Tiktok's other, smaller legal problem

Beijing Meishe Network Technology Co. v. Tiktok Inc., 2024 WL 1772833, No. 23-cv-06012-SI (N.D. Cal. Apr. 23, 2024)

Skipping the copyright and trade secrets part of the case. (In brief: Meishe argued that Tiktok copied its code via an employee who departed. The court found aspects of the copyright/§1202 claims claim insufficiently specifically pled and granted leave to amend, including to add sufficient detail to establish that the works at issue were not US works and thus exempt from the pre-suit registration requirement. The trade secret claims were likewise dismissed with leave to amend, including to specify what acts in furtherance of the offense were committed in the US.)

False designation of origin: Meishe alleged that “TikTok informs users that it owns and has proper rights to the code it uses in its applications”; defendants “have represented that they value intellectual property and would not infringe others’ intellectual property, but have done so as described in this Complaint” and defendants “willfully continued to represent the software as their own, not credited Meishe with being the owners or author of portions of Defendants’ products or code, and not stopped distributing infringing and misappropriated code.” This was classic Dastar. As stated in Luxul Technology Inc. v. Nectarlux, LLC, 78 F. Supp. 3d 1156 (N.D. Cal. 2015) “in this circuit, a reverse passing off claim requires the alteration of a product and a subsequent sale.”

False advertising: Meishe pointed to statements defendants made in their copyright notice at tiktok.com, in the ByteDance Code of Conduct, in TikTok’s Intellectual Property Policy, and in TikTok’s terms of service. But it wasn’t clear that any of these statements were made on the context of “commercial advertising or promotion” or how these statements were likely to influence purchasing decisions by consumers. The court granted leave to amend, but it’s hard to imagine how this gets plausible under the Lanham Act.

 

 

Hetronic remand: the continued rise of "use"

Hetronic International, Inc. v. Hetronic Germany GmbH, --- F.4th ----, Nos. 20-6057 & 20-6100, 2024 WL 1724995 (10^th Cir. Apr. 23, 2024)

Hetronic has US registrations; Abitron sold Hetronic-branded products without permission to customers around the world, including in the United States. The Supreme Court remanded for the court of appeals to revisit its decision that Lanham Act penalties extended to Abitron’s foreign sales to foreign customers because the foreign sales substantially affected U.S. commerce. The court of appeals remands, after a discussion of what the district court is to do on remand. Look for the cross-issue use of the idea of "use in commerce," including the cited cases.

Hetronic makes radio remote controls used to operate large industrial equipment. It executed licensing and distribution agreements for the remotes with two European companies, collectively Abitron. Abitron decided that it owned some of Hetronic’s IP under a years-old research-and-development agreement. Abitron began assembling Hetronic-branded remotes with parts that it sourced from unauthorized suppliers, in violation of its agreements with Hetronic, and sold the remotes to foreign and American customers. Hetronic terminated its licensing and distribution agreements with Abitron, but Abitron continued to sell Hetronic-branded remotes without Hetronic’s authorization.

The products circulate worldwide; “a product manufactured in Germany is often destined for another country, like the United States.” Abitron usually sold remotes to OEMs, like manufacturers of cranes. A crane manufacturer would install the remotes in its cranes, and then send the cranes around the world, including to the US. Knowing this, Abitron secured the required FCC certifications and hired a U.S.-based distributor to service Abitron’s U.S. products and to market them at U.S. tradeshows.

Hetronic understandably sued Abitron; a jury found for Hetronic on all its claims, including that Abitron had willfully infringed the Hetronic trademarks, and awarded Hetronic about $96 million in damages related to the Lanham Act violations, along with compensatory and punitive damages for the state-law claims. The district court enjoined further infringing uses of Hetronic trademarks “within and outside of the United States.”

After Abitron, the keystone for liability is the “specific action” that the alleged infringer took in the United States, and whether that action contravened the Act’s focus. Footnote: The concurrence for four Justices would have regarded domestic confusion as the key, not domestic conduct. Ultimately, a domestic, infringing “ ‘use in commerce’ of a trademark” draws “the dividing line between foreign and domestic applications” of the Lanham Act.

