Settlement disagreement leads to copyright, trade secret and false advertising claims

SimplexGrinnell LP v. Integrated Systems & Power, Inc., 2009 WL 857504 (S.D.N.Y.)

The plaintiff, SG, sells and services commercial fire safety systems. Defendant ISPI doesn’t make its own fire safety systems, but services them. They compete in New York and New Jersey. Often, customers will contract with SG to install a fire alarm system, but retain ISPI to service and maintain it. Before 2002, the parties had a close business relationship—ISPI originated in 1987 as a local service company for SG’s predecessor. But in 2002, they parted ways, and ISPI filed for Chapter 11 bankruptcy. ISPI instituted an adversary proceeding against SG, alleging breach of contract and various business torts. In 2004, the parties agreed on a settlement, which required SG to pay over a million dollars to ISPI and voided all prior agreeements between them. However, SG was required to sell ISPI service parts, including patches and fixes, for its then-existing customer base at list price. It also required SG to provide ISPI with certain forms of technical support.

The basic question in the case was whether the software used to program and configure two systems, the 4100 and 4100U, were covered by the settlement. With both systems, the software can run through a laptop or an on-site network computer; in either case, a software key (dongle) must be attached to the computer for the programs to run. Each time a program is run, it’s loaded into RAM, where it remains while a technician configures the system; this can take minutes or hours.

There are multiple revisions for each program—4100 has revisions 8 and 9, and 4100 goes from revision 10 to revision 12. And each revision has a number of versions: approximately 50 for 4100U. The particular version of the program must match the particular fire system panel installed. Dongles, however, are not version- or revision-specific: a given dongle works on all SG programs. (Query: why no DMCA claim?)

SG didn’t dispute that ISPI could use the 4100 program to service customers on its customer list. And the court concluded that the 4100U program was also a service part. Among other things, the settlement agreement defined “service parts” as items that used a six-digit product identification number, as both 4100 and 4100U programs did and do, and SG repeatedly sent ISPI price lists for “service parts,” pursuant to the settlement, that included the programs. And the programs are necessary to perform various fire system functions, making them service parts within the plain meaning of the term. The dongles were also service parts, despite SG’s attempts to claim otherwise, even if they contained proprietary information.

SG registered copyrights one version each of revisions 8 through 11 of the 4100 and 4100U programs. The registrations are from 2005; it’s also applied to register one revision of version 12, with an application filed in 2008.

ISPI had access to program disks, and later to a SG website to download revisions and updates. ISPI didn’t limit its use of the programs to servicing customers on the settlement customer list. At some point in 2005 or 2006, SG cut off ISPI’s website access, and denied ISPI’s request for new versions, but never sought to have ISPI return the software it possessed. In 2006, SG wrote to two of ISPI’s new customers, telling them that there was no authorized servicer other than SG itself. SG also denied ISPI’s request to buy dongles specifically for two customers on the existing customer list; SG argued unsuccessfully that the dongles were trade secrets, not service parts.

A preliminary issue was the effect of SG’s registrations. In the Second Circuit, registration of a work doesn’t confer jurisdiction over claims of infringement in derivative works. Each new version of SG’s program is a separate derivative work, as set forth in SG’s registrations themselves. Thus, the court only had jurisdiction over claims that ISPI infringed the registered revisions (not, of course, including the revision whose registration is still pending).

The court concluded that ISPI was infringing SG’s copyrights when it used the software with new customers, but not when it used the software with preexisting customers. Each use of the program creates a copy in RAM (the recent 2^nd Circuit Cartoon Network case supported the idea that retention in RAM for a few minutes, as here, sufficed), implicating the reproduction right. In some cases, new customers had the appropriate program and dongle installed on their onsite computers; in other cases, ISPI serviced new customers by bringing in a laptop with the appropriate software already installed. In either case, the court concluded, ISPI was infringing.

The court denied SG’s contention that ISPI was only authorized to use versions and revisions existing at the time of settlement, even if the customers on the list changed their systems and therefore needed new software. The settlement agreement didn’t limit ISPI to the systems existing at the time of the agreement; it put a limit on the parties ISPI had a right to service (and a right to get parts from SG for), not the equipment they used.

Thus, SG could refuse to sell service parts to ISPI for the use of other customers; and SG could assert copyright and trade secret rights against ISPI’s use of the parts for new customers, even if ISPI legitimately acquired the parts. (Query how first sale fits into this; but it’s not clear that the software or the dongles are among the service parts available on the resale market.) The court also rejected ISPI’s arguments that ISPI was licensed to use the programs more broadly and that SG was estopped from claiming infringement.

ISPI promoted itself in emails and letters to potential clients as the only company other than SG that had the necessary software to program SG panels. It stated that it used factory parts, had factory-trained technicians, and once said that it had “direct access to parts and support from the factory.” ISPI could obtain SG parts through other companies, even without direct access. Many of its service technicians were previously employed or trained by SG.

Neither party showed any damages from the other’s conduct. SG wasn’t entitled to statutory damages; it didn’t initially seek damages at all in its complaint, and its allegations of copyright infringement were at first limited to two customers on the settlement list; the incidents for which it sought damages were technically beyond the scope of the present action. Even were that not so, SG could only show a couple of instances of infringement of the registered versions, and it meet its burden of showing that its registrations predated the infringement, so statutory damages were unavailable.

Likewise, SG wasn’t entitled to costs and attorneys’ fees; it largely failed to establish specific acts of infringement, and the case was really about interpretation of the bankruptcy settlement, as to which each side prevailed in part. The most equitable solution was for each party to bear its own costs.

The court found that SG was entitled to an injunction against copyright infringement. Irreparable injury could be presumed from infringement; the evidence suggested ISPI would continue to infringe absent an injunction; ISPI had identified no hardship beyond the hardship of loss of ability to engage in unauthorized conduct and the resulting loss of business; and there was no public interest at stake, because SG could continue to service and maintain fire alarm systems that ISPI couldn’t. The injunction, however, would only extend to the particular versions of the programs over which the court had proper subject matter jurisdiction. The Second Circuit doesn’t allow the kind of general prophylactic injunction that other circuits do. (Query whether this rule will fall along with the Second Circuit’s ruling rejecting the Tasini settlement, when the Supreme Court does reverse.) SG’s remedy for other infringements is to register the other versions. The court’s ruling on the dongle will also preclude unauthorized use of the programs.

So: the dongles contain a trade secret, and ISPI misappropriated it as applied to new customers; for customers on the existing customer list, there was no misappropriation because ISPI was entitled to use the dongles. The court held that the dongles are trade secrets. They’re kept secret, even though they’re sometimes left at customer sites, because they are only provided to authorized users and are not available to the public at large. (Are any measures taken against reverse engineering, whether contractual or technical? This analysis seems rather brisk to me, sensitized as I am by Elizabeth Rowe’s recent presentation on trade secrets.)

ISPI misappropriated the dongles; it didn’t really argue the point, instead arguing that it was entitled to use them to service all customers. Its use for new customers was in breach of a confidential duty—it was provided the dongles for use attendant to authorized functions, first as SG’s agent and later pursuant to the settlement. The court also concluded that there was no copyright preemption, because breach of duty is an extra element. The rationale for finding no preemption, the court thought, was “nicely underscored” by the facts here, because the primary claims of copyright infringement were “largely irremediable.” (I would think this is a rationale for finding preemption—if the infringement were irremediable because of expiration of the limitations period, for example, then the court should be clear that a state-law cause of action shouldn’t resurrect what’s actually a copyright claim; lack of subject matter jurisdiction for failure to register is the same type of barrier. This isn’t to say that the trade secret claim should be preempted—though I do wonder whether the DMCA should factor into that analysis—but that the court’s extra reason is not as helpful as it thinks.) Trade secret is uniquely valuable for computer programmers precisely because it protects ideas, processes and systems that copyright can’t.

