lost sales as a result of the Lynd defendants’ false advertising.

Comment: This is a proximate cause question. Those lost sales weren’t the result of people believing the false advertising—they were the result of the scheme being exposed. That seems to be a different type of causation. The court says that proximate cause is present because plaintiff alleged “both economic and reputational injury flowing directly from the Lynd Defendants’ deceptive advertising as to the quality of the Product. Plaintiff was allegedly unable to sell the Product as a result of the Lynd Defendants’ false advertising as to its efficacy.” But “directly” and “as a result” are merely asserted (as perhaps they always are). The false advertising plausibly caused the plaintiff to enter into the contract with the defendant. But it did not thereby cause the lost sales. The fact that plaintiff figured out that the claims were false caused the lost sales.

I don’t really have anything against this holding, or a strong enough commitment to a theory of proximate cause to say the line should be drawn differently. But it’s always a little weird to me that it’s much easier for a business to win a false advertising case against a rival than for a consumer—the one directly harmed—to do so, and so a little weird to see doctrine stretched to some consumers, but only consumers that are businesses, because suffering harm to goodwill is so much more important than having been ordinarily defrauded.

With that out of the way, plaintiffs sufficiently pled a Lanham Act violation: false representations about the quality of the disinfectant that it licensed to the plaintiff, made in a press release. [Consider, for causation analysis, the chain between press release and harm to plaintiff’s goodwill compared to the chain between ad and harm in the standard Lanham Act false advertising case.] The press release was also “the kind of commercial promotion governed by the Lanham Act.”

Business disparagement claims failed, however, because the allegedly false information in the lab report wasn’t plausibly disparaging of the quality of the product or of AHBP. Breach of contract survived.

Monday, November 21, 2022

Google's "order delivery/takeout" results aren't misleading/TM infringement

Left Field Holdings v. Google LLC, 2022 WL 17072948, No. 22-cv-01462-VC (N.D. Cal. Nov. 18, 2022)

Short opinion, summarized by the opening paragraph:

The plaintiffs in this case don’t like how Google facilitates online orders from their restaurants. They try to articulate claims for trademark infringement, counterfeiting, false association, and false advertising. They don’t succeed, especially considering Rule 9(b)’s heightened pleading requirements for claims sounding in fraud.

The court analyzes in detail only the theory that the “Order Online” or “Order Delivery” button is misleading by itself “because it is near the restaurant’s name and is surrounded by links that would otherwise ‘directly connect the consumer to the restaurant,’” that is, the “Website” and “Call” links. But the “Directions” link is also right there and whether that would produce a direct connection is “debatable,” and so is a button to save the restaurant to one’s own Google account, as is a star rating and a blue link to “Google reviews,” “which are obviously not provided by the restaurant.” Thus, “[i]n context, the contested button is not false association or false advertising.”

The use of the restaurant’s name was “a textbook example of nominative fair use: There is no other way to identify the restaurant; Google uses only the plain name, not a stylized logo; and there is no improper suggestion of sponsorship or endorsement.”

The plaintiffs argued that “Order Online” or “Order Delivery” led users to a third-party delivery provider “unbeknownst to the restaurant.” “But the involvement of a delivery provider is not hidden from the user.” Plaintiffs’ screenshots showed that the delivery provider’s name was disclosed, and the complaint alleged that, if there are multiple delivery providers available, the user selects which to use. “Those facts are not consistent with false association or false advertising,” and using the restaurant’s name here was also nominative fair use. Nor was this counterfeiting: “A customer who places an order gets food from the restaurant, not Google.”

In cases where users didn’t get a “storefront” page to place an order, they would see a “landing” page offering “a list of options to place an order for pickup or delivery.” The court couldn’t imagine how this page would support any of the plaintiffs’ claims, especially since the plaintiffs’ submissions omitted the page footer and its prominent Google logo, undercutting any misleadingness argument. Yikes: “[I]n a complaint alleging misleading design choices, cropping out such an important part of the page raises serious Rule 11 concerns about the twelve lawyers who signed the amended complaint.”