What to do here?  

The relevant conduct is use of a trademark “in commerce” “in connection with any goods or services,” specifically “the sale, offering for sale, distribution, or advertising,” in a manner “likely to cause confusion.” So (?), the court first looked at which Abitron’s allegedly infringing activities amounted to an infringing use of Hetronic trademarks. Once there was an infringing use, the court then considered where that use occurred—domestically or overseas—to determine whether the Lanham Act applied. (Citation: 15 U.S.C. § 1117;  see also 1-800 Contacts, Inc. v. WhenU.Com, Inc., 414 F.3d 400, 412 (2d Cir. 2005) [a resurrected blast from the past; why “use as a mark” may be a very interesting doctrine going forward].

Direct sales to US customers: obviously covered. But Abitron contested the amount of those sales that could have caused confusion—all but about €1500 of sales went to Hetronic’s US-based affiliates, and Abitron argued that they had to have known what they were buying and that any confusion stemmed from confusion about “whether [the goods] were constructed with the parts Hetronic requested,” which goes to the “contractual obligations” between Abitron and Hetronic, not to “the goods’ source.” The court wasn’t going to touch the jury finding of likely confusion. And the confusion posited by Abitron was sponsorship/affiliation confusion, anyway. “[E]ven if Hetronic’s affiliates knew that Abitron sourced the remotes, part of a mark’s core function is to help consumers ‘quickly and easily’ identify that ‘this item—the item with this mark—is made by the same producer as other similarly marked items that he or she liked (or disliked) in the past.’” That quality assurance was gone if Abitron sold products under Hetronic trademarks that “varied substantively” from those affiliated with the Hetronic brand, as the evidence showed.

What about foreign sales?

In the initial appeal, this panel held that some of Abitron’s foreign sales triggered a domestic application of the Lanham Act either because the goods wound up in the United States or the foreign sales diverted customers from Hetronic, costing Hetronic tens of millions of dollars in sales that “would have flowed into the U.S. economy but for [Abitron’s] conduct infringing a U.S. trademark.” But neither theory works under the Supreme Court’s new framework.

€1.7 million of Abitron’s foreign sales “ended up” in the United States, but “the ultimate destination of the infringing goods” lacked significance compared to “the location of the conduct relevant to the focus” of the Lanham Act. Because that focus is “the punishment of illegal trademark uses in U.S. commerce detrimental to U.S. businesses and consumers,” foreign sales don’t trigger Lanham Act liability, even if they cause losses in the US. “[P]urely foreign conduct—that is, foreign sales to foreign customers”—can’t be the basis for Lanham Act liability.

There was other domestic conduct than direct US sales, though. “Use in commerce” covers “the sale, offering for sale, distributing, or advertising of any goods or services ... which ... is likely to cause confusion, or to cause mistake, or to deceive.” Thus, any marketing, advertising, and distributing activities that Abitron undertook in the United States were also “uses in commerce.”

What about downstream sales from OEMs to end-users? Justice Jackson thinks they’re infringing, and Hetronic relied on her concurrence to argue that these “goods [were] intended to be sold downstream” and that Abitron “took ... steps to facilitate downstream sales in the United States,” making those sales “sufficiently domestic” for Lanham Act purposes.

Abitron pointed out that, even if that happened, the uses would be uses by the OEM, not by Abitron. Anyway, Justice Jackson joined the majority in full, and also she was making a different point: She argued that use in commerce occurs “wherever the mark serves its source-identifying function.” But she also reasoned that, in the panel’s words, “infringing goods do not offend the Lanham Act merely by their presence in the United States.” Only resale would trigger Justice Jackson’s definition of “use.” Hetronic didn’t show that remotes originally sold abroad were then resold in the US; only then would the goods have begun “serving a source-identifying function in the way Congress described.” Hetronic didn’t introduce evidence that U.S. end-users ever resold Abitron products in U.S. commerce. And allegedly infringing uses in the US by other entities weren’t Abitron’s domestic infringing uses. “Hetronic’s downstream-sales theory strikes us as the sort of ‘repackag[ing]’ [of foreign conduct as domestic] the majority sought to prevent. Hetronic needs to keep its eye on the prize: Abitron’s infringement of Hetronic trademarks in U.S. commerce.”

