First Amendment symposium

From the articles editor of the Washington Law Review:  The University of Washington and the Washington Law Review are hosting a First Amendment symposium in Seattle next month. The event, entitled "The First Amendment in the Modern Age", will feature Dean Robert Post of Yale Law School, Professor Stephen Vladeck of American University, Bruce Johnson of Davis Wright Tremaine, and Professor Clark Lombardi of the University of Washington.


January 12, 2012 at 4:00 p.m.
William H. Gates Hall, Room 138
Reception to immediately follow.    
RSVP.

False marking repled as consumer protection claim

Sukumar v. Nautilus, Inc., --- F.Supp.2d ----, 2011 WL 6325854 (W.D. Va.)

False marking is the gift that keeps on giving!  The America Invents Act eliminated the patent false marking qui tam provisions and added a competitive injury requirement.  The plaintiffs, who’d sued before the AIA was passed, amended their complaint to allege bad faith and also that they’d suffered a competitive injury as a result of Nautilus’s false marking.  They also added claims for violation of California’s FAL and UCL as well as Washington consumer protection law.  Nautilus moved to dismiss the state law claims on preemption grounds.

The court began by reviewing the elements of the state law causes of action and concluding that they were all very similar in character, and could be treated similarly for the limited purpose of assessing preemption.

There’s a general presumption against preemption.  Consumer protection laws in particular have historically been part of the states’ broad police powers and accorded special deference unless there’s a clear direction from Congress. 

The AIA contained no express preemption provision.  Nautilus argued that Congress’s pervasive regulation of patents created field preemption.  Courts have held that state RICO counterclaims are preempted when identical in scope with an inequitable conduct defense, and that an abuse of process claim based on proceedings before the PTO is also preempted as a collateral intrusion on PTO procedures.

While it’s true that granting patents is exclusively a matter of federal law, the Patent Act “has never been interpreted as wholly upending the ability of the states to regulate anything tangentially related to the issuance of a patent.”  The Federal Circuit has even recognized that a state unfair competition claim is not subject to field preemption.  However, Nautilus argued that the AIA changed things enough to occupy the field.  The court disagreed.  Though the AIA did change false marking law, that wasn’t the “major objective” of the law, which was focused on first-to-file.  The legislative history on false marking focused on eliminating the qui tam remedy.  There was no evidence that Congress “sought to use the law to impose upon the traditional authority of the states to regulate areas of consumer protection.”

The main question of patent law in the case at bar, for preemption purposes, was whether the patent numbers affixed to Nautilus products actually covered those products.  In light of the states’ historical role in consumer protection, the court couldn’t find a clear and manifest purpose to occupy the field of false marking law.

What about conflict preemption?  Nautilus’s direct conflict argument was that, because the state law claims have different elements and provide for different remedies than Section 292, as amended, they must be preempted.  “But this does not preemption make.”  Concurrent regulation is pretty normal, including in consumer protection.  The court analogized to fraud in connection with buying or selling commodities, which is also regulated by both the US and California, albeit with different elements and different remedies.  In other contexts, the Federal Circuit has identified different elements as a reason not to preempt state law, because the state law didn’t involve patent-like protection.

Nautilus argued that bringing forth state law unfair competition claims would serve as an obstacle to Congress's intent in passing the AIA, to wit “eliminat[ing] litigation brought by unrelated, private third parties.”  Congress aimed to address the recent surge in false marking litigation, and thus allowing state law claims would cut against that objective.  But Congress was concerned with the recent surge of qui tam cases brought on the basis of expired patents, which wasn’t the case here.  Moreover, plaintiffs couldn’t be deemed to be “unrelated, private third parties”: they allege that they compete with Nautilus and were deterred from designing certain rehabilitation equipment because of the false marking.  (The court commented that “[i]t may very well be that a suit by a private plaintiff who does not allege competitive injury does not survive the conflict preemption analysis.”)

Past precedent recognized two areas of preemption: (1) “federal patent law bars the imposition of liability for conduct before the PTO unless the plaintiff can show that the patentholder's conduct amounted to fraud or rendered the patent application process a sham,” and (2) “federal patent law bars the imposition of liability for publicizing a patent in the marketplace unless the plaintiff can show that the patentholder acted in bad faith” (quoting earlier decisions).  The second scenario was the most closely analogous to the case before the court.  The allegations were that Nautilus placed patent numbers on its products that didn’t cover those products.  “At its core, Plaintiffs' false marking claim is an attempt to hold Nautilus liable for ‘publicizing a patent in the marketplace.’ Thus, under controlling precedent, the claim is preempted unless Nautilus acted in bad faith.”  Though the state laws at issue didn’t have bad faith as an element, this was implied to escape preemption.  The complaint here adequately alleged bad faith.

Finally, the court found that allowing state law claims here wouldn’t interfere with the objectives of the patent laws (providing incentives to invent, promoting disclosure, and protecting the public domain against state laws propertizing it).

Separately, Nautilus argued that the Washington state law claim should be dismissed because plaintiffs failed to meet that law’s “public interest” requirement.  Under Washington law, an act or practice harms the public interest if it injured or had the capacity to injure other persons.  “It seems obvious that the practice of falsely marking products which are sold to the general public in the stream of commerce has the capacity to injure persons other than [plaintiffs].”  False marking may dissuade potential competitors from entering the market, or deter scientific research.  That satisfied the public interest element of the law. 