But there’s leave to amend!

 

Monday, November 14, 2022

9th Circuit clarifies that Rogers v. Grimaldi covers news/political speech, not just "art"

Logical, but this is the clearest statement yet. Opinion here. The court also clarifies that, when Gordon v. Drape said that courts should consider whether the parties made the same type of use, the level of generality had to be pretty specific--it was not enough that both parties made "source-identifying" use if they did not identify the same product, and it was also not enough that they were both "online" services. Also of note: Although identifying the actual authors in prominent places was helpful to avoid explicit misleadingness, it wasn't required "at every possible turn."

Friday, November 11, 2022

contempt finding saves FTC's $120 million victory against real estate scammer even after AMG Capital

Federal Trade Commission v. Pukke, --- F.4th ----, 2022 WL 16568278, No. 20-2215, No. 21-1454, No. 21-1520, No. 21-1521, No. 21-1591, No. 21-1592 (4th Cir. Nov. 1, 2022)

Court’s intro:

Andris Pukke and other appellants sought to develop thousands of acres of land in Belize, which they marketed as a luxury resort called “Sanctuary Belize.” In their sales-pitch to U.S. consumers, many promises were made but not kept. In 2018, the FTC shut this down, calling Sanctuary Belize a “scam,” and alleging violations of the Federal Trade Commission Act and the Telemarketing Sales Rule for making misrepresentations to consumers. The FTC also brought contempt charges against Pukke stemming from past judgments against him. After an extensive bench trial, the district court found ample evidence of violative and contumacious conduct, ultimately ruling in the FTC’s favor. Pukke and others now appeal, raising a host of issues. None of their arguments have legal merit, nor can they overcome the evidence against them. We thus affirm in large part, the one exception being vacating the equitable monetary judgments in accordance with the Supreme Court’s decision in AMG Capital Management, LLC v. Federal Trade Commission, ––– U.S. ––––, 141 S. Ct. 1341 (2021) (holding that the FTC has no authority to seek monetary relief under Section 13(b) of the FTC Act).

After extensive hearings, the district court found that SBE had violated the FTC Act and TSR, and it held Pukke and others in contempt for violating a previous order. The defendants lied by claiming that the development had no debt; that the money collected would go back into developing the site; whether there would be amenities “comparable to those of a small American city” when it was completed; that it would be completed within two to five years; that there was a strong resale market for lots; and that Pukke wasn’t meaningfullly involved in Sanctuary Belize (he’d been convicted for obstruction of justice for lying to the FTC before, so SBE knew it would scare away purchasers if Pukke’s involvement were discovered).

These misrepresentations violated the FTC Act and the Telemarketing Sales Rule and permanently enjoined Pukke from engaging in any real estate ventures, from any involvement in telemarketing, and from making material misrepresentations in connection with the sale of any goods or services. The court permanently enjoined two other defendants from telemarketing and making material misrepresentations as well.

Under Section 13(b), the court entered an equitable monetary judgment of $120.2 million against defendants.  In addition, Pukke and the two others were in contempt of permanent injunctions entered in an earlier case: Pukke helped found a company called AmeriDebt, which turned out to be a credit counseling scam. The stipulated judgment required him to pay $172 million in restitution to the FTC, but all but $35 million was suspended on the condition that Pukke “cooperate fully” with the FTC. The judgment also permanently enjoined Pukke from making false representations in connection with the telemarketing of any good or service.  “Rather than cooperate, however, they conspired to hide their assets. As a result, in 2007, Pukke and Baker were held in contempt and incarcerated in order to coerce compliance with the court’s AmeriDebt orders.” But they didn’t turn over their holdings in the Belize land.

The court found Pukke and others in contempt of the AmeriDebt judgment when they committed telemarketing violations, and Pukke in contempt for repaying a loan made to him ostensibly to pay the FTC before fully satisfying his debt to the FTC.

