Wednesday, April 26, 2023

in a Lanham Act (false advertising) case, presumptions cannot substitute for Article III injury

TocMail, Inc. v. Microsoft Corp., --- F.4th ----, 2023 WL 3070085, No. 22-10223 (11th Cir. Apr. 25 2023)

Previous district court opinion allowing Lanham Act false advertising claims to proceed against Microsoft; applying the Article III analysis that doesn’t (yet?) get applied to trademark claims, the court of appeals concludes there’s no standing and thus no jurisdiction over the appeal.

TocMail “offers a product geared towards a specific type of threat called Internet Protocol (IP) evasion. TocMail launched its IP-evasion product, got a patent, and then sued Microsoft for false advertising—all within two months.” It alleged that Microsoft misled the public into believing that Microsoft’s product offered protection from IP evasion. But at summary judgment it failed to show any injury.

Microsoft’s Safe Links, part of its larger product, evaluated links as users clicked on them; the parties disputed whether it protected users from IP evasion, which occurs when a link sends visitors to different websites depending on the visitor’s IP address, thus attempting to send a security program to one (safe) website and the real user to another (malicious) website. Microsoft’s ads included statements like:

Sophisticated attackers will plan to ensure links pass through the first round of security filters. They do this by making the links benign, only to weaponize them after the message is delivered, altering the destination of the links to a malicious site. With Safe Links, we are able to protect users right at the point of click by checking the link for reputation and triggering detonation if necessary.

As a new market entrant,

TocMail hasn’t done much to market its product. In bringing its product to market, TocMail has issued two press releases, sent some emails to potential investors, and spent a few thousand dollars on digital advertising. That’s essentially it. TocMail hasn’t made any sales. TocMail admits that, although over 33,000 people have visited its website, it has not made a single sale and has zero revenue. There’s no evidence that TocMail has achieved any reputation in the marketplace.

It nonetheless estimated, based on Microsoft’s sales, “more than $43 billion in lost profits.”

While the harm theory might have survived a motion to dismiss, TocMail didn’t offer any expert testimony on damages causation, relying instead on the presumption of injury that some courts have held arises in a two-player market. According to TocMail, “TocMail and Microsoft are the only cybersecurity vendors that promote their cloud-based, time-of-click services as effective protection against IP evasion.” Given Microsoft’s dominance, TocMail argued, consumers would believe Microsoft over a startup. And TocMail pointed to evidence that one of Microsoft’s customers, Bosch, raised concerns about IP evasion and asked Microsoft if it would need to add a third-party solution for additional protection. Microsoft responded that Bosch “should be covered for email-based threats” with “the full suite of [Advanced Threat Protection] and the right best practices.” At the same time, Microsoft said that it “of course encourage[s] customers to take a multi-tiered approach to security.” And it noted that it was “exploring new ideas” to prevent IP evasion.

The district court granted summary judgment for Microsoft on failure to show falsity or misleadingness, but the court of appeals had to do Article III first.

TocMail failed to show injury in fact. It didn’t offer testimony from any witness saying that he or she would have purchased TocMail’s product if not for Microsoft’s advertising, any expert testimony calculating TocMail’s lost sales from consumers who went with Microsoft (its expert instead calculated lost profits by assuming that TocMail would have sold to everyone who paid for Microsoft’s product), or a survey showing that consumers had any interest in buying TocMail’s product. When it sued, it had done minimal advertising, and hasn’t made a single sale. Any harm was pure speculation. There was no evidence that the website visitors who declined to buy the product had even seen Microsoft’s advertising or bought Microsoft’s product. As to the customer who asked about IP evasion, TocMail didn’t depose anyone from that customer or provide other evidence that it would have bought from TocMail. The Supreme Court has indicated its “reluctance to endorse standing theories that rest on speculation about the decisions of independent actors.” [Ed. note: Like trademark claims do?]

TocMail’s claim was too hypothetical and uncertain, given that it assumed: “(1) that consumers read Microsoft’s advertising, (2) that consumers understand IP evasion, (3) that consumers are concerned about IP evasion, (4) that consumers would be willing to buy computer security programs from a company without any reputation, (5) that consumers would pay the price TocMail is charging, and so on.”

“All TocMail needed was some evidence that it suffered an injury: some testimony, some survey, some report. But TocMail has none.” What about presuming injury from being in a two-player market? Well, that presumption has been applied to the merits, not standing. “While it may make sense to presume injury in assessing the merits, presuming an injury in fact for purposes of standing would raise serious constitutional questions.” [Ed. note: Cf. the TMA’s presumption of irreparable injury.] “A legal presumption would seem to fall short of showing (through specific facts) a concrete and actual injury.”

Moreover, a presumption of injury from a two-player market “is based on an assumption about how third parties will behave. But this presumption collides head on with the Supreme Court’s ‘reluctance to endorse standing theories that rest on speculation about the decisions of independent actors.’ … In short, we can’t presume an injury in fact.”

The court here agreed with Hutchinson v. Pfeil, 211 F.3d 515 (10th Cir. 2000), which held that a presumption of injury alone cannot serve to prove standing. The cases that use the presumption of injury “merely support the proposition that when a plaintiff with an otherwise sufficient interest to have standing shows that its interest has been subjected to patently false representations, harm sufficient to sustain a claim and justify equitable relief may be presumed” (also citing Ortho Pharm. Corp. v. Cosprophar, Inc., 32 F.3d 690, 697 (2d Cir. 1994) (“Because consumer behavior is unpredictable, and because of the general rule in our [c]ircuit against making presumptions of injury ... favorable to the plaintiff, we affirm the district court’s decision dismissing [the plaintiff’s] Lanham Act claims for lack of standing.”)). “The presumption cannot be used to show Article III standing.”

Is INTA worried yet? 

using competitor's images in comparative advertising is fair use even when appearance isn't being compared

 I Dig Texas, LLC v. Creager Servs., LLC, 2023 WL 3066119, No. 22-CV-0097-CVE-JFJ (N.D. Okla. Apr. 24, 2023)

“This case arises out of alleged misuse of copyrighted images, eventually leading to a dispute … that resulted in false business reviews, malicious e-mails, and mutual efforts to interfere with each other’s business.” The court ends up kicking out all the federal claims and remanding to state court to resolve novel issues under the Oklahoma Deceptive Trade Practices Act.

The parties compete in the market for skid steer attachments and other products. Creager sells Montana post drivers (made in China) that compete with the Texas post drivers sold by IDT (advertised as made in the USA).

IDT created an ad for its products using two images of Montana post drivers for which Creager later obtained a copyright registration. The IDT ad displayed the two images next to the phrase “Made in China” inside a red circle with a line drawn through the words.

The parties had other disputes, including accusing each other of posting false reviews of the other. An IDT-related person admitted that he posted a review about Creager under the name “Karen Sideshow” alleging that Creager falsely advertised its products as “made in America,” and the post promotes the Texas post driver sold by IDT, as well as additional reviews about Creager using other false identities.

Creager also alleged that IDT contacted vendors who sell Creager’s products and made defamatory statements; the one that seemed to have an impact was to third party LJD, claiming that Creager was using LJD’s name in “defamatory advertising against my company,” advising that LJD could be “tangled up in litigation.” LJD therefore reduced the amount of business it conducted with Creager until it could determine how the litigation between Creager and IDT was resolved. Creager sent a letter to third party Semper Fi, an IDT consignee, stating that the owner “got in bed with a snake” and his recent bad decisions would “put [his] life in turmoil,” referring to a “tax thing” that Semper Fi’s owner interpreted as a threat to report him to the IRS for tax evasion. There’s more, including public disputes on Craigslist.

Creager alleged that IDT falsely advertised that its products are made in the US, when in fact IDT’s Texas post driver comes in a premium and economy model, and the economy model is wholly made in China while the premium model is partially manufactured in the United States, but the power unit is manufactured in China and the product will not function without the power unit. At least two IDT ads, though, specifically state that the power cell of the Texas post driver is manufactured in China, and “attempt to distinguish IDT’s products from other distributors that sell products wholly made in China.” [I note the headline is not that nuanced, though the rest of the post is.]

IDT removed its “Made in USA” advertising in the first 8 months of 2022, and its on-line sales increased during that time period.

Copyright infringement: This was permissible comparative advertising, which is fair use:

[I]t is clear that IDT used the images to compare its own Texas post drivers to the Montana post drivers sold by Creager, even if IDT’s advertisement does not include a picture or image of its own product. The comparison being drawn by IDT has less to do with the quality or features of the products but, instead, IDT is using the copyrighted images to suggest that customers should purchase IDT’s products based on where the products were manufactured. Due to the type of comparison being made, the lack of images of IDT’s products does not detract from the comparative nature of the advertising, and the Court finds that the purpose of IDT’s use of the copyrighted images was for a permissible purpose to compare IDT’s and Creager’s products.

The nature of the work didn’t disfavor fair use, since they were not particularly “creative or artistic” but were made to sell post drivers. The ads used the entire images.