UMG v. Veoh

The Ninth Circuit just affirmed on Veoh's DMCA defense.  While there are many things to say about the DMCA analysis (primarily: good job!) I will point out one thing that the vast majority of courts have, in my opinion, gotten wrong: the role of Rule 68 offers in copyright (and similar) cases.  The Rule 68 offer of judgment allows a defendant to recover its post-offer "costs" if it makes an offer of judgment and the plaintiff refuses and subsequently recovers less than what was offered.  Do costs include fees, the major component of actual litigation costs?  The weight of authority in copyright cases is "no," but I think that has to be wrong.
Consider the inherent conflict in the two things the court of appeals says in this case:

(1) A defendant has to be a prevailing party to be entitled to fees as part of Rule 68 "costs" where the relevant statute awards attorneys' fees to be a prevailing party.  (slip op. at 46)
(2) A defendant can recover Rule 68 costs only if it is not a prevailing defendant; Rule 68 doesn't apply when the defendant obtains judgment in its favor.  (slip op. at 47-48)

See the problem? (Other precedent establishes that Rule 68 "costs" include fees only when the underlying statute defines costs to include fees, so there's no way out of this trap by looking for a statute that doesn't mention fees, especially since there is as far as I know no such thing as a statute that awards fees to the non-prevailing party, though I'd be happy to be educated to the contrary.)  It seems to me that the only coherent way to deal with the Supreme Court precedent is to say that one looks to the underlying statute to figure out whether fees are defined as part of costs, but not to figure out who gets them, since if you did that the theoretical availability of fees would be a logical impossibility--jam tomorrow, and jam yesterday, but never jam today.

What's particularly notable about this analysis is that it happens right after the court has interpreted the DMCA to avoid self-contradiction/nullifying its provisions, particularly by interpreting "right and ability to control" to mean something more than "ability to take down after notice."

So, I'm left wondering: what's up with Rule 68 jurisprudence?

The claim is dismissed but the insurance lingers

Southern Snow Manufacturing Co. v. Sno Wizard Holdings, Inc., 2011 WL 6296735 (E.D. La.)

This part of the dispute is SnoWizard’s fight with its insurer.  (I let a couple other rulings go by, though the court also excluded the testimony of plaintiffs’ damages expert for being unable to show a connection between the allegedly misleading use of “TM” by SnoWizard and harm suffered by SnoWizard’s competitors.)

Hanover’s policy covers “personal and [] advertising injury,” including “[o]ral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person's or organization's goods, products, or services.”  SnoWizard tendered defense of plaintiffs’ claims and Hanover denied any duty to defend or indemnify. The court initially ruled against Hanover, reasoning that “disparages” was broad enough to potentially cover a C&D containing an allegedly false accusation of trademark infringement.

Given subsequent procedural developments, the questions before the court were whether coverage existed under the policy, and whether Hanover's duty to defend terminated as a matter of law once it became clear that coverage was not a possibility. 

The policy covered slander, libel, and disparagement, but didn’t define them.  The court noted that general meaning of those terms is broader than that constituting a cause of action in tort, particularly with respect to “disparagement,” which isn’t an independent tort in Louisiana. 

However, it was now undisputed that Southern Snow couldn’t sustain any defamation tort claim.  Thus, the court agreed with Hanover that the policy didn’t cover Southern Snow’s claims.

Still, the court denied Hanover’s attempt to terminate its defense obligations.  The policy expressly stated the circumstances allowing termination, and none were applicable.  The duty to defend is broader than the duty to indemnify.  The court pointed out that “we will have no duty to defend the insured against any ‘suit’ seeking damages for ‘personal and advertising injury’ to which this insurance does not apply,” appears in non-Louisiana policies. “But the specific Louisiana insuring agreement endorsement included with this policy glaringly omits this phrase, likely in recognition of the broad and continuing duty to defend that is implicit in Louisiana law.”

Bankruptcy and going out of business sales

In re Crawford Furniture Mfg. Corp., --- B.R. ----, 2011 WL 6325859 (Bkrtcy.W.D.N.Y.) 

Bankruptcy is a rara avis around here, but this case highlighted its interaction with consumer protection law.  Debtors, two related furniture companies, sought authority to enter into an agreement to conduct a going out of business sale without complying with state law restrictions on such agreements.  Crawford proposed to retain Highfill, Inc., to assist with the liquidation process. Highfill would provide additional merchandise “to enhance the marketability of the inventory on hand or to replace damaged inventory.”  The parties “anticipated that the majority of sold merchandise would derive from consigned goods not owned by either of the debtors.”  The agreement also required Highfill to conduct “an aggressive advertising program.”  Crawford therefore sought an exemption from state and local laws and regulations that would otherwise apply to a liquidation sale, including regulations about advertising. 

NY’s AG and the US Trustee opposed the motion, noting that New York regulates going out of business sales in various ways.  “For example, General Business Law § 583(d)(12) prohibits generally the augmentation of pre-existing inventory, and General Business Law § 590(a) limits going-out-of business sales in New York to a maximum of sixty days.”  Crawford argued that it wasn’t seeking exemption from health or safety regulations, so it was no big deal. 

This opinion memorialized the court’s order approving a modified agreement.  A debtor in possession in Chapter 11 generally enjoys the rights and powers of a trustee and can operate the business in its ordinary course.  But a going out of business sale is not the ordinary course, so a hearing was required.  The Bankruptcy Code generally requires trustees (etc.) to manage property according to the requirements of valid state laws, thus making the initial motion inappropriate. 

Under NY law, a merchant must secure a license before starting a going out of business sale.  The application must contain a full inventory of the merchandise to be sold.  The merchant must also agree not to sell goods acquired on consignment and it may not augment inventory during the course of the sale.  Outside bankruptcy, therefore, the proposed agreement was banned.  However, the law also provides that it won’t apply to people acting pursuant to an order or process of a court of competent jurisdiction.  So, if the court grants them leave, debtors need not comply with the law’s precise requirements.  The question was whether such an exercise of discretion was appropriate. 

“If the going-out-of-business sale involved only a liquidation of property of the bankruptcy estate, then this court might have granted a broader license for strategies that aim to maximize a return for creditors. But when a debtor seeks to augment its inventory significantly with property that it does not acquire in the ordinary course, the arrangement threatens to become a ruse to avoid the restrictions of state law.”  With no defined limit to the allowable new inventory, Highfill could launder sales of non-debtor merchandise free of consumer protection law.  Though NY’s law might allow a judicial order to suspend its ordinary requirements, “we should not use that authority unless the sale serves primarily to liquidate assets of the bankruptcy estate.” 

