Hotel horror story is consumer fraud, not common-law fraud

Onyx Acceptance Corp. v. Trump Hotel & Casino Resorts, Inc., 2008 WL 649024 (N.J. Super. A.D.)

Onyx is an auto finance company that buys loan contracts from car dealerships and securitizes them. It depends on personal relationships with car dealers for business. This lawsuit stemmed from a disastrous holiday party Onyx threw for its most valued customers at the Trump Taj Mahal Casino Resort in Atlantic City. The party, to reward the three dealerships in New Jersey and Pennsylvania which referred the most business to Onyx in fall 2001, was planned for December 1, 2001. Onyx had held a similar event at Bally’s the previous year, which had been a great success and had resulted in additional business. Onyx initially contacted Bally’s again, but Bally’s wouldn’t guarantee rooms on that night. Onyx chose Trump because Trump promised that, as a “huge hotel,” it could meet Onyx’s room availability needs. Trump’s representative told Onyx’s representative that their party was a “small event” that Trump “could easily take care of.” Trump’s representative said that Onyx’s rooms “were guaranteed.”

Onyx and Trump entered into a written contract providing that “all accommodations will be held on a definite basis.” Onyx signed and prepaid Trump for a banquet and 60 hotel rooms, which cost about $29,000. Trump issued a “DEFINITE BOOKING SHEET” to Onyx.

Unfortunately, Trump significantly overbooked the hotel that night. One day before the party, Trump realized that it was overbooked. Staff “pre-walked” twenty casino guests to another hotel to try to stave off the impending crisis, but there were still significantly more reservations than rooms. Trump never contacted Onyx about the potential problem. Indeed, two Onyx decisionmakers arrived early on December 1 and checked in, but weren’t informed about the problem. As other Onyx employees and guests began arriving, they were told there were no rooms available and that the hotel was “sold out.” Finally, hours later, the Onyx representative who’d arranged the party got a call from one of Onyx’s account representatives, who was in the lobby trying to check in. She immediately went down with her paperwork and advised the staff that Onyx had “pre-registered, prepaid rooms” connected with its party.

The staff apologized but said there was nothing they could do. The Onyx employee pointed out that Onyx had prepaid nearly $30,000, to which the response was “ma’am, we have people who spent $30,000 a hand.” (Of course, those people were most likely offered complimentary rooms, not refused rooms for which they’d paid.)

They continued to argue as guests continued to arrive. Trump didn’t explain why the prepaid rooms were unavailable, and during an hour-long argument the front desk didn’t offer any alternatives or solutions. Guests were arriving all that time, wanting to check in and shower before the party, which had been supposed to start at 7 pm. Some went up to the banquet, while others stayed in the lobby. It was “a complete nightmare, chaos.” Onyx’s guests were “upset, unhappy, frustrated, angry, even furious, and they wondered how the situation was going to be rectified whether they were going to be given rooms, or whether they should just go home. Guests who had been assigned rooms were asked to permit other guests to use their rooms to shower and dress for the evening, and Onyx employees doubled and tripled up in rooms, giving up their rooms for their invited guests to use.” All the while, other guests were arriving and receiving rooms, though Trump maintained that they had checked in earlier and were just picking up keys.

After an hour of argument, Onyx’s representative called her superior, who came down and spent at least another hour arguing with the front desk. Eventually he had a “lengthy discussion” with the general manager. After that, Trump booked Onyx guests at other hotels in the area. Six were booked at the Trump Plaza in Atlantic City, 20 at a Days Inn, and one at a hotel in Brigantine. These lacked the amenities of the Trump, and some of Onyx’s guests were upset at the divergence between what they’d been promised and what they got. Trump finally offered free transportation, another night at the Trump for free, and complimentary buffet coupons. However, this happened only after Trump first proposed that guests pay for their own taxis and submit receipts to the hotel for reimbursement. And the free transportation was “substandard”; one guest was driven around for 45 minutes, until 2 am, because the driver didn’t know where to go.

The banquet was a failure, because Onyx’s staff had been so consumed with fixing the room problem. The main topic of conversation at the banquet was the royal screw-up that had occurred. Onyx employees testified that business dropped off significantly after the party particularly, though not exclusively, from dealers who attended it. “[O]ne dealer stated that the fiasco at Trump was a topic of conversation among dealers, including those who did not attend. Dealers who attended the party testified that they took transactions away from Onyx as a result. However, these dealers could not identify with specificity the deals that they sent to other lenders, or the exact number of deals diverted.” Moreover, some of their testimony seemed to have been solicited, even exaggerated, by Onyx for purposes of litigation.

Onyx sued for breach of contract, common-law fraud, and violation of the New Jersey Consumer Fraud Act (CFA). It won summary judgment on its breach of contract claim and a directed verdict on its CFA claim, with trebled damages based on the amount it prepaid for the banquet and rooms. The judge granted a directed verdict to Trump on Onyx’s claims for common-law fraud, punitive damages, and lost profits. The judge further ruled that Onyx’s claims for lost profits had been frivolous and granted Trump fees.

Among other things, the court of appeals reversed the award of fees to Trump. There was no evidence that the lost profits claim was made or pressed in bad faith. Onyx overreached in trying to claim lost profits from all dealers, including those who didn’t attend the party. But the claim was made in (misguided) sincerity.

What did Trump have to say for itself? According to Trump, “‘guaranteed’ meant only that Trump may not cancel the reservation until 7 a.m. of the day after arrival.” Trump promised to hold “only ‘the reservation, not the room.’” Nor did Trump’s references to a “block” of “guaranteed” rooms mean that the rooms would be preassigned. As the court pointed out, “Trump’s Orwellian definitions of these words … were not shared with Onyx.” Trump’s representative never suggested that Onyx’s rooms could be given to other people. Nor did Trump tell its guests about its practice of overbooking by about 10%, which it does because there’s a historical no-show rate of 20-25%. Trump didn’t exclude guaranteed rooms or blocks of rooms reserved for prepaid groups from its overbooking policy. If the hotel is overbooked, it didn’t “discriminate on who doesn’t get a room ... [W]hether they’re cash paying or somebody who is a casino guest, if we don’t have a room, we don’t have a room.”

