Wednesday, March 22, 2023

Supplement guide was plausibly an agent of supplement company; direct and secondary liability available

Ariix LLC v. Usana Health Sci., Inc., 2023 WL 2574319, No. 2:22-cv-00313-JNP-DAO (D. Utah Mar. 20, 2023)

The parties compete in the supplement market using direct marketing, so compete in both consumer supplement sales and in sales representative recruitment. “Nutritional supplements are largely unregulated, and there have been several recent scandals regarding supplement quality. To empower consumers and sales representatives to make informed decisions, NutriSearch … publishes the NutriSearch Comparative Guide to Nutritional Supplements …, which is the leading source regarding nutritional supplement quality.” It’s written by Lyle MacWilliam and purports to provide independent and unbiased supplement reviews.

Ariix sued NutriSearch and MacWilliam with similar claims to those raised here about Nutrisearch’s alleged lack of independence from and bias towards Usana, resulting in false advertising. Ariix alleged that Usana paid MacWilliam to give Usana’s supplements the top rating in the Guide. As a result, “[t]he misstatements directly reduced Ariix’s revenues by causing both consumers and professionals to select Usana over Ariix.” The Guide, and promotions for it, contained several statements depicting itself as an independent, unbiased source of information, e.g., “This guide was not commissioned by any ... company whose products may be represented herein. The ... findings are the sole creative effort of the author and NutriSearch Corporation, neither of whom is associated with any manufacturer or product represented in this guide.”

Usana has also taken advantage of these neutrality claims. “For example, when Usana receives a new award from the Guide, it contextualizes the award by quoting language from the Guide claiming that it provides independent and objective evaluations. Usana’s website includes pictures of MacWilliam and the Guide next to quotes made by MacWilliam about his confidence in the quality of Usana’s supplements.”

However, plaintiff alleged, “Usana has directly paid NutriSearch and MacWilliam hundreds of thousands of dollars per year in fixed stipends, speaking fees, promotion fees, and promotion costs.” MacWilliam allegedly concocted the Guide as a sales tool while working as a Usana sales representative. Then he informed Usana executives that “I should not be on the board or a representative anymore because it looks like I’m biased. I am going to create more of a third-party appearance, but I’d like you to use me for speaking and support me.” Usana responded, “Yes, if you give us the number-one rating.”

Usana withdrew its support after NutriSearch awarded several other supplement companies, alongside Usana, with a Gold Medal rating in the Guide. This caused a sharp decline in book sales and speaking opportunities; Usana “told him that it preferred being the only company that received the Guide’s highest accolade.” MacWilliam asked “would it help if Usana is number one in some way?” Usana said yes, and MacWilliam added a new “Editor’s Choice” award to the Guide, which was solely bestowed upon Usana; the payments resumed.

The next year, plaintiff alleged,

MacWilliam informed Usana that, as calculated by the Guide’s publicly disclosed criteria, Usana would not receive the Guide’s top ranking. Usana reminded MacWilliam that “we pay you to make us number one.” MacWilliam stated that he would either need to alter the Guide’s ranking algorithm or Usana would need to reformulate its supplements. Usana and MacWilliam then collaborated to ensure that Usana maintained the top position.

Usana allegedly benefited financially from the Guide. It arranged the initial publishing agreement between NutriSearch, MacWilliam, and the publisher. “As a result of arranging the initial publication agreement, Usana receives a portion of the profits derived from the Guide’s sales.” [So it’s literally NutriSearch’s literary agent?]

Usana incorporates the Guide into its marketing training. Sales representatives are told to purchase the guide, “learn it, refer to it in making sales, and ... pitch the guide to end consumers.” Usana characterizes payments to NutriSearch and MacWilliam as marketing expenses. Usana reposts testimonial statements made by MacWilliam on its website and social media pages, and issues press releases announcing the awards it receives from the Guide.

Usana is also allegedly involved in editorial changes to the Guide and “orders” MacWilliam to meet with Usana’s chief product officer every year.

In 2013, Usana increased the Vitamin D and Iodine content in its supplements and rebranded to focus on these additions. The Fifth Edition of the Guide was then “rewritten from cover to cover” to highlight “the most recent and exciting scientific findings on two super-nutrients: Vitamin D and Iodine.” Prior to the Sixth Edition of the Guide, Usana reprinted its supplement labels to emphasize the potency of its products with regards to “cell signaling.” The Sixth Edition noted that the Guide had been “completely rewritten” to account for “groundbreaking discoveries” in cell-signaling. Usana ordered NutriSearch to add a new platinum tier of achievement to the Sixth Edition and Usana was the only company awarded with a platinum level rating in the Sixth Edition.

Usana has also allegedly used its relationship to harm competitors, as when, based on information from Usana,  NutriSearch initially awarded Ariix a three-and-a-half stars rating for a new product, later revised to five stars. “Usana instructed NutriSearch to print a new version of the Guide displaying Ariix Optimal’s three-and-a-half stars rating prior to Ariix’s product launch.” Ariix also had various difficulties obtaining the Guide’s Gold Medal of Achievement; while Usana was grandfathered in using old verification methods, NutriSearch rejected the same type of evidence from Ariix; after Ariix invested significant financial resources working with NutriSearch to develop new testing protocols, NutriSearch again rejected it because it “could no longer confidently assure the consumer that what is on the label is what is in the bottle.” “At the same time that NutriSearch claimed that its concerns regarding testing accuracy precluded it from awarding Ariix a Gold Medal certification, NutriSearch and MacWilliam represented to consumers that they were confident in the Guide’s verification abilities.”

MacWilliam declined Ariix’s offer to speak on behalf of Ariix, saying that he no longer wanted to travel, but he continued to travel and promote Usana. When Ariix confronted him, MacWilliam responded by admitting that Usana would “cut [him] off the second I ... [speak for Ariix.]”