The court therefore enjoined unauthorized use of the dongles. (Given SG’s recalcitrance on providing any software updates or dongles, I would think ISPI’s also entitled to an injunction allowing it to purchase same for old customers, but maybe ISPI didn’t ask for that.) The court did need to revisit irreparable injury, because recent circuit precedent suggests that damages will often be a complete remedy in trade secret case when there is no danger of further dissemination and the only possible injury is loss of sales to a competitor. The misappropriator who uses a trade secret to profit will often have the same interest as the the owner in avoiding further dissemination. But the court found that here, the interest in preventing copyright infringement of unregistered versions was sufficient to justify a finding of irreparable injury.

SG also alleged unfair competition in violation of the Lanham Act and state law. The court rejected ISPI’s argument for copyright preemption, because false designation of origin and false advertising aren’t rights equivalent to a copyright right. But SG lost the §43(a)(1)(A) claim, which seemed to be that ISPI misled customers into thinking it was a full and complete substitute for SG. Improperly marketing a product by creating a false impression of a link between the plaintiff’s product and the defendant’s product, those, is actionable as false advertising; it’s not a representation that defendant’s product originated with plaintiff’s.

ISPI’s claims that it had “direct access to parts and support from the factory” and “all the software necessary for programming” was only true for old customers, but false by necessary implication for new customers. They’re material statements, and the second one was made broadly to many potential customers; the first was only made to one New Jersey customer, which (1) wasn’t enough to constitute commercial advertising or promotion under the Lanham Act and (2) didn’t violate New York law because it was directed at New Jersey (which kind of sounds like a New Jersey joke).

ISPI’s claim to have “factory trained technicians” was not literally false, even though SG argued that their training was out of date. Nothing in the ads suggested that the training was the most up-to-date. Nor was the alleged misrepresentation shown to be material; the testimony was that most expertise comes from doing the job.

BC Law Review Symposium, panel 4

The First Amendment & The Construction of Copyright

Alfred Yen, Boston College Law School

Yen accepts Eldred, at least partially, but copyright law still chills speech. In particular, third-party liability poses particular risks because the incentives of the person doing the chilling are different. A speaker will fully weigh the value of her own speech—monetary or otherwise—in deciding whether to resist. But the intermediary has much less incentive to resist.

The expansion of indirect liability over time has made this a bigger deal—e.g., the expansion of vicarious liability from cases of direct financial benefit to indirect and diffuse financial benefit. Vicarious liability is strict—there’s nothing the defendant can do to avoid liability other than to censor another party. That makes it chilling. Contributory: similar issues. What constitutes knowledge for contributory liability? If a copyright owner informs eBay that copyright infringement is occurring on its network, is eBay now liable? That would be strict liability on the cheap. Inducement: another form of fault-based liability, here an intentional tort.

At the time of Sullivan, the common law of libel was also strict liability, including both compensatory and presumed damages (which can be awarded without proof). To the extent that vicarious liability is respondeat superior—responsibility for what your employees do—he has no problem with that. But the more expanded vicarious liability in copyright is constitutionally problematic. Sullivan and Gertz also tell us how contributory infringement should be construed. Notice of generic infringement on a network is constitutionally problematic, converting a fault-based cause of action to a strict liability cause of action. A plaintiff must at least show fault before claiming damages: the defendant needs to have behaved unreasonably under the circumstances, and failing to prevent all infringement isn’t unreasonable.

Following Gertz (which requires greater fault before presumed damages can be awarded than when baseline liability for actual damages in defamation can be awarded), to the extent that copyright allows presumed damages, they should be available in third-party cases only for reckless or intentional behavior.

Even if you don’t believe that this is a constitutional requirement, constitutional sensitivity counsels these reforms.

David Olson, Boston College Law School

Other changes in copyright: elimination of formalities, expansion of term—huge change in our lived experience of copyright law. The First Amendment interests accommodated by copyright law are no longer accommodated so well. The traditional contours analysis can show how our lived experience of copyright has changed.

So what counts as traditional contours? Kahle (certain formalities) and Golan (URAA restoration) (where a new ruling was just issued). The Berne Convention requires us to remove formalities. Golan: Taking material out of the public domain transgresses the traditional contours. The Tenth Circuit therefore sent it back to the district court for a First Amendment analysis; the district court applied intermediate scrutiny (both sides agreed that restoration was content-neutral and that the category of “foreign works” was too general to constitute a content-based category) and found the law insufficiently tailored. People who had used the works had reliance interests, and their First Amendment interests could have been protected while still complying with Berne.

Formalities in general might be a target—even though a generation has now grown up without formalities, it hasn’t been long enough to constitute a tradition. Then the question is whether compliance with the Berne Convention, along with equity and protecting authors from tiny mistakes, is sufficient government interest to justify the abandonment of formalities. The other rationales aren’t sufficient, but the Berne Convention is quite strong; the First Amendment interest might not outweigh it. But maybe we should do narrow tailoring for remedies for authors who haven’t complied with formalities: notice and registration. Also gives us a strong First Amendment interest in orphan works. Could have a requirement that a copyright owner comply with formalities, and if not the only remedy for infringement would be payment of a predetermined fee.

Moderator: Elizabeth Townsend Gard, Tulane University Law School: What would a case challenging formalities look like?

Olson: Ideally, you’d find people, maybe scholars/documentarians who want to make use of orphan works, can’t find the authors, and then could show a real impingement on their speech. File a declaratory judgment.

Yen: Who’s the defendant? Is the claim the statute is unconstitutional as applied?

Olson: The defendant is the US, and you could claim as-applied or facial unconstitutionality.

Gard: Can these two papers be put together?

Yen: He’s particularly concerned with third parties; first parties have incentives to assert their own rights. (Isn’t this a classic question of internalization—as Wendy Gordon noted long ago, fair users routinely don’t actually internalize all the benefits of their uses, for example, so are in similar positions to third parties in terms of incentives?) The First Amendment isn’t a cureall. But there might be room in circumvention and DRM to apply his analysis. He isn’t tying what he’s done here to traditional contours. He does highlight that it’s easy now to become an inadvertent infringer, which it wasn’t in 1909, where notice applied.

Me: (1) I’m now wondering about the role of knowledge/scienter/copyright myths among users—if we care about not imposing liability without fault on intermediaries, why shouldn’t we care about imposing liability without fault on initial speakers/copiers, who may think that copyright requires notice? Or are unconscious copiers? (2) Under Olson’s scheme, presumably the Supreme Court should affirm the Second Circuit case rejecting the settlement of the Tasini follow-on claims because the settlement can’t cover unregistered works.

Yen: The logic of his position probably does extend to individual liability without fault. For a later project!

Liu: Say more about what “traditional contours” means. Implicit in your article is a definition of traditional contours, but what could that possibly mean? The Copyright Act has changed so dramatically since 1789 in scope, works covered, rights granted, term, and lots of other ways (even registration and notice have changed hugely—you used to have to publish notice in a newspaper!). Why single out formalities?

Olson: one reason for traditional contours was a notion of judicial economy. Another: deference to Congress, which he expects the courts would continue to do. Courts will resist full cost-benefit analysis. Sometimes, though, balancing will be necessary.