The “most important” factor was market effect, and there was none. “The Supreme Court has expressly rejected the application of a presumption of market harm in cases when the duplication or use of a copyrighted work was for a commercial purpose, and the Court will not presume that IDT’s actions harmed the market for or value of the copyrighted images.” Creager never attempted to license the images or otherwise value them, other than to testify that no amount of money would justify licensing to a competitor for this type of ad. There was no evidence that a marketplace actually exists for the copyrighted images or that the images have any independent value.

Lanham Act false advertising counterclaim: IDT argued that, at most, its “Made in USA” statements were ambiguous.

The FTC says:

A product that is all or virtually all made in the United States will ordinarily be one in which all significant parts and processing that go into the product are of U.S. origin. In other words, where a product is labeled or otherwise advertised with an unqualified “Made in the USA” claim, it should contain only a de minimis, or negligible amount of foreign content.

But not all courts agree that “Made in the USA” statements are sufficiently clear and unambiguous to constitute a statement of literal fact for the purpose of a Lanham Act claim. Some of IDT’s claims were clear and unambiguous: it advertised “100% American Made Skid Steer Attachments,” and it includes a “Made in USA” logo on its website and certain ads. Its post on states that its premium model is manufactured in the United States, except for the “imported nitrogen power cell,” and IDT clearly stated that its economy model is “fully Chinese built.” Another ad asks consumers if they “[w]ant a post driver MADE in USA,” and IDT goes on to explain that its premium post driver is manufactured “in house,” except for the imported nitrogen power cell.

The details are repeated and clear, but the intro ("USA made post driver") is less so

The court didn’t need to resolve whether the FTC’s guidance should be applied directly, “because the Court is not dealing with vague or unsubstantiated claims that IDT’s products are wholly manufactured in the United States.” Instead, the ads made specific claims and “expressly inform[ed] consumers that part of the product originates from outside the United States. The FTC standard appears to apply to more general claims that a product is manufactured in the United States…. “While IDT’s advertising does make general claims that it sells products ‘Made in USA,’ this representation is supported by specific disclosures about its products.” Thus, Creager failed to show falsity or misleadingness.

Because the parties were asserting novel arguments that social media posts or online advertising can constitute an unfair trade practice under Oklahoma law, the court remanded the remaining claims to state court.

Tuesday, April 25, 2023

no disgorgement under state law when false advertising wasn't shown to result in sales

Republic Technologies (NA), LLC v. BBK Tobacco & Foods, LLP, 2023 WL 3004625, No. 16 C 03401 (N.D. Ill. Apr. 19, 2023)

Previous discussion. A jury found that defendant HBI engaged in unfair competition and violated the Illinois Uniform Deceptive Trade Practices Act (IUDTPA” in its packaging and promotional activities for its RAW Organic Hemp branded tobacco rolling paper products. Here, the court mostly denied a renewed motion for disgorgement, prejudgment interest, and attorneys’ fees.

Republic alleged that HBI, its competitor in the tobacco rolling paper industry, engaged in false advertising under the Lanham Act, unfair competition, and violations of the IUDTPA. HBI counterclaimed that Republic infringed its copyrights and trade dress. The jury ruled for HBI on one of its copyright infringement counterclaims and one of its trade dress claims against Republic and awarded HBI $979,620 in lost profits and $40,000 in statutory damages. The jury found that HBI did not engage in false advertising under the Lanham Act, but that HBI had engaged in unfair competition under Illinois common law and violated the IUDTPA. There was no special verdict form.

Because the jury was instructed not to consider the question of damages as to the unfair competition and IUDTPA claims (and plaintiffs cannot seek monetary damages under that statute), Republic was not awarded any monetary damages. The false advertising claims were based on statements (1) that HBI’s rolling paper is “made in Alcoy, Spain, the birthplace of rolling paper;” (2) that HBI’s RAW “Organic Hemp” papers are the “World’s Only” or “World’s First” organic hemp rolling papers; (3) that HBI contributes its funds or sales to a charitable entity called the “RAW Foundation;” (4) that HBI’s rolling papers are made with “natural hemp gum;” (5) that RAW rolling papers are “100% wind powered;” and (6) that OCB Organic Hemp papers (Republic’s products) are knock-offs, “RAWnabees,” copies, or fake versions of RAW. The court granted an injunction focusing on the Alcoy claims, which were false.

Here, the court declined to order disgorgement of “every cent of profit from HBI’s RAW brand during that time period—over $34 million.” Disgorgement is unavailable under the IUDTPA, which provides only for injunctive relief, and if the violation was willful, attorneys’ fees. But IUDTPA remedies are additional to any other remedies available against the same conduct under the common law. “And here, the jury also found that HBI committed common law unfair competition, which may carry with it the right to disgorgement, though the parties have not cited, and this Court could not find, an example in Illinois in the last 75 years.”

Assuming that disgorgement was available, the court looked to the Restatement (Third) of Unfair Competition for guidance. That worthy document deems disgorgement appropriate only when (1) “the actor engaged in the conduct with the intention of causing confusion or deception,” and (2) “the award of profits is not prohibited by statute and is otherwise appropriate” in light of all of the factors of the case.

The court was primarily guided by the absence of proof that the false statements were a substantial factor in producing sales. The court’s previous finding that the falsehoods “are likely to cause consumers to choose HBI’s products over Republic’s products” were directed at “likely” future harm to Republic, not actual proof of causation of HBI’s past profits. Republic could have provided survey data or consumer testimony, but did not.

Republic mainly pointed to the testimony of HBI’s own witnesses that the purpose and effect of the “RAW Foundation” promotion and charitable giving campaigns was to drive more sales, increase brand awareness, and enhance brand loyalty. “But though there was no official ‘Raw Foundation’ entity, HBI did indeed donate moneys to charities and conduct charitable events.” Also, a company’s belief that its advertising is important and profitable “is not evidence that the advertising actually had that effect.” (Once again, courts in false advertising cases refuse to make the plaintiff-favorable inferences that are standard in TM cases, here about intent.)

As for the parties’ competing damages experts, HBI’s expert admitted that he did not review any consumer data or have any background in understanding consumer behavior, while Republic’s expert also admitted that he did not know “how much of HBI’s profits are attributable to the challenged statements;” did not “have any basis for adjusting [his] profit opinion to account for the fact that the jury might accept some of the statements, but not all of them, as false advertising;” and did not “have any basis for an opinion that any of the challenged advertisements actually increased HBI’s profits.”  This lack of evidence that the wrongful conduct was a “substantial factor” in producing sales was “fatal” to an award of disgorgement.

The other factors listed by the Restatement didn’t change anything (the adequacy of other remedies; the public interest in deterrence/disgorgement; degree of fault; any delay in suing; any related plaintiff misconduct).  The court specifically noted the risk of a windfall to Republic, given that there are 22 hemp-based competitor rolling paper products, “all of whom may have suffered sales losses because of HBI’s misleading statements.” Deterrence was sufficiently served because it cost HBI money to bring itself into compliance with the injunction by removing numerous marketing statements from all packaging, marketing, and promotional materials for upwards of 600 items. Nor was Republic a completely innocent party in the matter, given that the jury found that it willfully infringed HBI’s trade dress and copyright.

However, the court did award some attorneys’ fees under IUDTPA, which are available “if the court finds that [defendant] has willfully engaged in a deceptive trade practice.” Willful conduct is defined as conduct that is “voluntary and intentional, but not necessarily malicious.” HBI acted with willfulness as to the Alcoy statements. “[W]hen HBI—a full year after trial—claimed that any problems with its Alcoy statements could be solved by essentially rearranging the punctuation of its previous statements, this Court found that it was ‘an attempt to mislead.’” Thus, Republic’s reasonable attorneys’ fees as to that issue would be awarded.

"Margarita Hard Seller" with no tequila isn't deceptive

Warren v. Coca-Cola Co., 2023 WL 3055196, No. 22-CV-6907 (CS) (S.D.N.Y. Apr. 21, 2023)

Defendant makes Topo Chico “Margarita Hard Seltzer.” It doesn’t have any tequila in it, though it is made with agave sugars. The front label contains the brand name “Topo Chico,” the word “Margarita,” and the phrase “Hard Seltzer.” These words appear on a yellow background containing faint images of agave plants. The label further indicates that the Product is 4.5% alcohol by volume.

defendant's package

Warren alleged that “[c]onsumers expect to receive a cocktail containing tequila when they order a margarita as this ingredient defines what a margarita is,” “[c]onsumers will expect the Product to contain tequila.” The use of “Hard Seltzer” allegedly reinforced that expectation, as “the term ‘hard’ in the context of alcohol refers to distilled spirits, i.e., ‘hard liquor’ ” like tequila. Nor does the product contain sparkling mineral water sourced in Monterrey, Mexico, which Plaintiff claims “is an essential part of Topo Chico beverages.”

She alleged NY GBL and other related claims. The court rejected them without leave to amend.

