Friday, April 12, 2024

Cal. appeals court affirms use of statistical sampling to calculate # of FAL/UCL violations in AG action

People v. Ashford University, LLC, 100 Cal.App.5th 485, 319 Cal.Rptr.3d 132, D080671 (Feb. 20, 2024)

Defendants Zovio and Ashfort are the former owners and operators of an online university. The trial court found that for more than a decade, defendants violated the UCL and FAL by making false and misleading statements to prospective students for a total of 1,243,099 UCL and FAL violations. It imposed $22,375,782 in civil penalties.

The court of appeals reduced the penalty for violations outside the FAL’s statute of limitations (a decrease of under $1 million), but approved of the trial court’s general approach to calculating damages, including its use of sampling and its consideration of solicitations from California to out-of-state prospective students.

The court explains:

Ashford University was founded in 2005, when Zovio, which had never offered any degree programs, purchased a small campus-based religious university located in Iowa. Zovio needed this university’s accreditation because only students attending accredited institutions are eligible for federal financial aid. Zovio renamed the school Ashford University (Ashford) and transformed it into an enormous online institution that was marketed as a traditional university. [It has now been rebranded as the University of Arizona Global Campus.]

A typical bachelor’s degree from Ashford cost between $40,000 and $60,000. At its peak, Ashford had more than 80,000 students and generated hundreds of millions of dollars annually, the vast majority from taxpayer-funded sources such as Title IV loans, income-based grants, and G.I. Bill funds.

As Ashford knew, its students led “complex” and “difficult lives” whose vulnerability “heighten[ed]” the need for accurate college advising. They were typically older than traditional college students with an average age of 35 to 37; of low income (between 55 and 76 percent received Pell Grants); around half identified as minorities. Of note, only a quarter of Ashford students graduated, and many defaulted on their student loans.

Despite Ashford’s knowledge of these facts, defendants “created a high-pressure admissions department whose ‘north star’ was enrollment numbers rather than truthful advising. Ashford called its salespeople “admissions counselors” and trained them to build trust and rapport with prospective students. Managers would threaten to fire those who failed to enroll enough students. It was clear to defendants that the boiler-room atmosphere put pressure on salespeople. “[A]dmissions counselors succumbed to the pressure and made deceptive statements to prospective students in order to boost their enrollment numbers and keep their jobs.”

The AG filed an enforcement action alleging that defendants had violated the UCL and FAL by making “myriad misrepresentations to prospective Ashford students regarding the costs of attending Ashford, the availability of financial aid, the ability of Ashford programs to prepare students for careers in certain professions, and the likelihood that academic credits would transfer into and out of Ashford.”

The trial court found in favor of the AG, relying on (1) the testimony of nine student victims who experienced the misrepresentations and relied on them in deciding to enroll at Ashford; (2) the testimony of former Ashford employees who explained how the pressure to meet enrollment numbers, instructions from managers, and other guidance led them to deceive students in order to promote enrollment; (3) the testimony of an expert in college admissions with over 40 years of experience setting industry standards for college advising and leading the admissions, financial aid, and registrar departments of four major universities; and (4) internal company documents and testimony of witnesses affiliated with defendants.

I’m omitting infuriating and tragic details of the misrepresentations, but to get the flavor, one woman testified that she withdrew from a degree program at a different school that would have led to teacher licensure because she was told Ashford’s program was equivalent to the one she was attending. “Only after graduating did she discover this was not the case and her Ashford education did not qualify her to take the state teaching exam.” There were also financial misrepresentations about debt, costs of attendance, and so on.

Defendants’ compliance department used scorecards to assess calls between employees and prospective students; the AG’s expert found relevant deceptive statements in over 20% of scorecards. A compliance director responsible for admissions call monitoring observed that there were “areas where the level of negligence is astonishing.” Defendants received “mystery shopper reports” documenting specific misrepresentations about financial aid and transfer credits. Their response was to discontinue the mystery shopper program. They also didn’t respond meaningfully to student complaints. Instead, they promoted a substantial number of repeat offenders who made relevant statements in at least half of their monitored calls, which encouraged further noncompliance.

Between 2013 and 2020, there were 1,573,400 phone calls between defendants and California students. The AG’s expert drew a random sample of 2,234 calls, of which 561 discussed at least one relevant topic within this sample. Twenty-two percent contained at least one misrepresentation. Defendants retained and produced only California calls, but, based on the testimony in the case, the court concluded that the total number of misleading calls placed by defendants from March 2009 through April 2020 was 1,243,099.

Public prosecutor, including the AG, can seek civil penalties of up to $2500 for each violation of the UCL and FAL; the statute doesn’t specify how violations to be counted, but  “[c]ivil penalties ‘are mandatory once a violation of [the UCL/FAL] is established, and a penalty must be imposed for each violation.’ ” UCL and FAL penalties are cumulative. The statute specifies: “In assessing the amount of the civil penalty, the court shall consider any one or more of the relevant circumstances presented by any of the parties to the case, including, but not limited to, the following: the nature and seriousness of the misconduct, the number of violations, the persistence of the misconduct, the length of time over which the misconduct occurred, the willfulness of the defendant’s misconduct, and the defendant’s assets, liabilities, and net worth.”

Some of the penalties imposed were for calls beyond the statute of limitations, so the court reduced the penalty ($9/call) by the relevant amount.

However, it was generally appropriate to use statistical methods to estimate the number of violations. Defendants argued that the trial court found 1,243,099 violations by extrapolating from a “set of just 126 calls,” but “[w]hether any particular statement was misleading is a highly individualized inquiry that should have been evaluated in the context of the specific coursework and degree programs, financial aid and debt issues, and professional aspirations under discussion (not to mention the follow-up calls made and written materials provided to the same prospective students that were never considered).” However, “[r]epresentative testimony, surveys, and statistical analysis all are available as tools to render manageable determinations of the extent of liability.” The court relied on the People’s experts, a subject matter expert in college admissions and a statistician.  It followed appellate guidance: “If sampling is used to estimate the extent of a party’s liability, care must be taken to ensure that the methodology produces reliable results. With input from the parties’ experts, the court must determine that a chosen sample size is statistically appropriate and capable of producing valid results within a reasonable margin of error.” Defendants could have tried to develop evidence that this extrapolation was invalid at trial; they didn’t.

Each misleading call could be appropriately counted as a separate statutory violation, even if, as defendants asserted, admissions counselors spoke to each victim on average “a ‘half-dozen’ times.” Counting each call was not arbitrary and capricious.  “Each phone call in the violation count was found to contain at least one deceptive statement,” and it wasn’t even clear that the sample included repeat encounters. Even if it did, the individualized solicitations justified counting each call as a violation.

Nor did the trial court wrongly apply California law “extraterritorially” when it counted statements that caused harm outside of California. The misconduct “emanated from California,” and it’s well-established that the UCL/FAL extend to conduct that emanates from California even if victims reside out of state. The AG is not (just) a representative of injured California citizens; the AG acts “under his constitutional authority as the chief law enforcement officer of the state.”

Finally, the penalty wasn’t constitutionally excessive. Nine dollars per violation isn’t excessive even if they committed a lot of violations. Defendants argued that the total was excessive in comparison to the People’s request for $222,119 in restitution on behalf of the nine testifying student victims, and there should only be a single-digit multiplier. This wasn’t a punitive damages case, but a civil penalty, which is fundamentally different: it’s sought by public law enforcement, not private officials; there’s no jury trial and thus no risk of jury passion or prejudice; and the underlying action doesn’t require proof of actual damages. More generally, the harm wasn’t disproportionate to the penalty, considering both monetary and nonmonetary harm.

“The court credited the testimony of the nine student victims, each of whom described how their admission counselors’ misrepresentations led them to make decisions that frustrated their goals, deprived them of years of lost time, cost them financially, and had other detrimental consequences.” It further found significant similarities between the deceptions identified in the sample and the stories of the testifying victims.

