Monday, July 29, 2024

"fair and skill-based" may falsely imply absence of bots in online gaming

Skillz Platform Inc. v. Papaya Gaming, Ltd., 2024 WL 3526853, No. 24cvl646(DLC) (S.D.N.Y. Jul. 23, 2024)

Skillz sued its competitor in mobile gaming, Papaya, for violating federal and NY law against false advertising by falsely advertising that its games pit human players against each other when in fact Papaya uses bots masquerading as human players.

Skillz alleged that its platform matches users with similar skill levels in one-to-one tournaments. Skillz does not use artificial competitors, i.e., “bots”, in its cash competitions. Like Skills, Papaya allegedly offers cash competitions in which players are matched by their skill level; unlike Skillz, Papaya hosts competitions with up to twenty players.

Papaya allegedly advertises that players will “be matched with other players within the same skill level ... so the game is totally fair and skill-based.” Also: Papaya “make[s] sure to match players against other opponents with a similar skill level to ensure a fun and fair experience for everyone.” It allegedly advertises that its cash tournaments are available “to all players over the age of 18.” In its Terms of Use, Papaya states that the “individuals who better use their relevant skill and knowledge and accumulate the highest scores will be the winner(s).” However, unlike Skillz, Papaya allegedly does not provide a function to allow players to chat with each other or give access to a competitor’s gaming history. Reviews have complained that Papaya uses bots to play against them.

The complaint sufficiently alleged implied falsity. References to “players”, “individuals”, “winners”, “fair” and “skill-based” “may be found by a jury to imply that Papaya’s games of competition are conducted among human players only and not among humans and bots.” Explicit “no bots” statements weren’t required for implied falsity. Also, it doesn’t matter that using bots wouldn’t necessarily make the games unfair. “The issue is not whether bots have been unfairly employed but whether consumers were misled about the presence of bots in the game.”

The complaint plausibly alleged materiality, because humans v. bots was a “material quality” of the platform, and the negative online reviews complaining about bots reinforced materiality, whether or not they were admissible at trial.

And the complaint plausibly alleged injury, because it alleged that, in this online gaming world, players are not likely to switch between platforms once they have decided on which to join. “Instead, they are motivated to build up in-game rewards and accomplishments on a single platform. Accordingly, when players have joined Papaya because of its false advertising, these players are often lost to its competitors.” Even if its damages are difficult to quantify, Skillz could still obtain injunctive relief and disgorgement.

The NY GBL claim survived for similar reasons.

 

Thursday, July 25, 2024

"Pure Irish Butter" plausibly misleads as to absence of dangerous chemicals

Winans v. Ornua Foods North America Inc., --- F.Supp.3d ----, 2024 WL 1741079, No. 2:23-cv-01198-FB-RML (E.D.N.Y. Apr. 23, 2024)

Plaintiffs alleged that the presence of per- and polyfluoralkyl substances (“PFAS”) in Kerrygold butter made the use of “pure Irish butter” into false advertising under NY law. The court declined to dismiss the complaint. Additional background: “[I]n early 2023, in response to a New York state law banning PFAS in food packaging, Ornua issued a recall of the Kerrygold Butter Products because the packaging contained PFAS. Exposure to PFAS — a category of synthetic, artificial chemicals often called ‘forever chemicals’ — is linked to fertility issues, developmental delays, increased risk of cancer, increased cholesterol and obesity, and reduced immune response and can be dangerous even at low levels.”

Prominent "Pure Irish Butter" on Kerrygold packaging

First, Ornua argued that Winans failed to plausibly allege the presence of PFAS, depriving her of standing. The court disagreed:

The parties do not appear to dispute that Winans purchased Kerrygold Butter products with packaging that contained PFAS. The question is thus whether Winans has alleged that the butter itself contained PFAS. To make that link, Winans posits the migration theory, whereby the PFAS migrated from the packaging to the butter, which she supports by citing several studies establishing other instances of PFAS migrating from packaging to food products.

That was plausible. Lab tests were not required at this stage. “Certainly, a testing requirement might be sensible in cases where there is no reason to otherwise believe that a product contained PFAS. But here, where Ornua publicly removed its products because the packaging contained PFAS, Winans’s allegations suffice.”

Misrepresentation: Ornua argued that “pure” modified only “Irish,” not “butter,” so it meant “butter purely from Ireland,” rather than “pure butter from Ireland.” Deceptiveness is generally a fact question, and it was plausible that a reasonable consumer reading the label would conclude that the adjective “pure” modifies the noun, “butter.” Indeed, Ornua’s reasoning was less plausible; the court noted that “pure Irish butter,” rather than “Irish pure butter” obeyed “the standard ordering of adjectives in English.”

Omission-based claims also survived; Winans plausibly alleged that Ornua knew of the problem. She alleged that “(1) Ornua exclusively controlled the contents of the Kerrygold packaging that contained PFAS; and (2) Ornua recalled its Kerrygold Products in response to a New York law banning PFAS from packaging, which suggests that Ornua was at the very least aware that its packaging did contain the chemical. It seems at least plausible that Ornua may have suspected that the PFAS could migrate from the packaging to the product.”

Nor did federal law preempt the omission-based claims. FDA regulations exempt from disclosure requirements “[i]ncidental additives that are present in a food at insignificant levels.” These “incidental additives” include “[s]ubstances migrating to food from equipment or packaging or otherwise affecting food.” But whether the levels were insignificant was a factual question.  

However, Winans lacked standing to seek injunctive relief.

No copyright over simple colors and shapes used to annotate X-rays

Overjet, Inc. v. VideaHealth, Inc., 2024 WL 3480212, No. 24-cv-10446-ADB (D. Mass. Jul. 19, 2024)

The court denied Overjet’s request for a preliminary injunction on copyright and false advertising claims, concluding that Overjet’s selection of colors and shapes for annotating dental x-rays was unlikely to be protected by copyright and that the literally false statements identified by Overjet had been removed, thus preventing a finding of irreparable harm.

“Overjet uses AI to scan dental radiographic X-rays and detect dental diseases. Specifically, Overjet uses an approach called segmentation, which outlines exact borders and shows the extent to which pathologies, or diseases, exist.” Its software “annotates diseases and structures on dental X-rays,” which “allows clinicians to better detect diseases and devise treatment plans.” It’s presently the only dental AI company with FDA clearance for “performing dental detection and segmentation to outline exactly where pathologies exist.”

In fall 2023, Overjet launched its “Anatomical Structures Visualization Tool” for Overjet Caries Assist, which introduced the relevant coloring scheme and design. The tool uses “white to represent enamel, purple to denote the pulp of a tooth, bright green lines with circles at the ends to indicate measurements of bone levels, and red and translucency to mark areas of decay.” [Id. Overjet allegedly chose these colors and shapes in order to create a “contrast with the gray scale” of the X-rays and with the ultimate goal of assisting with “patient assessment, diagnosis, and treatment planning.” It also allegedly “selected the design and colors to help with brand identification; the purple, for example, complements Overjet’s purple brand color.” Example image showing use of red, white, purple, and green lines ending in dots: 


Videa is a competing dental AI company. In December 2023, the FDA cleared “Videa Dental AI,” for “identifying and localizing a range of dental findings and indications, including caries or cavities and periapical radiolucency, when analyzing bitewing, periapical, and panoramic X-rays taken from patients three years of age and older.” If the software detects any indications, it “returns a set of bounding boxes representing the suspect dental finding.” Unlike Overjet, VideaAI offers a Clinical View and Patient View; the former “uses boxes and lines with dots to quickly display … points of interest.” Patient View, at issue here, is designed to be a “communication tool for [ ] provider[s].” and offers “a version of the results that are ‘segmented’ and highlights the shape of the points of interest” by “show[ing] more than mere lines and boxes.”

 Example; patient view with red areas, blue, white, and greenish lines with circles:

Videa beat Overjet out of a lucrative partnership with a large dental client.

Copyright: Overjet’s copyright protected its source code, but there were no allegations of code copying. Instead, it alleged copying of its “coloring scheme, shades, and shape.” First, there were real questions about whether actual copying occurred, given the timeline, which I won’t get into, though those questions are related to the existence of protection for, e.g., selecting green as the color for healthy gum levels, yellow for some risk, orange for higher risk, and red for a “potential problem.” Videa argued that it chose this “stoplight” system because it was “intuitive for patients and clinicians.” Likewise, it argued that red boxes to indicate tooth decay was an “obvious color choice to indicate warning ... and commonly used across industries.” Videa further argued that it used white to indicate enamel and blue to demarcate pulp was made “because white is the color of enamel and blue provides contrast to render pulp more visible.”

Second, the color scheme, shades, and shapes were not sufficiently creative/concrete to get copyright protection. The court began with 17 U.S.C. § 102(b): “In no case does copyright protection for an original work of authorship extend to any idea, procedure, process, system, method of operation, concept, principle, or discovery, regardless of the form in which it is described, explained, illustrated, or embodied in such work.”

