Thursday, December 28, 2023

identical product labeled "For children" and sold at higher price could be deceptive

Mendoza v. Procter & Gamble Co., No. CV 23-1382-DMG (JPRx), 2023 WL 8860900 (C.D. Cal. Dec. 20, 2023)

Mendoza brought the usual California claims, alleging that Vicks Vapo cough and cold treatment products marketed as being for children were identical to the adult versions, only pricier; the court mostly rejected P&G’s motion to dismiss. The Children’s VapoRub front label states that it is for children two and older; the Standard Product’s front label includes no age instruction. Id. ¶ Children’s VapoRub costs approximately $1.03 more per ounce than Standard VapoRub. The Children’s VapoPatch includes a picture of a cartoon child wearing the patch; the Standard Product contains a more defined image of an adult wearing the patch, and costs at least $0.70 less. The Children’s VapoCream includes the language “easy to apply” and illustrations of various objects, such as an airplane, butterfly, flowers, stars, paper airplanes, and clouds; the Standard Product does not have such language or illustrations and costs less.

There was no FDCA preemption of a standard misleadingness claim. Further, the complaint sufficiently alleged an affirmative misrepresentation that led reasonable consumers to believe, falsely, that the products were specially formulated for children—not just a price differential. Negligent misrepresentation claims failed, however, for want of non-economic damages.

Mendoza had standing to challenge the VapoCream products because the products and alleged misrepresentations were sufficiently similar to those of the products she did buy. And she sufficiently alleged that she “would like to, and would consider, purchasing the Products again ... [but] will be unable to rely on the Products’ advertising or labeling in the future, and so will not purchase the Products again although she would like to” to have standing for injunctive relief.

Friday, December 22, 2023

Cy pres recipient in false advertising case has to be false-advertising-focused group, court rules

 You might think that class action rules can be a bit like Calvinball, and I'd be hard pressed to disagree. Here's another hurdle to jump, although it's certainly jumpable.

Hawes v. Macy’s Inc., 2023 WL 8811499, No. 1:17-cv-754 (S.D. Ohio Dec. 20, 2023)

The court denies settlement approval in this case alleging that Macy’s misrepresented the thread count in some of the sheets it sold, because it doesn’t like the cy pres part of the remedy. The global class action settlement created a $10.5 million common fund, and the parties jointly moved the court to approve. As part of the settlement, Macy’s agreed to change the packaging on its sheets to include the language: “Thread count determined from a sample of a representative sheet by counting cotton yarns and by separating and counting adjacent parallel polyester yarns.” The $10.5 million fund would first satisfy any notice and administrative costs. The remaining balance was to go towards the class counsel’s attorneys’ fees, incentive payments for the named plaintiffs, and payouts to the class members who submit eligible claims. Class members whose purchases Macy’s can verify through its own records would receive $7.50 per unit of CVC Sheets purchased (and could potentially receive a secondary distribution), as would class members who had proof of purchase through receipts. Class members who attest under penalty of perjury that they purchased CVC sheets would receive $2.50 per household (no matter how many sheets persons in the household claim to have purchased) and no secondary distribution.

If, after all that, it was “economically feasible” to make a second distribution, the first two groups of claimants would receive their pro-rata share of the remaining funds, weighted according to the purchase price that each claimant paid for his or her sheets, but capped at 50% of that purchase price. If it wasn’t economically feasible to make a second distribution, or if funds remain even after a second distribution, the agreement provides that the remaining funds would go to the Public Interest Research Group (PIRG), a nonprofit advocacy organization that the parties chose.

The notice plan already went into effect and was “remarkably successful at generating claim submissions,” with an estimate of over one million claims before the close of the claims period; roughly 10% could be verified either by internal record or proof of purchase.Only 59 class members opted out and none objected.

First, the court found that the state consumer protection law claims couldn’t cover the US because it wasn’t enough to allege that “substantially similar statutes” exist in all other states is insufficient, and they only cited California and Missouri consumer protection law in the complaint. But fraud and unjust enrichment, along with UCC breach of warranty, did not create any conflicts. Thus, the court certified a class.

“The relief provided in the settlement (at least for those whose purchases are verifiable by Macy’s business records or who can provide proof of purchase) likely meets or exceeds what any class member could have procured by an individual lawsuit.” The submitted claims would likely account for around 40% of the class. “For low-value-claim class actions like this one, a 40% distribution rate weighs towards a finding of adequate relief.” Nor were appropriate incentive awards to class representatives a problem.

Although “every circuit to squarely consider the issue” has found that Rule 23 does not preclude cy pres awards. But when are they ok? The Eighth Circuit says only when “existing class-member claimants have been fully compensated and further distribution to remaining class members is not feasible” and when the recipient is “for the next best use for indirect class benefit.” Accordingly, the use to which the funds are put must be “consistent with the nature of the underlying action and with the judicial function.” The recipient must be one that “relates directly to the injury alleged in [the] lawsuit and settled by the parties.”

Here, it was proper to use cy pres as a last resort. “While Category 3 claimants will only receive $2.50, which would fall short of a full recovery for a fully-proven claim, the claimants in that category would likely not succeed at trial because they would struggle to prove they actually bought sheets,” and further distributions to absent class members were also feasible.

So what was the problem?

As far as the Court can tell, … PIRG does no work addressing false or misleading labeling for bed sheets, textiles more generally, or even false advertising as a category. … PIRG’s work appears to primarily focus on company or government policy related to toxins, waste, or climate change. … [M]ost of PIRG’s consumer-related campaigns relate to product safety, food safety, and unfair loan practices. True, the bed sheets here may have had a rougher texture than the customers had been led to believe, but uncomfortable and unsafe are two different categories, and no one contends the sheets raised safety issues.

Perhaps even more troubling to the Court in its assessment of PIRG as a potential cy pres recipient, … PIRG uses portions of its funds to donate to other organizations—organizations whose missions are even a further cry from any issues this suit presents. In 2016, PIRG granted $40,000 to the People’s Action Institute, an organization that advocates for socialized medicine, pursues “climate justice,” and fights against “the growing threat of authoritarianism in rural communities.” PIRG also donated over a million dollars to Environment America, an organization that seeks to ban plastic. Last, but not least, PIRG donated $60,000 to “Onward Together,” a PAC that supports progressive candidates in their runs for offices across the country.  

Whatever one may think of the merits of such endeavors, it is hard to see how they have much to do with bed sheets, thread count mislabeling, or even consumer fraud more generally. In sum, the Court can discern no way in which a potential multi-million-dollar award to PIRG is the “next best use” for a class fund created to settle consumer fraud claims stemming from inaccurate bed sheet thread counts. PIRG does not relate “directly to the injury” suffered by the class members and it would be an inappropriate exercise of the “judicial function” to divert class money to an unrelated organization that has nothing to do with the class or the injury its members suffered.

Worse, the parties didn’t provide argument beyond a “vague, unsupported statement” that PIRG “has as its purpose the advancement of consumer protections and rights.” Nor was it enough to provide a declaration from PIRG’s Director of its Consumer Watchdog Team stating that they will use any award “to promote accurate and truthful labeling and advertising of consumer bedding products … [to] educate consumers with a focus on truth in labeling … [to] serve as a marketplace watchdog … [and to] research and monitor the marketplace.” This was too vague a promise, and anyway there was no mechanism to enforce it. Further, money is fungible, so even enforceable restrictions wouldn’t help. (Does that mean every cy pres recipient has to be newly created? That seems … unhelpful, and also fungibility could presumably be overcome with evidence that there’d be no bedding marketing program at all in the absence of the money.)

“[T]he Court has an obligation to ensure that settlement proceeds benefit the class. The cy pres doctrine simply allows for a distribution that achieves those benefits indirectly.” The court singled out the National Advertising Division of the Better Business Bureau, which “exists entirely to address false advertising,” though TINA seems like a much better bet to me. Apparently NAD would satisfy the court’s desire for “narrow[] tailor[ing]” to the class’s interests, but the parties needed to identify some “organization that verifiably engages in meaningful work related to deceptive advertising,” requiring new notice to the class. The court expressed its concern that “the settlement notice postcard distributed to potential class members included no mention of the cy pres award, [which should] be included in any future notice so that class members can raise objections to that distribution if they wish.”

Wednesday, December 20, 2023

reseller's unsuccessful challenge to takedown notices leads to more successful infringement counterclaim

CDC Newburgh Inc. v. STM Bags, LLC, --- F.Supp.3d ----, 2023 WL 6066136, 22-cv-1597 (NSR) (S.D.N.Y. Sept. 18, 2023)

CDC sued STM, alleging violations of New York state and federal law arising from STM’s involvement in the removal of ten of its product listings from The court dismissed CDC’s defamation, tortious interference, and common law unfair competition claims, while allowing most of STM’s counterclaims to survive (except for dilution and common law unfair competition).