Defendants also didn’t show that Zovio was unable to pay. Among other things, “[i]n exchange for paying $54 million to ‘sell’ Ashford to UAGC, Zovio will now receive 15.5-19.5% of UAGC’s tuition revenue for the next 7-15 years.” Even if 10% of net worth is a maximum for punitive damages (which wasn’t clear), that didn’t apply to civil penalties. And, in this case, Ashford earned Zovio “hundreds of millions of dollars ... annually.” Its voluntary depletion of its assets—in order to get a future income stream—couldn’t count in its favor.


Friday, April 05, 2024

RAW power: over dissent, 9th Circuit orders trial on infringement, cancellation of TM applications

BBK Tobacco & Foods LLP v. Central Coast Agriculture, Inc., --- F.4th ----, 2024 WL 1356981, Nos. 22-16190, 22-16281 (9th Cir. Apr. 1, 2023)

Over a dissent, the panel reverses the grant of summary judgment on noninfringement, reasoning that the overlap in the use of the (descriptive) word RAW between the parties’ somewhat related products was enough to avoid summary judgment—which should rarely be granted in trademark cases (ugh), despite major visual differences and the lack of actual confusion evidence and low confusion rates shown by the parties’ surveys.

plaintiff's RAW

defendant's Raw Garden
Also over a dissent, the panel finds that a court can order trademark applications cancelled, not just registrations. (The panel did affirm the refusal to cancel defendant’s registrations on grounds of unlawful use, since they weren’t for unlawful items.)

BBK sells smoking-related products with RAW branding; CCA allegedly infringed by selling cannabis products with the mark “Raw Garden.” BBK sought to cancel several of CCA’s trademark applications for lack of bona fide intent to use the mark in commerce. “We hold that, under 15 U.S.C. § 1119, when an action involves a claim of infringement on a registered trademark, a district court also has jurisdiction to consider challenges to the trademark applications of a party to the action. We also hold that lack of bona fide intent to use a mark in commerce is a valid basis to challenge a trademark application.”

The dissent disagreed, given that the statutory language is:

In any action involving a registered mark the court may determine the right to registration, order the cancelation of registrations, in whole or in part, restore canceled registrations, and otherwise rectify the register with respect to the registrations of any party to the action.

But, the majority reasoned, the Lanham Act refers to an “[a]pplication for use of trademark” as a “request [for] registration of [a] trademark on the principal register.” “A challenge to an application thus necessarily affects the applicant’s right to a registration…. Indeed, some of the dissent’s own examples use the term ‘right to registration’ when adjudicating an opposition to an application.” Adjudicating applications in a single action was good for speed and efficiency.

The dissent would have allowed the PTO’s iterative registration process to go forward. The dissent would have interpreted “right to registration” in the relevant provision to mean “the court’s authority to adjudicate the ownership, scope, priority, and use of trademarks, which may entitle a party to registration of the mark.” That is, courts could determine who has rights to a trademark, but that’s not the same thing as cancelling pending trademark applications, as the use of “otherwise” in the final phrase of § 1119 indicates. “Of course, the right to registration may affect the applications’ adjudication. But that doesn’t alter Congress’s choice to leave decisions over trademark applications to the PTO.” Noscitur a sociis also supported excluding the authority to cancel trademark applications from § 1119. “Given the neighboring terms, we should likewise read ‘right to registration’ as only a power over completed registrations.” (The section title—“Power of court over registration”—also suggested that federal courts lack jurisdiction to cancel pending trademark applications. “Though a statutory title may never ‘limit the plain meaning of the text,’ a title may sometimes be a helpful interpretative tool.”)

Dueling surveys don't defeat class certification in supplement suit

Corbett v. PharmaCare U.S., Inc., 2024 WL 1356220, No. 21cv137-JES (AHG) (S.D. Cal. Mar. 29, 2024)

The court partially grants class certification and rejects motions to exclude experts. Plaintiffs allege consumer protection and breach of warranty claims based on PharmaCare’s Sambucol product, a dietary supplement that is advertised to “support immunity” and contain a proprietary extract of black elderberry. Sambucol comes in various forms, including syrup, tablets, capsules, and gummies. The challenged labels include some combination of the following statements: “Supports Immunity”; “Scientifically Tested” (xkcd is, as always, excellent on this); “Supports the immune system”; “Virologist Developed”; “provides strong immune system support to help you and your family stay healthy throughout the year. … conveniently arms you with some of the best protection nature has to offer”; “only Sambucol® can guarantee consistent, immune supporting properties in every serving”; “Developed by a world renowned virologist, Sambucol®’s unique manufacturing process preserves and maximizes the naturally occurring health benefits of the Black Elderberry”; “used in published scientific studies. No other elderberry brand can make the same claim”; “Developed by a world renowned virologist, Sambucol® has been trusted by millions worldwide. Sambucol can be taken every day for continuous immune support.”

Plaintiffs had two theories: first, the products contain a new unreported dietary ingredient and therefore, were illegal to sell as dietary supplements. Second, the products were labeled and marketed in a way that claims that they mitigate or prevent disease.

The court allowed the parties’ experts and their dueling consumer perception surveys, plaintiffs’ materiality survey, and dueling conjoint analysis/damages opinions.

One of the plaintiffs was a fine representative; he testified that he wouldn’t have bought the products if he’d known of the illegality, which didn’t make him atypical. The other testified that he only bought products that didn’t make the alleged misrepresentations at the core of the disease claim, so wasn’t a typical representative for the disease claims. On the other hand, it didn’t matter that he didn’t recall seeing the “dietary supplement” label because the crux of the argument was that plaintiffs wouldn’t have bought the products if they’d known they were illegal, which didn’t depend on reading the phrase “dietary supplement.”

Because of state-law differences, a nationwide class couldn’t be certified, but a California one could be. The court declined to find the drug theory preempted at this time, noting that California’s Sherman Law adopts the FDCA’s provisions; this isn’t obviously an attempt to directly enforce the FDCA.

Predominance for the drug claims was satisfied based on the theory that an illegal unapproved ingredient would render the products illegal for sale, and that a jury could find that illegality would be material to a reasonable consumer. “Plaintiffs’ unfair or deceptive business practice NDI claim may rest upon a theory that even putting the products for sale on the marketplace is an implicit representation that they are being legally sold and comply with the FDA.” Further, this finding could be supported at the certification stage “based on evidence such as the perception of the named representatives and does not require survey evidence.”

Predominance for the disease claims: PharmaCare argued that the labels varied between products, and while the majority of packaging contains the statements “support immunity” and “scientifically tested” on the front of the package, the statement “virologist developed” varies in its location, including on other sides of the package and in varying font sizes. Courts don’t require uniformity, only “sufficiently similar representations.” The question was whether differences were “materially different.”

There was no dispute that the phrases “scientifically tested” and “supports immunity” appeared on the front of the packaging of all products and in largely the same format and prominence. As for “virologist developed,” it appeared variously on the back, side, and top panels, which the court didn’t find materially different from one another (as front placement might have been).  The text also differed, in that mostly “virologist developed” appeared as part of a bulleted list, but for several of the products, it appeared in a paragraph on the package. Still, the text wasn’t in a smaller or finer print; “this difference in how this one phrase appears on packaging is not ‘materially’ different to preclude class certification, particularly in light of the other statements that do appear consistently amongst all the packaging for the products.”

variants of "virologist developed"

PharmaCare argued that disclaimers on the packaging precluded a disease claim: “[t]his product is not intended to diagnose, treat, cure or prevent any disease” on the back or the side, but not on the front. Whether disclaimers avoid deception is typically a question of fact.

Plaintiffs’ consumer perception survey showed people products with and without the challenged representations, modified to be “brand neutral”—that is, removing mentions of Pharmacare and Sambucol, botanical imagery, and modified the background color so that participants could not use that to determine the brand.

