Panel One
Christopher Buccafusco, Chicago-Kent – Moderator
Gregory N. Mandel, Temple Law, To Promote the Creative Process: Intellectual Property Law and the Psychology of Creativity
IP has historically not paid too much attention to how to promote creativity, but a wealth of psychological and other research has emerged, yielding valuable lessons for IP. Relevant concepts: convergent versus divergent thought processes. Novelty and appropriateness are both required, and this requires multiple cognitive processes in harmony. Originality mostly requires divergent thought, whereas appropriateness requires more analytical, logical convergent thought processes. Most people have difficulty alternating between the two types of processes.
Problem-finding and problem-solving: different kinds of creative achievements. Most people are better at problem-solving; few are proficient at both. IP pays no attention to this, treating all creative achievement uniformly, whether patent or copyright. Nonobviousness in patent applies both to problem-finding and problem-solving, even though the motivations differ in the two areas.
Motivation: intrinsic motivation (individual’s inherent interest/involvement with the challenge) is more likely to produce more creative outputs than extrinsically motivated work (expectation of financial or other awards; past or expected evaluations). Sounds a note of caution across IP. May be detrimental to the extent it turns the reward into a prize. Extrinsically motivated individuals are less engaged and more likely to rely on well known or algorithmic processes to solve the problem. Intrinsically motivated individuals are more likely to explore the challenge and come up with a creative solution.
How to turn external reality into an opportunity that is internalized for an inventor/artist? Certain kinds of external motivators work. A reward contingent on a creative accomplishment can increase intrinsic motivation. Commissioned work is often less creative. Reward that confirms creator’s autonomy/competence without instituting control, that can enhance creativity.
How individuals understand the IP system will thus have an effect on their creativity. If it’s seen as only allowing reward for sufficient creativity, it may be internalized to produce more creative outcomes. Patent’s nonobviousness requirement may promote intrinsic creativity, while copyright’s minimal originality standard may produce extrinsic task performance rewards.
Collaboration: a variety of research shows collaboration can be a big driver of creative achievement. Scientists and artists generate more creative outputs when exposed to more diverse creative input references. Creative scientists/artists often have exposure to multiple disciplines. Cross-pollination across fields works. Extraordinary innovation comes from integrating teaching in disparate fields.
But IP dissuades certain types of creative activity. Perhaps due to myths about differences between scientists and artists (left versus right brain). Troubling because collaboration is now an important driver of innovation.
Large-scale collaborative activity: need for multidisciplinary expertise and often substantial resources for new endeavors. Creativity in such situations necessarily entails formality and adherence to guidelines, so how do we also motivate intrinsic creativity? We want them to internalize the project’s goals. Can IP help structure the social identity of the group? Perceived relationship among contributors plays significant role in success—high levels of interaction and interdependence lead to more creativity. May explain some of the success of open and collaborative peer production. Viewing themselves as a social group, even though they’re spread out all over the world, each individual may be intrinsically motivated to perform his/her own task and coordinate it with the larger goals. Side effect of self-selection.
But the risk is convergent thinking, failure to express opinions “outside the box.” May need periods of individuals working on their own. Prospect of patent or copyright may promote creative output as a motivational goal.
Sean Seymore, Vanderbilt Law, Atypical Inventions
Patent law doesn’t accommodate atypical inventions very well. In theory, patent law’s one-size-fits-all regime should allow the law to evolve in judicial decisions over time as applied to different fields. In practice, patent lags behind new technology.
Patent doctrines from industrial age, 1800s (electrical, mechanical), are incompatible with inventions emerging from unpredictable fields—chemical inventions shoehorned into old law. Judges have long struggled with complex technical subject matter; shows no signs of improvement. Federal Circuit was created to bring stability and predictability, but may therefore be reluctant to modernize patent doctrines. Jurisprudence disconnected from technical communities.
Atypical inventions: a technical aspect of invention/process doesn’t conform to established patent standard. E.g., accidental inventions. Or the science itself doesn’t fit a well-established paradigm: incredible inventions. They tend to be revolutionary or paradigm-shifting, and they often represent a significant technological leap forward, creating new possibilities.
Accidents: First paradigm of invention is inventor sitting around, thinking, conceiving of a compound: A+B=C, forming a complete mental picture of C. Then inventor reduces that mental picture to practice, either by making it or filing a patent application describing how to make it. But what if the inventor goes to the lab and ends up making X though she intended to make C? Scientist has to take time to figure out (1) what she made and (2) what it does. Famous accidents: synthetic process for making indigo; ferrocene; 18-crown-6; buckminsterfullerene—all of these led to the Nobel Prize for the inventors.
Why does it matter? Today the filing date is constructively the date of the invention. One can establish an earlier date of invention, as far back as conception, with adequate proof. This is required to exclude prior art, avoid potentially invalidating prior art, etc. With accident, there’s a gap in time between the accident and the complete mental picture, leading to a potential loss of patent rights. Might lead to an accidental inventor losing patent rights based on a prior art reference/patent application where the reference’s author never made the thing!
This rule values mental over physical contributions. Dan Burk has a paper on this. Alternative: allow the date of the accident to serve as the invention date, as long as the inventor is reasonably diligent in investigating/elucidating its structure. Abbott Labs case from 1999 held that a compound that was physically made and sold in claimed form was complete and available as prior art even though its structure and identity were unknown at the time of sale. Tim Holbrook: The invention had been reduced to practice even though it had yet to be conceived. There should be symmetry between invention completeness for patent defeating purposes and for patent attaining purposes.
Incredible inventions: perpetual motion machines, methods to treat cancer, methods to treat baldness. Often rejected for lack of usefulness: can’t operate to produce intended result, if PHOSITA has reason to doubt the truth. Examiner has to build pf case of inoperability, at which point inventor has to rebut by showing operation—failure leads to rejection for lack of utility and enablement. Credibility lag in mainstream science: examiner often doesn’t know what PHOSITA would think. Problem: peer review can hinder change, blocking dissemination of novel ideas; this can carry over into patent law. Subjective bias: Patent Office and courts felt need to protect public from incredible inventions. Have in the past miscategorized possible inventions as impossible ones. Consequences: loss of patent rights/disincentive to file. Makes patent ignore cutting edge of technology.
Instead, should focus on technical merit instead of credibility. Screening tool should be enablement alone, not usefulness. Enablement is based on objective technical factors like claim breath and the technical aspects of the disclosure. How his rule would work: applied to a claim for “any and all devices and systems which operate in such a manner as to violate the Second Law of Thermodynamics”—any and all is a signal of a bad patent already. Per se nonenabled because of the infinite breadth. Fed Circuit affirmed rejection solely on nonenablement grounds because the disclosure revealed that the invention could not work as claimed.
Keith Sawyer, psychology, Washington U, The Western cultural model of creativity: Its influence on intellectual property law
Studies creativity in groups. Ten beliefs not held by all cultures, associated with individualistic cultures; collectivist cultures have a dramatically different cultural model of creativity. Western model is not explicit, absorbed by osmosis; emerged in 17th-19th centuries.
Is the current IP regime grounded in this belief? If so, how? If this belief is false, what alternative IP regimes would better align with scientific research?
1. The essence of creativity is the moment of insight.
2. Creative ideas emerge mysteriously from the unconscious.
The research doesn’t bear these out. Action (implementation) changes and forms the creative output. Ideas don’t emerge fully formed; creativity takes place over time and the medium is an essential part of the creative process; ideas come while working. Eight stages of creative process: find and formulate the problem; acquire knowledge relevant to the problem; gather related information; take time off for incubation, allow mind to wander; generate many ideas (this is where the Western model focuses); combine ideas in unexpected ways; select the best ideas (good creators have lots of ideas, most of which are bad); then finally externalize the ideas in materials/relevant media. Ideas develop and transform while the author is expressing them; a series of mini-insights come from the background work.
3. Rejecting convention results in greater creativity. Kids are more creative than adults. Creativity is a complete break with the past. Research does not support this belief. Creativity has to be explained by reference to previous experience and prior knowledge. Formal training and conscious deliberation are essential; sparks of insight follow hard work. Most innovations involve breaking at least one rule, but the others stay the same; knowing which rule to break is the key.
4. Creative contributions are more likely to come from an outsider than an expert. Leading people in a field are bound up in the old way of doing things. Student-edited law journals seem to reflect this belief! Research: no, it generally takes ten years to become an expert capable of making creative contributions.
5. People are more creative when they’re alone. Rather, ideas tend to emerge in conversation. Collaboration has increased dramatically over the decades, and the more authors a paper has, the more it’s cited. Grain of truth: creators spend time alone as well as talking: incubation period.
6. Creative ideas are ahead of their time, not recognized until later. This is a myth—e.g., that Gregor Mendel was not recognized at his time. Reputation during lifetime almost never increases after their deaths.
7. Creativity is a personality trait; if you have more of it, you’re more creative in every endeavor, and if you don’t you won’t be creative. Research: creativity is not a stable personality trait, though are there dispositions that make a difference—intrinsic motivation. They can be learned and are not genetic.
8. Creativity is based in the right brain. This is not true.
9. Creativity and mental illness are connected. This is not true.
10. Creativity is a healing, life-affirming activity. This is supported by the research, at least in Western cultures oriented towards individualized, self-actualizing goals. Less likely to be part of a non-Western cultural model of creativity.
Jessica Payne, psychology, Notre Dame, Sleep on It!
People have been scanned performing creative activities—associating words: see amygdala and anterior cortex, associated with emotions, before the insight comes.
The neurobiology of sleep, memory, and creativity. Ideally, you’d spend a brief amount of time transitioning into deep delta sleep. Neurochemical modulation varies across the wake-sleep cycle. Brain is doing plenty of stuff at night, including with SSRIs (cf. depression drugs). Regional activation during sleep: prefrontal cortex, associated with rationality, is switched off, but other portions of the brain are active. There’s communication between hippocampus and amygdala/neocortex.
Episodic memories (where you parked today) versus general knowledge (where to park) are separable but associated in the brain. Sleep consolidates memories. It also transforms and restructures what we know, allowing us to use memories for the future. Neat point about false memory test (show people a bunch of words related to a topic; many will say they recognize additional words also related to the topic as having been shown to them)—that’s a false memory in one sense, but represents an ability to extract the gist of the list. Memory deteriorates after 12 hours of wakefulness. But deterioration slows substantially for people who sleep. Gist words in false memory test: deterioration for wakefulness, but improvement for people who sleep—you rarely see people improving after delay, but here it is!
We also remember what’s emotionally relevant: if someone sticks a gun in your face, you will remember the gun very well but not the face of the perpetrator, with significant implications for eyewitness testimony. Stimulus: background scene is neutral; foreground is either a car accident or an intact car. Test people on components of scene. If scene is neutral, people are basically the same at remembering foreground and background. If scene has emotional object in foreground, memory for foreground is better and background worse v. neutral scene. Wakefulness: same massive deterioration over 12 hours, whether people are awake or asleep. For emotional scenes, deterioration over wakefulness, deterioration for background after sleep, but enhancement for foreground after sleep.
Brain calculates what to remember and forget, and how to put things together differently. Unusual intrusions in data for the list recall test. Kept finding people who recalled not just semantic associates, but words like “cloud,” “swirl.” Where did they come from? These intrusions were 2 ½ times more common after sleep.
Lots of anecdotal evidence of discoveries after sleep (and years of preparation): famous story about Kekulé conceiving of benzene as a closed, hexagonal, six-membered ring.
Experiment: teach people to pick one of two images that are, though they’re not told, transitive. That is, the rule is A > B, B > C, C > D, and so on, but the images are nonsense images. Can people learn the transitivity rule? Turns out, not very well—but if you let them sleep, they are much more likely to make the intuitive leap and say A > C even though they’ve never seen that pairing before. Similar results on finding hidden mathmatical rules—sleep seems to involve processing, connecting disparate items, finding patterns/rules in daily experiences even without prior knowledge that rules are there.
Jessica Silbey: auditory versus visual memory—watching a film of the ocean may be like being at the ocean. What role for false memories?
Payne: dreams tend to be profoundly visual. Our ability to accept crazy visual information in dreams without freaking out is not well understood, but may well have to do with deactivation of prefrontal cortex.
Q for Mandel: how to set level of creativity in copyright law to incentivize better?
Mandel: Has some ideas for joint authors/inventors—when we set the level in copyright, we want to take many factors into account. Intrinsic motivation would imply elevated standard. But may not be overall socially optimal.
Mark McKenna’s comment highlighted the tension between Seymore and Sawyer on the issue of impossible discoveries—Sawyer maintains that, though peer review has problems, mostly people who get things right are accepted broadly as having gotten things right. It does happen in isolated incidents, but over large samples creative breakthroughs are generally recognized as breakthroughs at the time. Sawyer does agree with Seymore on the importance of accidents: recognizing a good idea is incredibly important.
Seymore is more interested in the importance of the time lag—if you submit a patent application at the same time you submit your results for peer review, the scientific community will lag behind the PTO.
McKenna also asked Payne about suggestibility of memory: she finds some pieces of Elizabeth Loftus’s work more convincing that others. You can’t really run an experiement where you convince someone they’ve been sexually abused by their fathers—a handful might be susceptible (and kids are a huge area of investigation), but how many? Memories are suggestible, but that’s the price we pay for tremendously flexible systems that don’t create exact reproductions of what we encounter: reproduction is not what memory is for. Use, organization, and solving future problems are the functions of memory, not pure recording.
Under stress, you get false memories but they tend to abide by the general gist of the story. That does have big implications for the law, but we need more research to find its boundaries.
Friday, November 19, 2010
Monday, November 15, 2010
Trademark infringement from sharing a specialized license plate?
In 1999, nonprofit plaintiff REF (loves predators, doesn’t believe in global warming) allegedly signed a contract with the Colorado Department of Motor Vehicles for a specialty license plate. The plate features a drawing of the head of an eagle (or other bird of prey) and the words "Respects Wildlife." REF then obtained a Colorado state trademark registration for the plate and registered a copyright in the design. At first, only members of REF could get the plate. Recently, the Colorado legislature amended the statute governing specialty license plates to permit issuance of the plate to members of RMRP, another Colorado nonprofit. RMRP then began to use an “essentially identical” plate to attract members, and put images of the license plate on its website and in its promotional materials. REF sued.
RMRP moved to dismiss the non-copyright claims (Lanham Act false designation of origin, unfair competition, and false advertising, with coordinate state law claims). It argued that there was no connection to interstate commerce, because only owners of vehicles registered in Colorado may receive the specialty plates at issue. REF argued that posting images of the design on RMRP’s website satisfied the interstate commerce requirement, and that RMRP issues vouchers to its members for the license plate, and some members may not be Colorado residents. (In which case, could they even get the license plates?)
The court quoted precedent that, while the internet is generally an instrumentality of interstate commerce, that doesn’t mean that any use of the internet is necessarily commercial for Lanham Act purposes. “However, the pleadings claim the use of the plate to solicit membership throughout the world, which may be found to be a commercial use in interstate commerce.” This was enough to state a plausible claim, even though there was a question whether the specific activity associated with the license plate itself had any economic impact outside the state.
(Unmentioned at this point is a really interesting issue: who’s allegedly confused, and over what? If the use of the design doesn’t make RMRP members think they’re REF members, then all that’s at issue is a very odd kind of post-sale confusion, mediated through the state. And isn’t the state’s role here also of interest? If it specifically permitted this use, then there’s at least some argument for deference to that judgment.)
RMRP also argued that the state law claims were preempted by copyright. At a minimum, REP could plead its claims in the alternative, since RMRP denied the validity of the copyright, so there was no preemption based on the pleadings.
Standing claims another victim
Nature's Earth Products, Inc. v. Planetwise Products, Inc., 2010 WL 4384218 (S.D. Fla.)
Another day, another use of standing to do what the injury requirement should. Plaintiff Nature’s Earth makes Feline Pine clumping cat litter, which it promotes as natural and chemical-free. It sued its competitor Planetwise alleging patent infringement; this was voluntarily dismissed, but Planetwise counterclaimed for state and federal false advertising. Planetwise alleged that Nature’s Earth’s claims for its product’s “chemical-free [and] additive-free composition” were false because the litter actually contains the chemical polyacrylamide.
The court granted Nature’s Earth’s motion to dismiss the counterclaims for lack of standing. It sua sponte considered Article III standing, which requires allegations of actual or threatened injury fairly traceable to the challenged conduct that would be redressed by a favorable ruling.
Here, the only allegation of an injury was the conclusory and formulaic statement, "[Defendant] has been injured as a result of [Plaintiff's] deceptive, false, fraudulent, and misleading advertisements, marketing, and promotion, thereby resulting in damages to [Defendant]." “While Defendant need not plead injury with great detail, it must at least allege some factual matter supporting a reasonable inference that Defendant was injured by Plaintiff.” This didn’t make it under Iqbal and Twombly.
A proper factual allegation of lost sales and diverted customers might satisfy the constitutional standing requirements, so the court granted leave to amend.
Perhaps to guide later pleading, the court went on to find that Planetwise lacked prudential standing. To recap, the factors: (1) Is the injury of a type that Congress sought to redress in providing a private remedy for violations of the [Lanham Act]? (2) The directness or indirectness of the asserted injury. (3) The proximity or remoteness of the party to the alleged injurious conduct. (4) The speculativeness of the damages claim. (5) The risk of duplicative damages or complexity in apportioning damages.
(1) Competitive harm is typically diversion of customers. Because Planetwise pled no facts describing the nature of its alleged injury, factor one weighed against it. (2) This is a causation requirement, looking for a direct relationship between the accused conduct and the claimed injury; the failure to allege relevant facts also weighed against prudential standing. (3) Is there some other identifiable class of commercial entities with a closer connection to the injury who might sue? The most appropriate plaintiffs are competitors who lost customers, and though Planetwise is a competitor, it didn’t allege a recognizable injury and thus did not allege the requisite proximity to the false advertising. Comment: 1-3 here seem pretty formalistic. Is there any way to interpret the allegation of injury, however general, other than that Planetwise lost customers to Nature’s Earth?