CDC is a “non-authorized reseller” of consumer products that it purchases from resellers and distributors, among other sources, in order to resell these products at a discount. Although it didn’t usually purchase its inventory directly from the relevant manufacturers, it alleged that its products are authentic.

CDC alleged that STM knew that, when a trademark owner submits a report that a seller is listing a counterfeit product on Amazon, Amazon automatically removes the listing without warning to the seller, and Amazon’s algorithm considers this history of removal when determining how frequently the accused seller’s other products appear in consumer’s searches, reducing the accused seller’s sales of all products that it lists on Amazon.

STM sells cases, bags, sleeves, and other accessories for electronic devices under the “STM” and “DUX” trademarks. Codefendant Lienau allegedly assists clients with removing fraudulent products from Amazon’s website, and reported CDC to Amazon for selling counterfeits.

CDC allegedly knew that the items it sold through these ten listings were authentic because it obtained them from a reputable, publicly traded company that purchases these items from STM. It alleged that Lienau filed the reports for anticompetitive reasons after defendants suspected or confirmed the products were genuine.

STM’s counterclaims alleged that online marketplaces threaten a manufacturer’s ability to maintain its brand integrity because customers cannot easily distinguish between the authorized and unauthorized sellers of a manufacturer’s products. Thus, it alleged, it conducts all sales directly or through authorized dealers who are prohibited from selling on third-party websites. Its warranty is allegedly a “material component” of “genuine” STM products because consumers factor the existence of this warranty into their decision to purchase an STM product, and CDC isn’t an authorized dealer. CDC allegedly sold products as “new” when they were previously sold, and potentially opened or repackaged. CDC allegedly didn’t comply with STM’s customer service requirements because it cannot provide the type of instruction and support (for iPhone cases?) that STM requires authorized dealers to offer to consumers. Thus, the products sold by CDC allegedly don’t include the STM warranty (is this actually legal in NY?). This allegedly infringes STM’s marks and diminishes their value because consumers associate negative experiences that may result from purchasing them with STM’s brands. (As usual, a compelling and intuitive theory of harm.)

Defamation: The “counterfeit” statements to Amazon were opinion. A statement of opinion is one which is either “accompanied by a recitation of the facts upon which it is based” or “does not imply that it is based upon undisclosed facts.” Here, the challenged reports said things like

“Please note only CaseMotions and Sportique are authorized by STM to sell on Amazon. These sellers are not authorized nor are they buying direct from STM therefore we conclude this product is counterfeit”; and (2) “Please know STM has authorized only Sportique and CaseMotions to sell on outside of STM selling direct. STM has double checked their records and have no data to support this seller acquired STM product through a legitimate channel therefore we can safely assume they are selling counterfeit products.” Thus, the allegedly defamatory statements were opinion, not based on undisclosed facts.

STM, however, could not use NY’s anti-SLAPP law in federal court.

Tortious interference: Removal of listings on an e-commerce platform does not constitute harm to the underlying business relationship with the platform, so it wasn’t sufficiently alleged that STM interfered with CDC’s business relations with Amazon.

Nor did the alleged acts constitute unfair competition under NY state common law: there was no palming off or misappropriation.

The court also found it was inappropriate to exercise jurisdiction over a request for declaratory judgment of noninfringement.

Trademark infringement/unfair competition under §1125(a)(1)(A) was sufficiently pled and first sale couldn’t be decided on a motion to dismiss. But the state common law claim for trademark infringement was dismissed for failure to allege more than conclusorily that CDC acted in bad faith.

False advertising under § 1125(a)(1)(B) was also sufficiently pled because STM alleged that CDC made a literally false statement that the products came with their warranties, which was presumed to be material.

Dilution: “spare, conclusory allegations” that the STM trademarks “are widely recognized by the general consuming public of the United States” and “STM has expended substantial time, effort, money, and resources advertising and promoted STM Products with the STM trademark” were insufficient.

Monday, December 18, 2023

Using dominant competitor's part names/numbers for comparison isn't false advertising, TM infringement, or (c) infringement

There really should be a fee shift when a competitor harasses another competitor for daring to make comparisons of part numbers, but we don't seem to live in that world. 

Simpson Strong-Tie Co. v. Mitek Inc., 2023 WL 8697700, No. 20-cv-06957-VKD (N.D. Cal. Dec. 15, 2023)

Simpson sued its competitor MiTek for using Simpson part numbers for structural connectors/fasteners for use in the construction industry in its catalogs/other promotional material; the court here, after a nonjury trial before the magistrate judge, rather comprehensively rejects its false advertising, trademark, and copyright claims. (It sure would be nice if we could get a consensus that copyright in parts numbers and names should not be allowed.)

Structural connectors are used to join, and transfer the load between, different structural members, including vertical members like studs and posts, horizontal members like floor joists and roof trusses, and foundations. The engineer of record must indicate on construction drawings the specific structural connectors that will be used on a given project, whether a custom connector designed by the engineer to join and transfer the load between members or a pre-engineered connector. Typically, the engineer will specify a connector noting both part name and manufacturer (e.g., Simpson or MiTek), which the contractor/subcontractor is responsible for purchasing. The configuration and load capacity are the two most important considerations for selecting a connector, though aesthetics, treatment, and cost also play roles.

Simpson’s structural connectors are specified on most construction drawings in the US; its market share is over 75%. A contractor may request that a different connector be used, but may not use a different connector or otherwise deviate from the construction documents without the engineer’s approval. 

For decades, companies selling structural connectors have used descriptive product names, and names that consist of an acronym formed from the initial letters of the words of the product name followed by a model number or stock number. The product names are formed from words that are common in the construction industry, including: hanger, anchor, clip, concrete, masonry, brick, post, column, cap, tie, strap, beam, base, girder, rafter, roof, truss, hold down, plate, and retrofit. Simpson and MiTek part names generally consist of an acronym formed from the initial letters of the words that describe the connector in the product name, followed by a model number or stock number that corresponds to information about the particular connector, such as load capacity or size. Although Simpson’s naming process uses descriptive words, it’s “not dictated by a rule or system,” though it is limited by the number of characters that can be used—a maximum of 16. 

MiTek’s product and part names are also descriptive, but MiTek often begins by assigning a MiTek connector in development the same name as the Simpson connector with which MiTek intends to compete. Sometimes it keeps that name for sale. For 51 of MiTek’s structural connectors, MiTek’s part name is identical to the part name for the Simpson connector for the same application, and for 32, its part name differs from the part name for the Simpson connector for the same application by one letter.

Engineers rely on the information in the parties’ catalogs in evaluating whether a connector can be used in a particular application, and contractors may also do so. Simpson’s catalog includes a two-page “alphabetical product index” or “API,” an alphabetical list of the part names for the connectors included in the catalog with the page number where information about the connector can be found. New parts in recent catalogs are marked as new; Simpson registered copyrights in two of its recent catalogs. All Simpson’s connectors, catalogs, marketing literature, and retail display materials, are clearly labeled with the “Simpson Strong-Tie” name.

MiTek’s 60th product catalog also contains a reference number index, which includes most of the part names listed in the API in Simpson’s 2019-2020 Wood Construction Connectors catalog; the same was true of the most recent product catalog. All MiTek’s connectors, catalogs, marketing literature, and retail display materials, are clearly labeled with the “MiTek” name.

For decades, companies selling structural connectors have used “reference numbers” to cross-reference their competitors’ products, including charts listing [X] part names next to competitors’ part names, including Simpson’s. When MiTek uses reference numbers in its marketing materials, it does not affirmatively identify the reference numbers as Simpson part names. The MiTek catalogs’ reference number index lists Simpson part names in alphabetical order, without attribution to Simpson, and the page number where a MiTek connector product may be found, and are introduced with the text:

Reference numbers shown through the charts in this catalog are part numbers which may be more familiar to customers in various regions of the United States. These are included for the convenience of our new customers who have recently switched from a competitor’s product line to [MiTek/USP].

The reference numbers in this catalog are for general application comparison only and should not be used as a substitution tool. The user is responsible to compare specific load values, fastener schedules, material specifications, and other factors to determine suitability of use for any particular product.

MiTek’s catalogs also use Simpson part names as reference numbers, without attribution to Simpson, in the tables that summarize the technical information for the MiTek connector offered (see second column, Ref. No.):

MiTek’s Reference Number Conversion Guide likewise lists Simpson part names in alphabetical order, without attribution to Simpson, next to MiTek part names, and this use of reference numbers is repeated in its website/software/mobile app and point of sale materials.

example of point of sale display with "ref. #" in upper right under MiTek part number

Most MiTek connectors have at least one attribute that differs from the referenced Simpson connector. Nonetheless, MiTek’s use of reference numbers “is consistent with how reference numbers have been used in the construction industry for decades, and in particular with how reference numbers have been used by providers of structural connectors.”

