Fordham conference book published

Passing this announcement along from the publisher, including a discount offer:

Intellectual Property Law and Policy Volume 12 Edited by Hugh C Hansen

PRAISE FOR THE SERIES "This must be one of the most enjoyable and thought-provoking conferences in the IP field. The high quality of the speakers is matched by the intense, audience-led debates and challenges which follow." The Honourable Mr Justice Laddie, Royal Courts of Justice, London

"Faculty for this conference are always well-known 'names', well respected leaders in their fields, speaking with a combination of candor and timeliness that is unrivaled by any other forum of its kind." Honorable Marybeth Peters, Register of Copyrights, United States Copyright Office.

This is the 17th Annual volume in the series collecting the presentations and discussion from the Annual Fordham IP Conference. The contributions, by leading world experts, analyse the most pressing issues in copyright, trademark and patent law as seen from the perspectives of the USA, the EU, Asia and WIPO. This volume, in common with its predecessors, makes a valuable and lasting contribution to the discourse in IP law, as well as trade and competition law. The contents, while always informative, are also critical and questioning of new developments and policy concerns. Hugh C Hansen is Professor of Law and Director, Fordham University School of Law, Intellectual Property Law and Policy Institute.

Published May 2013 752pp Hbk 9781849460576
RSP: £125 / €162 / US$250 / CDN $250
Discount Price: £100 / €129.60 / US$200 / CDN $200

Order Online UK, EU, rest of world: If you would like to place an order you can do so through the Hart Publishing website. To receive the discount please quote the reference ‘HANSEN’ in the voucher code field and click ‘apply’.

US: If you would like to place an order you can do so through the Hart Publishing website. To receive the discount please quote the reference ‘HANSEN’ in the special instructions field on the credit card screen.

Being fooled by false "sale" ads confers standing despite receiving advertised price

Hinojos v. Kohl’s Corp., No. 11-55793 (9th Cir. May 21, 2013)

Judge Reinhardt began with some scene-setting:

Most consumers have, at some point, purchased merchandise that was marketed as being “on sale” because the proffered discount seemed too good to pass up. Retailers, well aware of consumers’ susceptibility to a bargain, therefore have an incentive to lie to their customers by falsely claiming that their products have previously sold at a far higher “original” price in order to induce customers to purchase merchandise at a purportedly marked-down “sale” price. Because such practices are misleading—and effective—the California legislature has prohibited them.

Hinojos alleged that he was the victim of such a practice at Kohl’s and that he wouldn’t have paid what he did for what he bought had he not been misled by advertised markdowns from fictitious “original” or “regular” prices.  The district court found that he hadn’t “lost money or property” because he received the advertised price, and the court of appeals reversed.

Under California law, a consumer loses money or property “so long as false advertisements induced him to buy a product he would not have purchased or to spend more than he otherwise would have spent.”  This revived Hinojos’s UCL, FAL and CLRA claims.

Hinojos alleged that he bought several items advertised as substantially reduced in price, but in fact routinely sold by Kohl’s at the advertised “sale” prices rather than the purported “original” or “regular” prices. He alleged that the advertised “original/regular” prices didn’t reflect prevailing prices in the three months immediately preceding the ads, and that he wouldn’t have bought the products without the misrepresentations.  The district court dismissed the claims, and denied reconsideration based on Kwikset, holding that Kwikset applied only to false advertisements regarding a product’s “composition, effects, origin, and substance.”

The FAL provides that “No price shall be advertised as a former price of any advertised thing, unless the alleged former price was the prevailing market price . . . within three months next immediately preceding the publication of the advertisement or unless the date when the alleged former price did prevail is clearly, exactly and conspicuously stated in the advertisement.”

However, Proposition 64 restricts standing to individuals who suffered injury in fact and lost money or property as a result of unfair competition.  The California Supreme Court held that the purpose of Proposition 64 was to “curtail the prior practice of filing suits on behalf of clients who have not used the defendant’s product or service, viewed the defendant’s advertising, or had any other business dealings with the defendant,” but “just as plainly preserved standing for those who had had business dealings with a defendant and had lost money or property as a result of the defendant’s unfair business practices.”  

The quantum of lost money or property is only so much as would suffice to establish Article III injury in fact.  Here, there was “no difficulty” regarding Article III injury in fact: the contention that class members paid more than they otherwise would have paid, or bought when they otherwise would not have bought, constitutes an Article III injury in fact. The only issue was whether this injury in fact was an economic injury sufficient to confer statutory standing.

Kwikset explained that:

From the original purchasing decision we know the consumer valued the product as labeled more than the money he or she parted with; from the complaint’s allegations we know the consumer valued the money he or she parted with more than the product as it actually is; and from the combination we know that because of the misrepresentation the consumer (allegedly) was made to part with more money than he or she otherwise would have been willing to expend, i.e., that the consumer paid more than he or she actually valued the product. That increment, the extra money paid, is economic injury and affords the consumer standing to sue.

Thus, Hinojos properly alleged lost money or property.  Kohl argued that Hinojos didn’t allege at what price (if any) he would have bought if the original/regular price hadn’t been misrepresented.  But that’s not a requirement, as Kwikset explicitly held, though the difference between what he actually paid and what he would’ve paid had the ads been truthful would be the appropriate measure of restitution.  But under Kwikset, he “need not be able to prove the quantum of damages he suffered in order to be entitled to injunctive relief given that he alleges sufficient facts to prove that he suffered some economic injury.”  [Compare the Article III analysis above, plus this statement, to the decision I blogged about yesterday denying a plaintiff standing to seek injunctive relief in this exact situation; were I plaintiff’s counsel I might move for reconsideration.]

The district court also erred to limit Kwikset on the grounds that it was limited to “factual misrepresentations about the composition, effects, origin, and substance of advertised products.” Kohl reformulated this as an argument that there was no difference in value between the product as labeled and the product as it actually was.  A misrepresentation of the “regular” price, Kohl’s argued, didn’t misrepresent the innate value of the products, so a consumer gets the product he expects at the price he expects.  Kwikset is broader than that.  True, Kwikset was about conditions of production (allegedly false “Made in USA” claims), and described other similar actionable misrepresentations, but they weren’t intended to be exhaustive. 

Indeed, Kwikset based its reasoning on the fact that “[t]o some consumers, processes and places of origin matter.” The court of appeals concluded, “[t]o other consumers, a product’s ‘regular’ or ‘original’ price matters; it provides important information about the product’s worth and the prestige that ownership of that product conveys.”  The court cited Dhruv Grewal & Larry D. Compeau, Comparative Price Advertising: Informative or Deceptive?, 11 J. of Pub. Pol’y & Mktg. 52, 55 (Spring 1992) (“By creating an impression of savings, the presence of a higher reference price enhances subjects’ perceived value and willingness to buy the product.”); id. at 56 (“[E]mpirical studies indicate that as discount size increases, consumers’ perceptions of value and their willingness to buy the product increase, while their intention to search for a lower price decreases.”).  Thus, misinformation about a “normal” price was significant to many consumers in the same way as other falsities, just as falsely labeling a watch as a Rolex would be actionable even if the watch was a functional equivalent of a Rolex.  The court noted that it was not relying on the cited article to establish facts not contained in the pleadings, but rather “in support of the conclusion that false advertisements about a product’s true market price are significant to consumers.”  (Iqbal/Twombly aren’t mentioned, but plausibility probably plays a role here.)

Indeed, this significance is exactly why retailers like Kohl’s have an incentive to falsely advertise sales, and exactly why the California legislature barred the practice.  “In fact, the deceived bargain hunter suffers a more obvious economic injury as a result of false advertising than the Kwikset consumer who was duped into buying foreign-made goods, because the bargain hunter’s expectations about the product he just purchased is precisely that it has a higher perceived value and therefore has a higher resale value.”