The court found that Overjet’s claim to shapes, colors, and shading defined the relevant “abstraction” for the infringement test. The next step was filtration: eliminating unprotectable elements. Functional elements are uncopyrightable. The scheme here seemed functional:

The underlying impetus of the color scheme and display is seemingly to aid clinicians in carrying out dental diagnostics.. Thus, although there may not be industry-standards or guidelines specifying what colors and shapes may be used on an X-ray, it nevertheless appears intuitive to use certain specific colors to indicate problem areas or create contrast in order to efficiently identify pathologies, suggesting that Overjet’s color, shape, and shading decisions were primarily driven by functionality.

Overjet’s own complaint indicated that the tool was “a tremendous aid in patient education …. Highlighting enamel and pulp allows for a richer understanding of the nature and severity of disease progression and a visual that matches dentists’ quantified AI finding.”

Relatedly, the individual colors and shades did not rise to the necessary low level of creativity. Although the “selection, coordination, and arrangement” of elements that are by themselves not protectable may nonetheless meet the originality requirement, that wasn’t the case here. It did not seem to the court that “countless artistic decisions” were possible, as they would be for turning a real animal into a stuffed toy. Overjet “organized and arranged only four colors (red, white, purple, and green) and two shapes (a line with circles at the end).”

False advertising:

Overjet challenged statements that allegedly falsely indicated that (1) “Videa’s software is safe and effective for various medical purposes,” even though it had not obtained the relevant FDA clearance, and (2) it had “reached a technological milestone in AI development before Overjet.”

For (1): In a now-deleted LinkedIn post from December 2023, Videa stated, “[h]ear from the clinicians who are experiencing firsthand VideaAI’s transformative power.” [The X-ray accompanying the statement allegedly implied that Videa had FDA clearance for segmentation when, in reality, the FDA had only cleared Videa’s “bounding box” approach. But “[b]ecause Videa is in fact an AI platform, the statement is not explicitly false. The Court cannot, however, without the benefit of the full LinkedIn post, assess the extent to which Videa’s statement, in light of the accompanying X-ray, is misleading, and refrains from evaluating Statement # 1 under the first prong of the Lanham Act at this juncture.”

In 2021, Videa represented that its AI software can “aid in the diagnosis and prediction of the progression of diseases such as caries or periodontitis.” But Videa has not been cleared for progression analysis. Video argued that it “merely provides this comparative tool to aid clinicians’ analyses.” The court found that the challenged statement emphasized the benefits of “AI within diagnostics and treatment planning,” [Ex. 27 at 2], and was neither false nor misleading. Its software localizes and identifies various dental indications in X-rays using bounding boxes. “In comparing these AI-generated annotated X-rays over time, clinicians can assess the extent to which certain conditions, including caries and periodontitis, have progressed.” Thus, the statement didn’t communicate that Videa provided progression analyses or that Videa had obtained FDA clearance for conducting such analyses. Similar analysis applied to Videa’s statement that its “artificial intelligence software ... helps gauge the caries level in carious lesions.” (The court also noted that, when the blog post was published, it contained an “investigational” disclaimer; that disclaimer was removed when Videa obtained the relevant FDA clearance.)

In 2024, Videa blogged that “[w]e suggest choosing an AI provider with the most FDA-cleared annotations.” According to Videa, annotations are “not equivalent to segmentation,” for which it’s not cleared, but rather refer to “a visual way of showing the results of AI analysis, which can take many forms, including a simple bounding box.” This wasn’t literally false, because Videa had just obtained FDA clearance for thirty plus indications. Nor was there a necessary implication that “annotation,” that is, labeling an X-ray, refers to FDA clearance for segmentation. That was too attenuated.

Overjet argued that the statement was misleading because the image right above the alleged misrepresentation is captioned “VideaAI’s patient view showing a segmented x-ray,” which could create an implied connection between “annotations” and “segmentations,” but there was no evidence of actual deception.

However, another ad, a segmentation view with the caption “[i]ntroducing the first FDA-cleared dental AI for patients aged 3 and up,” whose images were subsequently replaced, could lead a viewer to recognize the claim that Videa obtained FDA clearance for segmentation as “readily as if it had been explicitly stated” because of the combination of the image sand text.

Videa also stated that it is the “only dental AI company to spend time and money to retest and improve [caries] models.” Overjet argued that it had also done so, submitting a new iteration of its model after the FDA cleared it, and the court agreed that this rendered the statement literally false. Likewise, an initial statement that “[p]roviders can use VideaAI to help diagnose all patients, regardless of age” was literally false; it has been modified to “[p]roviders can use VideaAI to help diagnose all patients 3 years and older.” And another removed statement, “[t]he world’s first pediatric dental AI” was literally false because Overjet obtained clearance for pediatric patients—at least 12,efore Videa did, even though it was the first to receive clearance for patients 3 and older. “Pediatric care refers to the treatment of infants, children, adolescents, and young adults, and commonly encompasses all ages up to twenty-one years old.”

Another statement that VideaAI could “identify cysts” was potentially false, even though it was FDA-cleared for periapical radiolucency (“PRL”) detection, which includes cysts; identifying a PRL might not be the same thing as identifying a cyst. So too with a statement that Videa’s software “annotates 18+ months of historical images to help monitor and track progression of disease.” The software itself doesn’t track or quantify progression, but seeks to assist clinicians in assessing side by side comparisons of annotated X-rays. Although the statement was literally true, an image captioned “Current Visit” indicates that the subject tooth’s caries size has increased by 20% since the previous X-ray was taken. That image, coupled with the statement that Videa’s “AI annotates 18+ months of historical images to ... track progression of disease,” could suggest that the software—rather than the clinician—evaluates the progression.

Of the surviving statements, there was “scant” support for materiality. Statements focusing on the idea that Videa’s AI software can aid in the diagnosis and prediction of various diseases didn’t seem material. But references to VideaAI’s pediatric qualities were more plausibly material. Nonetheless, Videa sells to sophisticated customers such as dental practices and services, who “likely have the scientific and technological understanding to fully appreciate Videa’s product offering and its limitations.”

Online advertising and presentations during trade shows appear to be a starting point for potential purchases, but do not alone drive such decisions. It is reasonable to assume that, given the actors involved and the considerable monetary value of potential contracts, the sales process is thorough and lengthy, with a heavy focus on the software’s actual capabilities, including relevant FDA clearance.

What about bait and switch reasoning?

There was also no evidence of actual deception. “It seems reasonable that discussions surrounding relevant FDA clearance—and verification thereof—are a critical component of the sales process. A few promotional videos and blog posts, it appears, are unlikely to cause consumer deception among the relevant pool of potential consumers.”

Nor did Overjet show injury from the deception. This also prevented a showing of irreparable harm, especially as the literally false statements have been removed.

Trademark law and LinkedIn resumes: watch out?

Portkey Tech. PTE Ltd v. Venkateswaran, 2024 WL 3487735, No. 23-CV-5074 (JPO) (S.D.N.Y. Jul. 19, 2024)

Another case that starkly shows the effects of trademark’s abandonment of any harm requirement, not to its benefit, where false advertising claims fail because alleged misstatements about the extent of the defendant’s past involvement with a company don’t do it any identifiable harm, but trademark claims succeed because something something affiliation. (Maybe companies can resurrect noncompetes by prohibiting uses of their trademarks in former employees’ resumes! This is a joke, but that doesn’t mean it won’t happen.)

Portkey sued for unfair competition/reverse passing off, false advertising, and trademark infringement under the Lanham Act, as well as related state-law claims. It alleged that plaintiff Vignesh Sundaresan is the founder and sole proprietor of Portkey, a “software and technology company that operates many of Sundaresan’s blockchain, NFT, and Web3 projects.” Venkateswaran allegedly worked as an independent contractor for Portkey from 2017 to 2022, during which Venkateswaran performed work in areas like “communications and public relations,” “management of social media platforms,” and “attending and representing in conferences.” Sundaresan allegedly directed Venkateswaran and others at the company to adopt the alias “TWOBADOUR” when communicating with the public, and to “assist in the operation of METAPURSE,” which is “a fund utilized for the acquisition of digital art NFTs and virtual land NDTs, and other Web3-related investments.”

In 2022, the relationship dissolved; Portkey objected to Venkateswaran’s alleged references to Portkey and its asserted trademarks since 2022. “Venkateswaran publicly lists his former work at Portkey—including use of the TWOBADOUR alias and involvement with METAPURSE—on his ‘bios’ on Twitter and LinkedIn and has allegedly continued to associate himself with those projects in his public and private statements.”

