Is it false to make your competitor's service worse and then say you're better?

NetQuote, Inc. v. Byrd, 2008 WL 2552871 (D. Colo.)

Previous coverage. Prior summary:

NetQuote operates a web site that allows individuals to submit information about themselves and their insurance needs. NetQuote sells that information to insurance brokers and agents, who then contact the individuals with an insurance quote.

NetQuote sued MostChoice, a competitor, and Brandon Byrd, its employee. NetQuote alleged that MostChoice employed Byrd to pretend to be individuals interested in insurance quotes. He thus submitted hundreds of false inquiries to NetQuote’s web site, knowing that NetQuote’s clients would receive bad information that could not lead to a sale. NetQuote’s clients complained about the bad information, and some ended their relationships with NetQuote. To add false advertising to injury, MostChoice advertised itself as having superior accuracy and reliability in insurance referrals compared to NetQuote.

Defendants admitted that Byrd made at least 394 fake submissions. MostChoice also counterclaimed for “click fraud” under Georgia law.

NetQuote’s Colorado fraud claim required a knowingly false representation of material fact, made to a person who didn’t know the falsity with the intention that the victim act on it, and resulting damage. Defendants moved for summary judgment on the ground that NetQuote couldn’t show reliance or proximate cause. The court disagreed.

On reliance, defendants argued that NetQuote often receives bad leads, and issued $150,000 in credits to customers for bad leads before Byrd started his attacks. Thus, NetQuote can’t rely on the content of the leads it receives. NetQuote responded that its reputation depends on selling high-quality leads, and the court agreed that summary judgment was inappropriate on this ground.

Defendants then argued that reliance was impossible because no human at NetQuote read Byrd’s submissions; they were just distributed electronically. The court continued to disagree—reliance by a computer is possible. But there was a question whether the reliance was justifiable. Colorado law was not clear on whether this was a requirement of a fraud claim. NetQuote’s director of technology development testified that the system filtered out false names like Mickey Mouse, dubious key sequences like asdfg, and fictitious area codes. Defendants argued that this was an insufficient filter because it only avoided obvious errors.

The court found a question of fact (which I think is generous—given NetQuote’s product, the burden should have been on defendants, conceded bad actors, to identify a more intensive identity verification that would still be cost-justified and that would have screened out Byrd’s fakes). Justified reliance doesn’t require a perfect filtering system. NetQuote took affirmative steps to limit false leads. Normally, the justifiability of reliance is a question of fact, and it’s so here.

Likewise, on proximate cause, NetQuote submitted evidence that a large number of bad leads played a substantial role in its loss of two major accounts, as well as some local accounts, and that it spent $128,000 in employee time to suss out and stop Byrd’s conduct. Under Colorado law, proximate cause is generally for the jury. Here, NetQuote’s evidence was sufficient to defeat summary judgment.

Here’s a tidbit: one of the major clients reported that it received 476 leads from NetQuote; 421 were called, and 95 were unworkable/fake. The 325 workable leads had resulted in no sales. Defendants argued that the 325 unproductive leads showed that the fake leads had negligible impact on the client’s rate of sales, destroying the causal connection between Byrd’s acts and NetQuote’s loss of the account. But NetQuote presented testimony that, when agents tried to use the leads, they found a very high number of wrong leads, and this started in the first week of the operation. Given that agents were compensated partly on a commission basis, they were reluctant to pursue weak leads, and so they only worked on NetQuote leads at the end of the day, further diminishing their chances of success even when the information was valid. So the poor results on true leads might also be traced to the fake leads.

Separately, general notions of restitution allowed NetQuote to seek compensation for employee time spent dealing with Byrd’s fakery. Showing the chutzpah of a parricidal orphan, defendants argued that NetQuote shouldn’t be able to recover for that time because it received a benefit—it upgraded and improved its lead filtering system, hardening it against future assaults. The court modestly held that any benefits NetQuote received could be subtracted from its damages. I suspect law-and-economics theorists would have more to say about this; my own intuition is that, if NetQuote only invested in an upgraded filtering system because of the high rate of fake leads, the fact that its system is better now does nothing to decrease its damages. If Byrd had tortiously crashed into NetQuote’s delivery van, leading NetQuote to buy a new van that, because it was newer, had more and better features than the old van, that wouldn’t mean Byrd did NetQuote a favor.

On tortious interference with contract, defendants argued that they were protected by the competitor’s privilege, and that they didn’t intend to cause any customer to terminate a contract with NetQuote. Under Colorado law, a competitor may induce a third party to end a contract terminable at will if the act doesn’t employ wrongful means and is otherwise lawful. But there was a genuine issue of material fact over whether defendants’ conduct was fraudulent, which would be wrongful means. On intent, defendant MostChoice’s chair testified that he hired Byrd to reverse engineer NetQuote’s customer list by submitting bogus leads, apparently to get the names of agents who then followed up on the leads, and he did in fact have his employees contact NetQuote’s customers. This was, unsurprisingly, enough to avoid summary judgment.

NetQuote’s Lanham Act claim concerned MostChoice’s website ad copy claiming that its leads were “Better Than NetQuote Leads.” The court earlier rejected a puffery defense. Defendants moved for summary judgment on the ground that NetQuote had no evidence of consumer confusion. But the court adopted the rule from other circuits that, if MostChoice’s conduct was intentionally deceptive, NetQuote would be relieved of the burden of showing direct evidence of consumer confusion. MostChoice could, however, rebut any presumption of confusion caused by intentional deception.

Here, NetQuote argued that intentional deception could be inferred from MostChoice’s efforts to submit over 3,500 false leads to NetQuote. Byrd was hired to submit false leads for 20-30 hours a week over 9 months. The court agreed that a reasonable juror could find that MostChoice intended to harm NetQuote’s lead quality, making its acts intentionally deceptive.

