Third Trademark Scholars’ Roundtable, Bloomington, Indiana
The Role of Confusion in Modern Trademark Law
Graeme Dinwoodie and Mark Janis: Welcome and Introduction
Janis introduced the topic: confusion seems obvious but that’s why we’re focusing on it. Dinwoodie suggested that there is also ferment in European law and there may be some opportunity to translate scholarly thinking on the topic into legal outcomes.
Session 1: Methodological Perspectives on Confusion
Introduction: Jessica Litman
Overview of history, with big holes in it (Bob Bone’s paper covers a lot). 19th century cases: confusion over source was implicit in technical TM cases and explicit in unfair competition. It was very much “I know it when I see it” through the mid 20th century. Likelihood of confusion first showed up in statute in late 19th c. Precursor to 2(d) prohibiting registration of any mark likely to cause confusion with mark previously registered or previously known. Lanham Act draft initially mentioned confusion only in registration section but called the actionable thing “infringement.” Hearings made clear that people considered infringement to be confusion of source. Initially defined infringement in the definitions section involving deception/confusion as to source, then changed it to what became §32. Chief reason: concern about how the innovation of incontestability might expand the scope of TM rights, to rebut concern about people owning rights.
After that: mission creep for the multifactor confusion test. By 1965, we see district courts applying the test to products that are related but not identical, and by mid-1980s everyone’s using the test even for cases involving competing goods. For district courts: seemed to guide discretion without really constraining it in any way—test is a wonderful tool for persuading yourself that your initial intuition is correct. Courts of appeals: gave them something concrete to review and reverse. Inwood v. Ives came down in 1982, while all this was happening—we put the contributory infringement part in the casebook, but it’s worth noting what the case actually held—district court found noninfringement and functionality; court of appeals reversed on an “I know it when I see it basis,” but SCt reversed because court of appeals hadn’t found clearly erroneous factual findings. Great thing about multifactor test treated as mixed question of law and fact is that you can reverse a district court you think has erred without having to find clear error.
Primary discussants: Mark McKenna
Literature has really come to terms with enormous conceptual change in the 1920s-1940s; before that there was tendency to tell story of TM as historically consistent view of confusion as always a problem with slow change, until things went off the rails in the 1970s and 1980s. Applying TM to noncompeting goods required a real rethinking of premises; that’s where we start seeing “confusion” supplant “deception” as the right word. You don’t see deception any more after the 1920s-begun shift, and then “likelihood of confusion.” The case that was made to expand TM rights involved the reputational interests and market preemption of mark owners; tied to consumer interests [see Mark's comment below for more on that relation].
Reputational harm confusion: confusion resulting when consumers think plaintiff stands behind defendant’s goods. It may be that this was consistent with consumer expectations with some very related goods, but proponents were consciously trying to get out in front of marketing practices of changing. Only some companies were expanding, and only to closely related goods; but proponents believe in market preemption more generally. Courts start embracing likely confusion as a non-empirical concept. They aren’t requiring proof of likelihood if it’s implicit in the posited set of circumstances, and they aren’t requiring proof of harm, which is assumed to follow when people think the parties are related. They know what will happen if there’s an empirical test—a modest broadening of rights, but not the big expansion desired. Courts are willing to presume the harm. So expansion has been tied to a non-empirical claim, both at the level of whether confusion results and whether harm follows from confusion.
McKenna’s position: modern doctrine reflects search costs rhetoric pretty closely and that’s the problem. Search costs was an explanation for consequences of lack of protection for competing goods. Ironic, because this explanation is not developed until well after it’s clear that TM is far broader than that. Posner/Landes do not explain why search costs theory applies to noncompeting goods; assume that it self-evidently extends to all other aspects of TM law. Search costs makes the most sense w/r/t competing goods. Over time, search costs and confusion have been conflated. Search costs were thought to be the consequences of confusion—but courts have started to use the language of search costs to describe confusion, and any form of search costs can be used to find confusion.
Likelihood of confusion has always been nonempirical; should it reflect research findings? Some research goes to the question of when and whether confusion is likely. A lot of that research isn’t particularly useful because it doesn’t tell you very much about what kind of confusion they’re testing. They’re often asking consumers whether they associate two things, and then call that “confusion.” Not very robust. Another set of research is about reputation: consequences to mark owner if people think there’s a relationship—TM assumes this will happen as a matter of course but empirical literature tells us it happens rarely, and only with very related goods. Even if consumers believe there’s an association, consumers easily segregate reputational consequences. Literature strongly supports the idea that uses in other markets can have a preemptive effect—may prevent brand extension or shape meaning of brand making it more difficult to move it in another direction. This raises the question of whether this is normatively the kind of harm we should respond to—keep people out of the mark owner’s way so it can expand anywhere it wants. Let’s not talk about harms as if they were self-evident from confusion.
Lionel Bently
British history until 1994, when it became European. Contrasting history of expansion of confusion.
Other dynamics where notion of confusion contracts/willingness to ignore certain kinds of confusion. Misleading marks: inherently deceptive marks—19th c. courts were very quick to refuse relief where there was any sort of deception inherent in the mark—moralistic. If TM owner suggested the goods were patented when they weren’t, plaintiffs weren’t entitled to relief. Within the registration system we’ve always precluded registration of deceptive marks. Gradual increase in the threshold there—now require a serious likelihood of real deception as to the character of the goods before prohibiting registration. Narrowing of that concept of confusion. Why does that happen when we’re expanding the concept of confusion in other ways?
Willingness to ignore real confusion: where TMs are assigned and ownership transfers, either compulsory or voluntary. Many postwar cases involves TMs owned by the enemy, given to a UK-based establishment. After the war the old manufacturer wanted the market back; the courts would ignore the real confusion because they said the ownership shifted to the UK mark owner. Modern doctrine tolerates confusion generated by assignment—we want to regard property ownership/transfers as a trump. Sometimes we assume that the average consumer knows that the mark doesn’t indicate association with particular person, but association with an arbitrary source of the goods—the average TM attorney, not the real consumer.
Keep those contrasting stories in our minds when we consider expansion of confusion.
UK: more structured requirements: confusion requires the marks and the goods to be similar, at which point you then ask whether there’s likely confusion. This cabins likelihood of confusion compared to the US’s expansiveness. When we do get to our likely confusion analysis, we say something like: likely confusion means risk public might believe the goods/services come from the same or from economically linked undertakings. In that wording there may be a narrower notion of likely confusion than sponsorship/affiliation. But we haven’t really had any exploration about the breadth of economically linked undertakings. That could be very elastic.
Intent: not a consideration in European law. But English courts are much more likely to say that intent is evidentially relevant to likely confusion, though formally it’s not relevant. Infringement analysis is a mirror of registration analysis, and intent is not thought relevant when someone applies to register a later mark. In registration you’re just concerned bureaucratically whether the marks/goods are similar.
Free riding falls easily within the dilution concept in Europe, so there’s less temptation to expand the concept of confusion to cover free riding.
Max Planck Institute recently reviewed the Community TM. 200-page report covers likely confusion in about a page; it’s not particularly controversial. Pharma cases: the disconnect between how the pharma regulatory authorities behave and the TM authorities—TM allows more similar marks onto the register, but regulators are worried about people taking the wrong drugs. Institute suggests greater attention to the regulatory approach in the TM system w/r/t drugs because of the potential harm. Raises possibility of treating different fields of activity differently.
[US pharma regulators have their own name approval processes too, which played a role in one of my favorite cases, involving the TMs TRAVATAN and XALATAN. Pharmacia Corp. v. Alcon Laboratories, Inc., 201 F. Supp. 2d 335 (D.N.J. 2002). There is a good paper to be written, discussants agreed, about field-specific regimes for approving or disallowing names on the basis of similarity to an existing name in the field—DDMAC does it for drugs, and there are similar regimes for wine though Lemley says they receive no deference from the courts.]
The US is more empirical than Europe. The registration mentality leads to a nonempirical, routinized process.
TRIPs: says we have to give rights in cases of likely confusion with similar marks; in a developing country no one would think that you could change the law to a harm-based analysis.
McKenna: maybe likely confusion isn’t opposed to a harm test. We would want a focus on confusion of a certain type. Confusion about what? You can be confused about a huge range of things; specifying the type of confusion that is likely to cause harm makes sense.
Bently: likely confusion within TRIPs could mean a whole bunch of things, but if you had a very narrow concept of likely confusion there’s a good change the US would take you to the WTO on behalf of its TM owners.
McKenna: that makes it more important for the US to act first.
Lemley: Bently’s description: confusion caused by defendants is actionable, but confusion caused by TM owners is excused.
Lemley defends search costs model. Invocation of the term search costs alone can be divorced from a real context. Talking about meaningful consumer search costs is a way of trying to tie likely confusion to harm—why it has a consequence I should care about. It’s not that any confusion is problematic, but that we need to know whether defendant’s conduct is likely to confuse consumers in a way that causes harm. That’s an empirical question, though the US hasn’t treated it as such. Once you do that, it turns out that confusion is less often harmful than you think. Asking the empirical question reinforces rather than undermines the idea that we should care about search costs.
Robert Burrell: We ignore confusion in other cases. Australia: cases of market flooding, where the reputation of the junior user overwhelms that of the senior user; senior wins. Ignore confusion when there’s a perception of relation between a performer and another performer of the same work. Record consumers encountering a cover version often assume authorization by the performer instead of the copyright owner; we ignore that. We ignore evidence of confusion when the goods are so far removed that we don’t want to give the owner a remedy—“Big Mac” on bottles of wine—evidence of confusion, but held to be only an “erroneous assumption.” [We tend to do that in the US only with false advertising!]
Psychologists: if you ask people if TMs are confusing, people are good at figuring out what would cause delayed reaction times. If you give them a list of factors and ask them to evaluate whether there’s confusion, people become much less good at figuring that out. [RT: Verbal overshadowing!]
Bob Bone: Took McKenna’s argument to be more explanatory than normative—focus on search costs leads courts to look for confusion in the abstract, which then expands. He’s not sure the story is right. Search costs seem like a relatively recent idea; not a prevalent way of talking though it happens, and the focus on confusion dates further back. Other story: for variety of reasons, we detached confusion from harm, which was reinforced by the search cost rationale unhinged from its normative basis.
Bone thinks we’ve ignored nonconsequentialist rationales in TM normatively (though many are empty) as well as descriptively. Intent, secondary meaning strength are significant factors but marketing channels, bridging the gap are not—why are the former salient to the test? They tie directly into nonconsequentialist ideas (intent, anti-free riding, even appropriation of identity), and they shift us away from the need to do any kind of empirical inquiry.
Stacey Dogan: How does the Arsenal case fit into Bently’s story?
Bently: Double identity rules: identical mark on identical goods, there is no need to show likely confusion.
Dogan: swallow the rule? Or at least make the US story look more like the European?
Bently: because it’s so easy to register, that is a possibility. TM owners aren’t worse off in Europe, but the problems aren’t so much in the idea of likely confusion, but registering without any proof of use (though five years of nonuse can get you in trouble)—one big issue is when you can get a mark off the register.
McKenna: he’s happy to say courts weren’t motivated by search costs when they developed these doctrines. They were happy to talk about confusion and then assume the harm; they had a clear idea of the harm and just wanted to assume it happened without needing proof. There is a way to articulate search costs in a way tied to harm, but it’s so watered down that all we think is that confusion is harm, and this concept has infected too much of our reasoning.
Laura Heymann: connection between confusion and reputation: related to expansion of TM from source identifier to brand with personality. That expansion permits greater capacity for the sense that there are reputation-related injuries to the brand as entity/person, rather than reputation for particular goods. These harms sound more in defamation than in impersonation.
Marshall Leaffer: notion of the brand goes w/vast economic changes of 1960s; conglomerate enterprise led to the notion that one company is involved in any number of endeavors.
Bill McGeveran: what do we mean by “empirical”? Some of us are talking about what we’re measuring—to what extent is the thing we’re interested in a thing in the world we could go out and find, such as something anchored in consumer perception? Nonconsequentialist harms could be nonempirical in the sense that you wouldn’t need to measure the world (intent of defendant). Other issue: does the law require proof of it in the sense of surveyors or does the law engage in presumptions/assumptions to decide if the harm actually happened. You can have an empirical question and either measure it or decide what’s probably true (presumptions).
Morality/brand hijacking: could do the empirical/nonempirical analysis here—the problem might be consumers’ changed perceptions, or it could be the mere assault on the meaning regardless of whether it succeeds.
Dinwoodie: we’ve become too obsessed with empiricism because you can find people confused about anything. Need to ask whether we care about 10%, and about the type of confusion they’re suffering. If you were to limit the scope of rights in a confusion based system, we’d have to move away from empiricism.
McKenna: we’re nonempirical on the harm side. We should care less about empirics of likelihood, but the expansion came from indifference to the empirics of harm. The reputation question could be tied specifically to a market preemption idea. Market preemption could be about (1) occupying a market space through priority or (2) using the mark in a way that makes it more difficult for consumers to accept expansion into a third area. He’s most interested in (2); if you believe mark owner should have right to determine brand trajectory, (2) is tied to that.
Dinwoodie: empirics at macro and micro level. Injunctive nature of TM cases leads us to create a series of presumptions about how you assess the need for a particular form of relief.
Lemley: Theoretically in order to demonstrate plaintiffs’ losses, we ought to have to engage in specific harm and causation inquiries. It’s not impossible, but hard; if it’s so hard to demonstrate harm that we rarely get money damages based on plaintiff’s losses, that fact tells us something about whether harm is really following confusion.
Bone: if you care about consequences, then the question is when you infer the existence of particular facts. If we take Heymann’s point seriously about corporate personality, and think about it from a publicity rights perspective, you can think about trade secret as protecting corporate privacy. Is this utilitarian (protecting it for the benefits flowing from it) or moral? What kinds of moral rights do corporations have? There are judges out there who, without necessarily confessing it, think that defendants have taken the corporation’s personality—it’s not free riding but taking identity. And if we only talk about free riding we’re talking past this idea.
Dogan: exacerbated by blending of 43(a) and right of publicity claims in false endorsement cases—leads to blurring that may bleed over into the corporate context.
Litman: Elvis Presley is not meaningfully different from Procter & Gamble today. They’re both brands.
McGeveran: Haelan and other right of publicity cases are happening in the Second Circuit at the same time as all these Lanham Act cases. Interestingly, courts used to be very protective of personal names for defendants for these moral rights reasons, but trend lines have been different there. (Again, some “people” are more equal than others.)
Dinwoodie: causes of action interacting with each other. In Europe we have double identity, likely confusion, dilution, and unfair competition. Each cause of action should operate to create structure in the overall analytic system and a safety valve, but they can act as a mission creep reinforcement.
Bently: early days on initial interest confusion in Europe. The Google case; Ochs-Ziff case accepts the concept—lots of American law is coming through Dinwoodie & Janis to European law.
Lemley: there must be some limit on double identity, otherwise the Globe could be sued for mentioning the Daily Mail in an article—functionality?
Dinwoodie: yes, and Google France suggests that maybe confusion (generally and liberally defined) is the limit in such cases, though they’ve added a bunch of other factors such as advertising.
Bently: so will that broad and general idea of confusion in double identity then move into likely confusion cases? European cases are hard to predict in that way.
Dinwoodie: for all the flaws of the European system, it is highly structured and mechanical. Could be beneficial in preventing overspill from one cause of action into another.
Friday, April 22, 2011
PBM v. Mead Johnson affirmed; is eBay automatically satisfied by a successful Lanham Act claim?
PBM Products, LLC v. Mead Johnson & Co., --- F.3d ----, 2011 WL 1491066 (4th Cir.)
The Fourth Circuit affirmed the district court in this hard-fought litigation. There were three clusters of issues: (1) the district court’s dismissal of Mead Johnson's counterclaims; (2) the admission of expert opinion testimony and evidence of prior litigation between the parties; and (3) the injunction.
Background: PBM makes store-brand formula, and Mead Johnson makes Enfamil. Both use the same supplier for DHA and ARA, which the parties agreed are important to infant brain and eye development. Mead Johnson uses the brand name Lipil and PBM uses the generic lipids. Both companies use the same amount. PBM’s label says "Compare to Enfamil."
• "It may be tempting to try a less expensive store brand, but only Enfamil LIPIL is clinically proven to improve brain and eye development."
• "... before you try a store brand of formula, remember that a full year of Enfamil LIPIL goes a long way to nourishing the dreams you have for your little one."
• "All infant formulas are not the same ... Enfamil LIPIL formulas offer expert recommended levels of DHA and ARA."
• "Enfamil LIPIL's unique formulation is not available in any store brand."
• "There are plenty of other ways to save on baby expenses without cutting back on nutrition."
• "Store brands may cost less, but Enfamil gives your baby more. When it comes to nutrition and development, you want a product you can rely on."
A checklist stated that Enfamil LIPIL is "[p]roven to result in IQ scores similar to breastfed babies" and "[p]roven to enhance visual development," while indicating that the "Store Brand" does not. Finally, the mailer provided a graphic in which one half, captioned "with LIPIL," was clear and the other half, captioned "without LIPIL," was blurry.
PBM sued; the court denied a TRO; Mead Johnson counterclaimed for, relevantly, defamation and false advertising.
Mead Johnson’s counterclaims
The defamation claim was based on a press release declaring that "Mead Johnson Lies About Baby Formula ... Again." The district court granted summary judgment to PBM on this claim, reasoning that false advertising was substantially synonymous with lying, and thus the statement was substantially true. Mead Johnson argued on appeal that false advertising can occur without intent and is thus not necessarily lying, but the court of appeals found that “untruth” was a recognized meaning of “lie” and thus the statement was substantially true, given Mead Johnson’s conceded past false advertising and especially in the overall context, which made the reference to the past false advertising claims clear.