The district court’s test would preclude claims against “a vast array of other misleading marketing practices that have little or nothing to do with a product’s ‘composition, effects, origin, and substance.’”  Examples: “not available in stores,” “available for a limited time only,” “the same model of shoe worn by LeBron James,” “50% of customers who purchased product X also purchased our product,” and “more doctors recommend our product than any other brand.”  All of these were “effective marketing techniques” that could be used to deceive, if false, and generate purchases that otherwise wouldn’t occur.  There was no reason to think that Proposition 64 “meant to silently close the door on consumers’ ability to bring UCL and FAL claims based on such false advertising,” and Kwikset emphasized that Proposition 64 shifted the focus to actual deception by a misleading ad instead of “fishing expeditions” by nonpurchasers.

The district court also held that Hinojos got the benefit of his bargain because he kept the goods he bought, which weren’t defective.  Kwikset explicitly rejected this rationale.  He only got the benefit of the bargain if the misrepresentation wasn’t material.  This was an issue of fact, and also “the legislature’s decision to prohibit a particular misleading advertising practice is evidence that the legislature has deemed that the practice constitutes a ‘material’ misrepresentation, and courts must defer to that determination.”  (So is it material as a matter of law?)  Hinojos specifically and plausibly alleged that Kohl’s falsely marketed its products as on sale because consumers reasonably regard price reductions as material information. “In sum, price advertisements matter.”

The court also refused to certify the case to the California Supreme Court because Kwikset provided more than sufficient guidance.  The majority also expressed disapproval of Kohl’s strategies in this regard: Kohl’s initially removed the lawsuit under CAFA, then discussed Kwikset extensively in the appellate briefs, but never suggested certification there or at oral argument.  At oral argument, “any objective witness” would’ve concluded that Kohl’s had a “slim at best” chance of prevailing on the merits, and only a month and a day after oral argument did Kohl’s file a motion to certify.  The court looks with disfavor on motions to certify filed after prior opportunities to seek certification.  Also, the court didn’t like manipulation of the appellate system by attempts to avoid unfavorable panels—that’s why the Ninth Circuit doesn’t make panels public until shortly before oral argument.  Kohl’s sought certification only after it knew the panel’s views of the case at oral argument.  This smacked of manipulation.

Judge Wardlaw concurred, but only in the result on certification; though Kohl’s motivations were suspicious, “on this record and without providing an opportunity to Kohl’s to respond, it is somewhat unfair to conclude that Kohl’s had only a nefarious motive. I would simply deny the request as untimely.”

allegations of patent infringement protected by Noerr-Pennington doctrine

Sliding Door Co. v. KLS Doors, LLC, 2013 WL 2090298 (C.D. Cal.)

Sliding Door sued defendants alleging patent infringement; defendants counterclaimed for, among other things, false advertising and unfair competition.  Sliding Door made allegedly false claims that defendants were infringing Sliding Door’s patent and threatened to hold any purchaser of an infringing product accountable.  The relevant email included a link for the recipient to view Sliding Door’s catalog along with pictures of sample products.

For the Lanham Act claim, the court adopted the standard four-factor definition of “commercial advertising or promotion,” focusing on the question of whether the statements were commercial speech. Under the circumstances, the email could be seen as commercial speech.  It was sent by Sliding Door’s sales manager in its commercial division, included a link to Sliding Door’s catalog, and had images of Sliding Door’s product.  Thus, it could be seen as commercial speech made for the purpose of influencing consumers to buy Sliding Door’s goods and services.  The fact that it also included “cease and desist” language wasn’t dispositive, given these other contextual factors.

However, this was still protected communication under the Noerr-Pennington doctrine, precluding liability for petitioning the government for redress.  Conduct incidental to a lawsuit is also protected by Noerr-Pennington, and defendants failed to explain why this wouldn’t also apply to Lanham Act claims. The email here was related to the petition activity of filing suit, even if it was also carried out to further the petitioning party’s commercial interests.  The sham exception didn’t apply because Sliding Door’s claim “contain[ed] sufficient issues of fact” to show (for whatever values of “show” you want to apply on a motion to dismiss)  that its action wasn’t objectively baseless.

Similarly, the state law unfair competition claim was barred by California’s litigation privilege.  Defendants argued that statements made for advertising purposes weren’t protected.  The privilege applies to statements that have a connection or logical relation to the litigation process; it doesn’t apply if the statements only serve interests that happen to parallel or complement a party’s litigation interest.  Here, the email informed customers of the pending litigation and warned them of potential liability for buying infringing products.  This had a logical relation to the lawsuit.  Even though it was also advertising, it still fell within the scope of the privilege.

consumer who knows truth lacks standing for injunctive relief

Mason v. Nature's Innovation, Inc., 2013 WL 1969957 (S.D. Cal.)

Mason sued NI based on his purchase of Naturasil skin tag remover, based on representations on the label and website that Naturasil was an exclusive and 100% natural formula that was FDA registered and was proven to gently and effectively remove skin tags.  He alleged that the representations were false and misleading because the product wasn’t 100% natural; the product was merely listed as an unapproved homeopathic drug with the FDA, despite being marketed next to other FDA-monograph approved OTC drugs; the product isn’t effective because its active ingredient doesn’t remove skin tags, and the active ingredient is not even actually present in the product due to the enormous dilution of the product; and the product did not contain “exclusive” ingredients because the exact same ingredients were used in many of NI’s other products.  He brought California CLRA/UCL/FAL claims and warranty claims.

The court found that Mason lacked standing to seek injunctive relief because, since he knew the truth, he was in no danger of future injury.  There’s a split among district courts on this argument in false advertising cases; courts that reject it note that it vitiates the purpose of California’s consumer protection laws.  But even if California allows plaintiffs to seek injunctive relief on behalf of the public regardless of whether they’re likely to suffer future harm themselves, federal courts have to follow Article III.  “[A] plaintiff does not have standing to seek prospective injunctive relief against a manufacturer or seller engaging in false or misleading advertising unless there is a likelihood that the plaintiff would suffer future harm from the defendant's conduct—i.e ., the plaintiff is still interested in purchasing the product in question.”

In ADA cases, the Ninth Circuit held that injunctive relief is only available when there was likely injury in the future related to the plaintiff’s own disability.  Chapman v. Pier 1 Imports (U.S.) Inc., 631 F.3d 939 (9th Cir. 2011) (not a class action, and dealing with a statute in which injunctive relief is the only remedy available to private plaintiffs, thus making the redressability inquiry a different one). A plaintiff must desire to return to the noncompliant accommodation; plaintiffs lack standing if they don’t really intend to return, or if the barriers at issue don’t pose a real and immediate threat to them given their particular disabilities.  If ADA plaintiffs have to show likely future injury, consumer plaintiffs must too.  There was no likely future injury if a plaintiff had no interest in buying the product again because it didn’t work as advertised.  (I don’t really get this.  If a plaintiff satisfies Article III for a claim, as Mason unquestionably did, why does Article III also govern whether s/he gets to ask for each and every form of remedy that might be available, when a statute makes multiple remedies available?)

The court continued: this result means that injunctive relief won’t be available in federal court in many false advertising cases, though there may be cases in which a consumer would still be interested in purchasing a properly labeled product.  And anyway, Article III trumps California’s consumer protection law.  Consumers who seek injunctive relief can sue in state court. (NB: unless CAFA applies, given that there will be Article III standing for their damages claims!  Sorry ‘bout that.)

So the CLRA claim went in its entirety, since it was just for injunctive relief, as did the injunctive relief claims under the UCL and FAL.

The court declined to dismiss the warranty claims based on Mason’s failure to provide notice to defendant, because he bought the product from CVS, not directly from NI, and thus wasn’t required to give NI notice.  It didn’t have occasion to resolve which, if any, of NI’s representations fit the Magnuson-Moss Warranty Act’s definition of “written warranty.”

court parses Lanham Act standing on statement by statement basis

FieldTurf USA Inc. v. TenCate Thiolon Middle East, 2013 WL 1963918 (N.D. Ga.)