Liu: Would you treat intermediaries the same regardless of how people are using them? E.g., is there a difference between Napster (which arguably had more limited speech value than the NYT) than YouTube (where there’s more likely to be speech value in what’s up there)?

Yen: thought about the project in terms of an ISP who had full speech rights of its own. Vicarious liability should be rare, and limited to employees; most cases should be contributory liability. (So, I guess, his answer is yes, treat them the same.)

The benefit of using contributory liability is to ask nuanced questions about whether a particular third-party defendant is in a position to take cheap and effective precautions against infringement without also wiping out a lot of valuable noninfringing speech. This is important because the market often doesn’t work that well in letting people held strictly liable for others’ speech pass their costs on and work out for themselves who should be doing the screening.

Mammoth opinion in drug false advertising case

Bracco Diagnostics, Inc. v. Amersham Health, Inc., 2009 WL 806581 (D.N.J.)

Fair warning: this decision runs over 120 pages in Word. It is the product of a 39-day bench trial; I hope everyone took a vacation afterwards. Lots of stuff happened, probably the most wasteful of which was that a bunch of expensive expert opinions got excluded on Daubert grounds. The opinion also suggests some of the huge burdens of a false advertising case where many relevant representations are made by sales reps. Here, there were detailed notes of over 300,000 sales visits, creating an enormous job of reviewing and coding them, because the parties disagreed vigorously about how to characterize the notes of what got said.

The parties sued each other for false advertising. Bracco proved some false advertising, but couldn’t establish a causal nexus between the false ads and its alleged lost profits. “[T]he greater number” of Amersham’s ads were true, though some were false in extrapolating beyond the results of reliable, well-controlled studies. Thus, the court granted an injunction and damages for millions of dollars in corrective advertising. On the counterclaims, Amersham gave up on its pursuit of damages and Bracco discontinued the claims at issue, so even though some of Bracco’s ads were false the court didn’t grant an injunction against Bracco. The court required the parties to use an alternative dispute resolution mechanism for future allegations of false advertising.

Falsity

The parties sell x-ray contrast media, which are classified by osmolality. Bracco makes Isovue and Amersham makes Visipaque (a product with the osmolality of blood, also called iso-osmolar). Amersham made establishment claims that its iso-osmolar Visipaque performed better in terms of renal effects than low-osmolar contrast media (LOCM) such as Isovue. Amersham generalized to the class, even though the reliable studies were performed using its own LOCM as the comparator, in part to minimize the impact of its claims on that product, Omnipaque. (There were a bunch of other studies the court concluded did not support the general superiority claim.) In fact, there were no head-to-head studies of Visipaque versus multiple LOCM, or versus LOCM combined with pretreatments, which can improve the performance of LOCM. The FDA has sent warning letters to Amersham indicating that the results of its study can’t be extrapolated to media other than Omnipaque in advertising.

Here’s a bad fact: while one key study that was supposed to prove Visipaque’s renal superiority was ongoing, Amersham took “secret and forbidden peeks at the data looking for trends, and even changed the study endpoints and stopped the study early in response.” When a New England Journal of Medicine reviewer asked if there had been an interim analysis, Amersham and the authors denied it, then amended the article to include this false denial. The “secret attempt to ‘fix’ the study midstream” made the trial non-prospective. The court was also not impressed by the fact that Amersham’s marketing director “provided input to the NEJM article to try to make it misleading, and then celebrated the final version’s obscuring of the limitation of the results of the study to Omnipaque and its overly broad and unsupportable conclusion.”

However, the court determined that the study results were not entirely vitiated by these and other flaws. As long as Amersham carefully identified that Visipaque had been compared to Omnipaque alone, it could use the study results in ads; it just couldn’t use the study to claim general superiority. Notably, the court instructed that if Amersham uses its brand name Visipaque in ads, it must similarly refer to the brand name of the comparator—Omnipaque—instead of the clinical name (iohexol).

The case reminds us strongly that medical literature can say things that the FDA doesn’t allow drug manufacturers to say. One study author testified that he, his co-authors, and the NEJM believed in the scientific reasonableness of the conclusion (extrapolating superiority over Omnipaque to general superiority). But the FDA has repeatedly rejected Amersham’s attempts to make that claim itself.

Bracco doesn’t come off particularly awesome here either; it sponsored a head-to-head randomized trial comparing Visipaque and Isovue on the incidence of cardiac adverse events, then tried to reanalyze the data, undermine the results, and pressure the study’s author when it showed superiority for Visipaque.

Separately, Amersham overclaimed Visipaque’s advantage in patient comfort; its claims are only supported in regard to peripheral angiopathy procedures, not any others, as the FDA has reminded Amersham. Amersham also made unsupported claims of lower costs, based on the idea that Visipaque led to lower rates of adverse events, which are costly. There’s some indication that Visipaque has a higher rate of delayed adverse events than Isovue and other similar contrast media.

Only an unambiguous message can be literally false. The court found three key renal statements: “Visipaque may be better than a LOCM,” “Visipaque is better than all LOCM,” and “Visipaque is as good as or better than a LOCM with prophylactics.” The last two were unambiguous. The first claim was paraphrased from the key study and, without context, may be misleading—in context, it’s clear that “a LOCM” is “Omnipaque,” the LOCM tested. But the court found the phrase misleading on its own. (Is this a stealth application of falsity by necessary implication? I think the doctrine fits.) As for the non-renal superiority claims, there were cardiovascular superiority claims, which included claims of less pain, and cost superiority claims.

These were all establishment claims. (Amersham argued vainly that Bracco had the burden of proof to show by surveys that its claims were establishment claims. It was clear that these superiority claims were based on tests.) So Bracco needed to show that the tests didn’t support the claim, either by attacking the reliability of the tests or by showing that the claim wasn’t sufficiently founded in the tests. The court found that “Visipaque is better than all LOCM” was an extrapolation that strayed too far from the results of the underlying studies. The court found that those studies were reliable, but without identifying which LOCM was tested, disseminating the studies’ conclusions was misleading. Amersham must clearly and conspicuously state which drugs were actually tested. And it may not explicitly or implicitly communicate a superiority message over Isovue without a reliable head-to-head study. The non-renal superiority claims fared similarly.

The court found testimony about FDA guidelines to be legally irrelevant. In particular, the FDA requires substantial evidence before allowing superiority claims, defined as two or more adequate and well-controlled studies directly comparing the same products. But it’s not sufficient under the Lanham Act to show that claims are inadequately substantiated under FDA rules; claims must be shown to be literally false or misleading. Thus, a defendant could advertise the results of one adequate well-controlled head-to-head study without violating the Lanham Act (and just wait for the FDA letter, I suppose).

However, the FDA’s response to the claims at issue is probative and persuasive. Here, the court didn’t have to interpret the FDCA or speculate on the FDA’s position, since the FDA had provided its views in “numerous letters” to Amersham about Visipaque’s misleading superiority claims. (One lesson: even if FDA enforcement is dead, worry about your competitors’ use of FDA warning letters!) Amersham argued that, to the contrary, the FDA never acted against Amersham, despite Bracco’s attempts to convince it to do so, and that Bracco was using the Lanham Act as an end run around the FDA’s inaction, since none of the FDA letters were final agency action.

But the court wasn’t usurping the FDA’s authority or preempting its findings. The FDA had already made its position abundantly clear. Still, Bracco can’t prove falsity simply by relying on the FDA’s letters applying FDA’s standards. Inadequate substantiation under FDA standards is not the same as falsity. But Bracco had other evidence of falsity.

On implied falsity, the court excluded Bracco’s consumer survey and thus had no evidence of misleadingness, as required by the case law.