There’s an understandable conceptual step skipped here: Were MostChoice’s leads better quality than NetQuote’s leads, either in their Byrd-degraded state or in their “natural” state? If MostChoice’s leads were better, for whatever reason, then the claim is not false, which may be why NetQuote wasn’t arguing literal falsity. But failure to disclose MostChoice’s interference with NetQuote’s leads isn’t the usual kind of nondisclosure that creates misleadingness: No matter the cause of the quality of NetQuote’s leads, it’s still the case that they have that quality, and clients could be disappointed by it. It may well be true that disclosing MostChoice’s interference would leave most clients unwilling to contract with an entity that invests in degrading its competitor’s product. But then we have a nondisclosure claim—and a difficult one to prove, since nondisclosure is rarely actionable.

The real issue is that MostChoice took action to make its claim true, but if true, it was true only because MostChoice deliberately harmed the quality of NetQuote’s service. Ordinarily, a competitor may take action to make its claims true—by, for example, designing its product specifically to achieve better results on some metric than the competing version. We would never say that the resulting claim “X delivers superior battery life to Y” was false just because X didn’t disclose that the superiority was the result of design choices, even though those design choices may well mean that Y performs better on some other, unadvertised metric. On the other hand, this is the unusual case where the challenged acts degraded the competitor’s service rather than improving the advertiser’s, and I can hardly fault the court for wanting to grant a remedy. I do think tortious interference might be a better fit, though.

NetQuote did have a separate argument for literal falsity, based on a different claim that MostChoice advertised that it obtained all its leads “from people who visit the site,” but had purchased leads from LeadCo, a third-party aggregator. MostChoice’s CEO testified that MostChoice had only done so for a short period, and NetQuote had no evidence that MostChoice purchased leads during the time it made the challenged claim on its site, so its claim based on that statement didn’t survive.

MostChoice counterclaimed under Georgia law for “click fraud,” based on NetQuote employees’ acts in clicking on MostChoice ads for which MostChoice paid per click, without any intention of using MostChoice’s service. NetQuote employees allegedly did this 25 times from October 2004 through August 2005, and 27 times from January 2007 through September 2007.

The court held that there was no reason to think Georgia recognized a tort of “click fraud.” Even if Georgia did so, there was no evidence NetQuote engaged in misrepresentation. Its employees occasionally clicked on MostChoice’s ads to see what services it was offering as part of their practice of checking out what the competition was doing on Google, Yahoo! and other search engines. MostChoice’s CEO agreed that it was not fraudulent to click through from a search engine to look for information on the site without ultimately filling out an application. There was no evidence that NetQuote’s clicks “were prompted by some illicit purpose,” so NetQuote secured summary judgment in its favor on this claim.

Falsity, sincerity and implication

Mark Spottswood, Falsity, Insincerity, and the Freedom of Expression, 16 William & Mary Bill Of Rights Journal 1203 (2008)

This thoughtful and useful article argues for greater constitutional protection for false but sincerely held claims as valuable in themselves, not merely in order to provide breathing room for truthful speech. By contrast, false and insincere statements do not promote overall truth.

I don’t fully buy the insincerity argument: though there are through-and-through fraudsters, often people who tell lies believe that they are telling a larger truth—see, e.g., the existence of WMDs in Iraq and whether the US tortures. If sincerity is a pointer to the existence of an important debate on which we should inform ourselves, then I have difficulty saying that sincerity in the ultimate belief–e.g., should we be in Iraq?—shouldn’t count.

More generally, I do not understand the idea that lies deprive listeners of autonomy while truths (or sincere falsehoods) don’t. Whether true or false, a nonperformative statement leaves it to the listener to act, though we can often predict how particular statements will influence action. At the very least, the concept of “autonomy” used to make this claim contains an implicit definition of autonomy as freedom from manipulation by liars that turns the proposition “lies harm autonomy but non-lies don’t” into a tautology. I can, and do, define autonomy differently. And indeed, Spottswood slides from lies to manipulation (“An individual’s dignitary interest in speaking his mind cannot extend to the willful manipulation of others.”)—but one can manipulate with the truth, or with statements lacking any truth value, as well—e.g., “I will sell you this tasty banana for $.79” or “the quicker picker-upper.” The clever manipulator takes advantage of general features of human psychology, like our tendency to feel obligations when we perceive we’ve been given a gift (free with purchase!), but then again so does the liar, who must make her lie plausible to let it do its work.

I’m always glad to see Gricean implicature applied to legal issues. (Richard Craswell’s recent article in the Virginia Law Review is another good example; my colleague Greg Klass has a response to Craswell up at SSRN.) Spottswood argues that we can use implicature to help manage the gradients between true and false, and sincere and insincere claims, since we can look at ordinary rules of implication in context to assess the likelihood of misunderstanding or deception.

Unfortunately, I can’t share Spottswood’s optimism with respect to the truth-promoting benefit of false but sincere speech when it comes to commercial speech. I should note that he points out that the question of a corporate entity’s sincerity may be a difficult one—in fact, his focus on sincerity might be thought to support the proposition that a corporate speaker has no freedom of speech rights in itself, and any protection for commercial speech must be derivative of the audience’s interest in hearing truthful claims. Since his argument is not that sincerity is a moral value but that sincerity prompts a valuable search for factual proof and disproof, however, he might well contend that the audience’s interest is coextensive with “sincere” corporate speech, however defined.

He argues that false but sincere commercial speech should receive the same constitutional protection as true commercial speech. He points out that, for example, winemakers are currently prohibited by the ATF from making health claims for wine without significant qualifications, despite growing evidence in favor of such health claims. This is a fairly standard argument about regulatory mistakes in assessing truth—sincerity works here as a limit on the kinds of commercial speech that should get heightened protection.

He also accepts that “local” falsehoods might be so harmful that they should be regulated regardless of sincerity. The classic example involves the safety of drugs—though he argues for compelled disclosure of the regulator’s position, rather than suppression of the drugmaker’s own claims. I think this baby-splitting is doomed to failure; research on disclosures makes pretty clear that consumers simply won’t read that far. See, e.g., Paula Fitzgerald Bone & Karen Russell France, Policy Makers’ Paradigms and Evidence from Consumer Interpretations of Dietary Supplement Labels (showing that the presence of a disclaimer like the one Spottswood advocates has no effect on consumers’ beliefs about (1) the first-order claim made by the advertiser or (2) whether a regulatory agency has evaluated and approved the advertiser’s claim).