This is a question, at heart, of whether producers can push the definitions of products in new directions, not different in kind from whether “chik’n” can be made with all-vegan ingredients; consumers may need to learn new information, such as that alcoholic “margaritas” may not be made with tequila, if the definition is not frozen (no pun intended) by regulators.

Tequila: Plaintiff’s allegations were inconsistent with the label and with common sense. The product didn’t use the word “Margarita” in a vacuum, and instead states that the Product is a “Margarita Hard Seltzer.” “The context provided by the term ‘Hard Seltzer’ is critical and fatal to Plaintiff’s claim.” I didn’t know one couldn’t add tequila to seltzer!

The court: “Hard seltzer is a category of ‘alcoholic beverages that contain carbonated water, alcohol, and – in most cases fruit flavors, that have enjoyed skyrocketing popularity in the United States,’ which reasonable consumers would recognize as a product distinct from cocktails like margaritas.” How do we know? While plaintiff alleged that “hard” predominantly refers to distilled spirits, that’s only true for “hard liquor,” not for “hard cider” or “hard lemonade,” “and a reasonable consumer would understand the same in the phrase ‘hard seltzer.’” The reasonable meaning here is that, unlike regular seltzer, this one contains alcohol.

The court also took judicial notice that the product’s labeling as a “Margarita Hard Seltzer” contrasts sharply with the labels of the BuzzBox and Dulce Vida “[r]eady to drink ... margarita beverages” identified as competing alternatives in the complaint:

Those canned beverages are called “Perfect Margarita” and “Sparkling Margarita” with no additional qualifiers, and come in packages that describe the contents as “premium cocktails” and specify that they contain tequila. In contrast, the Product’s labeling does not refer to it as a cocktail or state that it contains tequila, nor does it describe the drink solely as any kind of Margarita – perfect, sparkling, or otherwise. Rather, the Product’s label uses “Margarita” as a modifier of the term “hard seltzer,” without any reference to cocktails or tequila.

Thus, “margarita” was a reference to taste, as confirmed by its proximity to flavor varieties on the package. Thus, “a reasonable consumer viewing the Product’s label as a whole would understand that they were purchasing a hard seltzer made to taste like a margarita and not a ready-to-drink margarita cocktail.”  

The use of agave images didn’t change anything, since the product uses an agave-based sweetener.

The court also pointed to the broader “circumstances” of purchase.

Had [Warren] lived in New York for any length of time, she would know that cocktails containing hard liquor are not and cannot be sold in grocery stores. But even assuming that she moved to New York right before buying the Product, she plainly was familiar with a margarita cocktail, and surely knew that nobody sells a margarita for $1.50. Further, cursory observation of the other items on sale in the beverage section of the ShopRite supermarket where she purchased the Product would have revealed soft drinks, beer, and hard ciders/lemonades/seltzers, but no hard liquor, cocktails, or wine.

[Would it be deceptive to sell these cans for $8 in a theater?]

Even if there was ambiguity created by the front (which the court thought there wasn’t) the ingredients label on the back, with its lack of reference to tequila, cured that ambiguity. I’m not sure why continued silence can cure ambiguity—the ingredient list doesn’t specify the type of alcohol—but the court thought that here, with “hard seltzer,” that continued silence confirmed the absence of tequila.

Likewise, Warren’s claim that the use of the Topo Chico brand name would lead reasonable consumers to believe that it contains sparkling mineral water sourced from Monterrey, Mexico was not plausible. The label made no claims that it was manufactured in Mexico or is otherwise connected to Mexico in any way, or that it contains sparkling mineral water of any kind; that was just Warren’s belief about the brand. “[A]ny such ambiguity is quickly resolved after reading the information on the Product’s back label, which explicitly states that it contains filtered carbonated water that is ‘not from source’ and certain ‘minerals for taste,’ and that it is produced and bottled in Milwaukee, Wisconsin.”

hashtags are plausibly infringing; sales claims plausibly false based on P's own history of sales

Automated Pet Care Prods., LLC v. Purlife Brands, Inc., 2023 WL 3046592, No. 22-cv-04261-VC (N.D. Cal. Apr. 21, 2023)

In two opinions on the same day, the court dealt with various IP/false advertising claims brought by one litter box seller against another. The first considered various trademark claims, including claims based on use of a hashtag on social media, where we are apparently going through everything we went through with domain names and search terms/metatags, yay.

Plaintiff (dba Whisker) sued defendant (dba Smarty Pear), its competitor in the market for automated, self-cleaning litter boxes. “Whisker is the pioneer of this technology while Smarty Pear is the newcomer.”

Whisker’s flagship Litter-Robot consists of a rotating chamber that automatically sifts cat waste after each use into a waste drawer beneath the chamber, thus keeping the litter box perpetually clean and eliminating the need for manual scooping. It has registrations for the word marks “Litter-Robot,” “Litter-Robot 3,” “Litter-Robot 3 Connect,” and “Litter-Robot Pinch Detect.” Smarty Pear allegedly used confidential information to inject the market with a new—and virtually identical—automated litter box: the Leo’s Loo. Its social media posts featured photos of the Leo’s Loo products, but those posts were tagged, at least in part, with #litterrobot, #LitterRobot, and #litterrobot3.

Using the old “Internet troika,” the three most important factors were (1) the similarity of the marks, (2) the relatedness of the goods or services, and (3) the simultaneous use of the Web as a marketing channel, all of which weighed heavily in plaintiff’s favor.

Defendant claimed that plaintiff lacked valid rights over the phrase “Litter Robot” (that is, with a space instead of a hyphen) and the hashtag “#litterrobot,” given the previous refusal of registration for “Litter Robot” as merely descriptive; in subsequent applications, Whisker “disclaimed” exclusive rights to the “Litter Robot” word mark, “meaning it acknowledged that it lacks a valid trademark over those words.” The PTO also declined to register “#litterrobot” on the Principal Register, because adding a hashtag to an otherwise descriptive mark did not alone make the mark suggestive.

If Whisker were pursuing claims based on [“Litter Robot” and “#litterrobot”]—say, if it were arguing that those marks have attained secondary meaning since the time they were rejected—then Smarty Pear’s disclaimer arguments would have merit. Whisker’s recent disclaimers would constitute admissions that the marks are not yet protectable.

But Whisker is not advancing trademark infringement claims based on those disclaimed marks. It neither disputes that it has disclaimed them nor argues that they’ve attained secondary meaning. … The key question here is whether Smarty Pear’s hashtags are confusingly similar to the marks over which Whisker has rights; focusing on whether they are also similar to marks over which Whisker does not have rights is not helpful.

This is the classic problem of scope v. validity, which modern trademark doctrine generally resolves by promising to appropriately limit scope in the infringement analysis, though that promise is often unrealized. The court commented:

To be sure, there is something unintuitive about the idea that Smarty Pear could be held liable for using marks that are nearly identical to marks the Trademark Office has determined are not protected. … But there is a place in the analysis to account for this peculiarity: the first of the Sleekcraft factors, the “strength of the mark.” … The resemblance between the marks that the Trademark Office has determined are merely descriptive and those it has agreed to register suggests that Whisker’s marks—while valid—are weak.

But plaintiff also alleged “significant marketing efforts over the course of 22 years, widespread publicity and write-ups, and rave customer reviews ranging in the tens of thousands. These allegations suggest the marks have been strengthened over time.” Anyway, “weak mark[s] entitled to a restricted range of protection,” infringement may still be found where, as here, “the marks are quite similar, and the goods closely related.”

The real issue here isn’t validity or strength, but whether the hashtags functioned as comparative advertising, and here the court tilts heavily against defendant: “For one, Smarty Pear’s intent is transparent: Not only are the products themselves virtually identical, but the strategic use of the number three and the upper-case letters in its hashtags evinces an intent to capitalize on Whisker’s goodwill.” The court didn’t discuss whether the rest of the post contained anything equivalent to the labeling that the 9th Circuit has considered relevant for sponsored ads.

Likely expansion also favored plaintiff. And plaintiff alleged actual confusion: “when Smarty Pear offered consumers free accessories to incentivize reviews of the Leo’s Loo, several consumers emailed Whisker’s customer support to claim their accessories, such that Whisker’s product specialists had to explain that the Leo’s Loo was not Whisker’s product.” And purchaser care was hard to assess: “These automated litter boxes aren’t exactly cars costing tens of thousands of dollars, but they’re not insubstantial purchases either. They sell for nearly $500 each. Most consumers would pause to reflect before spending that much on a product.”

Motion to dismiss denied as to trademark infringement, false designation of origin, and unfair competition claims based on the use of Smarty Pear’s hashtags.

Automated Pet Care Prods., LLC v. Purlife Brands, Inc., 2023 WL 3049106, No. 22-cv-04261-VC (N.D. Cal. Apr. 21, 2023)

After dismissing patent claims because infringement wasn’t plausibly pled, the court declined to dismiss some false advertising claims.  Statements like “[w]e’ve packed the Leo’s Loo with features that make it one of the most convenient self-cleaning litter boxes available” and “[w]e designed Leo’s Loo with kitty safety in mind ... so our feline friends are always safe when they step inside” were classic, non-actionable puffery. The allegation that these statements were likely to mislead consumers into believing that the product is made in California when it is allegedly manufactured in China was “strained and unconvincing.”