This is the Second Circuit, so nominative fair use is just a set of considerations to put into the hopper, and it’s almost impossibly difficult to kick out an infringement claim on a motion to dismiss without something like “clear parody or a total absence of proximity between the marks.”

Here, the marks in question were used at the top of Venkateswaran’s public profiles, directly proximate to his current business ventures. Sometimes Venkateswaran noted a past affiliation with TWOBADOUR and METAPURSE, but other times he did not. And sometimes he used terms that may still lend themselves to confusion (such as abbreviating “Former” into “Fmr”). For example, the First Amended Complaint alleges that Venkateswaran included on LinkedIn that he was the “Fmr Steward of Metapurse,” but then simply “Creator of the @Twobadour pseudonym.” Even if Venkateswaran is correct that an indication of former affiliation is not likely confusing as a matter of law, that would not shield the alleged reference to the TWOBADOUR mark, which at least on LinkedIn lacks an indication that the affiliation had ended.

Anyway, you can’t use “any indication of non-affiliation” to avoid an infringement claim, per JDI. “It still may be that some disclaimers or other explicit indications of non-affiliation will be enough to render consumer confusion unlikely, but whether that is true in this case will depend on facts not yet before the Court.” This bore on the similarity factor: “arguments about explicit indications of non-affiliation go to similarity.” And because the text of the alleged marks was similar (which will always be the case in any truthful reporting of former employment), and there was a disputed issue of fact about whether “former” and the like mattered, similarity weighed in favor of confusion.  

The court specifically noted that actual confusion was not plausibly alleged because the allegations were conclusory, but that didn’t matter. By contrast, allegations that defendant had “actual knowledge that Plaintiffs own all rights, title, and interest in the trademark METAPURSE,” that such references “have been willful, wanton, and in bad faith, and with intent to misrepresent Plaintiff’s business operations and successes as that of his own,” and that Venkateswaran “is attempting to exploit Plaintiff’s reputations and intellectual property to intentionally cause confusion among investors, artists, artist estates, trade conference organizers and organizations, scholars, publishers, and other market participants, hoping people choose to do business with him and his associated businesses, mistakenly believing that ... he remains associated with Plaintiffs and their business” plausibly alleged bad faith. What’s the difference?

The NFU factors didn’t help because they were “often heavily factual and thus ill-suited for the motion-to-dismiss stage.” Most notably, “the third element of the nominative fair use defenses requires that the use of the trademark not create a likelihood of confusion as to the mark-holder’s sponsorship, endorsement, or affiliation ... the existence of [which] necessitates focusing on ‘the minds of the relevant purchasers—an analysis based on a factual inquiry inappropriate to a motion to dismiss.’ ”

There was also “use in commerce” because Venkateswaran was promoting himself and his business ventures on LinkedIn.  

Reverse passing off claims, however, failed. Plaintiffs alleged that Venkateswaran represented to the public that he was more involved with the creation and management of TWOBADOUR and METAPURSE than he actually was, thus “passing off” the goods and services sold under those marks as his own. Under Dastar, prior involvement in the creation and promotion of a trademark is not “origin” of tangible goods or services, and thus misrepresentations as to same aren’t misrepresentations of “origin.”

False advertising: Plaintiffs didn’t plausibly allege “economic or reputational injury flowing directly from the deception wrought by the defendant’s advertising,” which usually occurs when “deception of consumers causes them to withhold trade from the plaintiff.” Where there is no allegation of a comparative advertisement, §43(a)(1)(B) requires “some affirmative indication of actual injury and causation.” There were no allegations of literal falsity, only “a subjective disagreement among the parties concerning the degree of Venkateswaran’s prior involvement with the business.” Nor did plaintiffs allege reputational damage.

State law consumer protection claims also failed because they didn’t allege harm to consumers; trademark confusion isn’t sufficient.

Puzzlingly, the court did find state law dilution plausibly pled because plaintiffs alleged that “Venkateswaran acted with hostility to Sundaresan’s and Portkey’s marks” and thus had predatory intent.

Tuesday, July 23, 2024

Announcing the Seventh Edition of Advertising & Marketing Law Casebook by Goldman & Tushnet

Eric Goldman and I are pleased to announce the seventh edition of our casebook, Advertising & Marketing Law: Cases & Materials. It is available for purchase in the following formats:

DRM-free PDF file. Price: $12
Kindle. Price: $9.99
Print-on-demand paperback from Amazon. Price: $30 + shipping and tax. Paperback buyers can get a free PDF file by emailing me a copy of their receipt showing which edition they bought.

If you are a professor, or are hoping to teach the course, and would like a free evaluation copy, please email Eric (egoldman@gmail.com).

A sample chapter, Chapter 14 (on publicity rights and endorsements), is available as a free download. We also have two online-only chapters on housing discrimination (Chapter 20) and political advertising (Chapter 21), both also freely downloadable.

We’ve discussed the book’s background and our goals as authors in this essay.

What Does the Book Cover?

Preface
Chapter 1: Overview
Chapter 2: What is an Advertisement?
Chapter 3: False Advertising Overview
Chapter 4: Deception
Chapter 5: Which Facts Matter? Reasonable Consumers and Materiality
Chapter 6: Omissions and Disclosures
Chapter 7: Special Topics in Competitor Lawsuits
Chapter 8: Consumer Class Actions
Chapter 9: False Advertising Practice and Remedies
Chapter 10: Other Business Torts
Chapter 11: Copyrights
Chapter 12: Brand Protection and Usage
Chapter 13: Competitive Restrictions
Chapter 14: Featuring People in Ads
Chapter 15: Privacy
Chapter 16: Promotions
Chapter 17: The Advertising Industry Ecosystem–Intermediaries and Their Regulation
Chapter 18: Case Study: Food, Drugs, and Supplements
Chapter 19: Case Study: Organic and “Green” Claims
Chapter 20 (online only): Case Study: Regulation of Discriminatory Advertising (Mostly Housing)
Chapter 21 (online only): Case Study: Regulation of Political Advertising

What Changed from the Sixth to the Seventh Editions?

We didn’t make many major changes in this edition. Most minor changes are standard updates. Some hot areas include courts’ treatment of reasonable consumers, online discrimination in ad targeting, and Section 230’s application to scammy online ads.

If You Are Teaching (Or Want to Teach) Advertising Law

For reasons why you should consider teaching an advertising law course, see this post. In addition to a complimentary book copy, we can provide (1) access to the Georgetown Intellectual Property Teaching Resources database, with digitized props galore; and (2) our PowerPoint slide decks, lecture notes, and other materials. If you are creating a new course, we can provide feedback on your draft syllabus and course proposal. Email me or Eric! You can see his old syllabi and exams on his Advertising Law course page.

Thursday, July 18, 2024

"plant-based" is plausibly misleading without qualification; can asterisks save the day?

Whiteside v. Kimberly Clark Corp., No. 23-55581, 2024 WL 3435308, -- F.4th --- (9th Cir. Jul. 17, 2024)

Whiteside alleged that KC’s “plant-based” baby wipes were misleadingly advertised; the court of appeals revived some claims that the district court had dismissed for failure to sufficiently plead misleadingness. The same stresses that have caused courts to occasionally modify the (nontextually-based) Lanham Act distinction between “explicitly false” and “misleading” here show up with competing interpretations of what an “unambiguous” front-of-package claim means. Just as the Lanham Act’s text does not make the distinctions courts have adopted, consumer protection laws don’t use “ambiguous” in their text either. In practice, “unambiguous” tends to mean “I think reasonable consumers could be fooled by this.” That might be as good a rule as we can practically get unless we want to restore caveat emptor, but it would be more useful for courts to write in terms of “reasonable consumers could think they had all the information they needed from the front of the package” than of “ambiguity.” The court here takes useful steps in that direction.

Whiteside alleged that the words “plant-based wipes” (or “plant-based ingredients”) and “natural care®” on the front label, together with the nature-themed imagery displayed on the packaging, suggest that Defendant’s baby wipes contain only “water, natural ingredients, and ingredients that come from plants and that are not subject to chemical modification or processing.” But they also contain synthetic ingredients that do not come from plants and are subject to chemical modification or processing.

Examples of the packaging:

 



The district court distinguished (1) labels where an asterisk was placed after “plant-based wipes*” and a corresponding qualifying statement (“*70%+ by weight”) was present elsewhere on the front label (the “Asterisked Products”); and (2) labels on which no asterisk or qualifying statement appeared on the front label. For both, directly preceding the ingredients list is a statement reading: “NATURAL AND SYNTHETIC INGREDIENTS.” Back label images:

 


closeup of ingredients list

After making the distinction, though, the court found that both sets of labels were ambiguous and therefore it was unreasonable to be fooled instead of consulting the back label.  The district court reasoned that when a product’s front label is not “unmistakably clear about the facet for which she seeks more information,” a reasonable consumer is expected to look to other features of the packaging, such as the fine print on the back label. Anyway, the term “plant-based” “plainly means mostly, not necessarily all, derived from plants,” making the Unasterisked Products not misleading as a matter of law, even without reference to the back label.