Crawford thus negotiated a more restrictive arrangement, to which the NY AG and the US Trustee agreed.  The court approved it, because Crawford offered proof “that its existing mix of inventory was inadequate to maximize a return through liquidation.”  Because consumers often wanted to buy its furniture in combination with other items—a bed frame with a mattress, for example—Crawford needed to offer an attractive combination of merchandise.  Thus, the revised agreement allowed supplementing existing inventory with “upholstered and bedding inventory” having a retail value not greater than $3,000,000.  In addition, the agreement ensured marketing merchandise similar to that which Crawford sold prior to filing for bankruptcy: only merchandise that was domestically produced; no carpeting or wood veneer products, since it hadn’t sold them before. Highfill also promised to approach the debtor's current vendors first when placing orders for additional consigned inventory. 

This adequately balanced consumer protection with maximization of creditors’ recovery.  “When a debtor assumes a liquidating mode, the core bankruptcy objective is to maximize the recovery of value from estate assets. A debtor exceeds this objective when it adopts strategies that are primarily designed to liquidate other property under the guise of a bankruptcy sale.”  Even when fulfilling the legitimate goal of liquidating estate property, the court stated that a sale should never “violate the underlying intent of state law with regard to consumer protection.” 

Thus, the court would only approve a proposal “designed primarily to market estate property and not as a subterfuge to evade state laws regarding the sale of unrelated merchandise,” which meant limiting inventory from outside manufacturers “to complementary items of a quantity that is reasonably needed to facilitate the sale of estate assets.”  Though it would grant relief from some provisions of NY law, the gains to the creditors from this waiver had to outweigh any decreased protection to the consuming public.  For example, Crawford demonstrated that it would maximize recovery if it could extend the sale through the holiday season.  Given that it had agreed to a variety of disclosures and other procedures to protect the interests of prospective customers, the court found that customers would derive only minimal benefit from a strict limit on the length of the proposed sale.  

Otherwise, the debtors had to satisfy all other applicable state laws, including laws regulating deceptive practices and false advertising.  In particular, they needed “transparent procedures that are reasonably designed not to mislead purchasers, creditors and other interested parties.”  Thus, in promotion and advertising, “the debtors may not mislead potential customers into believing that they are necessarily purchasing the discounted assets of a bankruptcy estate.”  The parties agreed not to use “liquidation” or “bankruptcy” in any of their ads, and within stores Highfill would put different colors of tags on consigned inventory versus debtors’ inventory, and post signs disclosing the different sources. In addition, the parties agreed not to raise prices prior to the commencement of the sale.  The court found that these practices should minimize the risk of deceiving consumers.

News for storage jars, right of publicity edition

Warning for rank idiocy: "The real loss from the controversy surrounding Paterno comes not for Penn State but for the Paterno family and, eventually, his estate."  Yes, that's exactly where the real loss comes.

Storage jars reference.

Snowball's chance: TM claim as false advertising

Southern Snow Manufacturing Co. v. Sno Wizard Holdings, Inc., --- F. Supp. 2d ----, 2011 WL 6287955 (E.D. La.)

Mark McKenna should be interested in this one, which also features Stacey Dogan and Glynn Lunney.

The parties sell ice-shaving machines and flavoring concentrates to vendors. SnoWizard registered ORCHID CREAM VANILLA, then sent a C&D to Southern Snow.  Southern Snow filed suit claiming that SnoWizard had obtained the trademark under false pretenses and adding unfair competition claims for ORCHID CREAM VANILLA and WHITE CHOCOLATE & CHIPS.  SS also filed an administrative cancellation action at the USPTO, and the TTAB cancelled the registration on the ground that the term was merely descriptive.  The court then granted summary judgment to SS for the same reason.

Plaintiff Parasol Flavors, LLC also sued after receiving a C&D from SnoWizard about flavor names SNOSWEET®, HURRICANE, PRALINE, KING CAKE, BUTTERED POPCORN, MUDSLIDE, GEORGIA PEACH, DILL PICKLE, CAKE BATTER, and BUTTERCREAM. SnoWizard counterclaimed, and the original district judge dismissed everything but the SNOSWEET claims, finding all the other flavor names generic.

SS also sued SnoWizard for infringement of SOUTHERN SNOW® and FLAVOR SNOW® and challenging the validity of various SnoWizard trademarks: CAJUN RED HOT, CHAI LATTEA, COOKIE DOUGH, MOUNTAIN MAPLE®, SNOFREE®, SNOSOUR®, SNOBALLS (design), SWISS ALMOND COCO, TIRAMISU, and ZEPHYR. SnoWizard counterclaimed for cancellation of SOUTHERN SNOW® and FLAVOR SNOW® and for infringement of MOUNTAIN MAPLE®, CAJUN RED HOT, and GEORGIA PEACH (the last of which was kicked out on summary judgment).

The court commented that plaintiffs’ challenge to the validity of 22 of SnoWizard’s trademarks was only a first step in its false advertising/Louisiana state law unfair competition claims.  Those were based on the proposition that SnoWizard made false statements of fact in appending ® and TM to various flavors that were in fact generic.  Plaintiffs argued that these claims were literally false.  They contended that the parties’ customers (people who operate snowball machines) weren’t familiar with trademark law, and that their purchasing decisions were likely to be distorted by all those TM claims.  Customers who bought supposedly exclusive flavors from SnoWizard might well buy other flavors and supplies from it, to benefit from shipping discounts and for convenience.

The court was unimpressed by the argument that there was no express authority that false claims to trademark protection are actionable.  Neither state law nor the Lanham Act purports to “enumerate the universe of potential unfair trade practices that are actionable.”

However, the false advertising claims here weren’t just misleadingness claims; they were literal falsity claims.  The court wasn’t willing to go that far.

First, the court went into some trademark theory, which I think it got wrong (though there are ways to reach this result that make sense to me).  Plaintiffs’ literal falsity claim, it determined, depended on the marks at issue being generic rather than merely descriptive marks.  Merely descriptive marks can be protected with sufficient evidence of secondary meaning.  (At which point they aren’t merely descriptive; secondary meaning negates the “merely” part of that.)  Thus, descriptiveness isn’t inherently inconsistent with trademark protection; the proponent just has a more difficult road. 