What about the steps Abitron took to facilitate US sales: obtaining FCC licenses and hiring a U.S.-based distributor? Hetronic argued that these were “essential steps” towards US sales, as in Steele v. Bulova Watch Co. But Steele is “outdated” and the new test gives no weight to Steele’s considerations. “[T]he majority eschewed everything Steele stood for: that any ‘essential steps’ taken domestically to facilitate trademark infringement abroad subject infringers to Lanham Act liability.” (Presumably contributory infringement is still available.)  Thus, Abitron’s acquiring FCC licenses, hiring a U.S. distributor, or repairing a broken part didn’t count as infringing domestic conduct because “none of those actions require using Hetronic trademarks in commerce.” Citing U.S. Surgical Corp. v. Orris, Inc., 5 F. Supp. 2d 1201, 1208–09 (D. Kan. 1998) (rejecting the plaintiff’s claim that defendant’s “conduct in receiving, reprocessing, and returning the instruments” constituted uses in commerce under the Lanham Act); Soc. Techs. LLC v. Apple Inc., 4 F.4th 811, 817 (9th Cir. 2021) (“[U]se in commerce within the meaning of the Lanham Act requires use of a genuine character,” meaning a use “sufficiently public to identify or distinguish the marked goods in an appropriate segment of the public mind.” (citation omitted)). “[T]hese behaviors strike us as merely intermediary or incidental to Abitron’s foreign infringement because none involve affixing Hetronic’s trademark to goods and introducing those goods into U.S. commerce by selling, advertising, marketing, or distributing them to American consumers.”

However, the U.S. distributor’s advertising at U.S. tradeshows or marketing Abitron’s infringing products online to U.S. customers would qualify as domestic infringing uses in commerce under Abitron. “[A]ny activities that Abitron engaged in through its U.S. distributor to sell, market, advertise, or distribute infringing goods to U.S. consumers do violate the Lanham Act.” (Why is this direct liability? Is it a vicarious liability analysis?)

Turning now to disgorgement:  Any portion of the disgorgement award based on Abitron’s foreign sales was improper, assuming those sales were unconnected to any infringing use of Hetronic trademarks in domestic commerce. Disgorgement should account for Abitron’s foreign sales that flowed from its domestic infringing conduct, like advertising, but Abitron argued that the record was insufficient to tether its foreign sales to its infringing domestic conduct. “Hetronic bears the burden of proving the connection between Abitron’s domestic infringing conduct and its foreign sales.” (The court of appeals proceeded in ignorance of Romag, but since the jury found willfulness, that didn’t matter.)\

The plaintiff’s burden is to identify the “total sales” that resulted “from the [defendant’s] infringing activity with reasonable certainty.” That requires more than showing the defendant’s gross revenues, though an estimation of infringed profits based on gross revenues is sufficient. “Above all,” the plaintiff needs to “show some connection between the identified ‘sales’ and the alleged infringement.” This is a proximate cause requirement (citing Lexmark).

Neither side requested a new trial, but the parties on remand could put on “limited opinion evidence as necessary for the district court to interpret which of Abitron’s domestic activities meet the infringing ‘uses in commerce’ threshold.” Hetronic argued that the district court should take into account that it declined to pursue attorney’s fees and treble damages; the court of appeals expressed no opinion on this (which is weird since it held a bunch of other arguments waived) and just said the district court has discretionary authority under the statute (which isn’t even fully accurate, since treble damages have to be compensatory and not a penalty).

Injunctive relief:  Can only cover domestic conduct.

Abitron sought a new trial on the state law claims, arguing that they were tainted by the now-irrelevant foreign conduct evidence, but that was waived.