The results showed that test group respondents shown the challenged representations were 2.2 times more likely to perceive the surveyed health benefits (51.9% versus 24.2%, or 27.7% net deception).  Defendants’ expert criticized the survey universe as overbroad—nearly half hadn’t purchased any of the products at issue in the past. He also argued that the survey didn’t test the theory of liability, and that the survey should have tested individual representations individually; used open-ended rather than closed-ended questions; and used actual packaging instead of modified packaging.

Defendants’ expert’s survey used respondents that shopped at supermarkets and drugstores who’d made a recent purchase in the product category of nutritional supplements/vitamins.

After being shown one of defendants’ products, respondents were asked open-ended questions, including 1) “please list all the reasons that you would or would not purchase this product;” and 2) “if you were to purchase [the product], would you have any expectations about specific benefits it would provide” and if answered yes, asked to explain their beliefs. Respondents were also asked a close-ended question on how likely it was that the product would deliver these specific benefits, being able to choose between “very likely,” “somewhat likely,” “neither likely nor unlikely,” “somewhat unlikely,” “very unlikely,” and “don’t know/no opinion.”

Then respondents were shown actual labels and asked to select any of 24 options of statements on the packaging that appealed to them, which included the challenged representations. If they did, they got a follow-up: 

In this survey, only 39.8% of respondents identified health-related reasons for why they would purchase the product, and only 21.2% identified immunity support. Only 71.2% of respondents answered that they would expect the product to provide benefits; 49.2% reported some health-related benefit, with 33.9% identifying immune support/boost immune system. Id. Dr. Keegan’s survey further tested attributes that consumers found appealing, including the following:

Further questions found that consumers varied in their certainty:

Defendants’ surveyor concluded that consumers provide a wide range of reasons for purchasing the products, without a unified or predominant reason driving their decision, that they had wide expectations of the benefits the product would provide, that there was wide variation in what consumers found appealing based on the statements on the packaging, and that consumers did not uniformly understand the statements to mean what plaintiffs assert they mean.

Plaintiffs’ expert had his own criticisms, mostly about use of open-ended questions for most of the survey, and a close-ended question with a ton of options. He contended that using such questions in a self-administered online survey tends to underestimate phenomena, and that survey experts believe that close-ended questions are “more appropriate for scientifically rigorous, quantitative survey research.” In his view, the survey encouraged respondents to answer “I don’t know” to his open ended questions, while providing 24 options for the close-ended question encouraged “under selection” of options.

Moreover, to plaintiffs’ expert, the responses actually supported the claim: “5 of the 7 most “appealing” claims were related to the Plaintiffs’ challenged claims: ‘Supports your immune system’ (62.7 % of respondents); ‘Supports immunity’ (59.0%); ‘Strong immune system support to help you and your family stay healthy throughout the year’ (48.9%); ‘Immune supporting properties’ (48.9%); and ‘Scientifically tested’ (41.0%).”

The dispute didn’t defeat predominance, because it could be resolved classwide.

So too with the dispute over plaintiffs’ materiality survey (and defendants’ expert’s modified version thereof). The materiality survey was a referendum: it tested consumers’ preference for buying the products with or without the challenged representations. Consumers were 11 times more likely to choose the product with the representations (8.1% versus 91.9%).

Defendants’ expert argued that this was dumb, because the format drew attention to the only difference between the products, and the product packaging in the control left open space that, in the real world, would be filled with other product benefit claims. He conducted a survey showing only Sambucol with the claims to one group and Sambucol without to the other, and found “no statistically significant difference between respondents’ likelihood of purchasing products with and without the Considered Representations.” 

Again, this “amounts to a disagreement on survey methodology, rather than suggestions that a survey could not be designed to test materiality in the first place.”

Damages: Plaintiffs first argued that a full refund model could be used to measure damages where a plaintiff’s theory of liability is that the product is valueless (which an illegal or useless product would be). The court disagreed on uselessness, because plaintiffs didn’t show that the products had no other benefits at all. Plaintiffs also argued that a product might actually be worthless if it was illegal to be sold as it was, but the cited cases involved a greater degree of illegality (illegal nicotine sales to youth, or poison sold as food, or a Schedule III controlled substance).

But a price premium model could work, and it was enough at this stage to propose, in detail, how that would be done.

Thursday, April 04, 2024

My latest acquisition

A small "Diet Brick" soda machine made out of Legos

 My son informs me that this is an "illegal build" but I like it anyway.

Wednesday, April 03, 2024

failure to properly allege falsity dooms FedEx at 6th Circuit

Fedex Ground Package System, Inc. v. Route Consultant, Inc., No. 23-5456, --- F.4th ----, 2024 WL 1364707 (6th Cir. 2024)

The court of appeals affirmed the dismissal of FedEx’s false advertising claims (under the Lanham Act and Tennessee Consumer Protection Act), albeit on somewhat different grounds. The district court had focused on FedEx's harm story; the court of appeals turns on falsity.

FedEx (here called FXG) alleged that Route Consultant made disparaging statements to foster discontent between FXG and its contractors, which would damage FXG and benefit Route Consultant.

FXG doesn’t deliver packages directly; it has a network of independent service providers (confusingly for me, ISPs) that provide pickup and delivery within neighborhoods, and transportation service providers (TSPs). Collectively they’re called “contracted service providers” (CSPs).

Spencer Patton owns several ISPs that work with FXG and also owns Route Consultant, a consultancy business for current CSPs and those that are looking to get into the business. Route Consultant advises CSPs on “buying and selling FXG routes, ISP and TSP ownership and operations, and fleet strategy.” It also provides brokerage services for CSPs interested in selling their business or otherwise assigning their CSP contracts, and it provides instructional courses and programs for CSPs.

FXG asserts that Route Consultant launched a promotional campaign premised on a “fictionalized crisis” between FXG and its CSP network, claiming that the CSPs were “financially collapsing under the weight of ... dramatic cost changes” resulting from global economic trends, and that these changes had “gone unaddressed by FXG in 2022.”. The alleged aim was to motivate CSPs to renegotiate their contracts with FXG, which would in turn allow Route Consultant to position itself as the intermediary for the renegotiations.

FXG identified nine specific claims relating to FXG’s alleged failure to make financial adjustments, including that the “average FXG business run by a CSP currently operates on profit margins below 0%”; “the current CSP financial model is collapsing due to substantial increases in the cost of fuel, labor, and vehicles over the past 12 months”; pointing to “soaring levels of CSP default rates as evidence of the current financial stress within the network”; and “Almost all of the other contractors that had renegotiation requests were also denied.”

For purposes of a motion to dismiss, “a complaint may not baldly assert that a challenged statement is false or misleading. It must explain why and how it is so.”

Statements that FXG had made “no financial adjustments” for CSPs: These were factual claims, but not plausibly alleged to be literally false. The complaint alleged literal falsity because “ISPs [ ] requested mid-contract renegotiations for only about 10% of their agreements in 2022; FXG has consented to approximately 40% of renegotiation requests since July 1, 2022; and over 90% of those renegotiations led to agreement on new terms that resulted in higher contractual payments to the ISPs.” But, in the context in which they were made, Route Consultant was not describing a failure to make financial adjustments on an individualized basis, but contrasting the “flat, across-the-board” CSP pay increases that FXG made in 2020 “in order to overcome the extraordinary conditions of” the COVID-19 pandemic and also asserting that FXG refused to properly address the issues raised by a “group of FedEx contractors” who wrote letters of concern. “The surrounding context of the statements makes no mention of individual renegotiation requests being denied.”

On a motion to dismiss, only “reasonable inferences” are drawn in the plaintiff’s favor. “And under the circumstances present here, it would be unreasonable to divorce [the statements] from their context.” Without literal falsity, the complaint didn’t allege misleadingness.

Statements that the “average FXG business run by a CSP currently operates on profit margins below 0%” and that “since [ ] Q4 of 2020, the industry has seen ‘a 15% pullback on the value of routes ….’” These were also statements of fact, but the complaint didn’t actually plead that they were false or misleading. Alleging that these businesses generated an operating margin of 16%, based on FXG’s calculations from Route Consultant’s appendix, didn’t go to profit margin. Likewise, alleging that an “industry analyst ... noted that ‘these ISP businesses are being sold for an average multiple of 0.8x Sales and over 2x their fleet value’ ” does not “explain how the sales value of an ISP at one point in time demonstrates whether there has been a ‘pullback’ in a route’s value over a period of time.”