The court of appeals reversed as to the unasterisked products. The Ninth Circuit has long held that reasonable consumers aren’t “expected to look beyond misleading representations on the front of the box to discover the truth from the ingredient list in small print on the side of the box.” Thus, the rule is that, “if a product’s front label is plausibly misleading to reasonable customers, then the court does not consider the back label at the pleadings stage. Whether the back label ultimately defeats the plaintiff’s claims is a question left to the fact-finder.”

On the other hand, if the front label is only plausibly ambiguous, the back can resolve the ambiguity. Indeed, the Ninth Circuit has held that “other contextual factors aside from the back label can defeat claims that a product’s label is misleading,” specifically in its manuka honey decision. In that case, the court said, the “foremost” reason for finding only ambiguity was that, “given the foraging nature of bees, a reasonable honey consumer would know that it is impossible to produce honey that is derived exclusively from a single floral source,” and “[a] reasonable consumer would not understand Trader Joe’s label . . . as promising something that is impossible to find.” Its low price and use of a honey grading scheme also meant that “100% New Zealand Manuka Honey” was not misleading. Here, the court says, it was very important in that case that manuka honey is “a niche, specialty product,” and that buyers were “undoubtedly more likely to exhibit a higher standard of care than a parent walking down the dairy aisle in a grocery store, possibly with a child or two in tow, who is not likely to study with great diligence the contents of a complicated product package.”

KC argued that a front label was ambiguous if it can have more than one possible meaning. Whiteside argued that a front label can be unambiguous if it was plausible that a reasonable consumer would view the label as having one unambiguous (and deceptive) meaning. Whiteside was correct. The plaintiff doesn’t have to prove unambiguous deceptiveness to avoid dismissal at the pleading stage. Instead, “a plaintiff must plausibly allege that the front label would be unambiguously deceptive to an ordinary consumer, such that the consumer would feel no need to look at the back label.” Thus, a front label is ambiguous if “reasonable consumers would necessarily require more information before they could reasonably conclude” that the front label was making a specific representation. The California courts have followed this rule, for example in the One-a-Day case, which “acknowledged that some sophisticated consumers might not interpret ‘One A Day’ literally and would inquire into the back label. But other reasonable consumers might take the front label at face value and assume that they needed to take only one vitamin daily. … Put another way, reasonable consumers would not necessarily require more information before concluding that they needed to take only one vitamin daily.”

The unasterisked products were plausibly misleading.  “Plant-based” “plausibly conveys a concrete and unambiguous meaning to a reasonable customer: that the product is entirely plant- based and exclusively contains ‘natural’ materials.” It was not an “all-but-meaningless marketing term” like “Nature Fusion,” especially combined with allusions to “natural care” and nature imagery

Although consumers could consult the back label, “[f]ront-label ambiguity is determined not by whether a consumer ‘could’ look beyond the front label, but whether they necessarily would do so.” The district court’s standard would always require a consumer to consult the back label, which contradicts controlling precedent.  Plus, baby wipes aren’t a niche, specialty product. “[C]onsumers of everyday items are not expected to study labels with the same diligence as consumers of specialty products.”

The district court also reasoned that the products were in fact “plant-based” because they contained at least 70% plant-based ingredients by weight. But California prohibits both literally false and misleading ads. And the district court’s definition of “plant-based” as “mostly, not necessarily all, derived from plants” had little support.

Even if consumers understand “tomato-based sauce” to mean “mostly but not all tomatoes,” that’s not helpful here, where the issue was not a characterizing ingredient. “[T]here is no reason to assume that consumers interpret all terms ending in ‘-based’ in the same way,” any more than they interpret “100%” the same way in every label.

Reasonable consumers also understand that meat does not grow on trees, yet technology has advanced such that plant-based meat is now available. Consumers could reasonably suppose that manufacturers have similarly devised a way to make baby wipes using only plant-based compounds.… Unlike bees … , which are familiar to anyone who has encountered vegetation,  most people likely have  not contemplated how baby wipes are made. Similarly, most consumers likely have not considered whether synthetic ingredients are necessary to make wipes “shelf-stable,” a term that is not part of

The court further pointed to the FTC’s “Green Guides,” which warn that unqualified representations like “made with renewable materials” are likely to mislead a reasonable consumer to believe that a product “is made entirely with renewable materials.” Although the FTC has declined to provide guidance on the term “plant-based” specifically, it’s the lack of qualification that is significant here; the FTC recommends using percentages or other qualifiers.

On the other hand, the use of an asterisk and the qualifying statement “*70+% by weight” on the front label of the Asterisked Products “ameliorate[s] any tendency of [the] label to mislead.” Those tracked the Green Guides’ recommendation for qualifications and complied with California law adopting the Green Guides. Even assuming that “70%+ by weight” is ambiguous, a reasonable consumer would require more information from the back label, which clarifies that the Products contain both “natural and synthetic ingredients.” “Even before reading the back label, the presence of an asterisk alone puts a consumer on notice that there are qualifications or caveats, making it unreasonable to assume that the Products were 100% plant- based.” (I don’t think the court thinks that it has taken back everything it said in the first part of the case, but maybe it has. If you thought the message was clear, how would you know that the asterisk related to the message you thought was clear and not to some other or peripheral feature? That’s the FTC’s reasoning for why asterisks and “disclosure” aren’t good qualifiers.)

Wednesday, July 17, 2024

Plaintiffs win partial summary judgment on falsity/materiality in "made in US" tea case

Banks v. R.C. Bigelow, Inc., No. 2:20-cv-06208-DDP-RAOx, 2024 WL 3330554 (C.D. Cal. Jul. 8, 2024)

The court here grants the consumer plaintiffs’ motion for partial summary judgment on their theory of falsity of Bigelow’s “manufactured in the USA” claim for its tea bags. All of the products at issue use tea leaves grown and processed abroad. Processing ves includes plucking, withering, rolling, oxidizing, drying, and sorting. “It is this processing which determines the type of tea — black, green, or oolong.” Bigelow then imports the tea leaves, blends and packages the tea into its tea bag products, and distributes them. The logo on back of the packaging stated “MANUFACTURED IN THE USA 100% AMERICAN FAMILY OWNED.” Plaintiffs received class action certification as to (1) CLRA, (2) common law fraud and intentional misrepresentation, and (4) breach of express warranty claims.

prominent Manufactured in the USA 100% claim on bottom right of back package

It was undisputed that all the tea leaves, and all the tea leaf processing, occurred abroad, and that foreign processing both determines type and renders the tea consumable. Still, Bigelow argued that “Manufactured in the USA 100%” was not literally false because the tea bags were made in the US. The court disagreed. California law makes unlawful the use of “Made in the U.S.A.,” “Made in America,” or “similar words when the merchandise or any article, unit, or part thereof, has been entirely or substantially made, manufactured, or produced outside of the United States.” The court found no substantive difference between the terms “made” and “manufactured” for the purposes of a CLRA claim involving alleged misrepresentations of United States origin; the words of the law suggested a legislative decision that the terms were “largely interchangeable.” In addition:

Judges should not engage in fashioning excessively nuanced exceptions to these consumer protection statutes, such as finding some artificial distinction between the words made and manufacture. Otherwise, the marketing industry will undoubtedly attempt to sidestep consumer protection statutes and mislead consumers through clever and ambiguous terminology, the very outcome these statues seek to prevent. Indeed, the Legislature has specifically instructed that the CLRA is to be “liberally construed and applied to promote its underlying purposes, which are to protect consumers against unfair and deceptive business practices and to provide efficient and economical procedures to secure such protection.”

Anyway, “manufacture” means “something made from raw materials by hand or machinery” and “describe[s] the physical process of transforming raw materials into goods.” A Made in the U.S.A. claim is false “if a substantial or significant portion of the component parts of the product are manufactured abroad.” The tea leaves, the “key component” of the tea bags, undergo a “physical process” that “transforms” them from “raw” unconsumable tea leaves into a consumable “good” of a distinct variety and flavor profile (black, green, or oolong tea) outside of the United States. “The distinctive aspects of tea, the flavor and quality, are made or destroyed during this process. Defendant’s own promotional video refers to the actions which happen abroad as ‘the steps of tea-making.’” The additional actions taken to create the tea bags didn’t change the fact that the tea leaves “have already been processed abroad and are no longer a raw material prior to import.” Even Bigelow’s Rule 30(b)(6) designee acknowledged that manufacture includes a broader set of activities than the blending and packaging that occurs in the United States. The tea leaves were “vital” and “the very essence” of the tea bags; they were why consumers buy the bags, which served as packaging for the product desired.