It was also puffery to label the Leo’s Loo Too as “the smartest self-cleaning litter box.” Standing alone, that descriptor is classic puffery. Plaintiff argued that, in context, the statement is actionable because the video then goes on to identify several specific features, falsely implying that competitor products lack those features.

If anything, the context here reinforces the conclusion that the statement is not actionable. Immediately below the video is a bold header that reads “Features You’ll Love,” followed by a second line of text which—in reference to the features listed immediately below it—describes the Leo’s Loo Too as “one of the most advanced ... self-cleaning litter boxes available.” And of the four features highlighted ever so briefly in the video itself, two are the most basic functions of any automated litter box: the Leo’s Loo Too “detects when kitties visit” and “cleans after they leave.” Under these circumstances, no reasonable consumer could believe the video implies that no other automated litter box can boast the identified features.

However, plaintiff adequately alleged false advertising based on defendant’s claim that the Leo’s Loo Too is the “First-Ever App-Connected Self-Cleaning Litter Box with Alexa and Google Voice Controls.” Plaintiff alleged that its own product, released years earlier, had its own smart app and can support Alexa and Google Voice, and that another Chinese product that defendant allegedly knocked off featured this built-in functionality long before the Leo’s Loo Too did.

Likewise, plaintiff plausibly alleged false advertising that “[o]ver half a million cats and their owners have made the transition to a litter-free life with Pear Family.” “This statement—conveying to consumers that Smarty Pear has sold over 500,000 of its Leo’s Loo and/or Leo’s Loo Too products—is a quantifiable claim capable of being proven false.”

Here’s the interesting bit: falsity was plausible because plaintiff, which has been in business for over 22 years, has had 700,000 sales in that time. “It thus seems implausible that Smarty Pear could have sold over 500,000 of its products in the one to two years it has been in the market. Moreover, such a representation is material to consumers and likely to induce reliance because it inspires confidence in the product.”

And the statement that defendant’s product’s UV rays are 99.9% effective at eliminating viruses and bacteria was also plausibly false advertising. Plaintiff alleged the existence of FDA guidance advising that UV rays are not effective at eliminating viruses or bacteria when they are “covered by dust or soil, embedded in porous surface or on the underside of a surface.” “Because bacteria or viruses within the Leo’s Loo Too are likely to be buried in litter, Whisker has adequately alleged that Smarty Pear’s boast of 99.9% effectiveness is false. And the complaint adequately alleges that such a representation is material and likely to induce consumer reliance given the premium placed on odor reduction in the market for litter boxes.”

fake meat law reinstated on appeal: intentionally misleading commercial speech gets no protection

Turtle Island Foods, S.P.C. v. Strain, No. 22-30236 (5th Cir. Apr. 12, 2023)

Reversing the district court, the court of appeals found that Tofurkey’s facial challenge to a Louisiana anti-fake meat law failed because the law plausibly could be read only to cover intentional deception.

Louisiana’s 2019 Truth in Labeling of Food Products Act bars, among other things, the intentional “misbrand[ing] or misrepresent[ing of] any food product as an agricultural product” through several different labeling practices. Those practices include “[r]epresenting a food product as meat or a meat product when the food product is not derived” from various animals.

Tofurkey’s products include plant-based “chick’n,” deli slices, burgers, sausages, tempeh, and roasts. Each of its labels, while employing meat-esque words like “sausage” or “burger,” prominently indicates that the product is “plant-based.”

representative packages

Tofurkey had Article III standing: it intended to engage in conduct arguably affected by a constitutional interest. “Tofurky’s labels and marketing— which no one contends are misleading or involve illegal activity—are just the kind of commercial activity the First Amendment protects.” And its intended actions were arguably proscribed by the law given its dictate that “[n]o person shall intentionally misbrand or misrepresent any food product as an agricultural product through any activity including:

[ . . . ]

(2) Selling a food product under the name of an agricultural product.

[ . . . ]

(4) Representing a food product as meat or a meat product when the food product is not derived from a harvested beef, pork, poultry, alligator, farm-raised deer, turtle, domestic rabbit, crawfish, or shrimp carcass. [similar for beef, pork, and poultry]

[ . . . ]

(9)       Utilizing a term that is the same as or deceptively similar to a term that has been used or defined historically in reference to a specific agricultural product.

The statute defines “misbrand” as “intentionally identify[ing] or label[ing] a food product in a false or misleading way.” To “misrepresent” also requires intention.

Louisiana argued that Tofurkey lacked standing because it didn’t intend to mislead or to break the law. But “intent” can mean different things, including intentionally making a statement that turns out to be misleading. Thus, the law was arguably broad enough to cover Tofurkey’s conduct. There was no explicit safe harbor for “meat-like, plant-based products as found in similar statutes in other states. See, e.g., Okla. Stat. tit. 2 § 5-107 (‘[P]roduct packaging for plant-based items shall not be considered in violation of [this statute] so long as the packaging displays that the product is derived from plant-based sources.’).”

And Tofurky faced a substantial (or credible) threat of enforcement. In a pre-enforcement challenge “to recently enacted (or, at least, non-moribund) statutes that facially restrict expressive activity by the class to which the plaintiff belongs, [we] will assume a credible threat of prosecution in the absence of compelling contrary evidence.” While Louisiana conceded that Tofurky’s nine demonstrative labels do not violate the Act, it declined to make any “representations as to whether any other label of Tofurky would be violative of the provisions of the Act.” And nothing bound the state from changing its mind and deciding Tofurky’s labels do violate the statute.

Merits: This was a facial challenge, which is a big deal. In the commercial speech context, “[t]o succeed in a typical facial attack, [Tofurky] would have to establish ‘that no set of circumstances exists under which [the Act] would be valid,’ or that the statute lacks any ‘plainly legitimate sweep.’”

Here, the law covered only speech that was completely unprotected: actually misleading commercial speech. Courts are required “to accept a narrowing construction of a state law in order to preserve its constitutionality.” The state’s preferred interpretation was that the law prohibits a company from intentionally misleading a consumer by claiming a product is made from beef, pork, poultry, crawfish, shrimp, meat, sugar, or rice when it is not. These would be “actually misleading representations” and thus not within the coverage of the First Amendment. The district court erred by applying Central Hudson to its reading of the statute, when it should have accepted this narrowing construction.


Friday, April 21, 2023

Thursday, April 20, 2023

consumer class settlement can't include injunctive relief unless there's Art. III standing to seek injunctive relief

Williams v. Reckitt Benckiser LLC, --- F.4th ----, 2023 WL 2906311, No. 22-11232 (11th Cir. Apr. 12, 2023)

The court of appeals reversed approval of a settlement that would have provided injunctive relief and up to $8 million in monetary relief to a class of individuals who purchased one or more “brain performance supplements” manufactured and sold by defendants. Given that the named plaintiffs alleged that the products were worthless, there was no reasonable probability that they’d want to buy them again, so they lacked standing to seek injunctive relief—and apparently even to agree to it as a settlement offer, which seems different.

I’m not a standing expert, but I don’t understand why, even if claims for injunctive relief couldn’t be maintained, one couldn’t settle claims for monetary relief with non-monetary remedies. The case the court of appeals discussed, Local No. 93, International Association of Firefighters v. City of Cleveland, 478 U.S. 501 (1986), seems very different (it’s about a consent decree that arguably violated a rule against issuing race-conscious court orders, and says “a consent decree must spring from and serve to resolve a dispute within the court’s subject-matter jurisdiction”). Here, the money damages provide the jurisdiction for the damages class, so why can’t the damages class agree to accept injunctive relief?

I assume that next on the chopping block is cy pres remedies for nonexhausted settlement funds, since plaintiffs can’t seek that as a remedy to be awarded either.

FWIW this was not a great settlement in terms of injunctive relief—it didn’t require anything meaningful—but this ground of reversal might be worse for consumers overall if such settlements do provide meaningful relief.

paying a referral fee is a consumer injury, not a competitor injury, for Lanham Act standing purposes

Lewis v. Acuity Real Estate Services, LLC, 63 F.4th 1114 (6th Cir. 2023)

Acuity operates a website that connects people looking to buy or sell homes with a local real-estate agent in their area. Acuity offers its services for free to home buyers and sellers but requires realtors to pay a fee for referrals. Lewis’s employer required him to pay Acuity’s fee out of his commissions from home sales. Lewis sued under the Lanham Act, alleging false statements to home buyers and sellers.

Lewis lacked a “commercial injury” because he was suing as a customer—he alleged that the “product” he bought was defective and sought to recover the referral fee. (The facts do sound frustrating: Lewis paid a referral fee to a different site, which he considered the one that brought him the client, but because Acuity was also involved, it successfully sued him and also collected.)

