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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