The contempt order of $120.2 million “represent[ed] the total consumer loss their contumacious conduct caused,” and it “represent[ed] consumer loss caused by their violation of the Telemarketing Order [from AmeriDebt], which prohibited any false or misleading representation in connection with ‘telemarketing.’ ” That is, the district court found, “the harm” from the “contumacious conduct is indeed the same as the harm caused by the FTC Act violations, in the present case $120.2 million.”

In addition, Pukke did not fully cooperate with the FTC and now owed the full $172 million of the AmeriDebt judgment to the FTC rather than the suspended amount of $35 million. “Pukke must account for the difference between the $4.26 million that Pukke” diverted from Sanctuary Belize to repay the loan and the “$4.112 million [the lender] paid the FTC, approximately $148,000—the exact number to be determined after an accounting.”

There were also default judgments against one individual and several corporations, permanently enjoining them from involvement in real estate ventures, telemarketing, and misrepresentations in future sales and holding them liable for $120.2 million.

The Pukke and two key individual defendants and some of the defaulted corporations timely appealed.

To establish civil contempt, the FTC needed to prove by clear and convincing evidence “(1) the existence of a valid decree of which the alleged contemnor had actual or constructive knowledge; (2) that the decree was in the movant’s favor; (3) that the alleged contemnor by its conduct violated the terms of the decree, and had knowledge (at least constructive knowledge) of such violations; and (4) that the movant suffered harm as a result.”  There was “no hint of an abuse of discretion” in the district court’s findings that this standard was satisfied for the two contumacious courses of action at issue.

Pukke argued that AMG Capital made the $172 million AmeriDebt judgment unlawful. But the AmeriDebt judgment was made final nearly twenty years ago, and “appeal from a postjudgment order does not revive a lost opportunity to appeal the judgment.” The court was not about to allow him to “defy injunctions with impunity over the span of nearly two decades.” Anyway, he agreed to “waive all rights to seek judicial review or otherwise challenge or contest the validity of [the] Order” when he consented to the AmeriDebt final judgment, trading certainty for the ability to challenge it in the future.

It was ok to impose the $120.2 million judgment against them as part of a telemarketing contempt order because the contempt motions were consolidated with the Sanctuary Belize case, giving the district court “a precise idea of the harm to consumers caused by the violations of the telemarketing injunction.”

Direct liability under the FTC Act and the Telemarketing Sales Rule was also present. The TSR prohibits deceptive acts or practices that “misrepresent[ ], directly or by implication ... [a]ny material aspect of the performance, efficacy, nature, or central characteristics of goods or services that are the subject of a sales offer.” The TSR also makes it a violation to “provide substantial assistance or support to any seller or telemarketer when that person knows or consciously avoids knowing that the seller or telemarketer is engaged in” a deceptive act or practice.  

While AMG Capital held that Section 5 of the FTCA does not authorize the FTC to seek, or a court to award, “equitable monetary relief such as restitution or disgorgement,” vacating that judgment was no help to Pukke, because he already had an overlapping $120.2 million judgment against him for contempt of the telemarketing injunction, so the FTC didn’t need to defend the award under Section 5/the TSR. Plus, the judgment entered under Section 13(b) included permanent injunctions and appointed a receiver. Those were ok, because “AMG did not impair courts’ ability to enter injunctive relief under Section 13(b).” Perhaps because of this overlap/the FTC’s reliance on the contempt award, the court did not explain that AMG Capital also did not address how penalties would be calculated for violating a Rule.

The default judgments were also fine.

Pukke argued that the TSR didn’t apply to selling real estate in Sanctuary Belize because the TSR only prohibits misrepresentations in the sale of “goods or services.” “It is generally true that the sale of real estate, of itself, does not constitute a good or service. But here Sanctuary Belize’s sales pitch inextricably linked the lots to many promised services and amenities when salespersons marketed the real estate as part of a luxury resort. That is, the services and amenities to be provided were fundamental to the telemarketing scheme.” They included promises of “paved roads, fresh drinking water, wastewater management, electrical service, a stable canal system, and security,” along with a hospital, medical center, “world class” marina, casino, golf course, and an airport, “which all certainly count as promises of goods or services intertwined with the sale of real estate.” “When the sale of real estate is so closely tied to promises of goods and services, the TSR is properly implicated, and the district court did not err in its analysis.”