After Mead Johnson presented its case on its Lanham Act counterclaims, the district court granted PBM's motion for judgment as a matter of law, concluding that the statute of limitations and laches barred claims relating to the “compare to” statement with respect to PBM’s routine and gentle formulas, and that as to the “compare to” claim with respect to PBM’s rice starch formula, Mead Johnson failed to prove falsity or loss causation.
The court of appeals affirmed the statute of limitations/laches period. Borrowing Virginia’s analogous state limitations period of two years, pre-May 18, 2007 claims were time-barred, and the continuation of those claims was not actionable because of laches. “When a false advertising plaintiff files suit outside of the statute of limitations, both elements of laches--unreasonable delay and prejudice--are strongly presumed.” Mead Johnson’s delay was unreasonable because it knew about the “compare to” claim “since at least 2006 when the parties were involved in trademark litigation over a label that contained the exact same claim.” This delay prejudiced PBM because PBM continued to use the ads for years, and by alleging that PBM had been unjustly enriched by over $27 million thereby, Mead Johnson conceded that permitting the suit to go forward would enable it to benefit from its own unreasonable delay.
As to the rice starch “compare to” claims, Mead Johnson argued that they impliedly communicated the false message that the products’ equivalence had been tested and verified. It relied on two surveys, but its expert assumed that respondents who said the products were the “same” meant “identical,” while admitting that some respondents who thought that the products were nearly the same would have chosen “same” instead of “different.” The testimony showed that the ingredients were very similar, but not identical, and that the nutritional value of the products were likely nearly the same. Moreover, the products had actually been tested against each other. Mead Johnson thus failed to prove falsity.
In addition, even if the “compare to” messages were false, the court of appeals held that Mead Johnson properly lost for another reason: it didn’t prove damages. Its expert assumed that every sale made by PBM was attributable to the “compare to” statement, but failed to show this.
Evidentiary issues
The court also denied Mead Johnson’s motion to exclude two PBM experts, Joseph Ridgway and Douglas Schoen. Ridgway conducted a survey showing consumers received two implied but false messages from the mailer. Similarly, Schoen conducted a survey showing that the mailer would dissuade consumers from purchasing store brand formula. Though Mead Johnson argued that the surveys failed to sample the proper group because they included parents of infants older than the targeted two-to three-month olds, the district court concluded that "while the survey sample may not exactly match the audience that received the disputed advertisement, it is a sufficiently close approximation of the recipient pool."
Admission of expert testimony: surveys may occasionally be completely unhelpful and therefore inadmissible, but this is rare. Flaws in methodology should generally be weighed by the trier of fact. Schoen’s online survey had participants pre-screened to ensure that they were (1) new parents or expecting a baby in the next six months, (2) were open to considering purchasing infant formula, (3) were not participating in the Women, Infants, and Children Nutrition Program, and (4) were or would be the primary or shared decision maker in choosing infant formula brands. Ridgway’s survey used new and expectant mothers, showing them either the disputed ad or a control ad. This was one appropriate method to investigate materiality, and the district court didn’t abuse its discretion in concluding that the objections, including objections to the universe, went to weight and not admissibility.
The district court also permitted PBM to introduce testimony about the prior false and misleading advertisements and the fact the parties settled the prior litigation, but not settlement amounts. Mead Johnson argued that the evidence of the older Lanham Act lawsuits lacked relevance (FRE 401) and was more prejudicial than probative (FRE 403); the court of appeals disagreed. It’s not easy to overturn a Rule 403 ruling on appeal; probative evidence should generally be admitted. Prior litigation between the parties is probative because it speaks to Mead Johnson’s intent in making its current misleading claims. (The opinion is not pellucid on this point, but it might be holding what the Fourth Circuit previously only “assumed,” that a history of false advertising could operate to relieve the plaintiff of presenting extrinsic evidence of consumer confusion.) Mead Johnson argued that only individual corporate agents can have intent to deceive, but the court disagreed.
Moreover, the probative value of the evidence was not outweighed by the danger of prejudice. “Any unfair prejudice was limited by the court's exclusion of specific evidence regarding the settlements in the cases. Further, a jury limiting instruction was never sought.” So the district court didn’t abuse its discretion.
PBM’s victory and the resulting injunction
The two express statements litigated at trial were: (1) "mothers who buy store brand infant formula to save baby expenses are cutting back on nutrition compared to [Mead Johnson's] Enfamil" and (2) "only Enfamil has been clinically proven to improve infants' mental and visual development." The two implied messages were: (1) Enfamil contains two important fatty acids, DHA and ARA, and PBM's store brand formulas do not; and (2) Enfamil has been clinically tested and shown to be superior to PBM's formula with respect to brain and eye development in infants.
The jury returned a general verdict in favor of PBM awarding PBM $13.5 million in Lanham Act damages. The court enjoined all four advertising claims.
An order granting an injunction is reviewed for abuse of discretion, with factual findings judged under the clear error standard and legal conclusions de novo.
Without any discussion, the court applied eBay: an injunction requires a showing that (1) there is irreparable injury; (2) remedies available at law are inadequate; (3) the balance of hardships favors the party seeking the injunction; and (4) the public interest would not be disserved by the injunction. But its application of eBay suggests that an injunction will still issue almost as a matter of course in a Lanham Act case.
The district court found irreparable harm because Mead Johnson’s ads misled consumers, and both parties presented testimony that false advertising harms a company’s reputation and goodwill as well as its sales. (Can anybody tell me what goodwill is, other than “sales we can’t quantify”?) Irreparable harm is the most difficult element to demonstrate in a false advertising case, because it’s virtually impossible to quantify lost sales or goodwill, given the market variables involved. Thus, if a plaintiff does prove lost sales, it will be entitled to an injunction even if other factors cause most of the sales decline; in fact, an injunction is appropriate even without an actual loss or sales diversion, as long as the plaintiff offers something more than a mere subjective belief of likely harm—proof of reasonable basis for the claim of likely harm. (Compare this approach to the Phoenix of Broward approach to standing—causation uncertainty is here a matter of remedy, not of standing.)
The jury’s verdict that Mead Johnson misled consumers and the evidence at trial supported the district court’s conclusion. Indeed, the testimony revealed that the entire goal of the flyer was to "deter moms from considering evaluating commodity brands" and to influence them to not even "consider a switch to a store brand formula."
For the same reasons, PBM showed that remedies at law were inadequate. The damage judgment compensated PBM for direct harm from the flyer, but the injunction prevents Mead Johnson from "infecting the marketplace with the same or similar claims in different advertisements in the future” (quoting the district court). Mead Johnson on appeal sought the opportunity to make the same claim again, arguing that it "should be entitled to advertise the true fact that its Enfamil formula is the 'only' product 'clinically proven' to improve brain and eye development versus the same unsupplemented formula."
The balance of hardships also favored PBM. Mead Johnson has no equitable interest in perpetuating false and misleading claims. “[D]espite having twice been restrained from disseminating misleading advertising, Mead Johnson continued to do so. PBM cannot fairly compete with Mead Johnson unless and until Mead Johnson stops infecting the marketplace with misleading advertising.”
And the district court didn’t err in finding that the public interest “heavily favors” an injunction, since preventing false advertising is in the public interest. “This interest is perhaps heightened when, as is the case here, the misleading information pertains to issues of public health and infant wellbeing.”
After this result, is there any instance in which a Lanham Act plaintiff could succeed on the merits and not be entitled to a permanent injunction, unless the court was completely convinced that the conduct could not be repeated (and of course voluntary cessation usually isn’t sufficient to show that)?
Scope of the injunction: the scope should be no broader than necessary. Mead Johnson argued that, because the general jury verdict did not specify which of the four statements in the flyer the jury found to be false and/or misleading, the injunction must be limited only to the flyer or other advertisements not colorably different from the mailer. The court of appeals disagreed. The injunction only reaches the specific claims the district court found literally false.
Mead Johnson relied for its “clinically proven” claim on a group of government-funded clinical studies. The district court concluded that this reliance was unjustified because the studies’ conclusion was not limited to Mead Johnson formula, but covered any formula with similar amounts of the same ingredients. Moreover, since the studies it relied upon were completed, the Mead Johnson formula at issue had undergone at least 19 changes. The district court’s conclusion that the “only clinically proven” claim was misleading was not clearly erroneous.
The Fourth Circuit affirmed the district court in this hard-fought litigation. There were three clusters of issues: (1) the district court’s dismissal of Mead Johnson's counterclaims; (2) the admission of expert opinion testimony and evidence of prior litigation between the parties; and (3) the injunction.
Background: PBM makes store-brand formula, and Mead Johnson makes Enfamil. Both use the same supplier for DHA and ARA, which the parties agreed are important to infant brain and eye development. Mead Johnson uses the brand name Lipil and PBM uses the generic lipids. Both companies use the same amount. PBM’s label says "Compare to Enfamil."
The parties are familiar combatants on the Lanham Act battlefield. For example, in 2001, Mead Johnson distributed brochures and tear-off notepads to patients in pediatricians' offices stating that store-brand formula did not have sufficient calcium or folic acid. PBM sued and obtained a restraining order prohibiting Mead Johnson from making similar statements. The parties settled that dispute. Then, in 2002, Mead Johnson distributed a chart to physicians stating that store-brand formula did not contain beneficial nucleotides. PBM sued and, again, the parties settled.In 2008, Mead Johnson distributed a flyer to 1.6 million consumers, targeting parents of two- to three-month-old infants. The flyer cited studies that compared Mead Johnson's current formula with an older version of the same formula and made a number of comparative statements:
• "It may be tempting to try a less expensive store brand, but only Enfamil LIPIL is clinically proven to improve brain and eye development."
• "... before you try a store brand of formula, remember that a full year of Enfamil LIPIL goes a long way to nourishing the dreams you have for your little one."
• "All infant formulas are not the same ... Enfamil LIPIL formulas offer expert recommended levels of DHA and ARA."
• "Enfamil LIPIL's unique formulation is not available in any store brand."
• "There are plenty of other ways to save on baby expenses without cutting back on nutrition."
• "Store brands may cost less, but Enfamil gives your baby more. When it comes to nutrition and development, you want a product you can rely on."
A checklist stated that Enfamil LIPIL is "[p]roven to result in IQ scores similar to breastfed babies" and "[p]roven to enhance visual development," while indicating that the "Store Brand" does not. Finally, the mailer provided a graphic in which one half, captioned "with LIPIL," was clear and the other half, captioned "without LIPIL," was blurry.
PBM sued; the court denied a TRO; Mead Johnson counterclaimed for, relevantly, defamation and false advertising.
Mead Johnson’s counterclaims
The defamation claim was based on a press release declaring that "Mead Johnson Lies About Baby Formula ... Again." The district court granted summary judgment to PBM on this claim, reasoning that false advertising was substantially synonymous with lying, and thus the statement was substantially true. Mead Johnson argued on appeal that false advertising can occur without intent and is thus not necessarily lying, but the court of appeals found that “untruth” was a recognized meaning of “lie” and thus the statement was substantially true, given Mead Johnson’s conceded past false advertising and especially in the overall context, which made the reference to the past false advertising claims clear.
After Mead Johnson presented its case on its Lanham Act counterclaims, the district court granted PBM's motion for judgment as a matter of law, concluding that the statute of limitations and laches barred claims relating to the “compare to” statement with respect to PBM’s routine and gentle formulas, and that as to the “compare to” claim with respect to PBM’s rice starch formula, Mead Johnson failed to prove falsity or loss causation.
The court of appeals affirmed the statute of limitations/laches period. Borrowing Virginia’s analogous state limitations period of two years, pre-May 18, 2007 claims were time-barred, and the continuation of those claims was not actionable because of laches. “When a false advertising plaintiff files suit outside of the statute of limitations, both elements of laches--unreasonable delay and prejudice--are strongly presumed.” Mead Johnson’s delay was unreasonable because it knew about the “compare to” claim “since at least 2006 when the parties were involved in trademark litigation over a label that contained the exact same claim.” This delay prejudiced PBM because PBM continued to use the ads for years, and by alleging that PBM had been unjustly enriched by over $27 million thereby, Mead Johnson conceded that permitting the suit to go forward would enable it to benefit from its own unreasonable delay.
As to the rice starch “compare to” claims, Mead Johnson argued that they impliedly communicated the false message that the products’ equivalence had been tested and verified. It relied on two surveys, but its expert assumed that respondents who said the products were the “same” meant “identical,” while admitting that some respondents who thought that the products were nearly the same would have chosen “same” instead of “different.” The testimony showed that the ingredients were very similar, but not identical, and that the nutritional value of the products were likely nearly the same. Moreover, the products had actually been tested against each other. Mead Johnson thus failed to prove falsity.
In addition, even if the “compare to” messages were false, the court of appeals held that Mead Johnson properly lost for another reason: it didn’t prove damages. Its expert assumed that every sale made by PBM was attributable to the “compare to” statement, but failed to show this.
Evidentiary issues
The court also denied Mead Johnson’s motion to exclude two PBM experts, Joseph Ridgway and Douglas Schoen. Ridgway conducted a survey showing consumers received two implied but false messages from the mailer. Similarly, Schoen conducted a survey showing that the mailer would dissuade consumers from purchasing store brand formula. Though Mead Johnson argued that the surveys failed to sample the proper group because they included parents of infants older than the targeted two-to three-month olds, the district court concluded that "while the survey sample may not exactly match the audience that received the disputed advertisement, it is a sufficiently close approximation of the recipient pool."
Admission of expert testimony: surveys may occasionally be completely unhelpful and therefore inadmissible, but this is rare. Flaws in methodology should generally be weighed by the trier of fact. Schoen’s online survey had participants pre-screened to ensure that they were (1) new parents or expecting a baby in the next six months, (2) were open to considering purchasing infant formula, (3) were not participating in the Women, Infants, and Children Nutrition Program, and (4) were or would be the primary or shared decision maker in choosing infant formula brands. Ridgway’s survey used new and expectant mothers, showing them either the disputed ad or a control ad. This was one appropriate method to investigate materiality, and the district court didn’t abuse its discretion in concluding that the objections, including objections to the universe, went to weight and not admissibility.
The district court also permitted PBM to introduce testimony about the prior false and misleading advertisements and the fact the parties settled the prior litigation, but not settlement amounts. Mead Johnson argued that the evidence of the older Lanham Act lawsuits lacked relevance (FRE 401) and was more prejudicial than probative (FRE 403); the court of appeals disagreed. It’s not easy to overturn a Rule 403 ruling on appeal; probative evidence should generally be admitted. Prior litigation between the parties is probative because it speaks to Mead Johnson’s intent in making its current misleading claims. (The opinion is not pellucid on this point, but it might be holding what the Fourth Circuit previously only “assumed,” that a history of false advertising could operate to relieve the plaintiff of presenting extrinsic evidence of consumer confusion.) Mead Johnson argued that only individual corporate agents can have intent to deceive, but the court disagreed.
Moreover, the probative value of the evidence was not outweighed by the danger of prejudice. “Any unfair prejudice was limited by the court's exclusion of specific evidence regarding the settlements in the cases. Further, a jury limiting instruction was never sought.” So the district court didn’t abuse its discretion.
PBM’s victory and the resulting injunction
The two express statements litigated at trial were: (1) "mothers who buy store brand infant formula to save baby expenses are cutting back on nutrition compared to [Mead Johnson's] Enfamil" and (2) "only Enfamil has been clinically proven to improve infants' mental and visual development." The two implied messages were: (1) Enfamil contains two important fatty acids, DHA and ARA, and PBM's store brand formulas do not; and (2) Enfamil has been clinically tested and shown to be superior to PBM's formula with respect to brain and eye development in infants.
The jury returned a general verdict in favor of PBM awarding PBM $13.5 million in Lanham Act damages. The court enjoined all four advertising claims.
An order granting an injunction is reviewed for abuse of discretion, with factual findings judged under the clear error standard and legal conclusions de novo.
Without any discussion, the court applied eBay: an injunction requires a showing that (1) there is irreparable injury; (2) remedies available at law are inadequate; (3) the balance of hardships favors the party seeking the injunction; and (4) the public interest would not be disserved by the injunction. But its application of eBay suggests that an injunction will still issue almost as a matter of course in a Lanham Act case.
The district court found irreparable harm because Mead Johnson’s ads misled consumers, and both parties presented testimony that false advertising harms a company’s reputation and goodwill as well as its sales. (Can anybody tell me what goodwill is, other than “sales we can’t quantify”?) Irreparable harm is the most difficult element to demonstrate in a false advertising case, because it’s virtually impossible to quantify lost sales or goodwill, given the market variables involved. Thus, if a plaintiff does prove lost sales, it will be entitled to an injunction even if other factors cause most of the sales decline; in fact, an injunction is appropriate even without an actual loss or sales diversion, as long as the plaintiff offers something more than a mere subjective belief of likely harm—proof of reasonable basis for the claim of likely harm. (Compare this approach to the Phoenix of Broward approach to standing—causation uncertainty is here a matter of remedy, not of standing.)
The jury’s verdict that Mead Johnson misled consumers and the evidence at trial supported the district court’s conclusion. Indeed, the testimony revealed that the entire goal of the flyer was to "deter moms from considering evaluating commodity brands" and to influence them to not even "consider a switch to a store brand formula."
For the same reasons, PBM showed that remedies at law were inadequate. The damage judgment compensated PBM for direct harm from the flyer, but the injunction prevents Mead Johnson from "infecting the marketplace with the same or similar claims in different advertisements in the future” (quoting the district court). Mead Johnson on appeal sought the opportunity to make the same claim again, arguing that it "should be entitled to advertise the true fact that its Enfamil formula is the 'only' product 'clinically proven' to improve brain and eye development versus the same unsupplemented formula."