As a result, even when the USPTO or a court finds that a party failed to establish secondary meaning, “it would not be fair to say that his assertion of the trademark via the TM was a literally false statement. The problem may be one simply of failed proof at the time that the claim is pressed. Therefore, if a trademark symbol is ever to constitute a literally false statement grounded solely on the classification to which the mark belongs, it could only arise with respect to generic marks.” 

Comment: This is what I think is weird.  Where a party invalidates a registration—as occurred with a number of the marks here—the court has misdescribed the burdens; the successful challenger has shown that the word at issue is not a mark.  Maybe in some other world, a world in which it has secondary meaning, it could be, but it’s not in this one.  We ask courts to evaluate the state of the world to judge falsity, not its potential states.  One could argue that we should “channel” various disputes into TM instead of false advertising, but I’m not sure why in this case, though an implicit theory requiring fault rather than error—not usually a requirement in false advertising cases, but implied in Lanham Act false advertising cases brought on the basis of false patent claims—might explain what the court does.  Perhaps the broader class of cases making it difficult to maintain false advertising claims against “false” statements about the law is more helpful: courts usually require intent in those cases because the law can be a tricky thing.

Anyway, the court then goes on to address generic terms: even though they’re never marks, “it is quite another matter to conclude that a competitor's use of a trademark symbol with a generic mark constitutes a literally false statement of fact.”  First, food flavor names can’t be inherently generic because the PTO was willing to register several of the flavors at issue.  But the real problem with plaintiffs’ theory was that classifying marks “is really somewhat of a subjective exercise, particularly at the descriptive/generic end of the category continuum where flavor names are often found…. It is hard to escape the conclusion that in the lower end of the categorization continuum some marks could be classified as either descriptive or generic depending upon who does the classifying. Classification is by no means an exact science.”  Thus, for example, five federal judges have ruled that “chocolate fudge” is descriptive for soda, while three found it generic.  “For Plaintiffs' theory to succeed, a mark would either have to be generic or not but the Canfield decisions demonstrate the fallacy of this otherwise axiomatic statement.”  Genericity can also vary over time, and by context (generic for one product, descriptive for another). “Clearly, genericness is not an intrinsic, immutable characteristic of a mark.”

There is no definitive answer to whether a term is generic or descriptive.  Any such determination “will necessarily come after the fact, meaning after a party has been the subject of legal action challenging his use of the TM symbol, and after he has perhaps exposed himself to civil liability under the Lanham Act for unfair competition.”  The court found the function and purpose of the TM symbol inconsistent with a scheme that would deter competitors from using the TM symbol to claim rights.  “Of course, the Canfield decisions demonstrate why a competitor could not even rely upon a favorable court ruling as to non-genericness when hoping to avoid potential liability for the cause of action that Plaintiffs urge in this case. Even a federal appellate court cannot bind courts located in another circuit.”

Thus, using a TM symbol with a term later found to be generic doesn’t constitute a literally false statement. 

“That said, the Court recognizes that some marks are so incredibly common and descriptive that it would be intellectually dishonest to believe that its categorization as generic vel non could ever be a close call. And it would seem that no party would ever be justified in believing that he could claim that mark as his own to the exclusion of others.”  The court identified peppermint and chocolate as perfect examples, and noted that plaintiffs would surely contend that SnoWizard’s claims to praline and dill pickle fell squarely into this category.  So, what if a party used “Vanilla TM”—literally false?

The court turned to the question of what “Vanilla TM” means: In order to figure out whether it was literally false, “it is necessary to ascertain exactly what information or statement can fairly be attributed to placing a ® or TM next to any product name.”  ® means registered, of course, and conveys to the customer and to other competitors that the trademark is in fact registered with the USPTO, but SnoWizard wasn’t accused of using ® on unregistered marks.

TM isn’t statutorily defined.  The USPTO’s website says “If you claim rights to use a mark, you may use the ‘TM’ (trademark) ... designation to alert the public to your claim of ownership of the mark, regardless of whether you have filed an application with the [ USPTO].”  SnoWizard’s expert Stacey Dogan “explains that businesses commonly use the TM symbol to put the public on notice that they have adopted a term as a trademark, with the hope that the mark will gain traction in the minds of the relevant public.”  Thus, the statement made by the symbol is essentially that the producer claims trademark rights to the term.  “Whether a party actually has a valid and enforceable trademark in the term is a wholly different question and one that a court will likely determine at some juncture.”  In other words, “TM” is not a performative utterance.  (But will they come when you do call for them?)

By contrast, the court found it plausible that it was literally false to use ® on an unregistered mark.  That’s a statement that can be empirically falsified.  Plaintiffs’ expert Glynn Lunney noted that the Copyright and Patent Acts provided penalties for false claims of copyright or patent protection.  Getting another significant detail wrong, the court commented, “[O]f course, a false claim that a work is copyrighted or patented, like a false claim that a mark is federally registered, is a statement that admits of empirical verification. A work, invention, or mark is either federally registered or it is not, and the owner's rights to use the relevant symbols are dictated by statute based on that status.”  Mistaken as to copyright, of course: since 1978, all original works are born copyrighted; registration is unnecessary, and not what’s indicated by the © in any event. 

Regardless, the court found that “TMs do not denote the same unequivocal information that a symbol like the ® does.”  Moreover, plaintiffs’ claims based on improper use of the ® didn’t fit within the scope of literal falsity.  Even if SnoWizard obtained its registration for ORCHID CREAM VANILLA® through fraud on the PTO, 15 U.S.C. § 1120 (which creates liability to any person injured by a fraudulently procured registration, and which plaintiffs were asserting as a separate cause of action) was the appropriate remedy.  Loss of registration on §1120 grounds (or any other grounds, as with some of the other names) didn’t retroactively turn ® into a literally false statement. 

