Friday, March 30, 2012

Iqbal: plausible to whom?


In re Quaker Oats Labeling Litigation, 5:10-cv-00502-RS   (N.D. Cal. Mar. 28, 2012)
Plaintiffs sued for violation of California’s consumer protection laws on the basic theory that all trans fats are unhealthy, making various Quaker products’ labels false and misleading. 
Initially, Quaker argued that Iqbal/Twombly required dismissal because plaintiffs’ claims were “implausible” in that the FDA disagreed with them.  While this is a terrible argument, it highlights the “plausible to whom?” question that Iqbal/Twombly generates; as it turns out, the answer is “plausible to the judge, not to the FDA.”
More specifically, Quaker argued that plaintiffs were wrong to claim that there was “no safe level” of trans fat consumption, and that the FDA had thoroughly evaluated and rejected this claim.  The court thought that plaintiffs persuasively responded that Quaker substantially overstated the FDA’s stance, but “even if it were the case that the FDA had clearly and specifically found that trans fats are safe in small quantities (notwithstanding possible consequences of cumulative exposure), that would not justify dismissing the complaint under Twombly and Iqbal as ‘implausible.’”  There was no reason to conclude that “the FDA is so infallible that it is wholly implausible for plaintiffs to contend trans fats present a health risk.  Particularly given that scientific understanding of the risks presented by particular substances often evolves over time, the FDA pronouncements on which Quaker relies are insufficient to support dismissing the complaint on implausibility grounds.”
Quaker had more success with its actual preemption argument.  As previous decisions had explained, plaintiffs could only avoid preemption if the material they challenged was not a “nutrient content claim” or “health claim,” or, if it does, that the product effectively was “misbranded” under the NLEA.   The NLEA governs all statements that “expressly or by implication,” “characterize[] the level of any nutrient,” or “characterize[] the relationship of any nutrient . . . to a disease or health related condition . . . .”  Here, plaintiffs argued that the statements didn’t comply with the NLEA and/or FDA regulations, making the products misbranded.  The court was partially persuaded.
The first challenged phrase was “Adds a dietarily insignificant amount of trans fat.”  Plaintiffs argued that Quaker’s recasting of the explicitly permitted statement that its products contain “0 Grams” of trans fats was deceptive.  But the regulations define an “insignificant amount” as an amount that allowed the nutrition label to say zero.  Since the challenged phrase was permissible under the regs, state-law claims of falsity or misleadingness were preempted.
Next, plaintiffs challenged the phrase “Heart Healthy”/images of hearts, combined with the claim that “diets rich in whole grain foods and other plant foods and low in saturated fat and cholesterol may help reduce the risk of heart disease” or “3g of soluble fiber daily as part of a diet low in saturated fat and cholesterol may reduce the risk of heart disease.”  These claims were expressly permitted by regulation. Plaintiffs argued that the proces by which Kraft obtained regulatory approval for the first claim was defective, but the question was not whether the claim should be permissible; rather, it was whether the claim was permissible under the regs. Trans fat was not a “disqualifying” ingredient that rendered misleading otherwise truthful nutrition content claims, so plaintiffs’ challenges were preempted.
Third was “Helps Reduce Cholesterol.”  FDA regs allow a health claim associating soluble fiber from whole grain oats with a reduced risk of coronary heart disease, and further allow “optional information” that the reduced risk comes through the intermediate link of cholesterol.  Plaintiffs argued that Quaker went beyond “optional information” by making the cholesterol claim so prominent.  The FDA sent a warning letter about an allegedly similar overemphasis of cholesterol lowering claims made on Cheerios boxes.  At the pleading stage, the court thought it was premature to rule that the Quaker claims were sufficiently different from the Cheerios situation.
Fourth was “All the nutrition of a bowl of instant oatmeal” on the Quaker Oatmeal to Go bar.  The regs allow the phrase “‘contains the same amount of [nutrient] as a [food]’ and “as much [nutrient] as a [food].’”  However, the court found that the regulation plainly contemplates that a specific nutrient will be identified; the FDA’s examples were “as much fiber as an apple,” and “Contains the same amount of Vitamin C as an 8 oz glass of orange juice.”  Quaker argued that if it could identify any one nutrient as equally available from the two products, there was no reason it couldn’t claim all the nutrition.  But the reg requires that the foods being compared qualify as a “good source” of the particular nutrient. Quaker didn’t explain how it could comply with the requirement that instant oatmeal be a “good source” of unspecified nutrients; the reg simply didn’t authorize this kind of statement.
Plaintiffs might not be able to show falsity or misleadingness, since they didn’t allege that there were any nutrients in instant oatmeal not found in the bars or found in lower levels; trans fat isn’t a disqualifying ingredient that would render misleading otherwise truthful nutrient content claims.  But that doesn’t mean there was preemption.
Finally, plaintiffs challenged images of oats, nuts, fruits, and brown sugar. The court previously held that challenges to photos of oats and nuts weren’t preempted because NLEA doesn’t regulate front-of-the-box symbols.  Quaker argued that the regs governed representations relating to product flavors.  But it wasn’t clear whether the challenged imagery would be better characterized as descriptive of flavors or of other characteristics.  At the pleading stage, at least, there was no preemption.
Quaker renewed its puffery argument, even though the prior order found that statements such as “wholesome” and “smart choices made easy” could not be dismissed on the pleadings as puffery.  Quaker argued that it had provided additional context, but the court disagreed.  Quaker might be able to show that the statements were too general or vague to be actionable, but not now.