 

Measuring device (c)able under Star Athletica; ignoring Dastar, court also allows false advertising claim

Leszczynski v. Kitchen Cube LLC, 2024 WL 1829620, No. 8-23-cv-01698-MEMF-ADS (C.D. Cal. Apr. 17, 2024)

Leszczynski invented a measuring cube that combines various measuring volumes into a single cubical structure. He posted the Cube design and 3D print files on Thingiverse.com, the largest site for 3D print objects. The Cube file was provided under a Creative Commons, non-commercial, no derivatives license.

Thingiverse cube

Kitchen Cube made and sold copies of the Cube. It advertised “This device was one of the most popular items on a popular 3D printing website with over 20,000 unique downloads” on its website, at a time when Leszczynski’s Thingiverse page displayed that his Cube had been downloaded 20,000 times. Kitchen Cube also stated on its website that “we designed and manufactured every kitchen measuring device in one easy to use gadget.” Kitchen Cube filed a patent application for the Cube. Other defendants manufactured and sold the Cube with their unique branding through Kitchen Cube’s affiliate program.

Kitchen Cube cube

Leszczynski sued for (1) copyright infringement; (2) violation of Creative Commons license terms; and (3) false advertising and misrepresentation.

After dealing with jurisdiction/proof of service, the court dismissed the copyright infringement claim because no registration had yet been received.

The breach of contract claim survived. Kitchen Cube argued that mutual consent and consideration were missing, but defendants’ act of downloading or utilizing the Cube file from Leszczynski’s Thingiverse page could constitute acceptance. Consideration was also alleged because the design conferred benefits to defendants, and Leszczynski received reputational benefits as a result of making the design available.

Even though the copyright was unregistered, Leszczynski could still have one. The court also found, at this stage, separability under Star Athletica, essentially because it was a 3D object (and thus could be made at a scale that would make it useless as a measuring device). I still don’t think that can be the test; that isn’t in fact imagining the design separately from the useful article, just imagining the useful article at a useless scale, like a skyscraper-sized shovel.

At this stage, Leszczynski sufficiently alleged that manufacturing and selling the Cube constituted commercial use of the Cube, and was prohibited under the Creative Commons license. He pled that his actual damages from the breach and/or the copyright infringement can be measured by multiplying the number of units sold by each defendant by $10 per unit, which sufficed. He could seek a remedy other than termination of the license, since the license didn’t exclude the right to seek damages.

False advertising: Only ok against Kitchen Cube. At this stage, Leszczynski sufficiently alleged that “Kitchen Cube’s behavior misleads the public regarding the Cube’s origin which affects Leszczynski’s market.” This claim of reputational injury seems to require secondary meaning, which seems like it would only be allowed under §(a)(1)(A), which would then generate a pretty significant Dastar problem—even under (B), the “origin” here is not physical origin.

The alleged falsehoods: (1) that Kitchen Cube “designed and manufactured” the Cube; and (2) that Kitchen Cube filed a patent application on the Cube. Kitchen Cube argued that Leszczynski admits that the alleged first false statements are true, as his copyright infringement claim is about Kitchen Cube’s manufacturing of the Cube, and that Kitchen Cube made a change to the original Cube design.

But he clearly alleged that the statement Kitchen Cube “designed and manufactured [the Cube]” was misleading because Kitchen Cube did not design it, but rather used Leszczynski’s design without authorization, even if it also made changes. (Somebody really needs to mention Dastar.) He also properly alleged a misstatement in the patent application because Kitchen Cube falsely claimed to have invented the Cube (which is not in “commercial advertising or promotion”). The court also didn’t discuss materiality (further suggesting this is really a §43(a)(1)(A) claim).

Use of competitor's photo in comparative ads caused no (c) damage, appeals court holds

I Dig Texas, LLC v. Creager, --- F.4th ----, 2024 WL 1590590, No. 23-5046 (10th Cir. Apr. 12, 2024)

The district court found that use of a competitor’s photos in comparative advertising was fair use; the court of appeals affirms on the alternative ground that no copyright damages can be traced to the use of the photos, holding that a plaintiff seeking defendant’s profits must show a nexus between the use of the copyrighted works and the profits. It also affirms the conclusion that it was not literally false to claim that machinery was American-made when it was assembled in the US from materials including foreign-sourced components.