Because “Vanilla TM” doesn’t make a statement that can be judged true or false in a way that admits of empirical verification, it might be an oxymoron but it’s not literally false.  Instead, it makes the statement that the party is claiming rights to the flavor name as a mark, “as preposterous as that assertion might be.”  It doesn’t mean (and therefore, the court took as given, does not inherently communicate to consumers) that the party has rights in the name, “or can ensure that the mark is capable of serving as a trademark or that the party could meet its burden of proof as to secondary meaning if a court were so indulgent so as to allow a party to try.”  Indeed, the court wasn’t even certain that a continued use of TM after rejection by the PTO or the courts would be literally false: some of plaintiffs’ claims were based on continued use by SnoWizard of TM on terms the court had already found generic.  While the court viewed SnoWizard’s chances of success on appeal as slim, there was still some chance that the court of appeals would view the terms as descriptive, allowing SnoWizard the opportunity to establish secondary meaning.

Plaintiffs argued that the parties’ customers weren’t familiar with trademark law and likely to overvalue IP claims, rather than appreciating the nuances teased out by the court.  But this didn’t matter to a literal falsity evaluation.  “The determination as to literal falsity cannot depend on who hears the statement and the meaning that the unsophisticated listener might attach. The intended audience may be relevant to determining the tendency of a statement to deceive but it is not relevant to determining whether a statement is in fact literally false.”  (Comment: But see cases finding literal falsity, or lack thereof, based on the circumstances that a statement was made to people in a particular field to whom it had field-specific meaning, e.g. “catastrophic failure” to medical practitioners or “sunscreen” to retailers.)

(Incidentally, here’s where plaintiffs’ insistence that the state law analysis was the same as the Lanham Act analysis is a potentially dispositive concession.  The state law is, the court says, more broadly written; I am willing to bet a fair amount of money that if there’s any precedent supporting an implicit/explicit falsity division in state law it comes only from other cases in which no party argued that the state law was different.  There is simply no reason that a state law must adopt a requirement that literally true but misleading claims have to be shown to mislead by survey evidence, and many reasons not to do so, including the historical basis of state unfair trade practices laws in (1) unfair competition law that didn’t make this distinction and (2) copying the FTCA, which doesn’t make this distinction.)

Turn now, therefore, to the possibility that the use of TM or even ® could be misleading.  “[E]vidence of some sort demonstrating that consumers were misled is necessary. Plaintiffs cannot simply rely on legal argument that appeals to the fact finder's intuition.”  But they didn’t have any such evidence.  “Plaintiffs have made a strategic business decision to proceed without customer input via surveys, etc., in order to avoid alienating their customers or discomfiting them by serving subpoenaes and other litigation-related materials.”  They therefore lacked evidence of materiality and actual or likely deception.  In the Fifth Circuit, market surveys are required to show these things.  The argument that unfamiliarity with trademark law caused customers to overvalue the TM was wholly speculative.  SnoWizard’s motion for summary judgment on the false advertising claims was granted.

Furthermore, plaintiffs challenged SNOSWEET,® SNOFREE,® and ZEPHYR on the grounds that SnoWizard hadn’t used them in commerce.  The court found that they weren’t entitled to judgement as a matter of law as to these marks, “particularly ZEPHYR which is not federally registered. Based on the explanation of the TM symbol contained in this opinion, the Court can see no basis to apply the use in commerce requirements that apply to federally-registered trademarks to ZEPHYR.” Comment: what? Rights come from use, and indeed only an ITU (federal) or an extension of protection for a foreign mark (federal again) can provide rights in the absence of use, and those only for limited periods. In an opinion so focused on what trademarks “are,” this is a whopper of an error, though if there’s evidence of use it may be harmless.

Southern Snow Manufacturing Co. v. Sno Wizard Holdings, Inc., --- F. Supp. 2d ----, 2011 WL 6287950 (E.D. La.)

Earlier ruling discussed by Eric Goldman -- these opinions just showed up in my Westclip, but are from April 2011.

SnoWizard moved for summary judgment for all claims based on the hidden use of SOUTHERN SNOW® and FLAVOR SNOW® in metatags and/or hidden text on its website. The court earlier rejected the argument that use of another party’s trademark in a website metatag creates likely confusion as a matter of law. Though expert testimony regarding search engines isn’t required, likely confusion is the lynchpin of any infringement claim, and it’s not enough to show that the alleged infringer used the trademark as a metatag. When the court earlier dismissed SnoWizard’s counterclaim, it noted the additional infirmity that the counterdefendant had’t even used SNOWIZARD, but had instead used “snow wizard.” The court wasn’t willing to speculate on the practical consequences of using that term.

 Southern Snow had more evidence for its claims than SnoWizard did for its metatag counterclaims. It showed that when SnoWizard “imbedded” SS’s trademarks in its website, either as metatags or hidden text, SnoWizard’s website showed up in search results. “Plaintiffs' evidence demonstrates, for example, that when a user runs “southern snow flavor snow” as a Google search, SnoWizard's website is listed first in the results before Plaintiffs' own website.” The court described this predicate showing as “a walk from home plate,” as distinguished from scoring a run (proving infringement).

 Strength: the marks were at least descriptive and not generic, but SS didn’t submit evidence of strength, so this factor was neutral. Mark similarity, product similarity, outlet and purchaser identity, and advertising media similarity all “unarguably” weighed in favor of SS: SnoWizard used SS’s trademarks verbatim in its website, and the parties directly compete to sell the same products to the same pool of potential customers using the same type of sales media.

 There was no evidence of intent; SnoWizard said that it legitimately used the trademarks because it repairs SS’s snowball machines. The court found this factor neutral. There was no evidence of actual confusion despite four years of use on SnoWizard’s site. This weighed against SS. Finally, there was no direct evidence of the care exercised by potential purchasers, though the parties emphasized that the customer base was snowball stand owners and other wholesalers/vendors who sell to snowball stand owners: business people and not the “less-caring, consuming public.” This was either neutral or weighed against SS.

 A mechanical tally of the factors was inappropriate. Though the parties both used an identical term, “with internet metatags, keywords, and hidden text the user never actually sees the trademarks or knows that they are in use. The customer is not likely going to be confused by the similarity in a mark whose presence is completely hidden from view.” Thus, mark similarity would not weigh heavily in the plaintiff’s favor. Instead, the court found that lack of actual confusion should be given more weight. Indeed, because SS’s only evidence in support of likely confusion was the Google search results, the court found actual confusion to be even more crucial. “The fact that SnoWizard's website appears in the search list for ‘southern snow flavor snow’ ahead of Plaintiffs' listing does not necessarily suggest an association or connection between the companies or their products, or that any prospective buyers would be likely to confuse the two companies.”