Pukke argued that AMG Capital required nullification of the district court’s appointment of a receiver and everything the receiver has done. Not so. “The appointment of a receiver has long been considered an ancillary power that a court can deploy to effectuate its injunctive relief,” which, again, remains available under §13(b).

Appellants also argued that the contempt judgments and the permanent injunctions against them were time-barred by the statute of limitations contained in 28 U.S.C. § 2462, which requires that a “proceeding for the enforcement of any civil fine, penalty, or forfeiture” be “commenced within five years from the date when the claim first accrued.” But neither a contempt judgment nor a permanent injunction is a “penalty” as described in Section 2462, and even if it were a penalty, the statute of limitations hadn’t run. A contempt sanction is not a penalty because it does not redress a violation not of public laws; it redresses violation of a court order. Also, “a penalty punishes past acts whereas an injunction prohibits future conduct.” Separately, the district court found that Pukke’s contumacious and violative conduct ran from the early 2000s up through 2018 when the FTC brought suit, meaning there was no time bar.

Pukke further argued that laches should apply because the contempt sanction was entered 15 years after the claimed violation. But laches is about equity and there was nothing inequitable here. “Pukke’s violations did not start and end 15 years ago; Pukke’s violations have occurred continuously for nearly two decades. Moreover, any alleged delay was caused at least in part by Pukke’s efforts to conceal his Sanctuary Belize malfeasance through misrepresentations and aliases.”

The injunctions also were not unduly broad. “Here, the district court found extensive misrepresentations regarding telemarketing and the sale of real estate intertwined with the promotion of goods and services. Thus, the various permanent injunctions—including the prohibition of SBE individuals and entities from engaging in further misrepresentations—are appropriately tailored to prevent similar scams in the future. Appellants ‘must remember that those caught violating the [FTC] Act must expect some fencing in.’”

diaper "no harsh ingredients" claim not puffery

Rice v. Kimberly-Clark Corp., No. 2:21-cv-01519-DAD-KJN, 2022 WL 16804522 (E.D. Cal. Nov. 8, 2022)

Plaintiffs claimed that Huggies Snug and Dry diapers were falsely advertised as safe/not harsh for babies, but their son developed “severe and persistent rashes, lesions, blistering, and what appeared to be chemical burns on his skin” under the diaper. On its Amazon.com storefront, Huggies represents, among other things, that Snug and Dry diapers help keep an infant “dry & comfortable” and contain “[n]o harsh ingredients.” But some negative consumer reviews of the product, dating to 2012, describe moderate to severe bumps, rashes, blisters, bleeding, peeling, and/or chemical burns that developed on their babies under the area covered by the diaper after they began using the Snug and Dry product. They brought the usual California claims.

Under Ninth Circuit law, their equitable restitution claims were dismissed because they have adequate remedies at law. But injunctive relief was still possible because they alleged that they and other future consumers will continue to be misled.

KC’s knowledge: The complaint quoted specific consumer reviews, responded to in many cases by the “Huggies team.” “The significant number of complaints pre-dating plaintiffs’ purchase by up to two years, the alleged responses by defendant’s agents to those complaints, the fact many of the complaints were posted on defendant’s own website, and the many similar complaints on top retailers’ websites is sufficient, in combination, to allege defendant’s knowledge at this stage.”

Fraudulent affirmative misrepresentations: Adequately alleged, despite KC’s arguments that the statements at issue were puffery and that no reasonable consumer would need to be warned about the possibility of diaper rash resulting from the use of diapers. Although the court wouldn’t credit general allegations about a “pervasive” marketing campaign without more detail, it did consider arguments about KC’s Snug and Dry Amazon.com storefront.