Simpson offered no admissible evidence of actual confusion, and no evidence that anyone chose to specify or purchase a MiTek connector based on MiTek’s use of a Simpson part number as a reference number because the engineer believed the reference number meant that the MiTek connector was equivalent to or substitutable for a Simpson connector. MiTek received inquiries about whether its connectors could be used in particular applications, including in place of Simpson’s, but there was no evidence that any inquiry arose from confusion or misunderstanding associated with MiTek’s use of Simpson part names as reference numbers or MiTek’s use of part names similar or identical to Simpson part names. Although a customer (reportedly) expressed concern that a MiTek product wasn’t a good substitute for the referenced Simpson product, there was no admissible evidence that the consumer was confused or misled.

Simpson offered a survey purporting to show confusion as to (1) source/affiliation/authorization and (2) equivalence.

False advertising: The use of a Simpson part as a reference number was not a necessary implication that the MiTek parts were equivalent and substitutable in all respects; one reasonable interpretation was that the products were generally suited to the same application or function and should be compared. Nor, for similar reasons, was the use intentionally misleading.

Because Simpson’s structural connectors are specified in the first instance on most construction drawings in the United States, the reference number serves as a starting point for identifying the relevant MiTek connector for further investigation for a possible substitution of the MiTek connector for the Simpson connector. Even where Simpson structural connectors are not already specified on the construction drawings, because Simpson is by far the dominant provider of structural connectors throughout the United States and therefore familiar to designers and engineers, the reference number serves a similar purpose as a starting point for identifying the relevant MiTek connector for evaluation to be specified instead of or in addition to (as in the case of dual specification) the referenced Simpson connector.

Simpson’s survey was unpersuasive because it was suggestive. For example, instead of using an open-ended question asking respondents what “Ref #: DTT1Z” means on the MiTek product label, the survey used a close-ended question (i.e. “do you believe that ...”), suggesting to respondents (a) that DTT1Z refers to a product that belongs to a company other than MiTek and (b) that using “DTT1Z” as a reference means that MiTek is communicating its product is equivalent to the product of another company. This meant the survey offered “no meaningful evidence” of confusion. Also, the control group respondents were exposed to the same MiTek stimuli, but the reference numbers were removed; the questions didn’t make sense in that context. For example, the control respondents were asked whether “based on this label, do you believe that MiTek sells [a product number not included in the label.]” MiTek’s expert testified that “there’s no way that [the respondents] could intelligently say yes. How could they say yes when don’t know what’s being compared?” Even so, the results of the primary and control surveys were very similar, “suggesting that the primary survey results are not reliable indicators of how the relevant audience understands MiTek’s use of reference numbers.”

Nor was the expert’s conclusion that the responses showed recognition of the numbers as Simpson part numbers reliable. The survey tested only six part names for “distinctiveness” or “secondary meaning,” and the results didn’t indicate that respondents identify these particular part names with Simpson.

Materiality was also a problem. With few exceptions, the engineer of record is in charge of choosing the structural connectors, and Simpson didn’t show that they were influenced “to any degree” by MiTek’s use of Simpson part numbers as reference numbers. They consider geometry, load capacity or strength, and, to a lesser extent, aesthetics, treatment, and cost.

Nor did Simpson show injury.

Passing off/§43(a)(1)(A): The part names were descriptive or, in some cases, generic. The court did not find secondary meaning. “[T]he relevant audience typically does not encounter Simpson’s part names alone,” but rather with Simpson and/or Strong-Tie. The evidence showed that engineers specify connectors by manufacturer (i.e. Simpson or MiTek or both) in addition to including specific part names on construction drawing.

And even if Simpson had shown secondary meaning, it couldn’t show likely confusion. Although similarity of “marks” and direct competition/overlapping marketing channels favored Simpson, strength, actual confusion, and consumer sophistication didn’t. As for intent, while MiTek did use some names identical to those first used by Simpson, “the Court is not persuaded that MiTek did so with the intent to confuse the relevant audience, but rather because the names described well the connector at issue.”

California UCL: same.

Copyright infringement of the API: I’m not sure there was any copying in fact of the index, unless MiTek replicated names of parts it didn’t stock! But it doesn’t matter. Merger/thin copyright, including the lack of protectability of product names/abbreviations that are standard or prevalent in an industry, prevented any finding of infringement. Alphabetical order, of course, is not protected, but Simpson argued that its product names for the connectors and their corresponding part names reflected at least a minimal degree of creativity and were protectable elements of the API. “Some of Simpson’s part names appear to lack even minimal creativity, see, e.g., (‘H’ for ‘Hurricane Ties’), but most of the others have the minimal level of creativity required for copyright protection, see, e.g., (‘HSLQ’ for ‘Heavy Shear Transfer Angle’).” Ugh. “[W]ith some exceptions, MiTek has not shown that there are so few ways of naming the connectors at issue that the part name merges with the idea of the connector itself or is otherwise unprotectable, particularly where the part name has four or five letters.” Ugh again.

Nonetheless, even assuming that all the product names in the APIs qualified for copyright protection, the copying was de minimis. The catalogs were concededly not substantially similar—the alleged copying was limited to the new material, no more than 20 new part names, in each API, of which MiTek copied at most 12 out of about 400 names (in a 300+ page catalog). Both in quantity and quality, this was de minimis. This would be true even if the court considered the API as a whole as a protected work.

Plus, even if there had been substantial similarity, the use was fair. (Applause to the court for separately considering protectability and substantial similarity instead of just considering them in factors two and three of the fair use analysis, which courts often unfortunately do.) Though MiTek’s use was commercial, so was Simpson’s, and there was more scope for fair use of its highly factual work. The amount used was tiny, and there was no effect on the actual or potential market for the works, “as there is no such market for Simpson’s catalogs, but only for the connectors the catalogs describe.” But asserting a copyright claim didn’t constitute misuse because there were itty-bitty copyrightable bits.

MiTek also didn’t show laches, even though Simpson knew of this type of use since at least 2013, and Simpson knew of similar uses of Simpson part names by other competitors, including MiTek’s predecessor companies, since at least 1988. At least by 2015, Simpson knew that MiTek planned to continue ignoring its legal threats; this was unreasonable delay. But, because Simpson was seeking only prospective injunctive relief, that wasn’t enough.

Was there evidentiary prejudice? MiTek argued that relevant documents and witnesses with information regarding early uses of product names and part names by companies other Simpson were no longer available by the time Simpson filed this action. But none of the non-copyright claims depended on the idea that Simpson created the part names or was the first user.  “Nor does the question of whether Simpson’s part names serve a source-identifying function now depend on another company’s use of the same part name at some point in the past.” (Genericity can, or at least could; maybe not And MiTek already made a persuasive showing on industry practice, so it didn’t need better or different evidence.

Nor was there expectations-based prejudice because MiTek didn’t show that it would have avoided investments or changed its advertising had Simpson sued earlier.

Friday, December 15, 2023

Reasonable consumers may not be required to peel back labels in store to read drug facts

Zimmerman v. L’Oreal USA, Inc., 2023 WL 8587620, No. 22-cv-07609-HSG (N.D. Cal. Dec. 8, 2023)

This putative class action bringing the usual California statutory claims alleges that L’Oréal misleadingly advertises the sunscreen benefits of some of its cosmetic products, such as L’Oréal Infallible Fresh Wear 24HR Foundation. The front label statements claiming it provides “Up to 24HR Breathable Texture,” “Up to 24H Fresh Wear,” and “Sunscreen Broad Spectrum SPF 25” allegedly led Zimmerman to believe that the foundation provided 24 hours of sunscreen protection. But this protection lasts only two hours. The drug facts panel, located underneath a peel-back sticker on the back label, directs users to “reapply at least every 2 hours” for sunscreen use.

Similarly, plaintiff Heuchan alleged that she purchased L’Oréal Infallible Pro-Glow Foundation, whose front label claims that it provides “Up to 24HR Foundation,” “OCTINOXATE Sunscreen,” and “Broad Spectrum SPF 15.” It also has a drug facts panel located underneath a peel-back sticker on the back label, directing users to “reapply at least every 2 hours” for sunscreen use. Plaintiff Giordano made similar allegations about “Lancome Teint Idole Ultra 24H Long Wear Matte Foundation,” with a front label claiming “Octinoxate Sunscreen” “Broad Spectrum SPF 15,” and “Up To 24H Color Wear & Comfort.” However, the complaint didn’t allege that the Teint foundation’s drug panel facts are located underneath a peel-back sticker on the back.

L’Oréal argued that it wasn’t plausible that a reasonable consumer would be deceived because the 24-hour statements clearly referred only to cosmetic benefits, and that a reasonable consumer would refer to the back panel. The court agreed with L’Oréal as to Giordano only.