Echoing Eric Goldman, the court pointed out that “one cannot make assumptions about the searcher's objectives when he types ‘southern snow flavor snow’ or some part or combination of that phrase into an internet search engine. The user is not necessarily trying to locate Plaintiffs' website because other vendors like SnoWizard service their machines.” The bottom line: the mere fact of appearing in search results for a trademarked term ahead of the trademark owner “does not necessarily suggest that any prospective buyer will be confused into believing that the competitors are associated or affiliated, that SnoWizard is one of Plaintiffs' product lines, or that SnoWizard is a pseudonym for Southern Snow or Flavor Snow.”

 The court emphasized that the consumers here were businesses. “Moreover, the internet and its vast search capabilities are no longer new to society as a whole, and this is especially true for the more popular search engines like Google. It is highly unlikely that the snowball stand owners who run internet-based searches when purchasing supplies are so utterly unfamiliar with how Google searches work so as to believe that SnoWizard might be affiliated with Plaintiffs' companies simply because the SnoWizard listing appears in the search results,” especially since these highly successful companies had been in the snowball business for years. Judgment for SnoWizard as a matter of law.

Next up: post on the false advertising aspects of the case.

New publication: Scary Monsters: Hybrids, Mashups, and Other Illegitimate Children, 86 Notre Dame L. Rev. 1635 (2011). The rest of the issue is available at the Notre Dame website.

Washington Post on ads masquerading as editorial content

Yep, it's still happening.

California law and Lanham Act converge to condemn false advertising

K & N Engineering, Inc. v. Spectre Performance, 2011 WL 6133258 (C.D. Cal.)

Previous coverage of the denial of summary judgment on Spectre's counterclaims. Hey look, sometimes a trial does what it's supposed to and reveals more facts!

The parties’ false advertising claims under state and federal law were tried simultaneously to the court and a jury. The jury returned a special verdict in favor of plaintiff K&N both on its affirmative claims and on the counterclaims raised by Spectre.

The parties compete in the market for automotive air intake products, including air filters and intake systems, which replace the entire factory-installed air path to the engine and include an air filter. These filters and systems “are designed to reduce the restriction on the amount of air flowing into a vehicle's engine caused by the stock air filter and intake, and thereby potentially increasing the vehicle's engine power.” Air intake systems aren’t highway-legal in California unless the the California Air Resources Board (“CARB”) has issued an Executive Order for a particular application (model, make, year, and engine size). Many systems fit more than one application. Sellers of systems for applications as to which there is no Executive Order are required to include a disclaimer with every California ad, making clear that the systems are not legal for highway use in California.

Without getting into the details, K&N challenged Spectre’s fuel economy claims; filtration claims; performance (horsepower and air flow) claims; and claims relating to the pollution control legality of Spectre intake systems.

Spectre claimed that using its filter “Saves Gas,” and some packaging stated “Government studies show that an efficient air filter can give you up to 10% better fuel economy, which translates to money in your pocket.” These statements, based on government websites, were both false. Since 2009, the Department of Energy has stated, “NEW INFORMATION: Replacing a Clogged Air Filter on Modern Cars Improves Performance but Not MPG. A new study shows that replacing a clogged air filter on cars with fuel-injected, computer-controlled gasoline engines does not improve fuel economy but it can improve acceleration time by around 6 to 11 percent. This kind of engine is prevalent on most gasoline cars manufactured from the early 1980s onward.” The website continued that replacing a clogged filter on an older care with a carburated engine might improve fuel economy 2-6% under normal conditions, or 14% if the car was so severely affected that it was almost undrivable.

The court noted that the “saves gas” claims didn’t compare its filters with clogged filters at the end of their useful lives. Instead, they stated that using an “efficient” filter such as Spectre’s would improve fuel economy, and that was false. Moreover, almost all of the filters with the “saves gas” claim were intended for use on cars manufactured from the early 1980s onward with fuel-injected, computer-controlled engines—“the cars for which the government study shows that replacing even clogged air filters will not increase fuel economy.”

Likewise, testing-based claims that “[a]ll Speed By Spectre hpR filters are tested at independent labs using ISO 5011 standards, and have been proven to filter 99.6% of particles” were false. This was based on a single test of a single filter, and it wasn’t a filter from a production run. It was extensively hand-oiled: “the tested filter contained approximately 41ml of oil, whereas Spectre's production filters indicated only 30ml of oil was required.” Practice tip: Don’t jigger your tests! Spectre didn’t commission any ISO 5011 tests on any production filters, and, since the filtration efficiency of a filter is affected by a large number of characteristics, there was no basis on which to conclude that any of the filters it sold would have the same efficiency as the sample filter that was tested. K&N’s own tests by the same independent lab, in which it told the lab to choose the parameters the lab believed appropriate, showed filtration efficiencies of 93.96%, 94.85%, and 97.44%; one filter couldn’t be tested because it stopped functioning.

Likewise, the packaging for Spectre’s PowerAdder line of products included a chart labeled “Filter Particle Retention” claiming that the Spectre PowerAdder filter trapped a higher percentage of particles of various sizes than “Brand K” air filters. Trial evidence proved that “Brand K” was a K&N filter, but Spectre had test results showing that Spectre filters performed materially worse.

Spectre’s performance claims to improve horsepower and air flow were also false. There was no evidence that replacing a stock air filter with a Spectre air filter would materially increase horsepower or torque, or show the substantial increases in peak horsepower and torque depicted on Spectre’s graphs on its packaging. The graphs were not supported by tests. Spectre’s horsepower ratings weren’t derived from tests corresponding to actual conditions; the airflow and pressure numbers it used in its extrapolations wouldn’t occur in a car, and even then it rounded up to obtain a “marketing” rating. Spectre had no data indicating that its filters would actually work in those conditions, and the court found that the air intake systems, as installed, were incapable of effectively allowing the claimed performance. Moreover, internal emails showed that Spectre understood that its ratings were marketing tools bearing no relationship to actual achievable horsepower.