Onyx’s expert on the hospitality industry testified that “guaranteed” means that a hotel has taken a room out of inventory, and the room is not subject to the hotel’s overbooking policy. He stated that, in 37 years in the industry, he’d never seen a group “so misrepresented and lied to.”

Trump argued that the trial court shouldn’t have found a CFA violation as a matter of law. But the court of appeals agreed that any reasonable person would conclude that Trump falsely represented a room guarantee. The guarantee was material, as Onyx proved by rejecting Bally’s because it wouldn’t offer a guarantee.

Trump proposed that its private definition of “guarantee” meant that there was no misrepresentation. It also argued that, at the time it made the contract, it believed that rooms would be available. Finally, it maintained that it made good-faith attempts to correct the problem.

The court readily concluded that Trump’s reservation/room distinction “defies any commonsense understanding of the term guaranteed.” It’s the customer’s reasonable expectations that define the scope of the CFA, not the seller’s “unreasonable definitions of commonplace terms.” The problem is not Trump’s failure to disclose its definition of “guaranteed,” or its failure to disclose its overbooking policy. Those only mattered because of its affirmative representations that the rooms were “guaranteed.” Though a breach of contract isn’t per se unfair or unconscionable under the CFA, substantial aggravating circumstances, as here, can justify applying the CFA and trebling damages.

Likewise, Trump’s lack of knowledge, at the time of contracting, that it would be unable to perform was irrelevant. Under the CFA, intent to deceive, and even knowledge of falsity, are irrelevant. Moreover, at the time it contracted, Trump knew that the rooms it called guaranteed were not really guaranteed at all; in a case of overbooking, Onyx’s guests could be kicked to the curb. Nor were Trump’s after-the-fact efforts to correct the problem it caused sufficient to avoid CFA liability, even assuming they were in good faith.

The court of appeals agreed with the trial court, however, that Onyx’s common-law fraud claim failed for lack of intent. Though Trump used an unreasonable, undisclosed definition of “guaranteed,” that wasn’t enough to establish intent. (Intent to what? Trump clearly intended that Onyx, in particular, rely on the “guarantee” claim, since it knew Onyx’s specific requirements.) Trump didn’t know that it would be unable to provide the rooms, and there was no evidence that it intended not to provide the rooms, or that it knew there was a reasonable or substantial likelihood that it wouldn’t be able to. It even tried to avoid the problem on November 31. There was no evidence that Trump routinely dishonored reservations, and overbooking is a recognized and accepted practice in the industry.

Comment: So here’s the upshot—a consistent practice of “Orwellian,” undisclosed private definitions of terms, which the defendant must have known would deceive customers, isn’t actionable as common-law fraud because the harm it always threatens doesn’t materialize for most consumers. This is why state consumer protection law covers more than the common law, and it’s why full First Amendment protection for commercial speech would wreak havoc with consumer protection law.

Not the usual shark cartilage false advertising claim

Hauf v. Life Extension Foundation, 2008 WL 623802 (W.D. Mich.)

Plaintiffs Hauf and Barrow are mother and son. In 1991, a teenaged Barrow was diagnosed with brain cancer and given 3-6 months to live. Hauf procured unconventional treatment, including shark cartilage supplements. His tumor shrank. In 1993, a friend told Hauf that she could get the supplements cheaper from defendant LEF; she ordered them for about 9 months, then stopped. By 1994, Barrow fully recovered.

Plaintiffs alleged that their story attracted wide notoriety, especially among cancer patients. People from LEF received Hauf’s permission to publish a version of their story in LEF’s magazine and in its “FDA Holocaust Museum.” The story appeared in the magazine as a letter to the editor from Hauf, but Hauf alleged this was by LEF’s request and that she insisted that no monetary gain was allowed from the use of their names, likenesses, or story. In 1995, at LEF’s request, Hauf sent an update on her son, which was also published in the magazine. And in 2002, she agreed to send another update, but reiterated the no-monetary-gain limit.

In September 2005, LEF conducted a membership drive, which involved a two-page testimonial attributed to the plaintiffs and included a photo allegedly representing Hauf. The testimonial allegedly included at least three false statements: (1) “In my search to save my son’s life, someone referred me to the Life Extension Foundation;” (2) “... the people of your organization supported my search for different treatment regimens we could try;” and (3) “Through your organization, I found out about a treatment called Immune Augmentative Therapy.”

Plaintiffs sued for the usual torts.

LEF sought dismissal of Barrow’s false endorsement/association claim, arguing that the facts alleged support at most an endorsement by Hauf, not by her son. Moreover, he only appears in the materials as “Steve,” so there was no distinctiveness or consumer confusion. Barrow argued that his story is intertwined with his mother’s story and that LEF’s testimonial confused the public into thinking that a “miracle cancer survivor” and his mother endorse LEF’s products. (Hmm. So if Jon Voight endorses a product, people are likely to think that Angelina Jolie does too?) LEF responded that “a story about Barrow told by Hauf is insufficient to constitute an endorsement by Barrow of LEF’s activities,” and there’s no allegation of false statements about Barrow.

The court rejected LEF’s argument. All Barrow has to do is prove that his identity has commercial value for advertisers addressing the relevant public, and he may be able to do so among cancer patients or advocates of alternative medicine. (Comment: that’s really not all Barrow has to do. That would be a right of publicity claim. At a minimum, there’s a nominative fair use defense if the materials just describe Barrow—which at least in some circumstances could be resolved on a 12(b)(6) motion.) Barrow gets his chance to prove that the membership drive misled the public about his sponsorship or approval.
For similar reasons, his misappropriation (right of publicity) claim survived. So did his false light claim. Allegedly, given LEF’s bad reputation, being associated with it would be highly offensive to a reasonable person. The elements are “(1) the false light in which the other was placed would be highly offensive to a reasonable person; and (2) the publisher had knowledge of, or acted in reckless disregard as to the falsity of the publicized matter and the false light in which the other was placed.” Because plaintiffs alleged they don’t share LEF’s “views or goals” on alternative medicine or life extension, the court refused to dismiss the claim on a 12(b)(6) motion. For the same reasons, the court refused to dismiss the defamation claim. (I can imagine cases in which a claim that a person endorses an organization is defamatory, but I wonder if this is one of them.)