(4) Speculativeness: because Planetwise didn’t allege how it was harmed, its entitlement to any damages would be pure speculation. Its demand for disgorgement of profits was also problematic because discerning the portion of profits derived from deceived customers versus profits derived from those who would have bought anyway would be highly speculative if not wholly unworkable. (5) Risk of duplicative damages (oh, how I hate this factor and its limitation of Lanham Act remedies to markets with few competitors): Because Planetwise failed to allege anything unique about its harm, for example that the ads were directed towards it or its customer base, every competitor in the natural litter market could sue if Planetwise were granted prudential standing. Due to the risk of duplicative damages and the complexity in apportioning them, the fifth factor weighed against a finding of prudential standing.
The court noted that its analysis only applied to the current counterclaim, not to a possible amendment. “Any new allegations should assert a recognizable injury, such as lost sales, that results directly from Plaintiff's alleged false advertising. Defendant should also allege, if it can, that its damages would not be duplicative and apportionment not overly complex, for example by alleging harm unique to Defendant vis-a-vis other natural-litter competitors.” Unanswered question: suppose Planetwise alleges that it has 20% of the market and that the false advertising gave Nature’s Earth a competitive advantage against the whole market. Shouldn’t it then be enough to claim 20% of the damages? Damages experts do this kind of apportionment in other cases—PBM’s case against Enfamil, for example, proceeded to a multimillion-dollar verdict even with the presence of substantial competitor Similac in the market. If the court really means “for example,” Planetwise shouldn’t have to allege that it was targeted. The Lanham Act, after all, covers both false boasts and disparagement, not just disparagement.
Another day, another use of standing to do what the injury requirement should. Plaintiff Nature’s Earth makes Feline Pine clumping cat litter, which it promotes as natural and chemical-free. It sued its competitor Planetwise alleging patent infringement; this was voluntarily dismissed, but Planetwise counterclaimed for state and federal false advertising. Planetwise alleged that Nature’s Earth’s claims for its product’s “chemical-free [and] additive-free composition” were false because the litter actually contains the chemical polyacrylamide.
The court granted Nature’s Earth’s motion to dismiss the counterclaims for lack of standing. It sua sponte considered Article III standing, which requires allegations of actual or threatened injury fairly traceable to the challenged conduct that would be redressed by a favorable ruling.
Here, the only allegation of an injury was the conclusory and formulaic statement, "[Defendant] has been injured as a result of [Plaintiff's] deceptive, false, fraudulent, and misleading advertisements, marketing, and promotion, thereby resulting in damages to [Defendant]." “While Defendant need not plead injury with great detail, it must at least allege some factual matter supporting a reasonable inference that Defendant was injured by Plaintiff.” This didn’t make it under Iqbal and Twombly.
A proper factual allegation of lost sales and diverted customers might satisfy the constitutional standing requirements, so the court granted leave to amend.
Perhaps to guide later pleading, the court went on to find that Planetwise lacked prudential standing. To recap, the factors: (1) Is the injury of a type that Congress sought to redress in providing a private remedy for violations of the [Lanham Act]? (2) The directness or indirectness of the asserted injury. (3) The proximity or remoteness of the party to the alleged injurious conduct. (4) The speculativeness of the damages claim. (5) The risk of duplicative damages or complexity in apportioning damages.
(1) Competitive harm is typically diversion of customers. Because Planetwise pled no facts describing the nature of its alleged injury, factor one weighed against it. (2) This is a causation requirement, looking for a direct relationship between the accused conduct and the claimed injury; the failure to allege relevant facts also weighed against prudential standing. (3) Is there some other identifiable class of commercial entities with a closer connection to the injury who might sue? The most appropriate plaintiffs are competitors who lost customers, and though Planetwise is a competitor, it didn’t allege a recognizable injury and thus did not allege the requisite proximity to the false advertising. Comment: 1-3 here seem pretty formalistic. Is there any way to interpret the allegation of injury, however general, other than that Planetwise lost customers to Nature’s Earth?
(4) Speculativeness: because Planetwise didn’t allege how it was harmed, its entitlement to any damages would be pure speculation. Its demand for disgorgement of profits was also problematic because discerning the portion of profits derived from deceived customers versus profits derived from those who would have bought anyway would be highly speculative if not wholly unworkable. (5) Risk of duplicative damages (oh, how I hate this factor and its limitation of Lanham Act remedies to markets with few competitors): Because Planetwise failed to allege anything unique about its harm, for example that the ads were directed towards it or its customer base, every competitor in the natural litter market could sue if Planetwise were granted prudential standing. Due to the risk of duplicative damages and the complexity in apportioning them, the fifth factor weighed against a finding of prudential standing.
The court noted that its analysis only applied to the current counterclaim, not to a possible amendment. “Any new allegations should assert a recognizable injury, such as lost sales, that results directly from Plaintiff's alleged false advertising. Defendant should also allege, if it can, that its damages would not be duplicative and apportionment not overly complex, for example by alleging harm unique to Defendant vis-a-vis other natural-litter competitors.” Unanswered question: suppose Planetwise alleges that it has 20% of the market and that the false advertising gave Nature’s Earth a competitive advantage against the whole market. Shouldn’t it then be enough to claim 20% of the damages? Damages experts do this kind of apportionment in other cases—PBM’s case against Enfamil, for example, proceeded to a multimillion-dollar verdict even with the presence of substantial competitor Similac in the market. If the court really means “for example,” Planetwise shouldn’t have to allege that it was targeted. The Lanham Act, after all, covers both false boasts and disparagement, not just disparagement.
Friday, November 12, 2010
Amazon not responsible for Associate's ad
Sellify Inc. v. Amazon.com, Inc., 2010 WL 4455830 (S.D.N.Y.)
Sellify sued Amazon for state and federal false advertising/unfair competition. Sellify’s sole proprietor created OneQuality LLC with two partners, Meli and O’Connor. OneQuality buys used electronics and sells them on eBay or on its website, onequality.com. It earned six-figure profits in 2006 and 2007, though 2007’s profits were only half those of 2006. In late 2007, Meli decided to shut down the company, and it stopped restocking inventory; in 2008, its website and eBay store operated only minimally. Maki acquired the rights to the OneQuality brand and began operating the website and eBay store in 2009. Sellify's profits dropped to approximately $50,000 in 2009.
Amazon allows more than 3 million Associates to link to its site. If a customer comes to Amazon through an Associate link, the Associate earns a fee, usually around 4%, on items placed in the customer’s shopping cart within 24 hours. Amazon provides detailed training and assistance in designing ads, and allows Associates to use the Amazon trademark and logo in their ads. But Amazon doesn’t monitor or control the content of Associates’ ads (though its contract bars them from disparaging or infringing third party IP) or authorize Associates to act as its agents. If Amazon finds a violation of the contract, it issues a warning threatening to terminate the Associate’s account and withhold accrued advertising fees if the Associate persists, and it follows up on the threat where necessary.
Through early 2009, Associates could buy keywords for sponsored ads. In March 2009, an Associate, Cutting Edge Designs, bought “onequality.com” and several close variants from Google. The triggered ad stated "Don't Buy from Scammers" or "Beware the SCAM Artists" and linked to the Amazon website. Though the ads indicated no source other than Amazon, Cutting Edge bought the ads without Amazon’s knowledge or consent.
Maki contacted Amazon’s Seller Central department, which told him that there was nothing that could be done about the ads. Sellify then threatened to sue Amazon, at which point Amazon told Cutting Edge about the complaint and threatened to close Cutting Edge's Associates account and withhold its accrued advertising fees if it did not stop running the ads. Amazon had no independent ability to remove the ads. After Sellify sent a second demand letter, Amazon terminated Cutting Edge’s account and withheld all unpaid ad fees; the keyword ads eventually stopped appearing. Sellify never contacted Cutting Edge or Google (though it’s not clear to me that the ads violated Google’s guidelines).
Sellify alleged $2.4 million in damages. In the six months the ads were active, they were viewed 1069 times and clicked on 61 times.
There was no direct liability for unlawful use of another’s trademark. Cutting Edge, not Amazon, designed and purchased the ads at issue. Courts in other circuits have recognized vicarious liability under the Lanham Act under theories of both actual and apparent authority. However, Sellify alleged insufficient facts to support either theory. Actual: the contract specifically disclaimed any agency relationship and expressly provided that Cutting Edge didn’t have the power to bind Amazon. Amazon didn’t control the form or substance of Cutting Edge’s ads and had no authority to remove them from the internet. “After being informed of the ads' existence in July 2009, Amazon exercised the only possible influence it had over them: breaking off contractual relations with Cutting Edge and withholding Cutting Edge's accrued advertising fees under the Operating Agreement. While these actions eventually led Cutting Edge to cease running the ads the following month, there is a wide chasm between such indirect contractual influence and the direct authority and control necessary for a finding of actual authority under agency law.”
Apparent authority exists when "a principal, either intentionally or by lack of ordinary care, induces [a third party] to believe that an individual has been authorized to act on its behalf." There was no evidence of this here. The contract allowed Cutting Edge to link to Amazon in its ads. But “standing alone, the mere act of allowing another to link to one's website, even if undertaken for commercial gain, cannot support a finding of apparent authority.” “[A] reasonable user of the internet would not interpret such a tenuous ‘link’ between entities as firmly indicative of an agency relationship.”
What about contributory infringement? (Given the ad text, I don’t know why we’re talking about infringement and not false advertising by disparagement/defamation, but ok.) There was no evidence that Amazon intentionally induced Cutting Edge to infringe; rather, it specifically sought to bar infringement. Did Amazon continue to supply a product to Cutting Edge knowing that it was infringing? First, Amazon supplied a service, not a product. (Is this even true in these circumstances? The relevant service is apparently the “right to link,” but I don’t believe anybody needs a contract to have that right.)
Following Tiffany v. eBay, and assuming without deciding that service providers can also be contributory infringers, the service provider must have “more than a general knowledge or reason to know that its service is being used” as a platform for trademark infringement. Particularized knowledge is required. Tiffany also spoke favorably of the idea that a service provider can be liable only when it has direct control of the instrumentality used to infringe. There was no evidence of particularized knowledge or direct control. “Although plaintiff had informed Amazon of Cutting Edge's infringing activity by calling their ‘Seller Central’ department and speaking with an unknown Amazon representative, these contacts pale in comparison to those found insufficient to satisfy the knowledge requirement in eBay--where the plaintiff had sent eBay two general demand letters and literally thousands of ‘Notice of Claimed Infringement’ submissions with respect to specific instances of infringement.” By contrast, Amazon acted once Sellify threatened to sue, and thus didn’t continue to supply its services to Cutting Edge after it knew that Cutting Edge was infringing.
This is cute, but misleading. Let me be clear: I don’t think these facts support contributory liability. But it’s not particularly honest to compare this situation to that in eBay on those terms. Here, there was particularized notification of the specific “infringing” behavior that Amazon’s service rep said it could do nothing about (until the lawyer got involved). By contrast, every time eBay was told about a specific infringing listing, that listing was removed. eBay’s particularized knowledge of infringements that it then fixed simply didn’t justify imputing knowledge to it of other, similar infringements it didn’t fix. The difference between these situations is direct control, not particularized knowledge. It’s not as if the individual eBay reps who did the grunt work in eBay were any more “known” or any more employees than the “unknown” rep who blew Sellify off here.
This was all Lanham Act analysis, but the reasoning was the same for alleged violations of the Connecticut Unfair Trade Practices Act ("CUTPA), unfair competition, and defamation/trade libel.
Anyway, even with viable liability claims, Sellify’s asserted damages were far too speculative to survive summary judgment. “Sellify crudely calculated its damages by subtracting its estimated 2009 profits from OneQuality's 2007 profits and multiplying by nine. Beyond the fact that Sellify has failed to put forth any evidence that the ads caused any potential customer to choose not to purchase its products, the evidence flatly contradicts Sellify's apparent contention that the entirety of its drop in sales from 2007 to 2009 is attributable to Cutting Edge's disparaging ads.” Its profits fell 50% from 2006-2007, long before the ads appeared. The store was virtually shuttered from late 2007 to early 2009, at which point it was restarted with no staff and less inventory. The ads only appeared 1069 times and got 61 clickthroughs. Thus, there was no support for the assumption that the ads were a but-for cause of driving 2009 profits down from 2007 profits. There was also no basis for alleged harm to future profitability; “given the paucity of views the ads received, it is highly unlikely” that any damage to Sellify’s future reputation occurred.
Sellify sued Amazon for state and federal false advertising/unfair competition. Sellify’s sole proprietor created OneQuality LLC with two partners, Meli and O’Connor. OneQuality buys used electronics and sells them on eBay or on its website, onequality.com. It earned six-figure profits in 2006 and 2007, though 2007’s profits were only half those of 2006. In late 2007, Meli decided to shut down the company, and it stopped restocking inventory; in 2008, its website and eBay store operated only minimally. Maki acquired the rights to the OneQuality brand and began operating the website and eBay store in 2009. Sellify's profits dropped to approximately $50,000 in 2009.
Amazon allows more than 3 million Associates to link to its site. If a customer comes to Amazon through an Associate link, the Associate earns a fee, usually around 4%, on items placed in the customer’s shopping cart within 24 hours. Amazon provides detailed training and assistance in designing ads, and allows Associates to use the Amazon trademark and logo in their ads. But Amazon doesn’t monitor or control the content of Associates’ ads (though its contract bars them from disparaging or infringing third party IP) or authorize Associates to act as its agents. If Amazon finds a violation of the contract, it issues a warning threatening to terminate the Associate’s account and withhold accrued advertising fees if the Associate persists, and it follows up on the threat where necessary.
Through early 2009, Associates could buy keywords for sponsored ads. In March 2009, an Associate, Cutting Edge Designs, bought “onequality.com” and several close variants from Google. The triggered ad stated "Don't Buy from Scammers" or "Beware the SCAM Artists" and linked to the Amazon website. Though the ads indicated no source other than Amazon, Cutting Edge bought the ads without Amazon’s knowledge or consent.
Maki contacted Amazon’s Seller Central department, which told him that there was nothing that could be done about the ads. Sellify then threatened to sue Amazon, at which point Amazon told Cutting Edge about the complaint and threatened to close Cutting Edge's Associates account and withhold its accrued advertising fees if it did not stop running the ads. Amazon had no independent ability to remove the ads. After Sellify sent a second demand letter, Amazon terminated Cutting Edge’s account and withheld all unpaid ad fees; the keyword ads eventually stopped appearing. Sellify never contacted Cutting Edge or Google (though it’s not clear to me that the ads violated Google’s guidelines).
Sellify alleged $2.4 million in damages. In the six months the ads were active, they were viewed 1069 times and clicked on 61 times.
There was no direct liability for unlawful use of another’s trademark. Cutting Edge, not Amazon, designed and purchased the ads at issue. Courts in other circuits have recognized vicarious liability under the Lanham Act under theories of both actual and apparent authority. However, Sellify alleged insufficient facts to support either theory. Actual: the contract specifically disclaimed any agency relationship and expressly provided that Cutting Edge didn’t have the power to bind Amazon. Amazon didn’t control the form or substance of Cutting Edge’s ads and had no authority to remove them from the internet. “After being informed of the ads' existence in July 2009, Amazon exercised the only possible influence it had over them: breaking off contractual relations with Cutting Edge and withholding Cutting Edge's accrued advertising fees under the Operating Agreement. While these actions eventually led Cutting Edge to cease running the ads the following month, there is a wide chasm between such indirect contractual influence and the direct authority and control necessary for a finding of actual authority under agency law.”
Apparent authority exists when "a principal, either intentionally or by lack of ordinary care, induces [a third party] to believe that an individual has been authorized to act on its behalf." There was no evidence of this here. The contract allowed Cutting Edge to link to Amazon in its ads. But “standing alone, the mere act of allowing another to link to one's website, even if undertaken for commercial gain, cannot support a finding of apparent authority.” “[A] reasonable user of the internet would not interpret such a tenuous ‘link’ between entities as firmly indicative of an agency relationship.”
What about contributory infringement? (Given the ad text, I don’t know why we’re talking about infringement and not false advertising by disparagement/defamation, but ok.) There was no evidence that Amazon intentionally induced Cutting Edge to infringe; rather, it specifically sought to bar infringement. Did Amazon continue to supply a product to Cutting Edge knowing that it was infringing? First, Amazon supplied a service, not a product. (Is this even true in these circumstances? The relevant service is apparently the “right to link,” but I don’t believe anybody needs a contract to have that right.)
Following Tiffany v. eBay, and assuming without deciding that service providers can also be contributory infringers, the service provider must have “more than a general knowledge or reason to know that its service is being used” as a platform for trademark infringement. Particularized knowledge is required. Tiffany also spoke favorably of the idea that a service provider can be liable only when it has direct control of the instrumentality used to infringe. There was no evidence of particularized knowledge or direct control. “Although plaintiff had informed Amazon of Cutting Edge's infringing activity by calling their ‘Seller Central’ department and speaking with an unknown Amazon representative, these contacts pale in comparison to those found insufficient to satisfy the knowledge requirement in eBay--where the plaintiff had sent eBay two general demand letters and literally thousands of ‘Notice of Claimed Infringement’ submissions with respect to specific instances of infringement.” By contrast, Amazon acted once Sellify threatened to sue, and thus didn’t continue to supply its services to Cutting Edge after it knew that Cutting Edge was infringing.
This is cute, but misleading. Let me be clear: I don’t think these facts support contributory liability. But it’s not particularly honest to compare this situation to that in eBay on those terms. Here, there was particularized notification of the specific “infringing” behavior that Amazon’s service rep said it could do nothing about (until the lawyer got involved). By contrast, every time eBay was told about a specific infringing listing, that listing was removed. eBay’s particularized knowledge of infringements that it then fixed simply didn’t justify imputing knowledge to it of other, similar infringements it didn’t fix. The difference between these situations is direct control, not particularized knowledge. It’s not as if the individual eBay reps who did the grunt work in eBay were any more “known” or any more employees than the “unknown” rep who blew Sellify off here.
This was all Lanham Act analysis, but the reasoning was the same for alleged violations of the Connecticut Unfair Trade Practices Act ("CUTPA), unfair competition, and defamation/trade libel.