The court held that “no reasonable person would describe Lewis’s payment of this referral fee as a commercial injury to his ‘reputation or sales.’” Rejecting Lewis’s specific factual situation as relevant, the court reasoned, “whenever this injury arose (that is, whenever Acuity requested its fee), Lewis will have gained, not lost, a sale.” (This arguably makes sense because the falsity alleged is misrepresentations that lead consumers to use Acuity’s site rather than continuing to search for agents on their own.) Lewis didn’t allege that his payment of this referral fee injured his status in the realtor market in any way. Nor did he allege any reputational harm from, say, Acuity’s online description of the realtors in its network (including Lewis) as “top talent.”

The court commented that other realtors could have standing:

To be sure, it is not difficult to imagine a potential commercial injury to realtors arising from Acuity’s allegedly false advertising. Instead of identifying the referral fee as the injury, suppose that a different group of realtors refused to join Acuity’s network. Suppose further that these realtors alleged that they lost business because Acuity’s purportedly false advertising caused home buyers and sellers to use Acuity’s referral services and the competing realtors in Acuity’s network. Even though this different group of realtors would not directly compete with Acuity (as compared to its network of realtors), this purported lost business may well qualify as “an injury to a commercial interest in ... sales” that falls within the Act’s zone of interests.

But that wasn’t the case presented.

Wednesday, April 19, 2023

Adequate price disclosure?

Seen in the wild:

Sign on door: "Due to inflation, prices for some food are increasing without notice. Guests can ask the staff at any time for the updated prices. Sorry for the inconvenience!"

My suspicion is that this is not really adequate, but these days, who knows.

Tuesday, April 18, 2023

Press release touting preliminary injunction can found false advertising counterclaims

Zest Anchors, LLC v. Geryon Ventures, LLC, 2023 WL 2903668, No. 22-CV-230 TWR (NLS) (S.D. Cal. Apr. 10, 2023)

Zest sued defendants for trademark/trade dress infringement, alleging that defendants’ DESSLoc suite of denture attachment products infringed the trademarks and trade dress of their Locator product suite. The alleged trade dress was the insert colors and “distinctively-shaped” gold abutments. Defendants had entered into a distribution agreement for its allegedly infringing products with one of Zest’s former distribution partners, ZimVie, under ZimVie’s OverdenSURE line.

The court partially granted the request for preliminary injunctive relief on the trade dress claim. Zest issued a press release announcing “a significant legal victory” that enjoined use of “the DESS overdenture system that imitates Zest’s LOCATOR® product line while Zest pursues its claims. The ruling helps to assure Zest customers, new and old, that when they buy Zest LOCATOR® products they will receive the genuine article.” The press release also stated that the order covered “infringing products sold by ZimVie.” Etc.

ZimVie intervened and counterclaimed for declaratory judgment of invalidity, cancellation fo the color marks registration, declaratory judgment of noninfringement, false advertising under the Lanham Act and California law, and tortious interference.

Lanham Act: ZimVie alleged three false and/or misleading statements in the press release: (1) Defendants’ DESSLoc products “infringe” Zest’s products, (2) ZimVie’s products “infringe” Zest’s products, and (3) the PI applies to ZimVie.

Zest argued that the claim should be dismissed because there was nothing false, misleading, or even factual in the statements, since “the truth of Zest’s position ‘depends on the resolution of a disputed legal issue.’ ”

The court disagreed. Though it found likely success on the merits, “whether DESS—much less ZimVie—is actually infringing remains to be determined.” Although Zest used the phrases “preliminarily” and “while Zest pursues its claims,” reading the press release as a whole, the court couldn’t conclude as a matter of law that no reasonable consumer could have been deceived regarding the scope of the PI, and ZimVie alleged that several reports and consumers understood the press release to mean that the Court had concluded that ZimVie was acting unlawfully. It went beyond “legal opinions” by imputing conclusions that had yet to be reached to the court; the limits of the court’s opinion were “clear” enough to be factual.

However, California FAL claims failed because ZimVie sought monetary damages, which are not authorized under the FAL. The FAL allows restitution, but that “requires both that money or property have been lost by a [claimant], on the one hand, and that it have been acquired by a [counterclaimant], on the other.”

Intentional interference with prospective economic advantage also survived.

Zest also argued that ZimVie’s state law claims were barred by California’s anti-SLAPP statute. ZimVie responded that the commercial speech exception applied. Zest argued that “the Press Release is a litigation update, not comparative advertising, so it is not exempt from the Anti-SLAPP Statute.” But the press release compared Zest’s “genuine article” to the “infringing products sold by ZimVie” and “provides contact information and a website URL for readers ‘[t]o learn more about’ Zest’s products and how they ‘can help you exceed patient expectations and grow your practice[.]’ ”

This was a close issue, but the press release was commercial speech because it “did more than summarize Zest’s allegations or provide a summary of this litigation.” Former licensees, such as ZimVie, “may not challenge the licensor’s mark based upon facts which arose during the term of the license,” although they “may challenge the validity of the mark if such challenge is based upon facts which arose after the license expires.” ZimVie alleged that the Trademark Office refused Zest’s trademark applications “for the ‘standard’ Inserts (blue, pink, and clear) and the ‘extended range’ Inserts (red, green, and orange) as they appeared packaged together in a set,” the court had previously “observed the functionality of these Inserts,” and Zest issued the press release touting the Locator product suite’s “well-known aesthetic features.” Because these developments occurred after the termination of the Distribution Agreement in September 2021, the court couldn’t find as a matter of law that ZimVie was estopped at this stage in the proceedings.

Monster wins permanent injunction against VPX in false advertising case

Monster Energy Co. v. Vital Pharmaceuticals, Inc., 2023 WL 2918724, No. EDCV 18-1882 JGB (SHKx) (C.D. Cal. Apr. 12, 2023)

Following a large verdict for Monster on false advertising claims, this opinion discusses extensively the requirements for injunctive relief in false advertising cases. The jury awarded $271,924,174 for damages sustained by Defendants’ false advertising and found that the false advertising was willful and deliberate.

“As a general rule, a permanent injunction will be granted when liability has been established and there is a threat of continuing violations.”

The court applied a rebuttable presumption of irreparable harm. VPX argued that Monster didn’t show irreparable harm because: (1) the harms are purely economic; (2) VPX “abandoned any marketing focus on Super Creatine or creatine” before the jury rendered its verdict; and (3) VPX’s remediation obviates the need for an injunction.

Are lost prospective customers and market share purely economic harms? Although they sound economic, “evidence of threatened loss of prospective customers” can be intangible, irreparable harm. [This only makes sense if the real issue is difficulty calculating those losses; otherwise, this is straight-up economic harm.] There was evidence at trial that Super Creatine was VPX’s point of difference, allowing VPX to distinguish its Bang from Monster’s beverages. “Six months after the jury rendered its verdict, Defendants continue to manufacture, distribute, and advertise BANG cans with the Super Creatine label. Accordingly, unless an injunction is granted, consumers will continue to believe that BANG contains creatine and view Monster’s products less favorably than they otherwise would, rendering the threat of future lost customers an intangible irreparable harm.”

The court reasoned that “a loss of customers directly translates to lost sales. A lost customer may constitute the loss of a relationship with a customer as well as reference to other potential customers.” It might not be irreparable if there was already no evidence of lost customers or sales and no explanation of why money was sufficient.  But “Monster presented evidence that it lost customers and an award of monetary damages to Monster has not stopped Defendants from continuing to falsely advertise their products to consumers.”

So too with lost market share.

Defendants argued that VPX had already abandoned any marketing focus on Super Creatine or creatine, “reflecting the economic reality that neither is an important contributor to sales.” The jury rejected this argument at trial, and they were still—even after trial—posting ads showing pictures of cans with the Super Creatine label.

VPX also argued that it has redesigned the BANG label, promotional materials, and advertising to eliminate any reference to Super Creatine or creatine. It has announced its decision to stop marketing BANG as containing Super Creatine and notified its distributors of the label changes along with the jury verdict; and its retailers are aware of its ongoing transition as well as the verdict. “VPX also argues that it will not return to the type of advertising that was the subject of the jury’s verdict because it is now governed by a board of majority-independent directors, who have instructed VPX to complete the redesign transition.”

These efforts were insufficient to meet the “formidable” burden of showing “it is absolutely clear the allegedly wrongful behavior could not reasonably be expected to recur.” Defendants admitted that VPX was still manufacturing cans with the “Super Creatine” label and continued to do so until sometime in March 2023. They also intend to sell “Super Creatine” cans through the end of the calendar year. Defendants argued that the destruction of its existing cans “would cause millions of dollars in losses, severely disrupt VPX’s supply lines and business relationships, and leave VPX unable to fill existing customer orders or meet consumer demands.” “But Defendants have brought on themselves these unfortunate consequences through their false advertising.”

