Midjourney can't force Disney to disclose the prompts it used that didn't generate material in complaint

Disney Enterprises, Inc. v. Midjourney, Inc., No. 2:25-cv-05275-JAK-AJR, 2026 WL 2055488 (C.D. Cal. Jun. 15, 2026)

This is what seems like a significant discovery dispute; I’m not an evidence scholar, but there’s interaction with the fair use analysis that copyright folks should attend to.

Plaintiffs sued Midjourney over its image and video generation “diffusion models,” arguing that they infringed both by copying their characters in training and by distributing copies of those characters in images and videos to Midjourney subscribers.

Midjourney sought to compel plaintiffs to produce: “(1) documents concerning their development, use of, and policies regarding generative artificial intelligence (‘AI’) tools for image and video creation, and (2) the complete set of Midjourney prompts and outputs that Plaintiffs (or their agents) used” for the operative complaint. The court granted the request in part for (1) but found (2) was privileged.

Plaintiffs objected to producing documents about third-party datasets they used in connection with any AI tool and similar documents. They agreed to produce nonprivileged responsive documents “sufficient to show instances in which [Plaintiffs] authorized its employees or contractors to use generative AI to generate images and/or video outputs intended for consumers, featuring the asserted works.” As for the prompts, they agreed to produce nonprivileged responsive documents “sufficient to identify the prompts used to create the image[s] generated by Midjourney shown in the complaint and put at issue in this action, and the side-by-side outputs contemporaneously generated in response to such prompts,” but not the prompts that they didn’t choose to include.

Midjourney argued that these discovery requests were relevant to both its defense of fair use, as well as its equitable defense of unclean hands.

Fair use: Midjourney argued that its requests bore on multiple elements of fair use, including transformativeness. But the court didn’t buy its argument that, “if Plaintiffs are developing and deploying diffusion models (employing the same technology, training techniques, and public data as Midjourney), that is a powerful concession that such models produce something fundamentally new and useful—relevant evidence of the transformative nature of that (and Midjourney’s) technology.” After all, Warhol says “the same copying may be fair when used for one purpose but not another.” [But this would be the same purpose, just a different user, no?] The SDNY has agreed that “the relevant inquiry under the first fair use factor concerns a defendant’s use of a plaintiff’s copyrighted material, not a downstream use of defendant’s allegedly infringing material by a copyright-holder plaintiff.” In re OpenAI, Inc., Copyright Infringement Litig., 800 F. Supp. 3d 602, 608 (S.D.N.Y. 2025). Likewise, New York Times Co. v. Microsoft Corp., 757 F. Supp. 3d 594 (S.D.N.Y. 2024), held that the fair-use factors “do not require a court to examine statements or comments a copyright holder may have made about a defendant’s general industry, whether the copyright holder has used tools in the defendant’s general industry, whether the copyright holder has admitted that other uses of its copyrights may or may not constitute fair use, or whether the copyright holder has entered into business relationships with other entities in the defendant’s industry.”

Public benefits (part of factor four after GvO): But GvO “made clear” that balancing the public benefits against the losses to copyright owners would not “always [be] relevant to the application of fair use,” and focused on the consequences of Google’s copying, not anything that the plaintiff (Oracle) did in its own business.

Nor was this evidence relevant to market harm. Relevant discovery would include the loss to plaintiffs and how the challenged use might “kill demand for the original,” as well as discovery directed to Midjourney concerning the public benefits from the copying.

What about industry custom and practice? Wall Data Inc. v. Los Angeles Cnty. Sheriff’s Dep’t, 447 F.3d 769, 778 (9th Cir. 2006), says that courts “should bear in mind that fair use is appropriate where a reasonable copyright owner would have consented to the use, i.e., where the custom or public policy at the time would have defined the use as reasonable.” But that’s dicta. [This is contrary to what one might have thought was happening two decades ago.] Sure, “industry custom and practice may be relevant to the analysis of fair use in a particular case,” but “courts consistently reject the argument that ‘everybody else is doing it’ as a defense to copyright infringement.” This is really about the (narrower) defense of unclean hands.

But the equitable defense of “unclean hands is recognized only rarely, when the plaintiff’s transgression is of serious proportions and relates directly to the subject mater of the infringement action.” Indeed, “the alleged wrongdoing of the plaintiff does not bar relief unless the defendant can show that he has personally been injured by the plaintiff’s conduct.”

Thus, plaintiffs’ development, use of, and policies regarding generative AI were not relevant to the defense of unclean hands because none of the discovery would establish inequitable conduct that is both directly related to plaintiffs’ claims and injured Midjourney. [Other than through preventing competition with this lawsuit.]

Still, the requested discovery was potentially relevant to establishing: (1) the potential market for or value of the copyrighted work; (2) industry custom and practice; and (3) the defense of unclean hands. But plaintiffs agreed to produce documents sufficient to show their business plans, roadmaps, research reports, other studies, and approvals of their actual or proposed development or training of generative AI intended for consumers, including their contractors’ authorized use of generative AI intended for consumers, as well as documents about some related matters. That was enough. Documents related to the actual or proposed development of generative AI not intended for consumers were not relevant, or not enough to be proportional. However, the court granted the motion to compel plaintiffs to also produce documents sufficient to show plaintiffs’ approval of the use of generative AI to generate images and/or video outputs intended for consumers, featuring the asserted works, which is relevant to the market-harm factor.

Requests for training-related documents had some relevance to establishing industry custom and practice, but had to be narrowed to focus on actual or proposed development of generative AI intended for consumers. “By contrast, Plaintiffs’ training of generative AI tools not intended for consumers would not provide evidence of industry customs and practices that would be relevant to Defendant’s defense of fair use,” or, if relevant, not enough to justify the burden of production. Thus, plaintiffs needed to produce non-privileged responsive documents sufficient to show their “development, training, or contemplated development or training of any generative AI to generate images and/or video outputs intended for consumers, featuring the asserted works, including training datasets, datasources, or model weights.”

Midjourney prompts: Plaintiffs agreed to produce documents sufficient to identify the prompts used to create the images generated by Midjourney shown in the operative complaints, as well as the side-by-side outputs contemporaneously generated in response to such prompts.

Midjourney argued that “withholding prompts and outputs related to images not used in the operative complaints would allow Plaintiffs to artificially inflate the universe of allegedly infringing outputs, distort the damages calculus, or misrepresent their own engineered images as examples of third-party infringement.” But “the volume of prompts and outputs related to images generated for potential use in the operative complaints, but not actually used, is infinitesimal compared to the true scope of this case which involves tens of millions of subscriber prompts associated with Plaintiffs’ copyrighted works.” Given the current statistical sampling protocol that the parties are finalizing, withholding the prompts wouldn’t distort a damages award.

The non-used prompts and outputs were protected work product.  The work-product doctrine protects “from discovery documents and tangible things prepared by a party or his representative in anticipation of litigation.” This was “classic” pre-suit investigation and efforts to prepare the operative complaints. Such unused prompts and outputs were “core” work product because they necessarily reveal counsel’s “mental impressions, conclusions, opinions, or legal theories developed in anticipation of litigation.” This kind of opinion work product “is virtually undiscoverable.” 