Spottswood’s overall argument depends on the idea that it is the contest over the truth of a false claim that improves overall knowledge—not the false claim itself. Spottswood emphasizes the role of credibility in assessing competing truth claims. But research reveals, for example, that people forget source before they forget an assertion, so that even an incredible source can create false beliefs a few days down the line, and, paradoxically, refuting a false claim can increase audiences’ belief in that claim. Likewise, ad repetition can create belief when there was initially disbelief, and ads can change attitudes towards products without adding any new information (see the work of Scott Hawkins).

Spottswood also discusses the epistemic benefits for nonexperts of learning that experts disagree, but does not in my opinion adequately account for the biased ways in which disagreement gets presented in the media, which—when it actually features factual disputes—tends to put one position against the other as if all disagreements were of equal credibility and featured roughly equivalent evidence on both sides. Moreover, with respect to commercial speech in particular, I’m not sanguine that people will learn about factual disputes in helpful ways. Who disputes the claims of supplement purveyors? Spottswood mentions Consumer Reports, but not many consumers subscribe, and competing supplement makers have few incentives to attack the level of scientific evidence for supplements generally, even if they have incentives to evaluate competitors’ claims to purity. It comes down to intermediaries: do we have reason to think that the actual level of confidence among experts will be adequately communicated?

Along with my skepticism about the correctability of false (though sincere) commercial speech, I am dubious of reinstating any fault-based line in advertising regulation. We moved away from fraud in consumer protection to a more strict liability scheme for good reasons; clever defendants can regularly at least create doubt about their actual beliefs. I doubt that the costs of a sincerity defense are worth the benefits, at least in the area of commercial speech regulation, which is where it would likely be the most important—given that the other area of speech regulation in which falsity routinely matters is defamation, where sincerity is already pretty important.

The sweet smell of injunctive relief

Here's news on the latest round in the Splenda wars. The pictures above show infringing Giant packaging and noninfringing Safeway packaging.

McNeil Nutritionals, LLC v. Heartland Sweeteners LLC (E.D. Pa. June 26, 2008)

McNeil sued Heartland for making packaging for its generic sucralose that was too similar to McNeil’s Splenda packaging. The district court initially handed Heartland a comprehensive victory; the Third Circuit reversed in part, finding that as a matter of law the likelihood of confusion factors weighed in favor of McNeil as to certain versions of the private-label packages, so that on remand the district court would have to consider whether injunctive relief was appropriate as to those versions. The district court, following instructions, granted the requested relief, noting that the packages at issue have been redesigned to be less like the Splenda packaging but that substantial inventory ($340,000) of the old versions remains.

Given that McNeil had, by appellate mandate, a likelihood of confusion, the court only had to evaluate the other elements of the claim—starting with the distinctiveness of the trade dress at issue and its nonfunctionality. The images of sweetenable food and coffee on the packaging, the court held, were descriptive rather than suggestive, given that other producers use similar images to communicate the message that the product was a sweetener. However, the court also found persuasive Second Circuit precedent that packaging choices are almost unlimited, and thus typically packaging trade dress will be inherently distinctive. It’s the combination of standard and descriptive elements that is likely to be inherently distinctive overall.

Notably, though Wal-Mart distinguished packaging from product design, this rationale is exactly the same rationale as that provided for holding product designs inherently distinctive. I don’t think it holds up much better here. The outcome is that the inquiry will hinge, not on the protectability stage, but on the multifactor likelihood of confusion test, so that a packaging design with no secondary meaning might still sometimes prevail.

Anyway, Splenda’s trade dress—the combination of pictures, colors, labeling, and layout, including the product name’s prominent placement on the package surrounded by a distinctive white cloud—was therefore inherently distinctive. The court rejected Heartland’s arguments that the trade dress was merely a combination of standard design elements. It distinguished other cases finding trade dresses not inherently distinctive, because they were mere variations on customary designs, as fact-specific. Before Splenda, the particular color scheme at issue was not used in the sweetener marketplace.

In any event, McNeil showed secondary meaning because of Splenda’s spectacular success in the market. McNeil’s evidence of success was general, and Heartland argued that the advertising and promotion didn’t aim at increasing recognition of the packaging, as opposed to the brand name. But the court reasoned that it could consider more than only “look for” or other trade-dress-focused ads. “It seems illogical to conclude in the context of a product packaging trade dress case that just because McNeil’s advertisements do not contain language saying ‘Look for Splenda in this packaging,’ they are not probative of secondary meaning. … [A] Splenda package has been featured in nearly every Splenda television commercial and print advertisement.” In addition, other factors, including the length of use and the fact that Heartland copied Splenda’s packaging, supported a finding of secondary meaning.

Likewise, the packaging was nonfunctional. Heartland argued that the use of yellow, photos of food and beverages, and the size and shape of the packages were functional. But the trade dress was the overall appearance of the product, not individual elements. McNeil wasn’t arguing for a ban on the use of yellow, pictures of food and beverages, or a particular size and shape.

The context of this case, where the gestalt issue of likely confusion has been decided by a different decisionmaker than the one considering functionality, highlights the ways in which this "overall appearance" rule creates some interesting conceptual problems. Assuming that the color, photos, and size and shape are in fact functional, McNeil can’t stop anyone from using them. But it is inarguably the case that the confusing similarity here is largely—if not entirely—based on the combination of color, photos, and (probably to a lesser extent) the size and shape. That will regularly be the case when courts refuse to filter out functional elements of trade dress from their confusion analysis. So one who wishes to copy all the functional elements of the Splenda trade dress may have to stay further away from the nonfunctional elements of the trade dress, whatever they are. (What are they? The court doesn't say. The absence of other identifiable trade dress elements that Heartland copied is one reason, I suspect, the court focused so much in its earlier opinion on the presence of house marks on the Heartland products. The presence of a house mark is arguably all that's needed to prevent unfair competition when there's a right to copy the rest of a configuration.)