Financial model collapsing/soaring levels of CSP default rates: These were not statements of fact but loose, hyperbolic terms. Even if “soaring” just meant rising, FXG didn’t plead falsity, “because its complaint refers only to the financial health of ISPs, not CSPs, and says nothing about defaults at all.” Anyway, collapsing/soaring couldn’t be measured to be falsified.

“Almost all of the other contractors that had renegotiation requests were also denied.” This was a statement posted in August 2022; the allegation that “FXG has consented to approximately 40% of renegotiation requests since July 1, 2022; and over 90% of those renegotiations led to an agreement on new terms that resulted in higher contractual payments” did not make this statement literally false, because it wasn’t limited to the period starting in July 2022; in context, it referred to requests over the past year and was not “unambiguously deceptive.”

Friday, March 29, 2024

Gerber's Good Start troubles continue

Hasemann v. Gerber Prods. Co., 2024 WL 1282368, No. 15-CV-2995(EK)(JAM), 16-CV-1153(EK)(JAM), 17-CV-0093(EK)(JAM) (E.D.N.Y. Mar. 25, 2024)

Gerber Good Start Gentle formula isn’t like most other infant formulas, which are made with “intact” cow’s milk protein. GSG uses cow’s milk protein that has been partially broken down (“100% Whey-Protein Partially Hydrolyzed”). The FDA allowed GSG to make “certain specified, modest claims” related to atopic dermatitis, aka eczema, which is the most common allergic disease in infants.

But the FDA was very limited in what it allowed: It would not object if Gerber claimed that “little scientific evidence suggests” that feeding certain infants a “100% Whey Protein Partially Hydrolyzed infant formula” for the first four months of life “may reduce the risk of developing atopic dermatitis throughout the 1st year of life.” The FDA also agreed not to challenge the assertion that “very little scientific evidence suggests” that the benefits may persist “up to 3 years of age.”

Gerber then revised GSG’s packaging to say, among other things, that GSG was the first and “only” formula “to reduce” an infant’s “risk of developing allergies.”

Previously, NY and Florida classes were certified, and there are also individual claims under New York, Florida, North Carolina, and Wisconsin law.

Here, the court denied Gerber’s motion for near-complete summary judgment (except Wisconsin individual claims) and denied plaintiffs’ motion for partial summary judgment, and also cabined the scope of Gerber’s expert’s testimony.

Plaintiffs alleged two misrepresentations (1) GSG “reduces the risk of infants developing allergies.” (2) Implied FDA endorsement, which allegedly occurred when Gerber “deemphasized” the qualified health claim’s “underwhelming specifics” in its ads.

First, a safety-seal sticker on certain GSG canisters stated: “1st & ONLY Routine Formula // TO REDUCE RISK OF DEVELOPING ALLERGIES // See label inside.” That label, which could be peeled back before purchase (if you would actually do that in a store) stated, in part:

Good to know. Our Comfort Proteins® Advantage ... If you choose to introduce formula and have a family history of allergy, feeding a formula exclusively made with 100% whey partially hydrolyzed, like GOOD START Gentle formula, during the first four months of life may reduce the risk of atopic dermatitis* throughout the 1st year, compared to formulas made with intact cow’s milk protein. The scientific evidence for this is limited and not all babies will benefit.

The asterisk following “dermatitis” referred to this statement: “*the most common allergy in infancy. GOOD START Gentle formula should not be fed to infants who are allergic to milk or infants with existing milk allergy symptoms. Not for allergy treatment.”

Magazine ad showing "mommy's eyes, not her allergies" claim
Second, a full-page print magazine ad that featured an image of a baby’s face with the sentence: “The Gerber Generation says ‘I love Mommy’s eyes, not her allergies.’ ” Smaller text below this line, next to an image of a GSG canister, stated:

If you have allergies in your family, breastfeeding your baby can help reduce their risk. And, if you decide to introduce formula, research shows the formula you first provide your baby may make a difference. In the case of Gerber Good Start Gentle Formula, it’s the Comfort Proteins Advantage that is easy to digest and may also deliver protective benefits. That’s why Gerber Good Start Gentle Formula is nutrition inspired by breastmilk.

Third, there was a similar TV ad with “may also” language. (The FTC did not like these ads either.)

Plaintiffs alleged that these ads were false and misleading because there was no scientific evidence supporting the claim that GSG reduced the risk of developing certain allergies or atopic dermatitis.

As for the implied FDA endorsement: (1) A coupon affixed to certain GSG containers described it as “the first and only formula brand made from 100% whey protein partially hydrolyzed, and that meets the criteria for a FDA Qualified Health Claim for atopic dermatitis.” It also bore a gold roundel, featuring the phrase “1st AND ONLY” surrounded by the phrase “MEETS FDA QUALIFIED HEALTH CLAIM.” (2) A print magazine advertisement described GSG as the “1st Formula with FDA qualified health claim.” (3) Another print ad said GSG was “the first and only infant formula that meets the criteria for a FDA Qualified Health Claim.”

First and only banner ad claim
In fact, the FDA authorizes health claims only when there is “significant scientific agreement.” It allows qualified health claims when they are “supported by some scientific evidence” and accompanied by a disclaimer; the FDA doesn’t approve these claims, but instead exercises enforcement discretion not to go after them. Crucially, “[t]he qualified health claim about GSG that the FDA ultimately permitted is not the claim Gerber originally sought permission to make.” Although Gerber referred to the qualified health claim determination in its ads, it didn’t use any of the approved versions.

Gerber’s proposed expert witness, a pediatric gastroenterologist who worked at Gerber for nearly two decades, first as the Medical and Scientific Director, then as the Global Chief Medical Officer, would opine that “Gerber had, and has, a scientifically sound basis” to represent that “feeding [GSG] instead of intact cow milk protein formula (CMF) to infants with a family history of allergy in the first month of life can reduce the risk that said infants will develop allergies, particularly and specifically atopic dermatitis.” He would further opine that “there is a significant and substantial body of scientific evidence to support the representations in the Challenged Advertisements.” “These opinions are, of course, more forceful than the claims the FDA permitted Gerber to make on the same subject.”

Plaintiffs’ arguments about bias, lack of data, and prejudice/confusing the jury did not justify his exclusion, but did justify limiting his testimony. He could be impeached with his relationship with Gerber. As for inadequate data, his report was “at base a literature review” considering 20 peer-reviewed publications of infant trials; he identified four studies as high quality. Three of those reported that the subjects receiving GSG or its equivalent saw statistically significant reductions in atopic dermatitis or other allergic diseases for at least a short time. Other studies showed no reduction compared to ordinary cow’s milk formula, or at least no statistically significant reduction. A review of medical literature is generally reliable methodology.

However, it could not appropriately include “findings that had not been published before Gerber disseminated the challenged advertisements. … Here, the operative question is whether Gerber’s challenged ads were misleading when made, not whether they would be misleading if made today.” Thus, the expert would be limited, when opining on the science underlying claims in a given ad, “to the body of research that existed when that advertisement debuted.” But most of the “high quality” studies would qualify under that restriction. Plaintiffs disagreed that the studies were “high quality,” but that was an issue for the factfinder.

As to summary judgment: there was a genuine issue of material fact about whether reasonable consumers would perceive the ads to claim that GSG could reduce allergy risk. (Is that not obviously what the ads say, especially the sticker touting: “1st & ONLY Routine Formula // TO REDUCE RISK OF DEVELOPING ALLERGIES // See label inside.”?) “Even accepting, arguendo, that the more cabined language on the ‘label inside’ clarified that GSG does not reduce the risk of developing allergies, a jury could still find that a reasonable consumer would be left with that impression.” As to the other ads, the implication was obvious, and a jury could find it so. (I’m not clear how a reasonable jury could find otherwise.)