The Amazon storefront claimed that Snug and Dry diapers offer “unbeatable protection,” contain “[n]o harsh ingredients,” are “[h]ypoallergenic and free of fragrances, parabens, elemental chlorine & natural rubber latex,” “help[ ] prevent leaks for up to 12 hours, day or night,” and “absorb[ ] wetness in seconds to help keep baby dry & comfortable.” While “unbeatable protection” is puffery, “No Harsh Ingredients – Hypoallergenic and free of fragrances, parabens, elemental chlorine & natural rubber latex,” “help[ ] prevent leaks for up to 12 hours, day or night,” and “absorb[ ] wetness in seconds to help keep baby dry & comfortable” were all “specific representations of fact on which a reasonable consumer could rely.” Taken together, they could lead a reasonable consumer “to believe Snug and Dry diapers keep a child’s skin dry, minimize diaper rash, do not contain ingredients that could harm infant skin, are suitable for sensitive skin, and are ‘safe for ... intended use,’ when in reality a ‘significant number of children who wear [them] will develop’ serious injuries.”

Plaintifs didn’t allege that KC implied that the diapers would never cause diaper rash, but that the statements suggested the diapers will never cause more severe, “unexpected” injuries, including chemical burns.

Fraudulent omissions: KC allegedly omitted (1) a statement qualifying defendant’s claims regarding the safety of Snug and Dry diapers, and (2) a label on the packaging warning consumers to stop using the diapers if a child suffers an unusual adverse skin reaction, as the diapers “may be the source of their child’s injury ....” To adequately plead a deceptive advertising claim under the FAL, plaintiffs must “identify specific advertisements and promotional materials; allege when [they] were exposed to the materials; and explain how such materials were false or misleading.” That was done here with the Amazon storefront and its affirmative statements, allegedly misleading because of the omitted information.

Under the CLRA/UCL unlawful prong, plaintiffs had to show that KC had a duty to disclose information regarding the Snug and Dry diaper’s alleged “propensity to cause prolonged adverse skin reactions.” This requires a material omission central to the product’s function, combined with at least one of the following: the defendant “has exclusive knowledge of material facts not known or reasonably accessible to the plaintiff,” “actively conceals a material fact from the plaintiff,” or “makes partial representations that are misleading because some other material fact has not been disclosed.” Here, plaintiffs plausibly alleged that KC made partial statements that misled consumers into believing the diapers were safe for all babies.

Even if some diaper rash is a fact of life, plaintiffs alleged “more severe, unusual, and persistent injuries, including ‘chemical burns’ resulting exclusively from the Snug and Dry diapers.” KC itself implicitly acknowledged that a chemical burn is not diaper rash when it responded to a customer review alleging the diapers caused “severe chemical burns,” by saying “Huggies products can’t cause a chemical burn ....”

Fraud and unfairness prong UCL claims also survived for now.

Friday, November 04, 2022

A lemon of a lawsuit against lemon-flavored water

Angeles v. Nestlé USA, Inc., --- F.Supp.3d ----, 2022 WL 4626916, No. 21-CV-7255 (RA) (S.D.N.Y. Sept. 30, 2022)

The court dismissed Angeles’ NY GBL and related claims alleging that San Pellegrino Essenza Lemon & Lemon Zest sparkling mineral water deceptively indicated that it was made with actual lemons and lemon zest rather than flavoring. The court found deception implausible given the use of “flavored” on the label. (I admit, I would be tempted to go the other way based on the “lemon zest,” which is a specific thing and not a well-known flavoring, along with the pictures of actual lemons on the label. But mostly I’m trying out cross-posting to Mastodon, @rtushnet@mastodon.social, and LinkedIn, since it seems to me that it might be time to increase readers’ options for following this content.)