Thursday, March 29, 2012

More than meets the eye in Transformers search results


Hasbro, Inc. v. Asus Computer International, Inc., CV 11-10437 PSG, (C.D. Cal. March 23, 2012)
Hasbro, owner of the Transformers toys/franchise, sued Asus for making a Transformer tablet and later a Transformer Prime.  As it turns out, Hasbro has a show about Optimus Prime that it is calling Transformers Prime.  The court denied Hasbro’s motion for a preliminary injunction, largely focusing on the potentially descriptive valence of “transformer” as applied to a tablet computer that can convert into a fuller-sized machine with keyboard etc., the expense of the computer ($550-750)/care taken by the purchasers, and Hasbro’s delay in seeking relief.
Some interesting tidbits: Hasbro put in evidence that googling “optimus prime tablet” picks up Asus’s “Transformer Prime” tablet; a search for “Transformer prime” causes Amazon to search its own site for “Asus transformer prime”; and a search for “transformers prime” returns “several Asus hits and Transformers Prime hits.”  But the court wasn’t convinced that this made confusion likely.  First of all, the “s” mattered: “Transformer Prime” made Google return results for Asus mostly, and “Transformers Prime” made it return results for Hasbro’s series.  Moreover, “[r]easonable consumers understand that when executing a key word search, the results they are presented with originate from thousands of sources, if not more.”  In addition, even though there were some hits for the animated series together with hits for the Asus tablet, Hasbro didn’t argue that these products were related (so one looking for the series would hardly end up buying the tablet and vice versa). 
And on Office Depot’s site, searching “Transformers” returned product results for the “ASUS Eee Pad TF 101-A1 Tablet” and several “Razer Transformers 3 RC21” carrying cases – a Transformers-branded product – but the source of each was clearly designated.  In addition, the first result from this search was the “ABBYY PDF Transformer,” “a software product which enables users to convert documents to PDF, and which therefore makes use of the word
‘Transformer’ in a manner similar to Asus.”  Online, commercial retailers combine thousands and even millions of unrelated products, so appearing on search results pages together is “at best equivocal.”  And having both Hasbro and Asus products on the same search page isn’t a big problem when the sources of both are clearly identified; references to the Asus aka Eee Pad Transformer Prime often have a thumbnail image “that clearly and immediately conveys the nature of the products.”  At a minimum, there was a factual question of “whether reasonable consumers shopping for electronics on large inventory sites like Amazon and Office Depot are able to distinguish between products employing the word ‘transformer’ for its primary descriptive meaning, and those referring to the Transformers brand.”
Hasbro also offered two online reviews, not quoted, to add to its evidence of confusion.  Nope: “Though the articles reference Transformers themes in connection with the Asus Eee Pad Transformer Prime, they are tech industry overviews of the development, launch, and capabilities of Asus and its competitor’s products.”  Again, they were at best equivocal; one could equally conclude that the authors weren’t confused.
On dilution, the court said some interesting things.  First, Asus contested fame.  I really think there’s a difference between “Transformers” and “transformer” here.  Asus also argued that Transformers weren’t a household name to the general consuming public, specifically “girls, women and more senior Americans.”  Hmph.  The court concluded, though, that this wasn’t an easy thing to decide on a motion for a preliminary injunction.
Turning to other factors, the court was unpersuaded of the dilution claim on this posture.  Transformer is “a common, descriptive word which Asus uses in its common, descriptive sense.” It’s not a good idea to allow anyone to monopolize such descriptive terms.  Almost a hundred registered marks include some variation of the word, making it unlikely that the Transformers mark was sufficiently distinctive to be protected against dilution.
It’s true that Visa Intern. Service Ass’n v. JSL Corp., 610 F.3d 1088 (9th Cir. 2010), found “evisa.com” likely to dilute Visa on summary judgment.  There, the 9th Circuit concluded that Visa was a strong, arbitrary mark as applied to credit cards and that Visa was a top credit card brand, and an “e” prefix was unable to distinguish the two marks.  However, the 9th Circuit noted that when “a trademark is also a word with a dictionary definition, it may be difficult to show that the trademark holder’s use of the word is sufficiently distinctive to deserve anti-dilution protection because such a word is likely to be descriptive or suggestive of an essential attribute of the trademarked good.”  (It’s ridiculous to emphasize the TM owner’s use, when the question is the defendant’s use, see, e.g., Apple, but the district court here is stuck with that.)  Also, such a word may already be in use as a mark by third parties.  Thus, the Visa court distinguished its earlier ruling in a case involving Trek Bicycles because the plaintiff’s use there played heavily off of the meaning of “trek.”  By contrast, Visa’s use played only weakly off the dictionary meaning and there was no evidence that a third party had used the word as a mark.  Moreover, the Visa defendant wasn’t using “visa” for its “literal dictionary definition,” which would have made it a different case.
The court here found that factual questions about whether this was more like Visa or more like Trek precluded a finding of likely dilution now.  “Asus’s use of the word ‘Transformer’ squares with one of its dictionary definitions and therefore describes an aspect of its product in a straightforward manner.  Almost a hundred registered trademarks also involve the word ‘transformer,’ dozens of which are registered in International Class 09, the same class as Asus and the Eee Pad.  Unlike Visa’s use of its mark, but like Trek Bicycle’s, the Transformers mark has descriptive attributes as applied to robots that convert or transform into other forms.”  In addition, though the marks are virtually identical on paper, Asus generally marketed its Transformer products with Eee Pad in front and model numbers behind. This was more than a mere “e” prefix or “Corp.” suffix.  Even though dilution doesn’t require substantial similarity, the similarity here was not high enough to favor Hasbro.
In a footnote, the court also discussed a theory developed in detail in Sara Stadler Nelson, The Wages of Ubiquity in Trademark Law, 88 Iowa Law Review 732 (2003): “any dilution by blurring that might occur here is due to Hasbro’s excessive licensing of its Transformers and Transformers related marks to over 800 licensees covering 11,000 different products.”  Dilution is the creation of new and different associations with the plaintiff’s mark, even without confusion.  Asus contended that the fact that the public might associate the brand with products other than toy robots “is the result of Hasbro’s decision to engage in cross-promotions, merchandizing, and excessive licensing.”  The court found this contention interesting but underdeveloped.
The court further emphasized the impact of Hasbro’s delay.  Hasbro knew about Asus’ intent to market the Eee Pad Transformer in mid-January 2011, and sent a single C&D.  Asus responded that “transformer” was a descriptive, noninfringing use and that Hasbro’s rights didn’t extend to the class of high-end computer products.  The Transformer went on sale in April, and Hasbro waited eight more months to sue.  It also waited two months after Asus announced the release of the Transformer Prime before suing and seeking a PI on the eve of the launch.
Asus submitted evidence that a PI would cause it considerable hardship.  “[T]here is typically a very short window of opportunity for a new computer device to capitalize on its ability to offer the latest technology, speed, graphics, and other features most in demand.  Right now, the Asus Eee Pad Transformer Prime TF 201 is the world’s first quad core tablet with Google’s latest Android operating system.”  An injunction would kill its window of opportunity to have that competitive edge, harming its business and that of its suppliers.  Given this harm, exacerbated by Hasbro’s delay, Hasbro hadn’t shown that the balance of hardships tipped sharply in its favor.
In addition, the court agreed that use of a descriptive term to accurately describe a product feature was in the public interest.  As the 9th Circuit has said, “We do not want to prevent the commercial use of descriptive words to name products, as straightforward names are often the most useful identifiers.”  