While this was mainly a breach of contract action, the court had occasion to resolve various Lanham Act false advertising/trademark and business tort issues.  TenCate (actually a bunch of related entities) entered into three contracts to supply FieldTurf with polyethylene fiber used to make artificial grass turf for athletic fields. Initially, FieldTurf entered into a supply agreement in which TenCate’s predecessor would provide monofilament fiber called Evolution exclusively to FieldTurf.  FieldTurf allegedly began receiving complaints about fields installed using Evolution fiber.  Its testing allegedly demonstrated that Evolution yarn was degrading prematurely.  It subsequently released Revolution, a competing fiber product.  FieldTurf sued TenCate for breach of contract, breach of warranty, and fraud. TenCate counterclaimed for false advertising, trademark infringement, slander, etc.

On FieldTurf’s statement that Revolution was the “industry’s strongest fiber,” TenCate argued that this meant tensile strength, and provided evidence that Revolution didn’t have the strongest tensile strength.  But a TenCate employee admitted in deposition that fiber strength can be measured in many ways; this was not literally false, and TenCate didn’t have evidence of consumer reception.  As for the statement that Revolution had “strongest ultraviolet inhibitor technology in the industry,” TenCate showed that other UV stabilizers were equal, but that wasn’t enough to show literal falsity, “only that the advertisement was phrased in a manner which may have misled consumers about the strength of Revolution's ultraviolet inhibitor technology.”

Revolution also claimed to have the “most natural looking fiber,” but this was puffery.  TenCate’s expert testified that there were ways to make turf fiber more natural looking, but also admitted that whether one type was more natural looking than another was unprovable.

And Revolution claimed to have the “strongest tuft bind” in the industry, but the court found that TenCate didn’t have standing to contest this claim.  According to FieldTurf, “tuft bind” related to “how hard it is to pull a tuft of fiber out of its backing” and has nothing to do with the fiber itself. Thus, there was no prudential standing.  Although TenCate’s commercial interests may have been harmed if end users purchased turf through FieldTurf rather than a TenCate-supplied turf producer, that didn’t counsel heavily in favor of standing because (NB: this is not a because, but a conclusion about materiality) the ads at issue made a lot of claims for Revolution, and there was no reason to think that the brief “tuft bind” claim persuaded a purchaser more than any other claim.  The directness of the injury counseled against prudential standing because the parties didn’t generally compete to sell the same products to the same end users. TenCate was a commercial entity competing in the general market for artificial turf and was therefore connected to the effects of the false advertising, which counseled slightly in favor of standing, but determining FieldTurf’s profits and TenCate’s losses from the “tuft bind” claims would involve too much speculation given the other important components of the product.  And the possibility of duplicative claims weighed against standing because, if TenCate could sue, so could every other competitor in the market for artificial turf and its components.

TenCate argued that FieldTurf’s ads were deceptive comparative advertising, justifying a presumption of causation and harm for actual damages.  But the “tuft bind”-related claims weren’t comparative advertising.  The ad pamphlet said that a third party fiber manufacturer’s “quality began to suffer” and repeated Revolution's motto: “This is no evolution. This is revolution.” (How is that not comparative with Evolution, the third party product?)  The ads “only” said that Revolution had the “strongest tuft bind in the industry” but didn’t “compare the tuft bind with the tuft bind of any competitors, including TenCate.”  (How is “strongest” not comparative? Ugh.)  Thus there could be no presumption of causation or harm.

FieldTurf also sought summary judgment on TenCate’s trademark infringement/unfair competition counterclaims, on the grounds that TenCate couldn’t show confusion.  The Evolution 3GS mark was incontestable, giving it “presumptive[]” strength (ugh again—no, incontestability means irrebuttable nondescriptiveness: as a matter of law, if it’s not generic, it functions as a mark, but that doesn’t make it a strong mark, so that’s wrong in two distinct ways).  But FieldTurf overcame the presumption of strength by showing that, when it introduced Revolution, Evolution had been sold exclusively to FieldTurf in the US, and “with trivial exceptions,” it hadn’t been advertised or promoted. Therefore it was (commercially) weak.  (Wonder why that pamphlet reads that way—an inside jab?)

The marks differed only by a single letter, but the buyers were sophisticated purchasers of technical products who were unlikely to be deceived.  The motto “It’s not evolution, it’s Revolution” made clear that FieldTurf was trying to distinguish the products, not to deceive, especially since it was saying that Evolution was defective; deception made no sense in context.  Plus, the parties dealt with consumers at different stages of the buying process: FieldTurf sold turf to athletic facilities, while TenCate sold fiber to other manufacturers of artificial turf—FieldTurf’s competitors.  And there was de minimis evidence of actual confusion. 

FieldTurf also won summary judgment on the slander claim because TenCate provided only hearsay to prove that it had occurred.  TenCate argued that a form letter FieldTurf sent was libelous, but the court agreed that the statements were privileged: made in good faith to a properly limited set of persons to protect the speaker’s interest in a matter in which it was concerned. Though FieldTurf’s letter was (relatively) widely disseminated in the “design community,” the letter was limited in scope.  It simply repeated the allegations of FieldTurf’s lawsuit that TenCate changed the fiber and didn’t live up to its promises.  FieldTurf’s protection of its reputation was privileged.

The tortious interference counterclaim also failed because the statements were privileged, and TenCate also failed to show financial injury.  Though three potential customers declined to adopt Evolution for various reasons, including that it had “a lot of baggage,” the statements didn’t show that the customers were affected by any FieldTurf statement, whether about the lawsuit or about a TenCate product.  Specific claims of lost sales, on inspection, were traced to reasons other than FieldTurf’s statements about TenCate, showing again how hard a tortious interference claim is to win in most instances.

restitution for deception is the same as restitution for the underlying unfair practice

Gutierrez v. Wells Fargo Bank, No. 3:07-cv-05923 (N.D. Cal. May 14, 2013)

Previous coverage here (9th Circuit) and here (earlier district court opinion). 

Plaintiffs challenged Wells Fargo’s “high-to-low” posting of account debits, which multiplied overdraft fees “by depleting the account as fast as possible and turning what might otherwise be a single overdraft into as many as ten.”  After a bench trial, the court found that (1) Wells Fargo’s choice of high-to-low posting was made in bad faith with the sole object of increasing overdraft fees, violating the “unfair” prong of the UCL; (2) Wells Fargo failed to adequately disclose this practice, violating the “fraudulent” prong; (3) Wells Fargo made misleading statements to consumers about its resequencing practice, also violating the “fraudulent” prong; (4) this deceptive conduct also established liability under the FAL; (5) Wells Fargo was enjoined to stop using high-to-low posting and tell the truth about whatever sequencing practice it chose; and (6) Wells Fargo was ordered to pay restitution of nearly $203 million, based on the difference between the fees charged based on high-to-low versus chronological posting.  The court didn’t reach the class claims for negligent misrepresentation and fraud because the injunctive relief sought thereunder would be duplicative.

On appeal, rulings 1-2 and 5-6 were reversed, but 3-4 were affirmed, though the court of appeals didn’t expressly address false advertising when it affirmed the findings on fraudulent misrepresentations.  The court of appeals ruled that application of the “unfair” prong was preempted as applied to a national bank’s posting order.  Liability based on failure to disclose was likewise preempted.  However, liability based on the “fraudulent” progn wasn’t preempted, because it was a generally applicable law that didn’t impose disclosure requirements in conflict with federal law. It only barred statements likely to mislead the public.

Wells Fargo made several kinds of affirmative misrepresentations.  One marketing theme was that debit card purchases were “immediately” or “automatically” deducted from an account. “This likely led the class to believe: (1) that the funds would be deducted from their checking accounts in the order transacted, and (2) that the purchase would not be approved if they lacked sufficient available funds to cover the transaction.”  This language appeared on the website, in brochures, and on Wells Fargo’s New Account Welcome brochure for years—on such a wide array of marketing materials, which were distributed so broadly, that class members were likely to be misled by them.