LEF also argued that Hauf’s right of publicity claim should be dismissed because her own allegations indicated she refuses to monetize her identity. The court, however, held that she could still have a pecuniary interest in her identity.

The court also refused to dismiss plaintiffs’ claim under Michigan consumer protection law, even though plaintiffs weren’t in the position of consumers. (Also, it wasn’t clear to me that membership in the LEF constituted “conduct of business providing goods, property, or service primarily for personal, family or household purposes” under Michigan law, but perhaps membership is a service.) If they suffered loss as a result of violation of the law, including mental distress, they could recover.

What do file-sharers have in common with discriminatory renters?

Answer: Not a secondary liability regime.

Eric Goldman blogged about the decision in Chicago Lawyers’ Committee for Civil Rights Under Law v. Craigslist, Inc., No. 07-1101 (7th Cir. March 14, 2008). He says, “I don’t think there’s much value to parsing [Judge Easterbrook’s] confusing statutory analysis” to figure out how the case comports with past Seventh Circuit precedent, and I won’t fight him on that, but there’s a sentence in the opinion that cries out for correction: “Grokster is incompatible with treating §230(c)(1) as a grant of comprehensive immunity from civil liability for content provided by a third party.”

What? Grokster is, as I recall, a copyright case. Section 230 explicitly excludes intellectual property law from its ambit. Grokster is neither compatible nor incompatible with any interpretation of §230; it is simply irrelevant. The fact that Judge Easterbrook doesn’t understand this suggests that his interest in efficient liability standards has distracted him from reading the relevant statutory text.

Short-seller SLAPPs back

USANA Health Sciences, Inc. v. Minkow, 2008 WL 619287 (D. Utah)

Defendants used California’s anti-SLAPP statute to get rid of the state-law causes of action in this case, though a federal securities law claim remained. Minkow co-founded the Fraud Discovery Institute (FDI), which wrote a long, negative report about USANA and sent it to the SEC, the FBI, and the IRS. (USANA sells distributorships based on the sale of nutritional supplements and similar products.) Minkow short-sold USANA shares. FDI then published the report on its website and issued a press release, and continues to make follow-up statements using, among other things, internet banner ads and YouTube videos.

Under the anti-SLAPP statute, a defendant must make a prima facie showing that the cause of action is based on free speech or petitioning activity, at which point the burden shifts to the plaintiff to show a probability of prevailing. Here, most of the allegations stem from defendants’ public relations campaign of disparaging statements about USANA. Defendants’ conduct wasn’t illegal as a matter of law, nor was it exempted from the anti-SLAPP statute by section 425.17, which applies to statements about a defendant’s own product or a competitor’s business, goods, or services. Defendants weren’t competing with USANA. Thus, USANA needed to show competent, admissible evidence in support of its claims.

Under the Unfair Competition Law, USANA needed to show that members of the public were likely to be deceived by defendants’ statements or that defendants’ practices were unfair in that they created harm outweighing their benefits. However, USANA could only show the technical inaccuracy of a few statements. Defendants’ report says that an independent lab “‘found zero amounts of N-Acetyl L-Cysteine’” (an antioxidant) in a USANA product. The report stated “Not Detected” rather than “zero,” but the lab report itself was attached to defendants’ report, so without evidence of materiality and deceptiveness, there was no violation of the law. Likewise, USANA disputed the report’s comparison of the antioxidants in a serving of grape juice to those in a serving of USANA’s TenX bar, arguing that a gram-for-gram comparison was the only meaningful measure. But defendants’ report explains its measures. Fundamentally, the misstatements of which USANA complains were “hyper-technical statements representing differing interpretations of data, with no evidence tending to show how the statement[s were] material.”

Moreover, USANA’s complaint did not support its claim that the alleged misstatements caused its stock price to plummet. Rather, the sequence of events suggested that something else was behind at least some of the price declines, because they occurred before the market had time to digest defendants’ reports. Similar flaws doomed USANA’s other state claims, including intentional interference with economic relations and tortious exposure to litigation.

Ruffian in a race for priority

Thoroughbred Legends, LLC v. The Walt Disney Co., 2008 WL 616253 (N.D. Ga.)

Ruffian was a filly who won ten of her eleven races, breaking records held by colts. In her final race, a one-on-one against the 1975 Kentucky Derby winner, she broke her leg and was ultimately euthanized. Plaintiff Vasquez rode Ruffian in nine of her races, including the final race, and Plaintiff Whiteley was her trainer.

In 2004, ESPN and ABC decided to make a movie about Ruffian. They asked Whiteley and Vasquez to participate, but both declined some time around May 12, 2004, refusing to allow the use of their names or likenesses in the film. On May 10, 2004, plaintiffs’ related company Thoroughbred Legends filed an ITU to register RUFFIAN as a service mark for “[e]ntertainment services, namely, production of theatrical plays, motion picture films, television shows, and documentaries.” In 2006, Legends offered to license the mark to ESPN, which declined.

Defendants then made Ruffian, a film about Ruffian. It aired in June 2007 and is now available on DVD.

On May 23, 2007, plaintiffs submitted a statement of use to the PTO, alleging use beginning October 31, 2006, when it attempted to license RUFFIAN to defendants. The specimen depicted a horse underneath the term “RUFFIAN” and offered to sell the individual plaintiffs’ life stories for a video about Ruffian. The PTO accepted the statement of use and the registration issued in August 2007. Defendants filed a petition to cancel it, which is pending.