Appellee I Dig Texas tried to appeal to consumers’ preference for American-made products; it used Creager’s photographs of its China-made Montana Post Drivers as part of its advertising.

Rather than ruling on fair use, the court reached the alternative ground of lack of any nexus to damage, which was fully briefed below.

Profits can be either direct or indirect; indirect profits would include “enhance[ing] operations by infringing on a copyright or “add[ing] sales because [defendant’s] advertisements included copyrighted images. Appellant Creager “bore the initial burden to show a nexus between I Dig Texas’s infringement and making of a profit.” Once the nexus has been established, the burden would be on defendant to show which profits didn’t come from infringement, but that first step still exists. Showing a nexus requires more than speculation.  

Although the photos depicted Creager’s products, “there’s no evidence that I Dig Texas sold any more products because the advertisements had included these photographs.” [I will note there’s a subterranean fair use rationale, still, since if the photos hadn’t been used for critical purposes but to show the appeal of defendant’s lookalike products no one would have failed to infer a nexus. This might be another knock-on effect of Goldsmith: courts now afraid to say that anything is transformative, even straight-up criticism.] There was no showing that I Dig Texas “made any money from the advertisements bearing the copyrighted images.” The existence of the ads wasn’t “evidence that anyone had bought something from I Dig Texas because of these advertisements. And even if someone had bought something from I Dig Texas based on these advertisements, there’s no reason to believe that the two photographs would have made a difference to any consumers.”

Nor were the ads literally false (again, an alternative ground: the district court found that the components were disclosed, but the court of appeals noted that at least some of the ads didn’t contain all the relevant information). “[A]n ambiguous statement can’t be literally false.”

Some I Dig Texas products were assembled in the United States, others in China. “Even for the products that I Dig Texas had assembled in the United States, some components had come from overseas. For example, I Dig Texas had used a nitrogen power cell made in China. And some of the nuts and bolts had come from Canada.” The court of appeals reasoned that “make” “could refer either to the origin of the components or to the assembly of the product itself.” Since some of the products were assembled in the US, the ads were ambiguous and not literally false.

What about the ones assembled overseas? Well, the ads didn’t say “all.”  I Dig Texas said on its website: “We Provide 100% American Made Skid Steer Attachments.” And a statement can be literally false by necessary implication. But that 100% was still ambiguous: it could mean “that only some of the products consist entirely of domestic components assembled in the United States. Or 100% could refer only to assembly of the final product rather than the origin of the components.” [Not discussed: were either of these true?] Nor could the court rely on FTC standards in a Lanham Act case, especially when the FTC noted that there was no bright line.

Likewise, patriotic symbols like the American flag could imply US manufacture, but they couldn’t “objectively be verified as true or false,” so they couldn’t be literally false. [Actually, that suggests they couldn’t be misleading, either, but the court seems a bit unclear about that.]

Hospital's use of Meta's Pixel, despite promise to keep data private, plausibly deceptive

Mekhail v. North Memorial Health Care, --- F.Supp.3d ---- , 2024 WL 1332260, No. 23-CV-00440 (KMM/TNL) (D. Minn. Mar. 28, 2024)

Mekhail alleged that North’s use of a piece of hidden software on its websites (a pixel developed by Meta) surreptitiously tracked, collected, and monetized various aspects of her online activity, including sensitive medical information protected by law. Although she alleged violations of the federal and Minnesota wiretap statutes and the Minnesota health records statute (which all survived the motion to dismiss), I’ll focus on claims under the Minnesota consumer fraud statute, the Minnesota deceptive trade practices statute, and common law claims of invasion of privacy and unjust enrichment.

Mekhail alleged that North’s public-facing website, which publicly offers information about medical issues and the health care resources provided by North, and its password-protected “patient portal,” which contains personal medical information, including patient records, appointment booking, and test results, both used the pixel to surreptitiously track, collect, and transmit her online activity, including page views, clicks, search terms, and so forth. This information was then allegedly collated by Meta and eventually used to craft targeted advertising to Mekhail related to her web activity.