Wells Fargo also made misleading statements directly to customers, such as, “[c]heck card and ATM transactions generally reduce the balance in your account  immediately,” that “the money comes right out of your checking account the minute you use your debit-card,” and that “[i]f you don’t have enough money in your account to cover the withdrawal, your purchase won’t be approved.” 

In online banking, Wells Fargo displayed pending transactions to customers in chronological order, only to secretly rearrange them high-to-low when posting to maximize overdraft fees.  Buried deep in its 60-plus page Customer Account Agreement was language on posting order that was both difficult to understand and misleading.  The agreement said that the bank “if it chooses” might use high-to-low posting, which “might” result in more overdraft fees.  This language, “if it were ever discovered and read in the first place, affirmatively left the misleading impression with consumers that the bank had not yet implemented high-to-low posting (whereas, in fact, the posting practice was already in use).”  The language also misled customers by suggesting that the order might be modified on a case-by-case basis, which it was not.

The court of appeals held that the ruling that the named plaintiffs were misled was “well supported by the evidence,” that “[t]he misunderstanding that Wells Fargo’s misleading statements sowed among customers about its posting scheme was a significant cause of the magnitude of the harm experienced by Gutierrez and Walker,” and that “the district court’s finding that Wells Fargo made misleading statements is amply supported by the court’s factual findings.”  Further, “[t]he pervasive nature of Wells Fargo’s misleading marketing materials amply demonstrates that class members, like the named plaintiffs, were exposed to the materials and likely relied on them.” The court of appeals vacated the injunctive relief because it related to posting order, and stated that the district court could provide restitution against Wells Fargo consistent with the finding on the “fraudulent” prong, even though the original restitution order, predicated as it was on Wells Fargo’s choice of posting method, had to be vacated as well.

On remand, the court reinstated the restitution award and granted a new injunction barring false and misleading representations about posting order.  Wells Fargo argued that the district court couldn’t do that; the court disagreed.

Basically, Wells Fargo argued that there was no evidence supporting the money award because plaintiffs’ damages expert hadn’t calculated damages based on misrepresentations, and plaintiffs had waived any such claim for damages based on fraud.  Though plaintiffs’ attorney sent an awkwardly worded email before trial, what he really meant (and how the trial proceeded) was that the expert hadn’t attempted to quantify damages or restitution based on common law misrepresentation/fraud claims (which require individualized reliance/proof of damages).  That didn’t waive restitution claims ancillary to an injunction under the UCL.  An injunction against an unfair or fraudulent business practice is usually accompanied by the ancillary equitable relief of restitution.  Such relief isn’t “damages” for a conventional “fraud” claim.  “This distinction may seem odd to those unfamiliar with Section 17200 but the difference is generally known to California practitioners.”

Further, Wells Fargo had every opportunity to dispute the damages analysis.  As the case was tried, the court understood, and all the parties should have as well, that restitution was a possible form of relief.

The full award was reinstated.  The remedial provision of the law provides that “[t]he court may make such orders or judgments . . . as may be necessary to restore to any person in interest any money or property, real or personal, which may have been acquired by means of such unfair competition.”  This language has been interpreted to allow recovery without proof of actual reliance.  “[O]nce a wrongdoer is proven to have engaged in a fraudulent business practice whose whole point was to cheat consumers out of money, restitution may be used to restore the money to the victims of the practice.”  It was sufficient that class members were likely to be deceived, a finding affirmed by the court of appeals. 

Still, there needed to be evidentiary support for the amount of recovery.  Plaintiffs’ expert didn’t attempt to quantify amounts obtained by misrepresenting the posting order (which order itself has now been held lawful).  Wells Fargo argued that slicing out the amounts obtained by misrepresentation would be difficult, if not impossible, on a classwide basis.  The court disagreed.  There was an overall scheme, carried out by affirmative misrepresentations that caused class members to believe that debits would be posted chronologically.  Again, the court of appeals affirmed the finding that “[t]he misunderstanding that Wells Fargo’s misleading statements sowed among customers about its posting scheme was a significant cause of the magnitude of the harm experienced by [class plaintiffs] Gutierrez and Walker.”

Even though liability couldn’t be predicated on the posting method itself, the harm from the affirmative misrepresentations came from the unexpected overdraft fees, which was the same harm caused by manipulating the posting method.  Restitution was likewise the same.  At trial, Wells Fargo had already tried to argue that the restitution calculations should be reduced based on assumptions about how many individuals were “on notice” of Wells Fargo’s practices, but the court already rejected that.  The appropriate measure of damages was to restore class members to a position consistent with the reasonable expectations induced by the affirmative misrepresentations—which could be done by calculating overdraft fees in a way approximating chronological order.  “Wells Fargo’s affirmative misrepresentations are intertwined with the other elements of the scheme and cannot be meaningfully separated into discrete causes of harm.”

The court drew an analogy to People ex rel. Bill Lockyer v. Fremont Life Ins. Co., 104 Cal. App. 4th 508 (2002), which challenged an annuity policy with unusual premium charges. The court found the policy as a whole misleading, and ordered restitution of premium charges paid plus interest.  “Although the premium charge itself was lawful, the misleading annuity policy was not, and the restitution order properly returned the unexpected premium charges.”  So here: the appropriate restitution was to return the unexpected charges to the customers, which was the calculation plaintiffs’ expert performed.  “This order is not penalizing Wells Fargo for a practice protected by federal preemption. Instead, it is penalizing Wells Fargo for affirmatively misleading the class as to what the practice was.” 

No prejudgment interest was allowed, but post-judgment interest should be computed based on the date of the original entry of judgment, since that was when Wells Fargo was found liable for false/fraudulent advertising.

Wells Fargo objected to an injunction as insufficiently specific, “but Wells Fargo should not escape an injunction because its misconduct was multifarious.” Also, Wells Fargo voluntarily cased high-to-low posting (in California, anyway) and allegedly didn’t plan on returning to the practice.  But without an injunction, it could return to its prior practice of misleading consumers if it did change posting order.  Thus, Wells Fargo was enjoined from making any false or misleading representations relating to posting order.

Another court rejects waiting for FDA to act on "natural"

Janney v. Mills, 2013 WL 1962360 (N.D. Cal.)

Plaintiffs, bringing the usual California claims, alleged that certain Nature Valley products were deceptively labeled “100% Natural,” “All Natural,” and “Natural” despite containing high fructose corn syrup (HFCS), high maltose corn syrup, and/or maltodextrin and rice maltodextrin, which are allegedly unnatural due to the processing required to create them. The term “natural” was allegedly pervasive and prominent on the packaging and in the advertising for Nature Valley products, including in the brand name and through “images of forests, mountains, and seaside landscapes.”

General Mills first argued that the case should be dismissed under the primary jurisdiction doctrine, since decisions regarding the meaning of “natural” should be made by the FDA.  Courts consider “whether there is (1) a need to resolve an issue (2) that has been placed by Congress within the jurisdiction of an administrative body having regulatory authority (3) pursuant to a statute that subjects an industry or activity to a comprehensive regulatory authority that (4) requires expertise or uniformity in administration.”  General Mills contended that food labeling was an issue placed within the primary jurisdiction of the FDA, which exercised comprehensive regulatory authority over labels, and that the FDA had adopted a policy for the use of “natural,” enforced through administrative action.

“Natural” isn’t defined in the FDCA, and “notwithstanding repeated requests, the FDA has expressly declined to define ‘natural’ in any regulation or formal policy statement.” While it solicited comments on a potential rule adopting a definition in 1991, in 1993 it declined to resolve the acknowledged ambiguity surrounding the term because of resource limitations and other agency priorities.  In 2002, the FDA again stated that defining “natural” wasn’t a priority; it declined again in 2006.  In 2010, a number of district courts stayed pending litigation over HFCS in beverages in the hope of a formal definition, to no avail.