Indeed, the fact that the tea was consumable increased the need for consumer protection here. The court offered an example of a baby food seller who “sourced peach puree from the Chernobyl area, then pasteurized that puree in the United States and packaged it in a convenient pouch labeled ‘Made in the USA’ or ‘Manufactured in the USA.’” Thus, the statement was literally false.

Reliance: This can be presumed classwide from exposure plus materiality, as long as the named plaintiff actually relied on the representation. “[A] showing of class-wide exposure sufficient to establish predominance at the class certification stage creates a rebuttable presumption that there was in fact class-wide exposure.” That presumption was not rebutted. Bigelow argued that the statement was just on the back of the box, but it was prominent—set off to the side in bold type.

Materiality:  Bigelow pointed to market research data indicating that consumers purchase tea for a variety of reasons that are “overwhelmingly unrelated to the source of the constituent tea leaves.” But “[t]hat other factors are material to a consumer’s purchasing decision does not establish that the origin of the tea would be immaterial to a reasonable consumer,” and Bigelow’s market data didn’t test consumers’ reaction to origin or made in the USA statements. Bigelow also offered a consumer survey purporting to show no effect on consumer purchasing behavior, but plaintiffs’ expert calculated a price premium. That’s generally for a jury. And the named plaintiffs may have purchased Bigelow tea before the statements was added to the package, but whether it was material to them was also for a jury.

Further, false or misleading U.S. origin claims are material as a matter of law. “While materiality is generally a question of fact, when the legislature has seen fit to specifically outlaw certain statements in order to protect consumers, such statements are material as a matter of law.” This was not a rebuttable presumption, so survey evidence wasn’t relevant. “When the Legislature has deemed a particular statement material enough to warrant legislative action, a defendant cannot rebut such a determination through self-serving surveys and market research. Further, even if it were a rebuttable presumption, Defendant’s above referenced evidence would be insufficient to rebut the presumption.”

However, damages remained a jury question. Bigelow argued that plaintiffs failed to show a price premium. But their expert’s testimony was admissible, and punitive damages remained possible.

Bigelow’s knowledge and intent was also a jury question for fraud and negligent misrepresentation, as well as punitive damages. “Plaintiffs point to sufficient evidence from which a reasonable jury could conclude that Bigelow knew that ‘Manufactured in the USA 100%’ was false or, at the very least, had no reasonable grounds for believing it.” There was also evidence of intent to induce reliance, “as the very purpose of advertising a particular statement on a package is to induce reliance.”

 

Monday, July 15, 2024

court allows Nike's legal theories and most of its expert testimony against StockX's resales/NFTs

Nike, Inc. v. StockX LLC, 2024 WL 3361411, No. 22-CV-0983 (VEC) (S.D.N.Y. Jul. 10, 2023)

Nike sued over StockX’s use of Nike trademarks on StockX NFTs without Nike’s consent and alleged sales of counterfeit Nike sneakers despite allegedly guaranteeing that all products sold by StockX were authentic. This opinion deals with various Daubert motions, allowing at least some of the testimony of eight challenged experts in.

Counterfeits background:

Unlike some other major resellers like eBay, StockX acts as an active intermediary. Prior to listing a product for sale on its website, StockX takes physical possession of that item and purportedly vets it through “a proprietary, multi-step authentication process.” According to StockX, no item is listed for sale unless it passes that test, a fact that, prior to the filing of this complaint, StockX touted on its website in support of its guarantee that all listed goods were “100% Verified Authentic.” Nike claims that, despite those efforts, StockX sold a number of Nike-branded shoes that were counterfeits.

NFT background:

In early 2022, StockX introduced Vault NFTs, which featured Nike’s trademarks and provided the holder ownership of an associated physical item. Many of the physical items were Nike sneakers. Around the same time, Nike began releasing its own NFTs. As with the physical sneakers, StockX claimed that its NFTs were “100% Authentic.” … The parties dispute whether the StockX NFTs were separate, virtual products that conveyed benefits beyond access to the physical good or merely receipts that allowed an NFT holder to claim ownership of the underlying good without taking physical possession.

StockX’s expert Sarah Butler surveyed consumers on the effects of StockX’s authenticity statements as a rebuttal to Nike’s expert John Hansen. “The test group was presented five pages from StockX’s website featuring the Authenticity Statements, and the control group was presented with similar webpages that featured versions of those statements that omitted references to ‘authentication’ or substituted them with references to ‘inspection.’” Butler found that there was no statistically significant difference in cells’ self-reported likelihood of purchasing shoes on StockX, suggesting lack of materiality.

Nike’s criticisms warranted cross-examination, not exclusion.

First, Nike argued, materiality was irrelevant because literally false claims are conclusively presumed to be material. (The cases of which I am aware say that literally false claims are presumed to be material, not conclusively presumed—it seems reasonable to say that the presumption should be rebuttable, and the Second Circuit’s holding in the NBA v. Motorola case—which held that the statement that scores were updated “from the arena” was immaterial because of its lack of prominence in/relevance to the main ad claim—certainly implies rebuttability, even from context alone.) Rather than treating the presumption as irrebuttable, however, the court here merely said that literal falsity depends on context, and literal falsity of the authenticity statements was still a contested issue, at least for now.

The rest of Nike’s objections went to reliability, which generally goes only to the weight of the evidence. Surveying previous purchasers from StockX was a potential weakness, but “not so egregious or clear cut” as to warrant exclusion. Nike also alleged that the survey was tainted with demand effects that “ ‘cued’ respondents that StockX was the survey’s sponsor” and that “the correct answer” was to indicate a likelihood to purchase from StockX. The putative sources were a screener question measuring current or past interest in purchasing from StockX and the inclusion of StockX webpages with “overwhelmingly positive content.” But the screener question offered StockX as just one option in an order-randomized list of fifteen resellers, which wasn’t a problem. As for the positivity of the ads, “consumer surveys in false advertising cases commonly display the challenged advertisement.” (Surely a highly negative control is not a very plausible ad.)

Nike also criticized the control as insufficiently distinct from the test—“inspection” wasn’t sufficiently different from “authentication.” Indeed, a handful of individuals in the control group said they were likely to buy from StockX because of its authentication process. But this too was fodder for cross-examination. And the fact that respondents responded very similarly to both claims didn’t require a finding that the survey was flawed; the alternate plausible explanation was that StockX was right about immateriality. The court pointed out that Nike’s own complaint treated “authentication” and “inspection” differently, claiming that the shoes were not properly authenticated, not that they weren’t inspected. The dictionary agreed that “authentication” involves a guarantee that the product is genuine; inspection does not. “Of course, a survey respondent could have easily reached the conclusion that the ‘inspection’ process was designed to weed out counterfeit products. That is an obvious ground for cross-examination but not exclusion.” (In the context of puffery, courts often distinguish “designed to” from “guaranteed or confirmed to”; if that’s the case—which I’m not sure it is, but that’s a problem with puffery doctrine—then surely it must also matter in determining meaning.)

Nike’s complaints about the stimuli were also nitpicking; stimuli must merely roughly simulate market conditions.  “Nike does not explain how the minor differences in the layout of products and third-party advertisements, which have no significant effect on the content or display of the Authenticity Statements, render the survey results unreliable, let alone less probative than prejudicial.”

Nike also argued that testing all the challenged statements at once overwhelmed respondents, and that respondents were only required to view the pages for a minimum of ten seconds. (This seems like an implicit criticism of Nike’s own theory of deception; if they overwhelmed respondents, how could they all be deceptive? There’s an answer, of course, which is probabilistic: those who noticed a particular statement might have been deceived by it.) Regardless, real consumers vary in their engagement with ads, and frequently only interact with them for a short time. Cross-examination could address any deviation from market conditions.

As for StockX’s economist damages expert, the court granted Nike’s unopposed motion to exclude his affirmative opinion regarding other factors that drive a consumer’s decision to purchase on StockX, but allowed it as rebuttal testimony. “At bottom, a rebuttal expert need not proffer a methodology or model, but only critique the opposing expert’s.”

StockX was also allowed to present the expert testimony of a self-professed “sneakerhead,” who opines on sneakerhead culture and explains how sneakerheads view the Vault NFTs and navigate the secondary market. His testimony was based on his own experience and his conversations with others. This was relevant to show the degree of sophistication of the sneakerhead community and “contextualize the manner in which members of the sneakerhead subculture approach their purchasing decisions.” His opinions that sneakerheads credit the Authenticity Statements as improving the resale experience were “relevant to the sophistication of at least this subset of StockX’s consumers and how likely they are to be deceived by any falsehoods.” Nike acknowledged that at least some of the Nike-branded sneakers purchased on StockX were bought by avid collectors. However, if the statements were shown to be literally false, Nike could re-raise its Daubert motion.