Amersham’s falsity was not willful, because the claims were based on scientific studies that have not been invalidated—just not sufficiently based. Amersham did have a protocol in place attempting to weed out false claims in ads, but, perhaps unsurprisingly, that protocol let through some claims that a neutral adjudicator later found false.

Puffery

I’m not sure why the court thought it necessary to say this, but: Amersham’s statements were specific and measurable factual claims, not puffery. The use of footnotes also didn’t help, because footnotes purporting to change the apparent meaning of claims but are inconspicuous or in fine print can’t remedy a misleading claim. Amersham’s footnotes simply cited studies, without further explanation and in particularly without explaining the studies’ limitations.

Materiality

The court found materiality because: (1) Amersham’s sales and marketing teams repeated certain unsupported claims; (2) the substance of the claims can’t be observed anecdotally by doctors (this is not directly about materiality, but it shows that doctors would have to take the claims on faith); (3) the type of claims—drug safety—were shown by Amersham’s own observations and market research to be useful at generating sales; (4) there was evidence that it will take several years for Bracco to recover from the falsity. Also, given that some of the claims were literally false, there is a presumption of materiality and deception.

Commercial Speech

Not everything at issue in the case was commercial speech actionable under the Lanham Act. Most obviously, internal company documents that were never publicly disseminated in the US weren’t actionable.

Scientific articles in peer reviewed journals also aren’t commercial speech, even if the underlying research was funded by one of the parties in the hopes of improving its economic position. Amersham may have sponsored the research whose results were reported in the NEJM, but it wasn’t the author; the author wasn’t paid for his work on the article; the article didn’t advocate a particular purchase, even though it came to specific conclusions about which product was better suited for medical purposes; and the article was published by the NEJM, which is an impartial educational journal.

In its initial form, the court refused to inquire into the article’s reliability, but the court nonetheless determined that using articles “in a secondary dissemination in the form of commercial advertising” puts their reliability in question. Manufacturers will only seek to disseminate favorable information, and their considerable financial resources mean that favorable findings are more likely to reach doctors than unfavorable findings, distorting doctors’ understanding of safety and efficacy. When manufacturers disseminate favorable studies in order to get people to buy their drugs, they are engaging in commercial speech.

Likewise, oral statements made by Amersham’s sales reps were actionable commercial advertising or promotion, if proved. Amersham argued that the sales notes weren’t sufficient evidence of what the sales reps said; and as mentioned above, there were epic disputes about interpreting whether the notes indicated any kind of falsity. But many cases accept sales notes as evidence of what was said. Under the standard Lanham Act test, commercial advertising or promotion must be disseminated sufficiently to the relevant purchasing public to constitute advertising or promotion within that industry, which in the case of oral statements means that they’re widely disseminated and part of an organized campaign in the relevant market.

Amersham argued that the number of actually false statements at issue was too small to be actionable. Bracco contended that, given how vital face-to-face communication is to selling drugs, the sales call notes were enough. The court agreed: the sales calls weren’t made in isolation, but as part of a large-scale marketing plan. “[E]ven if the offending sales calls are a very small percentage, and thus, alone would not be actionable, when the sales calls are combined with [the] overall campaign, which was promoted through press releases, websites, and [continuing medical education], the result is false ads which have been sufficiently disseminated to be actionable under the Lanham Act.”

Amersham also argued that a good faith effort by a company to educate its sales force about what can fairly be said about published studies rendered any limited false or misleading statements made by representatives outside of those parameters not actionable. But that’s not the law; the law targets not unreasonableness, but falsity. Nonetheless, the court considered Amersham’s training “evidential,” just not dispositive; I’m not clear what that means, but my guess is it has to do with the ultimate finding that Bracco couldn’t show that it was the falsity that cost it sales.

As for the rest of it: website ads, print ads, and TV ads are all actionable, as were continuing medical education events (CMEs) sponsored by Amersham, because they were designed by Amersham to deliver a specific message of Visipaque’s renal superiority. CMEs are presented by doctors, but here Amersham had a substantial role in the creation of their content. One example of a sponsored CME used slides that had the defendant’s logo on every slide and was given by an authorized representative. The “direct control” made the CME commercial. The court also specifically found commercial speech when defendant’s logo was on the first slide of another presentation and the presentation was made in part by its paid consultants.

Unclean Hands

Bracco’s own alleged false advertising wasn’t a barrier to relief because Amersham’s claims had significant safety implications. The unclean hands defense is rarely successful, because of a strong public interest in avoiding misleading ads. Bracco’s misconduct, even if taken as established, was largely defensive and limited in scope and duration.

Injunctive Relief

Bracco met the standards for injunctive relief. The court ordered corrective advertising: Amersham is to issue a press release, including on its website, about the decision and the corrective ads. Corrective advertising is appropriate in cases of falsity that bear on public health. Amersham is also to re-train sales and marketing personnel in accordance with the opinion. Future disputes about Amersham’s ads are to go to arbitration, which may include NAD (though I suspect NAD might decline jurisdiction over some standard methods of communication with doctors, like CME and sales rep visits), and Amersham is to bear the costs associated with the disputes if the ads are found to be false, while Bracco will bear them if the ads are not found to be false.

Damages

Falsity leads to a presumption of consumer deception and harm. But that doesn’t alone justify an award of money damages. For that, you need willfulness or other evidence. Here, there was insufficient evidence of willfulness; the studies were subject to interpretation (though Amersham wrongly interpreted them in its own favor) and Amersham did have an extensive ad approval process that considered FDA and other issues.

Amersham’s witnesses conceded that the Visipaque renal safety claims drove substantial sales increases, a big chunk of which were at Bracco’s expense, since the market is effectively a duopoly. Nonetheless, only some of the claims were false; others were “accurate touting of favorable results of reliable scientific studies,” which means it was impossible to conclude that the false ads were the cause of Bracco’s lost profits, so lost profits couldn’t be awarded. In particular, the court found that the falsity wasn’t the cause of Bracco losing several major contracts to Amersham. The basic problem was that some of Amersham’s uniqueness claims were true, while others were false, and it’s hard to tell which drove sales.

Disgorgement of Amersham’s profits was also inappropriate. Using the Third Circuit’s five-factor test: (1) Amersham’s acts weren’t willful or deliberate. (2) The court found insufficient evidence of sales diversion, as noted above. (3) Other remedies—injunctive relief and compensatory damages for the costs of Bracco’s corrective ads—were sufficient. (4) Bracco acted fast in asserting its rights, which favors disgorgement. (5) There’s a strong public policy in making false advertising unprofitable, deterring false statements about drug safety, and deterring inflated drug prices based on inflated clinical claims. But deterrence alone isn’t enough to justify disgorgement without willful conduct.

Bracco was, however, entitled to recover its costs for corrective ads and other damage control expenses if (1) there was a likelihood of confusion or damage to sales, profits or goodwill; (2) the damage control expenses were responsive to the misconduct; and (3) the expenses were reasonable under the circumstances and proportionate to the damage that was likely to occur. Bracco met these requirements. Hundreds of millions of dollars were at stake; it was reasonable of Bracco to spend a bunch, and the court awarded nearly $11.4 million.

However, the court concluded that Amersham wouldn’t have to pay Bracco’s expenses in investing in research to disprove the falsity. The parties compete fiercely, and Bracco has an incentive to invest in studies anyway. Given the number of studies submitted to the court, it appears to be “commonplace, if not a necessary part of the industry,” to spend significant amounts on comparative studies. Indeed, virtually every clinical trial, study, and publication in the area was sponsored by one of the parties; the court lamented the absence of a truly independent clinical study.