The FDA occasionally refers to a 1993 statement that it would “maintain its current policy ... not to restrict the use of the term ‘natural’ except for added color, synthetic substances, and flavors[;]” and that it would “maintain its policy regarding the use of ‘natural,’ as meaning that nothing artificial or synthetic (including all color additives regardless of source) has been included in, or has been added to, a food that would not normally be expected to be in the food.”  Consistent with the informality of this guidance, the FDA has taken few actions against companies for improperly using the term—warning letters to companies that used the term when their products contained various preservatives. General Mills argued that the warning letters showed that the FDA routinely made “considered, expert judgments about what products and food labels warrant administrative action for non-compliance with its informal policy.”  As in Pom Wonderful LLC v. Coca–Cola Co., 679 F.3d 1170 (9th Cir. 2012), General Mills argued, “[i]f the FDA believes that more should be done to prevent deception, or that [a manufacturer's] labels mislead consumers, it can act.”  Courts that have declined to apply the primary jurisdiction doctrine, General Mills contended, mostly acted pre-Pom (though not all such cases predated Pom).

The plaintiffs responded that the FDA explicitly and repeatedly refused to define “natural,” and that its current guidance only covered added colors and flavors in foods.  Despite significant consumer and industry interest for over two decades, the FDA has declined to act; a dismissal or stay on primary jurisdiction grounds wouldn’t cause any change.  Moreover, plaintiffs argued, they weren’t asking for a general definition of “natural,” but rather they were seeking resolution of a question of state law: whether General Mills’ marketing of its Nature Valley® products as “natural” could mislead reasonable consumers. Misleadingness determinations don’t necessarily entail technical questions or require agency expertise.

While the court found the question close, it denied the motion.  The relevant factors generally favored the resolution of this issue by the FDA; enforcement of a policy regarding the use of “natural” on food products required FDA expertise and uniformity.  And the informal policy was an FDA position “of sorts.”  But, “in repeatedly declining to promulgate regulations governing the use of ‘natural’ as it applies to food products, the FDA has signaled a relative lack of interest in devoting its limited resources to what it evidently considers a minor issue, or in establishing some ‘uniformity in administration’ with regard to the use of ‘natural’ in food labels.”  Because any referral to the FDA would likely prove futile, the court had little reason to stay or dismiss the case to allow the FDA the chance to take action, even if the other factors favored such a result.

General Mills also argued that the complaint failed to plead fraud with particularity. The court agreed that Rule 9(b) applied, but found the allegations sufficiently specific as to the packaging for the five products specifically identified by the plaintiffs.  However, they weren’t sufficient to plead misrepresentations in advertising apart from the product packaging (the Nature Valley website, Flickr photostream, Facebook page, Twitter account, and YouTube channel), or as to unidentified products; specific allegations for each product were required, and attaching only a selection of labels was insufficient. Rule 9(b) required plaintiffs to identify specific ads and promotional materials, allege when they were exposed to them, and explain how they were false and misleading.  Plaintiffs argued that “100% Natural” on the physical product was enough, but they didn’t identify particular misrepresentations in the online sources.  And the allegation that an “image of nature” could be viewed as deceptively describing the ingredients in granola bars was entirely implausible, and therefore inadequate to state a claim for anything.

Never steal anything from someone you can't outrun: Warner Bros. defeats infringement claim

Fortres Grand Corporation v. Warner Bros. Entertainment Inc., No. 3:12-cv-00535 (N.D. Ind. May 16, 2013)

McCarthy has said that there’s “surprisingly little” case law on whether a fictional company or product using the same name/brand as a real one constitutes trademark infringement.  If this is surprising, as the court here agreed, it’s only because we’ve started expecting overreach as a baseline.  This case adds to the small but obviously correct body of case law rejecting such claims (and, I hope, putting defendants in a position to ask for an award of fees next time).

Fortres Grand makes a real software program, Clean Slate.  Clean Slate erases evidence of user activity on a particular computer, and it’s a registered mark for “computer software used to protect public access computers by scouring the computer drive back to its original configuration upon reboot.”

The Dark Knight Rises included a handful of references to a fictional software program called “clean slate,” which Selina Kyle wanted to erase her criminal history from every computer database in the world.  (Yet another example of ridiculous tech premises; see also Carrion on Revenge, the Machine on Person of Interest, “Let’s Enhance,” and Phone Trace Race (warning: this last link goes to TVTropes; I am not responsible for the time you waste if you follow it).)  Also, WB created two relevant websites, rykindata.com and rykindata.tumblr.com, to promote the film. (Ed. note: Eric Goldman says keyword ad cases make no business sense; this tumblr has 5 entries, and the top one—featuring Selina Kyle—has only 94 reblogs/likes, whereas the others have 11, 4 (one of which is me), and none. Perhaps this also wasn’t worth suing over?)  As the court explained, the sites served to extend the movie experience:

[R]ather than just creating a straightforward promotional website where consumers can get information about the film (like, in this instance, www.thedarkknightrises.com), additional websites are created that market the film in a more subtle or creative way. In this instance, the websites are essentially a creative outgrowth of the fictional world of the film. They look like what a (fictional) citizen of Gotham might find if they were looking for information on the (fictional) Rykin Data company. They include images of fictional police reports related to the fictional character Selina Kyle, a fictional police file labeled “Cat Burglar Investigation,” a fictitious software patent, and an endorsement from a fictional Gotham City Better Business Bureau (BBB). [Hilariously/sadly, this last seems to have been removed, perhaps when counsel got a better look at the tumblr because of this suit.] 

These websites also use the term “clean slate” to describe the software referenced in the film. … One of the pages on the website is titled “PROGRAM: ‘CLEAN SLATE’” and explains that “‘Clean Slate’ is the informal name for Rykin Data’s primary service, in which the corporation will amass personal histories (specifically off the Internet) and destroy it permanently.” Both websites also contain a fictitious patent for the software, the abstract of which states that the invention has the effect of “granting the subject a clean slate within the digital world.” The Tumblr site also contains this statement: “Rykin Data: Providing Fresh Starts since 2004. . . . Clean slates are possible. . . . Have a fresh, clean start.”

The court considered these materials on the motion to dismiss because they were integral to the complaint.

Fortres Grand sued for trademark infringement and unfair competition under state and federal law; all the claims were subject to the same standard.  It claimed reverse confusion.

The court began by noting what trademark law isn’t about: “trademark infringement protects only against mistaken purchasing decisions and not against confusion generally.” To prevail, Fortres Grand needed to plausibly allege that Warner Bros. saturated the market with a product that the public was deceived into believing emanates from, was connected to, or was sponsored by Fortres Grand.  The fatal flaw in the case involved correctly identifying “the exact product that Warner Bros. has introduced to the market – a film, not a piece of software.”  Paradigm reverse confusion cases involve directly competing products where a small regional producer is overwhelmed when a larger player “rolls out a similar product with the same trademark on a nationwide level.”

But Warner Bros. didn’t have real “clean slate” software.  Fortres Grand couldn’t argue that it had been damaged by the saturation of the market with “clean slate” software.  Confusion had to be judged by Warner Bros.’ actual product, as other courts in similar situations have also ruled.  See Ocean Bio-Chem, Inc. v. Turner Network Television, Inc., 741 F. Supp. 1546 (S.D. Fla. 1990) (Star Brite Distributing had no claim against fictional Starbrite Batteries); Davis v. Walt Disney Co., 430 F.3d 901 (8th Cir. 2005) (Earth Protector advocacy organization had no claim against fictional environmental software company Earth Protectors); Caterpillar Inc. v. Walt Disney Co., 287 F. Supp. 2d 913 (C.D. Ill. 2003) (no consumer would be more likely to buy or watch George of the Jungle 2 because of any mistaken belief, based on presence of Caterpillar vehicles in the movie, that Caterpillar sponsored it). 