Wednesday, March 28, 2012

ABA Antitrust Section meeting


I was on this very interesting panel about the FTC's current enforcement practices:
FTC in the courts
Ed Glynn, moderator
Where the FTC is in terms of its use of federal court litigation.  FTC received stronger powers by amendment—not just an administrative agency but one with the power to go into court and seek injunctive relief.  This was aimed mostly at antitrust, with relatively little focus on permanent injunctions/consumer protection.  First big test in consumer fraud, Singer, 1973: The challenge was not proving a §5 violation, but that the defendants were taking consumer money and sending it overseas; the need was to seize assets before the defendants caught on.  Now an ex parte TRO to freeze a bank account is relatively common, but then it was a big issue.  Redress power has moved on from there.
Tim Muris, former chair of 2 FTC bureaus: Legislative history—after Nader reports and other reports, FTC was rejuvenated with efforts to increase its statutory power.  Desire to give it redress authority.  Initially: Redress was available after admin proceeding if a reasonable person would’ve known the conduct was misleading.  In the 1970s, the FTC tried to become the second most powerful legislature in DC; proposed one rule a month.  He came in under Reagan and had a different idea: there are basic rules like antifraud rules, but procedural problems in enforcing them for consumers—class actions didn’t work well, and consumers lacked sufficient incentives to use small claims court.  Problem in going after fraud: traditional C&D against fraudster didn’t seem like a very effective remedy.  Fall 1981: experiment with going after fraudsters and getting the money back as a remedy.  To do that, had to face fact that §19 wasn’t effective as a remedy—the money would be long gone after first admin procedure, then federal court enforcement procedure.  So you first have to tie up the assets; you can’t ask a judge to wait 3-4 years after that to try an administrative case.  Judges want to control their dockets better than that.  So instead of using the traditional §19 redress procedure, we used §13(b) to tie up the assets first, then use a permanent injunction to get the money back for consumers.
That turned out to be spectacularly successful. One year we got $900 million back.  This acts as a deterrent; there’s an active criminal component too.  The fraud program is now a staple of FTC enforcement. 8 circuit courts have blessed the use of §13(b) in fraud cases.
Result: people at the FTC no longer remember the 1970s and are overreaching.  FTC is asserting it can use §13(b) beyond the historical fraud program.  Congress was concerned about imposing these penalties; there were lots of opportunities to expand them beyond fraudulent/dishonest conduct.  The 8 circuit court cases involve fraud.  But the FTC’s position hasn’t been tested in court.  §19 should be used in non-fraud cases. 
1994 amendments to FTC Act: explicitly bless the fraud program, but didn’t reference or contemplate routinely seeking redress.  §19 does remain effective for dishonest/fraudulent conduct involving novel legal issues or settlements against legit companies where ex parte asset freezes are unnecessary.  You can settle a case against a nonfraudster and get redress through §19.
Attacking national advertisers with publicly traded stock imposes a significant penalty on their stock price even without money penalty—a C&D is not just a slap on the wrist.  Whether someone will actually take the FTC to court on this is unclear because of the pressure to settle.
Heather Hippsley, Division of Advertising Practices: where the FTC views its current federal enforcement program. Does not agree that FTC has overreached!  Views on when §13(b) should be used: statute covers deception, not fraud.  §13(b) as a tool fits certain fact patterns for certain remedies from particular defendants. 
We are interested in stopping deception: §5 for deceptive acts/practices, §12 for false advertising to induce purchase of foods, drugs, and devices.  Deception has been defined through litigation.  A big constraint: does the FTC have reason to believe the defendants are liable using the deceptiveness test?  Is it likely to mislead consumers, acting reasonably under the circumstances, about something material to the decision to use the product or service?
Three paths: (1) §13(b) 2d proviso, in federal court for whole case; (2) § 13(b) first proviso—uncommon—in fed court for preliminary injunction, in front of ALJ for remainder (might be more attractive with reforms that are speeding up ALJ proceedings); (3) Part III: in front of an ALJ.
How do you pick?  (1): where we want a TRO/PI; where we want a permanent injunction; where we want redress (because alternate paths take much more time); disgorgement of ill-gotten gains; other equitable relief.  On the other side: admin practice can avail ourselves of administrative expertise.  Monetary factors: there’s only been one fully litigated §19 case.  9th Circuit found: it’s a statutory remedy for consumer redress, restitution; doesn’t give disgorgement to strip defendants of ill-gotten gains. This is a critical remedy because the deterrence factor is very high if you can get disgorgement.  Defendants care about keeping the money.  Advertisers don’t want to give up profits any more than fraudsters do.  Only §13(b) allows disgorgement. Courts have been trending to tie redress to disgorgement: Verity case in 2d Circuit; recently affirmed a weight-loss supplement case—in equity, the anchoring theory is disgorgement.  Ancillary relief in §13(b) entitles FTC to take ill-gotten gains. This most often equals what the consumer paid, but not always.
Other reason for federal court action: TRO/PI for ongoing consumer harm.
Commission expertise/admin actions: where there is a new liability theory and FTC desires to interpret the Act—FTC will exercise discretion to go to ALJ there, such as in privacy cases; where issues of interpreting the ad—are they making this claim?—are key; need for extrinsic evidence/copy testing; what’s the basis for the claim—complex substantiation/whether the science is enough?  Most recently, have turned to administrative forum in, e.g., Pom Wonderful, to test a new remedy: more clear and precise injunctive/fencing in remedy.  Also compliance issues: civil penalties (admin) or contempt (federal court injunction).
Recent cases: Iovate: federal court settlement—routine diet supplement false advertising matters.  The claims were hard-core for cold/flu/allergy prevention & treatment and weight loss, high disconnect from science. Important to get redress because products are worthless if they don’t do what they say.  Nestle: administrative. Short ad campaign—the product basically failed in the market. Most important to us: get remedies for going forward with the company for other products; redress less important.  Danone: Administrative to get order relief, no money relief.  The states had already gotten substantial consumer redress, so no need for FTC to go to federal court and get redress. Reebok: redress important; the claims were specific and were the raison d’etre for the ad campaign, and they were false—another huge disconnect between science and claims, $100 million campaign based on 5-person study—pretty darn close to a fraud; we wanted to deter a company like this from doing it again.  We at the FTC tell consumers to rely on reputable advertisers, and so when a reputable advertiser goes awry, that’s a greater concern for us. 
John Graubert, Covington & Burling, formerly deputy counsel: defense perspective.
FTC’s ability to obtain substantial consumer redress under §13(b) is virtually an article of faith.  The FTC has become accustomed to have, annually, substantial consumer redress recoveries. Now it’s a big part of the agency’s identity.  Where this is beginning to cause difficult problems: does it make it difficult to settle cases? We’ve seen a steady but significant escalation in the amount of consumer redress and the scope of the substantive terms of the orders.  This is cause for concern in the defense bar.  Remedy being litigated in the Pom case (under submission so can’t comment)—provisions there are also in the settlements discussed—number of clinical studies, coordination with FDA. Being incorporated in large settlements with nationwide companies.
His concern: the numbers on the table have a tendency to escalate. Are we approaching a breaking point, a point at which it is not feasible to settle?  Courts may be skeptical about FTC positions—case on debt collection down in Texas where the judge looked at deceptiveness differently than the FTC did, and doesn’t necessarily give deference. If the settlement posture results in more litigation, then the agency may face limitations.
We could also see closer scrutiny of what equitable remedies mean.  There are limiting principles in equitable practice.  Maybe we need equitable tracing of particular property.  This means more work for the agency.  Warning: the fortress of these cases is not impregnable.
Next line of attack: no court has adequately explained what “proper case” means in the statute.  In a proper case, agency may seek permanent injunction.  Some defendants have tried to say it has to be limited to straight fraud cases, because there’s a wisp of legislative history, but most courts have found the defendants who made that argument to be fraudsters.  Can only get narrower because this is the broadest interpretation on behalf of the FTC it could be.
Need to come to grips with fact we’re in broadest class action environment ever.  If FTC issues a press release, there will be a class action filed. This raises the question: does the FTC need to be in the redress business at all?  FTC shouldn’t pile on.  Recent cases do involve parallel litigation, and the settlements are often worked out in parallel. 
More litigation will not be in the end rosy for the FTC since so much is open to challenge/pushback.
Me: I’m the only one who doesn’t need a disclaimer to avoid the faintest possibility of misleadingness about representing the views of the Commission.
The focus on the overall system is really helpful—feedback loops and counterpressures.
Broad range of actors regulated: internet sweeps to major brands; major brands can sometimes behave badly, as the big banks have most recently shown, so we shouldn’t necessarily limit penalties to the fly-by-night operations.  Trust-based economy we’ve been fortunate to live in for the past 80 years, but may be breaking down.  “Long-term greedy” v. short-term greedy.  George Akerlof: market for lemons problem.
Think of courts as always existing in implicit contrast other methods of enforcement: As a defendant, there is always a reason to argue for some other form of enforcement as being the one that ought to apply. Class actions: increasing barriers to multistate, certification, etc.; criticisms of plaintiffs’ lawyers’ recoveries (not an issue with the FTC!).  Interagency Working Group on advertising to children; there are those on the defense side who say that simply issuing a report recommending that advertisers adhere to guidelines violates the First Amendment rights of advertisers.  I didn’t say this right live: regulation will be under threat anyway, even if the FTC doesn’t use 13(b) aggressively. It could, like the SEC of late, not bring cases because it might lose; this is not a strategy for effectiveness either.
More generally, these disputes implicate another big question: does a regulatory choice about what constitutes deceptiveness, or fraud, have to be retail or wholesale?  Pom Wonderful is a good example of this question.  Last week’s tobacco decision: the 6th Circuit said that it was unconstitutional to determine that colors and visuals distracted consumers from the warnings about and dangers of tobacco. But this is a position the FTC and the FDA have long taken: that at least in particular ads, ad design can misleadingly distract from required disclosures.  This seems like a reasonable position; does it become less reasonable when it is made wholesale?  Are there different kinds of “wholesale” determinations—that is, is it different to say that color can distract than to say that color does distract?
Glynn: after asking is the defendant liable and is it material, should ask whether the conduct is fraudulent before going for §13(b).  In Singer, the 9th Circuit was interested in the issue of implying redress authority consistent with the statutory scheme. This hasn’t been an issue until recently; the Commission’s §13(b) cases have been against dishonest/fraudulent conduct.  Nervousness in defense bar comes from fact that FTC is willing to act against anything that violates §5 under §13(b) if they don’t need Commission expertise. But there’s a lot of conduct that is deceptive without being dishonest/fraudulent.  If you’re going to merge §5 standard with §13(b), you’re really saying that the Congress that granted §19 authority was doing a ridiculous act because there’s no need for §19.
Feeling in defense bar that it’s getting harder to settle.  You compare the worst that can happen in litigation to the settlement being offered. The difference is shrinking in a lot of cases.  More defendants are going to take their chances.  The criminal justice system is a plea bargain system; so is the FTC. If the plea bargain system falls apart because you ask for a life sentence for everything, that may not carry out the commission’s responsibilities.
Hippsley: the issue of how to settle with the FTC and whether or not the FTC is seeking rational amounts is different from the issue of which forum the FTC chooses. You see in the case examples that there still are different types of cases; FTC doesn’t always seek redress.  The sense that it’s difficult to settle for less than disgorgement is probably accurate. 
Muris: Reebok is not traditional—traditional remedy is to get all the money back. If Reebok is a fraud case, then the FTC did a miserable job, because they got $25 million back.  It was more of a traditional substantiation case, and the FTC has changed its standards.  Not suggesting that Reebok would be ok under traditional standards, but the FTC now seems to be saying is that in the new kind of redress case, we’re not trying to get all the money back, but there’s some premium ascribed to the ad, whereas traditionally the products were either worthless or completely out of proportion.  These are completely different than traditional substantiation cases.  It will bedevil the commission if you have to subtract the reasonable value of the product and just give the premium back.
Hippsley: with Reebok, that’s a settlement; when we settle, we choose a rational number.  (1) The FTC would say that the campaign was premised on a deceptive claim: the fraud was in the selling and it doesn’t matter if the shoe had value. (2) Another way to look at it is to look at litigated cases. Once you establish liability and are calculating redress/disgorgement, we do have cases that have attributed value to the product and it hasn’t undone the whole thing: a rare coin case where the coins were substantially overvalued; we took the real value and the premium, and the 8th Circuit upheld that.  That doesn’t stop us from going after full value when the product was worthless to the consumers who purchased it. 
Muris: if you took less than 10 cents on the dollar in Reebok, what you’re saying is that we could get the full amount, and that’s a hard argument to make to a judge.  Prediction: will instead argue for a premium, and that’s different.
Glynn: Freeze orders—directing defendants not to withdraw funds.  And FTC has also told the bank to surrender property to the FTC within a certain number of days after the seizure order is served.  But orders are generally just binding on defendants and those in active concert/participation with them.  But assuming a financial institution isn’t in active concert with them—maybe holding money as security for a loan or something like that—can they really be bound?  Thinks it’s null & void to tell bank what to do.
Hippsley: Traditionally, we serve the banks, and banks on notice of order can’t allow defendants to drain their accounts or they’ll then be in concert.  Federal court can also assert jurisdiction over the res.  Turnover should be to the court, not to the FTC.  If the bank does have a claim against the defendants, or the credit card company, it can intervene and sometimes does.

Tuesday, March 27, 2012

Do as I say, not as I do

TV creators/developers/writers on various topics including, at the end, their unauthorized downloading of British television they'd otherwise have to wait to see.  (Listen after 1:34.) Tell me again that this is a problem of law, not a business problem?