The balance of hardships also favored PBM. Mead Johnson has no equitable interest in perpetuating false and misleading claims. “[D]espite having twice been restrained from disseminating misleading advertising, Mead Johnson continued to do so. PBM cannot fairly compete with Mead Johnson unless and until Mead Johnson stops infecting the marketplace with misleading advertising.”
And the district court didn’t err in finding that the public interest “heavily favors” an injunction, since preventing false advertising is in the public interest. “This interest is perhaps heightened when, as is the case here, the misleading information pertains to issues of public health and infant wellbeing.”
After this result, is there any instance in which a Lanham Act plaintiff could succeed on the merits and not be entitled to a permanent injunction, unless the court was completely convinced that the conduct could not be repeated (and of course voluntary cessation usually isn’t sufficient to show that)?
Scope of the injunction: the scope should be no broader than necessary. Mead Johnson argued that, because the general jury verdict did not specify which of the four statements in the flyer the jury found to be false and/or misleading, the injunction must be limited only to the flyer or other advertisements not colorably different from the mailer. The court of appeals disagreed. The injunction only reaches the specific claims the district court found literally false.
Mead Johnson relied for its “clinically proven” claim on a group of government-funded clinical studies. The district court concluded that this reliance was unjustified because the studies’ conclusion was not limited to Mead Johnson formula, but covered any formula with similar amounts of the same ingredients. Moreover, since the studies it relied upon were completed, the Mead Johnson formula at issue had undergone at least 19 changes. The district court’s conclusion that the “only clinically proven” claim was misleading was not clearly erroneous.
Wednesday, April 20, 2011
UDRP victory turns to defeat when registrant ignores its limits
Newport News Holdings Corporation v. Virtual City Vision, Inc., --- F.3d ----, 2011 WL 1467183 (4th Cir.)
NNHC makes women’s clothing and accessories under the Newport News mark. It operates at newport-news.com, but VCV bought newportnews.com before that, in October 1997. NNHC began use of its domain name to sell clothes in 1999. VCV owns at least 31 domain names incorporating geographic locations, consistent with its original business model of providing city-related information. In 2000, NNHC brought an UDRP action against VCV, which VCV won because "visitors to [NNHC's] branded web site, who seek out the latest women's clothing and home fashions would clearly not be confused when seeing a home page of another web site, bearing an identical mark, that explicitly provides city information ... with no connection whatsoever to women's and home fashions." The panel further held that VCV's website provided "bona fide service offerings," and that "given the total absence of competition between the businesses of [NNHC and VCV] ... [VCV] did not register the contested domain name in an effort to cause any likelihood of confusion." newportnews.com, DeC AF-0238.
While newportnews.com continued to provide information about the city of Newport News, in 2004 it began running occasional ads for women’s clothing. Between 2004 and 2007, the newportnews.com website twice ran advertisements for NNHC products on two occasions, once by a company hired by NNCH; when NNHC learned about this it ordered the company to cancel the ads. Then, between February and March 2007, NNHC placed ads on the website in order to measure revenue losses attributable to it. NNCH then offered to buy the domain name, but VCV rejected the offer, asking for a seven-figure amount or for a commission deal.
In fall 2007, the site “shifted from a city focus, similar to that of VCV's other locality sites, to one emphasizing women's fashions. By February of 2008, the homepage was dominated by advertisements for women's apparel.” VCV’s principal Tran began managing the newportnews.com site personally, taking control away from the company that ran VCV’s other local sites. “The changes to the website were lucrative. Tran would later testify that most of VCV's revenue during that time came from the newportnews.com website instead of the locality sites, either individually or in total.”
NNCH sued in 2008 for trademark infringement, false advertising, and related claims. The magistrate judge hearing the case awarded NNCH summary judgment on its ACPA claim, including statutory damages and attorneys’ fees.
First, the court of appeals held that the district court properly exercised personal jurisdiction over Tran and held him personally liable for VCV’s acts by piercing the corporate veil. Tran is the President, the sole employee, and the only participating member of VCV's Board of Directors, and the business is run out of his home; there was a unity of interest and ownership as well as an intent to commit an injustice.
The court of appeals then rejected VCV’s challenges to the validity of NNHC’s mark and the finding of bad faith intent to profit under ACPA. The provision of ACPA that allows use of a descriptive term other than as a mark, fairly and in good faith, does not apply here because Newport News was no longer used to describe VCV’s goods or services or their geographic origin, because the site was primarily dedicated to women’s fashion.
“Most of the items on its homepage, as well as those most prominently placed, related to women's attire. Not only was the site dominated by advertisements for apparel, it also contained dozens of links to shopping websites. The website's references to the city of Newport News became minor in comparison to the fashion-related content. VCV cannot escape the consequences of its deliberate metamorphosis.” The rump provision of information about the city of Newport News was insufficient to be bona fide; an alternate holding would protect cybersquatters who provided some minimal amount of information about a legitimate subject. The court also pointed to the contrast between the newportnews.com website and VCV’s other sites, which were dominated by links and ads for the relevant cities. “[O]nce VCV largely abandoned its city information service, it ceased to have a right to use the name of Newport News to describe such service.” Even some measure of fair use would not preclude liability in these circumstances.
The court also rejected VCV’s argument that, under Lamparello v. Falwell, 420 F.3d 309 (4th Cir.2005), the court had to "determine whether a likelihood of confusion exists by 'examin[ing] the allegedly infringing use in the context in which it is seen by the ordinary consumer.'" That’s a TM standard, not an ACPA standard, where the inquiry is whether the domain name is identical or confusingly similar to NNHC’s mark. The fact that confusion about source or sponsorship could be resolved by visiting the website isn’t relevant.
Also, the district court correctly held that the UDRP decision was further proof of bad faith. [The eResolution arbitration] found VCV’s use proper precisely because its city information business was unrelated to NNCH’s clothing business, relying on "the total absence of competition between the businesses of [NNHC and VCV]." “The fact that, in the face of this cautionary language, VCV later purposefully transformed its website into one that competed with NNHC by advertising women's apparel is a legitimate factor within the totality of the circumstances supporting the district court's finding of bad faith.”
The court of appeals then rejected VCV’s laches defense. Assuming that such a defense applies to an ACPA claim (why wouldn’t it?), it was inapplicable because VCV’s bad faith intent to profit didn’t become obvious until November 2007. “Even when VCV started to place a few apparel ads on its otherwise city-focused website in 2005, VCV's bad faith was not obvious, as VCV was still providing a legitimate city-information service and not competing with NNHC.” NNHC sued within a year of the real transformation.
Similarly, VCV’s acquiescence defense failed, assuming it was available. Though NNHC placed ads on VCV’s site in February 2007, that was before the bad faith developed.
VCV also contested the court’s award of attorney’s fees. There was no abuse of discretion. The district court found VCV’s conduct exceptional because its transformation of the site came after it had been made aware that it was lack of competition that made its use of the domain name legitimate. “Neither during the proceedings below nor in response to repeated questioning at oral argument on appeal was VCV able to provide a legitimate justification for its decision to shift its website's focus to women's clothing, particularly in the face of the ICANN panel's implicit suggestion that to do so courted the risk of a finding of bad faith.”
A statutory damages award of $80,000 was also not an abuse of discretion. The court’s analysis of ACPA statutory damages was guided by their similarity to statutory damages in copyright. Such damages are not merely restitutionary but also designed to discourage wrongful conduct. Damages at the high end of the range (the top is $100,000 per domain name) were appropriate because VCV’s conduct was exceptional and egregious, even though VCV argued that it advertised women’s clothes for over two years before NNHC sued, during which time NNHC profited from advertising on the site and had discussions with VCV not mentioning infringement. When VCV’s wrongdoing crystallized in November 2007, its conduct then was exceptional and egregious, given that it was acting in direct contradiction to the UDRP opinion.
Finally, VCV’s argument that it should have been awarded attorney’s fees as well as costs on NNHC’s abandoned copyright claim. But VCV was not the prevailing party just because the copyright claim was omitted from NNHC’s amended complaint. There was no judicially sanctioned change in the legal relationship of the parties, and thus VCV was not the prevailing party. Costs could be awarded to a non-prevailing party, but only prevailing parties may recover attorneys’ fees as part of costs.
NNHC makes women’s clothing and accessories under the Newport News mark. It operates at newport-news.com, but VCV bought newportnews.com before that, in October 1997. NNHC began use of its domain name to sell clothes in 1999. VCV owns at least 31 domain names incorporating geographic locations, consistent with its original business model of providing city-related information. In 2000, NNHC brought an UDRP action against VCV, which VCV won because "visitors to [NNHC's] branded web site, who seek out the latest women's clothing and home fashions would clearly not be confused when seeing a home page of another web site, bearing an identical mark, that explicitly provides city information ... with no connection whatsoever to women's and home fashions." The panel further held that VCV's website provided "bona fide service offerings," and that "given the total absence of competition between the businesses of [NNHC and VCV] ... [VCV] did not register the contested domain name in an effort to cause any likelihood of confusion." newportnews.com, DeC AF-0238.
While newportnews.com continued to provide information about the city of Newport News, in 2004 it began running occasional ads for women’s clothing. Between 2004 and 2007, the newportnews.com website twice ran advertisements for NNHC products on two occasions, once by a company hired by NNCH; when NNHC learned about this it ordered the company to cancel the ads. Then, between February and March 2007, NNHC placed ads on the website in order to measure revenue losses attributable to it. NNCH then offered to buy the domain name, but VCV rejected the offer, asking for a seven-figure amount or for a commission deal.
In fall 2007, the site “shifted from a city focus, similar to that of VCV's other locality sites, to one emphasizing women's fashions. By February of 2008, the homepage was dominated by advertisements for women's apparel.” VCV’s principal Tran began managing the newportnews.com site personally, taking control away from the company that ran VCV’s other local sites. “The changes to the website were lucrative. Tran would later testify that most of VCV's revenue during that time came from the newportnews.com website instead of the locality sites, either individually or in total.”
NNCH sued in 2008 for trademark infringement, false advertising, and related claims. The magistrate judge hearing the case awarded NNCH summary judgment on its ACPA claim, including statutory damages and attorneys’ fees.
First, the court of appeals held that the district court properly exercised personal jurisdiction over Tran and held him personally liable for VCV’s acts by piercing the corporate veil. Tran is the President, the sole employee, and the only participating member of VCV's Board of Directors, and the business is run out of his home; there was a unity of interest and ownership as well as an intent to commit an injustice.
The court of appeals then rejected VCV’s challenges to the validity of NNHC’s mark and the finding of bad faith intent to profit under ACPA. The provision of ACPA that allows use of a descriptive term other than as a mark, fairly and in good faith, does not apply here because Newport News was no longer used to describe VCV’s goods or services or their geographic origin, because the site was primarily dedicated to women’s fashion.
“Most of the items on its homepage, as well as those most prominently placed, related to women's attire. Not only was the site dominated by advertisements for apparel, it also contained dozens of links to shopping websites. The website's references to the city of Newport News became minor in comparison to the fashion-related content. VCV cannot escape the consequences of its deliberate metamorphosis.” The rump provision of information about the city of Newport News was insufficient to be bona fide; an alternate holding would protect cybersquatters who provided some minimal amount of information about a legitimate subject. The court also pointed to the contrast between the newportnews.com website and VCV’s other sites, which were dominated by links and ads for the relevant cities. “[O]nce VCV largely abandoned its city information service, it ceased to have a right to use the name of Newport News to describe such service.” Even some measure of fair use would not preclude liability in these circumstances.
The court also rejected VCV’s argument that, under Lamparello v. Falwell, 420 F.3d 309 (4th Cir.2005), the court had to "determine whether a likelihood of confusion exists by 'examin[ing] the allegedly infringing use in the context in which it is seen by the ordinary consumer.'" That’s a TM standard, not an ACPA standard, where the inquiry is whether the domain name is identical or confusingly similar to NNHC’s mark. The fact that confusion about source or sponsorship could be resolved by visiting the website isn’t relevant.
Also, the district court correctly held that the UDRP decision was further proof of bad faith. [The eResolution arbitration] found VCV’s use proper precisely because its city information business was unrelated to NNCH’s clothing business, relying on "the total absence of competition between the businesses of [NNHC and VCV]." “The fact that, in the face of this cautionary language, VCV later purposefully transformed its website into one that competed with NNHC by advertising women's apparel is a legitimate factor within the totality of the circumstances supporting the district court's finding of bad faith.”
The court of appeals then rejected VCV’s laches defense. Assuming that such a defense applies to an ACPA claim (why wouldn’t it?), it was inapplicable because VCV’s bad faith intent to profit didn’t become obvious until November 2007. “Even when VCV started to place a few apparel ads on its otherwise city-focused website in 2005, VCV's bad faith was not obvious, as VCV was still providing a legitimate city-information service and not competing with NNHC.” NNHC sued within a year of the real transformation.
Similarly, VCV’s acquiescence defense failed, assuming it was available. Though NNHC placed ads on VCV’s site in February 2007, that was before the bad faith developed.
VCV also contested the court’s award of attorney’s fees. There was no abuse of discretion. The district court found VCV’s conduct exceptional because its transformation of the site came after it had been made aware that it was lack of competition that made its use of the domain name legitimate. “Neither during the proceedings below nor in response to repeated questioning at oral argument on appeal was VCV able to provide a legitimate justification for its decision to shift its website's focus to women's clothing, particularly in the face of the ICANN panel's implicit suggestion that to do so courted the risk of a finding of bad faith.”
A statutory damages award of $80,000 was also not an abuse of discretion. The court’s analysis of ACPA statutory damages was guided by their similarity to statutory damages in copyright. Such damages are not merely restitutionary but also designed to discourage wrongful conduct. Damages at the high end of the range (the top is $100,000 per domain name) were appropriate because VCV’s conduct was exceptional and egregious, even though VCV argued that it advertised women’s clothes for over two years before NNHC sued, during which time NNHC profited from advertising on the site and had discussions with VCV not mentioning infringement. When VCV’s wrongdoing crystallized in November 2007, its conduct then was exceptional and egregious, given that it was acting in direct contradiction to the UDRP opinion.
Finally, VCV’s argument that it should have been awarded attorney’s fees as well as costs on NNHC’s abandoned copyright claim. But VCV was not the prevailing party just because the copyright claim was omitted from NNHC’s amended complaint. There was no judicially sanctioned change in the legal relationship of the parties, and thus VCV was not the prevailing party. Costs could be awarded to a non-prevailing party, but only prevailing parties may recover attorneys’ fees as part of costs.
Monday, April 18, 2011
Screenshotapalooza:Webloyalty disclosure sufficient as a matter of law
Berry v. Webloyalty.com, Inc., 2011 WL 1375665 (S.D. Cal.)
Berry sued Webloyalty over his enrollment into a membership program on the internet. He bought tickets from MovieTickets.com and saw an ad to save $10 on his next purchase. He clicked on the ad and provided his email address, but didn’t read the other information. He started getting monthly charges of $12/month. (Has anyone ever actually saved money using this kind of service?) He alleged that the enrollment was deceptive and misleading.
The court, however, found that the disclosures were prominent enough that no reasonable consumer could have been fooled by them (essentially deeming all the people who feel cheated by programs of this type unreasonable).
After the clicking on the coupon, Berry was presented with an enrollment page where he entered his email address and clicked on a green button. The court pointed out that this page doesn’t display the MovieTickets.com logo anywhere, which I take it supports the conclusion that he should have known he was signing up for something different. The page contains several disclosures of the terms and conditions, including at the top: “Thank You ... Sign up to claim your rewards! Click YES below to get your $20.00 Cash Back Award if you sign up for all Cash Back Rewards of Shopper Discounts & Rewards, the premier online savings service FREE for the next 30 days and only $12 per month thereafter billed to the credit card or deducted from the debit card you used at MovieTickets.com today.”
Lower down the page offered a “Member Care Guarantee— Email reminder before first monthly charge— Cancel anytime hassle-free, online or by phone.”
Later: “So claim all your Shopper Discounts & Rewards Benefits ... plus get your $20.00 Cash Back Award! You'll get your $20.00 Cash Back Award and instructions on the next page so you can access the site and start saving today! Plus we'll send your Membership kit email to you at your email address. Try all the benefits free for the next 30 days FREE and see how much you save! There's no obligation to continue. If you are completely satisfied, do nothing and you'll enjoy ongoing savings for only $12 a month and of course you have our Guarantee as described in the Offer and Billing Details! There is no limit in the amount of money you can save!”
And there was another disclosure in a yellow bubble: “30 DAYS FREE plus only $12 a month thereafter.”
And further reiteration of the details under “Offer and Billing Details.”
And a statement indicating that, by providing an email address, the shopper agreed to have his credit card information transferred from MovieTickets.com to defendant.
This was also repeated in the “Details” section, where defendant’s use of MovieTickets.com’s stored credit/debit card info instead of requiring it to be reentered was labeled “for your convenience.”
The court applied Rule 9(b) to the fraud-based claims, though it doesn’t seem that it mattered. The court was convinced that the explicit and repeated disclosures defeated the misrepresentation claims. The disclosure immediately above the email address, which said, “By entering my email address as my electronic signature and clicking YES, I have read and agree to the Office and Billing Details and authorize MovieTickets.com to securely transfer my name, address and credit or debit card information to Shopper Discounts & Rewards for billing and benefit processing,” was sufficient to place reasonable consumers on notice that they were entering into the Shopper Discounts & Rewards club. The page also disclosed the $12/month charge after the first month and that there’d be an email reminder before the first monthly charge. This was sufficient—a consumer can’t decline to read clear and easily understandable terms.