Plus, they hadn’t removed existing false advertising from their social media accounts. Defendants assert that “[i]t is impossible for VPX to review and eliminate all of the hundreds of thousands archived and historical social media posts that may include an image of the legacy [BANG] can or logo.” But they didn’t explain why this is impossible, especially for VPX’s own social media accounts. It wasn’t enough that VPX was “removing active content most likely to be seen by consumers ... [and] expects to complete ... revisions to the contents of its website by approximately March 31, 2023.” content.” Moreover, consumers were still being deceived by its false advertising (citing a consumer post saying “The ceo posted a pretty descriptive video on the whole breakdown. A lot of fancy words in there but it sounded like [Bang]’s got [creatine] and the lawsuit is more against the word ‘super’ and another saying “A reminder that Bangs have creatine.”).

For the same reasons, monetary remedies were inadequate, though the court was less persuaded by the contention that a damages award is inadequate because VPX’s bankruptcy makes future relief uncertain. VPX is undergoing a chapter 11 reorganization, where “[l]iquidation is not the objective” and “the aim is by financial restructuring to put back into operation a going concern.” Monster offered no proof that damages “payable through a plan of reorganization is an inadequate remedy” or evidence that VPX “would be unsuccessful in reorganizing.”

The balance of hardships also favored an injunction: “there is no harm to a defendant from an injunction which prevents continuing dissemination of false statements.” What about the problems with destroying inventory/filling existing customer orders? Monster argued that VPX could wrap the cans in shrink sleeves, and anyway it’s been more than 6 months since the verdict. “Courts have ordered recalls for less than that amount of time. … But considering the burden that may fall on Defendants to remove all false advertising and cans nationwide, the Court will give Defendants an additional 30 days to complete the transition.”

The public interest also favored a permanent injunction.

Defendants argued that an injunction would burden legitimate and protected speech by requiring VPX to remove social media posts merely for including an image of a BANG can with the Super Creatine label. But there’s no free speech interest in false commercial speech. [Interesting question about old advertising hanging around—especially if the ad didn’t focus on the label; what result if the benefit of old promotional partnerships would be lost? Would the possibility of digital editing suffice? What if such editing would violate the contract with old promotional partners?]

The court wasn’t concerned about the non-false aspects of advertising that included images of the falsely labeled cans, e.g., an Instagram post with an image of a BANG can with the Super Creatine label and the caption reads: “With a blast of berry flavors in every sip, you won’t believe it has ZERO sugar, carbs, or calories! Tag a friend in the comments who needs to try this flavor!” “That social media post is advertising Defendants’ product by encouraging consumers to tell their friends to buy the BANG can with the Super Creatine label—a label that misleads consumers into believing that the can contains creatine.”

The court did narrow the scope of the proposed injunction. An injunction that prohibits Defendants from falsely or deceptively claiming that Super Creatine is creatine, that BANG drinks contain creatine, and that BANG drinks or Super Creatine provide the physical, mental, health, or other benefits of creatine, was appropriate. However, Monster’s proposed outright ban on any reference to creatine/creatine-related substances, even if truthful, was overbroad. It would enjoin VPX from ever using “any form or purported form of creatine” in their beverages, even if there was no deception. Thus the court adopted this language:

The Enjoined Persons are permanently enjoined from falsely or deceptively using, either expressly or impliedly, [using] the word ‘creatine’—whether alone or together with other words—in selling, offering to sell, marketing, promoting, or advertising any BANG energy drink or any other beverage ....

Defendants argued that the injunction should not burden truthful discussions concerning ongoing scientific research and developments regarding creatyl-L-leucine (“CLL”) and creatine forms, “ ‘about which there is legitimate ongoing scientific disagreement,’ ” [citing ONY v. Cornerstone] and that individual defendant Owoc has “legitimate commercial and noncommercial interests in CLL and creatine research that go beyond the promotion of BANG, which the injunction needlessly burdens.” But the injunction would be limited to advertising and promotional statements, not conclusions made from scientific articles. It was tailored to enjoin false statements made in “selling, offering to sell, marketing, promoting, or advertising” BANG drinks. Defendants were only enjoined from speaking about their views on CLL in a false or deceptive manner when “selling, offering to sell, marketing, promoting, or advertising,” BANG drinks.

Defendants argued that Monster’s brief confirmed its attempt to suppress noncommercial speech when Monster argued that defendants’ false claims continued by highlighting an Instagram video posted by Owoc on in November 2022, that has since been taken down by Defendants. Defendants argued that Owoc’s video was not purely commercial as it does more than propose a commercial transaction by including his critiques about Monster’s litigation tactics, his opinions on defendants’ and Monster’s studies, and VPX’s reorganization. The court declined to decide the issue since the video was no longer public. “But the Court will note that Owoc’s statement in the video that Super Creatine is ‘just like creatine monohydrate’ seems to be misleading and not inextricably entwined with pure speech such that it would be entitled to full First Amendment protection.” As the Supreme Court has held, “advertising which links a product to a current public debate is not thereby entitled to the constitutional protection afforded noncommercial speech.”

Removing the word “creatine” from all Bang labels and packaging wasn’t impossible; defendants were already in the process of doing it. Monster argued that the redesigned label will continue to deceive consumers because it lists CLL as an ingredient and it shows the seal and number for the Super Creatine patent. The court was not persuaded that VPX should be required to remove CLL as an ingredient or its patent number.

Defendants are entitled to include CLL and its patent number in their drinks, but they are not entitled to falsely claim that CLL is something it is not. Thus, because the redesigned label does not mention the word “creatine,” it sufficiently addresses the false advertising at issue: that CLL or “Super Creatine” is creatine.

The court also modified Monster’s proposed requirement to remove from all media “all videos and pictures showing the Bang Drinks can, label, or packaging,” because VPX isn’t in charge of the internet. The court thus limited the injunction to those that were posted by defendants or at their direction.

The court also partly granted Monster’s request for a required corrective statement.  A corrective statement was appropriate to “remedy lingering confusion caused by” past and ongoing deception. But it was unnecessary to require defendants to share a corrective statement in all of their presentations and to make available copies of the injunction at all U.S. trade shows and professional meetings attended by the defendants for at least a year. The “purpose of an injunction is to ensure that past wrongdoing is not repeated, not to further punish the wrongdoer.” They’d be ordered to “deliver to all retailers, e-commerce websites, brokers, distributors, dealers, wholesalers, importers, influencers, and other non-consumers who they have worked with to sell, offer to sell, market, promote, or advertise BANG Drinks a written, signed notice” “that includes a copy of” the permanent injunction.

Likewise, Monster’s proposal to make them share the corrective statements for at least one year raised First Amendment concerns. “Once Defendants remove within 60 days of this order their false advertising from all cans, labels, packaging, physical locations, and media, the harm to Monster will likely be greatly reduced, and sharing corrective statements for at least a year will ‘burden speech without justification.’” Thus the required duration would be reduced to one month. During that period, defendants had to post a corrective statement on “all webpages they use to sell, offer to sell, market, promote, or advertise any BANG Drinks” and on all their social media accounts a corrective statement in a font size at least 50% as large as the most prominent language on the page “and immediately adjacent to the most prominent language on the landing page of each website or pinned or otherwise saved as the first post on each social media account”:

In September 2022, a jury issued a unanimous verdict finding that Vital Pharmaceuticals, Inc. (d/b/a Bang Energy) (“VPX”) and former Chief Executive Officer John H. “Jack” Owoc willfully and deliberately engaged in false advertising by claiming that the BANG energy drink contains creatine, contains “Super Creatine,” and provides the benefits of creatine. The United States District Court for the Central District of California has permanently enjoined VPX and Mr. Owoc from falsely or deceptively selling, offering to sell, marketing, promoting, or advertising BANG as containing creatine, as containing “Super Creatine,” or as providing the benefits of creatine.

[This also omitted Monster’s request to mention the jury’s willfulness finding.]

Would the injunction compel VPX’s independent retailers and distributors to return or destroy any legacy products they purchased, creating massive losses? VPX cited caselaw finding that nonparty retailers and distributors were not in active concert or participation with the defendant because they had completed their purchases of the enjoined products prior to the injunction, though the court gave a “but see” to Aevoe Corp. v. AE Tech Co., 727 F.3d 1375, 1384 (Fed. Cir. 2013) (finding that distributors were “acting in concert” with defendant “in connection with the resale of the enjoined products,” because distributors had notice of the injunction and they had an exclusive distribution agreement with the defendant, making them “privies” of the defendant).

Because determining whether a retailer or distributor is in “active concert” with defendants wass a fact-intensive inquiry, the court declines to decide whether the injunction would compel retailers and distributors to return or destroy Bang products and subject those retailers and distributors to being held in contempt. Defendants were “free to explain the lawsuit, the scope of the injunction, the injunction’s timetable, and Defendant[s’] own theory of ‘active concert or participation’ to those retailers [or distributors] who express concern.” Yikes.