Tobacco regulations: conduct restrictions


Part III: Sampling, loyalty programs, and sponsorship regulation
Next, the court turned to bans on brand-name sponsorship and merchandise, sample tobacco products, and “continuity” programs (rewards of non-tobacco products in consideration for tobacco purchases).  You may be surprised to see which one it found an unconstitutional restriction on free speech.
The Act directed the FDA to ban free samples; non-tobacco items with the name or logo of a tobacco brand; continuity programs; and sponsorship by tobacco companies “of any athletic, musical, artistic, or other social or cultural event, or any entry or team in any event,” using a tobacco brand identifier.
Plaintiffs argued that the government had failed to justify these bans as measures that directly and materially advanced the interest in decreasing youth tobacco use.  Further, the bans covered marketing geared to and largely received by adults.  As less restrictive alternatives, plaintiffs suggested restricting media coverage of brand-sponsored events (because that’s First Amendment-friendly!), limiting the merchandise ban to items that can become “walking ads,” strengthening laws preventing sales to minors, raising the legal age of purchase to 19, penalizing youth who smoke, and other antismoking educational campaigns.
The district court held that the bans on free samples and gifts with purchase didn’t implicate, let alone violate, the First Amendment, since this was conduct without a significant expressive element.  The court of appeals, however, agreed with plaintiffs that “sampling and continuity programs are protected speech” because they “are promotional methods that convey the twin messages of reinforcing brand loyalty and encouraging switching from competitors’ brands.”
Comment: This is an amazing conclusion, and one that can’t mean what it says. It’s a well-known issue in First Amendment law.  There is no doubt that a racially motivated murder is communicative: it conveys its message of terror very powerfully. But conduct that sends a message, whether “you’re not welcome here” or “smoking is fun” is not thereby free speech.  Nor is conduct that changes how those who are exposed to it think about it thereby free speech: my opinions about Crest toothpaste were changed by my exposure to various flavors thereof, but that doesn’t make toothpaste speech.  Still less is anything that makes an experience more pleasurable (reward programs, free hugs accompanying purchase) thereby free speech.  Consider, for example, bribery.  Or, given what the Supreme Court is doing with campaign finance, maybe don’t.  Perhaps O’Brien analysis is appropriate—though even there I have my doubts, since Congress isn’t trying to deter the communication but instead trying to deter smoking—but that at most makes these programs communicative conduct, not “protected speech.” 
In a footnote, the court said that O’Brien was indeed the right standard for a regulation of communicative activity.  But the government has to be regulating the noncommunicative aspects of the conduct, not the expressive elements.  (Which is the aspect where you get the free stuff?  That sure seems noncommunicative to me.)  Here, the Act’s regulation of sampling and continuity programs was an attempt to regulate the “communicative impact” of the activity, not the activity itself. “The government has not articulated an interest in generally regulating the distribution of T-shirts, baseball caps, bobblehead dolls, or any other merchandise that may be available as part of a continuity program, or of regulating continuity programs themselves. Nor has it articulated an interest in regulating the act of providing free samples of products across consumer categories.” 
Me again: Yes, because the government was interested in regulating the sales of tobacco, as promoted by these “gifts” designed to trigger feelings of goodwill and reciprocity in recipients.  Note how broadly the court’s principle sweeps: there are a number of regulations of specific fields that would appear to be jeopardized by this standard, including restrictions on the kinds of tie-in benefits that sellers of real estate can offer, see, e.g., Coldwell Banker Residential Real Estate Services, Inc. v. New Jersey Real Estate Commission, 576 A.2d 938 (N.J. App. Div. 1990), and restrictions on holding sweepstakes with respect to certain product categories (alcohol, banking, dairy products, food retailers, insurance, gasoline, and our friend tobacco).  These are generally justified by reference to special concerns with the underlying products—and yes, the “dairy products” restrictions are probably dumb, but the repudiation of Lochner was about letting legislatures do dumb things with respect to ordinary economic activity.  And, of course, those are only the narrow applications of what the court said; more generally, putting any product on sale communicates that it’s worth buying, and banning the product suppresses the communication of that message.  You can say that usually this will survive First Amendment scrutiny, but the mistake, as Fred Schauer would point out, is to think that First Amendment scrutiny has any business here in the first place.
Back to the court’s analysis: Congress’s stated purpose was to reduce tobacco use and one mechanism it chose to do that was to regulate tobacco advertising and marketing.  That was further evidence that the primary intent of the marketing bans was the regulation of commercial expression.  (Or that’s just circular.  If I lower the price of a product to make it more attractive--a promotion--is the low price now free speech?)
All this puts us in Central Hudson territory.  Here the government gets a bit back: “Though Plaintiffs would have us believe that there is no causal connection between product advertising and the consumer behavior of children, such a claim stretches the bounds of credulity, even in the absence of the extensive record submitted by the government, which indicates the contrary. The tobacco industry spent approximately $13 billion in advertising to promote its products in 2005, and though Plaintiffs claim that all of it was spent to attract and retain adult consumers, it is impossible to believe that promotion so successful in the adult context that it is valued by Plaintiffs at $13 billion dollars had absolutely no effect on anyone below the age of eighteen.”  And adult users (who almost all start when they’re underage) are extremely brand loyal—only about 9% will switch among major brands.  That’s why ads target youth.  Courts have repeatedly found that tobacco ads have a “dramatic” impact on youth smoking, and have been intended to do so.  The court found a substantial state interest in curbing youth smoking that would be directly advanced by limiting marketing of tobacco products.
Plaintiffs argued that a ban on free sampling wasn’t narrowly tailored.  But this was easy: there was extensive evidence that free samples were easily accessible to young people.  A free sample “may serve as the best advertisement of all for a product that is physiologically addictive, and socially attractive to youth.”
Likewise, the distribution of branded non-tobacco products was also a good way of promoting smoking to adolescents, both current smokers and nonsmokers.  The government submitted studies showing that obtaining tobacco branded non-tobacco products “precedes, and reliably predicts, smoking initiation, even when controlling for other factors that have been shown to influence smoking uptake.” Thus, the government met its burden to show that the ban materially advanced its interest in preventing juvenile smoking. 
Plaintiffs argued that more tailored solutions were available, such as limiting the ban to items that can be “walking ads” and not covering keychains and matchbooks.  As a matter of fact, the Act contains an exemption for matchbooks as “adult-written publications” allowed to contain ads, though the FDA can remove this exemption if it’s inappropriate for the protection of public health.  The fact that plaintiffs were left with only one product allegedly unreasonably covered by the regulation was strong support for a finding of sufficient tailoring.
Event sponsorship: substantial evidence also supported Congress’s finding that young people are widely exposed to sponsored events, including via TV broadcast.  In 1996, more than 64 million children each year were exposed to tobacco ads on TV through auto racing sponsorship alone.  This affected youth tobacco use, according to the tobacco companies themselves: Philip Morris identified the objectives of TV sponsorship as “[r]egain[ing] momentum in the hearts and minds of our target market—young adult smokers under 25”; and “look[ing] at current and new program opportunities to extend our reach with starters and young adult smokers.”
Plaintiffs argued that the ban wasn’t narrowly tailored.  It included Lorillard’s Newport Pleasure Draw blackjack tournament in a youth-restricted casino, which wasn’t covered in the media.  The government responded that the manufacturers could still sponsor events in their corporate names.  The government won: “Just as branded non-tobacco merchandise reaches a wide audience of juveniles and contributes to their decisions to use tobacco products, so too does branded event sponsorship.” The incidental suppression of the ability to brand a single youth-restricted event wasn’t enough to make the law unconstitutional.  “Plaintiffs have failed to show that anything other than a nominal amount of protected speech is swept into the regulation.”
Now here’s the kicker, and why it matters when you call conduct "expression": the ban on continuity programs was unconstitutional. Continuity programs “are designed to maintain the loyalty of existing customers, not to attract new ones.”  In 1996, the FDA found that reward programs were “an instrumental form of advertising in affecting young people’s attitudes toward and use of tobacco.”  In 1992, about half of adolescent smokers and ¼ of nonsmokers owned Marlboro Miles or Camel Cash, about the same as owned tobacco-branded clothing.  Many teens, including many nonsmokers, reported participating in promotional activities.  But this was old evidence, and not enough compared to the overwhelming evidence supporting most of the other measures in the Act.  Because adults consume more than 98% of all tobacco sold, and continuity programs are naturally linked to consumption, “logic dictates that the overwhelming beneficiaries, both numerically and comparatively, of these continuity programs are adult consumers.”  Thus, the ban on continuity programs failed Central Hudson scrutiny.
Expect Supreme Court action on this case.