Another case, Keithly v. Intelius, Inc., No. 09–1485, 2011 U.S. Dist. LEXIS 16861 (W.D.Wa. Feb. 8, 2011), was not to the contrary. In Keithly, in order to reach the enrollment page, the consumer clicked on a button that said “Confirm the Purchase and Show my Report” rather than clicking on a coupon offer. Moreover, there were not as many disclosures in close proximity to the offer graphics. And the only text above the box where the consumer enters his email was “Please type in your email address below.”
Berry took three affirmative steps to accept the terms of the club membership—he entered his email twice and clicked the “YES” button.
This defeated all the claims: misrepresentation, unfair competition, false advertising, violation of the Electronic Funds Transfer Act, violated the Electronic Communications Privacy Act, civil theft, unjust enrichment, money had and received, conversion, negligence, and invasion of privacy.
With respect to the UCL, Berry also argued that the practice was unfair because the injury caused outweighed any benefit to consumers. “Unfair” is ill-defined in the context of consumer plaintiffs under the UCL, but generally means a practice that undermines a legislatively declared policy or threatens competition, or a practice that has an impact on its alleged victim that outweighs the reasons, justifications, and motives of the alleged wrongdoer. The court concluded that the complaint contained only cursory allegations insufficient to meet this standard.
What I think is missing here is a recognition that, as the FTC has long told advertisers, too much information is as bad as too little. By plastering the page with repetitive chunks of text that en-courages scrolling past, the advertiser decreases the chance that the consumer will actually read and understand the disclosures, especially when the page also has distractors like the logos of famous companies. Especially when the consumer doesn’t have to re-enter his or her credit card information, this layout is a recipe for consumers failing to understand the actual terms. If the defendants were really interested in providing full information, the first interaction would be clear and limited: if you click yes you’re entering a new program, for which you will pay after the first 30 days.
Procedural notes: the court considered the screenshots Berry saw as matters outside the pleadings. Berry initially contested their accuracy, authenticity, and completeness, and the court granted the parties limited discovery with respect to the screenshots. Because the screenshots could be directly linked to Berry’s account through a unique campaign ID number, the court took judicial notice of them, rejecting Berry’s opposition that the screenshot didn’t demonstrate the entire enrollment process or show what the page looked like on the computer screen. The enrollment page was central to Berry’s claims, and there was no reasonable dispute as to the accuracy of the screenshot. Likewise with the acknowledgement page Berry was given, confirmation email, and account history, along with enrollment webpage screenshots from two other cases cited by Barry in his response to the motion to dismiss.
Berry also requested judicial notice of Congressional reports on aggressive sales tactics on the internet and the resulting legislation (which, it is to be hoped, will protect future Berrys), which became law Dec. 29, 2010. The court took judicial notice of the existence of these reports and the law, but not the reports’ findings and contents, or the congressional statements issued with the new law.
Berry sued Webloyalty over his enrollment into a membership program on the internet. He bought tickets from MovieTickets.com and saw an ad to save $10 on his next purchase. He clicked on the ad and provided his email address, but didn’t read the other information. He started getting monthly charges of $12/month. (Has anyone ever actually saved money using this kind of service?) He alleged that the enrollment was deceptive and misleading.
The court, however, found that the disclosures were prominent enough that no reasonable consumer could have been fooled by them (essentially deeming all the people who feel cheated by programs of this type unreasonable).
Another case, Keithly v. Intelius, Inc., No. 09–1485, 2011 U.S. Dist. LEXIS 16861 (W.D.Wa. Feb. 8, 2011), was not to the contrary. In Keithly, in order to reach the enrollment page, the consumer clicked on a button that said “Confirm the Purchase and Show my Report” rather than clicking on a coupon offer. Moreover, there were not as many disclosures in close proximity to the offer graphics. And the only text above the box where the consumer enters his email was “Please type in your email address below.”
Berry took three affirmative steps to accept the terms of the club membership—he entered his email twice and clicked the “YES” button.
This defeated all the claims: misrepresentation, unfair competition, false advertising, violation of the Electronic Funds Transfer Act, violated the Electronic Communications Privacy Act, civil theft, unjust enrichment, money had and received, conversion, negligence, and invasion of privacy.
With respect to the UCL, Berry also argued that the practice was unfair because the injury caused outweighed any benefit to consumers. “Unfair” is ill-defined in the context of consumer plaintiffs under the UCL, but generally means a practice that undermines a legislatively declared policy or threatens competition, or a practice that has an impact on its alleged victim that outweighs the reasons, justifications, and motives of the alleged wrongdoer. The court concluded that the complaint contained only cursory allegations insufficient to meet this standard.
What I think is missing here is a recognition that, as the FTC has long told advertisers, too much information is as bad as too little. By plastering the page with repetitive chunks of text that en-courages scrolling past, the advertiser decreases the chance that the consumer will actually read and understand the disclosures, especially when the page also has distractors like the logos of famous companies. Especially when the consumer doesn’t have to re-enter his or her credit card information, this layout is a recipe for consumers failing to understand the actual terms. If the defendants were really interested in providing full information, the first interaction would be clear and limited: if you click yes you’re entering a new program, for which you will pay after the first 30 days.
Procedural notes: the court considered the screenshots Berry saw as matters outside the pleadings. Berry initially contested their accuracy, authenticity, and completeness, and the court granted the parties limited discovery with respect to the screenshots. Because the screenshots could be directly linked to Berry’s account through a unique campaign ID number, the court took judicial notice of them, rejecting Berry’s opposition that the screenshot didn’t demonstrate the entire enrollment process or show what the page looked like on the computer screen. The enrollment page was central to Berry’s claims, and there was no reasonable dispute as to the accuracy of the screenshot. Likewise with the acknowledgement page Berry was given, confirmation email, and account history, along with enrollment webpage screenshots from two other cases cited by Barry in his response to the motion to dismiss.
Berry also requested judicial notice of Congressional reports on aggressive sales tactics on the internet and the resulting legislation (which, it is to be hoped, will protect future Berrys), which became law Dec. 29, 2010. The court took judicial notice of the existence of these reports and the law, but not the reports’ findings and contents, or the congressional statements issued with the new law.
Insurer has duty to pay insured's customer's share of damages
CGS Industries, Inc. v. Charter Oak Fire Ins. Co., --- F. Supp. 2d ----, 2011 WL 1449618 (E.D.N.Y.)
CGS sued Charter Oak for breach of contract for failure to defend CGS in a trademark lawsuit brought by Five Four Clothing against CGS and its vendee Wal-Mart, and for indemnification of CGS for damages. The court initially found that Charter Oak had a duty to defend, and Charter Oak then moved for partial summary judgment on whether CGS was entitled to indemnification for (1) Wal-Mart's imputed portion of a $250,000 settlement paid by CGS to resolve the Five Four litigation; and (2) defense costs, including attorney's fees, of around $57,000 incurred on behalf of Wal-Mart.
Charter Oak’s policy included a provision insuring “advertising injury,” including injury arising out of infringement of copyright, title or slogan but excluding injury for which the insured assumed liability in a contract or agreement. But that exclusion does not apply to liability that the insured would have in the absence of contract or agreement. The underlying complaint didn’t separate damages caused by CGS (supplier) and damages caused by Wal-Mart (retailer).
Wal-Mart demanded indemnification from CGS for the underlying litigation based on their supplier agreement, which included a comprehensive indemnification provision. CGS then negotiated a settlement on behalf of both entities for the total amount of $250,000.
CGS argued that Wal-Mart was entitled to defense and indemnification from CGS automatically, as a matter of law, and not just under the supplier agreement. In addition, CGS argued that Charter Oak was not entitled to allocate the settlement amount between the parties and pay only for the sum paid to settle CGS’s liability because allocation was not required or possible given the parties’ alleged joint and several liability.
Charter Oak’s responsibility depended on “whether another legal rule, independent of contract liability under the supplier agreement, obligated CGS to indemnify Wal-Mart for damages and defense attributed to Wal-Mart. Put differently, assuming the supplier indemnification agreement between CGS and Wal-Mart did not exist, would CGS have had a duty under law to indemnify Wal-Mart for those damages?”
The insured had the burden of showing that an exception to the exclusion applied. CGS succeeded in satisfying this burden with respect to Wal-Mart’s imputed damages for Wal-Mart’s trademark violations, but not for Wal-Mart’s defense costs.
Given the way the underlying claims were pled, they sufficed to charge CGS with a breach of warranty to Wal-Mart, and under NY law Wal-Mart’s remedies include the right to indemnification from the seller for resulting economic loss. N.Y. U.C.C. § 2-312(3) (“Unless otherwise agreed, a seller that is a merchant regularly dealing in goods of the kind warrants that the goods shall be delivered free of the rightful claim of any third person by way of infringement or the like ….”). The requirements for damages are that the seller is a merchant regularly dealing in goods of the kind, the goods were subject to a rightful third-party infringement claim upon delivery, the buyer didn’t furnish specifications to the seller, and the parties did not make another agreement. The first three elements were indisputably satisfied, and the court rejected Charter Oak’s argument that the supplier agreement was “another agreement” negating CGS’s independent legal duty to indemnify. The provision starts with the words "[u]nless otherwise agreed," indicating that this section of the UCC is a default rule that the parties can waive, and that applies if the other three elements are satisfied and the contract doesn’t exclude warranty liability.
“The critical question is not what the supplier agreement provides with respect to CGS's duty to indemnify Wal-Mart. It is whether section 2-312(3) confers on Wal-Mart an independent legal right to indemnification from CGS. The contract between CGS and Wal-Mart is, for the purpose of this insurance agreement, a mere decorative counterpane over the blanket protection of the law--section 2-312(3).”
Thus, the full $250,000 was subject to a duty of indemnification, and was paid as compensation for covered advertising injury damages. Whether the settlement sum was reasonable was left for trial.
As to Wal-Mart’s defense costs, matters were different. Assuming the supplier agreement didn’t exist, would CGS still be obligated as a matter of law to indemnify Wal-Mart for its defense costs? CGS failed to provide convincing authority supporting its case. NY hasn’t decided the issue, and the weight of case law from other UCC jurisdictions is the contrary, with the majority of courts considering the question holding that the UCC doesn’t allow recovery of attorney’s fees as incidental or consequential damages.
In addition, general policy favored Charter Oak. “There is a strong principle, peculiar to our jurisprudence against one party's paying for the legal costs of another, even when the other wins in a litigation. This presumption is ‘the American rule.’” There was no indication in the insurance contract of an intent to depart from the American rule. CGS had to pay for Wal-Mart’s litigation costs because it contracted to do so.
The court noted that, here, CGS’s argument had some appeal: that it assumed Wal-Mart’s litigation burden as a matter of sales law, through an implied-in-law warranty against unsatisfactory goods, including the indirect damages caused by litigation expenses. But, on balance, Charter Oak prevailed because it only assumed the burden of CGS’s litigation expenses.
CGS sued Charter Oak for breach of contract for failure to defend CGS in a trademark lawsuit brought by Five Four Clothing against CGS and its vendee Wal-Mart, and for indemnification of CGS for damages. The court initially found that Charter Oak had a duty to defend, and Charter Oak then moved for partial summary judgment on whether CGS was entitled to indemnification for (1) Wal-Mart's imputed portion of a $250,000 settlement paid by CGS to resolve the Five Four litigation; and (2) defense costs, including attorney's fees, of around $57,000 incurred on behalf of Wal-Mart.
Charter Oak’s policy included a provision insuring “advertising injury,” including injury arising out of infringement of copyright, title or slogan but excluding injury for which the insured assumed liability in a contract or agreement. But that exclusion does not apply to liability that the insured would have in the absence of contract or agreement. The underlying complaint didn’t separate damages caused by CGS (supplier) and damages caused by Wal-Mart (retailer).
Wal-Mart demanded indemnification from CGS for the underlying litigation based on their supplier agreement, which included a comprehensive indemnification provision. CGS then negotiated a settlement on behalf of both entities for the total amount of $250,000.
CGS argued that Wal-Mart was entitled to defense and indemnification from CGS automatically, as a matter of law, and not just under the supplier agreement. In addition, CGS argued that Charter Oak was not entitled to allocate the settlement amount between the parties and pay only for the sum paid to settle CGS’s liability because allocation was not required or possible given the parties’ alleged joint and several liability.
Charter Oak’s responsibility depended on “whether another legal rule, independent of contract liability under the supplier agreement, obligated CGS to indemnify Wal-Mart for damages and defense attributed to Wal-Mart. Put differently, assuming the supplier indemnification agreement between CGS and Wal-Mart did not exist, would CGS have had a duty under law to indemnify Wal-Mart for those damages?”
The insured had the burden of showing that an exception to the exclusion applied. CGS succeeded in satisfying this burden with respect to Wal-Mart’s imputed damages for Wal-Mart’s trademark violations, but not for Wal-Mart’s defense costs.
Given the way the underlying claims were pled, they sufficed to charge CGS with a breach of warranty to Wal-Mart, and under NY law Wal-Mart’s remedies include the right to indemnification from the seller for resulting economic loss. N.Y. U.C.C. § 2-312(3) (“Unless otherwise agreed, a seller that is a merchant regularly dealing in goods of the kind warrants that the goods shall be delivered free of the rightful claim of any third person by way of infringement or the like ….”). The requirements for damages are that the seller is a merchant regularly dealing in goods of the kind, the goods were subject to a rightful third-party infringement claim upon delivery, the buyer didn’t furnish specifications to the seller, and the parties did not make another agreement. The first three elements were indisputably satisfied, and the court rejected Charter Oak’s argument that the supplier agreement was “another agreement” negating CGS’s independent legal duty to indemnify. The provision starts with the words "[u]nless otherwise agreed," indicating that this section of the UCC is a default rule that the parties can waive, and that applies if the other three elements are satisfied and the contract doesn’t exclude warranty liability.
“The critical question is not what the supplier agreement provides with respect to CGS's duty to indemnify Wal-Mart. It is whether section 2-312(3) confers on Wal-Mart an independent legal right to indemnification from CGS. The contract between CGS and Wal-Mart is, for the purpose of this insurance agreement, a mere decorative counterpane over the blanket protection of the law--section 2-312(3).”
Thus, the full $250,000 was subject to a duty of indemnification, and was paid as compensation for covered advertising injury damages. Whether the settlement sum was reasonable was left for trial.
As to Wal-Mart’s defense costs, matters were different. Assuming the supplier agreement didn’t exist, would CGS still be obligated as a matter of law to indemnify Wal-Mart for its defense costs? CGS failed to provide convincing authority supporting its case. NY hasn’t decided the issue, and the weight of case law from other UCC jurisdictions is the contrary, with the majority of courts considering the question holding that the UCC doesn’t allow recovery of attorney’s fees as incidental or consequential damages.
In addition, general policy favored Charter Oak. “There is a strong principle, peculiar to our jurisprudence against one party's paying for the legal costs of another, even when the other wins in a litigation. This presumption is ‘the American rule.’” There was no indication in the insurance contract of an intent to depart from the American rule. CGS had to pay for Wal-Mart’s litigation costs because it contracted to do so.
The court noted that, here, CGS’s argument had some appeal: that it assumed Wal-Mart’s litigation burden as a matter of sales law, through an implied-in-law warranty against unsatisfactory goods, including the indirect damages caused by litigation expenses. But, on balance, Charter Oak prevailed because it only assumed the burden of CGS’s litigation expenses.
Friday, April 15, 2011
Music Sampling at AU
Peter DiCola, Creative License: Exploring the Music Sampling Marketplace, Washington College of Law
Showed a clip of the movie Copyright Criminals. The related book focuses more on the licensing process. Impetus for the book: Unheard stories; discussions of albums that would be impossible to make in the current commercial music environment; Bridgeport Films case holding that any copying of a sound recording is infringing, no de minimis defense. Suggests maybe people in this field talk too much about Girl Talk, but there he is in the book/in NYT and so on because he’s a way to talk about the popularity of mashups.
How well does licensing work? Tom’s Diner DNA remix—Suzanne Vega decided to license an initially unauthorized remix, and participated in making a remix album. Interview: her manager felt that this was one of the things that allowed her to remain a working musicians. Both sides can really win from licensing—DNA gets remix, Vega gets exposure/some revenue.
Samples are expensive; can be up to six figures. Managers say: do it on just one song, because otherwise there won’t be any pie left. (Talked to 120 people in course of writing.) Being on a major label helps you navigate this system—not just resources but knowledge and ability to make negotiations happen; can be very difficult for newcomer/independent label.
Copyright owners found the right to deny permission valuable for noneconomic reasons; sampling was something different than covering—though many songwriters are no fans of the mechanical reproduction compulsory license either. Folk wisdom exists about who you don’t touch—George Harrison, Steve Miller.
Some deals just can’t be made: TuPac’s administrator can negotiate people down from 40%, but people think about a baseline of 25%, and that means that more than 3 samples doesn’t work. You usually have to have the recording—sunk production costs at least for a demo—to show to the copyright owner first; already taking a significant risk.
Musicians’ responses: one sample per track; substitutes; have a live musician replay the melody; musicians sample themselves—press something to vinyl and then sample it. Disguise or transform samples, e.g. by playing backwards—sensitive area, but it exists. Because Girl Talk’s record is not viable in a licensing environment, he gives it away and relies on live performance—you can decide you’re just not going to participate in the ordinary market. That’s a problem, pushing certain kinds of creativity to the underground sector. That’s money left on the table—a deal could be made to allow samplers to continue with their work.
Back of the envelope calculation of classic albums from the Wild West stage of sampling if they were made today—the cost is essentially infinite—sampling “Hotel California” alone would lead to demands for 100%. 275% of the composition royalties and 39 cents per album for just one song—Beastie Boys would lose $8 per album. This is hypothetical but meant to be informative about the general result—you’d lose money. No one we interviewed disagreed—no one said that everyone would bring their rates down to acknowledge the other samples.