His methodology was also reliable, based as it was “on his vast experience with the sneakerhead community, including his discussions with other sneakerheads over the years.” Also, the fact that he acknowledged that there were other definitions of “sneakerhead” and that the group is heterogeneous wasn’t a “fatal” flaw meriting exclusion as opposed to cross-examination.

Nike’s expert Kari Kammel leads the Anti-Counterfeiting and Product Protection Center at Michigan State University. Kammel opined on the rise of counterfeiting generally and on platforms like StockX, as well as what constitutes authentication. The court allowed Kammel’s testimony except for testimony about (1) counterfeiting generally and (2) about shoes that Nike claimed were counterfeit and sold on StockX, but that were not previously disclosed to StockX.

Counterfeiting generally: Kammel opined that counterfeiting can be tied to terrorist activity and results in lost jobs and tax revenue. Nike argued that these opinions were important to contextualize the alleged counterfeiting enabled by StockX, including the fact that a counterfeiting operation based in China sold over 1800 products on StockX. “Even assuming that Kammel could reliably connect these global forces to the parties in this case, the jury does not need a primer on the complex global economics and geopolitics of counterfeiting to understand the relatively narrow set of facts in dispute. Nor is this testimony necessary to establish a factual basis for her opinion.” In addition, “the lay public, particularly in New York, does not need expert testimony to understand that luxury goods face high demand or that counterfeiting is on the rise. The Second Circuit has made clear that district courts should exclude expert testimony within the jury’s ken, including matters that are frequently in the news.” Any minimal relevance was outweighed by the risk of wasting the jury’s time.

However, Kammel could opine about “how StockX’s authentication practices may make it vulnerable to counterfeiters and the types of harms that companies like Nike experience from counterfeiting.” This opinion was based on “a review of the discovery in this matter, discussions with Nike’s Vice President for Brand Protection and Digital IP, her own experience, and materials from trade associations.” In addition, her opinions on what constitutes authentication, based on the International Organization for Standardization, were “reliable and relevant to StockX’s state of mind.” She was also qualified to opine in rebuttal on how consumers approach the risks of encountering counterfeits in the market.

Nike’s damages expert John Hansen, a forensic accountant, sought to quantify a potential disgorgement award. StockX moved to exclude it because his calculations were based on StockX’s profits from all of its sales of Nike sneakers, not just sales attributable to the allegedly false advertisements. The court rejected that argument: Nike must demonstrate “ ‘economic or reputational injury’ proximately caused by the alleged false advertisement” to establish a false advertising claim. But once that’s established, the court may “award a defendant’s full profits,” not just those directly tied to the violation.

However, his opinion with respect to direct harms to Nike was unreliable and didn’t apply any expert methodology. Lay witnesses and documentary evidence, and the inferences to be drawn from that evidence, could be argued by Nike’s lawyers to establish direct harm to Nike.

Another Nike witness was allowed; he sampled shoes and opined that, in the year prior to his opinion, StockX sold “at least 200,000 shoes ... that were simultaneously offered by Nike for retail sale.”

And a Nike NFT witness was allowed in part. He studied blockchain and cryptocurrency at MIT and has extensive experience in the cryptocurrency sphere. He opined that, while the Vault NFTs were marketed and understood by consumers to be NFTs, they were not true NFTs. He compared the prices of the Vault NFTs to the underlying shoe to argue that consumers believed the Vault NFTs carried additional benefits.

He would be allowed to testify about the technology underlying NFTs, which was appropriate expert testimony subject matter. But his pricing opinion wasn’t based on an explained methodology. He didn’t explain why subtracting the price maxima on possibly different dates was a reliable method of valuing the benefits of the Vault NFTs beyond providing access to the physical shoe; he hadn’t used the approach before nor did he connect it to an accepted method of comparative valuation. His opinion that it was “illogical” for consumers to pay a premium for storing their sneakers with StockX was insufficient. Nike could establish a price premium through documentary evidence and basic logical arguments. Likewise, his opinion on consumer perception of StockX’s Vault NFTs were not based on expert methodology; he relied on StockX documents, including internal materials, and social media posts. This wasn’t beyond the ken of a lay juror; the documents spoke for themselves.

Finally, Nike’s survey witness Itamar Simonson was allowed; he conducted two surveys based on a variation of Eveready that sought to measure whether consumers understood the Vault NFTs to be sold or endorsed by Nike. StockX argued that his methodology wasn’t adaptable to the resale context where resellers may use the original producer’s trademark to describe the product being resold. But resellers don’t have “carte blanche” to use another company’s trademarks, and maybe the use on the Vault NFTs wasn’t permissible. Anyway, even if “Simonson failed to account for the fact that consumers may not be able accurately to identify a seller when presented with more than one trademark, or that the inclusion of more than one trademark may be permissible,” that wouldn’t justify exclusion.

Likewise, his use of a broad universe—people who, inter alia, (1) owned or expected to purchase sneakers; (2) were looking for new investment or collection opportunities; (3) were interested in investing in NFTs, buying collectibles, or investing in cryptocurrency; and (4) previously purchased new products from online resale marketplaces—sufficiently approximated the appropriate population such that this just affected the weight to be given his surveys.

The court didn’t think that the use of “products” when referring to a list that included pictures of four shoes (including one Nike shoe), a watch, a trading card, and an action figure, then repeating the term when asking the test group to describe which company offered the depicted “product / NFT” primed respondents to respond that Nike offered the shoe. Even if it was leading, that again went to weight.

The court also allowed Simonson’s testimony that the Vault NFTs represent an “unauthorized extension of the Nike Brand into [a] new category.” This was offered as a rebuttal to the opinion of StockX’s expert Scott Kominers that the Vault NFTs are not “ ‘digital brand’ NFTs” that serve “as a springboard for establishing a broader product ... brand,” and that to the extent that the Vault NFTs do have a digital brand, “the digital brand is unambiguously that of StockX alone.” This didn’t improperly embrace the ultimate legal issue of whether StockX needed Nike’s permission to sell the Vault NFTs, since his opinion that unauthorized brand extensions caused brand owners to “lose control” of the brand didn’t “purport to opine as to whether such authorization was legally required.”

Team Blood Donor

 Spotted in the wild:

Team Blood Donor "cooling towel" with five colored, overlapping blood drop outlines on label

Inova says, "[t]he Olympic-themed gifts add a fun and engaging element to the donation experience, making it more likely for donors to return and continue supporting our lifesaving mission." Unfair free riding or normal participation in popular culture?

Monday, July 08, 2024

federal preemption for airlines doesn't extend to Delta's "carbon neutral" ads

Berrin v. Delta Air Lines, Inc., 2024 WL 3304815, No. 2:23-cv-04150-MEMF-MRW (D.C. Cal. Mar. 28, 2024)

The court declined to find Berrin’s consumer protection claims against Delta based on its “carbon neutral” advertising preempted by the Airline Deregulation Act (ADA, confusingly enough), though that wasn’t the end of the inquiry.

Since March 2020, Delta has repeatedly touted itself as “the world’s first carbon-neutral airline.” This claim was based on carbon offsetting via participation in the voluntary carbon offset market. Berrin alleged that “foundational issues with the voluntary carbon offset market make it impossible to make a company carbon-neutral with the purchase of offsets.” Scientists and government regulators allegedly identified Delta “as one of many companies who have grossly misstated the actual carbon reduction produced by their carbon offset portfolio.” Berrin alleged she paid a price premium based on the deception, asserting the usual California statutory claims.

The purpose of ADA preemption is to prohibit states from regulating anything “relating to [air carriers’] rates, routes, or services.” However, “ ‘some state actions may affect [airline fares] in too tenuous, remote, or peripheral a manner’ to have pre-emptive effect.” While the Supreme Court has found state regulation dictating what sort of disclosures airlines must make when advertising certain prices to be preempted by the ADA, the Court explicitly stated that it was not addressing “state regulation of the nonprice aspects of fare advertising ...” and that “the connection [there] would obviously be far more tenuous.” (Likewise, the DOT’s regulation of airline advertising is limited to matters under the scope of rates, routes, and services, and thus didn’t have preemptive relevance beyond the ADA in this case.)

American Airlines, Inc. v. Wolens, 513 U.S. 219 (1995), involved claims against an airline’s retrotactive changes in terms and conditions to its frequent flyer program. The Court found that although both Illinois Consumer Fraud Act and contract claims had the same underlying facts—which were clearly related to rates and services—the plaintiffs’ claim was preempted but the contract claim could proceed. The ADA’s preemption clause does not “shelter airlines from suits … seeking recovery solely for the airline’s alleged breach of its own, self-imposed undertakings.” But, Wolens highlighted “the potential for intrusive regulation of airline business practices inherent in state consumer protection legislation” (emphasis added). The court here read this as “implying that there are instances in which such legislation may not be intrusive,” and found “no binding authority that holds that any attempt to regulate airline advertising or any application of consumer protection laws on airlines would be summarily preempted.”