The “Up to 24H Foundation” statement was ambiguous, but it was not clear that this ambiguity “can be resolved by reference to the back label.” “The Court cannot conclude as a matter of law that a reasonable consumer would peel back the label in the store, before purchasing the product, to find and read these instructions.” So too with the Teint foundation, but the back label resolved any ambiguity. (As a consumer, I'd worry about being forced to buy anything I'd done that to!)

alleged misrepresentation of partnership/approval suffices for false advertising claim

Faire Wholesale, Inc. v. Tundra, Inc., 2023 WL 8586681, No. 23-cv-02538-JSC (N.D. Cal. Dec. 8, 2023)

When does TM logic creep into false advertising cases? Faire operates an online marketplace connecting wholesalers with retailers. Faire sued Tundra, which makes a comparison tool. Faire sued, challenging Tundra’s unauthorized use of Faire’s users’ login credentials to gain access to Faire’s non-public information. The court denied Tundra’s motion to compel arbitration; the remaining statutory claims weren’t intricately intertwined with, nor dependent on, Faire’s service terms. Tundra—a nonsignatory to the service terms, and thus the arbitration agreement—couuldn’t force Faire to arbitrate those claims.

Tundra’s motion to dismiss was granted with leave to amend on the CFAA and California Comprehensive Computer Data Access and Fraud Act claims, and the California UCL claim to the extent it relies on the two former claims. The rest of the UCL claim and the Lanham Act claim survived because Faire plausibly pled that Tundra made misrepresentations likely to deceive the public into believing Tundra had partnered with Faire and was permitted to access Faire’s computers.

To list a product or search the catalog of products for sale on Faire’s platform, users must create an account with a username and password. Only users who have logged into password-protected accounts may access inventory, pricing, and contact information related to the goods available for sale on Faire’s platform. Faire’s service terms prohibit users from disclosing their passwords to third parties. Faire makes a commission on successful transactions on its platform, but Faire also provides wholesalers with a personalized link they can use to invite retailers to order directly from their shop on Faire’s platform; using that link results in 0% commission to Faire. Tundra’s comparison tool encourages its users to disclose their Faire login credentials and offers to pay the retailers up to 10% “cash back” on every purchase they make from a Faire wholesaler. Tundra solicits sellers on Faire’s platform to provide their Faire Direct links to retailers registered with Tundra by “promising to promote their brands to new retailers and give them greater exposure” to Tundra retailers. Tundra charges sellers who participate in the Faire Direct program a fee of 15% “that replaces the marketplace commission for new retailers to a marketplace and their reorders.” It then pays a percentage of this fee as “cash back” to the retailers and pockets the rest. This allegedly diverts commissions properly owed to Faire to Tundra. Tundra allegedly uses the information it scrapes from Faire’s platform, including contact information, to market its product.

UCL fraudulent claims: These were predicated on 1) Tundra’s misrepresentations it was an authorized user when logging into Faire’s platform and 2) Tundra’s misrepresentations Faire was aware of and approved Tundra’s practices. Reliance was required; Faire adequately alleged its own reliance on 1), and that its customers relied on 2), which was enough given that the parties competed.

Screenshot: "you're eligible for cash back on 11 marketplaces," with specific solicitation for Faire login credentials

The screen seeking a consumer’s login credentials plausibly supported an inference the public would falsely believe Tundra was partnering with Faire and had Faire’s permission to obtain the consumer’s Faire login credentials. (Would a clear disclaimer have solved the problem? Does it matter that there seem to be 10 other marketplaces involved?)

The Lanham Act claim also survived, for similar reasons. The screenshot was “commercial advertising or promotion.” And Faire alleged that Tundra repeatedly falsely advertised via phone and email solicitations that Faire was aware of and approved Tundra’s scheme: on December 15, 2022, Tundra’s employee allegedly told Brand A Faire approved of Tundra’s scheme and “it was above board.” The allegation that hundreds of brands have been targeted by Tundra’s false advertising “supports an inference Tundra’s misrepresentations have the tendency to deceive a substantial segment of Faire’s audience.”

On materiality, it sufficed to allege that brands pay for its services and Tundra’s false advertising influences brands to purchase Tundra’s services instead of Faire’s services. “Again, the screenshot of Tundra’s website is alone sufficient.” This seems wrong; in other cases, including one I just blogged, courts require a link between the falsity and the purchase decision. It wasn’t false that Tundra offered this service related to Faire; what was the allegation that Faire’s approval of the scheme mattered?

false advertising is harder to prove than TM infringement because of the injury requirement (not to mention materiality)

ImprimisRx, LLC v. OSRX, INC., 2023 WL 8604148, No. 21-cv-01305-BAS-DDL (S.D. Cal. Dec. 12, 2023)

The parties are compounding pharmacies that focus on medications used in optometry and ophthalmology. Section 503A compounding pharmacies fill prescriptions for individual patients. Section 503B compounding pharmacies produce compounded products in large quantities that are not necessarily tied to a specific patient, sold to practitioners and hospitals as “office stock” to be available for use on an as-needed basis. Plaintiff ImprimisRx operates both a Section 503A pharmacy and a Section 503B pharmacy, while defendants operate only a Section 503A pharmacy.

Section 503A allows for drugs compounded “for an identified individual patient ... [that are] necessary for the identified patient” to be exempted from the typical FDCA drug-approval requirements if certain conditions are met, including: (1) the drug compounding occurs after the receipt of a valid, individual prescription; or (2) the drug compounding occurs before the receipt of a valid, individual prescription “based on a history of ... receiving valid prescription orders for the compounding of the drug product” within an “established relationship” between the compounding pharmacy and the prescriber. There are other requirements, including for sterile manufacturing.

The court addressed motions for partial summary judgment on whether the statement that “OSRX operates in full compliance with Section 503A regarding compounded drugs as defined in the [FDCA]” violated the Lanham Act. Imprimis had two theories of falsity: (1) Defendants instruct prescribers to place bulk product orders, rather than for particular patients, and provide “office stock” for use by unspecified future patients; and (2) defendants fail to compound drugs in a sterile manner. The truth/falsity of these theories was subject to material dispute.

On materiality, literal falsity wasn’t enough to presume materiality. Defendants argued that their claims were in tiny print on the website and thus could not be observed by consumers. “While the statements may be presented in a small font, possible purchasers could still see them on Defendants’ website and order forms.” Imprimis also provided declarations by four ImprimisRx customers that claim Section 503A compliance was an important factor in their purchasing decisions and survey evidence that 54.1% of surveyed prescribers indicate that whether a compounding pharmacy “operates in full compliance with Section 503A” is an important factor in selecting a compounding pharmacy. But defendants’ own expert and survey evidence created a material issue of fact. (Even on sterile manufacturing?!?)

Injury: Injury too could not be presumed despite the fact that the parties were direct competitors; this wasn’t false comparative advertising. “Instead, Plaintiff must provide some proof of past injury or risk of future injury caused by Defendants’ false statements” to get money.  

Email correspondence where defendants attempted to poach Imprimis’s customers and other evidence of direct competition wasn’t sufficient to presume injury. This wasn’t mostly a two-player market, and the allegedly false statements did not harm the entire market. Although the parties were two of the largest compounding pharmacies within the post-operative ophthalmological market, Allergan, Novartis, and Bio Tissue manufacture competing products. “Because prescribers have many options in selecting post-operation ophthalmological drugs, the Court cannot assume Plaintiff’s sales were necessarily reduced by any increases to Defendants’ sales due to the false statements.”

And Imprimis provided evidence of materiality, but not of injury.  The evidence of poaching didn’t show that these customers were poached as a result of the alleged false statements. Although a precise calculation of damages is not required under the Lanham Act, a showing of some injury is required. Thus, defendants received summary judgment on Imprimis’s monetary damages and unjust enrichment claims.

In addition, Imprimis didn’t show irreparable injury, which would be required for a permanent injunction.

Counterclaims: Defendants alleged that Imprimis falsely advertises that it “compl[ies] with all cGMP requirements which are the most stringent standards in the nation.” All four challenged claims were publicly available three years before defendants lodged their counterclaims (three years being the California fraud statute of limitations, which the parties agreed was the most analogous). Defendants had the burden of showing why they lacked the means to discover the statements to invoke the discovery rule. They didn’t. “Indeed, because Plaintiff is a main competitor for Defendants, one assumes Defendants would be aware of the content hosted on Plaintiff’s website or the claims Plaintiff makes regarding its products.” So there was a presumption of laches. But there was no evidence of prejudice, so summary judgment on the laches defense was denied.

Once again, there were disputed fact issues on falsity and materiality. Once again, the counterclaimant couldn’t show any lost customers or any other actual harm, thus no irreparable harm, so there was summary judgment on monetary damages and injunctive relief.

(I guess what’s left is disgorgement?)