Bracco also didn’t get attorneys’ fees, which probably ate up a huge amount of the award (one expert alone got paid $500,000, which among other things made the court skeptical of claims that Bracco couldn’t have done a bigger survey because of the expense).

Counterclaims

Amersham alleged that Bracco falsely advertised Isovue’s superiority to Omnipaque. The court agreed that Bracco’s tests didn’t prove its claims. Bracco stipulated that these claims were no longer in use, and the court found no real possibility that it would revive the claims, so it declined to grant injunctive relief. But if disputes do arise, the same arbitration procedure is to be used, with the same cost-bearing structure.

BC Law Review Symposium, panel 3

Publicity, Reputation, Commerce & The First Amendment

Diane Zimmerman, NYU Law

Not all things we think of as IP will offend a First Amendment theorist. Trade secret: We respect rights not to speak, so much of trade secret law is acceptable under the First Amendment. Similarly, free speech doctrine is not that friendly to false/misleading speech. But outside of copyright, IP has a problem—when the label property gets placed on an interest, suddenly the image of dollar signs changes the way speech regulations are approached by many courts and they start balancing property versus speech. Is that legitimate?

Used to be that noncommercial use of persona was privileged, but use in advertising or products, or even some forms of commercial entertainment (Elvis lookalikes) would violate the right of publicity. This was based on a view of what constituted commercial speech that is now quite outdated. Leave aside commercial advertising uses for her purposes, and deal only with nonadvertising uses, including merchandising (coffee mugs, T-shirts).

Whatever you think about the First Amendment’s role in ads, there are speech concerns in these areas. Horror story: The Tony Twist case, Doe v. TCI--$15 million verdict (down from $24 million) bankrupted a comic book publisher because of the use of a hockey player’s name for one character who appeared in a fraction of the issues. The court admitted there was a free speech interest at stake, but found defendant’s intent to obtain commercial benefit sufficient to allow a jury to decide whether the commercial benefit outweighed the plaintiff’s property right.

That’s an example of a balancing test; the others are peculiar and troubling too. The Restatement of Unfair Competition sets out the common-law approach: if the use is a use on a product, plaintiff presumptively wins because that’s not expressive. That’s plain silly. You don’t put Springsteen’s face on a t-shirt because it’s a beautiful decoration; you do it because people who buy it want to express something about themselves, their origins, their allegiances. Also, the Restatement says that use of a persona unrelated to an expressive work is actionable, because the speech interest is subsumed by the property interest. But magazines use celebrity images just to attract attention all the time.

Saderup: Cal. S.Ct. came up with a test for the explicit reason of trying to salvage publicity rights against a very serious First Amendment defense. Why take transformativeness from copyright, which is provided for in the Constitution? Anyway, a realistic depiction of the Three Stooges violates the right of publicity, but turning Johnny and Edgar Winter, musicians, into half-worm, half-human characters in a comic book, that’s transformative. Wacky.

Then recently, the 8^th Circuit applied the Missouri Doe v. TCI rule in a way that seemed to invalidate all right of publicity claims, by saying that information in the public domain was free to all comers. Conclusion: chaos! Because if you try to fit the right of publicity into any kind of normal First Amendment analysis, it doesn’t work well. This is content-based regulation, identifying prohibited subject matter. How did we get to a point where we’re balancing right of publicity against free speech? Money—courts will look at an economic interest and analogize it to physical theft. But that is a false analogy.

Many people take comfort from Zacchini, which Zimmerman thinks is not a true right of publicity case. But using Tony Twist’s name is not the same thing as paying Tony Twist to play hockey, which was the issue in Zacchini. Lowe v. SEC: The Court said there would be real First Amendment problem to combat securities fraud by preventing a former security adviser from publishing a newsletter. P&G case—economic interest in barring newspaper from publishing harmful information was insufficient to justify suppression.

Roberta Kwall, DePaul Law

Wrote about the right of publicity and the First Amendment a while ago. Now interested in a particular factor she identified: morally based harm, where the use is an affront to the plaintiff’s dignity or autonomy interest. The Fat Boys case, where personas were used in a beer commercial when the Fat Boys were anti-drinking. Another case: Jackie Mason v. Jews for Jesus. JfJ used a caricature of Mason on the cover of a recruiting pamphlet—“Jackie Mason … a Jew for Jesus?!” Inside, there was a riff on his routines. But he’s not a JfJ; he’s an ordained rabbi.

The courts don’t do well understanding morally based harm in a right of publicity action. The autonomy and dignity interests at the bottom of some conceptions of the First Amendment are also at stake in the right of publicity as dignity.

The cases Zimmerman reviews don’t work to protect dignity interests. Money has nothing to do with dignity-based causes of action. In Doe v. TCI, looking at the predominant purpose of the defendant has nothing to do with the dignity-based harm. Likewise, the “actual malice” test used in Hoffman v. Capital Cities has nothing to do with dignity. Intent and money aren’t the right questions.

Two questions for a court when a plaintiff is largely or primarily concerned with dignity: (1) to what extent does the defendant’s use force the plaintiff to say something she doesn’t want to say; (2) to what extent does the defendant’s use of the plaintiff’s identity create a link between the parties? When a persona is compromised by a portrayal that the public understands as emanating from the persona, then there is a right of publicity violation. This test can show where First Amendment interests should prevail even when there is a dignitary harm—fictional portrayals aren’t compelled speech and don’t create a linkage; people understand the fiction doesn’t come from the persona. Use of Carol Burnett’s Charwoman character in Family Guy to mop the floor in a porn shop—the public understands that the parodies aren’t authorized, thus they don’t cause dignitary damage of the kind she recognizes. Closer case: when a political campaign uses an artist’s song as a theme, and the artist strongly disagrees with the politician—is that compelled speech? Is there a possible public link of the persona and the candidate? Something to discuss.

Moderator: Stacey Dogan, Northeastern University School of Law

She was struck by the difference in presumption between the two approaches. Zimmerman: presumption is that speech may not be limited absent a good reason. Kwall: if there is a harm, there’s a presumption in favor of protecting against it, which the speaker must overcome.

If the harm is dignitary, the right of publicity might be a bad idea. The vast majority of dignitary harms arise from clearly protected speech. So just because there’s some commercial hook in some instances, that doesn’t make those instances the right ones in which to address dignitary harm, when so much more harm is left unaddressed. Dogan drew an analogy to the argument I make about dilution in Gone in 60 Milliseconds.

Question for Kwall: what do you think about the merchandising right? Depending on the answer to that question, Kwall and Zimmerman may be far apart or close together.

Kwall: Wants a multifactor, context-sensitive test.

Zimmerman: She thinks courts are moving away from the newsworthy/commercial distinction, and are recognizing that other kinds of uses, including product uses, have major speech implications. Once you own up to the fact that a T-shirt is a form of speech, then it’s hard to explain why it’s not protected the way a newspaper is. We should be applying strict scrutiny!

Dogan: To her, the right of publicity is about TM law. If publicity is false endorsement, then §43 covers the waterfront. So we could abolish the independent right of publicity without trouble.

Q: How would the dignity claim survive death? Also how do you deal with postcards showing John Wayne wearing lipstick, titled “it’s a bitch to be butch”?

Kwall: if it were up to her, she’d protect personas under a theory of moral rights, but in a very cabined way. Attribution would be a requirement; you could use someone else’s persona/work as long as you identified that this was not emanating from them. And she’d terminate the interest at death.

Dogan: the problem of circularity/feedback effects—licensing practices develop in the shadow of court rules. Courts should thus draw lines early on, to protect speech interests.