Private reform proposals: Bridgeport perspective—increase the property right. Because of transaction costs, this is not the way forward. Private sector could make fair use more practically oriented, but no one in the commercial sector currently is using fair use for sampling. People may omit mention of their samples, but that’s not the same thing. Licensing: Magnatune, though we don’t know what its sales are: they allow sampling for a set fee. Why not a CRO? These aren’t seen as amenable to blanket licensing because everyone wants to evaluate the politics/quality/pricing for the specific song. Voluntary registry of who owns what would be incredibly helpful and bring down barriers.
Public reform proposals: A de minimis threshhold for sound recordings. It shouldn’t be zero. Clarify that §114 doesn’t mean no de minimis use. Judges could clarify fair use of sound recordings. Compulsory licensing has the same problem as blanket licensing—it doesn’t seem politically feasible given how much we heard from creators about how much they value control.
Money and control: this system isn’t working because there’s money on the table. What about a thought experiment: a reverse liability rule allowing copyright owners money or control (that is, they could pay to stop the use or take payment for it)? Grey Album: a million downloads, no money for Jay-Z or The Beatles, though it helped Dangermouse’s career.
Remix is being distributed so widely, we need a system to alleviate the pressure and allow remix to move out of the underground economy.
Jay Rosenthal, National Music Publishers Association (NMPA)
His own perspective, not that of NMPA. Represented rappers and artists during the critical period. Herbie Azor/Luv Bug—producer of Salt N Pepa etc. Worked with urban artists/producers who sampled, and represents Thievery Corporation, which has a reason for its name. And was general counsel for Recording Artists Coalition at the same time. Principles: (1) The artist has a right to be paid. (2) The artist has a right to control. (3) The artist has a right to attribution.
The book doesn’t address moral rights of artists as a political issue, not an economic one. Many artists have gained financially from sampling but you need perspectives from folks like Don Henley or Tom Waits. Copyright is the human right of the artist (attributed to the founder of Sweet Honey in the Rock).
Herbie Azor used a lot of bass tracks unauthorized, not because he was creating a new art form but because he was cheap and lazy—he didn’t want to hire a bass player and he needed to get the song done. A lot of rappers took tracks from DC go-go; one story involved a musician whose trombone solo was sampled; he heard it when he was working as a janitor at a DC school, and the kids didn’t believe him. He couldn’t find a lawyer to take the case because he had no money and died without receiving compensation. After hearing that story, Azor cleared rights. You can make money for everyone by viewing this as not just a money issue, not just an art issue, but a rights issue.
Likes Creative Commons license, as long as the artist has the right to pull the license at least prospectively (because the artist may need to do an exclusive deal). Compulsory license is problematic: setting the rates is the difficulty. Piracy has decreased the value of music and everyone is trying to keep the value high; it’s a mess. Compulsory license for covers: has gone up very little, and songwriters continually complain. And because there’s no compulsory license on the sound recording side, it puts out of whack the idea that the composition and the performance should be worth about the same. Apple deal: label gets 60 cents and pays the composer 9.1 cents. That’s wrong. Improvement in licensing could help. There is no de minimis for sound recordings, though there is for compositions. If you hear a blast of horn, it’s so distinctive, there’s so much authorship in it, it’s always copyrightable. Even if it’s transformed there should be compensation. Performers are so besieged already by the labels, radio.
Transaction costs: as time went on, lawyers did less and less. Managers started doing the deals because they became fairly rudimentary—tell the lawyers to write it up. Transaction costs were not as big as possible. Costs will be coming down because the value of music is coming down. You’ll see this in synch licenses as well as sampling.
Is this really a problem? Some artists couldn’t put out some albums. But the artist who is sampled has a different view: when you don’t ask, pay, or attribute, you’re fucking them over, and producers who really thought about it would understand that it’s not right. It’s like the Pyramids: they’re beautiful, but hundreds of thousands of people died making them, so did we really need them? It may sound like art, but it really is oppression. Even if some albums don’t come out the world will keep spinning.
Casey Rae Hunter of the Future of Music Coalition
We are interested in artist compensation, ability to reach artists, artists’ ability to participate in creating business structures. Tech is always disruptive and can change how we relate to music. Sampling arose out of urban folk expression and became a big phenomenon. I don’t feel comfortable characterizing the work of Public Enemy as cheap and lazy. Could as easily say to photographers: why don’t you just paint the thing? Market sometimes works, but friction in marketplace and uncertainty creates incredible barriers, economic and otherwise. Post-Bridgeport, you can’t build tracks in the same way. At a granular level, you can’t use building blocks of sound, and it is counterintuitive to treat the composition and sound recording differently. Fair use is imperfect and uncertain.
Given how much remixing actually goes on, we should worry about legal standards that have nothing to do with the practices of actual everyday creators.
Creators are diverse and have clashing opinions on virtually everything, including sampling.
Professor Peter Jaszi of the American University Washington College of Law
Book is a good model of ethnographic examinations of cultural production: if copyright is about promoting cultural production, we need to know how those systems of cultural production actually work—not just the music makers, but the lawyers, agents, labels, and others who are instrumental to the system.
Gives a nod to best practices—how do we get a consensus opinion from the community? What about an explicit opt-out, allowing any musician to designate a recording—regardless of ownership—with respect to sampling?
DiCola: was somewhat surprised that Rosenthal thought moral rights weren’t in the book; other audiences beat him up for endorsing varieties of artist control.
Q: what about first amendment implications?
Rosenthal: parody is fine. There is a difference between the sound recording and the musical composition. Entitlement: free speech is a right, but you can take it too far. No first amendment right to peer-to-peer filesharing. This generation thinks there’s more of an entitlement to use the work than anybody should have.
Hunter: Thinks it’s a mistake to conflate P2P with remix. There might not be a fundamental right to recombine, but here it is and it’s only going to get bigger; we do the future a disservice by not recognizing the phenomenon, even if not required by the first amendment. (I think he’s confusing the historically specific ways in which a practice is carried out, which are influenced by technology, and the general practice: “a fundamental right to recombine” describes how human culture is made, just as people used to talk face to face when that was the only technology available to them and now carry a fair amount of that conversation out on the phone or in other ways.)
Jaszi: Thinks Campbell (mentioned by Rosenthal) is not a parody case—the Court’s account of parody is weak; it’s the transformativeness that makes it fair use.
Q: First amendment/parody is a very limited subset. Fair use is not undefinable; there are a lot of cases and a lot of guidance on what is and isn’t. P2P filesharing isn’t. A pure economist would say that markets, if left alone, will function effectively, so if these albums wouldn’t have been created then they weren’t worth creating.
DiCola: A “pure” economist on the blackboard would say that markets always work. But I’m interested in transaction costs and friction in the system. Coase said all beneficial deals would occur in the absence of transaction costs, but they aren’t absent. Economists should study transaction costs, which is what the law and economics movement has done. This is where the market for samples is different from the grain market—it’s not a transparent market, which is not to say that some deals don’t happen. In terms of efficiency: that is his goal—utilitarianism is important in asking whether we’re getting the works we want. But you can’t explain the First Amendment with utilitarian analysis—even if it makes more people unhappy than happy, we still allow protests in the park. People who care about rights should care about economic reality and vice versa.
Q: how do current samplers feel about being sampled?
DiCola: They realize they’ll be the samplee, and some think they might enjoy being able to deny permission. If some neo-Nazi samples Public Enemy, Chuck D wants to be able to stop it. They are conflicted!
Rosenthal: People change—Hank Shocklee gave blanket permission and a few years later he was filing lawsuits. People accept control over synch licenses as ordinary—you say no if you don’t like the movie, and that’s fine. That’s how the 2 Live Crew case started—the Orbison estate didn’t like 2 Live Crew.
Showed a clip of the movie Copyright Criminals. The related book focuses more on the licensing process. Impetus for the book: Unheard stories; discussions of albums that would be impossible to make in the current commercial music environment; Bridgeport Films case holding that any copying of a sound recording is infringing, no de minimis defense. Suggests maybe people in this field talk too much about Girl Talk, but there he is in the book/in NYT and so on because he’s a way to talk about the popularity of mashups.
How well does licensing work? Tom’s Diner DNA remix—Suzanne Vega decided to license an initially unauthorized remix, and participated in making a remix album. Interview: her manager felt that this was one of the things that allowed her to remain a working musicians. Both sides can really win from licensing—DNA gets remix, Vega gets exposure/some revenue.
Samples are expensive; can be up to six figures. Managers say: do it on just one song, because otherwise there won’t be any pie left. (Talked to 120 people in course of writing.) Being on a major label helps you navigate this system—not just resources but knowledge and ability to make negotiations happen; can be very difficult for newcomer/independent label.
Copyright owners found the right to deny permission valuable for noneconomic reasons; sampling was something different than covering—though many songwriters are no fans of the mechanical reproduction compulsory license either. Folk wisdom exists about who you don’t touch—George Harrison, Steve Miller.
Some deals just can’t be made: TuPac’s administrator can negotiate people down from 40%, but people think about a baseline of 25%, and that means that more than 3 samples doesn’t work. You usually have to have the recording—sunk production costs at least for a demo—to show to the copyright owner first; already taking a significant risk.
Musicians’ responses: one sample per track; substitutes; have a live musician replay the melody; musicians sample themselves—press something to vinyl and then sample it. Disguise or transform samples, e.g. by playing backwards—sensitive area, but it exists. Because Girl Talk’s record is not viable in a licensing environment, he gives it away and relies on live performance—you can decide you’re just not going to participate in the ordinary market. That’s a problem, pushing certain kinds of creativity to the underground sector. That’s money left on the table—a deal could be made to allow samplers to continue with their work.
Back of the envelope calculation of classic albums from the Wild West stage of sampling if they were made today—the cost is essentially infinite—sampling “Hotel California” alone would lead to demands for 100%. 275% of the composition royalties and 39 cents per album for just one song—Beastie Boys would lose $8 per album. This is hypothetical but meant to be informative about the general result—you’d lose money. No one we interviewed disagreed—no one said that everyone would bring their rates down to acknowledge the other samples.
Private reform proposals: Bridgeport perspective—increase the property right. Because of transaction costs, this is not the way forward. Private sector could make fair use more practically oriented, but no one in the commercial sector currently is using fair use for sampling. People may omit mention of their samples, but that’s not the same thing. Licensing: Magnatune, though we don’t know what its sales are: they allow sampling for a set fee. Why not a CRO? These aren’t seen as amenable to blanket licensing because everyone wants to evaluate the politics/quality/pricing for the specific song. Voluntary registry of who owns what would be incredibly helpful and bring down barriers.
Public reform proposals: A de minimis threshhold for sound recordings. It shouldn’t be zero. Clarify that §114 doesn’t mean no de minimis use. Judges could clarify fair use of sound recordings. Compulsory licensing has the same problem as blanket licensing—it doesn’t seem politically feasible given how much we heard from creators about how much they value control.
Money and control: this system isn’t working because there’s money on the table. What about a thought experiment: a reverse liability rule allowing copyright owners money or control (that is, they could pay to stop the use or take payment for it)? Grey Album: a million downloads, no money for Jay-Z or The Beatles, though it helped Dangermouse’s career.
Remix is being distributed so widely, we need a system to alleviate the pressure and allow remix to move out of the underground economy.
Jay Rosenthal, National Music Publishers Association (NMPA)
His own perspective, not that of NMPA. Represented rappers and artists during the critical period. Herbie Azor/Luv Bug—producer of Salt N Pepa etc. Worked with urban artists/producers who sampled, and represents Thievery Corporation, which has a reason for its name. And was general counsel for Recording Artists Coalition at the same time. Principles: (1) The artist has a right to be paid. (2) The artist has a right to control. (3) The artist has a right to attribution.
The book doesn’t address moral rights of artists as a political issue, not an economic one. Many artists have gained financially from sampling but you need perspectives from folks like Don Henley or Tom Waits. Copyright is the human right of the artist (attributed to the founder of Sweet Honey in the Rock).
Herbie Azor used a lot of bass tracks unauthorized, not because he was creating a new art form but because he was cheap and lazy—he didn’t want to hire a bass player and he needed to get the song done. A lot of rappers took tracks from DC go-go; one story involved a musician whose trombone solo was sampled; he heard it when he was working as a janitor at a DC school, and the kids didn’t believe him. He couldn’t find a lawyer to take the case because he had no money and died without receiving compensation. After hearing that story, Azor cleared rights. You can make money for everyone by viewing this as not just a money issue, not just an art issue, but a rights issue.
Likes Creative Commons license, as long as the artist has the right to pull the license at least prospectively (because the artist may need to do an exclusive deal). Compulsory license is problematic: setting the rates is the difficulty. Piracy has decreased the value of music and everyone is trying to keep the value high; it’s a mess. Compulsory license for covers: has gone up very little, and songwriters continually complain. And because there’s no compulsory license on the sound recording side, it puts out of whack the idea that the composition and the performance should be worth about the same. Apple deal: label gets 60 cents and pays the composer 9.1 cents. That’s wrong. Improvement in licensing could help. There is no de minimis for sound recordings, though there is for compositions. If you hear a blast of horn, it’s so distinctive, there’s so much authorship in it, it’s always copyrightable. Even if it’s transformed there should be compensation. Performers are so besieged already by the labels, radio.
Transaction costs: as time went on, lawyers did less and less. Managers started doing the deals because they became fairly rudimentary—tell the lawyers to write it up. Transaction costs were not as big as possible. Costs will be coming down because the value of music is coming down. You’ll see this in synch licenses as well as sampling.
Is this really a problem? Some artists couldn’t put out some albums. But the artist who is sampled has a different view: when you don’t ask, pay, or attribute, you’re fucking them over, and producers who really thought about it would understand that it’s not right. It’s like the Pyramids: they’re beautiful, but hundreds of thousands of people died making them, so did we really need them? It may sound like art, but it really is oppression. Even if some albums don’t come out the world will keep spinning.
Casey Rae Hunter of the Future of Music Coalition
We are interested in artist compensation, ability to reach artists, artists’ ability to participate in creating business structures. Tech is always disruptive and can change how we relate to music. Sampling arose out of urban folk expression and became a big phenomenon. I don’t feel comfortable characterizing the work of Public Enemy as cheap and lazy. Could as easily say to photographers: why don’t you just paint the thing? Market sometimes works, but friction in marketplace and uncertainty creates incredible barriers, economic and otherwise. Post-Bridgeport, you can’t build tracks in the same way. At a granular level, you can’t use building blocks of sound, and it is counterintuitive to treat the composition and sound recording differently. Fair use is imperfect and uncertain.
Given how much remixing actually goes on, we should worry about legal standards that have nothing to do with the practices of actual everyday creators.
Creators are diverse and have clashing opinions on virtually everything, including sampling.
Professor Peter Jaszi of the American University Washington College of Law
Book is a good model of ethnographic examinations of cultural production: if copyright is about promoting cultural production, we need to know how those systems of cultural production actually work—not just the music makers, but the lawyers, agents, labels, and others who are instrumental to the system.
Gives a nod to best practices—how do we get a consensus opinion from the community? What about an explicit opt-out, allowing any musician to designate a recording—regardless of ownership—with respect to sampling?
DiCola: was somewhat surprised that Rosenthal thought moral rights weren’t in the book; other audiences beat him up for endorsing varieties of artist control.
Q: what about first amendment implications?
Rosenthal: parody is fine. There is a difference between the sound recording and the musical composition. Entitlement: free speech is a right, but you can take it too far. No first amendment right to peer-to-peer filesharing. This generation thinks there’s more of an entitlement to use the work than anybody should have.
Hunter: Thinks it’s a mistake to conflate P2P with remix. There might not be a fundamental right to recombine, but here it is and it’s only going to get bigger; we do the future a disservice by not recognizing the phenomenon, even if not required by the first amendment. (I think he’s confusing the historically specific ways in which a practice is carried out, which are influenced by technology, and the general practice: “a fundamental right to recombine” describes how human culture is made, just as people used to talk face to face when that was the only technology available to them and now carry a fair amount of that conversation out on the phone or in other ways.)
Jaszi: Thinks Campbell (mentioned by Rosenthal) is not a parody case—the Court’s account of parody is weak; it’s the transformativeness that makes it fair use.
Q: First amendment/parody is a very limited subset. Fair use is not undefinable; there are a lot of cases and a lot of guidance on what is and isn’t. P2P filesharing isn’t. A pure economist would say that markets, if left alone, will function effectively, so if these albums wouldn’t have been created then they weren’t worth creating.
DiCola: A “pure” economist on the blackboard would say that markets always work. But I’m interested in transaction costs and friction in the system. Coase said all beneficial deals would occur in the absence of transaction costs, but they aren’t absent. Economists should study transaction costs, which is what the law and economics movement has done. This is where the market for samples is different from the grain market—it’s not a transparent market, which is not to say that some deals don’t happen. In terms of efficiency: that is his goal—utilitarianism is important in asking whether we’re getting the works we want. But you can’t explain the First Amendment with utilitarian analysis—even if it makes more people unhappy than happy, we still allow protests in the park. People who care about rights should care about economic reality and vice versa.
Q: how do current samplers feel about being sampled?
DiCola: They realize they’ll be the samplee, and some think they might enjoy being able to deny permission. If some neo-Nazi samples Public Enemy, Chuck D wants to be able to stop it. They are conflicted!
Rosenthal: People change—Hank Shocklee gave blanket permission and a few years later he was filing lawsuits. People accept control over synch licenses as ordinary—you say no if you don’t like the movie, and that’s fine. That’s how the 2 Live Crew case started—the Orbison estate didn’t like 2 Live Crew.