Plaintiffs filed state and federal infringement claims, as well as defamation claims. Ruffian uses the perspective of journalist Bill Nack. “In the movie, Mr. Whiteley discloses private information about Ruffian’s condition to Mr. Nack and allows Mr. Nack to observe Ruffian’s medical treatment. Plaintiffs also point to a scene that portrays Mr. Whiteley blackmailing Mr. Vasquez, the regular jockey for both Ruffian and Foolish Pleasure in 1975, into riding Ruffian in the match race between the two horses. Plaintiffs argue that these conversations, falsely attributed to Mr. Whiteley and Mr. Vasquez, made them appear unethical and unprofessional.” Plaintiffs also alleged false light, because the Whiteley character calls the Vasquez character a “Puerto Rican,” though he’s Panamanian. “Plaintiffs contend that the film mischaracterizes this nickname, in reality an affectionate joke.” Finally, plaintiffs alleged appropriation of names and likeness: the film features characters based on them, and the actors emulated their dress, speech, and manner.

Defendants, it’s fair to say, won the trifecta on the trademark claims.

First, the court ruled that there had been no trademark use of RUFFIAN. Use doesn’t necessarily require sales, but there must be a bona fide use in commerce to signify source. Plaintiffs tried to license the mark RUFFIAN to ESPN and to other TV networks, producers, etc. They gathered facts, interview material, and memorabilia. But these activities didn’t involve using RUFFIAN to identify the source of any service. Instead, plaintiffs merely described the mark and claimed rights to it. For example, the message to ESPN came from a personal email account and displayed no logo or corporate header. It said: “I own Thoroughbred Legends, LLC, an entity that has obtained the trademarks for a number of famous thoroughbred racehorses-among them Ruffian ….” The court concluded: “The word ‘Ruffian’ is not distinguishable or set apart in any way from the rest of the message. Put simply, one cannot acquire rights in a trademark by asserting he owns it.” Plaintiffs also tried to license RUFFIAN to a store selling clothing and paper goods, but there was no evidence that the license was ever executed, and in any case the goods had “no discernible connection” to film production. Likewise, plaintiffs founded a charity called the Ruffian Foundation for equine medical research, but that doesn’t have anything to do with producing movies or TV shows, and there was no allegation of commercial trademark use.

Second, even if plaintiffs had used RUFFIAN as a mark, it’s descriptive because the name of a historical figure used in connection with a product representing that historical figure is descriptive. Plaintiffs provided no evidence of secondary meaning, and the record makes clear that such secondary meaning is absent. They sought discovery on the issue of intentional copying, but intentional copying alone is insufficient to show secondary meaning; even intentional copying wouldn’t be enough to create a fact issue here. The fact that the PTO registered RUFFIAN on an ITU basis was not dispositive. Though registration created a presumption of validity, that merely shifted the burden of production to the defendants, who rebutted the presumption. (Here the court seems to create some tension with the Fourth Circuit, whose decision in AOL v. AT&T held that the PTO’s registration of BUDDY LIST without any requirement of proof of secondary meaning was sufficient to create a factual issue about whether the term was generic; that decision, however, can be distinguished as being about genericness and also as containing some evidence other than the mere fact of the registration supporting AOL’s trademark claim.)

The court commented that what plaintiffs were really trying to sell facts, not services: “the story of Ruffian from the perspectives of her trainer and jockey.” But facts are in the public domain. The court viewed the attempt to trademark Ruffian’s name as an end run around copyright law.

Thus, and third, defendants were entitled to the descriptive fair use defense as a matter of law. Using Ruffian as a film title is a use other than as a mark and conveys no information about the origin of the movie. Origin is indicated by ESPN’s marks on the DVD. Ruffian is descriptive of the contents, and is used in good faith.

And in the bonus round, even if none of the above were true, defendants beat plaintiffs in priority. Defendants hired a producer to make the film in 2004, two years before plaintiffs’ asserted first use. Though plaintiffs’ uses aren’t sufficient, sauce for the filly would be sauce for the … other filly, I guess. “[I]f Plaintiffs urge the court to adopt their innovative theory of trademark use, surely they recognize that it applies equally to Defendants.” (Here the court misunderstands the effect of an allowed ITU application, which gives priority as of the date the application was filed, not the date the statement of use is filed, but it doesn’t matter because defendants beat plaintiffs’ filing date by ten days.)

Plaintiffs’ invasion of privacy claims also fell to a Rule 12(b)(6) motion. Under Georgia law, publications about a matter of public interest can’t invade privacy. This includes dramatizations of past newsworthy events, like an important event in horse racing history. Plaintiffs’ appropriation of name or likeness claims also failed for an independent reason. An appropriation of likeness claim is bounded by the First Amendment, and thus can’t succeed against an expressive, creative work, whether fictional or nonfictional. Advertising for Ruffian is also protected because Ruffian itself is protected.

Plaintiffs weren’t completely out of luck, though. The court allowed discovery on the false endorsement claim, though it expressed doubts about whether plaintiffs could prevail. (It refused to allow a separate false advertising theory, because the complaint didn’t put defendants on notice of that theory.)

Likewise, the court also allowed discovery on the defamation claim. Though there was a disclaimer at the end of the film, and the film was advertised as a docudrama rather than a documentary, the court found that the disclaimer “passes over the screen very quickly,” and is actually after the credits, not just after the film ends. The DVD synopsis says it’s an “extraordinary true story” and doesn’t say “based on” or “adapted from.” So the court was unwilling to hold that, as a matter of law, no one could reasonably think the film portrayed actual events. But if “the challenged scenes contain the essence of truth, and … any falsity was incident to ‘author’s license’ in creating a dramatization of the story,” defendants will still win. Furthermore, plaintiffs submitted affidavits that the conduct depicted made them look unethical according to the standards of their professions, which was sufficient to warrant discovery on whether the dialogue was susceptible of defamatory meaning.

The court concluded that plaintiffs were public figures because they are famous within the horse-racing world; thus, they’d be required to prove actual malice.