Further, internal communications showed that Gerber actively endeavored to make an allergy claim with these ads: Gerber asked its advertisers in a “communications brief” to “[c]reate a strong link between GSG ... [and] an allergy risk reduction benefit.” Gerber’s marketing team described “being challenged to find ways to push the envelope with bringing the allergy message forward.” Gerber told its ad firm that it “would now like to pursue” an ad “that actually uses the word ‘allergy’ in the headline (where previously we were not able to).”

There was also a genuine dispute of material fact as to whether the “first and only” group of challenged ads claimed FDA endorsement of GSG. “[A]dvertisements that reframe critiques of a product as praise can constitute false advertising.”

Gerber argued that none of the ads explicitly claimed to reduce allergies (uhhh… I do not think that word means what you think it means) or made FDA-endorsement claims, and there was no extrinsic evidence about what claims consumers would take away.

But “the requirement of extrinsic evidence to prove that implied assertions in ads are false is chiefly a requirement of Lanham Act false advertising claims — claims not present here.” (And by the way, it has no foundation in the Lanham Act, either. Courts just made it up as a case-management tool, while imposing a different rule in TM cases.) “GBL and FDUTPA claims challenging deceptive advertisements have no extrinsic evidence requirement. Those statutes ‘are not mere Lanham Act analogues.’”

“The plaintiffs need not adduce extrinsic evidence of consumer perception to create a jury question on the deceptiveness element.” (Side note: the individual plaintiffs’ own testimony should be “extrinsic evidence,” too.) (Extra side note: I know we’re all textualists now, but maybe this debate would be aided by talking about why requiring extrinsic evidence, or survey/consumer perception evidence testimony in particular, would be important.)

However, the plaintiffs didn’t show as a matter of law that GSG couldn’t reduce allergy risk. Likewise, whether the FDA statements were false was a triable issue, though it was a close call: “Gerber has adduced little evidence to rebut the plain implications of its advertising, when compared to the qualified health claims that the FDA actually authorized. … Here, though there is no genuine dispute about whether the FDA ‘endorsed’ GSG, there is … a lingering dispute about whether Gerber implied such an endorsement.”

Nor was summary judgment appropriate for either side on a price premium theory. Plaintiffs’ experts, who used conjoint analysis and similar standard techniques, were not unquestioned. Under the relevant state laws, “damages need not be calculated by mathematical precision” but “may include estimates based on assumptions, so long as the assumptions rest on adequate data.” One of the experts calculated price premiums in ways that didn’t rely on conjoint analysis, but used internal Gerber metrics, including its own estimate of the price elasticity of demand, for the value Gerber would realize from promoting the qualified health claim, including its projection of 6-10% growth in the United States for the first six months after introduction of an “allergy claim” to the U.S. market;  Gerber sales forecasts that quantified various factors, including the “allergy claim,” as “impactors” on future sales; and the price increases for GSG that Gerber implemented from 2011 to 2014, spanning the period of these claims.

Gerber’s core argument was that GSG was priced equal to or below other formulas in the Gerber Good Start line during the class period, even though these other formulas undisputedly did not make the challenged claims. But there was also evidence that Gerber expected to be able to raise prices across “the entire Good Start portfolio” thanks to the challenged advertising. This was a jury question.

conjoint analysis has to isolate challenged representations

Moore v. GlaxoSmithKline Consumer Healthcare Holdings (US) LLC, --- F.Supp.3d ----, 2024 WL 348821, No: 4:20-cv-09077-JSW (N.D. Cal. Jan. 30, 2024)

The court grants partial class certification and allows/excludes some expert testimony in this case alleging that ChapStick products were misleadingly labeled “100% Natural,” “Natural,” “Naturally Sourced Ingredients,” and “100% Naturally Sourced Ingredients” when they actually contain non-natural, synthetic, artificial, and/or highly processed ingredients.

The court allowed the expert testimony of a survey researcher for a proposed consumer perception survey and proposed conjoint analysis. Objections to the proposed survey went to weight, rather than admissibility. Likewise, testimony from an economic consultant was admissible because it provided additional information about conjoint analysis, including how it would adequately account for supply-side factors from an economics standpoint.

However, testimony of chemists about their view of what constituted an “artificial” ingredient wasn’t relevant: “Here, the only relevant understanding of the Challenged Statements is that of the reasonable consumer.” Both parties’ chemists were excluded.

Skipping over a lot, could materiality be proved on a classwide basis? As previous cases indicate, “[m]ateriality can be shown by a third party’s, or defendant’s own, market research showing the importance of such representations to purchasers.” Defendants’ documents and testimony acknowledge that there is a “strong consumer desire for ‘natural’ products and ingredients” in the lip balm market generally. Internal marketing research concluded that the “100% Naturals” ChapStick products “[t]ap[ ] into consumer desire for [a] natural option,” finding “79% of lip balm users 18-34 [are] interested in [the] natural option.” The same percentage of consumers identified ingredients as an “important” product-attribute; 59% of consumers also identified how ingredients are sourced; and 57% identified that where ingredients are sourced is “important.” Defendants’ other surveys rendered similar results: one found “ ‘Natural’ is important in a product that promises more than color and another found 65% of consumers place “importance” on “[a]ll-natural ingredients.” This was enough to create common evidence of materiality to a reasonable consumer.

However, a proposed consumer perception survey didn’t separately establish common proof of materiality. It failed to sufficiently isolate the challenged statements, combining the “natural” terms with extraneous words such as “Lip Butter,” “Natural with Argan Oil,” “Natural Age Defying,” etc. But the proposed survey was not impermissibly leading merely because it asked “whether or not they understand the specified statements on the product packaging to be communicating certain meanings.”

Failure to isolate the challenged statements in the proposed conjoint survey also made it incapable of calculating a reliable price premium; the court suggested that it could grant damages class certification on a renewed motion if there were a method that isolated the challenged statements.

There was standing to seek injunctive relief because the plaintiff still desires to buy natural lip-care products and would like to buy them again, but doesn’t know whether they are, in fact, natural, and she does not have the expertise to discern from their ingredient disclosures whether the Challenged Statements are true.

disclaimers that require consumers to understand tech, history and law don't avoid lawsuit over "flushable"

Schotte v. Stop & Shop Supermarket Co., 2024 WL 1251284, No. 1:23-cv-10897-IT (D. Mass Mar. 22, 2024)

Stop & Shop allegedly deceptively advertised cleansing wipe products as “flushable” in violation of Mass. Gen. Laws ch. 93A; Schotte also brought warranty, unjust enrichment, and fraud claims. The court declined to dismiss the complaint.

The Stop & Shop Wipes, which vary in fragrance and style, are all marketed and sold with bold, prominent font labeling them as “flushable” on the front of the packaging. Following the word “flushable” on the front of all packaging is a “†”and the text “For flushing see [back or bottom] panel” in smaller print. The back or bottom panel sets forth the following statements in even smaller print:

Independent lab testing shows these wipes meet INDA Flushable Product Guidelines. Not all systems can accept flushable wipes. Ignoring Disposal Instructions may lead to clogs, property damage, or regulatory violations.


Do not flush if:

• Violates local rules.

• Using RV, marine, or aviation system.

• Using macerator toilet or household pump.

• Fat or grease are put in any drain or you are unsure of system capability

Flushing ok if:

• Permitted by local rules.

• One wipe per flush.

• No history of clogs or backups.

• Septic follows EPA schedule for alternative systems (annual inspection & pumping).

If a problem is noticed, dispose of in trash and stop flushing.

The remainder of the disclaimer is concealed by a tab; the concealed portion reads, in part, “not all systems can accept flushable wipes.”

Schotte alleged a “substantial price premium” of at least 25% more for the Wipes as compared to non-flushable wipes from the same brands. Schotte also alleged that the wipes are not in fact flushable because they do not “break apart or disperse in a reasonable period of time after flushing, resulting in clogs or other sewer damage.”