Tobacco regulations: bans on manufacturers' speech


Part II: Bans on advertisers’ own speech
The court—now Judge Clay is back to speaking for the unanimous panel again—turned to restrictions on speech about “modified risk” tobacco products. Under the Act, people may only market a product as “modified risk” if the FDA determines that the product, as actually used by consumers, will significantly reduce harm/risks to individual tobacco users and benefit the health of the population as a whole. A “modified risk” product is a tobacco product whose label or advertising represents, implicitly or explicitly, (1) that it presents a lower risk or is less harmful than other tobacco products on the market, (2) that it or its smoke contains a reduced level/reduces exposure to a substance; (3) or that it or its smoke is free of a substance. A “modified risk” product is also a tobacco product that uses “light,” “mild,” or “low” or similar descriptors, or one as to which the manufacturer “has taken any action directed to consumers through the media or otherwise . . . respecting the product that would be reasonably expected to result in consumers believing” (1)-(3) above. Plaintiffs argued that this was overbroad because it would suppress their participation in the public health debate over harm reduction, even in scientific symposia, press releases, or news programming, and that they were being subjected to impermissible viewpoint discrimination. The district court agreed with them.
The court of appeals found that the premarket approval requirement was a prophylactic regulation of commercial speech, and thus not subject to traditional prior restraint analysis. While plaintiffs argued that their commercial speech was inextricably intertwined with political speech, but the court disagreed. The Act only applied to products where the labeling or advertising made particular health claims or used key words, or where the manufacturer took “any action directed to consumers through the media or otherwise . . . respecting the product.” There was no reason to think the Act touched on plaintiffs’ noncommercial speech in the public health context, including scientific symposia, regulatory press releases, or news programming, or to think that the Act would apply when manufacturers limited their speech to discussions of generic product categories such as smoke-free tobacco. Just because an ad is linked to a public debate doesn’t make it protected the way noncommercial speech is.
Even so, plaintiffs argued, they were subject to unconstitutional viewpoint discrimination because government agencies, ideological anti-tobacco organizations, and commercial manufacturers of tobacco-cessation products were “all free to publicly denigrate the relative health risks of Plaintiffs’ products” but plaintiffs couldn’t respond without receiving FDA preapproval. (I talk about why this argument shouldn’t work in Fighting Freestyle.) The court was unconvinced, because the government can ban commercial speech that’s more likely to deceive than to inform. Plaintiffs can respond to claims that modified risk products are unhealthy “if and when the veracity of the health claims they make in response have been demonstrated.”
Plaintiffs argued that this portion of the Act covered truthful, nonmisleading speech because it barred them from making claims about individual harm reduction even if they unambiguously disavowed any population-wide health benefit. It also barred them from marketing tobacco products as additive-free “to appeal to naturalists and smokers who prefer organic products, even when such preferences are not linked to perceptions of health benefit.” Moreover, though the Act allows products to be marketed as “smokeless” or “smoke free,” it barred manufacturers from “explain[ing] the relative health significance” of those designations. Furthermore, these restrictions allegedly didn’t materially advance the government’s interests, nor were they narrowly tailored.
In a potentially significant move, the court accepted plaintiffs’ argument that there’s no difference between a law that bars promotional speech and one that renders a product’s sale illegal based on speech used to promote it. This would seem to imply that the entire FDA preapproval edifice, which has precisely this structure (a drug is misbranded if it’s advertised for an unapproved purpose) must pass Central Hudson review—perhaps in each individual instance, though the court hedged its bets by parenthetically referring to a previous case as having “distinguish[ed]” normal FDA regulation.
The government’s main defense was that the industry’s speech about modified risk products was, and had historically been, misleading.  But Central Hudson still applied because “the provision undoubtedly ensnares some speech which may be completely truthful and nonmisleading.” Thus, the court turned to whether the government’s interest was substantial. This interest was the risk of fraudulent claims. (If all prophylactic antideception measures have to pass Central Hudson despite being enacted to prevent deception, what happens when the legislature finds that, for example, “organic” can only be used to describe food produced in a particular way?  In other words, this formulation of Central Hudson requires a very clear idea of how much deference a court should be willing to give the legislature on its factual premises.) A paternalistic assumption that the public will use truthful, nonmisleading information unwisely can’t justify its suppression, according to 44 Liquormart, even if the result is bad choices. In light of the industry’s history of deception, though, the government had shown a significant problem of misleading ads and marketing tactics, which had, for example, raised the market share of “low tar” cigarettes—which are no better for health—from 2% in 1967 to 81.9% in 1998. Query: So does this mean that paternalism is justified if, instead of an “assumption,” the government has actual evidence that people use information unwisely? Probably not under current doctrine, but then we shouldn’t really be talking as if the problem were paternalistic assumptions.
The premarketing approval requirement had the appropriate fit to further the substantial interest in preventing deception. It covered only commercial speech. The contention that plaintiffs couldn’t market “additive-free” products to “naturalists and smokers who prefer organic products, even when such preferences are not linked to perceptions of health benefit,” was unpersuasive because plaintiffs presented no evidence that such people actually exist. “On the contrary, we may safely presume that naturalists and those who subscribe to organic products do not engage in unmotivated or arbitrary behavior—common sense dictates the conclusion that they prefer such products precisely because they believe that natural and organic products confer health advantages over conventional products.” Note: While the court cited evidence on this with respect to smokers, it’s also possible to believe that organic production is better for the environment even though consumption of organic products may not confer health benefits.
Moreover, the requirement to show harm reduction at both the individual and population levels survived Central Hudson. “A claim that a product is less risky if it reduces harm to an individual, when that harm is externalized to others, is inherently misleading.” If marketing a product as “modified risk” raises the aggregate number of people, especially kids, who use tobacco by making them think the product is relatively safe, then that impairs the government’s compelling interest in reducing juvenile tobacco use.
Finally, plaintiffs’ suggested less restrictive alternatives—mandatory disclaimers, post-marketing review of ads, enhanced enforcement of fraud laws, and government public advertising campaigns—didn’t convince the court that there was a problem with fit. “Plaintiffs would have us believe that the government has only recently come to recognize the harms associated with false tobacco safety claims, and that the [Act] is the government’s first up at bat. But on this issue, the government is at play in the major leagues, and the alternatives suggested by Plaintiffs have already been tried and found wanting.” Congress expressly concluded that disclaimers wouldn’t work, because of evidence that consumers have misinterpreted ads claiming harm reduction even with disclaimers. Nor did the costs of correcting these misimpressions have to be externalized from the tobacco industry to the government and taxpayers. “And, although the idea of post-market review of deceptive claims may be appealing to the tobacco industry, the government has made a reasonable determination that, in the context of a deadly and highly addictive product, it would be a virtual impossibility to unring the bell of misinformation after it has been rung.”
Restrictions on the use of color and imagery in most tobacco ads, by contrast, failed Central Hudson scrutiny.  The Act mandated black text on a white background for any labeling or advertising, except for circumstances unlikely to reach juveniles: places where vending machines and self-service displays were permitted if the advertising wasn’t itself visible from outside and adult publications with 15% or less and 2 million or fewer of under-18 readers.  The district court struck this down as overbroad because it covered many innocuous images and colors (“images that teach adult consumers how to use novel tobacco products, images that merely identify products and producers, and colors that communicate information about the nature of a product, at least where such colors and images have no special appeal to youth”).
The government argued that the tobacco industry’s history of targeting juveniles through colorful and graphic advertising justified the breadth of the restriction.  As it framed the problem, “[t]he industry’s campaign to attract minors is not waged with tools of rational persuasion that invoke the ‘merits’ of taking up tobacco use. Instead, the industry relies on peripheral cues and irrational associations to distract would-be users from the fact that tobacco products are lethal and addictive.”  This strategy was more effective with juveniles than with adults.  The government contended that the ban was narrowly tailored because it exempted adult publication ads and didn’t apply to packaging, and allowed manufacturers to communicate via text, and because narrower bans would be subject to the industry’s history of evasion.
Plaintiffs argued that the ban prevented them from “attracting attention and differentiating their products in the retail environment” and communicating with adults, including by advertising their products’ packaging or logos and colors.  The ban covered direct mail to adults, some magazines primarily directed to adults, most retailers that sell tobacco, and taverns that allow juveniles “to enter for meals with their parents or during restricted times.”  Moreover, the burden of having competent and reliable survey evidence of readership, as required by law to advertise in an adult publication, was too heavy since a readership survey would generally be more expensive than the ad itself.
The court began with the proposition that truthful speech (or, in this case, nonfalsifiable speech, since we’re not talking about truthful communication for almost all of the uses of imagery involved here) is entitled to First Amendment protection.   IMS v. Sorrell: “the State may not seek to remove a popular but disfavored product from the marketplace by prohibiting truthful, nonmisleading advertisements that contain impressive endorsements or catchy jingles. That the State finds expression too persuasive does not permit it to quiet the speech or to burden its messengers.”  Thus, one implication of this decision is First Amendment protection for trademarks themselves as such, which contradicts prior Supreme Court precedent, Friedman v. Rogers, 440 U.S. 1 (1979), but I think is likely to find favor with the present Court.
The government’s argument was that colorful advertising distracted potential users from the harms of tobacco use and created positive lifestyle associations that overrode risk information.  This was not a claim of deception.  Note that the FTC and the FDA have long taken the position that distracting people from disclosures/disclaimers with color and sound can be deceptive; perhaps the court here would agree that specific uses of images and sound can meet that standard, but if that's true why isn't the evidence that consumers don't notice the current disclosures evidence that current uses of color and images are distrcting them?  
Plaintiffs rejoined that accepting the government's premise would allow bans of attractive ads for all age-restricted products, from movies to cars.  The court wasn’t entirely convinced—there are safe ways to consume alcohol, movies, lottery tickets, and cars, but there is no non-harmful way to consume tobacco. 
But it was convinced enough.  Ads always try to create positive associations.  “Perfume and cologne do not make people more beautiful, chewing gum does not make them more athletic, coffee does not make them more intelligent or urbane. By the same token, though the government would have us believe otherwise, using tobacco does not necessarily preclude a person from mountain biking, playing games, or engaging in romantic relationships.”  A broad prophylactic rule against images was unjustified.  From Zauderer: “We are not persuaded that identifying deceptive or manipulative uses of visual media in advertising is so intrinsically burdensome that the State is entitled to forgo that task in favor of the more convenient but far more restrictive alternative of a blanket ban on the use of illustrations . . . .”
As nondeceptive uses of color and imagery, the court identified informational ads, ads intended to “reinforce” consumer preferences by simply showing the package, and uses of color that grab attention in a crowded marketplace, “letting consumers know that their preferred brand or product is available at a particular retailer.” In addition, “there are surely certain color graphic tobacco ads that have nominal to zero appeal to the youth market.”  (Really?  Which ones?)  Suppressing them all imposed an undue burden.
The government’s argument that color was used to convey mood—red for passion and power, green for harmony and health—and circumvent other ad restrictions.  But that wasn’t enough to justify a blanket ban.  “Packaging shape, product shape and color, display location, and any number of other factors may also convey meaning through association.”  (Note the implication, about to come to fruition in the next section, that conveying meaning makes something speech.)  Congress could have exempted innocuous images and colors that merely teach consumers how to use novel tobacco products, identification-promoting images, and information-providing colors, at least where they had no special appeal to juveniles.  This would involve more difficulty in implementation—the government noted the controversy surrounding the “Camel Farm” ads, which also produced an interesting right of publicity case—but that’s required by the First Amendment.
Finally, the plaintiffs lost their challenge to bans on express or implied claims that a product is safe or less harmful due to FDA regulation or compliance with FDA standards.  They argued that a ban on any consumer-directed speech that conveys that the FDA is achieving its objectives was overbroad.  The district court found that the ban went beyond commercial speech and failed strict scrutiny, but the court of appeals disagreed.  Manufacturers were banned from making such claims in consumer-directed communications, but journalists, doctors, scientists and politicians weren’t banned from making noncommercial statements, so this was an ordinary commercial speech regulation.  The ban served the legitimate interest of keeping manufacturers from confusing consumers about the FDA’s role with respect to tobacco, which was significantly different from its ordinary regulatory role.  For the industry to claim or imply that tobacco products are made safe or less harmful by virtue of FDA regulation would be “inherently misleading and patently false.”  So this ban survived Central Hudson.