Monday, April 17, 2023

timeshare exit firm wins fee award where plaintiff failed to show key elements of claim

Club Exploria, LLC v. Aaronson, Austin, P.A., 2022 WL 19479011, No 6:18-cv-576-JA-DCI (M.D. Fla. Nov. 4, 2022) (R&R)

“[F]ew parties are as adversarial—or as litigious—as timeshare developers and timeshare exit companies.” Plaintiffs, timeshare developers, sued defendants, a timeshare exit law firm and its named partner, alleging various claims, including claims under the Lanham Act and the Florida Deceptive and Unfair Trade Practices Act (FDUTPA). The court granted summary judgment to defendants on all counts. Plaintiffs filed a fruitless “Motion for New Trial,” essentially seeking reconsideration of the Court’s decision on the tortious interference claim. The Eleventh Circuit affirmed the Court’s rulings. Defendants sought to recover their attorneys’ fees; the magistrate recommended granting the motion in part.

The Lanham Act provides that “[t]he court in exceptional cases may award reasonable attorney fees to the prevailing party.” A nonexclusive list of factors that district courts may consider includes “frivolousness, motivation, objective unreasonableness (both in the factual and legal components of the case) and the need in particular circumstances to advance considerations of compensation and deterrence.”

This was an exceptional case. To survive summary judgment on their Lanham Act claim Plaintiffs needed to produce at least some evidence satisfying five elements; that: “(1) the ... statements were false or misleading; (2) the statements deceived, or had the capacity to deceive, consumers; (3) the deception had a material effect on the consumers’ purchasing decision; (4) the misrepresented service affects interstate commerce; and (5) the plaintiff has been, or likely will be, injured as a result of the false or misleading statement.” Although there were genuine issues of material fact as to the first and second elements, there was no evidence presented as to the third element.

In response to defendants’ motion, plaintiffs stated only: “[r]egarding materiality, it is difficult to argue that [the alleged misconduct] would not influence the Club Exploria Owners’ decision to hire Defendants.” There was “no citation to legal authority and no citation to any record evidence that even arguably supports this proposition. Even without hindsight, Plaintiffs should have known that a single conclusory statement was wholly inadequate to rebut the obvious lack of evidence supporting the materiality element.” [There are arguments that literal falsity—which was all that plaintiffs argued—should be presumed material; sometimes those arguments are persuasive, as when the falsity goes to the core of the product or service.]

In other timeshare exit cases, including cases against these defendants, the plaintiffs presented evidence of materiality, including an expert report. Even if owners contacting Aaronson as a result of exposure to the allegedly false websites was evidence of materiality, there wasn’t such evidence here: almost all of the putatively affected owners were referred to defendants by outside lawyers. Only one found defendants through the website on which they hosted the allegedly false and misleading advertisements. Plaintiffs neither deposed that owner nor included them in their expert’s damages report. The result in the other case against these defendants “evinces, at least to some extent, that if Plaintiffs had diligently pursued their claims, there was a substantial likelihood that their claims would have proceeded to trial.” That was not favorable to them in the fees inquiry.

Plaintiffs argued that the presence of genuine issues of material fact regarding the first two Lanham Act elements militated against awarding attorney fees here. “However, missing one element is just as fatal to a claim as missing multiple elements. Moreover, the Court’s finding as to the first two elements had little to do with the strength of Plaintiffs’ litigation position.”

Also, the court found that plaintiffs lacked Lanham Act standing for similar reasons: they presented no evidence creating “a genuine issue of fact as to whether the nonpayment was caused by [Defendants].” Interestingly, after the sj motions were briefed, defendants made a settlement offer that would have waived all claims to attorneys’ fees, which expressed confidence that they would prevail and be entitled to such fees, which the court labeled “prescient.” Instead, despite the “obvious, fatal defect” in the Lanham Act claims, which defendants pointed out and plaintiffs devoted only a “single, conclusory sentence” to in their briefing, and despite the reasonable settlement offer, plaintiffs chose to gamble on surviving summary judgment. Thus, this case was exceptional because it “stands out from others with respect to the substantive strength of the party’s litigating position” and in “the unreasonable manner in which the case was litigated.” Zealous pursuit of a claim shouldn’t result in a fee award, “but there is no such protection for a lackadaisical pursuit.”

FDUTPA: A prevailing party in a FDUTPA action may recover reasonable costs and attorney’s fees from the nonprevailing party according to the court’s discretion, which does not require exceptionality but does require consideration of case- and party-related factors, as well as deterrence. Here, those factors weighed in favor of such recovery.

“During this litigation, the Court voiced disapproval of Plaintiffs’ litigation tactics,” including multiple motions to extend the summary judgment deadline and others. Exploria had the ability to satisfy an award of fees given its size. Deterrence was relevant because the district “has become inundated with scores of timeshare-related disputes. Many of these disputes are similar to this case …. [A]warding attorney fees here would serve to deter timeshare-related claims that are not legitimate or that will not be diligently pursued.” The court also noted that generally, the timeshare plaintiffs were substantially larger than the timeshare exit companies. “This disparity creates some risk that a timeshare developer (or multiple timeshare developers) may weaponize ultimately meritless litigation to pressure a specific timeshare exit company—which may be operating legally—out of business.” (This was not said to accuse these particular plaintiffs of malfeasance but to make a general observation about deterrence.)

As here, a claim that isn’t pursued diligently “ends up wasting the Court’s limited resources and draining the resources of the smaller defendants.” This case took three years, ending because of plaintiffs’ failure to present enough evidence. “This failure is especially egregious as to the Lanham Act claim because Plaintiffs’ failure went to materiality and causation—basic, related elements—and developing the necessary evidence may have been as simple as deposing the Affected Owner who found Defendants through Defendants’ website.”

As to the merits, “[u]ltimately, the success of a plaintiff’s FDUTPA claim is tied to the federal Lanham Act claim for false advertising.” Even though the court found FDUTPA to be inapplicable because defendants were not engaged in “trade or commerce,” had the court reached the merits it was likely that the FDUTPA claim would have also failed for the same reasons as the Lanham Act claim. “To the extent Plaintiffs believed that they could piggyback off the result in another case without putting in the requisite effort to develop the necessary evidence in their own case, that belief was unreasonable.”

Thus, even though there was insufficient evidence of bad faith, and insufficient efforts by the parties to explain whether the claim was brought to resolve a significant legal question under FDUTPA, the factors weighed in favor of a fee award.

However, defendants weren’t entitled to their appellate fees, because the appeal concerned only tortious interference.

Agency liability theory satisfies "commercial advertising or promotion" requirement of promoting one's own products/services

Ariix, LLC v. Nutrisearch Corp., 2023 WL 2933306, No. 17CV320-LAB (DDL) (S.D. Cal. Apr. 13, 2023)

Previous court of appeals ruling discussed here. Ariix alleged that NutriSearch, the publisher of the NutriSearch Comparative Guide to Nutritional Supplements, and the Guide’s author MacWilliam were directly funded by Ariix’s competitor, Usana, so that Usana could achieve the Guide’s number-one rating for nutritional supplements. The Ninth Circuit reversed an initial dismissal, finding that Ariix had “plausibly alleged that the defendant’s publication was commercial speech, was sufficiently disseminated, and contained actionable statements of fact.” The appellate panel remanded to decide whether the defendant’s publication was for the purpose of influencing consumers to buy the defendant’s goods or services, as additionally required for “commercial advertising or promotion” under the Lanham Act.

The panel majority did note that the allegations in the complaint suggest that the advertising was “intended to help Usana’s goods, not NutriSearch’s product,” and that in analyzing this element, it may be helpful for this Court “to determine whether the defendants and Usana had an agency relationship; for example, it might be the case that the defendants were acting as agents of Usana and therefore had a vested interest in the goods that Usana sold, which might be enough to satisfy this element.” Judge Collins, in his dissent, suggested that the third element may be satisfied with allegations suggesting that “Defendants ... acted on Usana’s behalf or at its direction by secretly making, in exchange for compensation, specific changes requested by Usana in its own or competitors’ product reviews in the Guide.” He concluded, however, that the complaint falls short of alleging a true agency relationship between Defendants and Usana:

That Defendants wrote obsequious reviews in the hope that Usana would be pleased and buy more Guides or give MacWilliam speaking engagements does not make them Usana’s agents in writing those reviews. Nor does it establish that they acted on Usana’s behalf or subject to its control in doing so.

Instead, the court agreed that Ariix’s position that, “[w]hether assessed as a hidden financial arrangement, an agency relationship, or a conspiracy, MacWilliam and NutriSearch had a vested interest in the sale of Usana’s goods sufficient to attribute Usana’s goods to them.”

Ariix alleged that “Usana pays NutriSearch and MacWilliam hundreds of thousands of dollars per year and provides substantial other benefits—such as book sales to Usana representatives—which altogether account for more than 90% of MacWilliam’s income.” [Okay, just for clarity: the next few paragraphs are allegations from the complaint as recited by the court but I’m not going to repeat “allegedly” 50 times.] As compensation, “Usana exercises ultimate control over MacWilliam and NutriSearch’s product,” namely by having Defendants “manipulate their ratings criteria to ensure Usana remains the top-rated supplement company in the guide and actively sandbag Usana’s competitors’ ratings and certifications” in order to “ratchet up sales for Usana products.”