Fortres Grand couldn’t plausibly allege either that consumers were deceived into believing that the DKR “clean slate” program came from Fortres Grand, or that they were deceived into believing that DKR came from Fortres Grand. 

“First, no consumer – reasonable or otherwise – can believe the fictional ‘clean slate’ software in the movie emanates from, is sponsored by, or connected to Fortres Grand because the fictional software does not exist in reality.” A consumer who tried to find it would quickly discover that it didn’t exist.  In other words, Warner Bros. was not making a trademark use of “clean slate”: it didn’t identify a source of software because there was no such software, and it didn’t identify the source of the film either (citing, inter alia, New Kids).

“Second, no consumer – reasonable or even unreasonable – would believe that the The Dark Knight Rises itself is connected to Fortres Grand.”  Fortres Grand isn’t in the motion picture business, and no one would buy tickets or discs because of a perceived association with Fortres Grand’s products.  Any allegation of confusion about the film’s source would be too implausible to survive Iqbal/Twombly.  (Notice how sponsorship/product placement has been erased from the analysis.  Really, the only coherent way to understand these statements is as normative claims, irrefutable by empirical evidence, rather than as descriptive claims.)  The promo websites changed nothing. “To the extent it can be said that the term ‘clean slate’ on these sites is even being used as a trademark, it can only be to indicate the source or origin for the film The Dark Knight Rises.”

Mark McKenna will appreciate this bit:  Pragmatically, infringement means confusion as to source, which means origin, which means “the producer of the tangible product sold in the marketplace.” Hello, Dastar! Vague, generalized confusion isn’t enough, since the key target is mistaken purchasing decisions.  Because “no one looking for Fortres Grand’s software is likely to mistakenly buy a ticket to The Dark Knight Rises,” there was no plausible claim for such mistakes.

And also: the use of “clean slate” was protected by the First Amendment, even if there were potential consumer confusion. Rogers v. Grimaldi, 875 F.2d 994 (2d Cir. 1989), provided the standard.  The Lanham Act doesn’t apply to artistic works as long as a use is artistically relevant and not explicitly misleading as to the source or content of the work.  Rogers is about titles, but also applies to the use of a mark in the body of a work.

The first prong, artistic relevance, is a purposely low threshold.  “Clean slate” had artistic relevance to both the film and the websites, as Fortres Grand’s own complaint acknowledged—it was the name of a program that would erase a person’s criminal history from every computer database.  Nor was the use explicitly misleading.  As the 9^th Circuit has (confusingly) said, “the relevant question” is whether the use of “clean slate” in The Dark Knight Rises would confuse its viewers into thinking that the Fortres Grand “is somehow behind” the film or “that it sponsors” the film.  The requirement of explicit misleadingness makes this a high bar: a work must make some affirmative statement of sponsorship or endorsement, beyond the mere use of a plaintiff’s mark, in order to be explicitly misleading.  There was no such affirmative statement here.

The court rejected Fortres Grand’s argument that Rogers only applies to forward confusion, not reverse confusion, because Rogers was about protecting use of “culturally relevant” marks.  Because Warner Bros. wasn’t trying to refer to Fortres Grand at all, it argued, Rogers wasn’t relevant. The court didn’t see the logic there.  First Amendment protection didn’t depend on the infringer’s having “some well-thought-out, ‘expressive’ critique of the trademark.”  In fact, the chilling effect of Fortres Grand’s position could be huge.  Small, relatively unknown trademark owners shouldn’t enjoy monopoly power over use of words in expressive works any more than the owners of famous marks should.  Other courts had concluded similarly; the one case that supported Fortres Grand, Rebelution, LLC v. Perez, 732 F. Supp. 2d 883 (N.D. Cal. 2010), read “artistic relevance” too narrowly, requiring defendant’s use “to be with reference to the meaning associated with plaintiff’s mark.”  As the Ninth Circuit has held, “the level of relevance merely must be above zero” (and, implicitly, “relevance” means “relevance to the work,” not “relevance to the plaintiff”—which is the only sensible reading; otherwise the reality show Apple Pickers about competing fruit sellers would be vulnerable to a claim from Apple, whose computers would lack artistic relevance to the show).

The same analysis applied to the promotional websites.  Fortres Grand argued that Rogers didn’t apply because the sites were commercial speech, but they weren’t, in that they did more than propose a commercial transaction.  “[I]n fact, it is hard to see that they really propose any commercial transaction, other than obliquely convincing consumers to buy a ticket to the film. Instead, they are creative, fictional extensions of the film – artistic works in and of themselves – and are thus entitled to First Amendment protection.”  Rogers applied in the same way.

Allegedly false equivalence statement triggers insurer's duty to defend

JAR Laboratories LLC v. Great American E & S Ins. Co., 2013 WL 1966386 (N.D. Ill.)

JAR sued its insurer seeking a declaration of a duty to defend it in an underlying suit filed by its competitor TPU, which distributes Lidoderm, a pharmaceutical product. TPU claimed injury from allegedly false and misleading representations JAR made in promoting its own LidoPatch.  Great American’s policies cover “advertising injury,” which is injury arising out of “[o]ral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services....” There is an exclusion for suits alleging infringement of intellectual property, defined as “personal and advertising injury”

arising out of any actual, alleged, or threatened misappropriation, infringement, or violation of any one or more of the following rights or laws: a) copyright; b) patent; c) trademark; d) trade name; e) trade secret; f) trade dress; g) service mark; h) slogan; i) service name; j) claim of authorship; k) other right to or law recognizing an interest in any expression, idea, likeness, name, style of doing business, symbol, or title; l) laws or regulations concerning piracy, unfair competition, unfair trade practices, or other similar practices; or m) any other intellectual property right or law.

The policy also excluded injury “arising out of the failure of goods, products, services to conform with any statement of quality or performance made in your ‘advertisement.’”

TPU sued JAR for false advertising under the Lanham Act.  The underlying complaint alleged that JAR issued a press release stating that LidoPatch contained the same active ingredient as the leading prescription patch, would be ready to ship shortly, and was “poised to become a major product in the topical analgesic category. With its proven pain relieving active ingredients, lidocaine, LidoPatch® can provide relief for minor pain …. Like the prescription brand, LidoPatch® will provide relief for up to 24 hours.”  Further, JAR’s website allegedly depicted the package and stated “PAIN RELIEF FOR WHERE IT HURTS!! LidoPatch, with lidocaine, for long lasting pain relief, and menthol to instantly soothe your discomfort. The result is a patch that offers real relief for those painful areas that nag you throughout the night and day. LidoPatch TM—Relief that lasts all day, without a prescription!”

TPU alleged that JAR was trying to mislead consumers into believing that LidoPatch was merely an OTC version of Lidoderm, and otherwise equivalent and interchangeable. However, TPU alleged, LidoPatch had a completely different formulation, and JAR didn’t have FDA approval or tests showing that LidoPatch was effective/fast acting.  TPU alleged that it lost goodwill and profits due to reduced demand for Lidoderm.  TPU ultimately amended its complaint to add causes of action under the deceptive trade practices/unfair competition/false advertising/consumer protection statutes of five states.

Insurance policies are construed in favor of the insured.  An insurer can’t refuse a defense unless it’s clear from the face of the underlying complaint that the allegations fail to state facts bringing the case within or potentially within the policy coverage. The question here was whether the allegations in the underlying complaint potentially alleged disparagement of Lidoderm. Great American argued that, in Illinois, disparagement requires a false statement about the underlying plaintiff. 

But on its face the underlying complaint alleged that JAR communicated false/misleading messages about Lidoderm—that LidoPatch and Lidoderm could be used to treat the same indication and that they were equally effective/interchangeable.  “That plaintiff's statements did not identify Lidoderm by name is immaterial, a point underscored by TPU's allegations about plaintiff's ‘messages.’ Whatever words plaintiff used, TPU clearly understood (and alleges that ‘a substantial segment of consumers’ would likewise believe) that plaintiff's implicit ‘message’ was about Lidoderm.”