The bottle displays “S. PELLEGRINO ESSENZA,” “SAN PELLEGRINO TERME – 1899,” “LEMON & LEMON ZEST,” “FLAVORED MINERAL WATER WITH NATURAL CO2 ADDED,” as well as “drawings of fresh full and cut lemons, lemon peels and leaves from the lemon plant, in a bottle covered in yellow cellophane.” The back label however, says that it “CONTAINS NO JUICE” and includes the Nutrition Facts panel, which states that it only contains “CARBONATED MINERAL WATER” and “NATURAL FLAVORS.” Angeles alleged that “[c]onsumers will expect the Product’s lemon taste is provided by lemon ingredients and have an appreciable amount of lemon”—“an amount sufficient so that all the lemon taste comes from lemons.” But she alleged that the drink didn’t contain “any appreciable amount of lemon ingredients,” but instead cheaper natural compounds that imitate lemon taste, such that, “though it may contain some lemon compounds, it lacks enough, if any, of the complementary flavor compounds in real lemons.”

While “courts in this Circuit have sustained claims where the language of a product label, in context, referred not only to a flavor but also indicated the presence of an ingredient,” they have regularly dismissed cases where a product’s label makes no “claims about the ingredients constituting the flavor.” This was the case here, where the phrase “Lemon & Lemon Zest” “merely represents that the Product is lemon flavored. The Product does not use language such as ‘made with lemon,’ ‘made with lemon zest,’ or any other similar message that would convey to a reasonable consumer that the Product includes those ingredients.” The label explicitly stated “no juice,” and the ingredients list confirmed this.


Wednesday, November 02, 2022

Cocoa/cacao? More like tomay-to/tomah-to, court rules

Lee v. Mondelez Int’l, Inc., 2022 WL 16555586, No. 22-cv-1127 (LJL) (S.D.N.Y. Oct. 28, 2022)

Lee sued over Green & Black’s dark chocolate products, which advertise specific percentages of “cacao” on their front label, such as 60%, 70%, and 85% cacao. The front labels also announce that the products are “made with the finest Trinitario cacao beans” or “fine Trinitario cacao beans.” The ingredients list, however, refers to chocolate, chocolate liquor, cocoa butter, or cocoa. Lee argued that cacao, the unprocessed/unroasted form, is more nutritious than cocoa, and so the advertising of “cacao” on the front was false.



The court found that claims under NY’s GBL (and DC’s similar statute) and common-law fraud were not preempted by the FDCA, but that deceptiveness to a reasonable consumer was not plausibly pled.

The court noted that “the FDA often conflates cacao and cocoa,” which meant that it hadn’t specified a standard of identity/ruled on whether there was a difference (helpful to Lee for preemption purposes) but which also reinforced the idea that there was no particular reason to think that consumers would distinguish them either. The FDA’s conflation was “ ‘persuasive evidence of the meaning of the label’ in the cacao context—namely, that the two terms have been treated as interchangeable, and that use of the word ‘cacao’ in lieu of ‘cocoa’ is not misleading or necessarily based on the level of processing.”

More generally, Lee failed to allege that reasonable consumers would think that “cacao” meant unprocessed. In context, the language didn’t imply lack of processing; the use of “made with” rather suggested only that cacao was the source of an essential flavor ingredient. The percentages, in context, clearly conveyed how much of the bars were derived from cacao beans, not the nature of the processing the beans underwent or their nutritional value. “The placement of the percentage reference directly below the representation of ‘Trinitario cacao beans’ thus could only indicate to a reasonable consumer that the ‘x’ percentage of the Product is derived from the Trinitario cacao bean (as opposed to, for example, other ingredients, such as sugar or vanilla extract), not that the cacao remained in its raw unprocessed form.” Even if it was ambiguous, the ingredients list, containing “cocoa,” “chocolate liquor,” and “cocoa butter,” did not contradict but clarified the front label, dispelling any inference of deception, given that those things are all made from cacao products. Thus, there was nothing false about the claims.