What about the other parts of the test for injunctive relief? Trademark infringement risks loss of control of reputation and potential damage to goodwill, which is regularly treated as irreparable injury, even without actual damage. Without considering eBay (and I’m not suggesting it should have!), the district court relied on 1950s Third Circuit precedent that likely confusion leads to the “inescapable conclusion” that there’s irreparable injury.

On hardship to Heartland, Heartland’s alleged lost sales would not constitute irreparable harm, because such losses are compensable by money damages and are taken into account by the bond posted by the plaintiff. The public interest is in not being confused, so essentially automatically favors the plaintiff who’s shown a likelihood of confusion. As a result, the injunction issued.

Propaganda: sauce for the goose edition

Michael Arrington, of TechCrunch, writes in The A.P. Has Violated My Copyright, And I Demand Justice:

As far as I can tell, the Associated Press is sticking by its ridiculous and unlawful assertion that "direct quotations, even short ones" are copyright infringements and result in lawsuit threats and DMCA takedown notices.

… [N]ow the A.P. has gone too far. They've quoted twenty-two words from one of our posts, in clear violation of their warped interpretation of copyright law. …

Am I being ridiculous? Absolutely. But the point is to illustrate that the A.P. is taking an absurd and indefensible position, too. So I've called my lawyers (really) and have asked them to deliver a DMCA takedown demand to the A.P. And I will also be sending them a bill for $12.50 with that letter, which is exactly what the A.P. would have charged me if I published a 22 word quote from one of their articles.

(I should probably note that I mean "propaganda" as a neutral term. Arrington's move is concededly not meant to assert actual legal rights, but rather to point out that the A.P. itself depends on the system of free quotation for news purposes. The move to claim rights over tiny quotes--and even the response that such use is fair use rather than not even rising to the level of copyright infringement--is dangerous for reasons Justin Hughes explores in Size Counts (or Should) in Copyright Law, 75 FORDHAM LAW REVIEW 575 (2005). I do wonder whether Arrington's lawyers can ethically file such a DMCA notice, under either the DMCA or general principles governing lawyers' conduct.)

230 protects another review site; Lanham Act claims also fail

Eric Goldman points to Nemet Chevrolet Ltd. v. ConsumerAffairs.com, Inc., 1:08CV254 (E.D. Va. June 18, 2008) and the related CMLP page with links to source documents. ConsumerAffairs is a website that hosts third-party consumer reviews of various products and services, including Nemet’s. Nemet sued ConsumerAffairs for defamation, tortious interference, and Lanham Act false advertising claims based on bad reviews posted by consumers. Section 230 got rid of the first two claims quite easily.

Nemet also brought claims under §43(a)(1)(A) and (B). The court held that Nemet lacked standing as a matter of law no matter how the Lanham Act claim was framed. Among other things, this follows the unfortunate trend of using “standing” as a catchall for failed claims, which is problematic because sometimes (though not here) it substitutes for actual factfinding. Here, the “standing” problem was that the parties weren’t in competition—what courts would formerly have called a failure to properly allege that the allegedly false claims appeared in “commercial advertising or promotion.”

Of course, you might be wondering, “Since when is competition a requirement for trademark infringement? That went out of style a century ago!” Or you might be wondering, “Doesn’t §230 also knock out the false advertising claim, which is not an intellectual property claim?” Good questions; sadly, the second isn’t answered by the opinion at all.

To answer the first question, it might help to know that the §43(a)(1)(A) claim was that the name “Consumer Affairs” diverts consumers by making them think that defendant is some sort of official or governmental body, which is also the basic gist of the §43(a)(1)(B) claim. So Nemet wasn’t making the standard false endorsement/affiliation trademark claim that disgruntled plaintiffs make against internet critics. It was just making a §43(a)(1)(B) claim that for some reason (§230?) it packaged as (a)(1)(A) as well. The court therefore held that the alleged harm is not the type of harm the Lanham Act seeks to prevent, given that the parties don’t compete. It applied the Conte Bros. standing test, and for once I don’t mind so much. The (a)(1)(A) problem is that Nemet doesn’t own any relevant marks or otherwise have any connection to any false association/affiliation with a consumer affairs agency. This is more of a real standing problem than most “standing” challenges these days.

Even if Nemet had standing, the court continued, its unfair competition claim would fail as a matter of law. Here the court proceeded as if Nemet had brought a false endorsement claim and relied on the unrelatedness of the parties’ goods and services, which is a bold move on a motion to dismiss. Unrelatedness can’t really justify dismissal as a matter of law without some other policy concern in play—here, protecting critics. At the very least, it’s not “unrelatedness” in general that justifies dismissal, but the unrelatedness of the specific service—providing consumer reviews—to any product or service reviewed.

Likewise, and getting to the better reason for dismissing the false advertising claim, the court found that even if Nemet had standing it couldn’t show the necessary competition to make defendants’ statements count as “commercial advertising or promotion.”

As for inquiry into whether §230 bars false advertising claims, that will have to await another day.

Stealth marketing of medical services on YouTube

This NYT feature on doctors who give consumers incentives to post doctor-created ads as their own contributions to YouTube raises some important advertising law questions, intertwined with the ethical ones.

LAST September, Michelle Wilder left Dr. Emil W. Chynn of Park Avenue Laser armed with ... a DVD of her Lasek surgery ....

Her viewing pleasure was not Dr. Chynn’s only concern. He hoped Ms. Wilder would be so thrilled with her results that she would post the 10-minute video on YouTube, along with his credentials, a link to his Web site, and a rave review.

As an incentive, Dr. Chynn offered either a free Botox injection worth $400 or a $100 discount on the $5,000 Lasek operation ....