Midjourney argued that plaintiffs waived protection by submitting prompts to Midjourney in the first place because Midjourney’s Terms of Service make prompts and outputs public by default and grant Midjourney a license to reproduce, prepare derivative works of, publicly display, publicly perform, sublicense, and distribute their inputs. But “waiver of attorney work-product protection requires more than the disclosure of confidential information, it requires an act inconsistent with the adversary system.” Pre-suit investigation was not inconsistent with the adversary system. Nothing stops Midjourney from conducting its own investigation of prompts submitted by plaintiffs and their counsel, though.

“Accepting Defendant’s view of selective disclosure would virtually eliminate the protection for attorney work product in the context of any court filing because every court filing inherently reflects strategic choices of counsel in what facts to include and even what legal arguments to make.”

Comment: If you believe, as many people seem to, that “how hard was it to get the model to generate an allegedly infringing output?” is a relevant question, then the rulings here make it harder to conduct that inquiry. I’m no evidence expert, but the ruling seems to make probabilistic/guardrails inquiries off-limits to fair use, which seems directionally wrong to me. (Burden-shifting might help—one could say that if the defendant puts in evidence that it tried to make it hard to generate infringing outputs, then the plaintiff has to do more to show that those guardrails didn’t work, which wouldn’t necessarily require disclosure of attorney work product. This is my optimistic reading of the reference to the millions of prompts at issue in this case.)

bad Lanham Act claim, swept up with bad patent claim, triggers Rule 11 sanctions

Raydiant Oximetry, Inc. v. ALC Medical Holdings LLC, --- F.Supp.3d ----, 2025 WL 3022882, No. 25-cv-00392-VC (N.D. Cal. Oct. 29, 2025)

Baseless patent and false advertising claims produce a big Rule 11 award. The patent stuff is eye-popping, and it’s hard to imagine that Rule 11 would have been appropriate just for the false advertising claim, which was baseless only because the challenged statements didn’t occur in “commercial advertising and promotion”/weren’t part of an organized campaign to penetrate the market. But still—a warning!

I’ll let the court introduce the facts:

This dispute began when ALC Medical Holdings sent Raydiant Oximetry a demand letter alleging that Raydiant’s medical device [a uterine device used to treat postpartum hemorrhaging] infringed ALC Medical’s patent. This accusation was false. Raydiant’s device has a “placement marker” that is permanently affixed, while the device claimed in ALC Medical’s patent requires an adjustable placement marker. In fact, the Patent and Trademark Office declined to approve the patent application until it was narrowed to require that the placement marker be adjustable.

Unfortunately, patent plaintiffs send baseless demand letters to defendants with some regularity. But this was no ordinary fishing expedition. To the contrary, all evidence available to ALC Medical and its lawyers at the time they sent the letter pointed strongly towards noninfringement. The sole founder of ALC Medical, Jennifer West, used to work at Raydiant. She helped develop Raydiant’s device and knew that it did not have a moveable placement marker. There was a reason for this design choice: Raydiant concluded that if the device’s placement marker were moveable, it would be dangerous to the patients who use it. Presumably for the same reason, the device West developed after she left Raydiant does not contain a moveable placement marker, even though her company’s patent requires one.

Thus, when Raydiant brought an action in this Court seeking a declaratory judgment of noninfringement, ALC Medical and its lawyers should have apologized and walked away.… Instead, they doubled down. They brought counterclaims against Raydiant, including one for infringement, asserting again that Raydiant’s device possessed a moveable placement marker. They also falsely alleged that West’s own device practiced the invention—that is, that her device had a moveable placement marker.

In support of the infringement counterclaim, ALC Medical and its lawyers submitted several diagrams depicting Raydiant’s device. On each diagram, they cited the YouTube video of a presentation Raydiant gave at an industry conference, indicating that the diagrams originated from the slide deck used in that presentation. But that was not entirely true. The lawyers manipulated one of the diagrams, superimposing dotted lines to make it seem like Raydiant’s device had a moveable placement marker. Nothing in Raydiant’s actual slide deck or the video of the presentation suggested that was the case.

Subsequently, Raydiant allowed ALC Medical and its lawyers to inspect the device. The inspection confirmed what all the evidence had previously suggested: the placement marker was not moveable…. ALC Medical and its lawyers … embarked on a ham-fisted scramble to avoid liability for Raydiant’s attorneys’ fees. First, they refused to dismiss their infringement counterclaim (or their equally frivolous false advertising counterclaim) unless Raydiant also agreed to dismiss its declaratory judgment action, with each side to bear its own fees and costs. Naturally, Raydiant refused. Then, ALC Medical and its lawyers filed a frivolous motion to dismiss Raydiant’s declaratory relief action for lack of jurisdiction, claiming falsely that Raydiant’s device was an “investigational device” immune from infringement claims. Later, they cobbled together a covenant not to sue that they argued mooted Raydiant’s declaratory relief claim, even though it clearly did not. At each step of the way, the position taken by ALC Medical and its lawyers became increasingly disconnected from the reality of the situation ….

Raydiant was awarded over $1.4 million in attorneys’ fees, with ALC Medical and its law firm Womble Bond jointly and severally liable.

The false advertising counterclaim was based on Raydiant’s presentation of its device at the Stanford Medicine Pediatric & Maternal Innovation Showcase, a pitch competition. Sanctions are warranted under Rule 11 if “(1) ‘the [challenged pleading, written motion, or other paper] is legally or factually baseless from an objective perspective,’ and (2) the attorneys failed to conduct ‘a reasonable and competent inquiry before signing and filing [it].’ ” The court found that both counterclaims “easily [met] this test.”

Just a bit from the patent discussion: Womble Bond denied bad faith in submitting the altered exhibit, asserting that the annotated dashed lines were made with a different font and in red color to distinguish the exhibit from the original slide. “This is difficult to swallow, particularly because counsel only submitted a black and white copy of its counterclaims to the Court, and the two fonts apparently used on [the exhibit] are not easily distinguishable. If Womble Bond and ALC Medical had truly been concerned about not misleading the Court, as opposed to disguising the baselessness of the infringement counterclaim, they could have easily included a disclaimer alongside the image clarifying that it had been annotated.” Practice tip ahoy!  

The Lanham Act counterclaim alleged that Raydiant’s discussion at the pitch session of its device’s being “cleared” or “approved” by the FDA was misleading because the device is a Class II device exempt from premarket notification requirements. “ALC Medical and its counsel knew or should have known that the claim was objectively baseless under Ninth Circuit law,” because only “commercial advertising or promotion” is actionable under 15 U.S.C. § 1125(a)(1)(B). This requires: (1) commercial speech; (2) made by a defendant who is in competition with the plaintiff [note that this is not necessary post-Lexmark]; (3) for the purpose of influencing consumers to buy the defendant’s goods or services; and (4) “disseminated sufficiently to the relevant purchasing public to constitute ‘advertising’ or ‘promotion’ within that industry.” A presentation at a one-off grant competition, “clearly” does not constitute “commercial advertising or promotion” under that definition. The court distinguished cases involving a press release and a conference presentation whose slides were posted on the defendant’s website. The pitch competition was more akin to “private statements made to actual and potential customers” that were insufficient to constitute sufficient dissemination. Thus, the counterclaim was “frivolous from the time it was filed.”