Minnesota Consumer Fraud Act: The MCFA prohibits the “act, use, or employment by any person of any fraud, false pretense, false promise, misrepresentation, misleading statement or deceptive practice, with the intent that others rely thereon in connection with the sale of any merchandise.” Mekhail has failed to allege a misrepresentation in connection with merchandise, as required by the statute. The alleged misrepresentation was North’s statement that it “protect[s] health and medical information as required by federal and state privacy law.” At oral argument, counsel offered the theory that the “exchange of data” between Mekhail and North represented an intangible good or commodity, but the complaint only referred to North’s medical services. And Mekhail didn’t allege that there was a misrepresentation made by North in connection with its provision of any medical services. She alleged a misrepresentation related to data privacy, “but North is not in the business of providing data privacy services.”

The Minnesota Unfair and Deceptive Trade Practices Act  prohibits the use of “deceptive trade practices” in the course of business, vocation, or occupation, which include “caus[ing] likelihood of confusion or of misunderstanding as to ... certification of goods or services,” “engag[ing] in (i) unfair methods of competition, or (ii) unfair or unconscionable acts or practices,” and “engag[ing] in any other conduct which similarly creates a likelihood of confusion or misunderstanding.”

North allegedly made numerous statements that it protected patients’ medical privacy and health data. North disputed that anything shared with Meta was protected health data and also argued that some of allegedly deceptive statements are linked to the Privacy Policy, which (allegedly) states that North “may disclose information to third parties who act for us or on our behalf.” But that wasn’t enough at the pleading stage to overcome the allegations of the complaint.

Article III standing: MUDTPA’s only remedy was injunctive relief for a “person likely to be damaged by a deceptive trade practice.” This showing of likely future harm that is seemingly “indistinguishable from Article III’s threat-of-future-harm requirement for injunctive relief.”

Mekhail alleged that there were two likely future harms: where new data is taken from her by the Pixel, and where the data already taken by the Pixel is used in newly harmful ways. This first scenario was “in obvious tension” with the fact that she was, by her own allegation, a “former patient” of North. However, she argued that she could become a patient again, especially in an emergency situation. This was somewhat tenuous, but nonetheless,

there are real and undeniable scenarios in which Ms. Mekhail, despite her best efforts, becomes a patient again of North. And it is not clear to the Court that Ms. Mekhail could ever truly quantify the likelihood of such a scenario. After all, a medical emergency, like that contemplated in the pleadings, can arise as real and immediately as tomorrow or, with any luck, may never occur. It is simply not within Ms. Mekhail’s capacity to plead the kind of concrete likelihood typically required by our standing cases.

In addition, because she was once a patient, North allegedly has records of past treatment and appointments. Thus, she may have to use the patient portal even if she does not return as a patient. “If she needs to obtain or review her own medical records from North using the portal (surely the quickest and least burdensome way) she would once again be exposed to harm from the allegedly deceptive practices.”

But the second theory was stronger: “her data, already collected by the Pixel, remains beyond her control and may be used in harmful ways.” The complaint sufficiently pled a likelihood of future harm, if not a likelihood of future deception. To find no standing would deprive federal plaintiffs of the remedy the statute set out. Nonetheless, she would need to do more to actually obtain injunctive relief.

Invasion of privacy based on publication of private facts and intrusion upon seclusion: There wasn’t a sufficiently public dissemination of her health data for the first theory. But an intrusion by North cannot be plausibly alleged because Mekhail conceded that it was Meta (or Meta’s Pixel), rather than North, that made the interception.

Unjust enrichment claims survived.

Good Meat is descriptive for sustainable meat-related services, plausibly deceptive for lab-grown meat

Good Meat Project v. GOOD Meat, Inc., --- F.Supp.3d ---- , 2024 WL 1083462,  No. 23-cv-04145-RFL (N.D. Cal. Feb. 12, 2024)

GMP is a nonprofit focused on sustainable butchery and meat production practices. It provides farmers, ranchers, and butchers with marketing education and technical assistance; incubates “Meat Collectives” across the country; and educates consumers about responsible meat production and consumption practices. GMP owns two federally registered trademarks: the “GOOD MEAT” standard character mark and the “GOOD MEAT BREAKDOWN” design mark.