First of all, nothing in the article indicated that consumers actually produce the ads themselves. ("Some have been produced by marketing companies like Spore Medical or SalemGlobal Internet both of which began offering video packages in the last year, while others have been videotaped and edited by a staff member.") At the very least, the ads are subject to standard regulations on endorsements and testimonials, and they should be disclosed as ads. Moreover, some of the testimonials are actually false, in clear violation of the law (see sec. 255(a), "Endorsements must always reflect the honest opinions, findings, beliefs, or experience of the endorser"):

A Benjamin was enough to silence one dissatisfied patient, who asked to remain anonymous because he is still undergoing treatment for an operation he had done about six months ago. Never mind that the video went up almost immediately, before he had time to heal, he said. “Regardless of whether I’m happy — that’s not going to stop me from posting,” he said. “It’s money in my pocket.”

As it turns out, he isn’t satisfied with his results, but he hasn’t taken down his glowing endorsement.

An ethicist asks, “If a patient voluntarily surrendered their privacy by having their procedure filmed and posted in trade for a financial cut on a service, what’s wrong with that?” The FTC, however, takes a different view.

Lawyer's banquet

Everyone needs something to do when traveling; what I do is look for IP issues. This image of a Rolling Stones album and song name, along with the name of the Rolling Stones themselves, appears in an ad in the May 2008 issue of SkyMall. Given cases like Yeager, how much money would the makers of this iPod case have to spend to defend against a Lanham Act claim for false endorsement by the Rolling Stones? Let's not even start on the copyright claim over the album cover.

consumer confusion in the under-3 set?

An anecdote, for whatever it’s worth: when my 33-month-old son saw me take Goodnight Bush out of the mailer, he said, “That’s my book!” When I explained that it wasn’t Goodnight Moon and we compared the two side-by-side, he said, “They match!” Then he insisted that I read him Goodnight Bush, though he soon lost interest. I don’t think his reactions are all that significant in terms of consumer confusion, given that a kid familiar with Goodnight Moon is unlikely to (a) be the purchasing agent or (b) be in the market for a second copy.

(Keep an eye on the Georgetown IP Teaching Resources RSS feed for a couple of scans for comparison purposes. Also, the news & reviews section on the official site, linked above, appears carefully culled for litigation purposes, focusing on the repetition of “political” and “parody.” Here’s hoping it works!)

I found some of the “goodnights” bitterly funny—my favorite was the blank page “goodnight air” changed to “goodnight allies.” The Twin Towers are alphabet blocks; Jesus rides a toy dinosaur for “goodnight evolution.” All in all, it’s more satire than parody, to the extent that one can tell the difference, though it does highlight the surrealism of the original Goodnight Moon as well.

Authorship, authenticity, advertising and ownership

Societe Civile Succession Richard Guino v. Beseder Inc., 2008 WL 2463770 (D. Ariz.)

The Societe moved for reconsideration of the court’s earlier ruling awarding defendant Jean Emmanuel Renoir $45,000 in lost profits for its false advertising counterclaim. See earlier discussion here: basically, the Societe advertised some Renoir-Guino works as originals. The court sustained the jury’s verdict that they were inauthentic and/or unauthorized, and that this was false advertising.

The court considered the motion under Rule 59(e), as a motion to alter or amend the judgment. Such motions are rarely granted—only when something has unexpectedly changed or gone so badly wrong that a manifest and critical error needs correcting. The Societe argued that a dispositive element of a false advertising claim was missing—it didn’t own any of the falsely advertised sculptures at issue in the case.

The court believed that, whether or not the Societe owned the sculptures, false statements about them could ground a false advertising claim. But the Societe argued that “commercial advertising” under the Lanham Act requires that a statement must be made “for the purpose of influencing consumers to buy defendant’s goods or services.” Coastal Abstract Service, Inc. v. First Am. Title Ins. Co., 173 F.3d 725, 734-35 (9th Cir. 1999) (emphasis added). However, the district court held, this language was merely adopted from a Fifth Circuit case, not discussed, and there was no reason to think the 9^th Circuit meant to restrict false advertising claims “solely to instances where false statements are made to influence consumers to buy the accused’s own products.” In fact, other 9^th Circuit cases make clear that a false advertising claim may be based either on statements about one’s own products or about another’s products; it is sufficient if the statement is made for the purpose of influencing consumers not to buy a competitor’s products. Thus, there was no manifest error of law or fact, even if the Societe didn’t own the sculptures.

This seems like fancy footwork on everyone’s part. The court’s ruling is certainly reasonable given the procedural context, but it bucks the trend on standing, which is how these competition issues are usually resolved these days (rather than by the weird test for what counts as “commercial advertising”). For the same reasons, the Societe’s argument seems like a different way of making the same argument that it wasn’t in competition with the defendants that it already lost before.

Yeager's publicity claim proceeds at Mach 1

Yeager v. Cingular Wireless , 2008 WL 2413167 (E.D. Cal.)

Chuck Yeager (wikipedia for the unofficial biography) is a man of many accomplishments, including becoming an “ace in a day” in WWII by downing five enemy fighters in one mission. He then became a test pilot, and flew the first plane to break the speed of sound (Mach 1). He’s made commercial use of his identity.

In 2006, defendants issued a press release (or, as the court said, an “advertising/promotional article (the ‘publication’) styled as a ‘Press Release’”) highlighting the reliability, durability and security of their cellular network. It focused on a new service for responding to disasters or emergencies and continuing to provide cell service. The press release states:

“Nearly 60 years ago, the legendary test pilot Chuck Yeager broke the sound barrier and achieved Mach 1. Today, Cingular is breaking another kind of barrier with our MACH 1 and MACH 2 mobile command centers, which will enable us to respond rapidly to hurricanes and minimize their impact on our customers.”

Yeager alleged that this reference harmed his ability to get sponsorship agreements with other phone providers. He sued for violations of the Lanham Act, California common law and statutory rights of publicity, unjust enrichment, and state-law false advertising.

Cingular argued that the First Amendment barred the claim, because the press release was news and addressed a matter of public interest. Yeager argued that the release was commercial speech and sought to capitalize on Yeager’s identity. Under California precedent, the First Amendment doesn’t protect commercial speech that uses a plaintiff’s identity without his or her consent to promote an unrelated product. Using identity as “illustrative” or “window-dressing” for a commercial theme isn’t protected by the First Amendment.