I'm not sure whether Sondheim fans should watch or stay away
The first musical number in this My Little Pony episode (about 4 minutes in) is very clearly a version of "Putting it Together." Transformative?
Thursday, April 14, 2011
Mission inedible: dip lawsuit proceeds
In this putative class action, plaintiffs sued defendants over their Mission Guacamole and Mission Spicy Bean Dip, alleging violations of California’s UCL, FAL, and CLRA. The alleged falsehoods: (1) "0 g transfat" (both); (2) "With Garden Vegetables" (guacamole); (3) " 'Guacamole' made in 'The Authentic Tradition'"; (4) "0 g cholesterol" (bean dip); and (5)"All Natural" (bean dip). Plaintiffs alleged that the products contain "substantial and dangerous levels of artificial transfat," a substance linked to cardiovascular disease, diabetes, and cancer.
The court first found that plaintiffs had sufficiently alleged standing, because they alleged they were deceived by the labels and would not have bought the products otherwise, and that they would not have bought the products at the offered price if they hadn’t been misled. They also alleged that, instead of receiving products free of artificial trans fat or authentic guacamole, they bought artificial products that could raise their cholesterol and damage their hearts. This was sufficient injury in fact for Proposition 64, as well as for Article III standing.
Defendant argued that the alleged injury was de minimis, but cited no consumer protection precedent. In the cited ADA case, the defendants fixed the problem very quickly, but here, there’d been no attempt to correct the alleged errors.
In addition, plaintiffs sufficiently alleged actual reliance on the labels, paying more for the products and buying them instead of other brands. The combination of injury in fact and actual reliance also met Article III’s causation requirement.
Defendant argued that plaintiffs lacked standing to seek injunctive relief because they already alleged that they know better now and are not at risk of further injury because they won’t buy the products again, so redressability was absent. The court found this argument unpersuasive. Plaintiffs alleged actual injury, and if the court were to construe the law as narrowly as defendant wanted, “federal courts would be precluded from enjoining false advertising under California consumer protection laws because a plaintiff who had been injured would always be deemed to avoid the cause of the injury thereafter (‘once bitten, twice shy’) and would never have Article III standing.” The court was reluctant to allow an alleged wrongdoer to avoid jurisdiction because, by definition, a plaintiff who’s become aware of the fraud is no longer deceived by it. Given that defendant hasn’t removed its allegedly misleading ads, the claims remain on the supermarket shelves; the policy of California’s consumer protection laws allowed plaintiffs to stand for the class (at least at this stage).
The court held that disgorgement of wrongfully obtained profits was not an available remedy under the FAL, though restitution is.
The court also declined to dismiss the CLRA damages claim. Plaintiffs filed a complaint that didn’t ask for CLRA damages, then provided notice to defendants demanding correction of the alleged falsehoods. The CLRA requires that this notice be given thirty days or more prior to the commencement of an action for damages. Plaintiffs filed a first amended complaint, for the first time asking for CLRA damages, more than thirty days after this notice. The court found that this satisfied the statutory requirements and refused to dismiss the damages claim.
The court then turned to the specific statements at issue. No reasonable consumer relies on puffery, and thus it’s not actionable. “The Authentic Tradition,” both standing alone and in context, is puffery: it’s not specific and measurable or verifiable.
“All Natural,” by contrast, is a factual statement. Construing the complaint in the light most favorable to plaintiffs, the products allegedly contain artificial trans fats, which could be found to be “unnatural.”
Defendant argued that “Guacamole,” in the context of the label and the ingredients list on the package, couldn’t be misleading, because the ingredients "combine to produce a basic guacamole flavor." (Comment: sounds delightful!) However, the court found that the label and the word could deceive a reasonable consumer.
Defendant argued that the real product name is “Guacamole Flavored Dip,” "indicating the product's 'characterizing flavor,' not the presence of actual [avocados or guacamole]."
However, the word GUACAMOLE is twice as large as the smaller “flavored dip” below it. “The label also prominently displays large pictures of avocados on the front of the jar. And the dip itself is green-colored, as would be avocados.” (I will also note that my completely unscientific survey revealed that websites selling the product described it as “Guacamole dip,” meaning that you’d have to read the text in the relatively tiny picture, not the product description, to learn that it was only “flavored.”) California law prohibits misleading ads as well as false ones. Consumers are not expected to look beyond misleading representations on the front of the box to discover the truth from the ingredient list. Thus, at this stage anyway, a reasonable consumer could read the label to imply that the product is guacamole, even though it allegedly contains less than 2% avocado powder.
“With Garden Vegetables,” however, was “accurate in the context of the label as a whole, and unlikely to deceive a reasonable consumer. The product does in fact contain vegetables that can be grown in a garden”--avocado powder, dehydrated onion, garlic powder, and bell pepper. Plaintiffs didn’t specifically explain how this was misleading, and the statement didn’t claim a specific amount of vegetables.
The court found that the claims related to "0 g cholesterol" on its Spicy Bean Dip and "0 g transfat" on both products were preempted by the NLEA. FDA regulations allow products containing less than 2 mg of cholesterol can be described as cholesterol free, and provide that trans fat content shall be expressed as grams per serving. If the serving contains less than 0.5 gram, the content, when declared, shall be expressed as zero. Plaintiffs didn’t dispute that defendant complied with the regulations, but argued that these statements were misleading implications that the products are healthy. This was a preempted claim.
Wednesday, April 13, 2011
Today's copyright word of wisdom
“In fact, if artists and inventors were not optimistic about their ability to make
money, it is very doubtful that anyone would still be willing to engage in creative activity.”
Ofer Tur-Sinai, The Endowment Effect in IP Transactions: The Case Against Debiasing
NB: this paper was a free SSRN download. Just sayin’.
money, it is very doubtful that anyone would still be willing to engage in creative activity.”
Ofer Tur-Sinai, The Endowment Effect in IP Transactions: The Case Against Debiasing
NB: this paper was a free SSRN download. Just sayin’.
Unsubstantiated safety claim can be literally false
Guidance Endodontics, LLC v. Dentsply International, Inc., 2011 WL 1336473 (D.N.M.)
Earlier discussion here. Guidance sued Dentsply, a much larger company that both competes with and supplies Guidance. Dentsply counterclaimed; it went badly for Guidance.
One counterclaim involved false advertising under the Lanham Act. Though the court held that some of the allegedly false claims were mere puffery, it allowed others to proceed. The claims that survived related to the following statements: "[n]ow you can treat every case better, quicker and safer with EndoTaper"; and EndoTaper "files can be used like ProTaper F1 to F5 or used in a Crown-Down like ProFile, GT, Endo Sequence, or K3 to create the perfect canal shape more efficiently and easier than any other file system." At a jury trial, the jury evaluated these statements as well as the more general claim that Guidance falsely advertised that the EndoTaper is efficient, safe and flexible. The jury found that Guidance had willfully falsely advertised, awarding $93,000 to Dentsply. (There was also a much larger punitive damages award not at issue in this ruling.)
Guidance moved for judgment as a matter of law, holding that there was insufficient evidence for a reasonable jury to arrive at this verdict. On such a motion, the judge must draw all reasonable inferences in favor of the nonmoving party.
Puffery is a claim that consumers would not take seriously because of its vagueness. Context matters, so the relative expertise of the speaker and the listener matter. Moreover, “the larger the audience the more likely it is that the statement is puffery.” As I said before, this is often untrue—think of DTC drug ads—and of course is often at least counterbalanced with the relative expertise consideration given the information mismatch between mass advertisers and their audiences. The only situation in which this principle really makes sense involves comparing the statement “this investment is a good one for you” when made by an individual with knowledge of the plaintiffs’ particular circumstances—less likely to be puffing—with the same statement made in a TV ad. The cited case, Alpine Bank v. Hubbell, 555 F.3d at 1106-07, is not to the contrary, since it says that "mass advertising expressed in vague terms (as in political campaigns) is not relied on by rational adults.").
Anyway, Guidance argued that the three statements at issue were puffery and hadn’t been shown to be false. The court disagreed. Using superlatives alone didn’t make the statements puffery. Whether one product is “quicker” or “safer” than another is testable, and a reasonable consumer might believe testing had occurred. Likewise, characterizing EndoTaper as "efficient, safe and flexible” involved statements of fact, not vague generalities. (I can see a court coming out the other way on this. The vagueness question is: how efficient does something have to be before it is “efficient”? How do we measure that—cost, dentist-hours, something else? How safe does it have to be in order to be “safe”? If, however, there are general standards in the industry for efficiency, safety, and flexibility, then the puffery argument gets more difficult.)
After that, the court found that there was sufficient evidence to support the jury’s finding of falsity as to safety. There were a couple of instances of apparent malfunction in the record, plus testimony that “the sharper the file, the less safe it is.” EndoTaper was apparently sharper than other designs. While there was testimony that some doctors would prefer sharper to safer files, this testimony did not help make the “safer” or “safe” claims true.
In addition, the court held that “a reasonable consumer might believe that Guidance Endodontics had engaged in some sort of testing before making statements that the EndoTaper was ‘safe’ and ‘safer.’” Guidance didn’t do any testing, therefore this (implicit) claim was false because it was utterly unsubstantiated (citing Novartis Consumer Health, Inc. v. Johnson & Johnson-Merck Consumer Pharm. Co., 290 F.3d 578 (3rd Cir. 2002)). Though the court says this isn’t a necessary implication case, this part of it is—given the nature of the claim and the nature of the product, consumers would expect substantiation, which wasn’t present.
For the same reason—absence of substantiation through testing—there was sufficient evidence to support the jury’s verdict of falsity on the claim that the EndoTaper could create “the perfect canal shape more efficiently and easier than any other file system.” In addition, Guidance’s ads also claimed that a different product was “easier” than any other file system, creating a contradiction.
Earlier discussion here. Guidance sued Dentsply, a much larger company that both competes with and supplies Guidance. Dentsply counterclaimed; it went badly for Guidance.
One counterclaim involved false advertising under the Lanham Act. Though the court held that some of the allegedly false claims were mere puffery, it allowed others to proceed. The claims that survived related to the following statements: "[n]ow you can treat every case better, quicker and safer with EndoTaper"; and EndoTaper "files can be used like ProTaper F1 to F5 or used in a Crown-Down like ProFile, GT, Endo Sequence, or K3 to create the perfect canal shape more efficiently and easier than any other file system." At a jury trial, the jury evaluated these statements as well as the more general claim that Guidance falsely advertised that the EndoTaper is efficient, safe and flexible. The jury found that Guidance had willfully falsely advertised, awarding $93,000 to Dentsply. (There was also a much larger punitive damages award not at issue in this ruling.)
Guidance moved for judgment as a matter of law, holding that there was insufficient evidence for a reasonable jury to arrive at this verdict. On such a motion, the judge must draw all reasonable inferences in favor of the nonmoving party.
Puffery is a claim that consumers would not take seriously because of its vagueness. Context matters, so the relative expertise of the speaker and the listener matter. Moreover, “the larger the audience the more likely it is that the statement is puffery.” As I said before, this is often untrue—think of DTC drug ads—and of course is often at least counterbalanced with the relative expertise consideration given the information mismatch between mass advertisers and their audiences. The only situation in which this principle really makes sense involves comparing the statement “this investment is a good one for you” when made by an individual with knowledge of the plaintiffs’ particular circumstances—less likely to be puffing—with the same statement made in a TV ad. The cited case, Alpine Bank v. Hubbell, 555 F.3d at 1106-07, is not to the contrary, since it says that "mass advertising expressed in vague terms (as in political campaigns) is not relied on by rational adults.").
Anyway, Guidance argued that the three statements at issue were puffery and hadn’t been shown to be false. The court disagreed. Using superlatives alone didn’t make the statements puffery. Whether one product is “quicker” or “safer” than another is testable, and a reasonable consumer might believe testing had occurred. Likewise, characterizing EndoTaper as "efficient, safe and flexible” involved statements of fact, not vague generalities. (I can see a court coming out the other way on this. The vagueness question is: how efficient does something have to be before it is “efficient”? How do we measure that—cost, dentist-hours, something else? How safe does it have to be in order to be “safe”? If, however, there are general standards in the industry for efficiency, safety, and flexibility, then the puffery argument gets more difficult.)
After that, the court found that there was sufficient evidence to support the jury’s finding of falsity as to safety. There were a couple of instances of apparent malfunction in the record, plus testimony that “the sharper the file, the less safe it is.” EndoTaper was apparently sharper than other designs. While there was testimony that some doctors would prefer sharper to safer files, this testimony did not help make the “safer” or “safe” claims true.
In addition, the court held that “a reasonable consumer might believe that Guidance Endodontics had engaged in some sort of testing before making statements that the EndoTaper was ‘safe’ and ‘safer.’” Guidance didn’t do any testing, therefore this (implicit) claim was false because it was utterly unsubstantiated (citing Novartis Consumer Health, Inc. v. Johnson & Johnson-Merck Consumer Pharm. Co., 290 F.3d 578 (3rd Cir. 2002)). Though the court says this isn’t a necessary implication case, this part of it is—given the nature of the claim and the nature of the product, consumers would expect substantiation, which wasn’t present.
For the same reason—absence of substantiation through testing—there was sufficient evidence to support the jury’s verdict of falsity on the claim that the EndoTaper could create “the perfect canal shape more efficiently and easier than any other file system.” In addition, Guidance’s ads also claimed that a different product was “easier” than any other file system, creating a contradiction.
Tuesday, April 12, 2011
Another court refuses to decide whether FTC is subject to Rule 9(b)
Federal Trade Commission v. Wellness Support Network, Inc., 2011 WL 1303419 (N.D. Cal.)
The FTC brought an action for injunctive relief and other remedies based on defendants’ allegedly false advertising and deceptive practices in selling dietary supplements. The defendants’ WSN Diabetic Pack promised a “Completely Natural! Diabetes Breakthrough” that would “Lower your blood sugar, safely and effectively with absolutely NO SIDE EFFECTS!! GUARANTEED!!” There were a bunch of other extreme claims, including “easier weight loss” and “less dependency on medications,” and the product was allegedly backed by “over 60 independent American university studies.” There were also testimonials from individuals such as “My blood sugar went from 230 to 117 in just 21 days” and “Since I've been using the Diabetic Pack I have lost 9 pounds, I have all kinds of energy and my sugar is down in the low 100s. Also I don't take insulin any more!” The WSN Insulin Resistance Pack made similar claims, starting with “Reverse Insulin Resistance, safely and effectively with absolutely NO SIDE EFFECTS!! GUARANTEED!!” The same weight loss and scientific study claims were made, along with a claim to prevent diabetes and the claim that the Pack “was validated by the 1999 Nobel Prize for physiology.” The FTC alleged that these claims of effectiveness and clinical proof were false or unsubstantiated.
Defendants first argued that the FTC failed to meet Rule 9(b)’s heightened pleading requirements for failing to explain, among other things, how the FTC thinks ads should be substantiated. Just in case, they argued that the complaint also failed under Iqbal and Twombly. The FTC disagreed that it was required to set forth facts showing why the statements were false or how they should have been substantiated, under either standard.
With respect to the individual defendants, the FTC argued that its allegations were sufficient to satisfy Rule 9(b). To hold an individual liable for injunctive relief, the FTC is only required to demonstrate that an individual defendant directly participated in or had the authority to control the deceptive acts of the corporate defendants. For monetary damages, it must show actual knowledge of material misrepresentations, reckless indifference to truth or falsiity, or awareness of a high probability of fraud along with an intentional avoidance of truth. The FTC argued that it satisfied either Rule 9(b) or Rule 8 by alleging that Robert and Robyn held “participated in” the deceptive conduct. It also alleged that defendant WSN is a closely held corporation, that Robert Held is its CEO, and that Robyn Held is an officer. Also, the statements identified in the complaint were purportedly made by "Bob Held," as the exhibits demonstrate. These allegations, the FTC contended, sufficed to give rise to a reasonable assumption of participation in and authority to control the corporate defendant.
The FTC also argued that Rule 9(b) doesn’t apply to FTCA claims because such claims don’t sound in fraud. Knowledge of falsity, intent to deceive, and justifiable reliance aren’t part of a FTCA claim.
Rule 9(b) applies when (1) a complaint specifically alleges fraud as an essential element of a claim, (2) when the claim “sounds in fraud” by alleging that the defendant engaged in fraudulent conduct, and (3) to any allegations of fraudulent conduct, even when none of the claims in the complaint “sound in fraud.” Courts in other circuits have declined to apply Rule 9(b) to FTCA claims because such claims don’t require proof of scienter, reliance, or injury and are not fraud claims. Some California courts, however, have held the contrary because the claims “sound in fraud” by alleging that defendants knew or should have known that their conduct was unfair or deceptive, even if the FTC doesn’t need to allege or prove all elements of common-law fraud.
The court quoted the DC Circuit’s reasoning that, “[a]s Rule 9(b) particularity is not focused on intent, it would be anomalous to suggest that a section 5 claim is free from Rule 9(b)'s heightened pleading requirement because the FTC need not prove scienter here.” But, though the court found this reasoning persuasive, it didn’t decide the issue, because the allegations agains the corporation and Robert Held were sufficient under either standard, while those against Robyn Held were insufficient even under Rule 8.
The FTC identified the allegedly deceptive statements in detail, stated the nature of the misrepresentations alleged (false claims of efficacy and substantiation), and alleged that they were false or unsubstantiated. This was sufficient under Rule 9(b). The FTC was not required to include allegations identifying the level of substantiation that would have been required or the standard for determining whether the statements were true or false.