This case is proceeding separately from the case against NutriSearch because of personal jurisdiction issues.

Timeliness: Utah has a three-year statute of limitations for fraud, and Ariix sued NutriSearch nearly five years before suing Usana with very similar allegations. Because the Lanham Act has no limitations period, the court used laches as the framework. To prove the affirmative defense of laches on a motion to dismiss, the complaint must clearly establish that “there has been an unreasonable delay in asserting the claim, and that the defendant was materially prejudiced by the delay.” This complaint didn’t do that.

Usana’s claim of prejudice from “fading memories, lost evidence, and the other difficulties associated with defending against stale claims” was conclusory and there was nothing in the complaint to suggest that Usana has lost relevant evidence. “On the contrary, the complaint alleges that Usana was either in a principal-agent relationship with MacWilliam and NutriSearch or that Usana conspired with them. Under these theories, Usana would have been aware of the ongoing litigation between MacWilliam, NutriSearch, and Ariix.”

As for economic prejudice, a defendant

must demonstrate that it continued to invest in the allegedly challenged behavior to its own detriment, in reliance that plaintiff would not bring a suit. But the mere fact that Ariix alleges damages does not establish that Usana continued to invest in the Guide or otherwise took actions in reliance on Ariix’s delay in filing suit….  Indeed, Usana vehemently denies any suggestion that it invested in or controlled the Guide.

Failure to state a claim: Ariix argued that Usana could be either directly liable for the Guide’s false statements or secondarily liable under a principal-agent theory. The court agreed that the compliant sufficiently alleged both.

Direct: Usana used MacWilliam and NutriSearch’s alleged misrepresentations in its own marketing. Usana argued that it couldn’t be liable for false statements made by third parties. But the cited cases all protected retailers, including digital retailers, who sold allegedly falsely labeled products: “[A] retailer is not liable if the retailer played no role in making the products or in formulating or disseminating the alleged false statements ....” This rule creates “a limited exception to liability when the defendant is a retailer who had no knowledge or role in the third party’s misrepresentation.” [I’ve never found this particularly convincing, and the knowledge part is particularly unjustified, but ok.]

Usana didn’t qualify for a retailer exception. “MacWilliam and NutriSearch’s misrepresentations directly promote Usana’s supplements and Usana did not inadvertently display third-party products with misleading labels.” As courts have held, quoting someone else counts for 43(a)(1)(B) purposes: “[T]o fall within the text of the Lanham Act, a defendant does not need to make a statement but only needs to use a statement or other form of conduct specified in the Act.” And the facts here supported a claim of “use.” The complaint alleged that “Usana was both aware of and encouraged MacWilliam and NutriSearch’s misrepresentations.” [That sounds like contributory liability—I think the liability is direct, without any agency issues, when they quoted MacWilliam and NutriSearch; the court notes facts recited above that go both to Usana’s encouragement and Usana’s own republications of their statements.] “Every time Usana won a medal of achievement, it issued a press release quoting the Guide’s statements that the Guide employed an independent and objective ranking mechanism, despite Usana knowing and actively encouraging the contrary. Although Usana itself did not state that the Guide was independent, Usana directly used MacWilliam and NutriSearch’s misrepresentations to promote Usana’s supplements.” [Knowledge is not an element of direct liability!]

Secondary liability: The complaint plausibly alleged that MacWilliam and NutriSearch were acting as Usana’s agents in making the misrepresentations. At common law, principals are vicariously liable for torts committed by their agents within the scope of the agency relationship. “To establish agency, a party must show (1) the principal manifested its intent that the agent act on its behalf, (2) the agent’s consent to act on the principal’s behalf, and (3) that both the principal and the agent understood that the agent is subject to the principal’s control.”  A plaintiff does not need to show an actual written agreement or plead specific details regarding the terms of the agency agreement. The court rejected Usana’s argument that there was no plausible allegation of an agreement because the complaint does not provide “the terms of performance, when it was entered, or other basic terms.” But the complaint did include the time and (some) terms of the agreement, which was enough. “A principal’s manifestation of assent to an agency relationship may be informal, implicit, and nonspecific.” Five years after the agreement had allegedly been entered into, one of Usana’s executives told MacWilliam that “we pay you to make us number one”; Usana receives a portion of the profits generated from sales of the Guide; Usana encourages its representatives to “get the Guide, learn it, refer to it in making sales, and even pitch the Guide to end consumers”; at Usana’s annual conference, MacWilliam is the only independent speaker who is allowed to sell his own product; Usana displays the Guide on its social media pages and issues press releases quoting the Guide’s claims of independent objectivity when Usana wins an award; Usana characterizes payments to MacWilliam and NutriSearch as marketing expenses. That was (possibly more than) sufficient.

Likewise, telling Usana executives that “I should not be on the board or a representative of the company anymore because it looks like I’m biased. I am going to create more of a third-party appearance, but I’d like you to use me for speaking and support me,” manifested MacWilliam’s consent and objective understanding that he was acting for Usana’s benefit, as did the instances in which he allegedly tried to not be so tilted in Usana’s direction and got financially punished for it, then got rewarded when he reversed course.

As for control, there are multiple nondispositive factors; fundamentally, the court asks whether “both [parties] understood that [the principal] was to be in charge of the undertaking.”  The complaint was sufficient there too, given the allegations above, e.g., that Usana conditioned speaking gigs and book sales on MacWilliam meeting this requirement and had MacWilliam rewrite the Guide to focus on Usana’s marketing priorities.

And it was plausible that the agents had actual authority to make the misrepresentations, including that the Guide was independent and objective.

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