Dastar bars false advertising claim against "first of its kind" ads

 Vericool World LLC v. Igloo Prods. Corp., 2023 WL 8634803, No. 22-cv-02440-HSG (N.D. Cal. Dec. 13, 2023)

Vericool alleged that Igloo falsely claimed that its “Recool” biodegradable cooler was the first of its kind. The court found this Dastar-barred, since the alleged misstatements do not go to the “nature, characteristics, or qualities” of the cooler as required under the Lanham Act. The court rejected arguments that the materiality of the claim distinguished it from Dastar-barred claims, and that “first of its kind” doesn’t necessarily imply anything about patent/IP status.

Dastar explicitly stated that the Lanham Act “does not exist to reward manufacturers for their innovation in creating a particular device” and that the Act’s “common law foundations ... were not designed to protect originality or creativity.” “Yet that is precisely what Plaintiff seeks to protect in this case: the originality and novelty of its own cooler design.” There was no meaningful distinction between claims of being the “first” and claims of inventorship. “Plaintiff may not directly challenge the Recool as infringing its patents, but just as in Dastar and Sybersound, it is trying to protect its intellectual property rights through the Lanham Act.”

Vericool didn’t help its claim by stating in its papers that “[t]o vigorously defend its patent, Vericool World had to bring this claim.” But “[t]he rights of a patentee or copyright holder are part of a ‘carefully crafted bargain,’ ” and for whatever reason, it didn’t bring a patent infringement claim.

Zobmondo Ent. LLC v. Imagination Int’l Corp., No. CV 09-02235 ABC PLAX, 2009 WL 8714439, at *1 (C.D. Cal. June 23, 2009), found that the use of “original” to describe a board game was actionable because it was about first physical manufacture, not creation of the idea. The court here disagreed. The ad at issue wasn’t about physical manufacture, just used the word “original.” “Yet the Supreme Court has stated that patent law, and not the Lanham Act, offers protections for a manufacturer’s ‘originality’ and ‘creativity.’” Plus, Zobmondo didn’t explain why date of manufacture was a quality or characteristic of the game itself. “Although when a product was manufactured may have implications for patentability, such as whether it is considered novel or non-obvious, in the Court’s view it does not alter the nature of the product or a user’s experience with it.” In Sybersound, the Ninth Circuit explained that the “nature, characteristics, and qualities” of the karaoke recording referred to things like the “quality of its audio and visual effects.” “Such attributes would affect the consumer’s experience rather than the rights of third parties.” (Comment: “First printing” might therefore be different.)

Blue Spike, LLC v. Texas Instruments, Inc., No. 6:12-CV-499, 2014 WL 11848751, (E.D. Tex. July 25, 2014), report and recommendation adopted, No. 6:12-CV-499, 2014 WL 11829325 (E.D. Tex. Aug. 15, 2014), involved allegations that the defendants falsely claimed on their websites that they were the “first to create content fingerprinting technology,” and that competitors are using “borrowed” technology. Here too, the decision didn’t explain how being the first to use a specific kind of technology goes to the “nature, characteristics, and qualities” of the good itself as opposed to the innovation of the technology at issue.

This reasoning also disposed of the UCL claim.

Thursday, December 14, 2023

Of Bass Notes and Base Rates: Avoiding Mistaken Inferences about Copying

 New article with Chris Buccafusco:

Houston Law Review, Vol. 61, 2023


To prove copyright infringement, a plaintiff must convince a jury that the defendant copied from the plaintiff’s work rather than independently creating it. To prove copying, especially cases involving music, it’s common for plaintiffs and their experts to argue that the similarities between the parties’ creative works are so great that it is simply implausible that the defendant’s work was created without copying from the plaintiff’s work. Unfortunately, in its present form, the argument is mathematically illiterate: It assumes, without any underlying evidence, that the experts know or could reasonably estimate how likely it is that a song with similarity level x to another, earlier song was created without copying from the earlier song. Until the state of the underlying art changes, it is reasonable for experts to testify about the existence of similarities between works, but it is unsupported and unreasonable for them to testify about the likelihood that those similarities came about from copying. We don’t know that likelihood in the absence of evidence about base rates: how common is it for a song to have similarity level x with some other song in the corpus of existing songs, and how common it is for that similarity to come from copying or from independent creation (or from both copying a shared antecedent). Until that knowledge is available, testimony about the probability of copying should be deemed inadmissible under Federal Rule of Evidence 702.

Thursday, December 07, 2023

Netchoice amicus on behalf of Discord

 Chris Sprigman and I just submitted this brief. The focus of the argument is the associational interests of Discord's users, who want and need assistance from centralized content moderation in order to support their communities. 

Dastar bars false marking claims brought under Lanham Act (dubitante)

Urban Dollz LLC v. Lashify, Inc., 2023 WL 8292459, No. CV 23-1427-GW-AFMx (C.D. Cal. Oct. 17, 2023)

Super-interesting holding that, while there’s no patent field preemption against bringing false patent marking claims under the Lanham Act, Dastar (as expansively interpreted to cover false advertising claims) does preclude such claims, possibly only because of party argument.

Urban Doll sued Lashify for Lanham Act false advertising and false patent marking, alleging that Lashify made false statements on social media that certain of its products were patented and innovative.

A party pleading false marking claim under 35 U.S.C. § 292 must show: (1) an unpatented article; (2) an intent to deceive the public; and (3) a competitive injury. The court found that, to satisfy Rule 9(b), Urban Doll needed to allege competitive injury in more detail, and dismissed with leave to amend. (The element of knowledge of falsity was satisfied by pleading, among other things, that defendants asserted their patent rights many times; that defendants claimed that defendant Lotti was the inventor, and that they have posted on social media that “falsely claiming patents or patent pending is illegal and false marketing.” “These factual allegations support Plaintiff’s allegation that Defendants are sophisticated, which in turn supports alleged intent to deceive.”)

A competitive injury is an injury that: (1) “results from competition,” and (2) is “caused by the alleged false marking.” It wasn’t enough to allege lost sales without alleging specific facts to support the claim that it was the false statements that led to the lost sales. Defendants argued that all but one of the allegations on which Plaintiff relies “predate[s] Urban Doll’s founding,” or was made “shortly thereafter.” The court agreed that Urban Doll needed to plead either that it was a current competitor in the same market at the relevant time, or that it was a potential competitor with both the intent and action of entering the market.

Likewise, Urban Doll needed more specific instances of competitive injury such as lost sales or deterred market entry causally traceable to the false marketing.  It wasn’t enough to allege that defendants “repeatedly labeled its competitors as “infringers, copycats, and counterfeits,” “with the express purpose of driving sales away from those competitors,” and that “Defendants’ customers believe and rely on Defendants’ representation when deciding what products to purchase.” Dismissed with leave to amend.

False advertising: First, the Patent Act can’t “preempt” the Lanham Act, but to harmonize them, courts have required Lanham Act claims based on false advertising of a patent to allege bad faith, which isn’t usually required. (Honestly, it sounds like disparagement could be a better false advertising claim here, depending on what exactly was said.)

But, though no one has noticed it before, even bad faith isn’t enough because of Dastar. In Sybersound Records, Inc. v. UAV Corp., 517 F.3d 1137 (9th Cir. 2008), “to avoid overlap between the Lanham and Copyright Acts,” the court interpreted “the nature, characteristics, and qualities of karaoke recordings under the Lanham Act ... to mean characteristics of the good itself, such as the original song and artist of the karaoke recording, and the quality of its audio and visual effects.” Misrepresentations about licensing status/compliance with copyright were not, therefore, actionable. Baden Sports, Inc. v. Molten USA, Inc., 556 F.3d 1300 (Fed. Cir. 2009), applied Sybersound to an alleged misrepresentation of inventorship. So, “authorship, like licensing status, is not a nature, characteristic, or quality, as those terms are used in Section 43(a)(1)(B) of the Lanham Act.” And that also applied to inventorship (or at least the plaintiff didn’t seem to dispute that claims only based on inventorship were barred).

The court noted that Baden wasn’t binding on it and was not immune from critique. One could read Sybersound to be about barring circumvention of patent/copyright rules by bringing a Lanham Act claim (e.g., expired patent, non-owner of IP right), not that one could never bring suit over statements about the IP status of a good. Here, at least with a bad faith add-in, the two statutes didn’t clash—the court doesn’t say this, but the logical extension is to say that the Lanham Act is precluded in false marking claims only to the extent that it’s strict liability.  

Claims about physical qualities, like “lashes are so light they literally stick to your lashes and melt within your lash line,” were not actually pled as false advertising, though the court granted leave to amend to make non-inventorship false advertising claims. Ad claims to use a “revolutionary method,” or to be the “worlds [sic] only” or “worlds [sic] first DIY lash extension system” “could reasonably be construed as being about the nature of the goods themselves (e.g., that they employed a new or unique technique or one that is superior to other products),” so the court wouldn’t construe them as only about inventorship. But the court cautioned that some of this was puffery.

using testimonials post-relationship failure can be a ROP problem

McCandless Group, LLC v. COY Collective, Inc., No. LA CV 21-02069-DOC-KES, 2023 WL 8351525 (C.D. Cal. Oct. 23, 2023)

The individual defendants co-founded COY in 2019 to provide creator clients with a platform to offer subscription services. COY hired MG to develop COY’s subscription platform. Things eventually went bad, resulting in contract/trade secret claims and copyright/ROP counterclaims.