For purposes of the motion to dismiss, the court accepted Yeager’s allegation that the press release was an “advertising/promotional article,” and used his name and reputation to promote Cingular’s unrelated product. These allegations were not contradicted on their face by the text of the press release, though the court explicitly noted that a different result might obtain at a later stage. The court could not find as a matter of law that the press release was a “news release on emergency preparedness,” as Cingular argued.

Cingular also argued that Yeager’s achievement in breaking the sound barrier was within the public domain, so that reference to it could not sustain a Lanham Act claim. The Lanham Act claim requires Yeager to show that a false or misleading representation is likely to deceive consumers as to association, sponsorship or approval—in other words, that there was likely confusion over whether Yeager endorsed Cingular. In a court bound by White, Wendt, Abdul-Jabbar, and the like, you can guess the outcome. Yeager’s allegations were sufficient to state a claim. His interest in his name and identity was created by his own actions, and not in the public domain.

Cingular then argued that the use of Yeager’s name was merely incidental and was nominative fair use. The court agreed with Yeager that these defenses were premature—they should be addressed on summary judgment. On a motion to dismiss, where the court is limited to the pleadings and all reasonable inferences must be made in the plaintiff’s favor, it’s highly unusual to hold that a defendant has proven an affirmative defense.

An incidental use is one that has no commercial value, given the role it plays in the publication as a whole. The Restatement (Second) of Torts says in comments that “a plaintiff’s name is not appropriated by mere mention of it,” and that there’s no claim when a name is published “for purposes other than taking advantage of his reputation, prestige, or other value associated with him.” The court noted that this defense generally applies to the right of publicity, not necessarily to the confusion-based Lanham Act claims, but found it unnecessary to resolve the issue. Yeager properly alleged that the reference to him was made to use his reputation to benefit Cingular, in order to sell its products and services. That was enough.

As for nominative fair use, the usual interpretive issue arose (illustrating why putting the burden on the defendant to establish the defense is significant). The court didn’t address the first two elements, but they’re pretty easy: Yeager isn’t readily identifiable without using his name, and all Cingular did was use his name. It’s the third New Kids element that will kill you: “the user must do nothing that would, in conjunction with the mark, suggest sponsorship or endorsement by the trademark holder.” Naturally, Cingular argued that it only used Yeager’s name once, not in connection with any product or service it was selling, and not as a (conventional) ad. Thus, nothing suggested sponsorship or endorsement.

But what is this “nothing” that Cingular must (not) do? Is it “nothing else” other than use a mark as necessary to identify the subject of discussion? In that case, lots of things are nominative fair use. However, Abdul-Jabbar essentially held that mere presence of a celebrity’s name in a conventional 30-second car ad can itself be enough to defeat nominative fair use, because any celebrity appearance is generally understood as an endorsement in that context. That result suggests that “nothing” is a bit more conceptually tricky than it could be.

Because Yeager alleged that the press release was an “advertising/promotional article,” and that the reference to him was likely to cause confusion, the court held that it could not find “as a matter of law that defendant’s reference to plaintiff in the publication makes no suggestion of sponsorship or endorsement by plaintiff.” This only makes sense if we accept the idea that reference alone can be the necessary “something.”

I don’t think Abdul-Jabbar is crazy to say that the context of a comparison to a celebrity achievement in a 30-second car ad might be likely to suggest endorsement, though that conclusion makes the nominative fair use test a heck of a lot less useful and a lot more obviously a matter of judicial mind-reading of consumers. But even under Abdul-Jabbar, the fact that the ad was a conventional TV ad was the “something” for purposes of New Kids factor 3. A press release, even if it is commercial speech (which I think it is), does not carry the same consumer expectations—if being commercial speech is “something,” then nominative fair use is dead.

Thus, all of Yeager’s claims survived.

My general reaction: This is why the current right of publicity is a terrible, terrible thing. If some people think Yeager is somehow associated with Cingular because of this press release making a single textual comparison with a historical event, that’s because trademark owners have convinced people that ridiculous ownership claims must be okay. The law should not work to prevent this tenuous and immaterial confusion. Suppose Cingular had truthfully said “a test pilot” broke the sound barrier, and Yeager had alleged that the general public would recognize that this was a reference to him, which it undeniably is? What logic makes this motion come out any differently under those circumstances (at least under the Lanham Act and California common law, which have no “name” limit)? How much of history does Yeager own?

And I’m deeply worried that the search for an external limiting principle, which understandably has often been the First Amendment, will succeed in a way that harms advertising regulation overall. That is, while I hope that more courts will stand up against overreaching publicity claims, if they use the First Amendment to do so, I fear the doctrine they create will be applied in real false advertising cases, not just in cases where the only alleged harm stems from a right of publicity/endorsement claim.

Canvas on Demand and copyrightability

Patry's recent post on Meshwerks, which addressed the copyrightability of certain digital models of cars, came to mind when I came across an ad for Canvas on Demand, which takes photos and puts them on canvas, either in photorealistic fashion or with a brushstroke-like effect. The site explains:

PhotoRealistic™ Style
Our artists evaluate your image then balance and enhance the color, then adjust the sharpness and contrast levels accordingly. We repair minor imperfections and optimize for canvas. Choose this style when you want to maintain the integrity of the original, when the photo has a group of people and the faces will be small or for landscapes with fine detail that you wish to maintain.

BrushStrokes™ Style
We follow the same process as photorealistic, then, using a specialized tablet and stylus create brushstrokes by hand to give a beautiful painterly effect. Choose this when reproducing portrait style photo where the subject’s faces are prominent or anytime you wanted the look of a traditional oil painting.

(Side note: those are silly trademark claims for generic terms.)