Tobacco regulations: mandated warnings, including graphics


Part I: Mandated warnings
Judge Clay’s opinion
The court began its analysis of the Act with the new mandated warnings. The Act required tobacco manufacturers to “reserve a significant portion of their packaging—the top 50% of the front and back of cigarette packaging, 30% of the front and back of smokeless tobacco packaging, and 20% of tobacco advertising—for full color, graphic health warnings issued by the FDA.” Plaintiffs argued that the scale and intrusiveness of the new warnings was disproportionate to the legitimate interest in conveying factual information to prevent deception, especially since consumers already overestimate the risks of tobacco. Furthermore, they argued, the new warnings were unduly burdensome because they overshadowed plaintiffs’ own speech. Moreover, the required graphic images went beyond “mere factual warnings” and instead required the plaintiffs to convey Congress’s message that tobacco use is “socially unacceptable” by mandating “subjective and highly controversial message[s].” Basically, since the new warnings were unnecessary to convey the facts, which were already “universally known,” the plaintiffs argued that they were unconstitutional.
The government responded that an “information deficit” still existed, especially among juveniles. Adolescents misperceive the magnitude of harm from smoking and the danger of becoming addicted, especially when they considered their own behavior. Thus, adolescents were likely to start tobacco use and then be unable to stop. It’s true that adolescents significantly overestimate the risk of developing lung cancer from smoking, but the government provided evidence that they underestimate the degree to which smoking can shorten life and the likelihood that they will suffer tobacco-related disease. Smokers, including adolescent smokers, were more than twice as likely as nonsmokers to doubt that tobacco use, even for 30-40 years, would cause death. As the District Court for the District of Columbia has found, most people don’t completely understand smoking-related diseases or addiction. Instead, they are superficially aware that smoking is dangerous. Thus, the government maintained, the point of the new warning was to ensure that the warnings are actually seen by consumers. Significant package real estate, moreover, remained for plaintiffs.
The court then gave special attention to plaintiffs’ argument for strict scrutiny, which was that the government was attempting to make commercial speakers into its “mouthpiece” for a “subjective and highly controversial marketing campaign expressing its disapproval of their lawful products.” First of all, there was no indication that the textual element of the new warning was subjective or highly controversial. The warnings were the same or similar to those that had been required since 1965, and plaintiffs didn’t submit any evidence that the content was disputed in the scientific or medical community. Plaintiffs relied on their expert, Dr. Kip Viscusi, but his methodology was “sometimes questionable” and his conclusions were largely based on research commissioned by “tobacco industry law firms specifically for use in litigation.”
Judge Clay on images
Moreover, the Act required that images required by the FDA visually “depict[] the negative health consequences of smoking” in accompaniment with the label’s textual warnings. And here’s where Judge Clay’s dissenting opinion kicks in: he would hold that “there can be no doubt that the FDA’s choice of visual images is subjective, and that graphic, full-color images, because of the inherently persuasive character of the visual medium, cannot be presumed neutral.” This is image as bogeyman, and it’s a position certainly not unknown to the law, as I’ve written.  Because visual images “are subjective and cannot be categorized as mere health disclosure warnings,” Judge Clay found the strict scrutiny argument “not wholly unpersuasive.”
Unpacking this a bit: Justice Stevens took the position that commercial speech regulation should be analyzed for its purpose. If it’s to preserve a fair bargaining transaction, then that’s the end of the matter. If it’s to accomplish some other purpose, then ordinary First Amendment scrutiny should apply, not the more relaxed Central Hudson standard. Implicitly, Judge Clay agrees, with the addition that a “subjective” message can’t be considered to protect the bargaining transaction—though I think that’s quite an odd addition. Commercial sellers use subjective images all the time, in fact they predominantly use images and nonfactual matter to make their products attractive; if we think that distorts rational judgment (which, recall, we must in order to make Judge Clay’s conclusion possible) then Judge Clay’s rule makes it impossible for the government to correct that distortion with a countervailing emotion—something he will essentially acknowledge by the end of his discussion. And, since Judge Clay’s position, along with that of the majority, is also that the government can’t prevent tobacco manufacturers from using nonfactual images in the first place, the government would then be completely disabled from combating this decision-distorting practice.
Regardless, plaintiffs argued that they were entitled to strict scrutiny because required “sexually explicit” labels on video games had been struck down by the Seventh Circuit, and Brown v. Entm’t Merchants Ass’n, 131 S. Ct. 2729 (2011), likewise struck down a law barring sales of violent video games to minors and requiring an “18” label. But, Judge Clay wrote, these cases involved not just warning requirements, but also affirmative limits on speech in the form of sales restrictions. (Note this smooth move, which also pops up later: a sales restriction is now a limit on speech! This is why the First Amendment is the new Lochner. The reasoning here is inconsistent with Central Hudson, which protects only commercial speech about products that may lawfully be sold; if they may not lawfully be sold to a certain group, offering to sell them to a member of that group is completely unprotected by the First Amendment.  The majority will later note Judge Clay’s conflation of bans and warnings, but accept that a sales restriction is a limit on speech.)
More to the point, Judge Clay recognized, those cases were about core speech: expression that was being sold. Those regulations were based on the harms the government determined were caused by the video games—the speech—and not harms caused by tobacco. The Supreme Court has already upheld the proposition that, “[t]o avoid giving a false impression that smoking [is] innocuous, the cigarette manufacturer who represents the alleged pleasures or satisfactions of cigarette smoking in his advertising must also disclose the serious risks to life that smoking involves.” Strict scrutiny did not apply.
Judge Clay nonetheless concluded that the requirement of color images was unconstitutional, both facially and as applied, and that in the interests of efficiency the court should have decided the as-applied challenge. Not all disclosures survive First Amendment scrutiny: under Zauderer, they must be reasonably related to the government’s interest in preventing deception. It’s true that adolescents aren’t sufficiently aware of the actual risks of tobacco use: current warnings have failed. But “[t]he primary deficiency in the form of the current warnings is that they are easily overlooked.” The government analogized these warnings to prescription drug warnings, but those do not require color graphics, and drug warnings “present purely factual information, with no subjective component.” (My guess is that Judge Clay thinks the FDA “black box” warnings are just rational and nonsubjective, even though they are supposed to make you stop and worry.)  The requirement of a large scale color graphic was “simply unprecedented.” (Of course, one might think the death toll of tobacco is equally “unprecedented,” not to mention the strategems used by the industry to stave off regulation and create uncertainty about the health effects of tobacco, echoing still today.)
Judge Clay concluded that the government hadn’t shown that color graphics were properly or reasonably tailored to address the continuing information deficit. “It appears, from the government’s own evidence, that the color graphic warning labels are intended to create a visceral reaction in the consumer, in order to make a consumer less emotionally likely to use or purchase a tobacco product.” As one study put it, graphic warning labels can help consumers “appreciate the risks of smoking” by creating “unfavorable emotional associations,” whereas “[b]land descriptions” are unlikely to create such associations “because they fail to attract attention or to make the health danger sufficiently compelling.” While a requirement of truthful disclosure is permissible, “even if perhaps frightening,” aiming “to simply frighten consumers or to otherwise attempt to flagrantly manipulate the emotions of consumers as [the government] seeks to do here” was not okay. ((1) I sure wish someone would tell that to the states mandating that various nonfactual claims be made, and pictures be shown, to women seeking abortions. (2) As marketers already know, there are no decisions without emotion. An emerging body of scholarship, as set out in this article by Kathryn Abrams and Hila Keren, attempts to integrate this insight with law.)
Judge Clay continued: The government argued that the industry’s own colorful images “can evoke a visceral response that subsumes rationale decision-making, and “[t]his principle applies equally when seeking to discourage behavior.” Given that, the government failed to persuade him that color graphics were reasonably tailored to the problem. Other options could deter youth smoking.
The majority found that color graphics would materially advance the interest in counteracting the information deficit among young people, but Judge Clay disagreed, because “color graphics cannot accurately convey all of the health risks associated with tobacco use. Although elements of the color graphics requirement may remain constant, the underlying message that they convey will vary with the interpretation and context of its viewer. The color graphics can be seen one way by some smokers, yet another by other smokers—one way by some non-smokers and yet an entirely different interpretation by other non-smokers.” (As we all know, the meaning of words is invariant across people. That’s why patents and contracts are so easy to interpret, not to mention legislation!)