Q: How would you apply dignity to Hustler v. Falwell? How would it change if it were actually a Campari ad?

Kwall: The Court said that no one would believe Falwell actually endorsed it, which is what she’d do too. If it were an ad, would it be construed as an endorsement? (No.)

Kwall eventually gets to the place where the dignity harm is being misrepresented. Dogan points out then that criticism alone leaves you with no claim. (Zimmerman points out that laudatory presentations have also been historically considered potentially actionable in false light, but most states are now collapsing that into defamation and that’s dying out.)

Lidsky: Rapp v. Jews for Jesus: same case, but not a celebrity—false light. Fla. S.Ct. used it to declare that it wouldn’t recognize false light as an independent cause of action; have to meet defamation’s standards. But the standards are different in publicity cases.

Zimmerman: we should rethink that separation. S.Ct. has said that privacy as a justification for regulating/punishing speech regularly doesn’t rise to a sufficient state interest. We haven’t used the right set of standards for evaluating publicity, though maybe we now have in privacy since those cases are so hard to win.

Papandreau: Why not return to the tort of misappropriation? If the only actionable dignity harm is misattribution, then why do you need the right of publicity? Consider what’s going on in the law of misappropriation in New York.

Kwall: The problem with misappropriation: same ills as IP generally—undefined and standardless, and almost discredited. Misappropriation might not advance the analysis.

Kwall for Zimmerman: What does she think of the idea of the plaintiff having speech interests, or autonomy/self-realization interests, in her own persona?

Zimmerman: She doesn’t think it’s two speech interests, but one speech and one self-realization/liberty interest, always in tension in a First Amendment system because unpleasant, cutting, hateful speech regularly causes the target to cringe. People’s feelings about themselves are subject to possible assault. That’s just the constitutional scheme.

Dogan: But if you define dignity only to included compelled speech, then there may be a speech interest.

Zimmerman: compelled speech is rare; disclaimer would be better.

Kwall agrees on disclaimer remedy.

Me: I don’t get the difference between Kwall’s (1) and (2). How can a copy of my image be compelled speech by me? I am not my image. Or, more specifically: how can there be any harm of this type without false endorsement? What she means by coerced speech is unclear to the extent it means anything other thus false endorsement. And the Burnett example, among others, makes it important to ask whether her definition of false endorsement is normative or empirical; it sounds empirical. But false endorsement, as we just discussed, is manipulable: suppose the plaintiff is Paris Hilton. Isn’t it easy for her to convince the public that all representations of her are endorsed by her?

Kwall: There’s a relation between compelled speech and linkage. Compelled speech goes not to public perception but the defendant’s taking the plaintiff’s image and using it in a way that makes the plaintiff look as if she’s saying something she isn’t. (I still don’t get how you know what the plaintiff looks like she’s saying without evaluating what the audience sees.)

Q: Why worry about the dignity of celebrities and not the dignity of other people?

Kwall: She wouldn’t draw any distinctions.

Minor Rescuecom question

Is it just me or does the Rescuecom opinion appendix have a bizarre reading of “bona fide” to mean “good faith generally” rather than “real attempt to use the mark as a mark and not just reserve rights”?

See: “In order to qualify to register one’s mark and receive the enhanced protections that flow from registration (giving the world notice of one’s exclusive rights in the mark), the owner must have made ‘bona fide use of the mark in the ordinary course of trade, and not merely to reserve a right in the mark.’ Id. § 1127. . . . [I]t would make no sense whatsoever for Congress to have insisted, in relation to § 1114 for example, that one who ‘without the consent of the registrant . . . use[d]. . . [a] counterfeit . . . of a registered mark in connection with the sale . . . of . . . goods [thereby] caus[ing] confusion’ will be liable to the registrant only if his use of the counterfeit was a ‘bona fide use of [the] mark in the ordinary course of trade.’ Id. §§ 1114 & 1127. Such a statute would perversely penalize only the fools while protecting the knaves, which was surely not what Congress intended.”

But if “bona fide” just means real use – good faith in use – which is strongly suggested by the words immediately following, then there’s no conceptual problem of knavery at all. The court returns to this rationale numerous times, and I think it’s quite unfounded, though I agree that trademark use can’t do the work being asked of it. My own preference would be for courts to continue the common-law development of secondary liability to make clear that Google is not directly liable for any infringement, but could be secondarily liable is those standards were met.

BC Law Review Symposium, panel 2

Panel 2: Corporate Reputation, Corporate Secrecy & The First Amendment

Elizabeth Rowe, University of Florida Levin College of Law

Trade secret lawsuits against web site operator for distributing decryption code; against individual to bar publication of sensitive photos and other materials; against a TV network to keep it from broadcasting film of a factory interior; against former employees. Assume there’s a threat to free speech from trade secret litigation. What should be done?

One question: is trade secret property? Courts are more solicitous of property rights as counterbalances against free speech claims. What is the justification for using someone else’s property? If an embezzler takes money, there’s no problem proceeding against him. Property explains the reaction of defending against the intruder. Another way to think of it: commercial privacy. But no one has ever explored what that means—how like individual privacy would commercial privacy be? A right to control access—greater protection against surveillance by competitors than the Fourth Amendment gives against surveillance by the government.

The First Amendment is generally outweighed in standard trade secret cases because the First Amendment protects public information, and a trade secret is not public. If there’s a breach of a duty of confidence, the courts will find no free speech issue. Where there’s no contractual or quasi-contractual relationship, the First Amendment weighs more heavily. Analogy to anticompetitive lawsuits defended on grounds of right to petition the government, where courts have asked (1) is the claim objectively basis, so that no reasonable litigant could believe it valid, and (2) is there a subjective motivation to interfere with a competitor’s business relationships. Courts have asked similar questions when looking at whether assertion of a trade secret claim is tortious.

Trade secret has built-in precautions, procedural and substantive. If applied vigorously, they are speech-protective. A lot of what troubles us about these cases is not unique to trade secret—broader civil procedure issues about the ability of a powerful party to assert claims against a weaker party. Defamation, etc. have the same problems. Big issue: trade secret isn’t defined/established until litigation—there’s no registration system or examination. Proving that the business took reasonable steps to keep the secret secret is usually the hardest step for the plaintiff; unfortunately, most court opinions don’t discuss the threshold question of what counts as a trade secret. That’s improper. The UTSA makes a fee award available to a prevailing defendant in cases in which the plaintiff should have known it didn’t have a trade secret.

Practical limits on lawsuits: threatening lawsuit can encourage further disclosure, as when a disgruntled employee posts a trade secret on the internet. Once it’s out there, the secrecy is lost.

Example of trade secret litigation gone bad: Scientology litigation to protect its religious secrets. Years, dozens of appeals, bad litigation tactics, multiple judges; ended up with a big fees award to defendants. Scientology had a philosophy of using litigation to harass and discourage critics, rather than to win. Was there proper application of the procedural and substative rules? Yes, just way too late, but in the end the courts got it right; the church only got one preliminary injunction (some other TROs, later dissolved once the court clued in). Scientology created controversy and called attention to its secrets; attempt to preserve secrecy failed.

Moderator, Lee Tien, EFF: EFF sees cases at a very different stage, before they actually happen. And usually the cases then don’t happen because EFF tells people it can’t find them counsel, so the people take the challenged stuff down. How much can we derive then from lawsuits, when on the ground the cost to the corporation is a couple of C&Ds and they usually work? Significant chilling effect, which might not be so bad for many things, but expansive secretization can be a problem when Apple sends out 10,000 copies of its OS and then claims it’s still a trade secret. Or people who get devices as a gift and want to reverse engineer them—they aren’t bound by contract, but are still vulnerable.