 

9th Circuit affirms class status based on materiality of claim in product name

Noohi v. Johnson & Johnson Consumer Inc., --- F.4th ----, 2025 WL 2089582, No. 23-55190 (9th Cir. Jul. 25, 2025)

J&J sells Neutrogena Oil-Free Face Moisturizer for Sensitive Skin. The district court certified a class in a consumer protection case brought by Noohi, who alleges that, despite the name, Neutrogena Oil-Free Face Moisturizer for Sensitive Skin contains oils and oil-based ingredients (ethylhexyl palmitate and soybean sterols). The court of appeals affirmed the certification.

Noohi’s expert Hickner, a professor of materials science and engineering, opined that, although “oil” lacks a standard scientific definition, the term generally refers to a “naturally-derived, chemically synthesized, or petrochemically-refined slippery ... substance” that is hydrophobic—meaning that it does not mix with water—and more viscous than water, but less dense. Dr. Hickner opined that, based on their chemical structures and physical properties, ethylhexyl palmitate and soybean sterols are oils with oil-like physical properties.

Her expert Roberts, an econometrics expert, described his proposed process for measuring class members’ damages by calculating the economic value to consumers of the “oil-free” statement: qualitative market research designed to uncover consumers’ understanding of and response to the “oil-free” label, plus quantitative surveying and market analysis to measure the economic value to consumers of the “oil-free” statement.

J&J contested the evidentiary value of both experts’ proposed testimony and submitted competing expert declarations for both.

First, the district court could properly accept the proposed damages model of Noohi’s economic expert. The Ninth Circuit has held that “class action plaintiffs may rely on a reliable though not-yet-executed damages model to demonstrate that damages are susceptible to common proof so long as the district court finds that the model is reliable and, if applied to the proposed class, will be able to calculate damages in a manner common to the class at trial.” The district court did not abuse its discretion in finding the proposed damages model fit Noohi’s theory of harm and was sufficient for purposes of class certification.

For measuring the price premium, Dr. Roberts proposed to show survey participants the product and ask at what prices they would find it “too inexpensive to be considered, a good value, expensive but still worth considering, and finally, too expensive to be considered.” Dr. Roberts would introduce information “challenging the ‘oil-free’ claim,” e.g. by telling participants that the ingredients contained extracts of soybean and palm oil. Then the survey would ask the price question again. He proposed to use regression analysis to determine the percent of the product’s overall price associated with the phrase “oil-free.” Courts have approved of similar “benefit-of-the-bargain” damages models in deceptive marketing cases under California law.

Dr. Roberts also proposed to measure “softer” kinds of harms consumers might experience, such as changes to “overall consumer satisfaction, brand loyalty, willingness to recommend [the Product], and repurchase intent.” He proposed questions about their attitudes towards and impressions of the product before and after the “exposure.” He would use “multivariate statistic[al]” analysis to quantify the changes in respondents’ perceptions of the Product. That would include damages beyond a price premium. But that didn’t make the problem unusable. The problem only comes when a model proposes to measure damages not associated with the plaintiffs’ theory of harm that can’t be separated from damages tied to the plaintiff’s theory. So all Roberts had to do to solve the problem was … not ask those questions.

J&J also argued that rather than comparing what consumers are willing to pay before and after they learn that the Product is not “oil-fee,” Roberts should compare “what consumers paid for ‘Neutrogena’s Oil-Free Face Moisturizer for Sensitive Skin’ and what they would have been willing to pay for ‘Neutrogena’s Face Moisturizer for Sensitive Skin,’ holding everything else about the product’s performance and packaging (other than the ‘oil-free’ claim) constant.” Dr. Roberts’ model, J&J argued, would improperly include the “emotional value” that consumers associate with learning that the “Product’s label contains a lie.”  But “California law does not prescribe any specific means of measuring a price premium for purposes of actual damages or restitution. In fact, ‘[c]lass wide damages calculations under the UCL, FAL, and CLRA are particularly forgiving.’” All that was required was “some reasonable basis of computation.”

“There is no talismanic means of measuring damages for deceptive marketing claims under California consumer protection law.” Conjoint analysis is ok, as is “contingent valuation analysis,” which is similar to Dr. Roberts’ proposed methodology in that it varies the features of a single product by presenting new information about the product and asks survey participants to “directly report what they are willing to pay for it.”

True, surveys might be badly done and inflate damages or fail to replicate purchase conditions. But Dr. Roberts recognized those risks in his deposition and rejected telling survey participants “you were lied to.” “Should Dr. Roberts’ execution of the survey fall short of that mark, [J&J] may explore that failure at summary judgment, in a renewed Daubert motion, or during cross-examination at trial.” At the class certification stage, the key inquiry was simply whether Noohi has “demonstrated the nexus between [her] legal theory ... and [her] damages model.” Whether the proposed calculation of the price premium would be accurate was a “merits inquir[y] unrelated to class certification.”

Second, materiality and reliance were susceptible to common proof. “Materiality, and therefore an inference of reliance, can be established by reference to an objective, reasonable consumer standard, and so in this case may be proven in a way common to the class.” It is for this reason that class actions asserting the usual California claims are generally “ideal for class certification.”

The presumption was rebuttable, but the district court didn’t abuse its discretion in finding the presumption to be unrebutted. “If the misrepresentation or omission is not material as to all class members, the issue of reliance ‘would vary from consumer to consumer’ and the class should not be certified.” Here, the district court also relied on the undisputed evidence of classwide exposure to the “oil-free” language prominently displayed on the front of the packaging. In determining material misleadingness under California law, “the primary evidence ... is the advertising itself.” The court was quite plaintiff-favorable here, as its understanding of California law required:

It is hard to imagine that consumers would purchase a product labeled “Oil-Free Moisture” without regard to whether the product was free from oil. If, somehow, the evidence later shows that a reasonable consumer would not have found the product’s name to be material to their purchase decision, “the failure of proof on the element of materiality would end the case for one and for all; no claim would remain in which individual reliance issues could potentially predominate.” 

Given the objective standard for materiality and the undisputed evidence of classwide exposure, Noohi is entitled to the inference that reliance can be shown via common proof.

J&J argued that “oil-free” might have multiple different interpretations: doesn’t contain oils, doesn’t contain ingredients derived from oils, or doesn’t perform in a way consumers consider “oily.” But J&J didn’t offer persuasive evidence of this variance, only Noohi’s testimony as to her motivations for purchasing and the expert report of a dermatologist as to the dermatologic uses of oil-free products. That didn’t show variance within the class.

Second, even if understanding of “oil-free” varies across the class, J&J didn’t explain why that would undermine the commonality of materiality based on a reasonable consumer standard, or rebut the inference of reliance. In cases reaching the opposite conclusion, “a sizable portion of the class either were not misled by the statements or would not have found the misrepresentations to be material had they known the truth.” As opposed to showing that “oil-free” didn’t affect the purchase decision, J&J’s evidence at most showed that it “affected the purchase decision of class members—and so was material—for different reasons.” J&J offered no evidence that “a consumer who thought ‘oil-free’ meant ‘without oils’ was any more or less likely to be affected in their purchase decision than someone who thought it meant ‘without oil derivatives’ or not tactilely ‘oily.’” Thus, J&J’s argument didn’t undermine the idea that materiality was susceptible to common proof:

The baseline inquiry is whether the statement was material to a reasonable person. An affirmative answer to that question gives rise to an inference of reliance. A showing that for some portion of a class that statement was not in fact material upsets that inference. But a showing that a statement was material to different class members in different ways does not.