And JAR’s literal statements could reasonably be read to identify Lidoderm explicitly, if not by name, since references to “the prescription brand” had to be read in view of TPU’s allegations that Lidoderm was “one of the most frequently prescribed pharmaceuticals in the United States,” and “one of the best-selling pharmaceutical patches of all time in this country.”

The alleged statements also needed to portray Lidoderm in a negative light to qualify as disparagement.  JAR argued that allegedly false equivalence claims met that standard, because disparagement can arise from comparison with something inferior.  See Acme United Corp. v. St. Paul Fire & Marine Ins. Co., 214 Fed.App. 596, 2007 WL 186247 (7th Cir.2007) (“[d]isparage means ‘to discredit or bring reproach upon by comparing with something inferior.’”); McNeilab, Inc. v. American Home Products Corp., 848 F.2d 34, 38 (2d Cir.1988) (“a misleading comparison to a specific competing product necessarily diminishes that product's value in the minds of the consumer.”). Great American argued that Acme was about underlying ad claims that the insured’s product was superior, not just equivalent, but “a statement equating a competitor's product with an allegedly inferior one is logically indistinguishable from, and no less disparaging than, a statement describing one's own product as ‘superior’ to the competitors'.”  In addition, TPU’s allegations of damage to goodwill and sales diversion bolstered the conclusion that the allegedly misleading statements disparaged Lidoderm.

Thus, the underlying complaint could reasonably be construed as falling within the scope of the policy, unless any exclusion applied.  Great American’s IP theory was that, because the underlying complaint asserted Lanham Act claims and state law claims that “sound in theories of unfair competition and unfair or deceptive trade practices, or other similar practices,” the IP exclusion was triggered.  “But this sweeping construction of the exclusion is not supported by the authorities defendant cites, and it flies in the face of both Illinois' policy and plaintiff's reasonable expectations about the scope of coverage.”  Allegations of unfair competition, “however unmoored from any intellectual property right,” weren’t excluded by the IP exclusion; to so hold would ignore the context in which that phrase appeared.  Read in context, the catchall provision excluding claims of “unfair competition, unfair trade practices, or other unfair similar practices” “bars coverage only of intellectual property claims based on such allegations.”  Otherwise, the term IP in the exclusion’s heading and its text would have no meaning.  The court wasn’t going to restrict coverage by deleting a limiting term from the caption of an exclusion.  Also, the exclusion began with the most specific excluded claims and ended with the most generall.  The very last exclusion, just before the ones on which Great American relied, was for “any other intellectual property right or law.”(Emphasis added). “The clear import of this final phrase is that the preceding subsections likewise referred to intellectual property rights or laws.”

The “quality of goods” exclusion also didn’t relieve Great American of its duty to defend.  The fact that LidoPatch was never released for sale was relevant to this exclusion.  TPU’s claims alleged injuries directly flowing from JAR’s ads, not from consumers’ discovery that the ads were false.  Plus, the underlying complaint alleged misstatements about Lidoderm, not just misstatements about JAR’s own products.

The court also rejected Great American’s argument that an exclusion for prior publication barred coverage, given that there were allegations of specific actionable statements within the policy period and TPU’s allegations of statements outside the coverage period were general and didn’t necessarily match up with the statements made within the policy period.

So Great American had a duty to defend, though it didn’t act in a vexatious and unreasonable manner given that there was a bona fide dispute over coverage, and therefore sanctions and costs weren’t appropriate.

No reasonable consumer would think diet soda "all-natural"

Viggiano v. Hansen Natural Corp., --- F.Supp.2d ----, 2013 WL 2005430 (C.D. Cal.)

Viggiano brought the usual California claims, along with federal warranty claims, based on Hansen’s diet Premium Sodas labeled as containing “all natural flavors.”  Each soda allegedly contained two synthetic ingredients, acesulfame potassium (“ace-k”) and sucralose, used as sweeteners and/or “flavor enhancers.”  Each soda also contained at least one natural fruit extract flavor. Viggiano alleged that consumers would understand “natural flavors” to mean that the flavors have not been “modified, enhanced and/or supplemented with artificial and/or synthetic compounds,” and that the “Premium Diet Soda” name also implied that the sodas were flavored only with natural ingredients.

Hansen argued that his claims were preempted because the FDA expressly regulates the use of “natural flavor” labels.  A manufacturer can use a “natural flavor” label even if the product contains artificial, non-flavoring ingredients, so long as the “characterizing flavor” is, in fact, natural.  However, if any added artificial flavor “simulates, resembles or reinforces the characterizing flavor ... the name of the characterizing flavor shall be accompanied by the words ‘artificial’ or ‘artificially flavored.’”  Other courts had found preemption in similar situations, distinguishing between unnatural ingredients and unnatural flavors.  The regulations allow “natural flavors” even when not all the ingredients are natural.

The FDA allows sucralose and ace-k as sweeteners and, for the latter, as a flavor enhancer—a “[s]ubstance[ ] added to supplement, enhance, or modify the original taste and/or aroma of a food, without imparting a characteristic taste or aroma of its own.” Thus, the court held, neither sucralose nor ace-k were flavors, but rather sweeteners/amplifiers of whatever characterizing flavor a product already had.  (I don’t know why that doesn’t count as “reinforc[ing] the characterizing flavor.”)  And neither appeared on the list of artificial flavors promulgated by the FDA.

Since FDA regulations expressly permitted this labeling, any requirement to use additional or different labeling was expressly preempted.  Another decision had held that the FDCA did not preempt state law consumer claims that an “all natural flavors” label on an ice cream box was misleading, because a reasonable consumer could plausibly interpret that to mean “all natural ingredients.”  But that court didn’t appear to have considered the specific flavor regulations, which made clear that ace-k and sucralose were not flavors.  “While the distinction between an enhanced natural flavor and an unenhanced natural flavor may be one with which normal consumers are not familiar, the FDA has not precluded food manufacturers from labeling their products naturally flavored simply because the flavor may be artificially enhanced.”  Moreover, the general “all natural flavors” label was confirmed by the ingredient list, which identified the specific natural characterizing flavor for each can.

Even if the claims weren’t preempted, dismissal would be appropriate, because no reasonable consumer would be deceived.  “Flavors” are not “ingredients,” and Viggiano identified no artificial flavors in the drink.  “In cases where a product's front label is accurate and consistent with the statement of ingredients, courts routinely hold that no reasonable consumer could be misled by the label, because a review of the statement of ingredients makes the composition of the food or drink clear.”  Plus, the fact that the soda was clearly labeled “diet” made clear that it contained artificial sweeteners, because it’s the absence of sugar that makes a soda “diet.”  Given the ubiquity of diet sodas, a reasonable consumer would understand that a diet soda contains artificial sweeteners, even if it also said “all natural flavors.”

The truth of “all natural flavors” also disposed of the express warranty claims. To the extent that Viggiano relied on the “premium” statement, that was mere puffery with “no concrete, discernable meaning in the diet soda context.”  Read in context of the other statements, none of them were actionable; thus, “premium” didn’t form part of an overall warranty regarding the quality of the product. Unsurprisingly, the implied warranty claims and the Magnuson-Moss Warranty Act claims also failed.  The latter failed not just because the state law claims failed, but also because the MMWA doesn’t apply to warranties otherwise governed by federal law, as here with the FDCA, and because Hansen’s label wasn’t a covered “written warranty” in the form of an assertion that the product was defect free or that it would meet a specific level of performance over a specified period of time.

bewildering complexity of modern world makes class certification difficult

Red v. Kraft Foods, Inc., 2012 WL 8019257 (C.D. Cal.)