Thus, Judge Clay would find the color graphic requirement unconstitutional. In a footnote, he approved the D.C. district court’s recent ruling upholding the industry’s as-applied challenge to the graphics adopted by the FDA. These graphics were, that court found, “neither designed to protect the consumer from confusion or deception, nor to increase consumer awareness of smoking risks; rather, they were crafted to evoke a strong emotional response calculated to provoke the viewer to quit or never start smoking.” R.J. Reynolds Tobacco Co. v. U.S. Food and Drug Admin., 2012 LEXIS 26257 (D.D.C. Feb. 29, 2012). Indeed, that court (using some pretty emotional language of its own, which I find at least ironic) found the graphics false and misleading—since not everyone’s tar-soaked lungs will look like the pictures, and since there were cartoons which are by definition untrue—and further found that there were less restrictive alternatives.
Judge Clay on bigger text
Now we’re back to Judge Clay’s opinion for the unanimous court: the increased size and placement requirements were reasonably related to the assault on the consumer “informational deficit.” Larger warnings would materially affect consumer awareness and decisions. Plaintiffs didn’t show that the remaining portions of the packaging were insufficient to place their own brand names, logos, or “other information” (whatever that might be). Instead, they argued that the big warnings might deter smokers from buying the product “by making it appear unhealthy or otherwise unattractive.” Judge Clay: “But this is, in some ways, the purpose of the labels—to provide truthful information regarding the health consequences of the product in order to decrease ‘the use of tobacco by young people and dependence on tobacco.’” (Comment: Make tobacco appear unhealthy? Nay, it is; I know not “seems.” But that’s the beauty of visual language: images are truth, or images are not reality, as needed for the argument one is making at any particular moment. Judge Clay is skimming over the reality that words have emotional power too and that one’s reaction to a giant textual warning might not be perfectly calibrated to the factual content of that warning. And that’s of course setting aside the question of what such calibration might look like, which is easy here because smoking is so bad for people.)
The image requirements: the majority opinion
Writing for the majority, Judge Stranch (writing also for Judge Barrett) reiterated some of Judge Clay’s opinion and explained why the majority diverged on the image based warnings.  First, the majority refused to consider an as-applied challenge to the image warning requirements, based on the timing of the plaintiffs’ challenge; the district court’s reasoning; the plaintiffs’ explicit statements that they were making a facial challenge; and Supreme Court precedent on what counts as a facial versus an as-applied challenge.  It’s hard to win a facial challenge.
With that out of the way: Under Zauderer, a disclosure requirement for commercial speech designed to avoid deception is assessed to see if it has a rational basis.  The Supreme Court rejected straight-up application of Central Hudson to disclosures based on the “material differences between disclosure requirements and outright prohibitions on speech.”  Commercial speakers have minimal interests in avoiding the provision of any particular factual information.  Unjustified or unduly burdensome disclosure requirements might violate the First Amendment by chilling protected commercial speech.  But, as long as the disclosures are reasonably related to the state’s interest in preventing deception, the advertiser’s rights are adequately protected.  The dissent failed to recognize the difference between restricting speech and requiring disclosures.
In Zauderer, the government didn’t require the lawyer to adopt or proclaimed a state-sanctioned opinion; instead it required him to include factual information about the limits of a contingency fee arrangement.  More recently, Milavetz, Gallop & Milavetz, P.A. v. United States, 130 S. Ct. 1324 (2010), reaffirmed Zauderer, holding required disclosures constitutional when debt-relief agencies were required to disclose pertinent information that could help consumers avoid deception.  Once the Supreme Court determined that the disclosures were reasonably related to preventing deception, it didn’t inquire further into whether the disclosures were unjustified or unduly burdensome.
National Elec. Manufacturers Association v. Sorrell, 272 F.3d 104 (2d Cir. 2001), further demonstrated that required factual disclosures for commercial speech should be subjected to rational basis review, looking only for a reasonable relationship between the government’s goal and the requirement.  Sorrell showed that this is true even if the required disclosure’s purpose is not just to avoid consumer deception.  Sorrell rejected a challenge to a law requiring manufacturers of mercury-containing lamps to disclose this fact on their products and packaging and to disclose that consumers should dispose of the products as hazardous waste.  The court of appeals upheld the required disclosure, because the information was factual and posed little risk of forcing commercial speakers to adopt state-sanctioned opinions with which they disagreed.  Though the disclosure’s purpose was not to prevent deception per se, it was meant to protect human health and the environment by reducing the amount of mercury released.  This goal was “inextricably intertwined” with “better inform[ing] consumers about the products they purchase,” and the disclosure requirement achieved that goal by making it more probable that purchasers would properly dispose of the lamps, reducing pollution.  Even if the statute ultimately failed to reduce all or most mercury pollution in the state, it had a rational relationship to that goal.
Sorrell relied on common sense rather than evidence to conclude that the disclosures would lead some consumers to change their behavior, thereby showing that constitutionality does not hinge upon some quantum of proof that a disclosure will realize the underlying purpose. A common-sense analysis will do.”  (Compare this to what the court says about continuity programs in that part of the opinion, where the unanimous panel disparaged the available evidence that they were attractive to adolescents.  This difference in the standard of proof can be defended by the difference between disclosures and bans, but it highlights the difficulty with treating conduct as speech.)  The disclosures didn’t have to be shown to be effective: lamps aren’t the largest source of environmental mercury, but the state didn’t have to address the biggest problem first as long as it didn’t violate a fundamental right.  And a right not to divulge accurate information is not fundamental.
Likewise, the Sixth Circuit has already held that Zauderer applies not only when the required disclosure “targets speech that is inherently misleading,” but also “where, as here, the speech is potentially misleading.” Int’l Dairy Foods Ass’n v. Boggs, 622 F.3d 628 (6th Cir. 2010). An advertiser’s interest in not providing factual information is minimal, so the disclosure requirements need only pass rational basis review.
With this background, the Act did fine.  No one disputed the truth of the textual warnings.  The Act also directed the FDA to require color graphics “depicting the negative health consequences of smoking.”  On a facial challenge, the question was whether any set of circumstances exists under which the statute would be valid.  To invalidate the requirement, plaintiffs would need to show that images can’t convey the negative health consequences of smoking accurately, “a position tantamount to concluding that pictures can never be factually accurate, only written statements can be.”  The majority concluded that this was “at odds with reason.”  Moreover, a “graphic” warning could consist only of words, such as “WARNING: Tobacco smoke can harm your children” “written in what appears to be a child’s handwriting.”  This statement would be factual and accurate, and therefore subject only to rational basis review.  (Of course, all fonts convey messages; we just notice some of them more easily than others.  It does seem unwise for courts to get into the weeds of package design, though I thought that was true in Boggs too.)
The majority envisioned many graphic warnings that could be factual disclosures: “a picture or drawing of a nonsmoker’s and smoker’s lungs displayed side by side; a picture of a doctor looking at an x-ray of either a smoker’s cancerous lungs or some other part of the body presenting a smoking-related condition; a picture or drawing of the internal anatomy of a person suffering from a smoking-related medical condition; a picture or drawing of a person suffering from a smoking-related medical condition; and any number of pictures consisting of text and simple graphic images.” 
Students look at pictures to learn factual information about the human body all the time.  A picture of a specific person is not opinion just because people differ; medical students learn valuable factual information by examining pictures and images of the human body.  If a picture is an opinion because different people would manifest a particular medical condition differently, then “textual or pictorial descriptions of standard medical conditions must be opinions as well. People with the same illness can and often will suffer a variety of differing symptoms. But one wouldn’t say that a list of symptoms characterizing a particular medical condition is nonfactual and opinion-based as a result. So too with graphic images.”
A couple of comments: (1) This discussion echoes debates over what constitutes objectivity in science; some scientists criticized images as inherently subjective, while others used them to show the ideal type of whatever was at issue—distilled truth or truth-to-nature—and still others used images to show truth as filtered through expert judgment.  From the perspective of each, the other concepts of truth are or can be misleading—but I don’t think that the First Amendment mandates a choice between these epistemologies. (2) Does this reasoning mean that the FTC’s Guides on endorsements are constitutionally suspect?  One of the major recent changes was greater disapproval of testimonials—especially before/after pictures—that didn’t represent standard results, unless consumers actually understand that the results wouldn’t be typical.  It would seem, by the majority’s reasoning, that if these pictures are “truthful” in the sense that they represent accurately what a particular person looked like before and after treatment then they are constitutionally protected.  The FTC, however, made its change after years of evidence that consumers interpreted these images and other testimonials as promising typical results despite the standard “results not typical” disclaimer.  That evidence might be enough to make a difference.
Back to tobacco: plaintiffs argued that Zauderer only covers “purely factual and noncontroversial” disclosures.  But Zauderer also spoke elsewhere of disclosures providing “factual” and “accurate information.”  Milavetz demonstrated that a disclosure need not be purely factual and noncontroversial, because the Court never asked whether the disclosure there satisfied that standard.