In California, “a plaintiff need not establish at the class certification stage that class members share a uniform understanding of the contested term.”

J&J also argued that it defeated the inference of reliance by showing that 30% of purchases were repeat purchases. (One thing that could be useful in a false advertising case would be to know whether that was a low percentage for a personal care product, or a high one.) “The existence of repeat purchasers does not defeat the inference of reliance. There is no indication that the repeat purchasers knew that the Product was not oil-free and purchased it anyway.” Plus, for reliance under California law, a misrepresentation need not be “the sole or even the decisive cause of the injury-producing conduct.”

5th Circuit discounts confusion caused by overlap in commonly used arbitrary word

Rampart Resources, Inc. v. Rampart/Wurth Holding, Inc., No. 24-30111, 2025 WL 586820 (5^th Cir. Feb. 24, 2025)

District court’s denial of preliminary injunction discussed here. Rampart Resources provides real estate and property management services in Louisiana, Texas, Arkansas, Mississippi, Alabama, West Virginia, and Ohio. Its services relate to right-of-way acquisition, servitudes, real estate brokerage, permitting, and property management—across several industries, including utilities, oil and gas, renewable energy, and public works. It has a 2018 registration for those services for “the stylized wording ‘RAMPART RESOURCES’ to the right of a graphic image of a road going into the horizon, with a road curving off to the right and left of the main road.” “To be clear, Rampart Resources does not have a trademark for the word ‘Rampart’ or ‘Rampart Resources.’”

Rampart/Wurth offers commercial and residential property management services throughout Louisiana, Texas, Mississippi, and Alabama. Its services cover multifamily, single-family, office, retail, and receiver/keeper properties; it uses different logos to refer to Rampart Multifamily Management and Rampart Commercial Management.

Rampart Resources found out about Rampart/Wurth’s recent adoption of that name change in September 2023 when a FedEx driver told its president that “another Rampart” had just opened in Baton Rouge and that she had confused the two businesses.

Rampart Resources received at least seven telephone calls in September and October 2023 from individuals inquiring about rent collection, leasing units, Section 8 housing vouchers, lease payments, and refunding deposits. After being told they must have the wrong number, customers responded, “this is the home office of Rampart, correct?” and “this is the number I got for Rampart.”

On appeal, the standard was abuse of discretion. “As to each element of the district court’s preliminary-injunction analysis ... the district court’s findings of fact are subject to a clearly-erroneous standard of review, while conclusions of law are subject to broad review and will be reversed if incorrect.” Here, the appeal failed on likely success on the merits.

The district court found that the type of mark/mark strength, similarity of products/services, and evidence of actual confusion weighed in favor of likely confusion; similarity of marks, consumer overlap, and degree of care of potential purchasers weighed against; and advertising media/defendant’s intent were neutral.

Rampart Resources argued that mark strength should weigh heavily in its favor, not just slightly as the district court held. Although the mark was arbitrary, and although Rampart Resources had used it for 34 years, Rampart/Wurth provided evidence of widespread use of the key portion (Rampart). This was not clear error.

Mark similarity: “It is visually apparent that all aspects of the marks (font, color, design, etc.) are different except the use of the singular word ‘Rampart.’ The common use of the word ‘Rampart’ does not make the marks similar when considering ‘the total effect of designation.’”

Similarity of services: the district court found only a minor overlap and didn’t weigh it heavily in Rampart Resources’ favor. “The district court correctly concluded that while both parties operate broadly in the real estate industry, there is not substantial overlap between the services offered.”

But, when there isn’t direct competition, “the confusion at issue is one of sponsorship, affiliation, or connection.” The critical question, the court of appeals said, is “whether the consuming public would believe that the natural tendency of [Rampart Resources]” would be “to expand into the [property management industry].” “Here, the district court found that it would be reasonable for a customer of Rampart Resources to believe it was making a foray into property management, since they have offered property management services in the past and represent that they are still capable of doing so.” Weighing this factor in favor of a likelihood of confusion, but only somewhat, not heavily, was plausible based on the record.

Advertising media: “Both parties stated that word of mouth advertising is perhaps their strongest form of advertising…. Although both parties represented they use face-to-face communications and website advertising, the district court is correct that the evidence presented for this digit is scant.” Finding the factor neutral was not an abuse of discretion.

Actual confusion: While swayed purchases are not necessary, “more is required when the confusion did not or cannot sway purchases.”  “[N]ot all confusion counts: evidence of actual confusion must show ‘more than a fleeting mix-up of names’; rather it must show that ‘[t]he confusion was caused by the trademarks employed and it swayed consumer purchases.’ ” Here, seven misdirected phone calls and the FedEx driver’s confusion was not weighty when evaluated in light of “the high volume of business conducted by the parties and the fact that there was no evidence that any of Rampart Resources’ customers had erroneously contacted Rampart/Wurth.” The court of appeals agreed.

Interestingly, the court found it “[m]ost important[]” that

there is no evidence that any of the eight incidents of actual confusion were related to Rampart/Wurth’s logo or conduct. None of Rampart Resources’ anecdotal evidence shows that parties were confused by the trademarks at issue in this case. Rampart Resources does not have a trademark on the word “Rampart.” Our court has rejected strictly anecdotal evidence where “the proponent did not show that ‘a misleading representation by [the defendant], as opposed to some other source, caused a likelihood of confusion.’ ”

[This is a covert way of saying that, if the confusion was caused by the overlap in “Rampart,” too bad for plaintiff—a purely empirical vision of trademark would say that if the confusion was caused by the overlap, then plaintiff’s rights would extend past its registration to other uses. But there is never a purely empirical account of trademark, much as courts often pretend otherwise. Also: How insulted do you think the Fifth Circuit would be to hear that this is a very European way of looking at it?]

Still, it wasn’t abuse of discretion to weigh actual confusion slightly in the plaintiff’s favor, even though the only evidence showed a “fleeting mix-up of names,” and not that any party was “actual[ly] confus[ed] about the origin of the parties’ products.”

There was no clear error in weighing the factors.  The district court found that the dissimilarity of the marks, as well as the sophistication of the clients weighed most heavily against a finding of likelihood of confusion. Given that each digit “may weigh differently from case to case,” that wasn’t clear error.

 

 

 

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.”

Claims that timeshare exit services are legal and effective were not puffery

Bluegreen Vacations Unlimited, Inc. v. Timeshare Lawyers P.A., 2021 WL 3552175, No. 20-24681-Civ-Scola (S.D. Fla. Aug. 11, 2021)

Another timeshare versus timeshare exit false advertising case. Marketing Defendants allegedly falsely advertise timeshare exit services by promoting a legitimate process to exit timeshare contracts. The Marketing Defendants allegedly advertise their services on the Third-Party Marketing Defendants’ websites that rate various timeshare exit companies. The Lawyer Defendants allegedly execute a letter directed to Bluegreen that is intended to “cut off any communication between Bluegreen and the Bluegreen timeshare owners, and constitutes the entirety of the ‘service’ the Lawyer Defendants perform.” And the Credit Repair Defendants allegedly manipulate the timeshare owners’ credit reports and remove negative trade lines related to the timeshare owner’s default on the timeshare contracts and file false police reports claiming identify theft on behalf of timeshare owners to discourage credit bureaus from reporting negative information.