There are interesting questions about whether Canvas on Demand produces copyrightable derivative works in either case. Both with photorealism and brushstroke effects, there are decisions to be made--the site positions them as artistic decisions--but there is also an attempt to achieve a certain result, and even if the process requires time and skill, that doesn't necessarily translate into copyrightability. I don't think the questions are very different as between photorealism and brushstrokes. There may be a greater concern with the photorealistic versions for interfering with others' ability to create their own photorealistic versions of the originals, but both are medium translations, and both processes might be used to create either copyrightable derivative works or uncopyrightable reproductions, depending on the specifics.

HerbaQuit told to commit to quit suing

Natural Answers, Inc. v. SmithKline Beecham Corp., --- F.3d ----, 2008 WL 2390483 (11th Cir.)

Natural Answers (for a past interaction with the Lanham Act, see here) claimed that defendants (GSK, for GlaxoSmithKline) infringed its rights in the unregistered mark HerbaQuit Lozenges and falsely advertised Commit Lozenges as “the first and only stop smoking lozenge.” The district court granted GSK summary judgment, and the court of appeals affirmed.

From 2000 to 2002, Natural Answers sold HerbaQuit, which was designed to “help satisfy cravings related to the smoking habit,” particularly the “psychological and habitual aspects of smoking.” (Ah, the distinction between supplement and drug claims, how I despise you.) In March 2001, Natural Answers solicited GSK for a joint venture promoting HerbaQuit; GSK declined the next month. By early 2002, Natural Answers ceased selling the product because it lacked the ability and resources to do so, though it did unsuccessfully solicit Philip Morris for a joint venture in December 2003.

In November 2002, GSK launched Commit Lozenges as “the first and only stop smoking lozenge.” Commit is FDA-approved and, unlike HerbaQuit, contains nicotine to deal with withdrawal from smoking.

The district court granted summary judgment on the false advertising claims on the grounds that Natural Answers couldn’t show any injury, because the two lozenges were never marketed or sold at the same time. Moreover, the court found that the ads weren’t false, because under the applicable laws and regulations, Natural Answers couldn’t market HerbaQuit as a smoking cessation (“stop smoking”) product. On the trademark claims, the court held that no reasonable juror could find a likelihood of confusion between HerbaQuit and Commit.

Rather than starting the trademark analysis with the obvious lack of likely confusion, the court of appeals began with abandonment. Abandonment under the Lanham Act requires that a claimant cease use of the mark and have an intent not to resume use in the reasonably foreseeable future (which is not the same as an intent to abandon). Such intent can be inferred from circumstances. Nonuse for 3 years creates a rebuttable presumption of the requisite intent. GSK was entitled to this presumption, shifting the burden of production (though not persuasion) to Natural Answers. The court of appeals found that any reasonable factfinder would find abandonment. The assertions that Natural Answers intended to resume use if it could find funding and/or a partner were insufficient; if that was enough, “no trademark would ever be abandoned.”

The court then found that Natural Answers lacked prudential standing to bring a false advertising claim. Under the terrible Phoenix of Broward decision (as well as under more sensible rules), Natural Answers lacked a sufficient interest to justify standing. As readers may recall, there’s a 5-factor test: (1) is the injury of the type Congress sought to redress in the Lanham Act; (2) how direct/indirect is the injury; (3) how proximate is the plaintiff to the defendant’s harmful conduct; (4) how speculative is the damages claim; and (5) what are the risks of duplicative damages/complexity in apportioning damages? Because the parties weren’t ever in direct competition, this inquiry didn’t go well for Natural Answers, as one might imagine.

First, this isn’t the type of injury Congress sought to redress: commercial interests in avoiding a competitor’s false advertising and avoiding the appropriation of reputation and goodwill. Natural Answers couldn’t lose any customers or potential customers from GSK’s ads, because it didn’t have any at the relevant time. Second, there’s no direct relationship between the allegedly false claims and the claimed injury. All Natural Answers alleged was that the “first and only” claim influenced purchasing decisions, harming HerbaQuit’s brand value if and when HerbaQuit returns to the market, but that can’t have caused lost sales or market share or increased promotional costs, all of which were at zero. (It does seem to me that there’s a story to be told that the presence of Commit on the market made it difficult or even impossible for HerbaQuit to reenter—but that would probably be true no matter what the marketing slogan for Commit was. I don’t think that unique products should be able to make false claims to consumers without constraint, but the Lanham Act might not be the way to go; also, as the court suggested, companies with non-lozenge smoking cessation products actually on the market have an incentive to challenge GSK’s ads if they make false claims.)

Finally, the suit presented a risk of duplicative damages, because if Natural Answers had standing, “then any company that ever had, will have, or, possibly, may have a smoking cessation product whose associated trademark could potentially be ‘weakened’ would have prudential standing.”

This standing problem defeated the state-law claims as well. Lanham Act analysis applies to common law unfair competition claims. And the Florida Deceptive and Unfair Trade Practices Act requires that the plaintiff have been “aggrieved” by the defendant’s conduct. The court of appeals held that the same lack of injury/lack of competition doomed the FDUTPA claim.

New article: User-generated Discontent

User-Generated Discontent: Transformation in Practice, 31 COLUM. J.L. & ARTS 110 (2008) (PDF). Using fanworks as a core example of transformativeness, I argue that creators' theories of fair use should inform fair use doctrine. In particular, I argue that there's a relationship between noncommerciality and fair use: investment in creating new works out of existing ones simply for the nonmonetary benefits of sharing those new works with others is a signal that transformative purpose is present, even if it lacks the traditional signals of transformativeness in commercial works like obvious parody. This also has implications for third-party hosts like YouTube.

Stephen Colbert on the perils of IP overenforcement

On May 28, the Word featured Major League Baseball's attempts to bar Little League teams from using team names that emulate major-league teams without paying for more expensive, licensed uniforms. Colbert suggested that the appropriate response might be to stop referring to any MLB trademarks at all, and just talk about basketball and soccer. Like the Girl Scouts, Little Leaguers are not great targets. (And if teams wearing unlicensed jerseys are likely to cause confusion over source or sponsorship, but MLB-licensed jerseys can be purchased by anyone with the right amount of cash in hand, doesn't that mean that MLB is engaged in naked licensing and has lost its rights?)