Article on consumer protection lawsuits and regulatory exemptions

Victor E. Schwartz, Cary Silverman, & Christopher E. Appel, “That's Unfair!” Says Who--The Government or the Litigant?: Consumer Protection Claims Involving Regulated Conduct, 47 Washburn L.J. 93 (2007): A comprehensive and comprehensively defendant-friendly survey of state consumer protection laws and exemptions for “regulated” businesses (to wit, all businesses). Excerpt from the introduction (footnotes omitted):

Most state consumer protection statutes [CPAs] recognize the value of consistency between government policymaking and private consumer protection lawsuits. CPAs often exempt conduct in compliance with state or federal regulations from their coverage. Application of this sound policy, however, is not consistently and predictably applied, exposing businesses that have carefully followed government requirements to potentially massive liability. In some cases, courts narrowly interpret such exemptions, allowing plaintiffs' lawyers to circumvent the clear language of the law. In other instances, the significance of regulatory compliance is relegated to dictum when a court relies on other grounds to dismiss a CPA claim, such as failure to show injury or damages or to meet class certification standards. Nevertheless, in recent years, several courts have rendered strong decisions giving new life to regulatory compliance exemptions. These examples demonstrate that courts have a clear choice in deciding who determines whether conduct is unfair or deceptive--government agencies charged with regulating products and services for the public good, or lawyers as private enforcers who seek the often generous recovery available under the statute.

Red light for Viacom on punitive damages

Viacom Int’l Inc. v. YouTube, Inc., SDNY (Mar. 7, 2008): “It is time to extinguish the ignus fatuus held out by Blanch [v. Koons]. Common-law punitive damages cannot be recovered under the Copyright Act.”

An unusual use of geographic terms

Laura Heymann pointed me to the following story, via Law & Letters:

Two Danish academics ... concluded that the Swedish names are reserved for the “better” products [at Ikea], and that even Norwegian names manage to make it into the bed department. But the “lesser” products bear Danish names like “Roskilde” and “Köge.”…Upholstered furniture, bookcases and multimedia consoles, for example, are named after small Swedish cities, while Norwegian towns serve as the namesakes of beds, dressers and hallway furniture. Names of Finnish origin grace the company’s chairs and dining tables.

NB: following the links leads to a retraction, perhaps because of more stringent European defamation laws. Apparently the analysis was not "thorough" as initially reported. (It does not appear that Danish names actually appear on prestige products, as far as the reporting indicates.) Another notable feature of the retraction is that it appears at the web address of the initial story. In this way, web publication allows for much better error correction, even as it means that errors can propagate quickly around the internet. If people follow the links to the initial source, web corrections are an improvement on publication in a subsequent edition of a paper or magazine.

Hoist on their own Vista: internal Microsoft complaints support class action

The New York Times had an illuminating story about documents produced by Microsoft as part of the “Vista Capable” consumer class action, which I discussed here. The Times also provides a pdf of Microsoft’s internal emails and marketing notes. The contents exemplify why issues surrounding individual reliance should not routinely defeat consumer class actions: Microsoft intentionally modified its marketing campaign to convince more consumers to buy low-end machines that couldn’t run the full Vista program; it knew consumers would rely on the campaign and intended them to do so; consumers did what Microsoft expected. If we can presume confusion from intent to confuse in trademark cases, we should do the same for reliance in consumer protection class actions.

Randall Stross reconstructs the sequence of events as follows: Initially, Microsoft planned to say that only high-end, graphics-intensive PCs are “Vista Ready.” But then it dropped the graphics hardware requirement to avoid cutting into Windows XP sales on cheaper machines while people waited for Visa. As Stross recounts, “A semantic adjustment is made: Instead of saying that a PC is ‘Vista Ready,’ which might convey the idea that, well, it is ready to run Vista, a PC will be described as ‘Vista Capable,’ which supposedly signals that no promises are made about which version of Vista will actually work.” As the skeptical tone indicates, this was a sketchy endeavor from the start.

This marketing decision caused “considerable internal protest.” One program manager complained that “even a piece of junk will qualify.” “It will be a complete tragedy if we allowed it.”

Post-release, Microsoft received immediate blowback from consumers and marketing partners. Dell, for example, noted: “Customers did not understand what ‘Capable’ meant and expected more than could/would be delivered.”

Some highlights from the emails, as reported by Stross:

Then there’s Mike, who buys a laptop that has a reassuring “Windows Vista Capable” logo affixed. He thinks that he will be able to run Vista in all of its glory, as well as favorite Microsoft programs like Movie Maker. His report: “I personally got burned.” His new laptop — logo or no logo — lacks the necessary graphics chip and can run neither his favorite video-editing software nor anything but a hobbled version of Vista. “I now have a $2,100 e-mail machine,” he says.

It turns out that Mike is clearly not a naïf. He’s Mike Nash, a Microsoft vice president who oversees Windows product management. ….

[Microsoft’s] own staff tried to avert the coming deluge of customer complaints about underpowered machines. “It would be a lot less costly to do the right thing for the customer now,” said Robin Leonard, a Microsoft sales manager, in an e-mail message sent to her superiors, “than to spend dollars on the back end trying to fix the problem.”

I suppose that depends on how much you have to pay the lawyers.

Longhorn is long shot for federal fame

Board of Regents v. KST Electric, Ltd., 2008 WL 577215 (W.D. Tex.)

This is a magistrate’s report and recommendation; it says some interesting things about federal trademark dilution. The University of Texas sued KST under state and federal trademark law, alleging infringement and dilution of its registered trademark – a longhorn steer in silhouette.

Among other things, KST sought summary judgment on federal trademark dilution, arguing that UT hadn’t shown the requisite fame. KST’s expert conducted a national survey that, he said, showed that only 5.8% of respondents associated the longhorn logo with UT alone, and only 21.1% of Texas respondents did so. Because the current standard requires a mark to be “widely recognized by the general consuming public of the United States,” 15 U.S.C. § 1125(c)(2)(A), the court only briefly mentioned a UT study conducted solely in the metropolitan Austin area. Rather, UT attacked KST’s survey and submitted circumstantial evidence of the logo’s fame based on the idea that UT “has permeated the national consciousness primarily through the success of its football program.”