This opinion considered only the marketing defendants. First, the court rejected the argument that Rule 9(b) applied to the false advertising claims. Noting only that local courts “tend to apply Rule 8 when addressing motions to dismiss claims under the Lanham Act,” the court followed that trend. And it found that the particularity requirements of Rule 9(b) do not apply to the FDUPTA claims. Under FDUPTA, “the proscription against unfair and deceptive acts and practices sweeps far more broadly than the doctrine of fraud or negligent misrepresentation, which asks only whether a representation was technically accurate in all material respects.” And because “FDUTPA’s elements are more particularized than those of common law fraud,” Rule 9(b)’s concerns with subjecting defendants to unfounded allegations of fraud are lessened by the required specificity. Because “FDUTPA claims seek a remedy for conduct distinct from traditional common law torts such as fraud[,]” “the uniqueness of the cause of action place[s] it outside the ambit of Rule 9(b).”

So too with tortious interference.

There is in general a division among courts on the pleading standard for state consumer protection claims; I wonder if there's any correlation between whether the defendants are, in the court's perception, ordinary advertisers, and the results.

Bluegreen also stated a claim for Lanham Act false advertising by alleging that the Marketing Defendants falsely claimed their services were legal and effective: “Our team at Timeshare Compliance as has a proven track record of persuading developers to exit timeshare contracts. We will remove all liability from your timeshare contract.” They advertised a “proprietary strategy of resolving timeshare contracts,” which was allegedly “to trick timeshare owners to withhold payments to Bluegreen and to hide their fraud through credit repair services and letters from lawyers falsely affirming the legality of the Marketing Defendant’s services.” Their cold calls allegedly said that “TSC’s service permits the Bluegreen owner to safely stop payments to Bluegreen” and that “the Bluegreen owner is guaranteed to receive a legal release from their timeshare obligation.” Evidence of misleadingness or of specific timeshare owners fooled by the scheme wasn’t required at this stage.

This wasn’t puffery/opinion: Claims about “a 100% guarantee and top ratings, as well as advertisements that owners would not be liable at all under the timeshare contracts could constitute facts on which a consumer may rely.”

The other claims survived too.

false advertising as compulsory counterclaim

Creative Impact Inc. v. MGA Entertainment, Inc., 2019 WL 7906430, No. CV 19-07009 AG (ASx) (C.D. Cal. Nov. 4, 2019)

The parties compete in the toy business. Creative Impact makes 5 Surprise, while MGA makes a similar toy called L.O.L. Surprise! In July 2019, MGA sued plaintiff Zuru in California state court alleging state law trade dress and trademark infringement claims.

Six days later, MGA’s CEO posted several messages on LinkedIn, such as, “ZURU Toy Company #Thieves of the Year of others #IP. Just look at the pictures. WHY are retailers supporting these thieves? I don’t get it.” Plaintiffs then sued for false advertising under the Lanham Act and other claims based on these posts, as well as on the IP issues in the state court dispute.

Under the circumstances, the Lanham Act claim was a compulsory counterclaim in the earlier-filed state court action.  Under California law, a “related” cause of action has to be alleged in a cross-complaint. A claim is “related” if it “arises out of the same transaction, occurrence, or series of transactions or occurrences” as the claims asserted in the earlier-filed complaint; this is to be “liberally construed” to accomplish the statute’s purpose “of avoiding a multiplicity of actions” through “piecemeal” litigation.

Here, the thrust of the state court complaint was that plaintiffs’ 5 Surprise toys infringe MGA’s trademark and trade dress in L.O.L. Surprise! Toys. The false advertising claim was “logically interrelated” because it was based on statements that “reiterate the core allegations of Defendant’s state court complaint—namely, that Plaintiffs are infringing on Defendant’s trademark and trade dress rights.” There were some additional relevant facts, but perfect factual overlap isn’t necessary. The Lanham Act claim “shares enough of a logical relationship with Defendant’s state law claims to be considered part of the same series of transactions or occurrences,” especially given the proximity in time between the state court suit and the statements and given that Creative can only win its false advertising claim by also defeating MGA’s infringement claim; otherwise the challenged statements aren’t false. That legal relationship speaks directly to the purpose of avoiding piecemeal litigation.

The presence of an additional plaintiff didn’t help in these circumstances, where the two plaintiffs were part of the same group of companies and constitute a single larger entity together. Fortunately for plaintiffs, they probably can still add a counterclaim, given California’s liberal approach to amending to add compulsory counterclaims.

Alkaline water false advertising claim is unappetizing, court rules

Weiss v. Trader Joe’s Co., No. 8:18-cv-01130-JLS-GJS, 2018 WL 6340758 (C.D. Cal. Nov. 20, 2018)

Trader Joe’s sells Alkaline Water, whose label includes:

• “pH 9.5 +”

• “Our Alkaline Water + Electrolytes is ionized to pH 9.5+.”

• “pH is the measure of acidity and alkalinity. The higher the pH, the greater the alkalinity.”

• “ionized to achieve the perfect balance”

• “refresh & hydrate”

• “hundreds of plus symbols” on the label

Trader Joe’s flyer touting Alkaline Water said:

• “Whether you’ve just eaten an abundance of corn or cranberries (foods high in acid); or you’ve been sweating profusely; and/or you’ve been reading this Flyer (because obviously that would make you thirsty) our Alkaline Water + Electrolytes is a drink that can satisfy.”

• “The mineralized water is purified through reverse osmosis, then run through electric currents (electrolysis), which changes the structure of the water and raises the pH to 9.5+ (neutral pH of water is 7).”

• “Trader Joe’s Alkaline Water + Electrolytes is water and then some.”

Weiss alleged that the label misled her to believe that the Water was a “superior source of hydration” and could help “balance pH internally.” She further alleged that the Alkaline Water does not actually have a 9.5 pH balance and that “the actual pH at the time of purchase and consumption was far less on the pH scale.” She brought the usual California claims.

The court found that this was all puffery except the “not 9.5 pH” part, and that wasn’t sufficiently pled, a holding I find dubious.

Initially, some of the complaint alleged lack of substantiation of the purported health benefits, which isn’t actionable by private parties under California law. The label and marketing also didn’t make the health claims she identified, because it was mostly mere puffery. E.g., “refresh” was “a vague, generalized assertion incapable of being proved false or of being reasonably interpreted as a statement of objective fact,” as were the plus symbols. Nor did the label claim to be a superior source of hydration, just a source. The “ionized to achieve the perfect balance” claim didn’t claim that consumers would become perfectly balanced or tout any health benefits from the perfect balance.