As to Robert Held, the allegations were also sufficient. While the factual allegations were “somewhat thin,” the FTC alleged that the corporation was closely held and that Robert Held owned it. In addition, defendants’ own website attributes the allegedly deceptive statements to him. This supports a plausible inference that he participated in and had knowledge of the misrepresentations.
However, the allegations against Robyn Held were too conclusory to support a plausible inference that she participated directly in the alleged deceptive acts, controlled or had authority to control them or had knowledge of them. “Indeed, the only factual allegation (aside from the boilerplate allegations that simply restate the legal standard) about Robyn Held is that she was an officer of WSN.” That wasn’t enough under Twombly, so the claims against her were dismissed with leave to amend.
The FTC brought an action for injunctive relief and other remedies based on defendants’ allegedly false advertising and deceptive practices in selling dietary supplements. The defendants’ WSN Diabetic Pack promised a “Completely Natural! Diabetes Breakthrough” that would “Lower your blood sugar, safely and effectively with absolutely NO SIDE EFFECTS!! GUARANTEED!!” There were a bunch of other extreme claims, including “easier weight loss” and “less dependency on medications,” and the product was allegedly backed by “over 60 independent American university studies.” There were also testimonials from individuals such as “My blood sugar went from 230 to 117 in just 21 days” and “Since I've been using the Diabetic Pack I have lost 9 pounds, I have all kinds of energy and my sugar is down in the low 100s. Also I don't take insulin any more!” The WSN Insulin Resistance Pack made similar claims, starting with “Reverse Insulin Resistance, safely and effectively with absolutely NO SIDE EFFECTS!! GUARANTEED!!” The same weight loss and scientific study claims were made, along with a claim to prevent diabetes and the claim that the Pack “was validated by the 1999 Nobel Prize for physiology.” The FTC alleged that these claims of effectiveness and clinical proof were false or unsubstantiated.
Defendants first argued that the FTC failed to meet Rule 9(b)’s heightened pleading requirements for failing to explain, among other things, how the FTC thinks ads should be substantiated. Just in case, they argued that the complaint also failed under Iqbal and Twombly. The FTC disagreed that it was required to set forth facts showing why the statements were false or how they should have been substantiated, under either standard.
With respect to the individual defendants, the FTC argued that its allegations were sufficient to satisfy Rule 9(b). To hold an individual liable for injunctive relief, the FTC is only required to demonstrate that an individual defendant directly participated in or had the authority to control the deceptive acts of the corporate defendants. For monetary damages, it must show actual knowledge of material misrepresentations, reckless indifference to truth or falsiity, or awareness of a high probability of fraud along with an intentional avoidance of truth. The FTC argued that it satisfied either Rule 9(b) or Rule 8 by alleging that Robert and Robyn held “participated in” the deceptive conduct. It also alleged that defendant WSN is a closely held corporation, that Robert Held is its CEO, and that Robyn Held is an officer. Also, the statements identified in the complaint were purportedly made by "Bob Held," as the exhibits demonstrate. These allegations, the FTC contended, sufficed to give rise to a reasonable assumption of participation in and authority to control the corporate defendant.
The FTC also argued that Rule 9(b) doesn’t apply to FTCA claims because such claims don’t sound in fraud. Knowledge of falsity, intent to deceive, and justifiable reliance aren’t part of a FTCA claim.
Rule 9(b) applies when (1) a complaint specifically alleges fraud as an essential element of a claim, (2) when the claim “sounds in fraud” by alleging that the defendant engaged in fraudulent conduct, and (3) to any allegations of fraudulent conduct, even when none of the claims in the complaint “sound in fraud.” Courts in other circuits have declined to apply Rule 9(b) to FTCA claims because such claims don’t require proof of scienter, reliance, or injury and are not fraud claims. Some California courts, however, have held the contrary because the claims “sound in fraud” by alleging that defendants knew or should have known that their conduct was unfair or deceptive, even if the FTC doesn’t need to allege or prove all elements of common-law fraud.
The court quoted the DC Circuit’s reasoning that, “[a]s Rule 9(b) particularity is not focused on intent, it would be anomalous to suggest that a section 5 claim is free from Rule 9(b)'s heightened pleading requirement because the FTC need not prove scienter here.” But, though the court found this reasoning persuasive, it didn’t decide the issue, because the allegations agains the corporation and Robert Held were sufficient under either standard, while those against Robyn Held were insufficient even under Rule 8.
The FTC identified the allegedly deceptive statements in detail, stated the nature of the misrepresentations alleged (false claims of efficacy and substantiation), and alleged that they were false or unsubstantiated. This was sufficient under Rule 9(b). The FTC was not required to include allegations identifying the level of substantiation that would have been required or the standard for determining whether the statements were true or false.
As to Robert Held, the allegations were also sufficient. While the factual allegations were “somewhat thin,” the FTC alleged that the corporation was closely held and that Robert Held owned it. In addition, defendants’ own website attributes the allegedly deceptive statements to him. This supports a plausible inference that he participated in and had knowledge of the misrepresentations.
However, the allegations against Robyn Held were too conclusory to support a plausible inference that she participated directly in the alleged deceptive acts, controlled or had authority to control them or had knowledge of them. “Indeed, the only factual allegation (aside from the boilerplate allegations that simply restate the legal standard) about Robyn Held is that she was an officer of WSN.” That wasn’t enough under Twombly, so the claims against her were dismissed with leave to amend.
Governing the Magic Circle panel 3
Eric Goldman - Capricious Account Terminations and 47 U.S.C. Section 230(c)(2)
Under §230(c)(1), websites generally aren’t liable for third-party content. But §230(c)(2) also has import. It says no provider shall be held liable on account of any action voluntarily taken in good faith to restrict access to or availability of material that the provider or user considers to be obscene, lewd, lascivious, filthy, excessively violent, harassing, or otherwise objectionable. Doesn’t apply to federal criminal prosecutions (of potential relevance if the provider restricts access to info used by gov’t). Doesn’t apply to IP claims or ECPA/state law antiwiretapping equivalents. Seeing people blocked as spammers complaining; people threaten to sue for “listening in” to the spam, but chances are this exception is irrelevant.
People allege that ISPs violate constitutional rights, but that runs aground on state action. State/federal claims are all that’s left, but §230(c)(2) takes that out.
One complaint people have: virtual world providers terminate their accounts.
Any workarounds? Hard to allege IP violations based on terminating user account, but has been litigated by CafePress—plaintiff alleged that kicking him off violated his TM rights, but court disagreed.
Good faith: possible workaround if antitrust/anticompetitive motivations are at issue. One case said maybe failing to explain to the user why she was kicked off is lack of good faith. Are some kinds of moral condemnation bad faith? It should be a subjective test: did they think they were acting for the right reason?
“Otherwise objectionable”: do we treat this as ejusdem generis (evaluating the words by the company they keep) or as a general catchall? Caselaw is murky but tends toward the latter.
False advertising/breach of contract/promissory estoppel. Some false advertising cases suggest §230(c)(2) might trump the words the ISP used. Heightened pleading requirements might apply. Contract claims: termination for convenience clauses and other disclaimers may protect the ISP. Some plaintiffs have claimed to be third-party beneficiary of someone else’s contract; this almost invariably fails. Promissory estoppel: Barnes v. Yahoo! leaves promissory estoppel as a possibility for working around the statute—therefore providers stop making promises that might be relied upon (if they’re represented by counsel).
Gives the ISP the ability to manage community without fear of legal regulation. We don’t want providers standing on the sidelines, encouraging anarchy. Users often want provider protection from other users. Market forces constrain capricious exercise of this power. Existing users can reduce activity or leave.
Farnaz Alemi (with James Chang) - Gaming the System: Whether Minors Should be Able to Disaffirm Online Contracts
Minors are important consumers in virtual worlds: feemium grames are a growing part of ecommerce; 64% of mobile gamers are minors. April 2010: 12 year old spent £900 on Farmville/Facebook, £288 from own account and the rest from his mother’s credit card. Bought virtual coins to make purchases in Farmville, and both Farmville and Facebook were unwilling to credit the account unless she turned him in to the police as a thief. Motive: he wanted the good stuff—knew he was making purchases.
A 6-year-old played Tap Zoo on her iPod Touch, trying to build a bigger zoo, purchased sea turtles, crocodiles and tigers for $100s. Parents logged into iTunes to sign up for the game, which stayed valid and automatically logged out only after 15 minutes. Controversy did lead to a refund. TapZoo: one consumer says it’s a scam—supposed to be a free app but charged $1000s.
Smurfberries: a 4-year-old bought $66.88 in Capcom’s Smurfberries on an iPad, bought tokens that speed up gameplay. Mother had no idea son could use real world money inside the game. Game says on the bottom: buying Smurfberries will charge your iTunes account.
11 year old spent about $1600 on Xbox live, when mother turned off parental controls by mistake. “It was just me wanting to get all this stuff which other people have which I don’t have and I was getting jealous.”
8 year old bought $1400 of Smurfberries. Free to download, but billed for in-app purchases. Capcom is rumored to make $4 million/month from Smurfberries. Apple receives 30%. Mother said this preyed on children—game is for kids 4+. Apple refunded the money after the Washington Post reported on the story and a Rep. from Mass. wrote to the FTC—unfair trade practices. Public interest view: $99 for a wagon or $19 for a bucket of snowflakes doesn’t have any business in a children’s game.
Who should be responsible? Parents, game providers, credit card companies, children?
Parents are giving the children the resources—as with violent games, arguably they should be proactive. Review games in advance, time the 15 minute password, educate kids, use discretion regarding forms of payment (use gift card), learn to say no (she says: probably what they are doing right now anyway).
Game providers: Apple updated its software to require a password every time a purchase is made while using an application. Microsoft: Play Smart, Play Safe—online resource for families (RT: yeah, that will work).
Credit card companies: if reported as fraud or theft—but will parents do that?
Children: the law is that minors may disaffirm contracts if they’re under 18, on grounds they don’t understand the transaction. Many businesses therefore refuse to contract with minors for fear of later disaffirmance—may be happening in online games.
Exceptions to disaffirmance: necessities of life (food, lodging, medical services); disaffirmance can’t be used as a sword, only a shield—AV v. iParadigms where disaffirmance was being used to avoid a clickwrap contract and assert a copyright infringement claim—can’t void obligations while retaining the benefits of the contract. Arts and sports—some states don’t allow disaffirmance by child actors etc. without going to court; California doesn’t allow disaffirmance of contract to create copyrightable work without going to court.
Should minors be able to disaffirm? Do kids understand what they’re doing? They have cellphones and iPads. Children understand games better than their own parents! They’re engaged in complex transactions: they know how to level up, manage a farm, purchase tokens, manage their money/property in the game. (RT: Understanding how to play a game and understanding its implications are very different things. This argument requires equivocation with respect to those two things.)
12-year-old boy knew he was making purchases in Farmville. 11-year-old with Xbox knew he was making purchases. If minors know how to operate intricate games, then shouldn’t we place the responsibility on the player regardless of age? (This strikes me as defining deviancy down, on the part of the game providers. I heard similar perspectives at the ANA about how teens are “almost” old enough to vote and drink and therefore what’s the problem in marketing to them? That the law must draw bright lines where there are often gradations is only an argument against legal lines when the benefits of doing so don’t outweigh the admitted costs for the folks near the line. And, starting from the premise that kids aren’t generally cognitively or emotionally able to make the same kinds of considerations as adults generally are, I’m not convinced.)
Currently, the game providers are shouldering the PR backlash, but Smurfberries has an explicit disclosure on the bottom—what more can they do? They give the purchaser an option to back away. Should the FTC determine they’re engaged in unfair trade practices? (Um, that’s why we ban both deceptive and unfair trade practices. I know plenty of advertisers don’t like it, but (or maybe that’s why) it’s in the statute. Here’s the current FTC standard: “To justify a finding of unfairness the injury must satisfy three tests. It must be substantial; it must not be outweighed by any countervailing benefits to consumers or competition that the practice produces; and it must be an injury that consumers themselves could not reasonably have avoided.” I understand Alemi to be saying that parents are already saying “no,” but they can’t figure out how to make the tech adhere to their decisions. I think that’s well within the “can’t reasonably be avoided” boundary.)
If game companies are blunted with more regulations, they’ll continue to limit their age pools, even if these are popular with youth. This could lead minors to create fake accounts.
The standard of voidable contract should no longer be the standard—instead there should be a rebuttable presumption that you knew what you were doing. Could rebut that by showing the child didn’t understand the transaction—say, when there was a 15-minute buffer. But if it’s 6 months of transactions, no dice. (I don’t understand why the exception for receiving the benefit doesn’t already apply to that. I don’t see any instance of a successful lawsuit in her parade of not-so-horribles. Conversely, I also don’t see how changing the law, so that it’s presumptively ok as a legal matter to take hundreds of dollars from 4-year-olds, changes the PR problem. It’s still a jerk move.)
Young Ming Kow and Bonnie Nardi - Mediating Contradictions of Digital Media
Contradictions aren’t necessarily bad—they occur at the edges, and help systems grow and develop. WoW community: examines modders. Modding is the practice of end user alteration of commercial hardware or software. WoW mods are scripted programming files that specify user interface elements, mostly distributed for free. Modders sometimes solicit donations in one of the mod’s windows. Blizzard supported modding—we can’t make hundreds of options, but you can.
Field observations in California and BlizzCon, forums, and chatrooms. Face to face interviews as well as chatroom interviews. A tradition within US community of ownership: WoW modders fought over two mod policies: (1) add-ons must be free of charge, with no premium versions, charge for downloads, charge for services related to the add-on, or otherwise require compensation. (2) modders may not solicit donations in the game/mod. Requests should be limited to the add-on website or distribution site and should not appear in the game. This substantially limits the number of donations—many gamers never visit the distribution site (and certainly not once they’ve used the mod for a while and decided how valuable the mod is).
Blizzard said it wanted to maintain the quality of its product. Modders wanted the freedom to determine distribution. Modders called for a strike. Some pulled their mods. Others stopped maintaining them. Blizzard warned users who complained but gave a 60-day grace period. Some were practically affected—donation links on a homepage made $20/week; donation links in the game allowed him to “count on [donations] to put food on my table.” He can’t mod fulltime. But fulltime modding is not just about making a living—fulltime modding leads to excellent mods, such as QuestHelper, 23 million downloads.
Contradiction arises because mods have different values to users and corporate overlords. Curse.com, a commercial company targeting gamers, sells premium versions of its mod downloading tool—suggested a relative solution to reward modders based on download counts, allowing them to share 20% of revenue from premium versions, divided by popularity, and to redeem reward points for Amazon gift cards. Other micropayment systems exist online. Mediating link allows resolution of contradictions, possibly.
Questions:
I offered some of my questions about minors. Chang was responding: the problem hasn’t yet materialized; we envision contracts to become more important as minors’ presence online increases. Credit card companies will be less likely to refund the money in the future. In terms of whether minors could disaffirm contracts where they actually got the benefit of the Smurfberries, the argument is equitable—but the equitable concern is inconsistently applied across jurisdictions. I.V. Paradigms, the court said they got the benefit of the Turnitin system, but that was odd since they were required to use the system to get credit.
Q: perplexed about examples with children. We have lots of games with paper tokens that are treated like money—Monopoly involves things that sound a lot like bona fide financial transactions. One might even say the child learns some things about how economies work. But to confuse those games with contracts would be odd. If a person plays that game, then goes online and plays something with a similar set of transactions that cost money, why does that become a contract just because there’s a corporate developer who’d like to collect money from the transaction and says something at the bottom of the screen that says “this is a contract”? It’s not the mechanics of the transaction that the child misapprehends but the consequences of the property system applied.
Chang: The rebuttable presumption would take a number of factors into account. Beyond virtual worlds—if you contract with Gmail and agree to ToS, same considerations. The fact that you’re playing a game could be taken into account.
Q: Apple says: I entered into a contract with mom and dad saying they’re responsible for charges on their account. Is the concept here that minors can disaffirm a purchase even if they’re using mom and dad’s account?
Chang: there are many different ways that minors disaffirming take place. Minors logged into parents’ account; or when a minor signs up for an account, which is allowed for 13-year-olds for Apple as long as a parent provides a credit card. We’re interested in the case where the account belongs to the minor; the parent hasn’t expressly agreed to the contract. (RT: Do any of the actual examples cover this?) You don’t know what the parent was thinking when the kid got the credit card. We looked at agency principles, which are very complex, but ended up limiting analysis to the case where kids are actually agreeing. (Lemley pointed out that his experience was that Apple requires him to agree to a new contract every time he signs on!)
Q: Modding—isn’t the question whether Blizzard can claim ownership of the mods? Blizzard’s real objection seems to be about some hierarchical desire for amateur status for modders. (Nice way to put it! I suppose we could also talk about free riding, even though there doesn’t seem to be free riding—Blizzard thinks that money on the table is by definition its money.) Is that as easily moderated by a third way?
Kow: modding community believes that they can use ownership to control distribution/seek donations. But Blizzard doesn’t agree—thinks they’re derivative works. Modders are small group—maybe 5%. Blizzard thinks it makes sense to protect its business interests over the other 95%. Some mods are accused of including invasive content interfering with the user experience. Only a few, but that led to a decision to ban all mods from asking for donations within the mod.
Nardi: there is a “good game experience” from Blizzard’s point of view, and asking for money in the mod harms that experience.
Heymann for Goldman: what about pretexts—the user is taking up too much bandwidth—should there be some connection to objectionable content?
Goldman: When a service provider kicks a user off its system, it blocks their ability to do anything, including uploading objectionable content. Could kick a user off, as WoW threatened, for going around saying mean things elsewhere—that stretches the concept. In the anti-spam cases, we’re seeing the same thing, though. You are not only responding to past spam but cutting off future communications (presumptively spam). Courts seem to think that’s ok. Thus, if you can terminate an account for past spamming, you can terminate an account for any other similar reason—even if there was plenty of legit content the user can be kicked off, not just have the offending content surgically removed.