Indeed, Zauderer “eviscerates” the argument that an image can’t be accurate and factual.  There, the lawyer challenged a rule forbidding illustrations in lawyer ads.  One of his ads used a drawing of an IUD, and the state defended its rule by arguing that images created unacceptable risks of misleading the public by playing on the emotions and conveying false impressions. Zauderer held to the contrary: “the use of illustrations or pictures in advertisements serves important communicative functions: it attracts the attention of the audience to the advertiser’s message, and it may also serve to impart information directly.”  Because the IUD drawing was accurate, the state’s ban was overinclusive.  Though this dealt with a restriction on commercial speech rather than a disclosure, the reasoning “demonstrates that a picture can be accurate and factual. If a picture can accurately represent an IUD, then there is no reason why a picture could not also accurately represent a negative health consequence of smoking, such as a cancerous lung.”
The dissent essentially adopted the reasoning rejected in Zauderer by arguing that graphic warnings would evoke a “visceral” reaction that subsumes rational decisionmaking.  Even if this were sometimes true, and even if a visceral response took the disclosure out of Zauderer’s ambit, some graphic warnings wouldn’t do this, dooming a facial challenge.  The health risks of smoking tobacco are facts (unlike, for example, an opinion about what counts as a “sexually explicit” video game).
The warnings were designed to promote greater public understanding of the risks of smoking, about which consumers have long been misled.  “Tobacco manufacturers and tobacco-related trade organizations … knowingly and actively conspired to deceive the public about the health risks and addictiveness of smoking for decades.”  Even setting aside this extended deception, ads promoting smoking deceive consumers if they don’t also warn of tobacco’s serious health risks—the FTC so found and the Supreme Court cited its conclusion with approval.
“In the face of this deception stand the existing warnings required before the Act. They have not been revised since 1984 and do not effectively convey the risks of smoking, primarily because the warnings are easily overlooked.”  Empirical evidence consistently indicates that these warnings don’t work.  In one study, for example, more than 40% of adolescents didn’t even view the warning, and 20% looked at it but didn’t read it. The Institute of Medicine concluded in 2007 that “the basic problems with the U.S. warnings are that they are unnoticed and stale, and they fail to convey relevant information in an effective way.”
Another problem, strongly supporting the graphic warnings, is that the textual warnings require a college reading level, which makes them inappropriate for young people and for anyone with poor reading ability, including ESL speakers (a category that will only increase) and people with reading disorders.  “Given these ineffective warnings, the evidence unsurprisingly shows that most people do not understand the full dangers of tobacco use,” and young people are especially vulnerable in this regard.  “A warning that is not noticed, read, or understood by consumers does not serve its function. The new warnings rationally address these problems by being larger and including graphics.” 
Common sense, as in Sorrell, supported the conclusion that some consumers would change their behavior in response to the new warnings.  Plaintiffs’ own argument that they needed to use color and graphics in advertising to communicate effectively with consumers supported the conclusion that the graphic warnings were reasonable.  “If color and graphics are necessary for Plaintiffs to effectively communicate and capture the audience’s attention, then warnings using color and graphics should more effectively convey risks than do purely textual warnings. Plaintiffs essentially admitted this point by stating at oral argument that ‘color and imagery are the most effective way to get your ad noticed and communicate a message.’”  Since the risks of tobacco use are material to consumers, such disclosures are reasonably related to preventing consumer deception.
Even apart from that, there was “abundant” evidence from other nations that larger, graphic warnings improved consumer understanding and decisions.  As one study concluded, “[S]mokers are more likely to recall larger warnings, as well as warnings that appear on the front of packages as opposed to on the sides,” and because “there is evidence that smokers with less education are less likely to recall health information in text-based messages,” warnings incorporating graphics “may be particularly important” in communicating with those who have less education. Canada implemented nearly identical warnings in 2000, and large percentages of smokers reported that these were effective in providing them important health information; Canadian smokers “were more likely to report cigarette packages as a source of information about health risks of smoking than smokers in the United States or other countries with only textual warnings.”  In Australia, graphic warnings made adolescents more likely to read, think about, and discuss the warnings.  Compared to the UK, which adopted new warnings but didn’t include graphics, Australia’s results were better at increasing cognitive processing and foregoing cigarettes—“the two strongest predictors of quitting smoking.”  “In sum, there is more than substantial evidence to support the conclusion that larger warnings incorporating graphics would promote greater public understanding of the health risks of using tobacco.”
These results were no surprise, because pictures are easier to remember than words.  General studies of warnings show that pictures plus conspicuous print make it easier to notice warnings and then to remember them. “In crafting warnings that effectively convey the serious health risks of smoking, Congress was simply following the findings of science, findings that Plaintiffs concede in their effort to protect their own advertising.”  Comment: Consider the implications of plaintiffs’ arguments for failure-to-warn doctrine or other attempts to communicate to a multilingual society.  Is a judicially or legislatively imposed mandate to use the poison sadface or other graphic warning unconstitutional because it’s not textual and because it’s likely to trigger a shorthand (visceral) stay-away reaction?  See generally Marjorie A. Caner, Products Liability: Failure to Provide Product Warning or Instruction in Foreign Language or to Use Universally Accepted Pictographs or Symbols, 27 A.L.R. 5th 697 (1995).
Plaintiffs argued that consumers already know, and even overestimate, the health risks of tobacco.  But that was irrelevant, because the test is whether the warnings are reasonably related to the purpose: “[A]n advertiser’s rights are adequately protected as long as disclosure requirements are reasonably related to the State’s interest in preventing deception of consumers.” Zauderer, 471 U.S. at 651.  Moreover, the factual premise was false; the conclusions of plaintiffs’ expert Kip Viscusi had previously been fully considered and rejected.  Plaintiffs then argued that the warnings wouldn’t reduce tobacco use, again relying on Viscusi.  This too was irrelevant even had it been true.  “What matters in our review of the required warnings is not how many consumers ultimately choose to buy tobacco products, but that the warnings effectively communicate the associated health risks so that consumers possess accurate, factual information when deciding whether to buy tobacco products. As shown above, the warnings effectively convey this factual information, just as they were designed to do.”
Finally, plaintiffs argued that the warnings were unduly burdensome because their size drowned out plaintiffs’ own speech.  Again, the test was whether the warnings were reasonably related to the government’s interest in preventing deception; if so, they wouldn’t be unduly burdensome.  Since the size requirement was amply supported, that was the end of the matter, and in any event plaintiffs hadn’t shown that the remaining portions of the packaging were insufficient.  Anyway, if the warnings wouldn’t reduce use, then plaintiffs certainly wouldn’t experience an undue burden.
The majority then addressed the dissent directly.  The dissent found the graphics to be not reasonably tailored to the problem, but the evidence was that current textual warnings aren’t effective.  More to the point, disclosure requirements don’t need to satisfy Central Hudson’s fit requirements, which apply to bans on a commercial speaker’s own speech.
The dissent argued that graphics “cannot accurately convey all of the health risks associated with tobacco use.” The majority responded, “Possibly true, but so what? The list of health risks from using tobacco is so enormous that a disclosure could hardly be faulted if it could not convey all of them.”  It recited myriad cancers and other health harms caused by smoking and by secondhand smoke.  A disclosure need not address every conceivable problem to be constitutional.  “Moreover, the dissent’s point is undercut by our unanimous determination that the textual warnings are constitutional even though they also address only a fraction of these health risks.”
As for the dissent’s reliance on the D.C. district court decision invalidating the FDA’s choice of images, the majority was unimpressed. First, the Act itself doesn’t require images that provoke a visceral response, only images that depict the negative health consequences of smoking.  Second, the majority vigorously disagreed with the premise that a disclosure that provokes a visceral response “must fall outside Zauderer’s ambit. Facts can disconcert, displease, provoke an emotional response, spark controversy, and even overwhelm reason, but that does not magically turn such facts into opinions.”  (Consider the discussion of Osama bin Laden’s death versus the suppressed photos of his dead body.  Both represent facts, and those facts are likely to make people react emotionally, though the consensus is that the pictures will do so more readily.)  Because graphics can present factual health risk information, which fights consumer deception, a graphic warning requirement is constitutional.
The majority finished with a reminder of how we got here: decades of deception by tobacco companies.  “It is beyond cavil that adolescents are a target of the marketing expertise of Tobacco Companies, a targeting that exists precisely because of intertwined advantages—or for the young, disadvantages—the coupling of immaturity of risk perception with the evidence that the vast majority of regular smokers made the decision to begin smoking as an adolescent.”  Plaintiffs’ products kill users and, often, their family members.  Graphic and textual warnings are therefore justified.