The Ninth Circuit has held that preemption could occur even if a state law’s effect is only indirect, but that “whether direct or indirect, ‘the state laws whose effect is forbidden under federal law are those with a significant impact on [ ] rates, routes, or services.’ ” Thus, state wage and hour laws were not preempted. Concerns for a state “patchwork” of regulations are only relevant to laws “that are significantly ‘related to’ prices, routes and services.” Where “a law does not refer directly to rates, routes, or services,” “the proper inquiry is whether the provision, directly or indirectly, binds the carrier to a particular price, route, or service and thereby interferes with the competitive market forces within the industry.” Meal and rest break laws, for example, “do not set prices, mandate or prohibit certain routes, or tell [ ] carriers what services they may or may not provide, either directly or indirectly.” This is true even if the state law has “some impact on costs or market share,” including laws that “shift[ ] incentives and make[ ] it more costly for [ ] carriers to choose some routes or services relative to others, leading the carriers to reallocate resources or make different business decisions.”

The court here wasn’t holding that false or deceptive advertising regulation in general, or California consumer protection statutes generally, were preempted. Rather, it focused on “carbon neutral” claims, which did not directly refer to rates, routes, or services. Delta would not be “bound to particular rates, routes, or services” if its representations on carbon-neutrality were regulated by state law. The fact that Berrin’s injury was measured by the extra she alleged she paid didn’t mean that her claim was about Delta’s rates (though the court suggested that this injury might be unique to her). More broadly: “Berrin’s claims, if enforced, would not require that Delta should have to set its rates at any particular amount, or that it has to make any claims about carbon neutrality with regards to how it would like to market its flights.” Instead, enforcing the law meant only that “should Delta want to make a claim that it is carbon-neutral, it must actually be carbon-neutral. That damages may be ultimately be calculated in the form of a price premium does not change that the thrust of the claim itself is not an allegation of a price premium.”

Maybe requiring Delta not to advertise falsely about environmental impact could impact the prices it could charge, or increase its costs to meet the standards it claims to follow. But this was insufficient to find the necessary relation to rates for preemption. “Delta has not identified how, if at all, regulation on its carbon-neutrality representations would significantly and necessarily impact the prices they could set.” The court noted that “it is conceivable that Delta could gain market share if it advertised ‘gambling and prostitution’ to consumers. But, the precedent set by the Supreme Court clearly leaves room for states to regulate such advertisement, and suggests it would not be preempted.”

For similar reasons, Berrin’s claims didn’t sufficiently relate to Delta’s services for preemption.

 “[R]egulation on carbon-neutrality would not bind Delta to any particular service.” The complaint was clear that “carbon-neutrality is not achieved through any difference on Delta’s actual flights, which presumably exude the same amount of carbon regardless of how carbon-neutral Delta represents itself to be. … While airlines surely may compete by choosing to offer different services that would affect the travel experience, the Court finds that carbon-neutrality does not qualify as such a ‘service.’” Even if a service were involved, the regulation at issue wouldn’t bind Delta to providing carbon neutral flights, only to make accurate representations about its carbon neutrality.

Nonetheless, the FAL and UCL claims were insufficiently pleaded for lack of standing for equitable relief; the court granted leave to amend. The CLRA claim for damages was adequately alleged.

 

 

plausible critiques of "clinically proven" suffice to plead false advertising

Noriega v. Abbott Laboratories, --- F.Supp.3d ----, 2024 WL 402925, No. 23 Civ. 4014 (PAE) (S.D.N.Y. Feb. 2, 2024)

Noriega alleged that Abbott’s PediaSure falsely advertised that it was “[c]linically proven to help kids grow.” The packaging claim also contains an asterisk directing a consumer to a statement on the labeling that reads, in smaller font: “Studied in children at risk of malnutrition.” The label also includes a cartoon giraffe next to, and exceeding the height of, a cartoon ruler.

example package with "clinically proven" claim circled

On its website, Abbott lists six clinical studies as “references” supporting the statement in its packaging that the Grow and Gain drink is “clinically proven to help kids grow.” The complaint cited three additional studies that, although financed by Abbott and undertaken by Abbott-affiliated researchers, weren’t listed, which allegedly did not find evidence that PediaSure led to an increase in children’s height-to-age or height-to-weight.

Noriega’s own grandson was short for his age; she allegedly paid a premium for it, but after around a year, she stopped, because her grandson, despite ingesting two Grow and Gain Drinks per day, remained short for his age, and had become overweight.

At the motion to dismiss stage, it was plausible that the “clinically proven” claim was false or misleading under NYGBL §§ 349 and 350.

Abbott’s central argument was that the clinical studies cited on its website support that PediaSure has been clinically proven to help kids grow, and therefore it was implausible to term that claim materially misleading. But the complaint alleged “strong, evidence-backed reasons to doubt Abbott’s claim including clinical studies that Noriega suggests may be as or more sound than those Abbott cites.” The complaint made methodological critiques of Abbott’s favored studies, which weren’t implausible. Some of them derived from a published, peer-reviewed paper. And although “identifying flaws in a scientific study does not necessarily make marketing statements based on such a study false or misleading,” “at the motion-to-dismiss phase, it is not the Court’s province to look beneath a facially colorable methodological critique where doing so would require resolving factual disputes and/or making scientific assessments.”

In footnotes, the court said it wasn’t relying on the critique that it was “methodologically improper” to base the “clinically proven” claim on children suffering from malnutrition in foreign countries. Noriega alleged that the nutritional experiences of such children materially differ from those of children in New York State and that “American children ... are not ‘at risk of malnutrition.’ ” “Although Noriega is at liberty to pursue such a theory in this litigation, the Court, in finding the Complaint’s § 349 and § 350 claims plausibly pled, puts aside these dubiously sweeping generalizations about the nutritional experiences of American children.” Relatedly, whether the asterisked disclaimer sufficed to clarify the claim was not suitable for a motion to dismiss.

Although “every clinical study could be criticized in some way,” the complaint here went “well beyond” “nitpicking” to “substantial.”

In addition, the complaint cited published literature disputing the methodologies of several of the studies on which the Abbott label’s effectiveness claim relied. And it cited three allegedly contrary Abbott-funded studies. “[T]he existence of studies contradicting the label’s claim reinforce[s] the plausibility of the Complaint’s allegation that the label would mislead a reasonable consumer.” Discovery was the place to evaluate the merits.

Cases like this serve as implicit rebukes to the Fourth Circuit's unserious GNC decision.

Friday, July 05, 2024

7th Circuit endorses behavioral approach to reasonable consumer standard

Kahn v. Walmart Inc., No. 23-1751 (7th Cir. Jul. 3, 2024)

Kahn alleged that Walmart routinely charged more at the checkout than advertised at the shelf, small amounts individually that add up to hundreds of millions of dollars a year. The district court found that a reasonable consumer would not be deceived because the true charge was printed on their receipt, which they could complain about if they cared. The court of appeals, in classic Seventh Circuit style modulated by behavioral economics instead of classical L&E, reverses, saying a lot of things about reasonable consumers as well as the well-resourced businesses that will fleece them if they can get away with it.

The complaint alleged that, “in 2012, California assessed a $2 million fine against Walmart for violating a 2008 ruling requiring it to resolve pricing errors at checkout. In November 2021, North Carolina fined two Walmart stores after an investigation found repeated and excessive scanning errors that caused overcharges on three to seven percent of items purchased each month. In February 2022, five additional Walmart stores had to pay North Carolina over $15,000 in fines for overcharging consumers due to price scanning errors.”

In Kahn’s case, he bought fifteen items, and was allegedly charged more than listed shelf price on six of them, for ten to fifteen percent markups. The overcharge was $1.89, nearly seven percent of the pretax total of his bill. “Small change for Kahn as an individual, no doubt, but keep in mind the volume of Walmart’s business.” Kahn’s counsel investigated other stores in Illinois, Florida, Indiana, Maryland, New Jersey, New York, and North Carolina finding overcharges.

A key question: is the “reasonable” consumer empirical or normative? You will not be surprised to hear that the Seventh Circuit embraces an empirical view: “Reasonable consumer behavior is not a matter of pure economic theory....  [W]hat matters is ‘how consumers actually behave—how they perceive advertising and how they make decisions.’” Consumers are not required to behave like “Adam Smith’s homo economicus, a perfectly rational being who gathers and evaluates the optimal amount of information about options in the marketplace to maximize utility preferences.” This is because “human cognitive abilities are not perfect or infinite. We have limited time, computational skills, and memories, and we rationally use mental shortcuts to deal with those limits. The classical economic model often fails to predict accurately how real humans will behave in real-life marketplaces.”