Anyway, even with viable liability claims, Sellify’s asserted damages were far too speculative to survive summary judgment. “Sellify crudely calculated its damages by subtracting its estimated 2009 profits from OneQuality's 2007 profits and multiplying by nine. Beyond the fact that Sellify has failed to put forth any evidence that the ads caused any potential customer to choose not to purchase its products, the evidence flatly contradicts Sellify's apparent contention that the entirety of its drop in sales from 2007 to 2009 is attributable to Cutting Edge's disparaging ads.” Its profits fell 50% from 2006-2007, long before the ads appeared. The store was virtually shuttered from late 2007 to early 2009, at which point it was restarted with no staff and less inventory. The ads only appeared 1069 times and got 61 clickthroughs. Thus, there was no support for the assumption that the ads were a but-for cause of driving 2009 profits down from 2007 profits. There was also no basis for alleged harm to future profitability; “given the paucity of views the ads received, it is highly unlikely” that any damage to Sellify’s future reputation occurred.
Thursday, November 11, 2010
Zynga and 230
Eric Goldman says everything I would have about Swift v. Zynga Game Network, Inc., No. C09-05443 (N.D. Cal. Nov. 3, 2010), so I won't, other than to say that it's really disappointing to see a court talking about a service provider's control of "design, layout, and format" as having any relevance to a 230 defense. Unless the design, layout, and format make the content illegal (which I can only imagine if they omitted/obscured important information required by law to be disclosed that the underlying content provider had attempted to provide), they are simply irrelevant to responsibility for the unlawful content.
The line between product disparagement and defamation is easily crossed
Dorman Products, Inc. v. Dayco Products, LLC, 2010 WL 4342014 (E.D. Mich.)
Previous opinion discussed here. Dorman countersued Dayco for defamation, trade disparagement, tortious interference with prospective contractual relationships, and unfair competition/false advertising under state and federal law.
In 2009, Dorman launched a line of automatic belt tensioners for the automotive aftermarket. It alleged that all of its automatic belt tensioners comply with applicable Society of Automotive Engineers (SAE) standards, which are important to consumers. Dorman alleged that its tensioners “garnered immediate attention” in the market because they provided significant value at significantly lower prices than those of Dayco and other dominant suppliers. As a result, Dorman alleged, Dayco distributed a PowerPoint presentation claiming that Dayco’s tensioners conformed to exacting standards and that, tested under the same standards, eight of twenty Dorman tensioners failed to meet them.
Dorman alleged that Dayco’s testing was in-house and didn’t rely on SAE standards, but used its own specifications, which did not employ reliable scientific testing methodology or statistical analysis. However, the presentation was allegedly intentionally designed to mislead customers into believing that Dayco used applicable industry standards, including relevant SAE standards, which in turn was likely to influence customers’ purchase decisions.
Dayco also sued Dorman for trade dress infringement, false advertising, and unfair competition, alleging that Dorman’s tensioners are inferior to Dayco’s. Dayco sent out an email about the lawsuit to customers and industry publications, stating that Dayco believed Dorman imported its tensioners from China and that Dayco was concerned that Dorman’s designs would mislead consumers and affect Dayco’s reputation. Aftermarket News and Automotive Week/The Greensheet published stories repeating Dayco’s allegations.
In addition, Dorman alleged that an interview published on Dayco's homepage with Dayco President and SAE member Dennis Walveart, entitled "Differentiate Between Quality and Sub-Standard Parts", was part of an intentional pattern by Dayco to falsely convey that "lower cost, private label aftermarket parts" are of inferior quality to Dayco's "simply because they are less costly" than the original equipment manufacturers' name brands. (Sample statement: “[I]f a technician goes to a name brand, whether it's Dayco, which is ours, or Federal Mogul, or Gates, our competition, they can assure themselves that they're going to get a good quality product. They go to a private brand, not necessarily 100% guarantee that's going to be a good quality product.”) Dorman alleged that consumer research showed that this campaign had worked: “a market research firm focused on the automotive aftermarket industry, recently reported that consumers of aftermarket products perceive a quality difference between private label and name brands.”
Dayco moved to dismiss the defamation claim, arguing that the facts only supported a claim for trade disparagement under Pennsylvania law (a separate claim which Dayco did not move to dismiss), because the statements were directed at Dorman’s products, not at Dorman itself. In business defamation cases, courts look at whether the defendant made a statement that "clearly imputes, to the person to whom it refers, characteristics and conduct which are incompatible with the proper and lawful exercise of a business,” and "any language which unequivocally, maliciously, and falsely imputes to an individual or corporation want of integrity in the conduct of his or its business is actionable." Under Pennsylvania law, a statement about the quality of a company’s goods can cross the line from disparagement to defamation when the statement “imputes to the corporation fraud, deceit, dishonesty, or reprehensible conduct in its business in relation to said goods or products."
Statements about the inferiority of Dorman’s products couldn’t make out a defamation claim. Allegations of inferiority are “par for the course” and "the most innocuous kind of puffing," generally not capable of misleading the public. The email and the website interview, among others, were therefore not defamatory. This includes the China importation statement, even though Dorman alleged that this was "an accusation synonymous with inferior products and designed to scare consumers with visions of lead-tainted products, Chinese drywall, and cadmium-laced children's toys," as well as Dayco’s expressed concern that confusion over Dorman products would harm Dayco’s reputation as a provider of superior products.
However, statements that could be construed as suggesting that Dorman misrepresented product quality are actionable. Some of Dayco’s statements could be read to impute dishonesty or improper business practices to Dorman. The Powerpoint comparing Dayco’s “exacting standards” to Dorman’s allegedly defective products could suggest that Dorman “misled the public into believing that their products are in conformance with SAE standards when they are not. The statement further suggests that Dorman misrepresented the quality of its products because, according to Dayco, the products are defective.”
Moreover, some statements imputed an intent to mislead the public to Dorman, such as asserting that the resemblance between Dayco and Dorman products wasn’t a coincidence. Dayco argued that it only claimed that the products were misleading, not that Dorman intentionally misled customers, but the court was unconvinced. Asserting infringement of trade dress, noncoincidental similarity, and misleadingness to consumers “has the potential” to impute an intent to mislead to Dorman, which is enough to survive a motion to dismiss. This conclusion was bolstered by the Automotive Week story stating that Dayco accused Dorman of “intentionally deceiving purchasers by selling products with Dayco look-alike housing but that contain inferior quality and largely different types of internal parts.”
Thus, statements that went beyond puffing/inferiority claims survived the motion to dismiss, including statements in Dayco’s complaint in the other lawsuit. (I guess Dayco didn’t argue litigation privilege?)
Tortious interference: this requires that: 1) plaintiff had prospective contractual relationships; 2) defendant's purpose or intent was to harm the plaintiff by preventing the relation from occurring; 3) there was an absence of any privilege or justification on the part of the defendant; and 4) actual damage resulted from defendant's conduct. How do you plead (2), intent, after Iqbal and Twombly? Here, Dorman did little more than plead the elements and various conclusory statements, which was insufficient to survive a motion to dismiss. “The assertions by Dorman that Dayco's statements were ‘defamatory’, that Dayco engaged in unfair competition and that Dayco ‘maliciously interfer[ed] with Dorman's prospective contractual relationships’ are legal conclusions, which the Court is not required to accept.” Other than that, Dorman only had a subjective belief that Dayco intended to harm Dorman. “The statements made by Dayco, do not, on their face, establish, or even give rise to the inference, that Dayco intended to harm any prospective contractual relationship Dorman may have had. The statements could just as plausibly be seen as statements intended to gain an economic advantage over a competitor in the market.” Pleading facts consistent with liability was insufficient.
The court also found that Dorman failed to properly allege (1), a prospective business relationship, which required more than a mere hope—a reasonable likelihood or probability. Dorman might have alleged sufficient harm by alleging that “customers and prospective customers” had informed it that Dayco’s allegations had deterred them from purchases, but that wasn’t enough to allege a reasonable likelihood or probability that a contractual relationship would be formed.
Unfair competition under Pennsylvania state law through false statements, tortious interference, and intent to illegally restrain competition: Dayco argued that unfair competition in Pennsylvania is generally limited to passing off. There was no passing off allegation here. Dorman contended that Pennsylvania courts have extended unfair competition to include tortious interference and to track the Lanham Act, but it only cited (and the court could only find) federal court cases. “Although the Third Circuit has seemingly extended the grounds for a Pennsylvania unfair competition claim, the Pennsylvania state courts have not.” In any event, federal courts equating Pennsylvania unfair competition with the Lanham Act seemed to be talking about §43(a)(1)(A)/passing off. A court in the Sixth Circuit was not in a position to extend Pennsylvania law, so the unfair competition claim was dismissed.
Previous opinion discussed here. Dorman countersued Dayco for defamation, trade disparagement, tortious interference with prospective contractual relationships, and unfair competition/false advertising under state and federal law.
In 2009, Dorman launched a line of automatic belt tensioners for the automotive aftermarket. It alleged that all of its automatic belt tensioners comply with applicable Society of Automotive Engineers (SAE) standards, which are important to consumers. Dorman alleged that its tensioners “garnered immediate attention” in the market because they provided significant value at significantly lower prices than those of Dayco and other dominant suppliers. As a result, Dorman alleged, Dayco distributed a PowerPoint presentation claiming that Dayco’s tensioners conformed to exacting standards and that, tested under the same standards, eight of twenty Dorman tensioners failed to meet them.
Dorman alleged that Dayco’s testing was in-house and didn’t rely on SAE standards, but used its own specifications, which did not employ reliable scientific testing methodology or statistical analysis. However, the presentation was allegedly intentionally designed to mislead customers into believing that Dayco used applicable industry standards, including relevant SAE standards, which in turn was likely to influence customers’ purchase decisions.
Dayco also sued Dorman for trade dress infringement, false advertising, and unfair competition, alleging that Dorman’s tensioners are inferior to Dayco’s. Dayco sent out an email about the lawsuit to customers and industry publications, stating that Dayco believed Dorman imported its tensioners from China and that Dayco was concerned that Dorman’s designs would mislead consumers and affect Dayco’s reputation. Aftermarket News and Automotive Week/The Greensheet published stories repeating Dayco’s allegations.
In addition, Dorman alleged that an interview published on Dayco's homepage with Dayco President and SAE member Dennis Walveart, entitled "Differentiate Between Quality and Sub-Standard Parts", was part of an intentional pattern by Dayco to falsely convey that "lower cost, private label aftermarket parts" are of inferior quality to Dayco's "simply because they are less costly" than the original equipment manufacturers' name brands. (Sample statement: “[I]f a technician goes to a name brand, whether it's Dayco, which is ours, or Federal Mogul, or Gates, our competition, they can assure themselves that they're going to get a good quality product. They go to a private brand, not necessarily 100% guarantee that's going to be a good quality product.”) Dorman alleged that consumer research showed that this campaign had worked: “a market research firm focused on the automotive aftermarket industry, recently reported that consumers of aftermarket products perceive a quality difference between private label and name brands.”
Dayco moved to dismiss the defamation claim, arguing that the facts only supported a claim for trade disparagement under Pennsylvania law (a separate claim which Dayco did not move to dismiss), because the statements were directed at Dorman’s products, not at Dorman itself. In business defamation cases, courts look at whether the defendant made a statement that "clearly imputes, to the person to whom it refers, characteristics and conduct which are incompatible with the proper and lawful exercise of a business,” and "any language which unequivocally, maliciously, and falsely imputes to an individual or corporation want of integrity in the conduct of his or its business is actionable." Under Pennsylvania law, a statement about the quality of a company’s goods can cross the line from disparagement to defamation when the statement “imputes to the corporation fraud, deceit, dishonesty, or reprehensible conduct in its business in relation to said goods or products."
Statements about the inferiority of Dorman’s products couldn’t make out a defamation claim. Allegations of inferiority are “par for the course” and "the most innocuous kind of puffing," generally not capable of misleading the public. The email and the website interview, among others, were therefore not defamatory. This includes the China importation statement, even though Dorman alleged that this was "an accusation synonymous with inferior products and designed to scare consumers with visions of lead-tainted products, Chinese drywall, and cadmium-laced children's toys," as well as Dayco’s expressed concern that confusion over Dorman products would harm Dayco’s reputation as a provider of superior products.
However, statements that could be construed as suggesting that Dorman misrepresented product quality are actionable. Some of Dayco’s statements could be read to impute dishonesty or improper business practices to Dorman. The Powerpoint comparing Dayco’s “exacting standards” to Dorman’s allegedly defective products could suggest that Dorman “misled the public into believing that their products are in conformance with SAE standards when they are not. The statement further suggests that Dorman misrepresented the quality of its products because, according to Dayco, the products are defective.”
Moreover, some statements imputed an intent to mislead the public to Dorman, such as asserting that the resemblance between Dayco and Dorman products wasn’t a coincidence. Dayco argued that it only claimed that the products were misleading, not that Dorman intentionally misled customers, but the court was unconvinced. Asserting infringement of trade dress, noncoincidental similarity, and misleadingness to consumers “has the potential” to impute an intent to mislead to Dorman, which is enough to survive a motion to dismiss. This conclusion was bolstered by the Automotive Week story stating that Dayco accused Dorman of “intentionally deceiving purchasers by selling products with Dayco look-alike housing but that contain inferior quality and largely different types of internal parts.”
Thus, statements that went beyond puffing/inferiority claims survived the motion to dismiss, including statements in Dayco’s complaint in the other lawsuit. (I guess Dayco didn’t argue litigation privilege?)
Tortious interference: this requires that: 1) plaintiff had prospective contractual relationships; 2) defendant's purpose or intent was to harm the plaintiff by preventing the relation from occurring; 3) there was an absence of any privilege or justification on the part of the defendant; and 4) actual damage resulted from defendant's conduct. How do you plead (2), intent, after Iqbal and Twombly? Here, Dorman did little more than plead the elements and various conclusory statements, which was insufficient to survive a motion to dismiss. “The assertions by Dorman that Dayco's statements were ‘defamatory’, that Dayco engaged in unfair competition and that Dayco ‘maliciously interfer[ed] with Dorman's prospective contractual relationships’ are legal conclusions, which the Court is not required to accept.” Other than that, Dorman only had a subjective belief that Dayco intended to harm Dorman. “The statements made by Dayco, do not, on their face, establish, or even give rise to the inference, that Dayco intended to harm any prospective contractual relationship Dorman may have had. The statements could just as plausibly be seen as statements intended to gain an economic advantage over a competitor in the market.” Pleading facts consistent with liability was insufficient.
The court also found that Dorman failed to properly allege (1), a prospective business relationship, which required more than a mere hope—a reasonable likelihood or probability. Dorman might have alleged sufficient harm by alleging that “customers and prospective customers” had informed it that Dayco’s allegations had deterred them from purchases, but that wasn’t enough to allege a reasonable likelihood or probability that a contractual relationship would be formed.
Unfair competition under Pennsylvania state law through false statements, tortious interference, and intent to illegally restrain competition: Dayco argued that unfair competition in Pennsylvania is generally limited to passing off. There was no passing off allegation here. Dorman contended that Pennsylvania courts have extended unfair competition to include tortious interference and to track the Lanham Act, but it only cited (and the court could only find) federal court cases. “Although the Third Circuit has seemingly extended the grounds for a Pennsylvania unfair competition claim, the Pennsylvania state courts have not.” In any event, federal courts equating Pennsylvania unfair competition with the Lanham Act seemed to be talking about §43(a)(1)(A)/passing off. A court in the Sixth Circuit was not in a position to extend Pennsylvania law, so the unfair competition claim was dismissed.
Wednesday, November 10, 2010
Everybody can publicize discovery but the parties
Pamlab, L.L.C. v. Brookstone Pharmaceuticals, L.L.C., 2010 WL 4363870 (E.D. La.)
Plaintiffs sued defendant for false advertising and unfair competition under federal and state law. Plaintiffs invented Metanx, an orally-administered prescription medical food for the dietary management of endothelial dysfunction in patients with diabetic peripheral neuropathy. Brookstone distributes Folast, a competing vitamin supplement that delivers folate through a mixture named Xolafin. Plaintiffs alleged that, though Folast isn’t a generic equivalent of Metanx, Brookstone falsely told national pharmaceutical databases that Folast has the same ingredients as Metanx and may be substituted for Metanx. In fact, plaintiffs alleged, Folast doesn’t contain the same form of folate in the same amount as Metanx.
Plaintiffs moved to remove the “highly confidential” designation from defendants’ discovery responses to plaintiffs’ requests for admission. The designation is limited to information that a party believes in good faith may cause it competitive harm. Plaintiffs argued that the requests addressed only the fact that one of the defendants hadn’t performed certain tests on Brookstone products. Plaintiffs contended that there was no legitimate business interest in withholding these admissions—the public had a right to know whether the products were “manufactured in accordance with good manufacturing procedures” and whether their shelf lives were established by testing. Thus, they maintained, “the only reason to designate these admissions as confidential is because such admissions would seriously undermine defendants' relationship with its customers and contradict defendants' media campaign.”
Defendants, unsurprisingly, argued that plaintiffs planned to use this information to obtain an unfair advantage, and only sought to remove the highly confidential designation from specific responses—the ones in which the testing defendant “admits that it follows good manufacturing practices.” Moreover, “plaintiffs know that the testing that it seeks through its requests for admission is not required for medical food manufacturers.” What testing the defendant does and doesn’t perform is non-public and proprietary; plaintiffs would use the fruits of discovery for promotional, not legal, purposes.
In response, plaintiffs argued that there was no showing that the admissions revealed confidential strategic plans, marketing plans, or research and development information. Public disclosure is the rule and confidentiality is the exception in judicial proceedings. Moreover, in the absence of good cause to restrict disclosure, a party can publicize discovery materials. Potential embarrassment isn’t good cause.
Resolution required balancing the public’s right of access against any interests favoring nondisclosure. There is a presumption of access which the party seeking secrecy must overcome, and a showing that the information would harm the company’s reputation is insufficient.
Here, defendants argued only that disclosure would embarrass them and injure them economically. This “generic” allegation didn’t rise to showing a trade secret or proprietary information, and didn’t outweigh the public interest in “an open and honest judicial process.”