After formally ending his tenure on Usana’s advisory board because his affiliation with Usana gave the appearance of bias, MacWilliam approached Usana executives, explaining that he’d like to continue publishing the Guide in exchange for Usana’s financial support: “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 agreed, but only if MacWilliam promised to “give [Usana] the number-one rating.” MacWilliam accepted, “assuring Usana it would get the number-one rating despite the guide’s claims of independence and objectivity.”

Defendants are “entirely dependent” on compensation from Usana. For instance, “Usana directly pays [Defendants] hundreds of thousands of dollars per year in fixed stipends, speaking fees, promotion fees, and travel fees”; Usana “heavily promotes the guide to its sales representatives and encourages them to purchase it”; Defendants “almost always tie[ ] the publication of a new edition of the guide to the date of Usana’s annual convention” so as to “continue to direct associates to the latest edition” and ensure “robust sales” of the Guide; and at Usana’s speaking events, “MacWilliam is the only purportedly ‘independent’ speaker who is allowed to promote and sell his own products at such events.” Thus, “not only do[ ] [Defendants] rate Usana highest because of the incentive to increase Usana’s sales and to keep Usana happy, but also because, driven by the dictates of Usana, Usana’s distributors are their largest market segment [for sales of the Guide].”

During times when Defendants “have failed to meet their commitments to Usana”—i.e., awarding the top Gold Medal certification to another company—“Usana punished [Defendants] for failing to deliver per their agreement by cutting them off financially.” In 2008, an Usana executive explained to MacWilliam that “we don’t want to stand up and say ‘we’re one of the five best’ ”—Usana wants to be “number one.” After Usana responded positively to MacWilliam’s question about whether it would help to be number one in some way, NutriSearch allegedly “cured this breach of its secret agreement with Usana by coming out with a new award called ‘Editor’s Choice’ and giving it to Usana.” NutriSearch understood that this would “entitle MacWilliam to return to the Usana event circuit to speak and sell more books, and thus earn more speaking fees and book royalties.” The next year, when “another company was actually going to beat Usana,” MacWilliam explained the situation to Usana, to which an Usana executive responded that “we pay [Defendants] to make us number one.” MacWilliam “worked with Usana to adjust his allegedly objective matrix so that Usana stayed on top.” Each year thereafter, “Usana required MacWilliam to adjust his matrix” to ensure Usana remained the top-rated company in the Guide.

The court found that the complaint plausibly alleged the existence of a hidden financial agreement between defendants and Usana, under which MacWilliam was paid “hundreds of thousands of dollars” under the guise of speaking fees in exchange for awarding Usana’s products the Guide’s number-one rating. All the while, the Guide was explicitly touted as an independent publication.

This hidden financial agreement plausibly helped increase the sale of both Usana’s products and sales of the Guide itself—to Usana’s distributors. “ The parties here had a clear financial arrangement designed to influence consumers to buy products from a third-party in which Defendants had a direct financial stake.” (Citing, among others, Enigma Software Grp. USA, LLC v. Bleeping Comput. LLC, 194 F. Supp. 3d 263, 294 (S.D.N.Y. 2016) (holding that “by alleging that [Defendant] earns a commission on directed sales of [products sold by Plaintiff’s competitor], the SAC adequately pleads that [Defendant] had an economic incentive to engage in such promotion,” and that such commercial speech was “made for the purpose of influencing consumers to buy products in which [Defendant] has a financial stake”).)

In light of this financial agreement, an agency relationship would exist, and the alleged misrepresentations were made within its scope.

“For an agency relationship to exist, an agent must have authority to act on behalf of the principal and ‘[t]he person represented [must have] a right to control the actions of the agent.’ ” Actual control is not necessary; as long as there is an agreement that the principal has the right to control the agent, an agency relationship exists.

The facts above plausibly alleged that Usana manifested assent to defendants acting on its behalf. The precise details of the agreement weren’t required at this stage in the litigation. Likewise, the complaint plausibly alleged that defendants consented to act on Usana’s behalf and agreed to be subject to its control. The allegations indicated that defendants voluntarily yielded to Usana’s desires and complied with its directives in order to secure Usana’s financial backing.

The Court need not find that the principal “actually control[s] [the] agent as a prerequisite for establishing a[n] [agency] relationship, rather the principal need only have ‘a right to control the actions of the agent.’ ” The complaint plausibly alleged Usana’s editorial control and that “Usana was clear in its directive that it be awarded the number-one award or else it would withdraw its financial support…. That Usana went so far as to require that Defendants change their entire ratings matrix to ensure Usana received the number-one award is highly suggestive of Usana’s right to control not only Defendants’ end product, but also the manner and methodology of Defendants’ performance.”

The Ninth Circuit recognizes four avenues through which an agency relationship may be established: “actual authority, apparent authority, ratification, and employment (respondeat superior).” Ariix claimed that the first three all applied.

An agent has actual authority to take a certain action when “the agent reasonably believes, in accordance with the principal’s manifestations to the agent, that the principal wishes the agent so to act.” Actual authority is limited to actions “specifically mentioned to be done in a written or oral communication” or “consistent with” a principal’s “general statement of what the agent is supposed to do.” Ratification, on the other hand, occurs when the principal accepts the benefit of the agent’s act either with actual knowledge of the material facts or with “knowledge of facts that would have led a reasonable person to investigate further”—also known as “willful ignorance.”

The complaint plausibly alleged an agency relationship created through actual authority. “[W]hile the precise details of their agreement remain unknown, including whether Usana’s instructions were written or communicated verbally to Defendants, such facts are appropriate for discovery at a later stage in this litigation.”

The court declined to address whether Ariix’s allegations separately established a plausible conspiracy.

even if retailer is responsible for price premium, misleading label is actionable

DiGiacinto v. RB Health (US) LLC, --- F.Supp.3d ----, 2023 WL 2918745, No. 22-cv-04690-DMR (N.D. Cal. Apr. 11, 2023)

Plaintiff alleged that Children’s Delsym Cough Relief was misleadingly marketed as different from, and more expensive than, the adult product, when the concentration is the same. The front of the packaging for the children’s product contains a cartoon image of a child. It states “Ages 4+” at the top of the package and “For Children & Adults” at the bottom. The front of the packaging for the adults’ product contains no statement about the suitability of the product for any ages: 

The side labels for both products contain an identical dosing chart that includes dosing amounts for children and adults along with the statement “Dosing Cup Included” below an image of a cup containing liquid. The “Drug Facts” labels on the back of the packaging for both products are identical. Both products contain the same amount of the active ingredient and the same inactive ingredients.

DiGiacinto further alleged that “[n]o reasonable consumer who understood that the Children’s Delsym Cough Relief product was formulated identically to the adult’s Delsym Cough Relief product would choose to pay more for it.” He brought the usual California statutory and common-law claims.

RB Health submitted a declaration by its Trade Marketing Director stating that RB Health does not sell the Delsym Cough Relief and Children’s Delsym Cough Relief products “directly to consumers, but, instead, sells the Products to retailers and to distributors who in turn sell to retailers.” Since 2018, RB Health has sold both products “to the same distributors and retailers at the same price. The price the consumer pays for the Products is not set by RB Health.” Thus, RB Health argued, it was not responsible for plaintiff’s harm and he lacked Article III standing.

But Article III doesn’t require proximate cause.

Here, RB Health was responsible for the different labeling of identical products, which plausibly linked to his injury in a way that was “more than attenuated.” Even if RB Health wasn’t responsible for the price premium, it was allegedly responsible for the representations that allegedly led him to purchase the more expensive product. “A causation chain does not fail simply because it has several links, provided those links are not hypothetical or tenuous and remain plausible.” DiGiacinto also sufficiently alleged that he will be unable to rely on the advertising or labeling of the children’s product in the future, providing standing to seek injunctive relief.

This is because DiGiacinto cannot discover whether RB Health’s misrepresentations have been cured simply by looking at the children’s product front label since it does not disclose that it is pharmacologically identical to the adults’ product. Instead, he would have to inspect and compare the ingredient labels on two separate products, including the active and inactive ingredients listed, to determine whether the products are identical in form and quantity. The Ninth Circuit has held that “reasonable consumers” should not “be expected to look beyond misleading representations on the front of [packaging] to discover the truth from the ingredient list in small print on the side of the [packaging],” and RB Health does not cite any cases holding that a reasonable consumer is expected to compare labels on more than one product in order to determine whether a label is accurate.

Cases rejecting similar claims were distinguishable because here, the front of the packaging of both the children’s and the adults’ products identifies the active ingredient but not its concentration. (That’s not really a great distinction because it still requires consumers to compare two different products to avoid deception.) Also, while the front of the children’s product discloses that it can be used for anyone over four years of age (“Ages 4+”), the front label of the adults’ product said nothing about age. “This could lead a reasonable consumer to believe that the adults’ product is not suitable for children to consume and to purchase the children’s product instead.”