Rebecca Tushnet, Georgetown Law

Who gets criticize corporations, and under what terms? There are three distinct groups who might want to engage in speech about about commercial entities or to constrain those commercial entities from making particular claims of their own. Competitors may sue each other for false advertising under the Lanham Act and coordinate state unfair competition law; consumers may sue businesses using state consumer protection laws and common-law claims; and government regulators may impose requirements on what businesses must and may not say.

I will evaluate a facially persuasive but ultimately misguided claim about corporate speech: that because consumers regularly get to say nasty things about corporations under the lax standards governing defamation of public figures, corporations must be free to make factual claims subject only to defamation-type restrictions on intentionally false statements—essentially, common-law fraud.

Courts have occasionally evaluated whether the Federal Trade Commission’s findings are consistent with the First Amendment, but have put few limits on the FTC. Likewise, the only courts to consider whether the First Amendment ought to impose restrictions on Lanham Act false advertising claims have rejected free speech claims. Nike v. Kasky, a putative consumer class action, was the first real attempt to apply First Amendment restraints to private consumer protection law. It was not a success, but it came nearer than the others, in part because of a fairness argument unavailable in the other two contexts.

Beginning in 1996, Nike was targeted by protesters claiming that it (actually, its subcontractors) underpaid and abused workers in developing countries. Nike launched a public relations counteroffensive. Marc Kasky believed that Nike was not telling the truth in those claims, so he sued, as California law then allowed him to do. A divided California Supreme Court held that Nike’s statements about its labor practices in press releases, letters to universities which had contracts with Nike, paid “advertorials,” and letters to the editor were commercial speech. The Supreme Court granted cert, but ultimately dismissed certiorari as improvidently granted because of underlying procedural difficulties.

Kasky could have been a New York Times v. Sullivan for consumer class actions. Several aspects of Kasky combined to make the plaintiff’s claim troubling. Nike had faced a well-organized campaign determined to make its labor practices matters of public controversy, and had been seeking to defend itself when it spoke out. California law, like the federal Lanham Act and most state consumer protection laws, lacks any scienter requirement; perfectly good-faith errors, if false, can lead to liability. In addition, California’s standing requirement for consumer suits was minimal at best.

What happened? I want to focus here on one particular, rhetorically powerful argument for Nike and why it was not and should not have been sufficient.

From Nike’s perspective, one significant problem with calling Nike’s speech commercial was its effect on the balance between Nike and its critics. When antiglobalization forces condemn Nike for its labor practices, their speech – concededly noncommercial – is subject only to general libel laws. One side gets to fight freestyle while the other is limited to Marquis of Queensberry rules.

Some responses cast the matter as one of David confronting Goliath. Nike’s side often cast the issue as one of organized interest groups, distinct from consumers, attacking businesses: politically correct Goliath versus business Goliath (or even small business David).

The fundamental difficulty with the fisticuffs metaphor: Advertising law allows many different actors to challenge an ad. The Lanham Act requires both sides to refrain from foul blows, so there’s no unfairness at all between competitors. The FTC, state attorneys general, and similar government actors are referees: cousins to that familiar government agent, the nightwatchman. If First Amendment doctrine requires application of a defamation standard to false advertising claims in the name of equality, it will disrupt other coherent regulatory schemes that are already equal – the referee will go home.

The answer might be to require only consumers to show fault. But that rule would be even more bizarre. The core justification for state regulation and competitor lawsuits is to protect consumers from harm. If consumers themselves can only stop deliberate or negligent falsehood, what justification do others – who have interests that will never quite align with consumers’ – have for suppressing nonnegligent speech?

There is also a second symmetry that is key to Nike’s argument from fairness: nice things versus nasty things. The argument is that, if consumers can attack Nike, Nike must be allowed to defend itself with non-defamatory speech using the same standards. This symmetry is vitally important to the other two regulatory schemes because the usual false advertising scenario involves someone challenging nice things that the advertiser says about itself.

Nike’s attempt to speak positively about itself subject only to New York Times v. Sullivan constraints was therefore a dagger aimed at the heart of false advertising law generally. Conclusion: when gov’t acts as a regulator, as with the FTC, or allows consumers to act as regulators, by using the courts, then the symmetry argument should not apply.

Where might symmetry play a useful role in imposing First Amendment constraints on regulations of commercial speech? Where they actually disadvantage competitors systematically, perhaps. Trademark owners get to take advantage of every non-false sales pitch possible, including appeals to our emotions, the seductive likability of the familiar [Bradford on emotion and dilution], etc. But dilution protection means that critics/competitors cannot appeal to our negative emotions, cannot use disgust or other emotions to get us to abandon a brand. [Deere v. MTD; Katya Assaf’s The Dilution of Culture and the Law of Trademarks, 49 IDEA 1 (2008)] To the extent that dilution actually does force competitors to fight on different terms, it might be subject to the viewpoint discrimination/Marquis of Queensberry objection.

Dilution may be a generational thing. In 1980, dilution was not considered a strong argument; it wasn’t until later, and a general trend towards propertization—we didn’t use “IP” as a term then—that dilution strengthened. His initial reaction to Kasky: this is a case about whether the speech was in fact commercial. It was embedded in a dialogue about globalization. The ACLU was on Nike’s side. But there is a blurring of the line between participating in public debate and proposing a commercial transaction.

Papandreau: For Rowe: protecting public speech isn’t the proper definition of the First Amendment’s scope. There seems to be a real chilling effect of the lawsuits, especially when combined with Jane Doe claims—because it’s so easy to allege a trade secret violation, maybe easier than alleging defamation.

Rowe: True, this is the fundamental problem of trade secret law (not just in its First Amendment intersection). In practice, there can be a long time between a TRO and a preliminary injunction—depends on the defendant whether this is something that it/he can afford. But it’s not a unique problem: the power of civil litigation generally can chill.

Zimmerman: Isn’t it a problem that there’s very little scrutiny of the nature of the trade secret, not just the methods used to protect it ? The Food Lion v. ABC case might have been brought as a trade secret—about the operation of the back room of the grocery. Yet trade secret folks seem to agree that the nature of the trade secret doesn’t seem to matter much. Also, how the defendant got the trade secret matters a lot—if a third party thinks the trade secret has public interest, then that’s a big First Amendment deal and yet the UTSA seems to contemplate a legitimate action against the third party.

Tien: The standard saying that the defendant need only have “reason to know” of the trade secret status factors into that.

Rowe: On the one hand, trade secret law doesn’t make value judgments—marketing info, secret recipes, maybe even illegal/immoral shortcuts (Bernie Madoff’s business model?). But courts in practice do make value judgments. Courts distinguish between technical and business info; courts are more likely to find technical info (possible patent subject matter) to be a trade secret than business (marketing) info.

Zimmerman: But what about drug info, scientific info reported to FDA that the FDA calls trade secret?

Rowe: There are exceptions for disclosing info in the public interest. California’s Bunner case is problematic in many ways, including that it involved reverse engineering. It shouldn’t have gone as far as it did.

Tien: The EFF makes all these arguments! But in N.D. Cal. we have a lot of pro-business judges inclined to protect trade secret first and ask questions after. Given the expense of discovery, the deck is stacked.

Kwall: Privacy v. property—say more.

Rowe: Everybody seems to think that property is the stronger claim. The privacy claim just adds extra, compared to perhaps other rights.