The magistrate judge hesitated over one consideration, however. Both parties alleged negative campaigning by the other. Defendants argued that plaintiffs would take the admissions, disseminate them, and win in the market before “a jury of the parties' peers” could weigh the evidence. Thus, good cause existed for a protective order “given the potential for widespread dissemination of discovered information to the public.” The order would preclude dissemination of information gained through discovery.
This compromise would work well, the court found, by protecting the right of the public to an open judicial system. “Should any member of the public decide that he or she wants to research the underlying nature of this suit, he or she has the right do so.” But the parties would be free from negative campaigning while the suit was pending.
This strikes me as a really interesting result, but I’m not sure what to say about it. Any thoughts?
Plaintiffs sued defendant for false advertising and unfair competition under federal and state law. Plaintiffs invented Metanx, an orally-administered prescription medical food for the dietary management of endothelial dysfunction in patients with diabetic peripheral neuropathy. Brookstone distributes Folast, a competing vitamin supplement that delivers folate through a mixture named Xolafin. Plaintiffs alleged that, though Folast isn’t a generic equivalent of Metanx, Brookstone falsely told national pharmaceutical databases that Folast has the same ingredients as Metanx and may be substituted for Metanx. In fact, plaintiffs alleged, Folast doesn’t contain the same form of folate in the same amount as Metanx.
Plaintiffs moved to remove the “highly confidential” designation from defendants’ discovery responses to plaintiffs’ requests for admission. The designation is limited to information that a party believes in good faith may cause it competitive harm. Plaintiffs argued that the requests addressed only the fact that one of the defendants hadn’t performed certain tests on Brookstone products. Plaintiffs contended that there was no legitimate business interest in withholding these admissions—the public had a right to know whether the products were “manufactured in accordance with good manufacturing procedures” and whether their shelf lives were established by testing. Thus, they maintained, “the only reason to designate these admissions as confidential is because such admissions would seriously undermine defendants' relationship with its customers and contradict defendants' media campaign.”
Defendants, unsurprisingly, argued that plaintiffs planned to use this information to obtain an unfair advantage, and only sought to remove the highly confidential designation from specific responses—the ones in which the testing defendant “admits that it follows good manufacturing practices.” Moreover, “plaintiffs know that the testing that it seeks through its requests for admission is not required for medical food manufacturers.” What testing the defendant does and doesn’t perform is non-public and proprietary; plaintiffs would use the fruits of discovery for promotional, not legal, purposes.
In response, plaintiffs argued that there was no showing that the admissions revealed confidential strategic plans, marketing plans, or research and development information. Public disclosure is the rule and confidentiality is the exception in judicial proceedings. Moreover, in the absence of good cause to restrict disclosure, a party can publicize discovery materials. Potential embarrassment isn’t good cause.
Resolution required balancing the public’s right of access against any interests favoring nondisclosure. There is a presumption of access which the party seeking secrecy must overcome, and a showing that the information would harm the company’s reputation is insufficient.
Here, defendants argued only that disclosure would embarrass them and injure them economically. This “generic” allegation didn’t rise to showing a trade secret or proprietary information, and didn’t outweigh the public interest in “an open and honest judicial process.”
The magistrate judge hesitated over one consideration, however. Both parties alleged negative campaigning by the other. Defendants argued that plaintiffs would take the admissions, disseminate them, and win in the market before “a jury of the parties' peers” could weigh the evidence. Thus, good cause existed for a protective order “given the potential for widespread dissemination of discovered information to the public.” The order would preclude dissemination of information gained through discovery.
This compromise would work well, the court found, by protecting the right of the public to an open judicial system. “Should any member of the public decide that he or she wants to research the underlying nature of this suit, he or she has the right do so.” But the parties would be free from negative campaigning while the suit was pending.
This strikes me as a really interesting result, but I’m not sure what to say about it. Any thoughts?
Head to head: literal falsity helmet claims rejected
Riddell, Inc. v. Schutt Sports, Inc., --- F.Supp.2d ----, 2010 WL 2803461 (W.D.Wis.)
Background: According to the New York Times, “[r]ecent engineering advances made by Riddell, Schutt, Adams and other manufacturers have undoubtedly improved the performance of the football helmet, which from its leather roots has always symbolized football’s duality of valor and violence. But helmets communicate a level of protection that they do not provide, experts said, in part because of lax industry standards and practices.”
Riddell sued Schutt for patent infringement, false advertising, and trade libel/product disparagement related to football helmets and faceguards. Together the two make up 90% of the football helmet marketplace, with Riddell having slightly more in dollar sales. Schutt brought the “usual counterclaims”: noninfringement, invalidity and inequitable conduct, as well as counterclaims for false advertising. Riddell moved for partial summary judgment on Schutt’s false advertising/deceptive trade practices claims.
Beginning in 2002, the University of Pittsburgh Medical Center conducted a study to compare the concussion rates and recovery times for athletes wearing Riddell’s Revolution helmet compared to those wearing traditional helmets. Riddell underwrote the study, providing salary support for two lead authors of the study, Micky Collins and Mark R. Lovell. A third author, Mark Ide, was a Riddell employee. Three other authors are co-owners of ImPACT, “a company that manufactures and distributes computerized neurocognitive testing software.” In 2003, ImPACT and Riddell agreed that ImPACT would not sell “in conflict” with Riddell and would pay Riddell for any ImPACT sale completed through a Riddell-initiated contact. The study used ImPACT concussion management software.
The research proposal for the study included directional hypotheses, which means that the researchers had some expectations about what would happen. Here, they hypothesized that athletes wearing the Riddell helmet would have significantly fewer incidences of cerebral concussion and fewer and shorter markers of concussion severity and dysfunction relative to the controls. The study was not randomized—the high school students studied were allowed to choose Riddell’s Revolution or a traditional helmet.
From 2002-2004, the study tracked more than 2000 high school players, slightly more than half wearing the Revolution. The Revolution helmets were reused after the first year. The traditional helmets were from school inventories and not necessarily new. All non-new helmets were refurbished and recertified each year to industry standards.
In a 2002 analysis of pilot data, the authors found nearly identical concussion rates. The 2003 data showed that the difference “approached” statistical significance. The 2004 data showed 2207 participants, 1173 with the Revolution helmet. This report showed 5.29% wearing the Revolution helmet with diagnoses of cerebral concussions, while 7.16% wearing traditional helmets sustained concussions. According to the authors, this difference “approached but did not reach statistical significance.” The final three-year study, however, considered only 2141 participants, 1173 fitted with the Revolution. Excluding 66 participants produced 5.3% (that is, rounding up from 5.29%) and 7.6% concussion rates respectively, which the authors described as “statistically significant,” and demonstrating “a trend toward a lowered incidence of concussion,” but cautioned that the “limited size sample precludes a more conclusive statement of findings at this time.”
The researchers submitted the study for publication in Neurosurgery, a neurology journal. It was subject to substantial criticism during the peer review process for cherry-picking data and for the “substantial conflict of interest” faced by the researchers. Among other things, reviewers pointed out that helmet selection was neither randomized or controlled, and that younger people tended to use the older helmet, which is significant because younger people may be more susceptible to concussion. Likewise, another reviewer found that disparities in the age of the helmets used “invalidate[] any comparison,” since the Riddell helmets were new, which is well recognized to affect performance, but the other helmets were of unknown age.
Regardless, the results were published in Neurosurgery in 2006. The article “compared the concussion rates of the 1,173 participants fitted with the Revolution helmet (5.3%), with the rates of the 968 participants fitted with traditional helmets (7.6%), concluding that there was a 2.3% decreased absolute risk for sustaining a concussion and a 31% decreased relative risk for athletes wearing the Revolution helmet. The study also subtracted “actual and estimated” (?) athletes with previous concussions, producing a 3.7% concussion rate for 1109 players wearing Revolution helmets and 6.2% for 916 players wearing traditional helmets, about 41% decreased relative risk. Comments were appended, including one opining that the study “suffers from a serious, if not fatal methodological flaw” raising doubt about the “significance of the data” because the age of the traditional helmets was not known. Another commenter stated that the study “has several limitations,” including the fact that “[h]elmet selection was neither randomized, nor controlled” and that “each of the authors has a business relationship with either” ImPACT or Riddell.
Riddell has, since then, relied heavily on the study in its ads, using the following or similar language: “Research shows a 31% reduction in concussions in players wearing Riddell Revolution Helmets.” Some ads made an explicit comparison to traditional football helmets; others claimed reduced risk “up to 41%,” and others added that this was only for players who hadn’t previously suffered a concussion. Although the study tested only the Revolution helmets, and although there are a number of design and material differences between the Revolution and other models in the Revolution family, Riddell used the phrase in many advertisements for other helmets in the Revolution family. (Differences include: different face guard mechanisms, materials used in the outer shell and liner, locking rear pads, mandible designs, and padding structure. These differences could affect the helmet’s ability to prevent concussions.) One letter falsely attributed the 31% finding to Riddell Revolution Youth helmets, a “mistake” identified and changed after the mailing went out. PowerPoints for sales reps included similar misstatements about which helmets had been studied, such as “IQ HITS, Speed, Revolution IQ, Revolution, Speed Youth, IQ Youth, Revolution Youth and Revolution Little Pro helmets all offered as ‘exclusive benefit from Riddell’ that ‘reduce[ ] chances of a concussion by 31%/41%.’”
Riddell has had great market success since the concussion study was published. Riddell gets a $50 premium for the Revolution helmet, which Riddell attributes to the helmet’s technology and the concussion study.
The challenged ads all refer to the results of the concussion study, also known as establishment claims. Establishment claims can be shown to be false by showing that the cited test or study doesn’t prove the claim. Some courts have also stated that an establishment claim can be literally false if the test or study does prove the proposition, but wasn’t sufficiently reliable to permit one to conclude with reasonable certainty that it established the proposition for which it was cited. The court here expressed doubt about that, and held that it was not bound to follow the cases explaining that standard. Initially, I think that the court is a bit confused about what “prove” means, since it appears to hold that “prove” means something other than “establish the proposition for which it was cited to a reasonable degree of certainty.” I really have no idea what that other meaning would be.
The court, however, found that this standard leads to a strained reading of “literally false” (a term, I might point out, which nowhere appears in the Lanham Act; judicial glosses are purely a matter of judicial determination): “a court's determination that a test is ‘unreliable’ leads to a conclusion that a statement in the form ‘test shows x’ is literally false even if the test really does show x.” The court speculated that this might be an application of falsity by necessary implication, though the Seventh Circuit has also not adopted that doctrine. But necessary implication exists only if a consumer will “unavoidably receive a false message" from a statement. “The statement that a ‘test shows x’ (or even that it ‘proves’ x) merely suggests that the test is reliable; it does not send an ‘unavoidable’ message that it is.”
Comment: This is ridiculous. There is no reason other than wanting you to rely on the test that an advertiser would present to you the results of that test; the necessary implication is that the test is reliable. The court’s interpretation of “unavoidably” would strip the concept of any meaning, since we could always posit a consumer who would read an ad in an extreme and unlikely way. In addition, the court is missing the point: establishment claims have special force to consumers, which is why advertisers like to say “tests prove X” instead of “X.” If the challenger proves that the test isn’t sufficiently reliable to establish X, then the test doesn’t prove or show X, and the claim that it does is literally false. That is, the court treats the issue as if it were “is X true?” when there is also a claim that “tests prove X” in the ad, and that claim is, independently, falsifiable even without falsifying X.
However, the court took the position that, “if a cited test is unreliable, statements that the ‘test proves x’ are merely deceptive or misleading, not ‘literally false.’” But because this was at odds with, well, all the other cases, and because the parties didn’t dispute the standard, the court said that it would assume that the “not sufficiently reliable” test applied. The court’s reservations about the standard “inform[ed]” its reading, though. What counts as sufficient reliability? The court thought that it “appears to be tied to whether the methods and findings of the cited study are acceptable to the relevant scientific community.” (So basically, I wonder how this court decides Daubert motions; it did ultimately drop a reference to Daubert.) In the cases the court examined that found unreliability, “members of the scientific community, a government agency responsible for monitoring the field or the authors themselves identified a flaw in the study that undermined the study's conclusion.”
The challenged establishment claim was Riddell’s ads touting the Neurosurgery study's findings that the risk of sustaining a concussion for Revolution helmet wearers was between 31% and 41% (for those without a previous concussion) less than the risk for traditional helmet wearers.
Schutt identified the following concerns: (1) conflicts of interest based on Riddell's funding and participation in the study and Riddell's relationship with ImPACT (query whether Riddell complies with the new FTC Guides on endorsements); (2) the non-random sampling method; (3) the lack of information about the age and condition of traditional helmets used; (4) discrepancies between the number of participants in earlier reports and in the final report; (5) the "preliminary" nature of the study; and (6) the fact that the concussion data gathered in the years following the study were not included as part of the study.
These issues “give reasons to doubt the results of the study, but they do not show that the study was unreliable” to the relevant scientific community. Schutt relied too heavily on criticisms during the peer review process, including the criticism that the three-year cutoff of the study may have been simply an attempt to reach statistical significance. The study was published over these objections. Even a study that passes peer review may be unreliable, but approval for publication is some evidence of reliability. “[A] party seeking to attack the reliability of a peer-reviewed article should do more than recite objections made by reviewers.” Schutt added nothing to suggest that the reviewers were not in a position to assess the reliability of the study. (Which they did! Why can't the court weigh their objections itself?) The fact that more traditional helmet wearers were included in earlier stages, and that additional concussion data were gathered in subsequent years, was also not important, because Schutt didn’t offer any evidence that the decision to drop those subjects/years was scientifically inappropriate or that the extra data would have been less favorable. Thus, Schutt failed to show that the results or methods of the concussion study were unreliable. (Compare the recent Kaiser v. Pfizer case, where the court found that data manipulation by a study sponsor was intentionally fraudulent, because even if you find positive results once you massage the data, it's the massaging that's scientifically inappropriate.)
Schutt also argued that there were significant differences between what the study showed and what the ads claimed it showed: (1) some ads touted helmets other than the Revolution helmets tested in the study; (2) certain ads made claims directed to players other than high school players, the age group tested in the study; and (3) certain ads compare Riddell's helmets to Schutt's high-end helmets, but the study compared Riddell's helmets only with "traditional helmets."
First, the court found that Schutt glossed over the specific language in the ads, focusing instead on context. The specific language "research shows a 31-41% reduction in concussions in players wearing Riddell Revolution helmets" accurately reflected the study, even when “nestled into” ads for helmets other than the Revolution. This might be misleading or deceptive, but there was no consumer survey evidence.
Riddell’s statement that the study showed concussion reduction in “Riddell Revolution Youth” helmets were, however, literally false. Riddell corrected this statement in its files. Apparently literally false statements in PowerPoint presentations to Riddell’s sales force weren’t ads, and Schutt lacked evidence that the sales force made those statements to the public.
Statements that the "technology" used in Riddell's Revolution line of helmets has been "shown to reduce the incidence of concussion" were trickier. It was fair to say that the study showed that the technology reduced concussion, since it identified the padding structure and shell shape as what distinguished it from traditional helmets. But it was uncertain whether the technology used in the family or line of helmets has been shown to reduce concussion. The different helmets have different design features, including differences in shell, face guard, padding, lining and other features, and even the current Revolution helmet is different from the original production.
But this uncertainty was Schutt’s problem: it had the burden to show literal falsity by proving relevant design differences between the tested helmets and other helmets in the family. Schutt’s evidence of difference didn’t show that the differences were relevant to concussion testing. It had general evidence that design differences can change concussion results, but not reason to think that the actual design differences in this case would be expected to do so.
Likewise, Schutt’s argument that ads directed at groups outside high school students were literally false because the study wasn’t designed to apply to those age groups failed. Just being overly broad isn’t literal falsity:
Schutt also argued that, despite the study’s failure to test Schutt’s high-end helmets, Riddell used the study to compare those helmets. This is mostly based on PowerPoint presentations to sales reps, which aren’t ads and don’t support a claim that representatives were making false statements. The PowerPoints may have guided sales reps, but they weren’t “scripts.” (Is it really plausible that sales reps were downplaying claims they heard internally? Still, I can see where getting some customer/sales rep testimony would have helped.)
Anyway, the presentations weren’t literally false. They included statements such as: "With RCRT, Speed reduces the chances of concussion by 31%/41%. XP doesn't stack up." The court (in conflict with FDA/FTC standards for making comparative statements of this sort, which prefer or require head-to-head testing, no pun intended) found that literal falsity would have required language to the effect that the study actually tested Speed v. XP or otherwise tested high-end Schutt helmets. “Although the presentations and internal discussions may suggest that sales representatives were trained to mislead, they fail to suggest that representatives were trained to make literally false statements.”
Schutt also challenged comparative ads that didn’t provide the point of comparison, traditional helmets: general superiority claims of “reducing concussion” by 31%, along with “The Riddell Revolution helmet is the standard against which all football helmets are measured--shown in published research to reduce the risk of concussion by nearly a third."
Assuming that falsity by necessary implication is a valid claim in the Seventh Circuit, Schutt still lost. Schutt argued that, because Schutt and Riddell are the two principal competitors in the market, failure to disclose the point of comparison necessarily implied testing against all product offerings, including Schutt’s high-end helmets. The court disagreed. Case law supports the proposition that a superiority claim may necessarily implicate a principal competitor, even without naming the competitor. However, that doesn’t necessarily imply comparison with a particular product of the competitor’s—Schutt didn’t contest Riddell’s claims of superiority over Schutt’s standard helmets. The lack of a qualifer could mislead, but is not necessarily false.
The “standard against which all football helmets are measured” ad required separate analysis, because it did suggest that the comparison was all helmets. But “the language is odd enough to weigh against reading the advertisement that way.” The ad didn’t say that all helmets had been tested against the Revolution, and this “subtle difference” in language made it ambiguous. “In other words, what makes it such a "leader," under one reading, is the simple fact that it has been tested and other high-end helmets have not.” Thus, there was no falsity by necessary implication.