Spectre’s catalog, now taken down from its website, even admitted the lack of real-world applicability of its ratings. It said: “The CFM and Horsepower ratings are what the filter will support in a naturally aspirated engine with no measurable loss due to restriction. This is important to know if the vehicle has been modified for increased performance as it tells you how much power the filter will support. These filters are rated at a much higher number than the requirements of the engine. Like speed ratings on a tire, it's always better to have more.”

This statement was insufficient as a disclaimer to correct the falsity. The court noted that “(1) the ratings are prominently featured on the packaging for Spectre products without such disclaimer; (2) the disclaimer appeared on a single page of Spectre's catalog separated by several pages from the portions of the catalogs that state the ‘ratings’ for specific air intake systems and air filters; and (3) the catalog was removed from Spectre's web site by October 26, 2009, while the ratings have remained on the packaging.”

As for the legality of Spectre systems, Spectre had three CARB Executive Orders allowing highway use in California of certain air intake systems for specific models of vehicles. However, Spectre sold systems in California that weren’t covered by an Executive Order without limiting them to non-highway use. The Executive Orders specifically provided that “No claim of any kind, such as ‘Approved by the Air Resources Board,’ may be made with respect to the action taken herein in any advertising or other oral or written communication.” Spectre nevertheless stated on its packaging, advertising and marketing in California that its systems covered by Executive Orders were “CARB–Approved.” It also advertised “C.A.R.B. Approval Pending” for a number of systems months before it applied for an Executive Order covering those air intake systems. But parts sold before the CARB issues an Executive Order covering them are not legal for highway use in California, either before or after the Executive Order issues.

The court concluded that Spectre made sales as a result of its false advertising, and the jury found that K&N suffered injury from the false advertising.

Legally, the case is notable because, as the court pointed out, though the California Section 17200 and 17500 claims were largely duplicative of the Lanham Act claim tried to the jury, there were two important differences. First, because Section 17200 covers unlawful business acts or practices even without false advertising, the court could deal with Spectre’s violation of CARB regulations by enjoining it from selling air intake systems not subject to an Executive Order without providing the required disclaimer or advertising its air intake systems as “CARB Approved,” regardless of whether such conduct is actionable under the Lanham Act. Second, Section 17500 allows an injunction against misleading conduct even without proof of actual deception or confusion, avoiding the Lanham Act’s explicit/implicit divide.

The court, like the jury, found in favor of K&N both on the claims and the counterclaims; Spectre challenged ads by AutoAnything.com, but the court found that California law doesn’t authorize claims for vicarious liability based upon the failure to control another party's advertisements.

Finally, based on the “overwhelming evidence” of Spectre’s “repeated, deliberate, and willful use of false statements and matter in its advertising,” the court found that this was an exceptional case. Time for a fee award! (It’s not clear from the published opinion what’s going on with damages.)

Claims of international scope count as "designation of origin"

Benihana of Tokyo, Inc. v. Benihana, Inc., --- F.Supp.2d ----, 2011 WL 6187098 (D. Del.)

Plaintiff Benihana of Tokyo (BOT) sued defendants (for convenience, Benihana) for breach of contract, false designation of origin, trademark infringement, and conversion. An earlier agreement transferred BOT’s trademarks in the US, Central America, South America, and the Caribbean islands to Benihana, while BOT owned the marks outside that territory. The parties agreed not to use the marks to reduce their value or usefulness to the other party. In 2010, though, Benihana applied for a WIPO international registration seeking protection in Iceland, Iran, Monaco, Singapore, Ukraine, Vietnam and Zambia, as well as Cuba. BOT sued for breach of the agreement; Benihana then renounced the registration except for as to Cuba.

BOT’s claims focused on three acts: (1) seeking registration of the BENIHANA trademark in the disputed countries, particularly with respect to Singapore and Vietnam where plaintiff had obtained prior registration; (2) purporting to be BOT or to be authorized by BOT in seeking the registration; and (3) falsely advertising that defendants have “[l]ocations throughout the United States, Latin America and the Caribbean.” BOT claimed trademark infringement based on Singaporean and Vietnamese trademark law.

The court refused to dismiss BOT’s conversion claim. Under the applicable law, Florida’s, a conversion claim can cover wrongful taking of intangible assets in a business venture.

The false designation of origin claim was predicated on Benihana’s allegedly deliberate use of plaintiff's name in applying for the registration. However, defendants showed as a matter of law that the “Benihana of Tokyo” reference was an error on the part of the USPTO and not the result of defendants’ intentional action, and thus the court granted the motion to dismiss. (That seems right, though it’s an interesting question what would have happened if there had been an intentionally deceptive act—yes, it’s a use in commerce, and yes, it’s probably likely to cause confusion, but this still doesn’t seem like the conduct that 43(a) of the Lanham Act is supposed to cover; it would be more like fraud on the PTO.)

False advertising: BOT alleged that, “In marketing [their] services, defendants advertise that they have ‘locations throughout the United States, Latin America and the Caribbean,” and that this was a false designation of origin because BOT owns the rights in Mexico. Defendants argued that this was a false advertising claim, and that BOT failed to plead that the misrepresentation involved an inherent or material quality of the product. However, BOT argued that “defendants' paraphrasing of the statutory provision relating to materiality omitted ‘geographic origin of his or her or another person's goods, services, or commercial activities.’”

BOT alleged literal falsity since defendants are precluded from operating in a large portion of Latin America. BOT also argued that geographic origin was material to the services offered. (I’m not sure that “geographic origin” extends as far as “licensed to operate in X”—unless it was offering franchise opportunities, it doesn’t really seem like Benihana was claiming to deliver services that originated in Latin America.) The court ruled that, on the pleadings, BOT sufficiently alleged a false advertising claim.

The court, however, declined to exercise its supplemental jurisdiction over BOT’s trademark claims under foreign laws based on the threat that Benihana might open restaurants in Singapore and Vietnam. “[I]nternational treaty obligations, comity, judicial economy, and other exceptional circumstances” justified this exercise of discretion.