One of the individual defendants is “a social media personality and model who became well-known for her photos and videos, and who has also started an agency to provide management services to other models and influencers.” Individual counterclaim defendant McCandless pitched Bartlett on building a personal website for her to “monetize” her following on Instagram and other sites. After they executed a Web Development Agreement, a number of her copyrighted photos were added to the site created by McCandless (it’s disputed who did that). Bartlett also helped them recruit another popular Instagram model, Passos. Because of Bartlett’s popularity, McCandless used her, among other personalities, to market his services and asked her to provide a “testimonial” video for him to use, which she provided and he posted to his Instagram.

After the relationship broke down, Bartlett’s website became disabled, but MG and McCandless kept copies of Bartlett’s photos on their servers until after defendants filed their counterclaims. “Before their removal, Works were accessible at least to an unknown number of individuals with content creator or content manager access to MG’s platform. While the URLS for each image (which included long strings of characters unique to each image) were only findable by those with that access who had saved the links prior to Bartlett’s website being shut down, any person that entered the correct URL into a web browser could access the photos.”

McCandless admits that he left Bartlett’s testimonial on his Instagram page and did not remove the video until September 2022, despite lacking authorization since at least 2020. Although not tied specifically to Bartlett’s video, MG received revenue from new models during the period of use of Bartlett’s endorsement video for recruitment. “Bartlett was upset by the use of her image to endorse a company with whom she was also engaged in litigation.”

Addressing only the counterclaims: Bartlett made out most of her ROP claim related to the testimonial video, despite an argument that she hadn’t shown injury. “The invasion of plaintiff’s right to privacy constitutes the harm, entitling plaintiff to recover for all damage caused by the invasion. While special damages may be awarded if sustained, general damages are recoverable without a showing of specific loss,” which included injury to her feelings. While the prima facie claim had been established, there was a genuine dispute of fact on the affirmative defense of incidental use, which the court predicted existed in California.

A defendant’s “insignificant or fleeting use of plaintiff’s identity is not an infringement.” It was undisputed that Bartlett’s video was a small part of a longer endorsement video, and it was disputed whether McCandless was “unaware” this video was on his Instagram and what commercial impact the video had. These were questions for the jury, as was the “knowing” element of the statutory misappropriation claim, given the credibility question of whether McCandless knew the video was still on his Instagram page.

Copyright counterclaims: There was a genuine dispute of fact about the public display right. Bell v. Wilmott Storage Servs., LLC, 12 F.4th 1065 (9th Cir. 2021), held that an infringing public display includes making an image available via a server that is publicly accessible, regardless of whether anyone accesses the photo. Causation was established because Wilmott had “assum[ed] responsibility for ... the servers.” This was “volitional for purposes of copyright infringement.” “In other words, Bell establishes that general control of the server that is publicly displaying the image may be sufficient to impose liability.”

But in Bell, the copy was apparently always infringing, which doesn’t seem to be the case here. Nonetheless, the court concluded that MG’s inaction after Bartlett requested the images be removed and filed her counterclaims “may have caused the photos to remain public, without Bartlett’s consent, for five months.” Responsibility for the website and its architecture was a disputed issue.  

California's UCL potentially available against junk fees

Sepanossian v. National Ready Mix Co., --- Cal.Rptr.3d ----, 2023 WL 7590798, No. B319260 (Ct. App. Nov. 15, 2023)

Sepanossian, who operates a construction business, filed a class action against Ready Mix, which sells mixed concrete to small businesses for construction projects, alleging Ready Mix charged its customers an “energy” fee and an “environmental” fee “wholly untethered to any actual cost for ‘energy’ or ‘environmental’ issues” that Ready Mix instead “recognize[s] as profit.” The complaint alleged causes of action for UCL fraudulent and unfair business practices; breach of contract; and “unjust enrichment.” The court of appeals reversed a dismissal of the UCL claims, but affirmed on unjust enrichment.  

Customers pay Ready Mix a “set rate” for its concrete products. Sepanossian alleged that Ready Mix adds an “energy” fee and an “environmental” fee separate from the set rate to every sale, about $30 each. These fees are uniform and do not correlate to or fluctuate in any way with any actual energy or environmental costs incurred by Ready Mix or the size of the order, but instead allegedly are recognized by Ready Mix as profit. The energy and environmental fee amounts were separately itemized on invoices and disclosed to customers, but without further explanation or information. “The gravamen of Sepanossian’s complaint is not that class members did not know the amount of these charges, but rather that the terms environmental fee and energy fee were misleading.”

Sepanossian alleged, “Plaintiff and class members would not have entered into contracts with Ready Mix and would not have paid the fees at issue had they known the truth about the ‘energy’ and ‘environmental’ fees and had not been subject to Ready Mix’s misrepresentations and omissions.”

The trial court dismissed the complaint on the basic theory that plaintiffs didn’t suffer any harm because the amount was disclosed to them and Ready Mix didn’t make any claims about how it was going to use the fees. I think that undersells the harms of junk fees—they come late in the transaction, they hamper comparison shopping, and by seeming “regulatory” they prevent any attempts at negotiation, which for a business customer might be a real thing.

The court found that plaintiffs stated a claim both for “fraudulent” and “unfair” practices under the UCL.  At the pleading stage, it was plausible that the fees misled consumers into thinking they had some nexus to energy or environmental costs. “A perfectly true statement couched in such a manner that it is likely to mislead or deceive the consumer, such as by failure to disclose other relevant information, is actionable,” and “a reasonable consumer would likely be surprised to learn that a charge expressly identified as an ‘energy’ or ‘environmental’ fee, added on top of the set rate for a concrete purchase, had no actual relationship of any kind to Ready Mix’s energy or environmental costs and was pure profit.” Indeed, “[r]easonable consumers are entitled to infer that the descriptive name attached to a particular fee they are being charged has some connection to the fee unless otherwise indicated.”

Unfairness: Similarly, it sufficed to allege that (1) such fees are automatically added to every concrete purchase, thus causing substantial injury to customers; (2) the fees provide no countervailing benefit to customers; and (3) the fees were mandatory and unavoidable, thus there was no way for customers to reasonably avoid the injury because if they wanted to purchase concrete from Ready Mix, they had to pay the fees. It wasn’t enough that consumers could avoid the fee by declining to transact with Ready Mix.

However, because there was an express contract between the parties covering the fees, and the contract was not procured by fraud or otherwise unenforceable or ineffective, Sepanossian could not assert a claim for restitution based on unjust enrichment.

Wednesday, December 06, 2023

court finds that transferring title to mural also transferred (c); VARA and CMI claims against ad also fail

Williams v. Hy-Vee, Inc., --- F.Supp.3d ----, 2023 WL 3602813, No. 4:22-cv-00025-RGE-HCA (S.D. Iowa Mar. 15, 2023)

Williams, a professional artist, was commissioned to paint an abstract mural on the wall of a building located in Des Moines, Iowa.  The contract provided that the buyer would own the “Work” once it was paid for and that “Purchaser and/or building owner may not copyright, reproduce, or merchandise images of the Work without the Artist’s written consent in advance.” The agreement also stated: “The Purchaser will not permit any use of the Artist’s name or misuse of the Work which would reflect discredit on his/her reputation as an artist or which would violate the spirit of the Work.” In the completed mural, William’s initials (“CAW”) and his Instagram username (“@KingCaw”) were included in the lowermost opposing corners.

a picture of the Williams mural

Hy-Vee, a grocery chain, aired a commercial during Super Bowl LIII, which featured portions of the mural. A longer version of the commercial was also posted on Hy-Vee’s Facebook page.

The central portion of the mural is depicted in the commercial, but not the lower right- and left-hand corners of the mural. Williams registered his copyright and sued, alleging infringement, violation of VARA, and §1202 violations. Hy-Vee counterclaimed for declaratory judgment that Williams’s copyright registration certificate for the mural is invalid because Williams knowingly provided inaccurate information to the Register of Copyrights when he filed his copyright registration application.