Lee argued that reasonable consumers would understand references to percentages to refer to raw cacao, but his cited sources were mostly not about chocolate bars but products sold as powders, and they suggested that “when a manufacturer intends to refer to the cacao that has the health benefits Plaintiff claims he believed the Products to have, it refers to ‘raw cacao,’ or to ‘raw cacao powder’ or to ‘cacao nibs.’” Nor did he allege that his sources were widespread or otherwise connected to the understanding of the reasonable consumer. Two were product ads, one was a recipe directed at “those who cook” [apparently not the general consuming public these days], and only one was even apparently directed to the general public, and advocated the use of cacao powder and not the consumption of chocolate bars.

This conclusion also doomed both falsity and scienter for common law fraud; if the FDA didn’t distinguish, then it would be hard for Mondelez to have the necessary scienter.


Tuesday, November 01, 2022

Disparagement as TM infringement? One court thinks, sure

Homelight, Inc. v. Shkipin, 2022 WL 16528142, No. 22-cv-03119-TLT (N.D. Cal. Oct. 28, 2022)

Defendants allegedly both disparaged Homelight and infringed its trademark, which seems a weird combo, but half of the TM claims aren’t as contradictory as they seem—the other half really are. The parties operate “online platforms that match real estate agents with residential homebuyers or sellers.” Homelight alleges that defendants’ reviews and articles falsely and misleadingly accuse Homelight of engaging in illegal price fixing, violating other state and federal laws, defrauding or misleading the public, or otherwise harming consumers. Also, “defendant HomeOpenly allegedly misuses plaintiff HomeLight’s registered logo in a way that is likely to confuse consumers, and HomeOpenly Inc.’s logo is confusingly similar to HomeLight’s logo.”

The court found that trademark infringement was plausibly pled, which is unfortunate. The allegations of the complaint make clear that the putative “misuse” of the logo is, per the complaint, that, “[i]n its many webpages that make false and misleading allegations about HomeLight, HomeOpenly prominently uses the HomeLight logo in a manner that falsely suggests association or sponsorship, and which results in consumer confusion or is highly likely to result in consumer confusion.” Using HomeLight’s logo on pages that allegedly falsely disparage HomeLight is not infringement—it is simply implausible that consumers would believe that HomeLight associated with or sponsored a company that disparages it.

plaintiff's registered logo

defendant's logo

OTOH, while the logo claim is a stretch—they share colors and descriptive conceptual elements, and it’s hard to imagine the logo is really that strong—it’s not facially unbelievable, though there’s still some tension between the two theories of disparagement and confusion.

The court, unfortunately, misapplies nominative fair use, reasoning that “[i]n this case, however, plaintiff alleges that defendants are using plaintiff’s trademark to refer to defendants’ goods or services. Therefore, the traditional fair use doctrine is the proper analysis rendering the nominative fair use doctrine inapplicable.” But the putative services are information about the plaintiff (albeit allegedly disparaging)—that is, as in New Kids, clearly nominative. Sigh.

False advertising: Sufficiently pled, despite Shkipin’s argument that his reviews were not commercial speech. Courts consider: whether (1) “the speech is an advertisement,” (2) it “refers to a particular product,” and (3) “the speaker has economic motivation.” Here, (3) is the key issue. While “[a] mere failure to disclose bias or financial interest would not necessarily make speech commercial,” plaintiffs alleged that defendants used the reviews to disparage competitors, pushing business towards HomeOpenly. Although it’s a free website, it “makes money through ad revenue, and so it indirectly benefits when consumers use its site.” [This on its own is clearly not enough—so does the New York Times.]

In addition, while the site allowed consumers to post their own reviews, defendants allegedly “exercise control over consumer reviews to cast further dispersions on plaintiff. (For instance, the defendants allegedly include disclaimers below positive reviews warning that plaintiff has solicited the reviews in exchange for a cash gift card.)” This was plausibly commercial speech. [This really has to be seen in the context of direct competition, because otherwise it makes all ad-supported review sites into commercial speakers.]