KST’s survey tested the UT longhorn logo in white with a white background, rather than in its usual burnt orange color (the logo itself is “almost invariably” either burnt orange or displayed against a burnt orange background). The control group was shown the longhorn from the Longhorn World Championship Rodeo logo, to control for guessing or for the possibility that any depiction of a longhorn steer will be associated with UT.

Slightly less than half of the total respondents were from Texas; almost 22% of Texas respondents shown the control logo associated it with UT alone, and 26.5% associated it with UT and another “company, organization, or place.”Among non-Texas respondents, 5.3% in the control associated the control logo with UT alone, and 6.1% with UT and some other entity.

UT claimed the logo presentation was biased because of the absence of burnt orange. The expert claimed that UT’s mark is used in a wide variety of contexts, so picking any one would bias the results. The magistrate found this response disingenuous. The mark should be shown in its typical manner, rather than an unlikely manner.

The expert’s coding was also suspect. He didn’t count as associations favoring UT responses such as “Texas football” or “the Texas Longhorns” because they didn’t include reference to an academic institution. He also admitted to numerous coding errors, almost invariably in KST’s favor. A subject who associated the UT logo with “Texas college,” and gave the reason for doing so “That’s the image on helmets” was coded as not making a UT association.

UT also argued that the question was leading because it asked for associations with any “company, organization, or place,” which could lead respondents to simply say “Texas,” which would then be coded against UT.

Though UT didn’t raise the issue, the magistrate was troubled by KST’s sample size, 454 people, which “seems small for a national sample,” and “would not pass muster for a reputable national poll (like a Gallup or Zogby). Gallup and other major polling and survey organizations typically have a sample size of 1,000-1,500 individuals for national polls” (citation omitted). Comment: Ulp! The magistrate seems to be unfamiliar with trademark/advertising litigation surveys, as to which 454 is a pretty decent sample – and a pretty expensive one. Moreover, the sample size will affect the confidence interval, but not the best estimate of actual fame. For a clear explanation of this, as well as discussion of the case law on sample size, see Jacob Jacoby, Amy H. Handlin, & Alex Simonson, Survey Evidence in Deceptive Advertising Cases Under the Lanham Act: An Historical Review of Comments From the Bench, 84 Trademark Reporter 541 (1994).

In any event, the magistrate found that KST’s survey didn’t show absence of fame. UT’s affirmative evidence of fame, however, was insufficient to avoid summary judgment, so KST still prevailed on the federal dilution claims. UT’s evidence appeared impressive “at first blush,” but upon examination was evidence of niche fame in sports, clearly excluded by the TDRA. UT games are regularly televised nationwide and watched by millions of viewers; Sports Illustrated regularly features UT and the logo; UT has many official corporate sponsorships for its teams; UT has one of the nation’s most successful collegiate licensing programs, just behind first-place Notre Dame.

But UT’s evidence didn’t show that someone who was not a college football fan (or perhaps, “to a lesser extent,” college baseball or basketball fan) would recognize the longhorn logo as associated with UT. The magistrate was “well aware” of the popularity of college football, and noted that “the Court counts itself as a more than casual fan of Saturday afternoon football in the Fall.” But it was unwilling to make the leap to the “general consuming public,” a group it defined as “nearly the entire population of the United States.” UT athletics have “a level of national prominence,” but the longhorn still doesn’t “stand toe-to-toe with Buick or KODAK.” (Now there’s a mental image for you; a little like the image at issue in Deere v. MTD, actually.)

Quoting Barton Beebe, the magistrate concluded that the “‘TDRA is simply not intended to protect trademarks whose fame is at all in doubt,’” and recommended summary judgment for KST on the federal dilution claim.

"Grassroots" group, but not grass-fed

The NYT runs a story on an astroturf group, American Farmers for the Advancement and Conservation of Technology (Afact), dedicated to promoting milk produced with synthetic bovine growth hormone, aka rBST or rBGH. Responding to consumer suspicion of the hormone, milk labeled as untreated has achieved wide marketplace penetration. “Some dairy industry veterans say it’s only a matter of time before nearly all of the milk supply comes from cows that weren’t treated with Posilac.” And other dairy products may follow suit. (The fact that they’ve been slower to do so illustrates the importance of salience to human thinking – there’s no reason we shouldn’t have the same preferences for ice cream and cheese, but milk appears to us to be closer to the cow and thus hormone treatment seems more significant.)

Why might farmers resist this trend? As the Times explains:

Cows typically produce an extra gallon a day when they are treated with Posilac. That can translate into serious money for dairy farmers at a time when prices are near record highs.

So Afact has embarked on a counteroffensive that includes meeting with retailers and pushing efforts by state legislators and state agriculture commissioners to pass laws to ban or restrict labels that indicate milk comes from untreated cows.

Last fall in Pennsylvania, Dennis Wolff, the agriculture secretary, tried to ban milk that was labeled as free of the synthetic hormone because, he said, consumers were confused. Mr. Wolff’s office acknowledged that it had no consumer research to back up his claim, and he eventually had to scale back his plans when consumer groups and Gov. Edward G. Rendell balked.

…. A Consumer Reports survey last summer found that 88 percent of consumers believed that milk from cows not treated with synthetic hormones should be allowed to be labeled as such.

Afact says it believes that such “absence” labels can be misleading and imply that milk from cows treated with hormones is inferior. In fact, the F.D.A. maintains that there is no significant difference between milk from cows that are treated and from those that are not.

…. In September 2006, Kevin Holloway, president of the Monsanto dairy unit, gave a speech in which he said the “fundamental issue” was dairy farmers’ ability to choose the best technology. “Dairy farmer choice to use a variety of F.D.A.-approved technologies is at risk,” he said.

…. Afact believes that the push for milk from untreated cows is being driven by advocates like Consumers Union and PETA, “who make a profit, living and business by striking fear in citizens,” Mr. Miller said in an e-mail message.

The group also believes it will be hard for food retailers to “move away from the rBST-free stance without legislation and government policy,” according to an Afact presentation to dairy farmers in January.

Private enterprise loves the free market, until it loses.