Stop & Shop argued that this couldn’t deceive a reasonable consumer, both because of the disclaimers and because flushable merely means “capable of being flushed down a toilet,” regardless of what happens later on. (That’s not my department!)

“[W]hether a term with multiple, contradictory definitions or interpretations has the capacity to mislead is best left to ‘six jurors, rather than three judges, [to] decide on a full record.’” To avoid a finding of plausible deceptiveness, disclaimers or qualifications must be “sufficiently prominent and unambiguous .... Anything less is only likely to cause confusion by creating contradictory double meanings.” Here, a factfinder

could reasonably find that the disclaimer on the back of the Wipes packaging is neither sufficiently prominent nor unambiguous and, instead, that the small-print lists would not be noticed. And a factfinder could also find that even if the lists were noticed, the disclaimers would require consumers to have in-depth knowledge of the sewer or septic system they are using, its plumbing history, as well as “local rules”—not just for a toilet in their residence or office but any toilet they may wish to dispose of the Wipes in. A reasonable jury could find the disclaimer so small and vague that it does not relieve Defendant of any potential liability for its deceptive acts.

In addition, Schotte alleged that he would be interested in purchasing the wipes again if Stop & Shop ensured they were actually flushable, so he sufficiently pled a likelihood of future injury to establish standing for injunctive and declaratory relief.

Side note: one court has held that “flushable” is not sufficiently factual/uncontroversial to allow legislatively required disclosures under Zauderer. I think that’s definitely wrong, but it’s consistent with a pattern where courts allow themselves—or juries they supervise—to find facts but don’t like legislatures doing so. Both courts and legislatures are governmental regulators, though.

Thursday, March 28, 2024

adult venue's insurer did not successfully exclude ads from ad injury coverage

Princeton Excess & Surplus Lines Ins. Co. v. R.I. Cranston Entertainment Inc.; 2024 WL 1285631, C.A. No. 21-63-JJM-PAS (D.R.I. Mar. 26, 2024)

Defendant, d/b/a Wonderland, operated an adult entertainment club and was one of the many such sued by various models for using their images in advertising without their consent from 2015 to 2019. Princeton insured Wonderland from 2016-2018 (with a broad exclusion for defamation, invasion of privacy, and various forms of advertising injury in the second year called the Exhibitions and Related Marketing Exclusion), and agreed to defend the club but reserved the right to deny insurance coverage. After settlement negotiations (including Wonderland’s separate counsel), Wonderland agreed to a judgment for $1.895 million, with a covenant not to execute and an assignment of rights against Princeton to the models in lieu of payment. Princeton then sued Wonderland and the models, seeking a declaratory judgment that it has no obligations under the Consent Judgment. Defendants counterclaimed for payment and damages for breach of contract and bad faith.

If policy terms are “ambiguous or capable of more than one reasonable meaning, the policy will be strictly construed in favor of the insured and against the insurer.”

Princeton argued that (1) no coverage was available for claims during the 2017 to 18 Policy Period; (2) Wonderland breached the insurance contract by agreeing to the Consent Judgment in violation of the cooperation and non-assignment clauses; and (3) the Consent Judgment was unreasonable, and thus unenforceable, as a matter of law.

The consent judgment was a lump sum and, Princeton argued, included uncovered claims; most of the images fell within the 2017-18 period. The policy excluded personal and advertising injury, including “publication, in any manner, of material that violates a person’s right of privacy,” disparagement, use of advertising ideas, and trade dress infringement, if such activities “arise out of or are part of ‘exhibitions and related marketing,’ ” which are broadly defined.

The underlying claim alleged false advertising and false association under the Lanham Act, misappropriation, violation of the Models’ common-law and statutory privacy rights, and defamation, “all of which fall squarely under Personal and Advertising Injury. So the burden falls to Princeton to show that its exclusion is valid.”

The problem was that the policy and the exclusion were “clearly worded, specific, and directly contradictory to each other. Under Rhode Island law, policy exclusions must be unambiguous, and ‘contract provisions subject to more than one interpretation are construed strictly against the insurer.’” Also, “Rhode Island courts will not uphold an exclusion that leads to unreasonable results, particularly if doing so will make another part of the coverage illusory.” The court found that definition of “Exhibitions and Related Marketing” was so broad as to “preclude coverage in almost any circumstance.” The Fifth Circuit recently found that, even if all “advertising injury” was excluded by this exact policy language, “personal and advertising injury” was an umbrella provision and not illusory because there was still personal injury coverage. Princeton Excess & Surplus Lines Ins. Co. v. A.H.D. Houston, Inc., 84 F.4th 274 (5th Cir. 2023); but see Princeton Express v. DM Ventures USA LLC, 209 F. Supp. 3d 1252, 1258 (S.D. Fla. 2016) (declining to uphold a “field of entertainment” exclusion on the grounds that it would exclude “anything listed in (d) through (g) listed under Personal and Advertising Injuries” and would thus make the Policies illusory as to advertising coverage).

The court here disagreed with the Fifth Circuit. By its plain language, “exhibitions” encompass almost all forms of production and advertising: “motion pictures, television programs, commercials, web or internet productions, theatrical shows, sporting events, music, promotional events, celebrity image or likeness, literary works and similar productions or work ....” including social media, as well as material produced “in any medium including videos, phonographic recordings, tapes, compact discs, DVDs, memory cards, electronic software or media, books, magazines, social media, webcasts and websites”— “a broad-ranging definition that contradicts Princeton’s purported coverage” for “advertising” (defined as “a notice that is broadcast or published to the general public ... about your goods, products or services”). And the exclusion also withdrew coverage for all related forms of marketing. Rhode Island doesn’t allow insurers to make whole sections of a policy illusory.

It also didn’t save Princeton that exceptions purportedly restored coverage for advertising related to Wonderland’s food and liquor services. Princeton argued that these exceptions preserve coverage for “use of another’s advertising idea or infringement of copyright, slogan, or trade dress in an advertisement for any aspect of Wonderland’s business other than exhibitions or marketing for exhibitions (such as its food or liquor service).” “But the Exhibitions and Related Marketing Exclusion precludes coverage for any commercial, web production, or promotional event, regardless of whether the advertisement relates to a show, a theatrical performance, or purchase of a hamburger. It would exclude the advertising examples that Princeton cites to make its case.”

Thus, Princeton owed Wonderland a duty to indemnify for advertising injury arising out of Exhibitions and Related Marketing under the 2017 to 18 Policy. Moreover, there was no evidence that the consent judgment purported to settle claims outside the policy period; it was based on Princeton’s denial of claims for that period, and its plain language suggested that it was limited to that period.

The policy didn’t apply to “[a]ny punitive damages, exemplary damages, or the multiplied portion of any award, because of any ‘bodily injury’, ‘property damage’ or ‘personal and advertising injury’.” But again, there was no evidence that the consent judgment included these.

Princeton argued that Wonderland breached the terms of the insurance contract by interfering with its right to defend and settling the case in violation of the cooperation and non-assignment clauses. But it was uncontested that Princeton knew about the Models’ offer and took no steps to preserve its rights over the course of many months, so it waived any objection to the terms of the settlement. Also, there was a cooperation clause requiring cooperation in investigation and settlement; this is a reciprocal obligation, and no reasonable jury could look at Princeton’s conduct and find that it used “reasonable diligence” to obtain Wonderland’s cooperation.

Finally, Princeton waived its right to object based on the non-assignment clause:

We think the insured should be allowed, as soon as the insurer denies coverage, to protect its interest by negotiating a settlement. The only valuable asset the insured may have is its cause of action against the insurer and the insured should be able to assign this right to the injured party to protect itself from further liability.

Also, “because an insured’s rights to proceeds vests at the time of loss ... restrictions on the insured’s right to assign its proceeds are generally rendered void.”