Schutt only showed one instance of literal falsity, and it couldn’t show injury from those ads. Its evidence of injury was “scant,” coming down to the fact that Riddell charges a $50 premium for helmets using the Revolution technology and that it has “converted” high school and college players. But Schutt didn’t submit evidence of lost sales or market share, and there was no evidence that players switched from Schutt helmets to the falsely advertised Riddell Youth helmets. Moreover, the falsity was merely technical—had the ad simply asserted that the results of the study could be applied to the Youth helmet as part of the same family, “the reader would have gotten the same message and there would have been no false advertisement problem.” Under these circumstances, it would be unjust to award damages, and there was no reason to grant an injunction, since Riddell removed the reference and there was no suggestion that they intend to reuse that language. (Different courts take different approaches to voluntary discontinuance; perceived good faith affects whether injunctive relief is nonetheless deemed appropriate.)
The court concluded with a caution: Schutt lost “not because Riddell's advertisements were particularly open and honest, but rather because Schutt tried to take the easiest evidentiary path to success: literal falsity.”
Schutt's state-law Deceptive Trade Practices claim failed because it required Schutt to show "pecuniary loss, which it could not do, and also because the law does not provide a cause of action for misrepresentations made to non-parties. It was “not designed to protect product manufacturers from the deceptive acts of their competitors.”
Background: According to the New York Times, “[r]ecent engineering advances made by Riddell, Schutt, Adams and other manufacturers have undoubtedly improved the performance of the football helmet, which from its leather roots has always symbolized football’s duality of valor and violence. But helmets communicate a level of protection that they do not provide, experts said, in part because of lax industry standards and practices.”
Riddell sued Schutt for patent infringement, false advertising, and trade libel/product disparagement related to football helmets and faceguards. Together the two make up 90% of the football helmet marketplace, with Riddell having slightly more in dollar sales. Schutt brought the “usual counterclaims”: noninfringement, invalidity and inequitable conduct, as well as counterclaims for false advertising. Riddell moved for partial summary judgment on Schutt’s false advertising/deceptive trade practices claims.
Beginning in 2002, the University of Pittsburgh Medical Center conducted a study to compare the concussion rates and recovery times for athletes wearing Riddell’s Revolution helmet compared to those wearing traditional helmets. Riddell underwrote the study, providing salary support for two lead authors of the study, Micky Collins and Mark R. Lovell. A third author, Mark Ide, was a Riddell employee. Three other authors are co-owners of ImPACT, “a company that manufactures and distributes computerized neurocognitive testing software.” In 2003, ImPACT and Riddell agreed that ImPACT would not sell “in conflict” with Riddell and would pay Riddell for any ImPACT sale completed through a Riddell-initiated contact. The study used ImPACT concussion management software.
The research proposal for the study included directional hypotheses, which means that the researchers had some expectations about what would happen. Here, they hypothesized that athletes wearing the Riddell helmet would have significantly fewer incidences of cerebral concussion and fewer and shorter markers of concussion severity and dysfunction relative to the controls. The study was not randomized—the high school students studied were allowed to choose Riddell’s Revolution or a traditional helmet.
From 2002-2004, the study tracked more than 2000 high school players, slightly more than half wearing the Revolution. The Revolution helmets were reused after the first year. The traditional helmets were from school inventories and not necessarily new. All non-new helmets were refurbished and recertified each year to industry standards.
In a 2002 analysis of pilot data, the authors found nearly identical concussion rates. The 2003 data showed that the difference “approached” statistical significance. The 2004 data showed 2207 participants, 1173 with the Revolution helmet. This report showed 5.29% wearing the Revolution helmet with diagnoses of cerebral concussions, while 7.16% wearing traditional helmets sustained concussions. According to the authors, this difference “approached but did not reach statistical significance.” The final three-year study, however, considered only 2141 participants, 1173 fitted with the Revolution. Excluding 66 participants produced 5.3% (that is, rounding up from 5.29%) and 7.6% concussion rates respectively, which the authors described as “statistically significant,” and demonstrating “a trend toward a lowered incidence of concussion,” but cautioned that the “limited size sample precludes a more conclusive statement of findings at this time.”
The researchers submitted the study for publication in Neurosurgery, a neurology journal. It was subject to substantial criticism during the peer review process for cherry-picking data and for the “substantial conflict of interest” faced by the researchers. Among other things, reviewers pointed out that helmet selection was neither randomized or controlled, and that younger people tended to use the older helmet, which is significant because younger people may be more susceptible to concussion. Likewise, another reviewer found that disparities in the age of the helmets used “invalidate[] any comparison,” since the Riddell helmets were new, which is well recognized to affect performance, but the other helmets were of unknown age.
Regardless, the results were published in Neurosurgery in 2006. The article “compared the concussion rates of the 1,173 participants fitted with the Revolution helmet (5.3%), with the rates of the 968 participants fitted with traditional helmets (7.6%), concluding that there was a 2.3% decreased absolute risk for sustaining a concussion and a 31% decreased relative risk for athletes wearing the Revolution helmet. The study also subtracted “actual and estimated” (?) athletes with previous concussions, producing a 3.7% concussion rate for 1109 players wearing Revolution helmets and 6.2% for 916 players wearing traditional helmets, about 41% decreased relative risk. Comments were appended, including one opining that the study “suffers from a serious, if not fatal methodological flaw” raising doubt about the “significance of the data” because the age of the traditional helmets was not known. Another commenter stated that the study “has several limitations,” including the fact that “[h]elmet selection was neither randomized, nor controlled” and that “each of the authors has a business relationship with either” ImPACT or Riddell.
Riddell has, since then, relied heavily on the study in its ads, using the following or similar language: “Research shows a 31% reduction in concussions in players wearing Riddell Revolution Helmets.” Some ads made an explicit comparison to traditional football helmets; others claimed reduced risk “up to 41%,” and others added that this was only for players who hadn’t previously suffered a concussion. Although the study tested only the Revolution helmets, and although there are a number of design and material differences between the Revolution and other models in the Revolution family, Riddell used the phrase in many advertisements for other helmets in the Revolution family. (Differences include: different face guard mechanisms, materials used in the outer shell and liner, locking rear pads, mandible designs, and padding structure. These differences could affect the helmet’s ability to prevent concussions.) One letter falsely attributed the 31% finding to Riddell Revolution Youth helmets, a “mistake” identified and changed after the mailing went out. PowerPoints for sales reps included similar misstatements about which helmets had been studied, such as “IQ HITS, Speed, Revolution IQ, Revolution, Speed Youth, IQ Youth, Revolution Youth and Revolution Little Pro helmets all offered as ‘exclusive benefit from Riddell’ that ‘reduce[ ] chances of a concussion by 31%/41%.’”
Riddell has had great market success since the concussion study was published. Riddell gets a $50 premium for the Revolution helmet, which Riddell attributes to the helmet’s technology and the concussion study.
The challenged ads all refer to the results of the concussion study, also known as establishment claims. Establishment claims can be shown to be false by showing that the cited test or study doesn’t prove the claim. Some courts have also stated that an establishment claim can be literally false if the test or study does prove the proposition, but wasn’t sufficiently reliable to permit one to conclude with reasonable certainty that it established the proposition for which it was cited. The court here expressed doubt about that, and held that it was not bound to follow the cases explaining that standard. Initially, I think that the court is a bit confused about what “prove” means, since it appears to hold that “prove” means something other than “establish the proposition for which it was cited to a reasonable degree of certainty.” I really have no idea what that other meaning would be.
The court, however, found that this standard leads to a strained reading of “literally false” (a term, I might point out, which nowhere appears in the Lanham Act; judicial glosses are purely a matter of judicial determination): “a court's determination that a test is ‘unreliable’ leads to a conclusion that a statement in the form ‘test shows x’ is literally false even if the test really does show x.” The court speculated that this might be an application of falsity by necessary implication, though the Seventh Circuit has also not adopted that doctrine. But necessary implication exists only if a consumer will “unavoidably receive a false message" from a statement. “The statement that a ‘test shows x’ (or even that it ‘proves’ x) merely suggests that the test is reliable; it does not send an ‘unavoidable’ message that it is.”
Comment: This is ridiculous. There is no reason other than wanting you to rely on the test that an advertiser would present to you the results of that test; the necessary implication is that the test is reliable. The court’s interpretation of “unavoidably” would strip the concept of any meaning, since we could always posit a consumer who would read an ad in an extreme and unlikely way. In addition, the court is missing the point: establishment claims have special force to consumers, which is why advertisers like to say “tests prove X” instead of “X.” If the challenger proves that the test isn’t sufficiently reliable to establish X, then the test doesn’t prove or show X, and the claim that it does is literally false. That is, the court treats the issue as if it were “is X true?” when there is also a claim that “tests prove X” in the ad, and that claim is, independently, falsifiable even without falsifying X.
However, the court took the position that, “if a cited test is unreliable, statements that the ‘test proves x’ are merely deceptive or misleading, not ‘literally false.’” But because this was at odds with, well, all the other cases, and because the parties didn’t dispute the standard, the court said that it would assume that the “not sufficiently reliable” test applied. The court’s reservations about the standard “inform[ed]” its reading, though. What counts as sufficient reliability? The court thought that it “appears to be tied to whether the methods and findings of the cited study are acceptable to the relevant scientific community.” (So basically, I wonder how this court decides Daubert motions; it did ultimately drop a reference to Daubert.) In the cases the court examined that found unreliability, “members of the scientific community, a government agency responsible for monitoring the field or the authors themselves identified a flaw in the study that undermined the study's conclusion.”
The challenged establishment claim was Riddell’s ads touting the Neurosurgery study's findings that the risk of sustaining a concussion for Revolution helmet wearers was between 31% and 41% (for those without a previous concussion) less than the risk for traditional helmet wearers.
Schutt identified the following concerns: (1) conflicts of interest based on Riddell's funding and participation in the study and Riddell's relationship with ImPACT (query whether Riddell complies with the new FTC Guides on endorsements); (2) the non-random sampling method; (3) the lack of information about the age and condition of traditional helmets used; (4) discrepancies between the number of participants in earlier reports and in the final report; (5) the "preliminary" nature of the study; and (6) the fact that the concussion data gathered in the years following the study were not included as part of the study.
These issues “give reasons to doubt the results of the study, but they do not show that the study was unreliable” to the relevant scientific community. Schutt relied too heavily on criticisms during the peer review process, including the criticism that the three-year cutoff of the study may have been simply an attempt to reach statistical significance. The study was published over these objections. Even a study that passes peer review may be unreliable, but approval for publication is some evidence of reliability. “[A] party seeking to attack the reliability of a peer-reviewed article should do more than recite objections made by reviewers.” Schutt added nothing to suggest that the reviewers were not in a position to assess the reliability of the study. (Which they did! Why can't the court weigh their objections itself?) The fact that more traditional helmet wearers were included in earlier stages, and that additional concussion data were gathered in subsequent years, was also not important, because Schutt didn’t offer any evidence that the decision to drop those subjects/years was scientifically inappropriate or that the extra data would have been less favorable. Thus, Schutt failed to show that the results or methods of the concussion study were unreliable. (Compare the recent Kaiser v. Pfizer case, where the court found that data manipulation by a study sponsor was intentionally fraudulent, because even if you find positive results once you massage the data, it's the massaging that's scientifically inappropriate.)
Schutt also argued that there were significant differences between what the study showed and what the ads claimed it showed: (1) some ads touted helmets other than the Revolution helmets tested in the study; (2) certain ads made claims directed to players other than high school players, the age group tested in the study; and (3) certain ads compare Riddell's helmets to Schutt's high-end helmets, but the study compared Riddell's helmets only with "traditional helmets."
First, the court found that Schutt glossed over the specific language in the ads, focusing instead on context. The specific language "research shows a 31-41% reduction in concussions in players wearing Riddell Revolution helmets" accurately reflected the study, even when “nestled into” ads for helmets other than the Revolution. This might be misleading or deceptive, but there was no consumer survey evidence.
Riddell’s statement that the study showed concussion reduction in “Riddell Revolution Youth” helmets were, however, literally false. Riddell corrected this statement in its files. Apparently literally false statements in PowerPoint presentations to Riddell’s sales force weren’t ads, and Schutt lacked evidence that the sales force made those statements to the public.
Statements that the "technology" used in Riddell's Revolution line of helmets has been "shown to reduce the incidence of concussion" were trickier. It was fair to say that the study showed that the technology reduced concussion, since it identified the padding structure and shell shape as what distinguished it from traditional helmets. But it was uncertain whether the technology used in the family or line of helmets has been shown to reduce concussion. The different helmets have different design features, including differences in shell, face guard, padding, lining and other features, and even the current Revolution helmet is different from the original production.
But this uncertainty was Schutt’s problem: it had the burden to show literal falsity by proving relevant design differences between the tested helmets and other helmets in the family. Schutt’s evidence of difference didn’t show that the differences were relevant to concussion testing. It had general evidence that design differences can change concussion results, but not reason to think that the actual design differences in this case would be expected to do so.
Likewise, Schutt’s argument that ads directed at groups outside high school students were literally false because the study wasn’t designed to apply to those age groups failed. Just being overly broad isn’t literal falsity:
In this case, the challenged advertisements state simply that the concussion study showed decreased concussion rates, without providing the limitation that the study applied only to high school students. … The absence of limiting language does not require the audience to conclude that there must have been no limitations in the study. (There are always limitations.) … The context does not require a conclusion that the study must have tested the segment of the population that forms the audience. At most, such a context suggests that the study had a broad study group or that the results can be applied to the audience. This means the advertisements may be misleading, not that they are literally false.
Schutt also argued that, despite the study’s failure to test Schutt’s high-end helmets, Riddell used the study to compare those helmets. This is mostly based on PowerPoint presentations to sales reps, which aren’t ads and don’t support a claim that representatives were making false statements. The PowerPoints may have guided sales reps, but they weren’t “scripts.” (Is it really plausible that sales reps were downplaying claims they heard internally? Still, I can see where getting some customer/sales rep testimony would have helped.)
Anyway, the presentations weren’t literally false. They included statements such as: "With RCRT, Speed reduces the chances of concussion by 31%/41%. XP doesn't stack up." The court (in conflict with FDA/FTC standards for making comparative statements of this sort, which prefer or require head-to-head testing, no pun intended) found that literal falsity would have required language to the effect that the study actually tested Speed v. XP or otherwise tested high-end Schutt helmets. “Although the presentations and internal discussions may suggest that sales representatives were trained to mislead, they fail to suggest that representatives were trained to make literally false statements.”
Schutt also challenged comparative ads that didn’t provide the point of comparison, traditional helmets: general superiority claims of “reducing concussion” by 31%, along with “The Riddell Revolution helmet is the standard against which all football helmets are measured--shown in published research to reduce the risk of concussion by nearly a third."
Assuming that falsity by necessary implication is a valid claim in the Seventh Circuit, Schutt still lost. Schutt argued that, because Schutt and Riddell are the two principal competitors in the market, failure to disclose the point of comparison necessarily implied testing against all product offerings, including Schutt’s high-end helmets. The court disagreed. Case law supports the proposition that a superiority claim may necessarily implicate a principal competitor, even without naming the competitor. However, that doesn’t necessarily imply comparison with a particular product of the competitor’s—Schutt didn’t contest Riddell’s claims of superiority over Schutt’s standard helmets. The lack of a qualifer could mislead, but is not necessarily false.
The “standard against which all football helmets are measured” ad required separate analysis, because it did suggest that the comparison was all helmets. But “the language is odd enough to weigh against reading the advertisement that way.” The ad didn’t say that all helmets had been tested against the Revolution, and this “subtle difference” in language made it ambiguous. “In other words, what makes it such a "leader," under one reading, is the simple fact that it has been tested and other high-end helmets have not.” Thus, there was no falsity by necessary implication.
Schutt only showed one instance of literal falsity, and it couldn’t show injury from those ads. Its evidence of injury was “scant,” coming down to the fact that Riddell charges a $50 premium for helmets using the Revolution technology and that it has “converted” high school and college players. But Schutt didn’t submit evidence of lost sales or market share, and there was no evidence that players switched from Schutt helmets to the falsely advertised Riddell Youth helmets. Moreover, the falsity was merely technical—had the ad simply asserted that the results of the study could be applied to the Youth helmet as part of the same family, “the reader would have gotten the same message and there would have been no false advertisement problem.” Under these circumstances, it would be unjust to award damages, and there was no reason to grant an injunction, since Riddell removed the reference and there was no suggestion that they intend to reuse that language. (Different courts take different approaches to voluntary discontinuance; perceived good faith affects whether injunctive relief is nonetheless deemed appropriate.)
The court concluded with a caution: Schutt lost “not because Riddell's advertisements were particularly open and honest, but rather because Schutt tried to take the easiest evidentiary path to success: literal falsity.”
Schutt's state-law Deceptive Trade Practices claim failed because it required Schutt to show "pecuniary loss, which it could not do, and also because the law does not provide a cause of action for misrepresentations made to non-parties. It was “not designed to protect product manufacturers from the deceptive acts of their competitors.”
Tuesday, November 09, 2010
district court's failure to specify leads to remand of FTC case
Federal Trade Commission v. Lane Labs-Usa, Inc., No. 09-3909. (3d Cir. Oct. 26, 2010)
Lane Labs makes and sells specialty dietary supplements and cosmetic products. Individual defendants were its current president and sole shareholder, Andrew Lane, and Lane's father, I. William Lane, a consultant to the company. In 2000, the FTC charged them with violating §5 of the FTCA, focusing on unsubstantiated representations about BeneFin, a dietary supplement, and SkinAnswer, a cosmetic cream. The defendants agreed to a consent decree, and the district court found Lane Labs liable for $1 million.
The defendants agreed to refrain from “mak[ing] any representation, in any manner,… expressly or by implication, about the effect of [a covered] product on any disease or disorder, or the effect of such product on the structure or function of the human body, or about any other health benefits of such product, unless, at the time the representation is made, [they] possess[ed] and rel[ied] upon competent and reliable scientific evidence that substantiates the representation.” “Competent and reliable scientific evidence” was defined as “tests, analyses, research, studies, or other evidence based on the expertise of professionals in the relevant area, that have been conducted and evaluated in an objective manner by persons qualified to do so, using procedures generally accepted in the profession to yield accurate and reliable results.”