Plaintiffs sued Kraft under the UCL, FAL, and CLRA based on allegedly false marketing of Teddy Grahams, many varieties of Ritz Crackers, Original Premium Saltine Crackers, Honey Maid Graham Crackers, Vegetable Thins and Ginger Snaps, as healthy, though they contain high levels of partially hydrogenated vegetable oil and other “unhealthy, highly-refined, highly-processed, and nutritionally empty ingredients,” and thus allegedly cause health problems including cardiovascular disease, diabetes and cancer.  The court previously denied class certification without prejudice; the renewed motion limited the class to California consumers and proposed one subclass per product with the challenged label.  (The court found that plaintiffs lacked standing as to varieties of Saltines they never purchased, so they could only make claims based on regular Premium Saltines, not Premium Saltines Unsalted Tops, Premium Saltines Multigrain, Premium Saltines Fat-Free and Premium Saltines Low Sodium—a list that amazes me just because I had no idea the world of saltines was so complex.)  

In this tentative opinion before a hearing, the court was unwilling to certify a class seeking damages under Rule 23(b)(2), but sought clarification over whether plaintiffs would seek injunctive relief only under 23(b)(2) if it denied, as it was inclined to do, any 23(b)(3) certification (for a class seeking damages).  Kraft argued that such a suit would be largely moot because it had discontinued many of the challenged labels, so the court needed more information, because 23(b)(2) certification might be warranted, but ascertainability and predominance precluded a 23(b)(3) certification.

Defining the class as including only consumers who bought products with the allegedly unlawful labels assuaged the court’s worry about ascertainability to the extent that a previous definition included consumers who might not even have seen the allegedly misleading claims and thus wouldn’t have standing.  However, ascertainability was still a problem because the court thought it would be infeasible to determine whether a person was a class member—overlapping with manageability concerns.  That is, these were cheap products and consumers were unlikely to have receipts or even good memories about what they bought when. 

When there was no way to verify that self-identified class members suffered the alleged injury, and when consumers themselves might not be able to honestly identify themselves, certification was probably improper.  Self-identification is more acceptable where “consumers are likely to have retained receipts, where the relevant purchase was a memorable bigticket item, or where the defendant would have access to a master list of either consumers or retailers who dealt with the items at issue.”  The one case plaintiffs identified allowing self-identification for small-ticket purchases without written receipts was Zeisel v. Diamond Food, Inc., No. C 10–01192 JSW, 2011 U.S. Dist. LEXIS 60608 (N.D. Cal. June 7, 2011), which itself “relied upon cases involving big-ticket items or cases where there were no nuanced labeling issues involved,” and the court was unwilling to rely on it. Lack of ascertainability/manageability would also make it impossible for future courts to figure out who was and wasn’t bound by the judgment, a serious problem.

Since lack of ascertainability alone wouldn’t necessarily scuttle a class action, the court continued with the other factors.  Numerosity was of course easy. As for commonality, plaintiffs identified common questions about what Kraft communicated, whether it was material, etc.  Under the UCL and FAL, plaintiffs need not prove that each individual class member relied on misrepresentations if reasonable consumers were likely to be deceived.  Thus, even if some class members bought the products because they liked the taste, that wouldn’t affect commonality.  As for CLRA claims, individualized reliance is an element, but reliance can be presumed if material misrepresentations were made to the entire class.  And materiality wasn’t suitable for adjudication at the certification stage; the court noted that plaintiffs made a sufficient threshold showing of materiality, identifying numerous Kraft documents indicating that health labeling like the challenged labels was likely to influence purchasing decisions.  (However, the court noted that, among other things, the fact that one class representative made a post-suit purchase of one of the products indicated that the issue of whether the misrepresentation was material was far from clear.)  As to subclasses involving one product and one label, whether a claim was material to a reasonable consumer was plainly a common question of fact. 

Subclassing solved the court’s previous objections to the wide range of products and labeling claims challenged.  Kraft argued that class members had different reasons to buy the products, but common injury didn’t depend on whether class members were upset about the injury for the same reasons: the question was whether liability could be determined by resolving the same factual and legal allegations.

However, the court thought the proposed classes failed 23(b)(3)’s predominance requirement: individualized issues of damages were too important.  The court was troubled by other things, but not decisively so.  Kraft argued that the Teddy Grahams and Ritz I subclasses still involved numerous products, but the former contained more than one product only insofar as the container sizes differed, which wasn’t enough variation.  The court was more worried by the varieties of Ritz crackers—Kraft allegedly falsely claimed that “Reduced Fat, Whole Wheat, Hint of Salt, or Low Sodium” were all “sensible” choices, but the legal and factual underpinnings of why they weren’t sensible would seem to differ.  Plaintiffs responded that the ingredients rendering the crackers nonsensible were the same for all the varieties, but the court would still find that four different products with two different labels was too many for one subclass.

Kraft also argued that the subclasses were challenging too many labels.  This only related to Teddy Grahams and Honey Maid, since the others involved either only one label or the labels “sensible snacking” and “sensible solution,” “which are sufficiently similar that the Court cannot imagine Kraft to argue that different legal and factual questions would resolve the merits of Plaintiffs' claims as to one as distinct from the other.” The most problematic was the Teddy Grahams subclass, which challenged four labels: “sensible snacking,” “sensible solution,” “smart choices,” or “help support kids' growth and development.” These differed enough to prevent common questions from resolving the claims of all members.  For Honey Maid, challenging “wholesome” also differed from “sensible snacking/solution,” and the court was inclined to narrow the class.

The court was less impressed by Kraft’s argument that there couldn’t be commonality when the same challenged words were used on a number of different package designs for the same product.  Plenty of cases have found predominance where one allegedly fraudulent message was conveyed across TV, print ads, and product labels, and Kraft couldn’t cite cases in its favor on this argument.  Though there were other problems with the proposed classes, it would be “manifestly unjust” for a court to reject predominance simply because a company didn’t use the allegedly fraudulent claim for an extended period of time or because it periodically made minor changes to the packaging containing the challenged claim.

Kraft argued that some of the packaging during the subclass periods didn’t bear the allegedly fraudulent representations, but consumers who bought those packages wouldn’t be part of the class in the first place; this was just another version of the ascertainability argument, or could be seen as going to damages from the challenged labels rather than to liability.

Kraft’s most successful argument was on individualized damages methods.  Plaintiffs had the burden of showing that restitution could be calculated by methods of common proof.  Nonrestitutionary disgorgement wasn’t available in a UCL class action, so awarding full disgorgement wasn’t allowed, since the class members “undeniably” received some benefit from the products, and a large portion of the sales wouldn’t be tainted by misrepresentations due to “customer loyalty and other factors” driving sales.  Plaintiffs’ second theory was that Kraft should pay restitution of a premium charged for misleading health and wellness claims, compared to the same products before the claims were used.  The amount of such a premium might be established on a classwide basis, but individual class members would still need to prove how many purchases they made, where and when, to determine how much they were owed.  “While this method has been approved in a few analogous class actions, memory issues as to what products were purchased where and in what quantities, as well as price differences at the vast array of retail establishments that sell the Products render this Court unwilling to find that common questions of law or fact will predominate as to the resolution of class members' claims, due to the individualized nature of the damages calculations.”  Thus, predominance wasn’t met due to manageability concerns.

The court rejected Kraft’s arguments against typicality, including the argument that plaintiffs were atypical because they bought and ate other foods with the same ingredients they alleged were unhealthy here.  This was irrelevant because the issue was misleadingness, not whether plaintiffs bought other products that may or may not have made any healthfulness claims.  Their purchases were relevant to individual reliance, but that wasn’t an element for the UCL and FAL claims, and the CLRA claim would only survive as a class action if the misrepresentations were material and individual reliance could be presumed.

The court also rejected various challenges to plaintiffs’ adequacy, though finding it a close question given the class representatives’ unfamiliarity with the complaint and the addition and removal of a law firm as co-counsel.  The court cautioned counsel to “include, involve and respect the class representatives sufficiently if the case moves forward.”

The court left final resolution of certification for a hearing focusing on ascertainability, damages calculation, and other lingering issues.