Was the consent judgment collusive and unreasonable and thus unenforceable? No, there was no evidence of misconduct. (Princeton was bound because the judgment fixed Wonderland’s liability, triggering the duty to indemnify, and Wonderland properly assigned its claims to the models.) Princeton pointed to statements made by Wonderland’s manager, who stated that the offer of $10,000 per model was “crazy” and was upset that Princeton “did not want to fight it.” It argued that this was incompatible with Wonderland’s decision to settle all claims for $1.895 million, and that the manager hadn’t read the consent judgment so Wonderland could not have truthfully stated that it was reasonable.

“That a party may have opposed a settlement does not render a settlement fraudulent or collusive. And a party’s failure to read a contract does not render it unenforceable. A party may rely on their attorney in drafting settlement documents, and the attorney can be presumed to speak for them regardless of whether they have read the documents.” Any concerns about collusion were “further assuaged by the fact that the judgment was negotiated under the supervision and guidance of a seasoned Magistrate Judge and that other courts have repeatedly found liability on similar facts.”

But the complaint included other policy exclusions that were not yet before the court (exclusions for knowing falsity and the like), so defendants only got partial summary judgment.  They were entitled to summary judgment on liability for breach of contract (the duty to indemnify), but not on damages.

Monday, March 25, 2024

5th Circuit allows image-based tobacco warnings in barest nod to consistency on compelled commercial speech

R J Reynolds Tobacco Co. v. Food & Drug Admin., 2024 WL 1208111, --- F.4th ----, No. 23-40076 (5th Cir. Mar. 21, 2024)

The sudden shift in the political valence of the commercial speech doctrine strikes again! The Fifth Circuit upholds mandatory cigarette warnings as acceptable compelled commercial speech under Zauderer, reversing the district court’s 2022 decision. Let’s just say that, five years ago, this would have struck me as an unlikely result, and in 2020 the decision to file in Texas would have been much less complicated; even in 2022, I would have expected the district court to be upheld. (It returns to the district court for an APA challenge, about which I express no opinion.)

The Family Smoking Prevention and Tobacco Control Act requires cigarette packages to include “color graphics depicting the negative health consequences of smoking to accompany the [updated] label statements.” These warnings “shall comprise the top 50 percent of the front and rear panels of the package” of cigarettes and “at least 20 percent of the area of [any] advertisement ....” A facial challenge was rejected by the Sixth Circuit in 2012, but the DC Circuit struck down the FDA’s first attempt on an as-applied challenge. Now it’s the 5th Circuit’s turn.

In enacting the TCA, Congress found that “efforts to restrict advertising and marketing of tobacco products,” including existing mandatory warnings, had “failed adequately to curb tobacco use by adolescents, [so] comprehensive restrictions on the sale, promotion, and distribution of such products [were] needed.” The TCA’s legislative findings included: (1) minors still often see and are exposed to tobacco product advertising; (2) the “overwhelming majority of Americans who use tobacco products begin using such products while they are minors and become addicted to the nicotine in those products before reaching the age of 18” and (3) “[r]educing the use of tobacco by minors by 50 percent would prevent well over 10,000,000 of today’s children from becoming regular, daily smokers, saving over 3,000,000 of them from premature death due to tobacco-induced disease[s]” and would “result in approximately $75,000,000,000 in savings attributable to reduced health care costs.”

Congress identified nine new warnings to rotate regularly, which must “comprise the top 50 percent of the front and rear panels of” each cigarette package and “at least 20 percent of the area of [any] advertisement ....” It further instructed the Secretary of Health and Human Services to “issue regulations that require color graphics depicting the negative health consequences of smoking to accompany the label statements.” And Congress gave the Secretary the authority to “adjust the type size, text and format of the label statements” for clarity, conspicuousness, and legibility.

When the FDA made its first attempt, the DC Circuit held that the chosen graphics were not targeted at deception; nor were they providing “‘purely factual and uncontroversial’ information” because the images “could be misinterpreted by consumers” and “are primarily intended to evoke an emotional response, or, at most, shock the viewer into retaining the information in the text warning.” It therefore applied Central Hudson instead of Zauderer and struck down the initial rule. Under Central Hudson, the FDA lacked even “a shred of evidence ... showing that the graphic warnings will ‘directly advance’ [FDA’s] interest in reducing the number of Americans who smoke.”

The FDA reasoned that its new images promoted “the Government’s interest in promoting greater public understanding of the negative health consequences of cigarette smoking” and also “dissipat[es] the possibility of consumer confusion or deception,” thereby advancing the government’s interest in preventing “consumer misperceptions regarding the risks presented by cigarettes.”

Warnings with images, such as "smoking cases head and neck cancer" with image of woman with obvious neck swelling

Plaintiffs here alleged that each of the Warnings “misrepresent[s] or exaggerate[s] the potential effects of smoking” and that, “[c]ontrary to FDA’s characterization, the peer reviewers raised serious, substantive concerns about FDA’s studies” used to support the selected Warnings.

The district court reasoned that Zauderer did not apply because the imagery was fundamentally so “prone to ambiguous interpretation” that “it is unclear how a court would go about determining whether it[ ] ... is ‘accurate’ and ‘factual’ in nature”:

In other words, the court reasoned that no photorealistic image could ever be purely factual and uncontroversial because different viewers will ascribe to it different meanings. The inherent ambiguity in any graphic warning—e.g., that viewers may interpret the heart disease warning to suggest that open-heart surgery “is the most common treatment for heart disease” or the best—means that the Warnings cannot be “ ‘purely factual and uncontroversial’ and objectively accurate as required to allow relaxed Zauderer review.” Further, the court found that the graphic portions of the Warnings fell beyond Zauderer’s reach because they are inherently “provocative.”

And the warnings weren’t narrowly tailored under Central Hudson because the government hadn’t first tried increased funding for antismoking advertisements, increased government anti-smoking communications, or “test[ed] the efficacy of ‘smaller or differently placed warnings.’ ”

(Preclusion as to RJR’s challenge to the constitutionality of the TCA itself would have been appropriate, but that didn’t resolve the case (there were other plaintiffs), so the court proceeded to the merits.)

Key holding: “The Warnings are both factual and uncontroversial, despite the emotional impact the graphics may have.”

The court—weighing in on an issue that divided the DC Circuit—concluded that Zauderer is a “carve-out” from, not an application of, Central Hudson.

Moreover (and not unrelatedly), Zauderer applies to all compelled commercial speech, not just deception-preventing speech. The Fifth Circuit held in NetChoice that the state’s interest in “enabling users to make an informed choice regarding whether to use [social media] Platforms” was sufficient to survive review under Zauderer. Similarly, Chamber of Commerce of the USA v. SEC, 85 F.4th 760 (5th Cir. 2023), recently held that “the disclosure of a company’s rationale for a stock buyback was purely factual and uncontroversial commercial speech” (although it still struck down the SEC’s action because it was the SEC, I mean because of the APA).

First, the warnings were “purely factual.” What is factual? Well, it’s not an opinion. Moreover, the government may not demand a private party “undertake contextual analyses, weighing and balancing many factors ... that depend on community standards,” to determine the speech it must “parrot.” Book People, Inc. v. Wong, 91 F.4th 318, 340 (5th Cir. 2024). “Factual” needs to involve “information” that is “[c]oncerned with what is actually the case rather than interpretations of or reactions to it” and “actually occurring.” (Lots of dictionaries invoked here.) Thus, “factual” must mean “falsifiable material and inferences fairly drawn from it, rather than one’s non-falsifiable ‘interpretations[,] ... reactions,’ or opinions.”

Crucially, “factual” does not mean “true,” because that would make “purely factual information”—the language of Zauderer—surplusage. (This seems to ignore the idea that opinions aren’t statutes, but here we are.) Thus, the required warnings would be factual if they were comprised of “only (a) information supported by facts and (b) conclusions driven by those facts, and (2) not akin to unfalsifiable statements of opinion.”