Furthermore, “[p]redictable tendencies in consumer behavior mean that retail settings can be engineered to influence consumers in ways they (meaning we) do not fully anticipate or appreciate.” But what about the free market, you might ask? “The market itself usually cannot correct for these problems. Instead, consumer protection regulations are often responses to inefficiencies enabled by market manipulation.” Thus, courts applying the reasonable consumer standard must focus on “how real consumers understand the carefully crafted messages aimed at them.”

Grocery shoppers, in particular, are well-studied, providing plenty of empirical fodder for remand. Especially on a motion to dismiss, courts shouldn’t “overlook the realities of attempts to influence consumer behavior.” Here, the nation’s largest retailer “allegedly stands to profit by hundreds of millions each year from shelf pricing discrepancies.” It was reasonable to assume that it was engaging in a lot of careful consumer research. And “we have often stressed that consumers are likely to exhibit a low degree of care when purchasing low-priced, everyday items.” Such a low degree of care “does not make consumers unreasonable—it makes them human, and even economically rational when search costs and transaction costs are included in the utility calculus. But it also makes them vulnerable to exploitation by unfair and deceptive practices.”

There was “nothing implausible” about allegations that Walmart’s inaccurate shelf prices are likely to deceive a significant portion of reasonable consumers. “It is neither ‘unreasonable’ nor ‘fanciful’ for consumers to believe Walmart will sell them its merchandise at the prices advertised on its shelves.” Indeed, Illinois’s consumer protection statutes assume that consumers rely on advertised prices by specifically singling out “misleading statements of fact concerning the … existence of … price reductions” as deceptive acts. The advertised shelf prices weren’t alleged to have been accompanied by any statements warning they might not be reliable or saying they were provisional. “If shelf prices are not accurate, they are likely to mislead reasonable consumers.” (In a footnote, the court noted that Walmart was wise not to challenge materiality: “Price is obviously a material term of consumer transactions.”)

The district court erred when it concluded that providing a receipt after the transaction dispelled any deception created by Walmart’s facially misleading shelf prices. It reasoned that “Kahn could, and indeed did, use this receipt to compare the prices Walmart charged him with the advertised shelf pricing. This comparison revealed the discrepancy and dispelled any potential deception.”

But, first, providing information after the transaction doesn’t show that the shelf prices wouldn’t have deceived a reasonable consumer. And the district court’s rationale would require unreasonable efforts by consumers to protect themselves. The receipt alone, of course, doesn’t dispel deception. Instead, the consumer has to go back and compare the advertised prices for every item. The court:

Who does that? For obvious reasons, many reasonable consumers will not undertake such audits. Some consumers lack smartphones to photograph the shelf prices as they shop, requiring them to write down or remember dozens of distinct shelf prices. Others lack the time to retrace their steps through the store, comparing their receipts against all the shelf prices. Even if shoppers somehow retain records of each shelf price, at checkout, many are trying to corral young children, others are skimming the tabloid headlines displayed to entice them, and still others are lending a hand to the baggers or pulling out their wallets. Shoppers can easily miss the split-second display of a price or two at checkout. Even if consumers do notice a price discrepancy on a point-of-sale display or on a receipt, they must then raise the issue to the store’s attention to resolve it. It is reasonable to infer that many consumers in that situation would be concerned about holding up the six shoppers in line behind them, reluctant to trouble a busy store manager over a few pennies per item, or unable to spare the time to track that manager down.

Reasonable consumer behavior does not require shoppers to audit their transactions and to overcome those additional hurdles just to ensure that they receive merchandise at the advertised shelf prices.

Consumer protection laws “do not expect or require real consumers to undertake such measures over a few pennies per item. Nor, as plaintiff plausibly alleges, does Walmart expect them to. That is precisely why these alleged price discrepancies may be highly profitable on a large scale and over the long run.” Plaintiffs “are entitled to present evidence on how consumers actually understand these labels” and respond to Walmart’s advertising. Walmart could, of course, attempt to prove that its shoppers have photographic memories and plenty of time to scrutinize receipts.

In addition, Kahn adequately pled that, even where the consumer discovers the discrepancy before completing a purchase, Walmart was engaged in deceptive bait-and-switch pricing. These are injuries that consumers “cannot reasonably avoid,” which come “in the form of higher prices and search costs.”

For similar reasons, Kahn adequately alleged “unfairness” under Illinois consumer protection law. This claim wasn’t necessarily based on fraud, since inaccurate shelf pricing practices could “offend an established public policy, and are immoral, unethical, oppressive, and unscrupulous,” in ways “substantially injurious to consumers.” This was plausible because the sunk costs plausibly leave consumers with little choice but to submit. And a small harm to lots of people can be a substantial injury. Moreover, the FTC reasons that the substantial injury to consumers “is not outweighed by benefits to consumers or competition” because “[t]he practice of advertising prices that are not the full price does not benefit consumers or competition.”

The district court also held that Kahn failed to allege sufficiently that Walmart intended for him to rely on its inaccurate shelf prices. First, Illinois consumer protection law “eliminated the requirement of scienter,” so that “innocent misrepresentations are actionable as statutory fraud.” Kahn needed only to allege that Walmart intended that he rely on its shelf prices, not that it intended to deceive him. He did both. (Under Rule 9(b), scienter can be alleged generally.)

Kahn alleged that “Walmart is well aware that it is deceiving its consumers,” in part because Walmart stores have been fined for this practice in multiple states. “There is nothing implausible about these allegations that Walmart intends consumers to rely on shelf pricing. The contrary proposition seems absurd. Walmart uses shelf pricing to inform consumers of its prices so they can compare items and decide what to buy.” There were no indications that there were disclaimers, which would in any case merely create a fact issue of sufficiency.

Plus, affirmative intent to mislead was plausible. The relevant factors: “Walmart’s size, the hundreds of millions of dollars in profits allegedly available from the pricing discrepancies, and the company’s heavy focus on sales from brick-and-mortar stores.” It was reasonable to infer that Walmart, in particular, had access to consumer research and was “aware of the obstacles that would deter real consumers from trying to hold it to its advertised shelf prices.”

Of course, Walmart sells hundreds of thousands of products, and some errors were inevitable. But error rates can be managed:

We assume that neither courts nor regulators can insist on perfection in retail pricing. They can, however, address how a retailer tries to prevent and remedy discrepancies like those alleged here. Even if some low level of price discrepancies is unavoidable, Walmart is not alleged to have undertaken any preventive or remedial measures to mitigate overcharges, such as by implementing systemic controls.

That made deceptive intent plausible. (What if they try and fail to the tune of hundreds of millions of dollars a year? Who is the cheapest cost avoider? What is the proper remedy?)

Walmart’s best argument was its reliance on Tudor v. Jewel Food Stores, Inc., 288 Ill. App. 3d 207, 681 N.E.2d 6 (1997). Tudor alleged that Jewel violated the consumer protection law because the prices scanned at the cash register differed from the advertised or shelf prices. The state court of appeals found a lack of deceptiveness/lack of intent on the pleadings, which alleged that the store’s internal audits showed the scanned prices were accurate 96% of the time. Also, the complaint pled that Jewel had a “policy providing ‘[i]f the scanned price on any unmarked item is different from the price on the shelf, you will get the item free.’” The “combination” of “the high accuracy rate …, along with the issuance of a receipt and defendant’s policy of providing a money-back guarantee …, indicates there was no deception by defendant.” Nor was Jewel’s conduct “unfair,” since the provision of a receipt and the money-back guarantee meant that “oppressiveness and lack of meaningful choice necessary to establish unfairness” were lacking. These same two factors also indicated that the “defendant did not intend that plaintiff rely on an incorrectly scanned price.”

But Tudor didn’t control where here, the only overlapping exculpatory allegation was that Walmart provided an accurate receipt. Of note, the state of Illinois participated as amicus on Kahn’s side, and the court of appeals predicted that the Illinois Supreme Court, if faced with the allegations in this case, would also distinguish Tudor.

The complaint here didn’t allege a 96% accuracy rate (to be clear, with millions of transactions a year, that’s still a lot of inaccurate charges; it would probably be useful to know how many favored the store). Nor did it allege a money-back policy that went beyond a mere refund and provided the mislabeled item for free: “Offering consumers the full value of the item as a bounty gives them an incentive to look for price discrepancies and shifts the balance of incentives for the retailer closer to optimal deterrence.”

Kahn didn’t sufficiently plead a likelihood of future injury, though, so the court’s remand would allow an opportunity to replead if possible for injunctive relief (the only form available under one of the relevant Illinois laws). “It may be possible for plaintiff to plead a likelihood of future harm, particularly in light of the injuries to consumers routinely caused by bait-and-switch pricing schemes …, such as the time and mental energy reasonable consumers must expend to protect themselves from the alleged unfair and deceptive practices.”