FDA letters not official FDA action for Lanham Act purposes

Schering-Plough Healthcare Products, Inc. v. Schwarz Pharma, Inc., 2008 WL 582738 (E.D. Wis.)

Schering-Plough alleged that its competitor Schwarz made false and misleading statements about its Polyethylene Glycol 3350 Powder for Oral Solution laxative drugs. 3350 was a prescription-only drug from 1999 to late 2006, at which time the FDA approved it for OTC sale, with three-year exclusivity for Schering-Plough. In early 2007, Schering-Plough began marketing 3350 in a product called Mira LAX. 3350 is the only active ingredient in Mira LAX and in Schwarz’s competing product.

The defendants sought and received FDA approval to market generic equivalent Polyethylene Glycol 3350, using the Accelerated New Drug Approval (ANDA) process to piggyback on Schering-Plough’s approval. But because of the OTC exclusivity, the approvals only cover prescription uses. Defendants sold their 3350 products as “Rx only” and “prescription only” laxatives. Schering-Plough alleged false advertising, because 3350 is available without a prescription—albeit only from Schering-Plough. Defendants responded that, because their ANDAs were based on Schering-Plough’s original NDA, which was for 3350 as a prescription-only drug, their labels are required to indicate that their products are available only by prescription.

Schering-Plough argued literal falsity: 3350 is not prescription only. However, in the context of the full bottle label, targeted at pharmacists and buyers with significant pharmaceutical experience, a reasonable factfinder could conclude that “prescription only” refers to defendants’ products, not all products with the same active ingredient. Thus, the court denied Schering-Plough’s motion for partial summary judgment on literal falsity.

The next question was whether resolving Schering-Plough’s claims would require the court to interpret the FDCA before the FDA could do so. Under the FDCA, an ANDA must include a showing that “the labeling proposed for the [generic] drug is the same as the labeling approved for the listed drug.” 21 U.S.C. § 355 (j)(2)(A)(v). Moreover, any approved prescription drug “shall be deemed to be misbranded if at any time prior to dispensing the label of the drug fails to bear, at a minimum, the symbol ‘Rx only.’” 21 U.S.C. § 353(b)(4)(A). Logically, and despite the potential misleadingness in this particular situation based on the relatively unusual transition to OTC availability, defendants’ products must bear a “prescription only” label.

You can see where this is going: there is no way to rule for Schering-Plough without interfering with the FDA’s ability to interpret and enforce the FDCA. But there’s a reason Schering-Plough sued: it has the FDA on its side!

In April 2007, the Director of the Office of Generic Drugs in the FDA’s Center for Drug Evaluation and Research, sent letters to the defendants stating that their products were “misbranded and may not be legally marketed.” Defendant Schwarz responded by replying that it disagreed with the Director’s position. Nonetheless, it would withdraw its 3350 product from the market if the FDA allowed it to sell off its existing inventory for the next six months. The FDA responded by rejecting Schwarz’s substantive arguments, but stating that it would exercise its enforcement discretion as Schwarz requested.

Schering-Plough argued that the FDA had already determined that the defendants’ labels violate the FDCA, and thus no judicial interpretation of that law is required. The FDA has already taken the position that defendants violated the provision of the Act that states “a drug to which [prescription requirements do not apply] shall be deemed to be misbranded if at any time prior to dispensing the label of the drug bears the [Rx only] symbol....” 21 U.S.C. § 353(b)(4)(B) .

The court, however, disagreed that an FDA letter was an official FDA determination. In Mylan Laboratories, Inc. v. Thompson, 389 F.3d 1272 (D.C. Cir. 2004), in which the court of appeals deferred to an agency letter to a private party. That letter, however, was different in that it had an immediate legal consequence, prevending Mylan from marketing its drug. The letters here didn’t revoke any approvals “or otherwise purport to mandate any immediate legal consequences.” Nor did they refer to withdrawal of approval for one of the reasons specified in the statute.

Thus, though “in the opinions of the FDA officials who wrote the letters, the defendants’ products are misbranded …. the FDA has not yet taken any official position concerning the labeling of the defendants’ products to which the court can defer.” By statute, the FDA must follow a specific procedure to withdraw approval for a drug based on misbranding, including offering notice and a hearing. The FDA letters here didn’t do that. Judicial action here would interfere with the FDA’s exclusive authority over interpreting the FDCA.

News about false advertising of health products

Airborne, a supposed cold remedy, has agreed to settle false advertising claims based on egregious misrepresentations:

An Airborne ad testimonial called it a "miracle cold buster" and a company press release boasted it would: "Get rid of most colds in one hour."

Airborne CEO Elise Donohue said it's product supports your immune system and offered the following evidence, "We have a clinical study. A double-blind placebo-controlled study."

When reporters went to the Florida address of the company that conducted the study, a woman answered the door and to the response of "Do you conduct clinical trials here," she said, "Oh, you gotta be kidding me."

Turns out the study was a two man operation started up just to do the Airborne study. One of the men claimed to have a degree from Indiana University, but the school said he never graduated.

Press release from the Center for Science in the Public Interest, which worked on the case.

Separately, the FDA has sent warning letters to companies selling alleged STD treatments. The products falsely claim FDA approval and greater effectiveness than standard treatments.

Somehow, I think the multimillion-dollar settlement will be more of a deterrent—especially to imitators—than a warning letter. Supporters of federal preemption of drug-related false advertising claims need to explain how an overwhelmed FTC and FDA can protect consumers on their own.

Extraterritoriality of false advertising law

Software AG, Inc. v. Consist Software Solutions, Inc., 2008 WL 563449 (S.D.N.Y.)

Plaintiff Software AG is an “enterprise integration software vendor” that operates in about 70 countries. Its key products, which include database management systems (ADABAS) and a programming language (NATURAL), are “mission critical” for its clients, many of which are large multinationals. ADABAS and NATURAL are Software AG trademarks.

Defendant Consist is an American company with a Brazilian affiliate, Consist-Brazil under the control of Consist’s president. For over 30 years, Consist or its predecessor had been the exclusive distributor of Software AG products in 7 South American countries, including Brazil. Software AG attempted to terminate the relationship in 2006, but Consist took the position that Software AG’s notice was insufficient. In December 2007, the court ruled that the notice was sufficient and thus the parties’ contract was terminated.