Plaintiffs argued that the new warnings “misleadingly exaggerate smoking risks” and improperly “focus on conditions that less frequently arise from smoking,” even though the existing warnings were concededly purely factual. “Consequences supported by scientific findings, even if exaggerated or non-modal, are still, by definition, factual.” The factual content of the text was undisputed.

What about the images? Images can be factual. “The addition of images to the textual warnings makes no difference to the constitutional analysis of factuality.” In the FDA’s own words: “FDA used a certified medical illustrator to design images that depicted common visual presentations of the health conditions and/or showed disease states and symptoms as they are typically experienced, and that present the health conditions in a realistic and objective format devoid of non-essential elements.” Each of the images was “a straightforward, science-based, objectively truthful depiction of the accompanying text,” “no different from those a medical student might see in a textbook.”

Merely because the images might convey “an ideological or provocative message” does not make them nonfactual:

A fact does not become “value-laden” merely because the fact drives a reaction. But even if it did, ideological baggage has no relevance to the first Zauderer prong. Any number of factual messages are, of course, ideological. Similarly, emotional response to a statement is irrelevant to its truth. That someone may have to declare bankruptcy [in order to get debt relief] is likely to engender strong emotions. But the Court never even discussed that aspect of the mandatory disclosures [in its case upholding required disclosures about bankruptcy by certain debt relief providers].

[Footnote] … We offer the following example: “The Nazis committed genocide.” That is a factual statement. It is also a statement that denounces the Nazi’s actions and beliefs as morally repugnant. That is an ideological message. Though the government may not be able to compel Volkswagen to include that message in its advertising without justification, a court would likely still review any such attempt under Zauderer.

[Somebody is thinking about abortion disclosures.]

Plus, these images were “meant to be interpreted literally.” They weren’t “primarily intended to evoke an emotional response” but instead “to draw attention to the warning and depict a possible medical consequence of smoking. Thus, at most, the emotional response of viewers is incidental to their retention of information about the health risks.”

What about the argument that the images might be subject to several different interpretations, and the FDA didn’t test for consumer takeaway? “[W]hen each image is paired with a fact-based, textual warning, any reasonable viewer interprets the image in light of the words.” It was error to ignore the words.

Also, the government need not choose only the most common side-effect or consequence of the disease or injury discussed in a warning. “People may interpret ‘debt relief agency’ in many ways, but disclosing that a business is one is still purely factual.” Nor were cigarette companies required to make difficult contextual judgments weighing multiple factors to determine the warning, since the FDA did it for them.  

For similar reasons, the warnings were uncontroversial. NIFLA says that abortion is a controversial topic, making disclosures about abortion controversial; but NetChoice said that “disclosures of social media censorship decisions” were not controversial. Thus, a factual disclosure is “controversial” under Zauderer “where the truth of the statement is not settled or is overwhelmingly disproven or where the inherent nature of the subject raises a live, contentious political dispute.” Content moderation isn’t inherently contentious, even though it was connected to “a live, contentious, political issue.” [Wow, this might be even dumber than the statements in NetChoice itself. Because it is about content that some people want and some people don’t, content moderation policy is the definition of inherently contentious—as abortion is not, even if people living in Texas today think it must be. This is a fake argument; the real reason—inconsistent with NIFLA’s dicta, which should be ignored the way all abortion-related First Amendment pronouncements should be ignored—comes next.]

There’s no good-faith debate that the warnings aren’t truthful. Thus, they are uncontroversial.

Next, the warnings must be “reasonably related to the State’s interest” and not “unjustified or unduly burdensome.” “Zauderer does not require the state to assert an anti-deception interest.” No court of appeals majority has ever held otherwise, and the Fifth Circuit has previously referred to valid interests in “promoting the free flow of commercial information”; we ruled that was “more than enough to satisfy this prong of Zauderer” and “promoting the ethical integrity of the legal profession.” “Increasing public understanding of the risks of smoking, particularly given the ‘long history of deception concerning consumer health risks in the cigarette industry,’ is a legitimate state interest.” [Now do the long history of state and private discrimination against nonwhites.]

The warnings were not unjustified. Plaintiffs argued that the interest at issue was too amorphous and that the warnings hadn’t been shown to be effective.

The images served an informational interest. Zauderer itself explained that “[t]he use of illustrations or pictures in advertisements serves important communicative functions: it attracts the attention of the audience to the advertiser’s message, and it may also serve to impart information directly.” The FDA even tested their effectiveness in raising consumer awareness and then refined them based on those results.

NIFLA says that a compelled disclosure is justified only if it will “remedy a harm that is ‘potentially real[,] not purely hypothetical,’ and ... ‘extend[s] no broader than reasonably necessary.’ ” Plaintiffs argued that current Surgeon General’s warnings are sufficient, but that ignored “significant evidence that consumers do not notice, much less internalize, the text-only warnings in the status quo. The updated warnings serve to remedy the harm that buyers might (1) not know about tobacco’s harms or (2) ignore the existing Surgeon General’s warnings.”

And here the Fifth Circuit engages in what is all too common in rejecting plaintiffs’ arguments: it makes up a contradiction that doesn’t exist. This isn’t to say the Fifth Circuit is wrong about the weighing here, but it’s a bad look to claim logical flaws that are themselves illogical: “Plaintiffs inconsistently claim that the disclosure requirements are overly emotional and ideological such that they become non-factual speech, while also asserting that FDA’s informational interest does not justify the Warnings because they will not be effective. In other words, plaintiffs suggest consumers will simultaneously notice and not notice the warnings.” But of course, consumers could both notice and not be informed or change their behavior because of the warnings. I notice a ton of stuff to which I am indifferent every day. The underlying question is whether the government ought to have to show some real likelihood of changed decisionmaking in order to justify mandatory disclosures, and I have to admit that I am leaning more towards “yes,” at least for a noticeable percentage of consumers. In the absence of any need for effectiveness, disclosure becomes a compromise where regulators/lawmakers tell themselves they’re protecting consumers while blaming the ones who continue to make “bad” decisions for the consequences of continued marketing.

Effectiveness: Plaintiffs argued that the FDA’s studies were flawed, but all that was required constitutionally was a reasonable relation to a legitimate state interest. “Whether FDA’s use of the studies survives APA review is a question we consider separately from our Zauderer review.” This move too sets up the ability to approve state mandates (not subject to the APA) like in NetChoice while still invalidating anything the Fifth Circuit doesn’t like as a policy matter.

The warnings were not unduly burdensome, despite their size and offputting content. Even if they wouldn’t survive Central Hudson review, that wasn’t enough to invalidate them. The Sixth Circuit already upheld the required size and the court here wasn’t going to revisit that. “Undue burden” means that “the regulation cannot impose a burden excessive or disproportionate to the benefits gained.” In NIFLA, the burden was undue because the disclosures were “wholly disconnected from California’s informational interest”; allowed for no consideration of “what the facilities say on site or in their advertisements”; and “cover[ed] a curiously narrow subset of speakers.” But in NetChoice, decision disclosure/appeal and biannual transparency disclosure couldn’t possibly burden protected speech, so that was ok, and the SEC’s buyback disclosures weren’t unduly burdensome because they “neither burden[ ] issuers’ protected speech nor drown[ ] out their message” given that they occurred only “within the narrow confines of SEC filings.” [Gotta admit, these don’t sound promising for disclosures that have to be a big part of every package.]

Here, the benefits were to alleviate “information asymmetry regarding the harms tobacco causes and consumers’ suboptimal awareness of and response to those harms,” and reducing those harms would be a significant benefit. [If it occurs.]

The claimed harms were to plaintiffs’ free speech rights and to their finances. But “plaintiffs can still speak on 80% of their advertisements, and they still control more than 50% of the total surface area of their cigarette packages.” That allowed “ample room for manufacturers to distinguish their products from other products” and not be “drown[ed] out” or deterred from advertising at all. And plaintiffs have at most a “minimal” interest in withholding useful and factual information; harm suffered from an infringement on that interest was limited. Thus, the burdens were not undue in comparison to the benefits.