As for the flyer touting the water as good “[w]hether you’ve just eaten an abundance of corn or cranberries (foods high in acid); or you’ve been sweating profusely,” there was still no health benefit claim.  I think this ignores the effects of implicature. Why would it be relevant to whether you should choose this water that you’ve been eating foods high in acid?  There’s no reason to mention that other than to imply that the water you drink should “balance” your acidity (an impossible task in my case, I fear). But because the flyer finished by claiming to “satisfy,” it was mere puffery. As for “water and then some,” it followed the description of the water as containing 0.1% “minerals (electrolytes), harvested from the lake region of Utah.”

The 9.5 pH claim was factual and falsifiable. However, Weiss failed to plead with particularity “how she came to believe that the representation is false.” That’s a diversion, mostly corrected in the court’s ultimate analysis. We really don’t care how she came to believe that it’s false, or even if she did come to believe that—her belief in falsity is not an element of her claim. We care whether the statement was false. 

And as with so many Twiqbal issues this is all about the court’s common sense: pleading that the pH was not 9.5 is a factual allegation. Is that plausible? Sure, why couldn’t water not have pH 9.5?  Apparently much water doesn’t, according to TJ’s itself. However, the court wants a “basis” for the assertion of falsity. “Even assuming that viewing videos on the internet or personally testing the pH balance of the Water is enough to support her claim,” that wasn’t in the complaint, and the complaint needed to specify when the pH wasn’t 9.5—at bottling, at purchase, or at consumption.  In a footnote, the court warned: “The Court seriously questions Plaintiff’s decision to bring this suit if the only support she has for this claim is what she has seen on the internet, or her own rudimentary testing. Further, the Court reminds Plaintiff’s counsel that attorneys are subject to sanctions under Rule 11 when they present ‘factual contentions [that] have [no] evidentiary support or ... will [not] likely have evidentiary support after a reasonable opportunity for further investigation or discovery[.]’”

false advertising claim needs to talk about asterisks to plead with particularity

Anthony v. Pharmavite, 2019 WL 109446, No. 18-cv-02636-EMC (N.D. Cal. Jan. 4, 2019)

Despite generally favorable substantive rulings for plaintiffs, the court dismisses the complaint for false advertising of a nutrition supplement for failure to plead with particularity under Rule 9(b), specifically for failing to discuss the asterisks on the claims at issue.

Pharmavite represents that its biotin supplements “may help support healthy hair, skin and nails.” Each health benefit representation on a label includes either an asterisk and obelisk (*†) or two obelisks (†‡), which I will shorthand as asterisks. The relevant references are to a disclaimer on the back of a label that says: “Biotin may help support healthy hair, skin, and nails in those that are biotin deficient”  or “May help support healthy hair, skin and nails in those deficient in biotin.”  This is allegedly misleading because “most people obtain more than enough biotin from their daily diets, so biotin supplements are unneeded, superfluous, and will provide no health benefits. Only a minuscule percentage of individuals with biotin deficiencies could potentially benefit from biotin supplements.” Allegedly, “[o]nce there is sufficient biotin in the body, any additional supplements are superfluous and the body ultimately excretes them.” The only benefits would come to people with  “exceedingly rare conditions that cause ... biotin deficiencies—less than [0.00138] percent of the population.”

Whether a reasonable consumer would be misled by the labeling could not be resolved as a matter of law, given the prominence of the claim to “help support healthy hair, skin and nails.” “A reasonable consumer, representing a significant portion of the population, could understand this representation to mean that there is a possibility that he/she will experience benefits to his/her hair, skin, and nails from using the Biotin Products.”  [It is extremely unlikely that “may” moderates this much if at all.]  As alleged, the vast majority of the population can’t benefit, so “for virtually all consumers, the term ‘may’ overstates the chances of obtaining any benefit.” Qualifying words like “may” may be relevant to the reasonable consumer’s understanding [cases cited, but not consumer research—plaintiffs might be well advised to plead that “may” doesn’t matter!] but that could still be misleading. “A reasonable consumer could understand ‘may’ to mean a reasonable possibility or a reasonable probability, rather than merely a vanishingly small possibility on the order of 0.00138 percent.” 

As for the deficiency disclaimers, there was a question of fact about whether a reasonable consumer would notice it and continue on to the disclaimer. The Ninth Circuit has rejected the premise that “reasonable consumers should be expected to look beyond misleading representations on the front of the box to discover the truth from the ... small print on the side of the box.”  There was a separate question about whether the substance of the disclaimer was any use. “For instance, the disclaimer does not state that the Biotin Products would not benefit those who are not biotin deficient. Nor does it explain that exceedingly few people are in fact biotin deficient. A reasonable consumer, experiencing hair, skin or nail problems, might plausibly believe he or she has a biotin deficiency or would otherwise benefit from the product.” [Cf. the old Geritol case, where Geritol advertised that it could alleviate fatigue caused by iron deficiency—much more clearly making the relevant disclosure than here.  This was nonetheless misleading because most fatigue wasn’t caused by iron deficiency, so many consumers were buying a product that wouldn’t help them with the problem for which they sought relief, given that Geritol’s ads targeted the general, fatigued population.] Thus, the disclaimer was not so unambiguous and express that a reasonable consumer couldn’t be deceived as a matter of law.

However, the complaint still flunked 9(b) because it didn’t discuss whether plaintiffs saw the asterisk; whether they read the corresponding disclaimer; and if they did read it, how the disclaimer affected their purchasing decision. It didn’t mention the asterisk or disclaimer at all. Dismissed without prejudice.

The injunctive relief claim was dismissed with prejudice because plaintiffs didn’t allege an imminent or actual threat of future harm absent an injunction. The claim was “predicated on the premise that, as a matter of scientific fact, biotin supplements ‘are unneeded, superfluous, and will not provide any benefits’ to anyone without a biotin deficiency.” Thus, plaintiffs wouldn’t desire to purchase such supplements in the future if truthfully advertised.

Court sanctions plaintiffs for inaccurate images of product labels in complaint

Hunt v. Sunny Delight Beverages Co., No. 18-cv-00557-JLS-DFM, 2018 WL 6786265 (C.D. Cal. Dec. 18, 2018)

Some Sunny Delight beverages bear names derived from fruits, such as “Orange Strawberry,” “Orange Pineapple,” “Strawberry Guava,” and “Watermelon,” while others are less fruity, such as “Smooth & Sweet” or “Blue Raspberry.” Plaintiffs alleged they bought several different varieties, including the “Orange Strawberry” and “Orange Pineapple.” They brought the usual California claims, alleging that none of the Products “contain any or all of the actual juices from the displayed fruits,” and that the labels failed to disclose this. They alleged that that the following images were true and accurate representations of the “Orange Strawberry” and “Orange Pineapple” labels:

Sunny Delight sought to introduce evidence that the images weren’t in fact true and accurate depictions of the labels. The court agreed that this was improper at the pleading stage and denied the motion to dismiss. Sunny Delight later moved for Rule 11 sanctions, alleging that plaintiffs knowingly included inaccurate images and induced the court to rely on them.  The labels it proffered “include much, if not all, the information that Plaintiffs allege is unlawfully missing, including disclosures that the Products are ‘artificially flavored.’” Its chief marketing officer submitted a declaration that

Sunny Delight has never sold a product labeled as the ones [depicted in] the First Amended Complaint are labeled. Sunny Delight product labels have always included more information about the products than shown in [the FAC]. The images in [the FAC] that Plaintiffs claim are the true labels they read and relied on are actually just images from an old version of Sunny Delight’s website. Those were stylized images used on the website only. They lack numerous details on the actual labels because people looking at the website have trouble reading all the things that are on the actual labels given the size of the images. Sunny Delight has never sold any products with the labels reflected in [the FAC].