Williams wasn’t entitled to a rebuttable presumption that he was the copyright owner because he only submitted a copy of his Public Catalog search results, not his certificate of registration. The court found that the only reasonable interpretation of the contract was that “Work” referred to both the physical mural and the copyright. If the agreement was terminated before payment, the contract provided “all rights of ownership in the concept, design, and Work itself” to Williams, but didn’t reserve those rights if it was completed and paid for. “This omission is telling.” Reading the other provisions “to silently reserve to Williams the same rights expressly reserved in the immediately preceding clause would frustrate this objective” by rendering the express  reservation of Williams’s ownership rights in the “concept” and “design” of the mural superfluous. The requirement that the owner couldn’t “copyright, reproduce, or merchandise images of the Work without the Artist’s written consent in advance” wasn’t the same thing as a reservation of copyright. This provision didn’t make the copyright unusable, just restricted some of the rights in a copyright. Williams’s other arguments relying on extrinsic evidence thus couldn’t be considered because the contract wasn’t ambiguous.

VARA: VARA immunizes from liability “any reproduction, depiction, portrayal, or other use of a work in, upon, or in any connection with any item” enumerated in the Copyright Act’s list of items excluded from its definition of a “work of visual art,” including any “motion picture or other audiovisual work.” Thus, VARA’s attribution right did not apply to the commercial.

§1202 CMI removal: Although CAW/the Instagram handle met the definition of CMI, Hy-Vee didn’t violate §1202 by filming only sections of the mural without that CMI. The depiction of the center portion of the mural in the commercial didn’t constitute a “transfer or moving” of Williams’s copyright management information, nor a “change” in the substance of this information. The court didn’t reach the speculative allegation that the CMI might have been cropped in post-production.

Worse for Williams, Hy-Vee made out a prima facia case that the registration was invalid because Williams claimed he owned “all of the rights” in the mural. The court was required to seek the Copyright’s Office at this point, so it didn’t fully resolve the invalidity issue. In response to Hy-Vee’s argument that he knew he didn’t own the rights, he submitted sworn affidavits from himself and the executive director of the organization that hired him to paint the mural, both attesting to their understanding that copyright in the mural was reserved to Williams. But “[g]iven the terms and context of the Agreement, Hy-Vee has ample factual support to allege Williams either knew or was willfully blind at least to the necessity of transferring the right to publicly display the mural to 6th Avenue Corridor.” At the very least, the court reasoned, he’d transferred the right to publicly display the mural, since by its nature it was publicly displayed.

This fact alone provides strong basis for Hy-Vee’s allegation Williams knew he did not own all rights in the mural. It is more than plausible 6th Avenue Corridor would have acquired the right to publicly display the mural—the only way possible to display the mural—along with physical ownership of the mural. Williams’s argument that 6th Avenue Corridor was merely granted a “limited, non-exclusive license” to publicly display the mural is unconvincing. Williams fails to explain how the right to publicly display a mural fixed on the exterior of a building could be non-exclusive. conclude Williams retained ownership of the right to publicly display the mural would create an absurd and inefficient division of ownership.

[FWIW, I think the contract interpretation is wrong but plausible, but this part is just wrong, and continues the conflation between the work and the copy. §109 limits the public display right when someone is publicly displaying a lawfully made work they’ve purchased (without further transmission elsewhere). So it’s perfectly reasonable for Williams to believe he retained the entire public display right, subject to §109 and other limitations provided for by law.]

Amicus brief on applying the Lanham Act to political speech post-JDI

 In support of neither party.

Monday, November 27, 2023

Earnings calls, recall notices not "commercial advertising or promotion," but could be "of and concerning" largest market player

In re SoClean, Inc., Marketing, Sales Practices & Products Liab. Litig., 2023 WL 8006602, MDL No. 3021, No. 22-542 (W.D. Pa. Nov. 17, 2023)

Because this is MDL with lots of claims, the facts are a bit complicated. SoClean is a dominant player in the market for medical devices that sanitize continuous positive airway pressure machines (CPAPs), which treat sleep apnea and respiratory conditions. It alleged that the Philips defendants, who make such devices, engaged in false advertising about one of SoClean’s devices in order to deflect blame for the Philips devices’ design defects. SoClean and the FDA have been back and forth about what kind of medical device SoClean’s product is; as part of their interactions SoClean dropped “claims pertaining to the cleaning, sanitizing, or disinfection of CPAP machines” from its website. SoClean has submitted a de novo application for its latest product, which is under review.

In 2020, the FDA issued a safety communication about “potential risks associated with the use of ozone and ultraviolet (UV) light products for cleaning CPAP machines and accessories” focusing only on the issue of potential risk of ozone leakage, but SoClean alleged that its products don’t leak ozone at unsafe levels. (In its press release, the FDA referred to its own testing on “several of those illegally marketed products,” although SoClean alleged that it believed in good faith that it didn’t need preapproval.)

Meanwhile, Philips allegedly knew for years that the polyester-based polyurethane foam used to dampen sound in Philips’ ventilator, CPAP, and other respiratory care devices was susceptible to degradation and off-gassed potentially harmful volatile organic compounds (VOCs). Philips allegedly misled the FDA by telling it that foam degradation may be “exacerbated” by ozone cleaners, without any reliable testing or other valid scientific evidence to validate those statements. Philips repeated similar statements elsewhere. One Philips entity’s CEO said, on an earnings call, that ozone was a problem for foam, and that “[t]he FDA observed this and also put out a safety notice to say, don't use ozone for CPAP machines,” which allegedly misrepresented the reasoning for the safety notice. As in other instances, he used the opportunity to promote the next-generation Philips product, which had a more stable foam.

A number of Philips devices were recalled for foam degradation, giving two reasons to customers and users: foam off-gassing and foam degradation from use of “unapproved” ozone cleaning devices, which could “exacerbate[e]” the problem; anti-ozone cleaning claims were disseminated in various ways, including Philips’ website FAQ about the recall and another earnings call.

Philips also allegedly blamed SoClean at the largest 2021 home medical equipment trade show and conference in the United States, telling distributors and resellers during meetings that “SoClean was the problem.” Resellers and distributors allegedly cited these statements as the reason for not placing orders with SoClean, leading all but one of SoClean's top distributors and resellers to stop placing orders with SoClean.  Because the disparagement was successful, and actual and prospective customers and distributors believed that SoClean devices were the reason for the product recall, sales to distributors, resellers, and end-users allegedly plummeted.

The Philips defendants argued that there was no statutory Lanham Act standing because they weren’t even indirect competitors, but the court here found that Lexmark removed any requirement even of indirect competition (including by blessing lawsuits across the distribution chain, e.g. manufacturer v. dealer). All SoClean needed was to show that it suffered commercial injury proximately caused by defendants’ violations of the Lanham Act, which it plausibly alleged.

However, the Philips defendants argued that SoClean wasn’t within the zone of interests protected by the Lanham Act because the only commerce protected by the Lanham Act is lawful commerce. And, they continued, SoClean was illegally marketing its devices. This argument couldn’t be resolved at the present stage, when SoClean alleged that it marketed and sold its device “with the knowledge of the FDA,” including having an FDA inspection of its manufacturing facility without FDA raising concerns. However, other documents integral to the complaint indicated that the FDA thought there was a potential FDCA violation. So the court wanted to hear from FDA experts about whether the FDA’s knowledge that SoClean planned to continue marketing the challenged device for a limited period of time gave it a “legally protected interest” during the relevant timeframe.

Commercial advertising or promotion: A separate problem. Quarterly reports and earnings calls, “without allegations that defendants intended to influence the consumers and the communication was disseminated to the consumers,” aren’t commercial advertising or promotion for these purposes. (The court says they’re not “commercial speech,” but since that’s a First Amendment term, I’m using the more statutorily precise “commercial advertising or promotion.”) Here, the allegations were insufficient to show that the earnings calls and quarterly report were advertising or promotional; rather, they primarily served their typical function: to influence investors. Although the statements “may have had an incidental effect of promoting goods, i.e., to deflect blame for the recall and promote Philips’ goodwill so that the consumers would continue to purchase Philips’ devices,” that wasn’t sufficient: they weren’t primarily made to advertise or promote Philips’ products. Nor did SoClean plausibly allege sufficient dissemination of the earnings calls and quarterly report; there were no allegations that any consumers listened to the calls or read the report.

Recall notice: Eli Lilly & Co. v. Roussel Corp., 23 F. Supp. 2d 460 (D.N.J. 1998), found that a recall notice wasn’t commercial advertising or promotion because it wasn’t designed to influence customers to purchase defendant’s goods, but rather to inform consumers that the goods will no longer be available for sale. Did alleged blame-shifting in these recall notices change the analysis? No. “[A]ny effect of promoting defendants’ products (by deflecting blame to SoClean to promote the Philips defendants’ goodwill) was incidental to the primary purpose of the recall notice, which was to inform consumers about the recall.”

Recall FAQ on website: Same thing.

Update to physicians and health care providers: This one said that “[t]he foam degradation may be accelerated by environmental conditions of high temperatures and humidity. Unauthorized cleaning methods such as ozone cleaning may exacerbate potential degradation….” It ended: “Philips is recommending that customers and patients do not use ozone-related cleaning products.” Again, this wasn’t an ad but an informational document about the recall, and it didn’t promote Philips’ newer devices.