In 1986, with Software AG’s full knowledge, Consist-Brazil registered NATURAL and ADABAS in Brazil. (As it turned out, it subsequently registered them in Argentina and Uruguay as well.) Under German law, which governed the parties’ contract at the time, this registration was for Software AG’s benefit. However, there was no express provision for conveying the Brazilian marks to Software AG in the event of termination.

The district court found that “Consist has taken a number of steps to frustrate the ability of Software AG to assume its rightful place as the distributor and maintainer of its own products in the Territory.” The parties’ contract authorized Consist-Brazil to provide maintenance for customers’ Software AG products, but only while the contract was in effect. Yet Consist-Brazil promised customers that it could continue to provide maintenance services after January 1, 2008. One customer therefore signed a new two-year contract, worth about $85,000 a month, that would also include new versions of seven Software AG programs. Consist-Brazil entered into 179 similar agreements in Brazil.

Moreover, as a practical matter, Consist-Brazil employees only provided basic maintenance services in Brazil. More advanced support services were provided by Software AG employees from its Denver facility. Consist no longer has access to those more advanced services. Basically, Consist-Brazil breached its contracts with its Brazilian customers, because it can’t offer them much support, nor can it provide them with software updates and fixes. Without this support, users could have big trouble with their Software AG products, which could affect Software AG’s goodwill.

In January 2008, Consist-Brazil posted two notices in Portuguese on its Brazilian website, promising to fulfil all its contractual obligations to its customers, including updating and technical support, and quoting a portion of its contract with Software AG to support its claim that it could continue to provide support and updates. The court found that Consist-Brazil’s statements were literally false and that Consist’s president knew this.

After the preliminary injunction hearing, some other things happened. The court was not well pleased:

The Court has also been advised that [Consist has] commenced two lawsuits …. In these actions, Consist has obtained, ex parte, orders that (1) enjoin Software AG from using its own trademarks, NATURAL and ADABAS, in connection with the distribution and maintenance of its own products in Brazil, and (2) direct Software AG to provide Consist with access to maintenance services and products that Software AG has no contractual obligation to provide and that Consist has no contractual right to receive. This Court does not know whether Consist has accurately and fully advised the Brazilian court about the pendency of this action, or about the fact that, even as its applications were being made, this Court was preparing a decision--after a full hearing at which both sides had every opportunity to present their positions--relating to the very issues that were the subject of the ex parte applications in Brazil. However, the Court specifically finds that Consist, [Consist’s president,] and their United States counsel, the law firm of Duane Morris LLP, acted in bad faith, and with the intent to compromise this [Court's] ability to rule on the matters before it and to issue effective relief ….

Unsurprisingly, the court found in Software AG’s favor on its breach of contract claims, including breach of an obligation to transfer the Brazilian trademark registrations to Software AG. Likewise, the court found Consist liable for tortious interference with prospective business relations; Consist-Brazil’s customers would have gone to Software AG for their mission-critical needs if not for Consist-Brazil’s actions.

Software AG also brought a Lanham Act claim. The question was whether the Lanham Act could apply extraterritorially. The test in the Second Circuit asks a court to balance (1) whether there’s a substantial effect on US commerce; (2) whether the defendant is a US citizen; and (3) whether there’s a conflict with trademark rights under foreign law. (Note: (3) doesn’t seem applicable to most false advertising cases, and as we’ll see the court modified it here – which allowed the court to sidestep the issue of Brazilian trademark rights.) At least two factors must tilt in favor of the plaintiff to apply the law extraterritorially.

There was a substantial effect on US commerce. Consist-Brazil’s misrepresentations “substantially affected U.S. commerce by causing confusion among Brazilian customers about who can and cannot provide them with support for their products.” Brazilian customers have thus refused to enter into maintenance agreements with Software AG; these agreements, if entered into, would be worth millions of dollars, and advanced support would be provided from Software AG’s Denver facility.

The statements on Consist-Brazil’s website were made with Consist’s knowledge and approval, and at the specific instruction of Consist’s president, a New York resident. Consist is a US corporation with its principal place of business in New York City. Factor two thus favored extraterritoriality.

The court found no relevant conflict between US and foreign law. The representations about Consist-Brazil’s ability to provide maintenance were literally false, and thus objectionable under both Brazilian and American law, since Brazil bars “the publication of false information in order to obtain a competitive advantage.” (Comment: I see why the court so concluded … but aren’t the statements presently true, in that Software AG is under court order in Brazil to provide the necessary services? Perhaps they’re misleading, or even false by necessary implication.)

In any event, all three factors pointed towards extraterritorial application of the Lanham Act. Irreparable injury was also easily shown. Consist-Brazil’s conduct interferes with Software AG’s ability to establish its own business in Brazil, even though it’s the only entity that can legally offer the relevant services. Moreover, because the old contract didn’t provide for specific payment for support and update services – they were provided for free as part of the exclusive distribution agreement – “the net effect of the Brazilian injunction is to require Software AG to provide products and services to Consist for free without receiving any income from Consist, its former distributor.” That’s irreparable injury.

The court enjoined Consist and its affiliates from taking any further actions to keep Software AG from using its marks in Brazil until a final judgment had been entered. This necessarily included a prohibition on continuing the Brazilian lawsuit; the court extensively considered its power to do so, and concluded that an anti-foreign-suit injunction was required under the circumstances.

Transformation by subtraction

I have to admit, I’m deeply creeped out by this example of transformation by subtraction: Garfield Minus Garfield. As the site says: “Who would have guessed that when you remove Garfield from the Garfield comic strips, the result is an even better comic about schizophrenia, bipol[a]r disorder, and the empty desperation of modern life? Friends, meet Jon Arbuckle. Let’s laugh and learn with him on a journey deep into the tortured mind of an isolated young everyman as he fights a losing battle against lon[e]liness in a quiet American suburb.”