In addition, if plaintiffs bought Orange Strawberry within the last 5 years, it would have had a front-of-pack statement disclosing artificial ingredients. Deposition testimony from the named plaintiffs corroborated Sunny Delight’s argument that these were stylized images.  Counsel “intimated to them that the stylized online labels were identical to the in-store labels on the Products Plaintiffs had purchased; neither [plaintiff] could fully recall the actual contents of the labels on the purchased Products.”

The court found that plaintiffs and their counsel had knowingly made false factual contentions in the first amended complaint, including the allegation that the embedded image was a “true and accurate representation” of the labels, as well as numerous allegations that likewise incorrectly described those labels in ways that are central to the claims in the litigation. “These falsehoods were not the product of reasonable mistake and were not mere inaccuracies that would ‘likely have [had] evidentiary support after a reasonable opportunity for further investigation or discovery.’”  Plaintiffs’ counsel acknowledged at the hearing that they based the complaint on Sunny Delight’s website, not on the labels on the actual products. “That approach might have been acceptable had Plaintiffs purchased the Products based on a website image, but they did not…. It is apparent that Plaintiffs’ counsel did not undertake the most fundamental of investigations— namely, examining the actual Product labels—before filing the First Amended Complaint.”  Counsel had the opportunity to acknowledge the problem when Sunny Delight identified it, but they compounded it instead, arguing that the court should take the allegations as true.  This wasted the court’s and Sunny Delight’s time and resources, and was sanctionable under Rule 11.

The court struck the first amended complaint rather than parsing the allegations for any that were salveageable. However, the court wouldn’t strike the complaint with prejudice.  Plaintiffs argued that at least some of their claims still had merit, and the court didn’t rule on whether the presence of a front disclaimer would preclude the claims as a matter of law. The court was also wary of confusing attorney honesty with the merits; sanctions address only the former.  Nonetheless, to serve Rule 11’s deterrent purposes, the court also awarded reasonable attorneys’ fees for preparing this motion and the second motion to dismiss, where the misrepresented labels formed the core of the dispute and were the primary basis for the court’s ruling.  Fees for general casework, or for the first motion to dismiss—which was primarily about jurisdiction—were not included.

9th Circuit easily rejects In re GNC's "all scientists must agree" standard for falsity

Sonner v. Schwabe North America, Inc., --- F.3d ----, No. 17-55261, 2018 WL 6786616 (9th Cir. Dec. 26, 2018)

Happy holidays to me!

Sonner sued the sellers of two Ginkgold nutritional supplements for violations of the UCL and CLRA and breach of express warranty. Sonner alleged that the products were falsely labeled as capable of improving various cognitive functions when in fact they provided no such benefits, citing expert opinion and other scientific evidence (including evidence from randomized controlled trials showing no difference from placebo) in support.  The district court granted summary judgment, relying on In re GNC to hold that she couldn’t proceed on a literal falsity claim because she didn’t show that all scientists agreed that the claims were false.  Instead, it reasoned, where “both sides have produced expert testimony and scientific research in support of their claims,” but Sonner failed to critique the expert testimony and each of the scientific studies proffered by defendants by “challenging the methodology, structure, or independence of [Schwabe’s] studies,”  the evidence was “insufficient to allow a reasonable juror to conclude that there is no scientific support for [Schwabe’s] claims.”

The court of appeals reversed: “UCL and CLRA claims are to be analyzed in the same manner as any other claim, and the usual summary judgment rules apply.”  The plaintiff has the burden of proving falsity or misleadingness by a preponderance of the evidence. “Therefore, to defeat summary judgment, Sonner need only produce evidence of a genuine dispute of material fact that could satisfy the preponderance of the evidence burden at trial. Sonner easily met her burden by producing expert testimony and other scientific data that Ginkgo biloba has no more of an effect on mental sharpness, memory, or concentration than a placebo.” Requiring her to do more than that—to foreclose any possibility that the products worked—wrongly elevated her burden far beyond that applicable to summary judgment. Arguments going to the bases of experts’ opinions go to the weight of the evidence in the fact-finder’s evaluation, “an inquiry that is not proper at the summary judgment stage.”

Schwabe argued that the Ninth Circuit should follow In re GNC, 789 F.3d 505 (4th Cir. 2015), which required—at the pleading stage—a plaintiff to allege that “all scientists agree that [the products] are ineffective at providing the promised [ ] benefits” in order to allege falsity under California law.  This holding was always dumb—among other things, it rested on a misreading of the Lanham Act’s distinction between literal falsity and implicit falsity—and the court of appeals here rejected it.  “We are unpersuaded by the notion that a plaintiff must not only produce affirmative evidence, but also fatally undermine the defendant’s evidence, in order to proceed to trial.” That’s not how civil—or even criminal—litigation works.  “If the plaintiff’s evidence suggests that the products do not work as advertised and the defendant’s evidence suggests the opposite, there is a genuine dispute of material fact for the fact-finder to decide.”  

Nor were Sonner’s claims essentially “lack of substantiation” claims, which private plaintiffs are prohibited from pursuing under California law. “Sonner has the burden of proof as to her claims, unlike a substantiation claim where the onus is on the defendant to substantiate the assertions in its advertisements.” 

The breach of express warranty claims were reinstated for the same reasons.

PS: Since In re GNC purported to interpret California law, can we now defer to the 9th Circuit to say that the case isn't even right in the 4th Circuit?  I know, it would be better for a California state court to point this out--I can hope, though.

Pleading compliance w/test rules doesn't plausibly plead compliance for consumer plaintiffs

Anglin v. Edgewell Personal Care Co., 2018 WL 6434424, No. 4:18-CV-00639-NCC (E.D. Mo. Dec. 7, 2018)

Are there people who believe that Twiqbal improved consistency?  Because I do not understand the level of detail required. Here, the magistrate holds that pleading that one’s testing complied with FDA regulations is not sufficient to plausibly plead that one’s testing complied with FDA regulations.  I would have thought that, if it’s enough of a fact to be determined by a court and not trigger preemption, then it’s enough of a fact to be pled on its own, even if it is a potentially dispositive issue.  But I don’t see non-advertising Twiqbal cases, so I might be overly critical.

The plaintiffs sought to represent a class of Banana Boat “SPF 50” or “SPF 50+” product purchasers. They alleged that “rigorous scientific testing has revealed that the Products do not provide an SPF of 50, much less ‘50+’.” Consumer Reports magazine reported in May 2016 that “its own testing had revealed that Banana Boat Kids SPF 50 sunscreen lotion had an SPF of only 8.” Further, plaintiffs alleged that their own independent testing using FDA methods demonstrated the Products had SPFs lower than listed on the label. They brought various state law false avertising claims.