Q: the papers sound like big corporation wins v. little kids, big corporation wins v. modders, big corporation wins v. users—Goldman’s title was “capricious” terminations. Does he really mean that? Can ISPs breach their promises?
Goldman: hard to stretch the statute to support the truly capricious termination. But if the ISP can come up with a good pretext, it might still comply with the statute. He doesn’t think the ISP needs to list reasons in the ToS. The thing he thinks is troublesome from a contractual perspective is promising not to terminate and then doing so. Don’t think ISP needs to be able to use the statute to unwind its contractual promises, but he thinks that’s a colorable argument. As a practical matter, ISP will promise that it can act capriciously to the full extent of the law; 230(c)(2) just reinforces that.
Power imbalances: company can act as game god; market forces offer a pushback. Doesn’t strike him that one clearly trumps the other.
Q: but no one ever talks about accountability in decisions made by big corporations. Of course communities need to be managed, but when the corporation is making money off of social interactions, the free market does not of its own accord apply a social justice obligation. In exchange for the money, why not require companies to treat those social ties with respect?
Goldman: descriptively, Congress may have said that there’s no accountability. Normatively, his view is that accountability means many different things. Every ISP thinks their industry is not the right solution for any problem at hand—the lawyers should solve it; the lawyers think the engineers should solve it; Goldman thinks that the law is the wrong solution.
Lemley: seems significant that virtually no business catering to older groups allows kids under 13, and that nonetheless a bunch of kids end up on the games. They ban kids because of COPPA. Should the test use evidence of age misrepresentation as evidence that the kid knew what she was doing?
Chang: What COPPA has done is ban minors from the internet unless they’re willing to misrepresent who they are. Many companies don’t want to take the time to obtain verifiable parental consent. No gmail, other basics. (RT: But on the other hand: Club Penguin!) Part of the reason to advance the presumption is to give increased confidence to retailers. We don’t want retailers to be constantly questioning the risk of minor disaffirmance. This will remove a lot of value of microtransactions. (Okay, this is part of my skepticism: retailers are stuck with the costs of fraud a lot. Convince me that this marginal uncertainty over and above real fraud is depressing retail activity, or that this is the intervention retailers need rather than other measures to combat identity theft—James Grimmelmann has a short recent piece making the point about how much fraud retailers tolerate because they can’t be bothered to check things like spelling, age, birthdate, etc.)
Chang thinks that age misrepresentation should be evidence that the kid knew what she was doing. If the kid understands she can’t enter into the transaction unless she’s 13 and changes her birthdate, that’s awareness of the rules.
Under §230(c)(1), websites generally aren’t liable for third-party content. But §230(c)(2) also has import. It says no provider shall be held liable on account of any action voluntarily taken in good faith to restrict access to or availability of material that the provider or user considers to be obscene, lewd, lascivious, filthy, excessively violent, harassing, or otherwise objectionable. Doesn’t apply to federal criminal prosecutions (of potential relevance if the provider restricts access to info used by gov’t). Doesn’t apply to IP claims or ECPA/state law antiwiretapping equivalents. Seeing people blocked as spammers complaining; people threaten to sue for “listening in” to the spam, but chances are this exception is irrelevant.
People allege that ISPs violate constitutional rights, but that runs aground on state action. State/federal claims are all that’s left, but §230(c)(2) takes that out.
One complaint people have: virtual world providers terminate their accounts.
Any workarounds? Hard to allege IP violations based on terminating user account, but has been litigated by CafePress—plaintiff alleged that kicking him off violated his TM rights, but court disagreed.
Good faith: possible workaround if antitrust/anticompetitive motivations are at issue. One case said maybe failing to explain to the user why she was kicked off is lack of good faith. Are some kinds of moral condemnation bad faith? It should be a subjective test: did they think they were acting for the right reason?
“Otherwise objectionable”: do we treat this as ejusdem generis (evaluating the words by the company they keep) or as a general catchall? Caselaw is murky but tends toward the latter.
False advertising/breach of contract/promissory estoppel. Some false advertising cases suggest §230(c)(2) might trump the words the ISP used. Heightened pleading requirements might apply. Contract claims: termination for convenience clauses and other disclaimers may protect the ISP. Some plaintiffs have claimed to be third-party beneficiary of someone else’s contract; this almost invariably fails. Promissory estoppel: Barnes v. Yahoo! leaves promissory estoppel as a possibility for working around the statute—therefore providers stop making promises that might be relied upon (if they’re represented by counsel).
Gives the ISP the ability to manage community without fear of legal regulation. We don’t want providers standing on the sidelines, encouraging anarchy. Users often want provider protection from other users. Market forces constrain capricious exercise of this power. Existing users can reduce activity or leave.
Farnaz Alemi (with James Chang) - Gaming the System: Whether Minors Should be Able to Disaffirm Online Contracts
Minors are important consumers in virtual worlds: feemium grames are a growing part of ecommerce; 64% of mobile gamers are minors. April 2010: 12 year old spent £900 on Farmville/Facebook, £288 from own account and the rest from his mother’s credit card. Bought virtual coins to make purchases in Farmville, and both Farmville and Facebook were unwilling to credit the account unless she turned him in to the police as a thief. Motive: he wanted the good stuff—knew he was making purchases.
A 6-year-old played Tap Zoo on her iPod Touch, trying to build a bigger zoo, purchased sea turtles, crocodiles and tigers for $100s. Parents logged into iTunes to sign up for the game, which stayed valid and automatically logged out only after 15 minutes. Controversy did lead to a refund. TapZoo: one consumer says it’s a scam—supposed to be a free app but charged $1000s.
Smurfberries: a 4-year-old bought $66.88 in Capcom’s Smurfberries on an iPad, bought tokens that speed up gameplay. Mother had no idea son could use real world money inside the game. Game says on the bottom: buying Smurfberries will charge your iTunes account.
11 year old spent about $1600 on Xbox live, when mother turned off parental controls by mistake. “It was just me wanting to get all this stuff which other people have which I don’t have and I was getting jealous.”
8 year old bought $1400 of Smurfberries. Free to download, but billed for in-app purchases. Capcom is rumored to make $4 million/month from Smurfberries. Apple receives 30%. Mother said this preyed on children—game is for kids 4+. Apple refunded the money after the Washington Post reported on the story and a Rep. from Mass. wrote to the FTC—unfair trade practices. Public interest view: $99 for a wagon or $19 for a bucket of snowflakes doesn’t have any business in a children’s game.
Who should be responsible? Parents, game providers, credit card companies, children?
Parents are giving the children the resources—as with violent games, arguably they should be proactive. Review games in advance, time the 15 minute password, educate kids, use discretion regarding forms of payment (use gift card), learn to say no (she says: probably what they are doing right now anyway).
Game providers: Apple updated its software to require a password every time a purchase is made while using an application. Microsoft: Play Smart, Play Safe—online resource for families (RT: yeah, that will work).
Credit card companies: if reported as fraud or theft—but will parents do that?
Children: the law is that minors may disaffirm contracts if they’re under 18, on grounds they don’t understand the transaction. Many businesses therefore refuse to contract with minors for fear of later disaffirmance—may be happening in online games.
Exceptions to disaffirmance: necessities of life (food, lodging, medical services); disaffirmance can’t be used as a sword, only a shield—AV v. iParadigms where disaffirmance was being used to avoid a clickwrap contract and assert a copyright infringement claim—can’t void obligations while retaining the benefits of the contract. Arts and sports—some states don’t allow disaffirmance by child actors etc. without going to court; California doesn’t allow disaffirmance of contract to create copyrightable work without going to court.
Should minors be able to disaffirm? Do kids understand what they’re doing? They have cellphones and iPads. Children understand games better than their own parents! They’re engaged in complex transactions: they know how to level up, manage a farm, purchase tokens, manage their money/property in the game. (RT: Understanding how to play a game and understanding its implications are very different things. This argument requires equivocation with respect to those two things.)
12-year-old boy knew he was making purchases in Farmville. 11-year-old with Xbox knew he was making purchases. If minors know how to operate intricate games, then shouldn’t we place the responsibility on the player regardless of age? (This strikes me as defining deviancy down, on the part of the game providers. I heard similar perspectives at the ANA about how teens are “almost” old enough to vote and drink and therefore what’s the problem in marketing to them? That the law must draw bright lines where there are often gradations is only an argument against legal lines when the benefits of doing so don’t outweigh the admitted costs for the folks near the line. And, starting from the premise that kids aren’t generally cognitively or emotionally able to make the same kinds of considerations as adults generally are, I’m not convinced.)
Currently, the game providers are shouldering the PR backlash, but Smurfberries has an explicit disclosure on the bottom—what more can they do? They give the purchaser an option to back away. Should the FTC determine they’re engaged in unfair trade practices? (Um, that’s why we ban both deceptive and unfair trade practices. I know plenty of advertisers don’t like it, but (or maybe that’s why) it’s in the statute. Here’s the current FTC standard: “To justify a finding of unfairness the injury must satisfy three tests. It must be substantial; it must not be outweighed by any countervailing benefits to consumers or competition that the practice produces; and it must be an injury that consumers themselves could not reasonably have avoided.” I understand Alemi to be saying that parents are already saying “no,” but they can’t figure out how to make the tech adhere to their decisions. I think that’s well within the “can’t reasonably be avoided” boundary.)
If game companies are blunted with more regulations, they’ll continue to limit their age pools, even if these are popular with youth. This could lead minors to create fake accounts.
The standard of voidable contract should no longer be the standard—instead there should be a rebuttable presumption that you knew what you were doing. Could rebut that by showing the child didn’t understand the transaction—say, when there was a 15-minute buffer. But if it’s 6 months of transactions, no dice. (I don’t understand why the exception for receiving the benefit doesn’t already apply to that. I don’t see any instance of a successful lawsuit in her parade of not-so-horribles. Conversely, I also don’t see how changing the law, so that it’s presumptively ok as a legal matter to take hundreds of dollars from 4-year-olds, changes the PR problem. It’s still a jerk move.)
Young Ming Kow and Bonnie Nardi - Mediating Contradictions of Digital Media
Contradictions aren’t necessarily bad—they occur at the edges, and help systems grow and develop. WoW community: examines modders. Modding is the practice of end user alteration of commercial hardware or software. WoW mods are scripted programming files that specify user interface elements, mostly distributed for free. Modders sometimes solicit donations in one of the mod’s windows. Blizzard supported modding—we can’t make hundreds of options, but you can.
Field observations in California and BlizzCon, forums, and chatrooms. Face to face interviews as well as chatroom interviews. A tradition within US community of ownership: WoW modders fought over two mod policies: (1) add-ons must be free of charge, with no premium versions, charge for downloads, charge for services related to the add-on, or otherwise require compensation. (2) modders may not solicit donations in the game/mod. Requests should be limited to the add-on website or distribution site and should not appear in the game. This substantially limits the number of donations—many gamers never visit the distribution site (and certainly not once they’ve used the mod for a while and decided how valuable the mod is).
Blizzard said it wanted to maintain the quality of its product. Modders wanted the freedom to determine distribution. Modders called for a strike. Some pulled their mods. Others stopped maintaining them. Blizzard warned users who complained but gave a 60-day grace period. Some were practically affected—donation links on a homepage made $20/week; donation links in the game allowed him to “count on [donations] to put food on my table.” He can’t mod fulltime. But fulltime modding is not just about making a living—fulltime modding leads to excellent mods, such as QuestHelper, 23 million downloads.
Contradiction arises because mods have different values to users and corporate overlords. Curse.com, a commercial company targeting gamers, sells premium versions of its mod downloading tool—suggested a relative solution to reward modders based on download counts, allowing them to share 20% of revenue from premium versions, divided by popularity, and to redeem reward points for Amazon gift cards. Other micropayment systems exist online. Mediating link allows resolution of contradictions, possibly.
Questions:
I offered some of my questions about minors. Chang was responding: the problem hasn’t yet materialized; we envision contracts to become more important as minors’ presence online increases. Credit card companies will be less likely to refund the money in the future. In terms of whether minors could disaffirm contracts where they actually got the benefit of the Smurfberries, the argument is equitable—but the equitable concern is inconsistently applied across jurisdictions. I.V. Paradigms, the court said they got the benefit of the Turnitin system, but that was odd since they were required to use the system to get credit.
Q: perplexed about examples with children. We have lots of games with paper tokens that are treated like money—Monopoly involves things that sound a lot like bona fide financial transactions. One might even say the child learns some things about how economies work. But to confuse those games with contracts would be odd. If a person plays that game, then goes online and plays something with a similar set of transactions that cost money, why does that become a contract just because there’s a corporate developer who’d like to collect money from the transaction and says something at the bottom of the screen that says “this is a contract”? It’s not the mechanics of the transaction that the child misapprehends but the consequences of the property system applied.
Chang: The rebuttable presumption would take a number of factors into account. Beyond virtual worlds—if you contract with Gmail and agree to ToS, same considerations. The fact that you’re playing a game could be taken into account.
Q: Apple says: I entered into a contract with mom and dad saying they’re responsible for charges on their account. Is the concept here that minors can disaffirm a purchase even if they’re using mom and dad’s account?
Chang: there are many different ways that minors disaffirming take place. Minors logged into parents’ account; or when a minor signs up for an account, which is allowed for 13-year-olds for Apple as long as a parent provides a credit card. We’re interested in the case where the account belongs to the minor; the parent hasn’t expressly agreed to the contract. (RT: Do any of the actual examples cover this?) You don’t know what the parent was thinking when the kid got the credit card. We looked at agency principles, which are very complex, but ended up limiting analysis to the case where kids are actually agreeing. (Lemley pointed out that his experience was that Apple requires him to agree to a new contract every time he signs on!)
Q: Modding—isn’t the question whether Blizzard can claim ownership of the mods? Blizzard’s real objection seems to be about some hierarchical desire for amateur status for modders. (Nice way to put it! I suppose we could also talk about free riding, even though there doesn’t seem to be free riding—Blizzard thinks that money on the table is by definition its money.) Is that as easily moderated by a third way?
Kow: modding community believes that they can use ownership to control distribution/seek donations. But Blizzard doesn’t agree—thinks they’re derivative works. Modders are small group—maybe 5%. Blizzard thinks it makes sense to protect its business interests over the other 95%. Some mods are accused of including invasive content interfering with the user experience. Only a few, but that led to a decision to ban all mods from asking for donations within the mod.
Nardi: there is a “good game experience” from Blizzard’s point of view, and asking for money in the mod harms that experience.
Heymann for Goldman: what about pretexts—the user is taking up too much bandwidth—should there be some connection to objectionable content?
Goldman: When a service provider kicks a user off its system, it blocks their ability to do anything, including uploading objectionable content. Could kick a user off, as WoW threatened, for going around saying mean things elsewhere—that stretches the concept. In the anti-spam cases, we’re seeing the same thing, though. You are not only responding to past spam but cutting off future communications (presumptively spam). Courts seem to think that’s ok. Thus, if you can terminate an account for past spamming, you can terminate an account for any other similar reason—even if there was plenty of legit content the user can be kicked off, not just have the offending content surgically removed.
Q: the papers sound like big corporation wins v. little kids, big corporation wins v. modders, big corporation wins v. users—Goldman’s title was “capricious” terminations. Does he really mean that? Can ISPs breach their promises?
Goldman: hard to stretch the statute to support the truly capricious termination. But if the ISP can come up with a good pretext, it might still comply with the statute. He doesn’t think the ISP needs to list reasons in the ToS. The thing he thinks is troublesome from a contractual perspective is promising not to terminate and then doing so. Don’t think ISP needs to be able to use the statute to unwind its contractual promises, but he thinks that’s a colorable argument. As a practical matter, ISP will promise that it can act capriciously to the full extent of the law; 230(c)(2) just reinforces that.
Power imbalances: company can act as game god; market forces offer a pushback. Doesn’t strike him that one clearly trumps the other.
Q: but no one ever talks about accountability in decisions made by big corporations. Of course communities need to be managed, but when the corporation is making money off of social interactions, the free market does not of its own accord apply a social justice obligation. In exchange for the money, why not require companies to treat those social ties with respect?
Goldman: descriptively, Congress may have said that there’s no accountability. Normatively, his view is that accountability means many different things. Every ISP thinks their industry is not the right solution for any problem at hand—the lawyers should solve it; the lawyers think the engineers should solve it; Goldman thinks that the law is the wrong solution.
Lemley: seems significant that virtually no business catering to older groups allows kids under 13, and that nonetheless a bunch of kids end up on the games. They ban kids because of COPPA. Should the test use evidence of age misrepresentation as evidence that the kid knew what she was doing?
Chang: What COPPA has done is ban minors from the internet unless they’re willing to misrepresent who they are. Many companies don’t want to take the time to obtain verifiable parental consent. No gmail, other basics. (RT: But on the other hand: Club Penguin!) Part of the reason to advance the presumption is to give increased confidence to retailers. We don’t want retailers to be constantly questioning the risk of minor disaffirmance. This will remove a lot of value of microtransactions. (Okay, this is part of my skepticism: retailers are stuck with the costs of fraud a lot. Convince me that this marginal uncertainty over and above real fraud is depressing retail activity, or that this is the intervention retailers need rather than other measures to combat identity theft—James Grimmelmann has a short recent piece making the point about how much fraud retailers tolerate because they can’t be bothered to check things like spelling, age, birthdate, etc.)
Chang thinks that age misrepresentation should be evidence that the kid knew what she was doing. If the kid understands she can’t enter into the transaction unless she’s 13 and changes her birthdate, that’s awareness of the rules.
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