GMI is a food company which produces and sells cultivated, lab-grown meat from extracted animal cells.  GMI removes embryonic fertilized chicken eggs, minces the tissue and places the cells in culture, grows cells in culture, and then 3D prints the cells into shapes resembling cuts of chicken. Eat Just, GMI’s parent company, filed an ITU for a stylized GOOD Meat mark in 2020; in 2021, defendants entered into agreements granting their security interests in the intent-to-use application to a third party, and also Eat Just assigned the entirety of its business having an interest in the GMI mark to GMI. A notice of allowance issued in 2022.

The court denies a preliminary injunction on the trademark claims based on lack of likely success on the merits, but declines to dismiss either infringement or false advertising claims. The false advertising claims are based on the allegation that the defendants falsely advertise and promote their cultivated meat products as “real meat, made without ... taking a life” by “painlessly extract[ing] cells from an egg or living animal.”

Likely success on the merits: Strength was the sticking point. GMP was entitled to a strong but rebuttable presumption that the GOOD MEAT mark is inherently distinctive because the PTO registered the mark without requiring GMP to show secondary meaning. GMI successfully rebutted this presumption by showing, by a preponderance of the evidence, that the mark was merely descriptive, putting the burden back on GMP to show secondary meaning.

Under both tests used by the Ninth Circuit—the imagination test and the competitive need test—“good meat” was descriptive of GMP’s services:

Customers do not need to exercise their imaginations to understand that the term “GOOD MEAT,” as applied to educational services, refers to education concerning “responsible” consumption of animal meat: that is, meat that consumers can feel good about eating. There is little-to-no mental leap required to understand that GOOD MEAT describes GMP’s services. Indeed, the evidence shows that, in ordinary parlance, the term “good meat” is used routinely to refer to the concept of sustainably sourced meat.

The court noted that the fourth Google result for “good meat” is a book titled Good Meat: The Complete Guide to Sourcing and Cooking Sustainable Meat. This title was probative of how the term “good meat” is used in ordinary speech and demonstrated the descriptive nature of the term. So too with the competitors’ needs test. GMI identified, two LinkedIn pages run by international companies selling food products, GoodMeat and Good Meat Co.; the aforementioned book; and USPTO records showing over 570 live registered trademarks using the term “good” to describe meats and processed foods. Though registrations and foreign uses aren’t use in the US, “these examples are not being used to show a crowded trademark field or the extent of use in the term in the domestic market; they are used to show how difficult it is to market goods and services that support sustainably or responsibly sourced meat without using the term ‘good meat.’”

With the burden back on GMP to show secondary meaning, it didn’t do so. There was no evidence that consumers viewed the term “good meat” as referring a single source: that is, GMP. This actually should have ended the inquiry: no mark, no trademark infringement. But the court treated it as weighing against likely confusion.

GMP argued that it had organized Meat Collectives in numerous states and has promoted its services in various states, but didn’t offer evidence of how its efforts have been received in the actual marketplace. Its evidence was insufficient to gauge the mark’s commercial strength.

GMP then argued a reverse confusion theory, but there the important question is “whether the junior mark is so commercially strong as to overtake the senior mark.” [Again, reverse confusion shouldn’t be available where there’s no mark, and probably not even for a descriptive mark, given the risk that the adopter took on of choosing a descriptive term.] But there wasn’t evidence that the “mark” had been completely overtaken. For example, GMP was the sixth result in a Google search for “good meat,” behind two results unrelated to either GMP or GMI. [Query how personalization of search results affects this metric.]

Proximity of the goods: They were similar at a high level of abstraction. But GMP offers services, while GMI sells goods. “GMP focuses on butchering, slaughter, and the development of Meat Collectives. It provides educational services to butchers, ranchers, farmers, and consumers interested in sustainable meat production. GMI, by contrast, sells a food product that explicitly avoids butchering, ranching, and farming.” Disfavored confusion.