In addition, the order forbade express or implied misrepresentations regarding “the existence, contents, validity, results, conclusions, or interpretations of any test, study or research” in connection with “the manufacturing, labeling, advertising, promotion, offering for sale, sale, or distribution of any food, dietary supplement, or drug.” The defendants were also subject to record keeping and periodic reporting requirements.
The FTC challenged defendants’ advertising for AdvaCal, a calcium supplement, and Fertil Male, which “purports to improve male fertility.”
AdvaCal’s combination of active ingredients “purportedly yields a calcium hydroxide product that is significantly more absorbable by the human body than competing calcium supplements.” Since introducing the product in 2000, Lane Labs made a number of claims about AdvaCal’s efficacy and uniqueness. Lane Labs provided the FTC with compliance reports in 2001, 2004, and 2004, attaching copies of AdvaCal ads and scientific research on which Lane Labs relied. Many of the claims at issue now were disclosed in 2001.
Fertil Male supposedly improves sperm production and motility. One ad featured a customer who proclaimed that Fertil Male caused his sperm count to “skyrocket” in a months. Defendants’ compliance report disclosed its Fertil Male ads in 2006. (The opinion doesn’t explain why the product, which was introduced in 2003, wasn’t included in the 2004 report.)
In 2006, the FTC notified Lane Labs that certain Fertil Male ads contained misrepresentations in violation of the Final Order, then sent a similar notice about AdvaCal. In 2007, the FTC filed a motion to hold the defendants in contempt and requesting $24 million in damages.
The district court held a five-day evidentiary hearing. Two experts testified for each side; while the court found them all credible, it found defendants’ experts more impressive because their approach “seemed more reasonable.” The court also heard from Andrew Lane and Jennifer Morganti, a naturopathic doctor employed by Lane Labs from 2001 to 2004. Lane testified that he took the Final Order “extremely serious[ly].” The Final Order “was distributed to all senior management personnel; copies were sent to Lane Labs' customers; an outside company was retained to compile existing research and to monitor research updates; and Lane hired Morganti to serve as manager of nutritional research.” Morganti “testified that her primary responsibility was to scrutinize Lane Labs' marketing claims to ensure that each representation was supported by scientific research.” The court found Lane credible.
The district court found that the challenged marketing claims were supported by competent and reliable scientific evidence. Unfortunately, the district court didn’t examine the particular representations challenged in any detail. Instead, it focused on the fact that AdvaCal was “a good source of calcium,” and that there was “little to no evidence that either AdvaCal or Fertil Male was ineffective or potentially dangerous.” Lane Labs, it ruled, had acted in accordance with the “spirit” of the Final Order, and this was just a difference of opinion over good products.
Even if the defendants violated the Final Order, the district court continued, they were entitled to a defense of substantial compliance, even if the materials they relied on were not perfect. The FTC dragged its feet in notifying the defendants of potential violations, which raised an issue of fundamental fairness. The defendants attempted to comply with the Final Order, believed that they had succeeded, and heard nothing to the contrary from the FTC.
The FTC appealed.
Contempt requires that the defendants knew about and disobeyed a valid court order; this must be proven by clear and convincing evidence, but disobedience need not be willful. Good faith is not a defense to civil contempt. The only issue was disobedience.
The FTC challenged four AdvaCal claims: (1) Only AdvaCal can increase bone density; (2) AdvaCal has been shown in clinical tests to increase bone density in the hip; (3) AdvaCal is three to four times more absorbable than other calcium supplements; and (4) AdvaCal is comparable or superior to prescription osteoporosis drugs. It also challenged the one-month “skyrocketing” sperm claim for Fertil Male. It also argued that Lane Labs distorted research regarding AdvaCal and other forms of calcium.
The court of appeals easily found that the defendants falsely claimed that AdvaCal had a unique ability to increase bone density, which other supplements couldn’t. The FTC presented evidence demonstrating that the claims were unsupported by competent and reliable scientific research, because nearly all calcium supplements increase bone density. Even defendants’ witness Morganti stated, “[t]o say that no other calciums can build bone is probably not true.” There was no credible evidence in the record supporting defendants’ claims; Lane’s lay speculation was not credible.
The district court nonetheless ruled that the defendants “offered support and substantiation” for the uniqueness claim. This was clearly erroneous.
Bone density: Defendants touted clinical research showing AdvaCal’s ability to increase bone density in the hip. It was undisputed that no such clinical research exists, though defendants did produce animal studies. However, the district court didn’t clearly err in finding compliance with the Final Order. Two clinical studies in peer-reviewed journals showed that calcium increased bone density in the human hip, and reasonable testimony explained that this could be generalized or “extrapolated” to AdvaCal. The district court’s finding was thus affirmed.
Absorbability: Defendants claimed that AdvaCal was three to four times more absorbable than other calcium supplements. The FTC’s expert stated that this was “not physically possible,” given that the typical calcium carbonate supplement is absorbed at a rate of 30-35%. One hundred and twenty percent absorption “is physiologically--and mathematically—unattainable,” and 60% is highly unusual. The defendants argued that AdvaCal wasn’t marketed to the average individual, but to elderly women, a substantial number of whom suffer from achlorhydria and osteoporosis. Achlorhydric individuals absorb calcium at a rate significantly below average, sometimes as low as 4%. Lane’s witness testified that it would not be unusual for such an individual to absorb AdvaCal three to four times more effectively than calcium carbonate.
However, this argument failed to account for the ads’ actual language, which was not limited to elderly women suffering achlorhydria. For example: “Osteoporosis now strikes women and men of all ages, races and nationalities. But osteoporosis can be prevented. A key is taking the right calcium and the right calcium supplement is AdvaCal․ AdvaCal has been clinically shown to be three times more absorbable than other calciums.” The district court failed to grapple with this incongruity. However, the record contained some evidence that AdvaCal was marketed to individuals at risk of, or suffering from, achlorhydria. The court of appeals determined that it couldn’t review the district court’s factual findings because there was no indication that court considered the factual dispute over whether the ads promised results that were unattainable for “large segments” of their audience. This issue was remanded.
In 1999, Lane told the Health Sciences Institute newsletter that AdvaCal was “a revolutionary calcium supplement… that has been clinically shown to actually build postmenopausal bone density, without the side effects of hormonal drugs or supplements.” HSI then published an article claiming that AdvaCal “works as well or better than [leading prescription drugs], and without the substantial side effects and risks.” But AdvaCal has never been tested in comparison to any prescription drug, and there was no evidence to substantiate this equivalence/superiority claim. The defendants argued that they weren’t responsible for HIS’s representation. The court of appeals concluded that this was “more than a stretch,” given that Lane paid for the right to distribute the article, and did so extensively. The defendants adopted HIS’s characterization by “aggressively promoting” the content, including through direct mail and retail store displays. “They cannot run from the representation now that its veracity has been subjected to the spotlight.”
Once again, the district court didn’t address the comparability/superiority claim or its responsibility for using the HIS article. Any implicit finding of lack of responsibility or substantiation was clearly erroneous.
Fertil Male: The defendants did better with the claim about “skyrocketing” sperm in one month. The court credited the testimony of defendant’s expert, who stated that there was competent or reliable scientific evidence suggesting that Fertil Male improves male fertility parameters such as sperm count, sperm motility, and sperm production. The FTC argued that it would be impossible for a supplement to increase sperm count in one month, but there was little testimony on this. Spermatogenesis requires at least three months, but the testimony didn’t explain the relationship between spermatogenesis and sperm count and “appears to imply” that there is some positive change within the first month. The court of appeals relied on this colloquy:
I have to admit, I don’t see anything there that counts as even implying positive change—the witness just says that it’s possible that something unexpected/unexplained could occur, which is not substantiation but the lack thereof. But the court of appeals found that the FTC didn’t examine the subject further when it had the opportunity, and the record testimony was ambiguous at best, allowing the district court’s finding to stand.
Finally, the FTC argued that the defendants violated the Final Order provision barring express or implied misrepresentations regarding “the existence, contents, validity, results, conclusions, or interpretations of any test, study or research” pertaining to “the manufacturing, labeling, advertising, promotion, offering for sale, sale, or distribution of any food, dietary supplement, or drug.” The district court held that some of the ad claims were “incorrect,” and “errors were made over a number of years,” but didn’t identify the misstatements and errors at issue. Instead, it focused on AdvaCal’s general efficacy as “a good source of calcium” that would “most likely help the people who take [it].” Thus, the FTC failed to show that the ad claims made false representations.
This was a problematic analysis. The Final Order prohibited misrepresenting research and data; “it is simply unconcerned with a product's overall salutary effects.” A product that effectively delivers calcium to the body can still be falsely advertised. The district court should have made particularized findings of fact about the alleged misrepresentations. Many of the claims at issue “appear misleading on their face,” such as an ad claiming that clinical tests showed AdvaCal to increase bone density, including in the hip, when it was undisputed that no such clinical research exists. But the court of appeals couldn’t tell whether the district court even considered this claim, and, if it had done so, how it could have concluded that this claim didn’t violate the Final Order. Remand for more specific findings was required.
Finally, the district court held that, even if the defendants violated the Final Order, they were entitled to a defense of substantial compliance. Such a defense requires a party to show that
it (1) has taken all reasonable steps to comply with the valid court order, and (2) has violated the order in a manner that is merely “technical” or “inadvertent.” The district court focused on defendants’ “considerable” compliance efforts, including timely compliance reports. The FTC didn’t respond, and the district court concluded that “to tell Defendants that their efforts were not good enough years after not advising them of any compliance issues is disingenuous and is highly relevant to the inquiry into whether Defendants should have done something different in the first instance.”
However, the district court did not address prong (2), whether these violations were merely technical or inadvertent. The entirety of its analysis was directed at reasonableness: its submission of compliance reports; its retention of additional compliance personnel; and the government's delay in commencing an enforcement proceeding. (Considering delay was not a laches defense, but does reflect on the reasonableness of defendants’ conduct. “After providing the government with its advertising and the research relevant thereto, the Lane defendants heard nothing for a period of years. To construe the FTC's silence as approval was technically mistaken, but it was not unreasonable. We are, of course, sympathetic to the FTC's significant regulatory and enforcement responsibilities, but delays of this extraordinary length are inordinate.”) None of this does much to illuminate question (2), even though the court implicitly recognized that violations did occur. Thus, the court of appeals was unable to conduct meaningful appellate review and remanded.
Ultimately, it was insufficient to conclude that the defendants complied with the “spirit” of the Final Order. The district court wasn’t asked to decide whether AdvaCal and Fertil Male were generally efficacious, but whether specific marketing claims violated consent decrees.
Lane Labs makes and sells specialty dietary supplements and cosmetic products. Individual defendants were its current president and sole shareholder, Andrew Lane, and Lane's father, I. William Lane, a consultant to the company. In 2000, the FTC charged them with violating §5 of the FTCA, focusing on unsubstantiated representations about BeneFin, a dietary supplement, and SkinAnswer, a cosmetic cream. The defendants agreed to a consent decree, and the district court found Lane Labs liable for $1 million.
The defendants agreed to refrain from “mak[ing] any representation, in any manner,… expressly or by implication, about the effect of [a covered] product on any disease or disorder, or the effect of such product on the structure or function of the human body, or about any other health benefits of such product, unless, at the time the representation is made, [they] possess[ed] and rel[ied] upon competent and reliable scientific evidence that substantiates the representation.” “Competent and reliable scientific evidence” was defined as “tests, analyses, research, studies, or other evidence based on the expertise of professionals in the relevant area, that have been conducted and evaluated in an objective manner by persons qualified to do so, using procedures generally accepted in the profession to yield accurate and reliable results.”
In addition, the order forbade express or implied misrepresentations regarding “the existence, contents, validity, results, conclusions, or interpretations of any test, study or research” in connection with “the manufacturing, labeling, advertising, promotion, offering for sale, sale, or distribution of any food, dietary supplement, or drug.” The defendants were also subject to record keeping and periodic reporting requirements.
The FTC challenged defendants’ advertising for AdvaCal, a calcium supplement, and Fertil Male, which “purports to improve male fertility.”
AdvaCal’s combination of active ingredients “purportedly yields a calcium hydroxide product that is significantly more absorbable by the human body than competing calcium supplements.” Since introducing the product in 2000, Lane Labs made a number of claims about AdvaCal’s efficacy and uniqueness. Lane Labs provided the FTC with compliance reports in 2001, 2004, and 2004, attaching copies of AdvaCal ads and scientific research on which Lane Labs relied. Many of the claims at issue now were disclosed in 2001.
Fertil Male supposedly improves sperm production and motility. One ad featured a customer who proclaimed that Fertil Male caused his sperm count to “skyrocket” in a months. Defendants’ compliance report disclosed its Fertil Male ads in 2006. (The opinion doesn’t explain why the product, which was introduced in 2003, wasn’t included in the 2004 report.)
In 2006, the FTC notified Lane Labs that certain Fertil Male ads contained misrepresentations in violation of the Final Order, then sent a similar notice about AdvaCal. In 2007, the FTC filed a motion to hold the defendants in contempt and requesting $24 million in damages.
The district court held a five-day evidentiary hearing. Two experts testified for each side; while the court found them all credible, it found defendants’ experts more impressive because their approach “seemed more reasonable.” The court also heard from Andrew Lane and Jennifer Morganti, a naturopathic doctor employed by Lane Labs from 2001 to 2004. Lane testified that he took the Final Order “extremely serious[ly].” The Final Order “was distributed to all senior management personnel; copies were sent to Lane Labs' customers; an outside company was retained to compile existing research and to monitor research updates; and Lane hired Morganti to serve as manager of nutritional research.” Morganti “testified that her primary responsibility was to scrutinize Lane Labs' marketing claims to ensure that each representation was supported by scientific research.” The court found Lane credible.
The district court found that the challenged marketing claims were supported by competent and reliable scientific evidence. Unfortunately, the district court didn’t examine the particular representations challenged in any detail. Instead, it focused on the fact that AdvaCal was “a good source of calcium,” and that there was “little to no evidence that either AdvaCal or Fertil Male was ineffective or potentially dangerous.” Lane Labs, it ruled, had acted in accordance with the “spirit” of the Final Order, and this was just a difference of opinion over good products.
Even if the defendants violated the Final Order, the district court continued, they were entitled to a defense of substantial compliance, even if the materials they relied on were not perfect. The FTC dragged its feet in notifying the defendants of potential violations, which raised an issue of fundamental fairness. The defendants attempted to comply with the Final Order, believed that they had succeeded, and heard nothing to the contrary from the FTC.
The FTC appealed.
Contempt requires that the defendants knew about and disobeyed a valid court order; this must be proven by clear and convincing evidence, but disobedience need not be willful. Good faith is not a defense to civil contempt. The only issue was disobedience.
The FTC challenged four AdvaCal claims: (1) Only AdvaCal can increase bone density; (2) AdvaCal has been shown in clinical tests to increase bone density in the hip; (3) AdvaCal is three to four times more absorbable than other calcium supplements; and (4) AdvaCal is comparable or superior to prescription osteoporosis drugs. It also challenged the one-month “skyrocketing” sperm claim for Fertil Male. It also argued that Lane Labs distorted research regarding AdvaCal and other forms of calcium.
The court of appeals easily found that the defendants falsely claimed that AdvaCal had a unique ability to increase bone density, which other supplements couldn’t. The FTC presented evidence demonstrating that the claims were unsupported by competent and reliable scientific research, because nearly all calcium supplements increase bone density. Even defendants’ witness Morganti stated, “[t]o say that no other calciums can build bone is probably not true.” There was no credible evidence in the record supporting defendants’ claims; Lane’s lay speculation was not credible.
The district court nonetheless ruled that the defendants “offered support and substantiation” for the uniqueness claim. This was clearly erroneous.
Bone density: Defendants touted clinical research showing AdvaCal’s ability to increase bone density in the hip. It was undisputed that no such clinical research exists, though defendants did produce animal studies. However, the district court didn’t clearly err in finding compliance with the Final Order. Two clinical studies in peer-reviewed journals showed that calcium increased bone density in the human hip, and reasonable testimony explained that this could be generalized or “extrapolated” to AdvaCal. The district court’s finding was thus affirmed.
Absorbability: Defendants claimed that AdvaCal was three to four times more absorbable than other calcium supplements. The FTC’s expert stated that this was “not physically possible,” given that the typical calcium carbonate supplement is absorbed at a rate of 30-35%. One hundred and twenty percent absorption “is physiologically--and mathematically—unattainable,” and 60% is highly unusual. The defendants argued that AdvaCal wasn’t marketed to the average individual, but to elderly women, a substantial number of whom suffer from achlorhydria and osteoporosis. Achlorhydric individuals absorb calcium at a rate significantly below average, sometimes as low as 4%. Lane’s witness testified that it would not be unusual for such an individual to absorb AdvaCal three to four times more effectively than calcium carbonate.
However, this argument failed to account for the ads’ actual language, which was not limited to elderly women suffering achlorhydria. For example: “Osteoporosis now strikes women and men of all ages, races and nationalities. But osteoporosis can be prevented. A key is taking the right calcium and the right calcium supplement is AdvaCal․ AdvaCal has been clinically shown to be three times more absorbable than other calciums.” The district court failed to grapple with this incongruity. However, the record contained some evidence that AdvaCal was marketed to individuals at risk of, or suffering from, achlorhydria. The court of appeals determined that it couldn’t review the district court’s factual findings because there was no indication that court considered the factual dispute over whether the ads promised results that were unattainable for “large segments” of their audience. This issue was remanded.
In 1999, Lane told the Health Sciences Institute newsletter that AdvaCal was “a revolutionary calcium supplement… that has been clinically shown to actually build postmenopausal bone density, without the side effects of hormonal drugs or supplements.” HSI then published an article claiming that AdvaCal “works as well or better than [leading prescription drugs], and without the substantial side effects and risks.” But AdvaCal has never been tested in comparison to any prescription drug, and there was no evidence to substantiate this equivalence/superiority claim. The defendants argued that they weren’t responsible for HIS’s representation. The court of appeals concluded that this was “more than a stretch,” given that Lane paid for the right to distribute the article, and did so extensively. The defendants adopted HIS’s characterization by “aggressively promoting” the content, including through direct mail and retail store displays. “They cannot run from the representation now that its veracity has been subjected to the spotlight.”