2022 press release: The stated purpose of the update was to “provide healthcare providers, patients, and other stakeholders with updated information on the testing results to date.” A press release can be an ad, but not this one. It didn’t promote any Philips product—the only one it mentioned was the recalled product which could not be sold—or explicitly propose a commercial transaction. The general economic motive of being a for-profit business was not enough. “This is not a case in which the press release compared two products, touted one product as superior to another, or promoted the defendant’s product.”

Statements to distributors: First, did Rule 9(b) apply? The court didn’t reach the issue, because even if it did, SoClean could satisfy the heightened pleading standard by pleading “information and belief” about what defendants said to third parties.

But were they commercial advertising or promotion, or nonactionable “oral statements disseminated to a small group of people.” While “purely private” communications cannot be “commercial advertising or promotion,” this “is a matter of degree based upon specific facts of a case, including facts about the pertinent industry.” Here, the allegations about the size and influence of the trade show, including that the parties’ largest distributors and resellers were there, sufficed to plead commercial advertising or promotion.

[Pause for harm causation questions: Was too much damage already done by then? The allegations about losing big distributors after that seem enough to defeat that argument.]

Falsity/misleadingness: The Philips defendants argued that the “gist” was true: according to the FDA itself, foam might degrade both on account of high heat humidity as well as ozone, and customers shouldn’t use ozone cleaners because they are unapproved, potentially harmful, and might harm their CPAP devices. The FDA, they argued, was investigating SoClean and issued its public Safety Communication warning against the use of ozone cleaners more than a year before the recall at issue in this case, which was more than a year before the Philips defendants could have allegedly influenced or misled the FDA.

The court reasoned that SoClean plausibly alleged that the recall had nothing to do with ozone cleaners or off-gassing during ozone cleaning, so the statement to resellers and distributors was at least misleading.

New Hampshire Consumer Protection Act: Same analysis. But must the conduct have occurred in New Hampshire to be actionable? The trade show wasn’t there. Still, since this was allegedly a nationwide campaign, that was enough to show plausibly that the offending conduct took place within the state.

Tortious interference claims also survived.

New Hampshire defamation: The Philips defendants argued that their allegedly defamatory statements concerned a class of products and how those products CPAP products, and, therefore, were not “of and concerning” SoClean. But it was plausible that the alleged statements to the resellers and distributors specifically referred to SoClean. As for the rest of the statements (which weren’t covered by the Lanham Act/state consumer protection law), SoClean plausibly pled that the recipients of those statements understood that defendants were referring to SoClean. But, defendants argued, SoClean was really alleging trade libel, not defamation, and trade libel isn’t recognized in New Hampshire. Still, if SoClean’s own reputation was injured, not just its product’s reputation, that could be the basis of a defamation claim.

Other issues, like whether SoClean was a limited-purpose public figure, needed more information; “if SoClean’s devices were legally marketed and safe (as SoClean alleges) and the Philips defendants provided the FDA erroneous information about ozone’s role in the foam degradation, then the controversy would not be about the safety of SoClean’s ozone-generating devices.”

too much complaining about copying triggers Dastar/preemption for other claims

Design Gaps, Inc. v. Hall, 2023 WL 8103156, No. 3:23-cv-186-MOC (W.D.N.C. Nov. 21, 2023)

Design Gaps produces custom cabinetry for high-end homes; Hall is a former employee of Design Gaps who signed a nonsolicitation/noncompete clause but went to work for a design studio that was part of Design Gaps’ main competition, Peters. Peters allegedly subsequently constructed homes with interior designs “substantially similar” to building components depicted in Design Gaps’ technical drawings. Design Gaps had in the past conducted projects for Peters Custom Homes including the design and construction of residential cabinetry in homes referred to as “Quail Hollow North” and “Lake Wylie.” Defendants allegedly promoted the kitchen and other areas of the residences designed and constructed by Design Gaps as their own designs and trade dress.

Design Gaps brought trade secret, tortious interference, and state and federal false advertising/false designation of origin claims against defendants.

Defendants moved to dismiss the Lanham Act claims as preempted by copyright. (It’s preclusion, really, but the court says that preemption principles are implemented by Dastar.) And the complaint was full of references to Design Gaps’ copyrighted designs and defendants’ “copying.” Here there was no extra element rendering the claims qualitatively different from copyright claims. Instead, plaintiffs alleged that the alleged substantial similarity itself constituted a misrepresentation of origin. This was just Dastar: “Design Gaps does not allege that the kitchens and cabinets cited in the Amended Complaint were actually sold in commerce by anyone other than the Peters Defendants.” So too for the state law claims.

who has standing to challenge robot lawyers?

MillerKing, LLC v. DoNotPay, Inc., --- F.Supp.3d ----, No. 3:23-CV-863-NJR, 2023 WL 8108547 (S.D. Ill. Nov. 17, 2023)

“This case pits real lawyers against a robot lawyer.” Spoiler: the robot wins for lack of Article III standing.

DoNotPay is an online subscription service that touts its ability to allow consumers to “[f]ight corporations, beat bureaucracy and sue anyone at the press of a button” and bills itself as “The World’s First Robot Lawyer,” offering legal services “related to marriage annulment, speeding ticket appeals, canceling timeshares, breaking leases, breach of contract disputes, defamation demand letters, copyright protection, child support payments, restraining orders, revocable living trusts, and standardized legal documents.”  But DNP isn’t actually licensed to practice law. MillerKing, a small Chicago law firm that claims to be a direct competitor of DNP, sued DNP for false association and false advertising under the Lanham Act and Illinois state law. Along with state consumer protection claims, MK alleged that DNP was engaged in the unlawful practice of law under Illinois law. (The false association claim was based on the theory that consumers are misled to believe that DNP is affiliated with licensed attorneys and that State bar authorities approve of or sponsor DNP’s services.)

MK “advertises its services online and provides legal services across various practice areas including personal injury, wrongful death, family law, divorce law, child custody, criminal law, traffic law, estate planning, probate, workers’ compensation, business law, municipal law, and mediation.” It sought to represent a class of similar law firms.

DNP advertises that it uses artificial intelligence” rather than “human knowledge.” Users can generate personalized contracts, independent contractor agreements, non-disclosure agreements, bills of sale, prenuptial agreements, LLC operating agreements, promissory notes, and parenting plans. It also touts its ability to give advice on property tax appeal procedures, create customized property tax guides, provide advice on how to appeal traffic tickets in any city, provide services to initiate litigation and obtain a judgment, and guide users through the process of filing a court case. For a lawsuit over $500, DNP states that it “can generate demand letters, court filings and give you a script to read in court.” It claims to have taken on hundreds of thousands of parking ticket cases and overturned $4 million in parking ticket fines; initiated more than 1,000 small claims lawsuits against a single company in 42 states; and “processed over 2 million cases.” However, it backed off a claim that the “robot lawyer” would soon represent someone in a courtroom by whispering in the person’s ear exactly what to say because of “threats from State Bar prosecutors.” Some online reviews are poor, stating that DNP has failed to dispute parking tickets as requested, has created inadequate legal documents, or has included inaccurate information in its forms. DNP removed some products from its website, but it continued to advertise and promote legal products and services including defamation demand letters, divorce certificates, divorce settlement agreements, and numerous other categories of legal services.

MK argued that it, and the class, have been or are likely to be injured by the direct diversion of clients from themselves to DNP or by a lessening of the goodwill associated with MK and the class’s goods and services. That wasn’t enough. MK didn’t allege any lost revenue or added expenditures as a result of DNP’s conduct. Nor did it allege that any MK client or prospective client withheld business, considered withholding business, or even heard of DNP. For the hundreds of thousands of parking ticket cases that DNP claims to have taken on, for example, there was no allegation that those customers originally were clients of MK, had considered hiring MK, or would have sought the advice of any law firm in the first place if not for the representations made by DNP.

As to goodwill, although the complaint alleged that DNP provided some poor customer service, it didn’t allege that DNP’s failures were imputed to MK specifically or lawyers generally. What about Lexmark?

Unlike MK, Static Control not only alleged injury due to diversion of sales and reputational harm, but it also provided the facts necessary to make those allegations plausible. Static Control alleged Lexmark directly targeted its customers and falsely stated that doing business with Static Control was illegal. These facts are sufficient to state a concrete, particularized, and actual injury. MK’s general allegations that DNP has caused a diversion of clients and loss of goodwill, on the other hand, are not.

Even if the Court were to find that MK (a law firm) was a “direct competitor” of DNP (an AI-based legal subscription service), the court would not presume Article III standing from direct competition. “MK has conflated the injury requirement for a statutory cause of action under the Lanham Act claim with Article III’s injury-in-fact requirement.” Maybe presuming injury  works in other cases, but the products here were different enough that the court declined to do so. “[T]he Court will not infer that MK has suffered harm through lost clients just because DNP has gained them.”