Mark similarity: “Visually, the marks are similar. Aurally and semantically, they are identical.” Favored confusion.

Actual confusion: A GMP board member claimed to have received a LinkedIn message from students at an Italian university who mistakenly believed they were contacting GMI. “The Ninth Circuit has found mistakes made by a single retailer and single customer insufficient to support a showing of actual confusion. Other courts in this District have also found even stronger evidence of this type to be similarly unpersuasive.” This was even weaker evidence, given that the alleged confusion wasn’t among “industry journalists or the vendors that are GMP’s target customers.” Moreover, the evidence was even less compelling in light of the passage of time: if GMI had, as GMP alleged, flooded the online market with advertising, only one example of actual confusion disfavors a finding of likely confusion.

Marketing channels: “Merely showing that both businesses advertise on the internet is insufficient to show marketing channel convergence.” The marketing was otherwise quite distinct: GMP markets principally to ranchers and farmers, while GMI markets cultivated meat products made without ranching or farming. Disfavors confusion.

Degree of customer care: The record was mixed.

Ranchers and farmers are likely to exercise high levels of care in seeking out training programs and networking opportunities, but members of the public interested in sustainable meat practices may be less discerning. Likewise, GMI’s products are relatively cheap — its cultivated meat product is served as part of a tasting menu that costs only $70 despite being offered by a famous chef — but also cater to a relatively niche group of consumers who may exercise greater care in their meat consumption.

Neutral.

GMI’s intent: There was no evidence that GMI intentionally selected its mark to capitalize on GMP’s goodwill or to “palm off” its goods as that of GMP, or intended to flood the market (or that GMI should have known of the mark and disregarded the risk of reverse confusion).  

Likely expansion of product lines:  “Given their antithetical targets, it seems unlikely that the GMP and GMI would expand into each other’s marketing channels.…There is little risk that GMP will begin creating any lab-based meat product, and it is equally unlikely that GMI will begin providing educational services related to farmed and butchered meat.”

In essence, the same analysis applied to the GOOD MEAT BREAKDOWN mark, except that that mark was more dissimilar to GMI’s mark, which outweighed the greater conceptual strength of “good meat breakdown” and design.

Also, the length of time that GMP waited before seeking relief undercut any finding of imminent harm. GMI sent a C&D to GMP in April 2022 (whoops!) but did GMP didn’t sue until sixteen months later, then waited two more months before filing for preliminary relief. Also, GMI recently withdrew its application to sell its cultivated meat products in the domestic marketplace, further undercutting the idea that harm is imminent. The court also considered GMI’s investment of millions in its branding and advertising as weighing against relief.

Nonetheless, the complaint sufficiently alleged infringement. For purposes of a motion to dismiss, GMP alleged that its mark was valid and infringed.

False advertising: GMP plausibly alleged that consumers could understand “GOOD Meat” and “real meat” to mean meat from a once-living animal, or that consumers could believe that GMI’s cultivated meat products are developed entirely from chemical or plant-based sources, not from the use of an embryonic, fertilized egg. GMP also sufficiently alleged competitive injury “as its consumers may mistakenly believe that GMP endorses GMI’s statements and approach to food production, and resultingly decide to stop using GMP’s services.” [Notably, while false advertising doesn’t require competition, this particular theory of competitive harm seems parasitic on the infringement claim, and would have to fail if there was no likely confusion even if there was falsity.]

GMP also stated a plausible claim for declaratory judgment that GMI’s mark was deceptively misdescriptive. However, it didn’t plausibly allege that the mark violated the Lanham Act’s anti-ITU-trafficking rule. Even if the ITU was used as collateral for a loan, “[a] security interest in a mark, as collateral for a loan, does not fall within the plain language of section 1060(a). It also does not raise the policy concerns that underlie the Lanham Act’s anti-trafficking provision.” With no allegation of actual default or transfer to a lender, the claim was dismissed with leave to amend.

 

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.

 

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 (9^th 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.

My latest acquisition

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

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.”