Once again, the district court didn’t address the comparability/superiority claim or its responsibility for using the HIS article. Any implicit finding of lack of responsibility or substantiation was clearly erroneous.
Fertil Male: The defendants did better with the claim about “skyrocketing” sperm in one month. The court credited the testimony of defendant’s expert, who stated that there was competent or reliable scientific evidence suggesting that Fertil Male improves male fertility parameters such as sperm count, sperm motility, and sperm production. The FTC argued that it would be impossible for a supplement to increase sperm count in one month, but there was little testimony on this. Spermatogenesis requires at least three months, but the testimony didn’t explain the relationship between spermatogenesis and sperm count and “appears to imply” that there is some positive change within the first month. The court of appeals relied on this colloquy:
THE COURT: Could a male's sperm count increase in the first month, or is that something that just couldn't happen?
THE WITNESS: It could have happened as part of the regression to the mean. It could have happened because the sperm--the maca had some effect inside the testes in a way I don't understand.
But in general, it's a--it's a three-month window.
I have to admit, I don’t see anything there that counts as even implying positive change—the witness just says that it’s possible that something unexpected/unexplained could occur, which is not substantiation but the lack thereof. But the court of appeals found that the FTC didn’t examine the subject further when it had the opportunity, and the record testimony was ambiguous at best, allowing the district court’s finding to stand.
Finally, the FTC argued that the defendants violated the Final Order provision barring express or implied misrepresentations regarding “the existence, contents, validity, results, conclusions, or interpretations of any test, study or research” pertaining to “the manufacturing, labeling, advertising, promotion, offering for sale, sale, or distribution of any food, dietary supplement, or drug.” The district court held that some of the ad claims were “incorrect,” and “errors were made over a number of years,” but didn’t identify the misstatements and errors at issue. Instead, it focused on AdvaCal’s general efficacy as “a good source of calcium” that would “most likely help the people who take [it].” Thus, the FTC failed to show that the ad claims made false representations.
This was a problematic analysis. The Final Order prohibited misrepresenting research and data; “it is simply unconcerned with a product's overall salutary effects.” A product that effectively delivers calcium to the body can still be falsely advertised. The district court should have made particularized findings of fact about the alleged misrepresentations. Many of the claims at issue “appear misleading on their face,” such as an ad claiming that clinical tests showed AdvaCal to increase bone density, including in the hip, when it was undisputed that no such clinical research exists. But the court of appeals couldn’t tell whether the district court even considered this claim, and, if it had done so, how it could have concluded that this claim didn’t violate the Final Order. Remand for more specific findings was required.
Finally, the district court held that, even if the defendants violated the Final Order, they were entitled to a defense of substantial compliance. Such a defense requires a party to show that
it (1) has taken all reasonable steps to comply with the valid court order, and (2) has violated the order in a manner that is merely “technical” or “inadvertent.” The district court focused on defendants’ “considerable” compliance efforts, including timely compliance reports. The FTC didn’t respond, and the district court concluded that “to tell Defendants that their efforts were not good enough years after not advising them of any compliance issues is disingenuous and is highly relevant to the inquiry into whether Defendants should have done something different in the first instance.”
However, the district court did not address prong (2), whether these violations were merely technical or inadvertent. The entirety of its analysis was directed at reasonableness: its submission of compliance reports; its retention of additional compliance personnel; and the government's delay in commencing an enforcement proceeding. (Considering delay was not a laches defense, but does reflect on the reasonableness of defendants’ conduct. “After providing the government with its advertising and the research relevant thereto, the Lane defendants heard nothing for a period of years. To construe the FTC's silence as approval was technically mistaken, but it was not unreasonable. We are, of course, sympathetic to the FTC's significant regulatory and enforcement responsibilities, but delays of this extraordinary length are inordinate.”) None of this does much to illuminate question (2), even though the court implicitly recognized that violations did occur. Thus, the court of appeals was unable to conduct meaningful appellate review and remanded.
Ultimately, it was insufficient to conclude that the defendants complied with the “spirit” of the Final Order. The district court wasn’t asked to decide whether AdvaCal and Fertil Male were generally efficacious, but whether specific marketing claims violated consent decrees.
Sixth Circuit invalidates milk labeling rule
International Dairy Foods Association v. Boggs, Nos. 09-3515, 09-3526 (6th Cir. Sept. 30, 2010)
In the mirror image of IDFA v. Amestoy, 92 F.3d 67 (2d Cir. 1996), here the plaintiffs invalidated on First Amendment grounds most of a regulation designed to discourage milk producers from identifying that their milk came from cows not treated with recombinant bovine growth hormone (rBGH, aka rBST, sometimes capitalized differently). The decision contains some troubling signs of skepticism about consumer protection regulation more generally.
The Ohio Department of Agriculture (ODA), following a line of reasoning pushed by Monsanto, adopted a regulation prohibiting dairy processors from making claims about the absence of artificial hormones in their milk products (composition claims), and requiring them to include a disclaimer when making such claims about their production processes. IDFA and the Organic Trade Association sued for violation of the First Amendment and the dormant Commerce Clause.
rBST is a genetically engineered hormone used to increase milk production. The FDA approved its use in cows in 1993, concluding that milk from treated cows was safe for human consumption. The FDA "found that there was no significant difference between milk from treated and untreated cows," Interim Guidance on the Voluntary Labeling of Milk and Milk Products from Cows that Have Not Been Treated with Recombinant Bovine Somatotropin, 59 Fed. Reg. 6279 (Feb. 10, 1994). The FDA therefore concluded that composition claims such as “rBST-free” were likely to be misleading, because the FDA found no compositional difference between milk from treated and untreated cows. Production claims such as "from cows not treated with rbST” were less problematic, but could be misleading if they implied that milk from untreated cows was safer or of higher quality than milk from treated cows. The FDA suggested that production claims should be paired with a statement such as “[n]o significant difference has been shown between milk derived from rbST-treated and non-rbST-treated cows," or with a statement of "the firm's reasons (other than safety or quality) for choosing not to use milk from cows treated with rbST."
However, because the states traditionally regulate milk production, the FDA stated that its Guidance was nonbinding. It also recommended that states require companies to maintain records substantiating no-rBST claims and to make those records available for inspection.
Since the Guidance, consumers have increased their demand for milk from non-rBST-treated cows. Many dairy processors no longer accept milk from rBST-treated cows, and of course organic milk can’t come from cows treated with rBST.
When the ODA solicited comments about its proposed regulation defining what constitutes false and misleading milk labels, it received under 70 (out of 2700) emails and letters in favor of the proposed rule. Nonetheless, Director Boggs adopted the final rule:
The relevant standard is provided by Central Hudson. False and misleading commercial speech may be banned; other speech regulations have to pass a more stringent test. However, Supreme Court doctrine has developed a not-very-well-theorized distinction unknown to false advertising law generally: “inherently” misleading speech may simply be banned. “Potentially” misleading speech, however, should be cured with more disclosure rather than with a ban. The Lanham Act jurisprudence has some conflicting cases about whether disclosures should be presumed effective or ineffective; First Amendment cases, however, have not attempted to engage in empirical analysis of effectiveness, and this case won’t be the happy exception.
There were two sets of claims at issue: composition (the milk doesn’t contain rBST) and production (the milk comes from cows not treated with rBST). The district court found that composition claims were inherently misleading because they implied a composition difference between milk from the two sets of cows, conflicting with the FDA’s finding that there is no measurable difference.
The court of appeals held, however, that the record showed that there was a compositional difference between milk from untreated cows and conventional milk:
I find this an extremely interesting set of statements. (1) There is no discussion of whether the FDA also considered this evidence, or what level of deference would be given to the FDA’s rejection if it had done so. (2) Assuming this is post-1994 evidence, is the FDA required by the First Amendment to revisit its conclusions about appropriate labeling every time there is a new study? (3) Are these studies any good? That is, a government entity has found a certain fact: there is no compositional difference. What evidentiary standard is being applied to invalidate that factfinding?
Regardless, the court of appeals found that there was a compositional difference. But, even more sweepingly, “the failure to discover rbST in conventional milk is not necessarily because the artificial hormone is absent in such milk, but rather because scientists have been unable to perfect a test to detect it.” So it is possible that conventional milk contains rBST; we just can’t tell yet, but we might be able to tell someday.
Query: given this, can conventional milk producers advertise that “our milk contains no rBST”? If it’s constitutional to impose a substantiation requirement, then let’s concede that the FTC could go after this claim—though compare what supplement makers get to say based on cases such as Pearson. But imagine an organic producer suing a conventional producer under the Lanham Act for making a no-rBST claim: it seems to me that, given this evidence, the organic producer could not meet its burden of showing falsity. Suppose the ODA responds by allowing conventional producers to advertise "our milk contains no rBST"? Careful what you wish for.
The court of appeals concluded that there were “two distinct types of milk”: untreated cows cannot produce milk containing rBST, but conventional milk might contain rBST. If factual uncertainty is constitutionally sufficient to invalidate the regulation (and the court of appeals punted on this point, emphasizing the IGF-1 as well), then the court may have kicked the supports out of fifty or so years of FDA regulation, plus knocked some serious holes in the general substantiation requirement as well. That is, if the First Amendment requires allowing advertisers to make claims that might or might not be benefits—claims whose truth we simply do not know—then what’s left of substantiation?
The court of appeals found that the only uncertainty was in the extent of the difference. Thus, “rBST free” “at best informs consumers of a meaningful distinction between conventional and other types of milk and at worst potentially misleads them into believing that a compositionally distinct milk adversely affects their health.” Thus, the composition claim was not inherently misleading and needed to be tested under Central Hudson’s remaining three factors.
(Note the sleight of hand on what the compositional difference is. That is, we might accept that there is an IGF-1 difference, but that’s not what the producers want to advertise. They want to advertise “rBST-free,” which says nothing about IGF-1 and may be inherently misleading.)
Separately, the processors challenged the ban on composition claims about the absence of antibiotics and pesticides. The state argued that antibiotics and pesticides are "largely detectable in milk" and that "all milk is routinely tested for antibiotics, and the presence of any antibiotic in any amount renders the milk unacceptable for consumption," though cost considerations prevent the routine testing of every batch of milk. It did not submit evidence about the testing procedures used. The court of appeals concluded that evidence about testing “might well influence our determination” as to whether "antibiotic free" and "pesticide free" are inherently misleading:
So this issue was remanded.
For a claim that is only potentially misleading, a complete ban will be upheld if the state shows that (1) its interest is substantial, (2) the ban directly advances that interest, and (3) a ban is no more extensive than necessary to serve that interest. Preventing deception is a substantial interest, but the state has the burden to demonstrate that “the harms it recites are real and that its restriction will in fact alleviate them to a material degree.” Here, the record of deception was weak at best. The FDA’s guidance merely said that the “rBST-free” claim “may imply a compositional difference,” but that doesn’t establish that the claim is necessarily misleading in every context. And the FDA cited no evidence or studies about consumer confusion. Thus it’s not evidence that the harm is real.
This is conflating a couple of issues. The rBST-free claim necessarily implies a compositional difference, and, as the court seemed to recognize above, no one could seriously dispute that implication. The real question is whether the compositional difference is meaningful to consumers for health or nutrition reasons, or whether this is like advertising “OUR milk is lead-free,” falsely implying the inferiority of other milk.
The court of appeals also dismissed the relevance of the consumer comments received by the ODA. Some comments did demonstrate confusion, such as one consumer who stated that she needed “to know that the milk I drink has no added hormones.” But “few if any” commenters indicated that their confusion stemmed from product labels, rather than other sources.
Anyway, the rule didn’t directly advance the state’s interest and was more extensive than necessary. Any confusion could be alleviated with a disclaimer informing consumers that rbST has yet to be detected in conventional milk. “Examples of possible disclaimers include a statement regarding the lack of evidence that conventional milk contains rbST, or even the disclaimer already required by the Rule to accompany production claims: ‘The FDA has determined that no significant difference has been shown between milk derived from rbST-supplemented and non-rbST-supplemented cows.’”
It’s really too bad that the court didn’t consider (and possibly wasn’t presented with; I haven’t read the briefs) the really compelling evidence that long, involved disclaimers of this sort—specifically, disclaimers about the FDA’s conclusions—have precisely zero effect on consumers’ understanding of the main claims. Consideration of this evidence would bear strongly on Central Hudson factors (2) and (3). See, e.g., Karen Russo France & Paula Fitzgerald Bone, Policy makers’ paradigms and evidence from consumer interpretations of dietary supplement labels, 39 Journal of Consumer Affairs 1 (2005); research presented here.
Anyway, the district court reasoned that a disclaimer “would only serve to confuse a consumer” by contradicting itself—“it would say a product is ‘free’ of rbST, but at the same time state that there is no rbST in other products, which defeats the purpose of making the claim in the first place." The court of appeals, however, thought that this argument assumed that conventional milk had conclusively been shown to be free of rBST. An appropriate disclaimer “could assure consumers that the substance is definitively not in milk so labeled while also advising them that it has yet to be detected in conventional milk.” Thus, the prophylactic ban on composition claims was more extensive than necessary.
The Rule also regulates production claims, requiring them to be accompanied by a disclosure stating that "[t]he FDA has determined that no significant difference has been shown between milk derived from rbST-supplemented and non-rbST-supplemented cows." This disclosure must be on the same label panel, "in exactly the same font, style, case, and color and at least half the size (but no smaller than seven point font)" as the production claim.
The district court granted partial summary judgment to the state, first finding that required disclosures are tested under a reasonableness standard rather than under Central Hudson. It found that production claims imply that conventional milk is inferior or unsafe and that the state has an interest in correcting this potentially misleading information. The court did find a factual dispute over whether the formatting requirements were unduly burdensome for small containers.
On appeal, the processors argued that more stringent review should apply to disclosure requirements. Zauderer v. Office of Disciplinary Counsel of the Supreme Court of Ohio, 471 U.S. 626 (1985), explained that, "because disclosure requirements trench much more narrowly on an advertiser's interests than do flat prohibitions on speech, warnings or disclaimers might be appropriately required in order to dissipate the possibility of consumer confusion or deception” (alterations, citation, and ellipsis omitted). Disclosure requirements are allowed where they’re "reasonably related to the State's interest in preventing deception of consumers," but not when they’re "unjustified or unduly burdensome."
The court of appeals here concluded that Zauderer applied to misleading commercial speech, whether it’s inherently or potentially misleading. This is consistent with the rule that commercial speech is protected because of consumers’ interests in receiving truthful information, not because of commercial speakers’ autonomy interests. Commercial speakers thus have minimal interests in avoiding the provision of factual information. (This rule is also consistent with the idea that the preferred remedy for potentially misleading speech is disclosure; or it could be, anyway, if we had any real idea what the difference between potentially and inherently misleading speech was.)
The disclosure requirement was reasonably related to the state’s interest in preventing consumers from being deceived by production claims. Like composition claims, production claims are potentially misleading “because they imply that conventional milk is inferior or unsafe in some way. But neither the FDA nor any study has conclusively shown that to be the case.” So, I guess, if conventional milk had been conclusively shown inferior, the disclaimer requirement would be unreasonable.
The processors argued that the state failed to show that production claims are misleading. But the state’s burden is more relaxed where the remedy is disclosure and where the possibility of deception is self-evident. Zauderer specifically stated that no survey was necessary to require disclosure. Although the FDA’s Interim Guidance and the consumer comments here were “weak” evidence of deception, they were enough to show that the risk was not speculative. The disclosure requirement is “reasonably related to thwarting that risk.”
However—shockingly!—the court of appeals found that there was no rational basis between the state’s concern and the requirement that the disclosure be “contiguous.” As a reminder, the Rule stipulates that disclosures must be "in the same label panel, in exactly the same font, style, case, and color and at least half the size (but no smaller than seven point font)" as the production claim, and also must be contiguous to the production claim. The font, style, case, and color requirements for the disclosure's text had “a self-evident rational basis” to prevent marketers from making the disclosure unreadable.
But the producers wanted to be able to use an asterisk instead of making the disclosure contiguous. Director Boggs testified that the ODA decided against this based on his "anecdotal experience" of talking to consumers in grocery stores, who informed him that "oftentimes it's hard to understand labels, especially when the print is so small." The court of appeals observed that this showed nothing about whether using an asterisk was effective, and there was no other basis in the record for Boggs’ belief. In light of the paucity of evidence in the record, the contiguity requirement had no demonstrable connection to preventing deception and lacked a rational basis. (This decision is somewhat worrisome for the FTC’s position on disclosures and disclaimers, except that I strongly hope that the FTC would be able to introduce consumer research and testimony from marketing experts who would convey the conventional understanding that, in fact, asterisks don’t work very well if at all for important claims.)
Finally, the processors argued that the disclosure requirement was unduly burdensome, but that concern stemmed largely from the anti-asterisk rule. There was no evidence that the font, size, and color requirements impaired their ability to communicate effectively.
They also alleged a dormant Commerce Clause violation from the disclaimer regulation, but given the First Amendment holdings, there was no significant burden on their ability to participate in interstate commerce. Without the prophylactic ban on composition claims and the asterisk prohibition, the Rule would be “largely indistinguishable from similar regulations in other states.”
Ohio’s rule also didn’t govern conduct occurring entirely out of state, which would have violated the dormant Commerce Clause. The processors argued that, given the complex national distribution channels for milk and the costs of changing labels, the Rule effectively required them to create a nationwide label corresponding to Ohio’s requirements. But the Rule had no direct effect on out-of-state labeling conduct, nor did complying with Ohio law risk conflict with the law of another state. The Rule didn’t impede or control the flow of milk products across the country, and the FDA has explicitly recognized the state role in labeling milk from untreated cows.
The processors argued that the Rule was purposefully and in practical effect protectionist, designed to help in-state interests at the expense of out-of-state interests. Unlike the situation in Vermont, Ohio’s milk producers are more likely to produce conventional milk, and thus the Rule stripped out-of-state processors of a competitive advantage from advertising their nonuse of rBST. But the purpose of the regulation was to prevent deception, which doesn’t indicate protectionism. Moreover, the discriminatory purpose argument was undermined by the processors’ own story, which was that traditional Ohio dairy farmers and Monsanto lobbied for the Rule to keep other Ohio dairy processors from converting to nontreated milk. As for practical effect, the rule’s burdens and benefits don’t correlate with being in or outside of Ohio.