The court rejected defendants’ primary jurisdiction argument. The FDA published a “sunscreen Final Rule” allegedly “mandating a whole host of highly specialized, highly scientific, and precise technical and scientific protocols that manufacturers must follow relating to testing and labeling.”  Agency expertise is “the most common reason for applying the doctrine,” which is also used “to promote uniformity and consistency with the particular field of regulation.” Other cases have rejected applying the doctrine to sunscreen labeling, given that plaintiffs allegedly relied on long-established SPF testing procedures and standards, rendering their labels false and misleading, which is a routine factual question for courts. Defendants argued that the court would have to determine whether the parties’ tests followed the technical and scientific requirements of the sunscreen Final Rule. But “this Court is equipped to address such technical and scientific questions, as this and other courts routinely do on a regular basis.” Even if the FDA was in the “best” position to interpret the Final Rule, the court could do so too.  In terms of uniformity and consistency, it was merely speculative that the FDA would be taking further action, much less formal action, or that any such action would be retroactive. Though the FDA had solicited bids for testing sunscreens over two years ago, there was no indication that further action was forthcoming.

However, the preemption argument did better in that it helped kick out the case, although not definitively. The court found that the FDA testing requirements meant that no non-FDA compliant testing could be used to establish the true SPF of a sunscreen, making the Consumer Reports testing irrelevant. If and only if plaintiffs’ testing was FDA-compliant, then their claims were not preempted.  The relevant allegations:

…. Plaintiffs conducted their own independent testing of the Products, utilizing the methodology for SPF testing mandated by the FDA.

Specifically, the independent testing conducted by Plaintiffs was conducted in compliance with all FDA testing methods embodied in FDA Final Rule, 21 CFR Parts 201 and 310, (Federal Register/Vol 76, No 117/Friday, June 17, 2011/Rules and Regulations, including 21 CFR 201.327).

The results of the independent testing conducted by Plaintiffs were consistent with the results suggested by Consumer Reports’ test results and confirmed that the Products had actual SPFs substantially lower than the claimed SPF 50 or “50+”.

Plaintiffs’ investigation concluded that all three products, clearly labeled as containing SPF 50 or “50+”, contained an SPF of less than 37.8 and no more than a 30.1.

This wasn’t sufficient (though plaintiffs said they were prepared to file an amended pleading). The complaint was 34 pages long and only 4 paragraphs were devoted to this crucial issue (this comparison strikes me as a bad measurement tool). Only one paragraph mentioned the specific methodology. There was a need for more than a “conclusory statement that the testing complied with the FDA Final Rule, an ultimate question this Court may be called upon to decide in the future.” And it was unclear whether plaintiffs had FDA-compliant test results relating to all three challenged products. Thus, the court found it prudent to allow an amended complaint.

The court also commented that plaintiffs would likely have difficulty satisfying the predominance requirements on their nationwide claims, but declined to dismiss the class certification parts of the case at this time.

Preserve challenged ads/social media posts after receiving a C&D or risk sanctions

Nutrition Distribution LLC v. Pep Research, LLC, No. 16CV2328-WQH(BLM), 2018 WL 3769162

 (S.D. Cal. Aug. 9, 2018) (magistrate judge)

A spoliation/false advertising issue.  “While Defendants produced some social media documents, the production did not include Facebook or Twitter posts relating to the illicit products identified in the complaint.” For a finding of spoliation, a party must show that “(1) the party with control over the evidence had an obligation to preserve it at the time of destruction; (2) the evidence was destroyed with a ‘culpable state of mind’; and (3) the evidence was relevant to the party’s claim or defense.”

After plaintiff’s demand letter and complaint, which identified the products and ads at issue, defendants had an obligation to preserve relevant posts on their social media sites.  There was evidence of a culpable mental state, where a deponent responded to a question about whether the deleted posts had anything to do with this lawsuit, with “It’s possible. Actually, it was -- I think it had more to do with any copycat companies, law firms like yours trying to file the same frivolous lawsuit.” When asked about deleting posts related to marketing one of the products at issue, he responded, “I have the right to do whatever I want to do with my Facebook account, regardless of a lawsuit or not.” His declaration that no posts were deleted intentionally for purposes of litigation/post-filing was inconsistent with his deposition testimony and unsupported by evidence. Destruction after notice/negligence is sufficent to be culpable.

Finally, the evidence indicated that the deleted evidence was relevant to the claims as it “include[d] advertisements, photos, marketing, and misleading statements at issue in this action.” There was prejudice, because the plaintiff only has some Facebook and Twitter posts, not all of them.  The appropriate sanction was an adverse inference instruction that “the social media posts deleted were false advertising of products that compete with Plaintiff.”  Monetary sanctions were unnecessary given such an instruction.

Blast from the past: false price claims insufficiently pled

Ashley Furniture Indus., Inc. v. American Signature, Inc., 2015 WL 12999664, No. 11-cv-427 (S.D. Ohio Mar. 12, 2015)

At this point I will just institute a “blast from the past” category for Westclip.  This one made it because of a discussion of Twiqbal plausibility for false advertising claims based on allegedly false pricing.  Main issue, focused on fair use in comparative advertising, discussed here.  As relevant here, defendant (aka Value City) counterclaimed against its sofa-selling competitor, Ashley, under the Lanham Act and coordinate Ohio state law.

Value City provided seven examples of purportedly false ads involving items of furniture offered at a “sale” price along with one or more higher prices for comparison. In several, the item of furniture was advertised several months later with different “regular” and “compare” prices. In addition, Ashley’s ads included “one day” sales and “limited quantity” sales, but the items in those sales were offered on multiple occasions. Several ads also said that the items were discounted by a specific amount or percentage, but the ads didn’t identify the nature of the higher price, such as whether the higher price was Ashley’s regular price or a competitor’s price. Value City alleged, “upon information and belief,” that the “sale” prices in the advertisements were in reality Ashley’s regular prices, and the “regular” prices were artificially inflated prices used just for ads.

The court found that Value City had failed to plead plausible false advertising claims.  Value City argued that it was reasonable to infer that serial offers of the same “one day” deal were false; that comparative prices that “yo-yo up and down” were not actual prices from a competitor; and that a “compare” price “that suddenly zooms up by $800” wasn’t based on bona fide sales of a comparable item at a competing retailer.  The court disagreed. The allegations gave rise to an inference that false advertising was possible, but not plausible. 

Value City’s core argument was that the ad prices changed over time, but there were a lot of possible explanations for that not involving false advertising:  “Businesses routinely adjust the prices of their products. The same is true of the allegedly successive one-day and limited quantity sales. Supplies might be limited at one point in time but not at a later date.”  As for failure to identify the source of the comparison price, that made the ads ambiguous, as was the meaning of “one-day” and “limited quantity”—did that mean forever, or just for now?  Thus, these weren’t plausibly literal falsehoods.

One alleged misrepresentation could constitute literal falsity: the statement that Ashley’s advertised prices were sales prices when in fact they were its regular prices. Further, allegations based upon “information and belief” don’t necessarily fail Twiqbal. However, here, Value City’s “bald assertion” was “conclusory and speculative,” lacking additional factual allegations to provide plausibility—even if evidence that might support the allegations was uniquely in Ashley’s possession.

Also, Value City didn’t plausibly plead materiality or harm causation in connection with the non-literally false statements at issue.