Supplemental complaint: internet resale case survives summary judgment

Standard Process, Inc. v. Total Health Discount, Inc., 2008 WL 2337279 (E.D.Wis.)

Hey, an internet resale-of-goods case that isn’t entirely about ridiculous metatag/initial interest confusion claims! Yet somehow they take pride of place anyway. Standard Process sells dietary supplements through resellers; Total Health Discount resells them, but is not an authorized reseller. Standard Process bars authorized resellers from selling to any other health care professionals or businesses; selling via e-commerce including the internet; and selling Standard Process via retail directly to the general public, except behind-the-counter sales from pharmacies or health clinics.

Nonetheless, Total Health carries Standard Process products as one of its over 350 brands. Standard Process terminated one reseller after discovering his connection to Total Health, and sent Total Health a threat letter about its use of the Standard Process logo and pictures of Standard Process supplements on its website. As a result, Total Health removed the logo and the pictures (note: removing the pictures, while understandable, was caving to bullying; that’s an unwarranted demand), but continued to use the Standard Process name and product names in plain type. It also added this disclaimer at the top of its Standard Process page: “Total Health is not an authorized seller of Standard Process, Inc., products. Total Health purchases Standard Process supplements from authorized third parties for resale, and is in no way affiliated with, authorized, sponsored or related to Standard Process, Inc.”

The court denied summary judgment on Total Health’s first sale defense, because Total Health made other statements suggesting an affiliation with Standard Process: it referred to Standard Process’s 75^th anniversary and described its accomplishments using the first-person pronouns “we” and “our.” In addition (and this really shouldn’t have counted, since it’s no evidence of affiliation), Total Health pays to show up in search results for “standard process.” Citing the terrible 10th Circuit Australian Gold decision, the court found that the undisputed facts didn’t establish that Total Health’s conduct was protected by first sale.

The same result applied to the nominative fair use defense. Given (1) the payment for display in search engine results, and (2) the use of “we” and “our,” the court couldn’t determine on summary judgment that Total Health satisfied the third prong of the New Kids test, which requires that the user “do nothing that would, in conjunction with the mark, suggest sponsorship or endorsement by the trademark holder.” Again, (1) is ridiculous; first of all, buying the mark as a keyword isn’t a use “in conjunction” with the mark—at most, it’s use of the mark itself. And even if we make all inferences in favor of the nonmoving party, where’s a scintilla of evidence to suggest that buying keywords suggests sponsorship or endorsement? Nonetheless, the court cited Australian Gold and Promatek to the effect that the search engine purchases could cause initial interest confusion about whether Total Health was “favored or authorized.”

Standard Process also argued that Total Health engaged in false advertising under Wisconsin state law and the Lanham Act because the statement “Total Health purchases Standard Process supplements from authorized third parties for resale” is literally false. Standard Process claimed that, in fact, Total Health buys its supplements directly from Standard Process by using fictitious shell accounts in the names of individuals who opened accounts with Standard Process at the behest of Total Health. This, it argued, harmed its brand and goodwill because Total Health’s statements suggest that Standard Process doesn’t enforce its resale policy, leading to “hundreds” of calls and emails from end users and resellers asking whether Total Health is authorized and why Total Health is selling Standard Process products on the internet. (And this is a consumer harm because …?)

Total Health responded that its conduct caused no harm, and could only increase revenue. Moreover, it argued that its disclaimer is not literally false, since it buys Standard Process products from third party accounts who have authorized Total Health to place orders as their agent. And the “evidence” of confusion is actually from Standard Process account holders complaining about competition, not from consumers. Nor is any confusion material.

The court found that genuine issues of material fact precluded summary judgment here as well. A factfinder could conclude that the statement isn’t literally false, or that it is confusing to consumers who conclude that Standard Process has “changed its philosophy” that its products must be “provided within the context of an ongoing relationship” between an end user and an authorized retailer. (On the latter, really? I’d love to see the evidence that consumers think anything about whether Standard Process enforces its resale policy—I doubt they have any beliefs at all, whether correct or mistaken—my suspicion is that the issue is so immaterial that it never even rises to consciousness.) Moreover, a reasonable factfinder could conclude that the statement is literally false because Total Health is effectively buying for itself, which would mean that Standard Process wouldn’t be required to prove actual confusion. And the statement might be material because it induces consumers to buy the supplements without the advice of a health care professional. (Query: wouldn’t the appropriate remedy be a reformulated disclaimer, to the effect that these are legitimate Standard Process products, but Total Health isn’t an authorized Standard Process reseller?)

There was also an interesting dispute over Standard Process’s claim of intentional interference with contractual relations. Total Health designated the list of customers from whom it purchases Standard Process products as confidential and only for the eyes of Standard Process’s outside counsel. Standard Process claimed that it couldn’t make its case without sharing that information with the business side. But, since it wasn’t clear that the list was necessary to establish whether Standard Process used an enforceable contract, and it was undisputed that Standard Process would terminate every account on that list, causing Total Health to lose 18% of its business, the court refused to remove the confidentiality designation. “Under the circumstances of this case, it is understandable that Standard Process would like to control the sales and marketing of its own products and prevent Total Health from obtaining its products for resale. However, the court is not inclined to grant such relief in a discovery motion.”

Moreover, Standard Process didn’t submit evidence that there was a binding contract. Its unilateral resale policy didn’t establish a contractual relationship with its account holders. “Indeed, in return for account holders’ promises not to sell to other businesses, sell via the Internet, or sell in a retail setting directly to the general public, Standard Process commits to nothing.” It merely retained the option to stop doing business with account holders who act against its interest. That’s not a contract.

In addition, there was no evidence that Total Health interfered with a contractual relationsihp, or caused harm to Standard Process. The sales generated by Total Health could “easily” be a benefit to Standard Process, not an injury. (Isn’t this inconsistent with the reasoning on the false advertising claims?) Thus, Total Health received summary judgment in its favor on this claim.