Without an impermissible extraterritorial effect or a finding of protectionism, the court of appeals weighed the burdens and benefits of the Rule. State regulations are to be upheld unless the burden imposed on interstate commerce is clearly excessive in relation to the claimed local benefits. Here, without the absolute ban on composition claims and the asterisk ban, the processors’ argument that economic realities would require them to either stop selling in Ohio or conform nationwide labels to Ohio law was no longer persuasive. (I don’t think this is a dormant Commerce Clause violation, but I’m not sure why it follows from the invalidation of some of the Rule that the producers won’t be forced to print Ohio-conforming labels nationwide as a matter of economic reality. I presume that the idea is, once they can make composition claims and move the disclaimer around, putting those labels on nationwide wouldn’t be unduly burdensome given the lack of conflict with other states’ laws.) Anyway, the intended benefit of consumer protection is significant, and states have always had a particular interest in truthful advertising of food.
In the mirror image of IDFA v. Amestoy, 92 F.3d 67 (2d Cir. 1996), here the plaintiffs invalidated on First Amendment grounds most of a regulation designed to discourage milk producers from identifying that their milk came from cows not treated with recombinant bovine growth hormone (rBGH, aka rBST, sometimes capitalized differently). The decision contains some troubling signs of skepticism about consumer protection regulation more generally.
The Ohio Department of Agriculture (ODA), following a line of reasoning pushed by Monsanto, adopted a regulation prohibiting dairy processors from making claims about the absence of artificial hormones in their milk products (composition claims), and requiring them to include a disclaimer when making such claims about their production processes. IDFA and the Organic Trade Association sued for violation of the First Amendment and the dormant Commerce Clause.
rBST is a genetically engineered hormone used to increase milk production. The FDA approved its use in cows in 1993, concluding that milk from treated cows was safe for human consumption. The FDA "found that there was no significant difference between milk from treated and untreated cows," Interim Guidance on the Voluntary Labeling of Milk and Milk Products from Cows that Have Not Been Treated with Recombinant Bovine Somatotropin, 59 Fed. Reg. 6279 (Feb. 10, 1994). The FDA therefore concluded that composition claims such as “rBST-free” were likely to be misleading, because the FDA found no compositional difference between milk from treated and untreated cows. Production claims such as "from cows not treated with rbST” were less problematic, but could be misleading if they implied that milk from untreated cows was safer or of higher quality than milk from treated cows. The FDA suggested that production claims should be paired with a statement such as “[n]o significant difference has been shown between milk derived from rbST-treated and non-rbST-treated cows," or with a statement of "the firm's reasons (other than safety or quality) for choosing not to use milk from cows treated with rbST."
However, because the states traditionally regulate milk production, the FDA stated that its Guidance was nonbinding. It also recommended that states require companies to maintain records substantiating no-rBST claims and to make those records available for inspection.
Since the Guidance, consumers have increased their demand for milk from non-rBST-treated cows. Many dairy processors no longer accept milk from rBST-treated cows, and of course organic milk can’t come from cows treated with rBST.
When the ODA solicited comments about its proposed regulation defining what constitutes false and misleading milk labels, it received under 70 (out of 2700) emails and letters in favor of the proposed rule. Nonetheless, Director Boggs adopted the final rule:
(A) dairy products will be deemed to be misbranded if they contain a statement which is false or misleading.
(B) A dairy label which contains a production claim that "this milk is from cows not supplemented with rbST" (or a substantially equivalent claim) may be considered misleading on the basis of such language, unless:
(1) The labeling entity has verified that the claim is accurate, and proper documents, including, but not limited to, producer signed affidavits, farm weight tickets and plant audit trails, to support the claim, are made readily available to ODA for inspection; and
(2) The label contains, in the same label panel, in exactly the same font, style, case, and color and at least half the size (but no smaller than seven point font) as the foregoing representation, the following contiguous additional statement (or a substantially equivalent statement): "The FDA has determined that no significant difference has been shown between milk derived from rbST-supplemented and non-rbST-supplemented cows."
(C) Making claims regarding the composition of milk with respect to hormones, such as "No Hormones", "Hormone Free", "rbST Free", "rbGH Free", "No Artificial Hormones" and "bST Free", is false and misleading. ...
(D) Statements may be considered to be false or misleading if they indicate the absence of a compound not permitted by the United States [F]ood and [D]rug [A]dministration to be present in any dairy product, including, but not limited to antibiotics or pesticides. Except as otherwise provided in this rule, accurate production claims will not be deemed false or misleading.
The relevant standard is provided by Central Hudson. False and misleading commercial speech may be banned; other speech regulations have to pass a more stringent test. However, Supreme Court doctrine has developed a not-very-well-theorized distinction unknown to false advertising law generally: “inherently” misleading speech may simply be banned. “Potentially” misleading speech, however, should be cured with more disclosure rather than with a ban. The Lanham Act jurisprudence has some conflicting cases about whether disclosures should be presumed effective or ineffective; First Amendment cases, however, have not attempted to engage in empirical analysis of effectiveness, and this case won’t be the happy exception.
There were two sets of claims at issue: composition (the milk doesn’t contain rBST) and production (the milk comes from cows not treated with rBST). The district court found that composition claims were inherently misleading because they implied a composition difference between milk from the two sets of cows, conflicting with the FDA’s finding that there is no measurable difference.
The court of appeals held, however, that the record showed that there was a compositional difference between milk from untreated cows and conventional milk:
the use of rbST in milk production has been shown to elevate the levels of insulin-like growth factor 1 (IGF-1), a naturally-occurring hormone that in high levels is linked to several types of cancers, among other things. The amici also point to certain studies indicating that rbST use induces an unnatural period of milk production during a cow's "negative energy phase." According to these studies, milk produced during this stage is considered to be low quality due to its increased fat content and its decreased level of proteins. The amici further note that milk from treated cows contains higher somatic cell counts, which makes the milk turn sour more quickly and is another indicator of poor milk quality.
I find this an extremely interesting set of statements. (1) There is no discussion of whether the FDA also considered this evidence, or what level of deference would be given to the FDA’s rejection if it had done so. (2) Assuming this is post-1994 evidence, is the FDA required by the First Amendment to revisit its conclusions about appropriate labeling every time there is a new study? (3) Are these studies any good? That is, a government entity has found a certain fact: there is no compositional difference. What evidentiary standard is being applied to invalidate that factfinding?
Regardless, the court of appeals found that there was a compositional difference. But, even more sweepingly, “the failure to discover rbST in conventional milk is not necessarily because the artificial hormone is absent in such milk, but rather because scientists have been unable to perfect a test to detect it.” So it is possible that conventional milk contains rBST; we just can’t tell yet, but we might be able to tell someday.
Query: given this, can conventional milk producers advertise that “our milk contains no rBST”? If it’s constitutional to impose a substantiation requirement, then let’s concede that the FTC could go after this claim—though compare what supplement makers get to say based on cases such as Pearson. But imagine an organic producer suing a conventional producer under the Lanham Act for making a no-rBST claim: it seems to me that, given this evidence, the organic producer could not meet its burden of showing falsity. Suppose the ODA responds by allowing conventional producers to advertise "our milk contains no rBST"? Careful what you wish for.
The court of appeals concluded that there were “two distinct types of milk”: untreated cows cannot produce milk containing rBST, but conventional milk might contain rBST. If factual uncertainty is constitutionally sufficient to invalidate the regulation (and the court of appeals punted on this point, emphasizing the IGF-1 as well), then the court may have kicked the supports out of fifty or so years of FDA regulation, plus knocked some serious holes in the general substantiation requirement as well. That is, if the First Amendment requires allowing advertisers to make claims that might or might not be benefits—claims whose truth we simply do not know—then what’s left of substantiation?
The court of appeals found that the only uncertainty was in the extent of the difference. Thus, “rBST free” “at best informs consumers of a meaningful distinction between conventional and other types of milk and at worst potentially misleads them into believing that a compositionally distinct milk adversely affects their health.” Thus, the composition claim was not inherently misleading and needed to be tested under Central Hudson’s remaining three factors.
(Note the sleight of hand on what the compositional difference is. That is, we might accept that there is an IGF-1 difference, but that’s not what the producers want to advertise. They want to advertise “rBST-free,” which says nothing about IGF-1 and may be inherently misleading.)
Separately, the processors challenged the ban on composition claims about the absence of antibiotics and pesticides. The state argued that antibiotics and pesticides are "largely detectable in milk" and that "all milk is routinely tested for antibiotics, and the presence of any antibiotic in any amount renders the milk unacceptable for consumption," though cost considerations prevent the routine testing of every batch of milk. It did not submit evidence about the testing procedures used. The court of appeals concluded that evidence about testing “might well influence our determination” as to whether "antibiotic free" and "pesticide free" are inherently misleading:
If the State's testing can detect these substances and prevent any amount of them from being present in conventional milk, then such claims would be inherently misleading because they falsely imply that conventional milk contains antibiotics and pesticides when in fact the State tests to ensure that it does not. But there is no evidence in the record to verify the State's contention.
So this issue was remanded.
For a claim that is only potentially misleading, a complete ban will be upheld if the state shows that (1) its interest is substantial, (2) the ban directly advances that interest, and (3) a ban is no more extensive than necessary to serve that interest. Preventing deception is a substantial interest, but the state has the burden to demonstrate that “the harms it recites are real and that its restriction will in fact alleviate them to a material degree.” Here, the record of deception was weak at best. The FDA’s guidance merely said that the “rBST-free” claim “may imply a compositional difference,” but that doesn’t establish that the claim is necessarily misleading in every context. And the FDA cited no evidence or studies about consumer confusion. Thus it’s not evidence that the harm is real.
This is conflating a couple of issues. The rBST-free claim necessarily implies a compositional difference, and, as the court seemed to recognize above, no one could seriously dispute that implication. The real question is whether the compositional difference is meaningful to consumers for health or nutrition reasons, or whether this is like advertising “OUR milk is lead-free,” falsely implying the inferiority of other milk.
The court of appeals also dismissed the relevance of the consumer comments received by the ODA. Some comments did demonstrate confusion, such as one consumer who stated that she needed “to know that the milk I drink has no added hormones.” But “few if any” commenters indicated that their confusion stemmed from product labels, rather than other sources.
Anyway, the rule didn’t directly advance the state’s interest and was more extensive than necessary. Any confusion could be alleviated with a disclaimer informing consumers that rbST has yet to be detected in conventional milk. “Examples of possible disclaimers include a statement regarding the lack of evidence that conventional milk contains rbST, or even the disclaimer already required by the Rule to accompany production claims: ‘The FDA has determined that no significant difference has been shown between milk derived from rbST-supplemented and non-rbST-supplemented cows.’”
It’s really too bad that the court didn’t consider (and possibly wasn’t presented with; I haven’t read the briefs) the really compelling evidence that long, involved disclaimers of this sort—specifically, disclaimers about the FDA’s conclusions—have precisely zero effect on consumers’ understanding of the main claims. Consideration of this evidence would bear strongly on Central Hudson factors (2) and (3). See, e.g., Karen Russo France & Paula Fitzgerald Bone, Policy makers’ paradigms and evidence from consumer interpretations of dietary supplement labels, 39 Journal of Consumer Affairs 1 (2005); research presented here.
Anyway, the district court reasoned that a disclaimer “would only serve to confuse a consumer” by contradicting itself—“it would say a product is ‘free’ of rbST, but at the same time state that there is no rbST in other products, which defeats the purpose of making the claim in the first place." The court of appeals, however, thought that this argument assumed that conventional milk had conclusively been shown to be free of rBST. An appropriate disclaimer “could assure consumers that the substance is definitively not in milk so labeled while also advising them that it has yet to be detected in conventional milk.” Thus, the prophylactic ban on composition claims was more extensive than necessary.
The Rule also regulates production claims, requiring them to be accompanied by a disclosure stating that "[t]he FDA has determined that no significant difference has been shown between milk derived from rbST-supplemented and non-rbST-supplemented cows." This disclosure must be on the same label panel, "in exactly the same font, style, case, and color and at least half the size (but no smaller than seven point font)" as the production claim.
The district court granted partial summary judgment to the state, first finding that required disclosures are tested under a reasonableness standard rather than under Central Hudson. It found that production claims imply that conventional milk is inferior or unsafe and that the state has an interest in correcting this potentially misleading information. The court did find a factual dispute over whether the formatting requirements were unduly burdensome for small containers.
On appeal, the processors argued that more stringent review should apply to disclosure requirements. Zauderer v. Office of Disciplinary Counsel of the Supreme Court of Ohio, 471 U.S. 626 (1985), explained that, "because disclosure requirements trench much more narrowly on an advertiser's interests than do flat prohibitions on speech, warnings or disclaimers might be appropriately required in order to dissipate the possibility of consumer confusion or deception” (alterations, citation, and ellipsis omitted). Disclosure requirements are allowed where they’re "reasonably related to the State's interest in preventing deception of consumers," but not when they’re "unjustified or unduly burdensome."
The court of appeals here concluded that Zauderer applied to misleading commercial speech, whether it’s inherently or potentially misleading. This is consistent with the rule that commercial speech is protected because of consumers’ interests in receiving truthful information, not because of commercial speakers’ autonomy interests. Commercial speakers thus have minimal interests in avoiding the provision of factual information. (This rule is also consistent with the idea that the preferred remedy for potentially misleading speech is disclosure; or it could be, anyway, if we had any real idea what the difference between potentially and inherently misleading speech was.)
The disclosure requirement was reasonably related to the state’s interest in preventing consumers from being deceived by production claims. Like composition claims, production claims are potentially misleading “because they imply that conventional milk is inferior or unsafe in some way. But neither the FDA nor any study has conclusively shown that to be the case.” So, I guess, if conventional milk had been conclusively shown inferior, the disclaimer requirement would be unreasonable.
The processors argued that the state failed to show that production claims are misleading. But the state’s burden is more relaxed where the remedy is disclosure and where the possibility of deception is self-evident. Zauderer specifically stated that no survey was necessary to require disclosure. Although the FDA’s Interim Guidance and the consumer comments here were “weak” evidence of deception, they were enough to show that the risk was not speculative. The disclosure requirement is “reasonably related to thwarting that risk.”
However—shockingly!—the court of appeals found that there was no rational basis between the state’s concern and the requirement that the disclosure be “contiguous.” As a reminder, the Rule stipulates that disclosures must be "in the same label panel, in exactly the same font, style, case, and color and at least half the size (but no smaller than seven point font)" as the production claim, and also must be contiguous to the production claim. The font, style, case, and color requirements for the disclosure's text had “a self-evident rational basis” to prevent marketers from making the disclosure unreadable.
But the producers wanted to be able to use an asterisk instead of making the disclosure contiguous. Director Boggs testified that the ODA decided against this based on his "anecdotal experience" of talking to consumers in grocery stores, who informed him that "oftentimes it's hard to understand labels, especially when the print is so small." The court of appeals observed that this showed nothing about whether using an asterisk was effective, and there was no other basis in the record for Boggs’ belief. In light of the paucity of evidence in the record, the contiguity requirement had no demonstrable connection to preventing deception and lacked a rational basis. (This decision is somewhat worrisome for the FTC’s position on disclosures and disclaimers, except that I strongly hope that the FTC would be able to introduce consumer research and testimony from marketing experts who would convey the conventional understanding that, in fact, asterisks don’t work very well if at all for important claims.)
Finally, the processors argued that the disclosure requirement was unduly burdensome, but that concern stemmed largely from the anti-asterisk rule. There was no evidence that the font, size, and color requirements impaired their ability to communicate effectively.
They also alleged a dormant Commerce Clause violation from the disclaimer regulation, but given the First Amendment holdings, there was no significant burden on their ability to participate in interstate commerce. Without the prophylactic ban on composition claims and the asterisk prohibition, the Rule would be “largely indistinguishable from similar regulations in other states.”
Ohio’s rule also didn’t govern conduct occurring entirely out of state, which would have violated the dormant Commerce Clause. The processors argued that, given the complex national distribution channels for milk and the costs of changing labels, the Rule effectively required them to create a nationwide label corresponding to Ohio’s requirements. But the Rule had no direct effect on out-of-state labeling conduct, nor did complying with Ohio law risk conflict with the law of another state. The Rule didn’t impede or control the flow of milk products across the country, and the FDA has explicitly recognized the state role in labeling milk from untreated cows.
The processors argued that the Rule was purposefully and in practical effect protectionist, designed to help in-state interests at the expense of out-of-state interests. Unlike the situation in Vermont, Ohio’s milk producers are more likely to produce conventional milk, and thus the Rule stripped out-of-state processors of a competitive advantage from advertising their nonuse of rBST. But the purpose of the regulation was to prevent deception, which doesn’t indicate protectionism. Moreover, the discriminatory purpose argument was undermined by the processors’ own story, which was that traditional Ohio dairy farmers and Monsanto lobbied for the Rule to keep other Ohio dairy processors from converting to nontreated milk. As for practical effect, the rule’s burdens and benefits don’t correlate with being in or outside of Ohio.
Without an impermissible extraterritorial effect or a finding of protectionism, the court of appeals weighed the burdens and benefits of the Rule. State regulations are to be upheld unless the burden imposed on interstate commerce is clearly excessive in relation to the claimed local benefits. Here, without the absolute ban on composition claims and the asterisk ban, the processors’ argument that economic realities would require them to either stop selling in Ohio or conform nationwide labels to Ohio law was no longer persuasive. (I don’t think this is a dormant Commerce Clause violation, but I’m not sure why it follows from the invalidation of some of the Rule that the producers won’t be forced to print Ohio-conforming labels nationwide as a matter of economic reality. I presume that the idea is, once they can make composition claims and move the disclaimer around, putting those labels on nationwide wouldn’t be unduly burdensome given the lack of conflict with other states’ laws.) Anyway, the intended benefit of consumer protection is significant, and states have always had a particular interest in truthful advertising of food.
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