The bond Kevin Trudeau doesn't want you to know about

Federal Trade Commission v. Trudeau, --- F.3d ----, 2011 WL 5927435 (7th Cir.)

Some background. Kevin Trudeau violated a court-approved settlement with the FTC by misrepresenting the content of his book The Weight Loss Cure “They” Don't Want You to Know About. The district court held Trudeau in contempt and ordered him to pay $37.6 million to the FTC and banned him from making infomercials for three years. The Seventh Circuit affirmed the district court's finding of contempt but vacated the sanctions, holding that the district court needed to explain its calculation and how the resulting funds would be administered. The court of appeals further held that the infomercial ban was inappropriate as a civil sanction because it did not give Trudeau an opportunity to purge, that is, to comply with the underlying order not to misrepresent his publications.

On remand, the court reinstated the fine, explaining that it reached that figure by multiplying the price of the book by the 800-number orders, plus the cost of shipping, less returns. The court instructed the FTC to distribute the funds to those who bought Trudeau's book using the 800–number; any remainder not paid to victims or used in administering the redress would be returned to Trudeau. The district court imposed a $2 million performance bond, effective for at least five years.

Trudeau again appealed, arguing that the sanction was improperly based on consumer loss rather than on his gain and that the bond violated the First Amendment. The court of appeals this time affirmed. The original consent order was too weak to protect consumers from deception; Trudeau aired violative infomercials at least 32,000 times. “He should not now be surprised that he must pay for the loss he caused.”

The court considered the $37.6 million fine a conservative measure of consumer loss, since it only considered sales from the 800 number, not sales in bookstores carrying his “As Seen on TV” titles, even though the conspicuous “As Seen on TV” sticker on those books made the link between those sales and the infomercial “less than speculative.” Moreover, the figure was reliable; Trudeau himself used that figure.

It was acceptable to measure the fine by consumer loss. That’s what remedial sanctions are for, and it was within the district court’s discretion to determine that, “unless the remedial sanction was measured by consumer loss, the victims of Trudeau's contempt would not receive full relief for their actual loss. This conclusion is informed—but not limited—by the remedies available in the underlying FTC action.” The consent agreement was aimed at protecting consumers from misrepresentations that caused them economic injury. “When that agreement was breached flagrantly and repeatedly, the district court chose a remedial sanction that might come close to putting Trudeau's victims in the same position they would have been had Trudeau not misrepresented his books in infomercials in violation of the agreement.”

FTC v. Verity Int'l, Ltd., 443 F.3d 48 (2d Cir. 2006), which was not a contempt case, created a narrow “middleman” exception to the usual rule that consumer loss may be the proper measurement of damages, where the defendants only received their cuts after other parties had taken some money out of the stream. Trudeau argued that he was compensated only indirectly for sales of his books. But this was a completely different situation:

Trudeau assigned his rights to payment from his company's assets to ITV Global in exchange for ten years of monthly million-dollar checks. This was not about middlemen taking a cut for their services, but about steadying Trudeau's cash flow. Now, having received only $1.05 million from ITV Global, Trudeau argues that the fine should be capped there. But what if ITV Global had not paid him at all? Would the district court have been powerless to impose any remedial fine? Of course not. The district court recognized that precisely how Trudeau decided to get paid for selling his books through deceptive infomercials in violation of a court order is irrelevant to the proper measure of his remedial fine.

The bond was also fine as a modification of the earlier consent order to increase the likelihood that Trudeau would comply going forward, in lieu of an infomercial ban. Instead, Trudeau has to post a $2 million bond before he participates in any “infomercial for any book, newsletter, or other informational publication, about the benefits, performance, or efficacy of any product, program or service referenced in any such [publication].” This is a purgeable sanction because the bond won’t be forfeited to the FTC unless Trudeau makes a deceptive infomercial. “After so many violations, the district court did not have to stick with the old plan.”

Moreover, the bond requirement did not violate the First Amendment. The only argument meriting discussion was whether Trudeau’s right to engage in commercial speech was violated by a requirement that he post a bond before participating in any infomercial, misleading or not. As applied to misleading commercial speech, “there is no possible First Amendment violation, of course, because misleading commercial speech gets no constitutional protection.” But the bond requirement was subject to intermediate scrutiny as a general restriction on commercial speech.

The FTC had the burden to show that (1) there was a substantial interest supporting the restriction, (2) the restriction directly advanced that substantial interest, and (3) the restriction was narrowly drawn. The first two requirements were obviously met: consumer protection is a substantial interest, and the performance bond directly advanced consumer protection by making it more likely that consumers would be compensated for future violations and less likely that there would be future violations via deterrence. As for tailoring, it was not a problem either. A restriction on commercial speech must not be more extensive than necessary, but a least-restrictive-means analysis is not required. Instead, the scope of the restriction must be proportionate and carefully calculated to the interest served, and not impose an inordinate cost.

The court of appeals found that the performance bond satisfied this standard. First, the bond applied only to infomercials, not books or any print medium, nor even to TV or radio ads under 2 minutes. It targeted only the commercial speech that had caused such “tremendous” harm in the past. Second, the district court took seriously Trudeau’s claim that he couldn’t afford $2 million by allowing him to file an audited financial statement and prove as much at a hearing. Third, the bond was proportional to the amount of harm Trudeau caused in the past; if anything, it was low, given that for nearly a year the infomercial sold thousands of books each day.

Larry Sager's Etsy store

Either a wealth of exam questions or a spectacle you can't unsee. Maybe both?

Rau/Bieber collage:

"This handsomely framed collage brings together everyone's favorite Contracts professor with Canada's most vapid cultural export. Like baby, baby, baby, oh!!"

There's also a Bedazzled Dukeminier & Krier (derivative work?) and several other altered casebooks.

Ada Initiative fundraising drive for women in open tech and culture

The Ada Initiative seeks to support women in open technology & culture, addressing the ways in which "open culture" and "open source" are in fact only open to certain people. (Cf. free as in beer; many women understand that there's not much free about a free beer.)