Joe Liu: Say more about equivalence—is it just an aesthetic preference? Being mistaken about statements about yourself is less persuasive. Is Nike hamstrung by application of strict liability, as was the concern in Sullivan?

Lidsky: Protection of speech shouldn’t depend on ID of speaker, right? Separately, Fred Schauer talks about boundaries between areas of law—securities regulation has proved relatively impervious to First Amendment constraints.

Me: I don’t think that first proposition is descriptively or normatively true, at least as applied to non-human entities. Schauer doesn’t have a theory of how the boundary shifts; Nike was an attempt to move the boundary and make it hard to argue with a straight face that the Lanham Act was exempt from scrutiny.

Yen: Unpredictability of damages was a big concern in Sullivan—is that as big a problem when injunction is the only remedy?

Me: Absolutely, the SCt later decided to calibrate speech-protective effects by allowing some lawsuits even when Sullivan’s standards weren’t met, but cabining damages so that only actual damages were available in the absence of actual malice. You can do some rough calibration that way, but in the end a C&D letter may have an irreducible chilling effect, at least depending on the size of the target.

Zimmerman: Rethinking commercial speech—this conversation is ignoring the audience. The audience wants to hear what Nike and Kasky have to say. She’s willing to cabin off commercial advertising, though not to cabin off the SEC and the FTC. But the public benefits from robust debate—it’s going to buy the sneakers.

Me: Sure, and Nike didn’t stop advertising or even talking about its labor policies after Kasky. Unless you get rid of the Lanham Act and the FTC, kicking Kasky out of the running still leaves Nike subject to a plain falsity/misleadingness standard in its ads.

Zimmerman: But Nike should have been free to defend itself—it didn’t start the conversation.

Me: It started the conversation about the shoes—it doesn’t get to control the metrics people use to evaluate the shoes. Every instance of speech participates in an ongoing conversation about what we should value.

Reputation and Property Meet the First Amendment

Boston College Law Review Symposium

Panel 1: Anonymity in Cyberspace

Lauren Gelman, Stanford Law School’s Center for Internet & Society

Privacy issue: if people can’t have better privacy guarantees, they may stop using the internet to do so many useful things. Proposal: a technical solution used to signal how information can be redisseminated, like Creative Commons but based on neighborliness rather than license.

Why do people post things on the public internet that aren’t meant for the public? Because of blurry-edged social networks. Like phone numbers in physical space: you have a listed phone number if you can’t ID in advance everyone you want to be able to contact you. There are social costs—telemarketers, etc.—but also benefits. On the internet, people share stories and build communities. But they end up with a binary choice: share information with everyone or privatize and decide on an individual basis. Problems: data mining is going to get more effective; and our stories/photos/etc. aren’t just about ourselves—they feature other people, meaning that other people control your privacy.

To avoid free speech issues, the proposed solution is built on signalling and neighborliness. Not like copyright—the people burdened by disintermediation in copyright are very different from the people burdened by disintermediation with privacy. They lack resources/economic incentive to protect themselves, they are less sophisticated, and the background privacy law is a lot less favorable to them than background copyright law.

Moderator, Jonathan Zittrain, Harvard Law: We are no longer worried about David v. Goliath (government, Amazon) but David v. David—how to deal with that, while being sensitive to First Amendment concerns? Lidsky addresses similar questions with respect to John Doe defendants in online anonymity cases.

Lyrissa Lidsky, University of Florida Levin College of Law

CDA 230 closed off access to the deep pocket, so it made sense to turn to John Doe lawsuits; anonymity on the internet made it necessary to find your detractor before suing him. Disinhibition: anonymity disinhibits negative expression, including defamatory expression; turns out that communication on the internet also disinhibits, even if you’re not anonymous, so that the effects of anonymity are worse on the internet.

Internet John Doe cases put very starkly on the table the value of anonymity. ISPs just used to turn over your name if sued; if you were lucky, the ISP would notify you of the suit, and you might be able to get counsel and file a motion to quash. Most judges would say: this is an allegation of libel, so the ISP needs to turn over the info. Judges didn’t care about anonymous speech, and they didn’t know the internet norms, so judges were taking statements that were opinion in context and reading them as assertions of facts.

What’s changed in the past ten years? A lot more sensitivity to the right to speak anonymously, and to the context of the internet. Courts are trying to develop a balancing test, allowing John Does to get notice before the identity is revealed and screening libel cases to make sure there’s a serious claim before anonymity is ripped away. There are more legal resources.

Lessons: (1) judicial understanding of tech shapes legal developments quite strongly. (I’ve often wondered: if judicial opinions a hundred years ago had been written like they are today, when would they have stopped defining a “railroad”?) (2) Prominent cases matter to set the paradigm against which people reason—when people think of anonymous speech, do they think of the KKK, Lori Drew, or Publius speaking truth to power? (3) Nonlegal fixes for the problem of online libel—reputationdefender.com and the like. Key adjunct to the law; what can we do to mitigate the problem outside the law? E.g., automatically link a reply to a defamatory statement, for example when the defamatory statement comes up in a search engine. (4) The importance of national approaches; there’s a state by state approach to John Doe now, but if you care about the First Amendment then each state shouldn’t get to make it up as it goes along. (5) Citizens have to be sophisticated interpreters of anonymous speech. The problems can have their own fix if people don’t give too much credence to anonymous speech; good info consumers know this. (Comment: I think this solution is undercut because people forget source more easily than they forget content, causing them to step-up the credibility of anonymous allegations over time.)

(6) Note the growth of cases against nonmedia defendants. SCt jurisprudence is developed with institutional media in mind; at first it seemed that the Court might not even apply the protections to nonmedia defendants. With more nonmedia defendants being sued, and the collapse of the divide between media and nonmedia, we need to rethink. Example: how the SCt defines actual malice. Reliance on one unverified source may be actual malice. But that’s not how individuals think about what they say; need adaptation. Another: do nonmedia defendants get the privilege of fair report, reporting what was said at a government meeting? Statutory protections against libel, such as retraction—does that apply? The statutes are written with the institutional media in mind and need revision. If the comments to a blog have defamatory statements, can the blogger claim reporters’ privilege to protect identity?

CDA immunity: these cases came up because of the CDA. The 9^th Circuit’s Roommates case has opened up a wedge, which may limit John Doe suits.

Zittrain: What does Lidsky think of Gelman’s project?

Lidsky: Some of the norms on some sites, like dontdatehimgirl.com, don’t have the neighborliness norms Gelman assumes. Could we make a presumption that ignoring the poster’s privacy preferences was wrongful?

Me: How would that help with dontdatehimgirl, where the poster is happy to have the info shared? It’s the guy who objects. This seems to be a place where one of Gelman’s key points—our stories aren’t just about us—makes her proposed solution less helpful. Gelman and Zittrain suggest: maybe we allow the subjects to tag content and assert their own preferences about whether this information ought to be shared, and then people can decide which preferences to honor; maybe sometimes knowing that one of the subjects is embarrassed will limit dissemination. I think that’s probably true, but other people will just gleefully disseminate further, and possibly harass the tagger—see, e.g., the Star Wars Kid.

Diane Zimmerman, NYU: Suppose we disagree about what you say about me, and I get to tag the speech with my preferences? Classic problem of privacy/speech: my speech is about your life. You can’t say privacy promotes speech without defining what speech values you’re trying to protect. Troglodyte question: shouldn’t we suggest that people ought to be more cautious? Why should we encourage people to put private information online if they don’t want it disseminated? The best protection of privacy is shutting your mouth. Isn’t the fuzzy boundaries idea just one of convenience, and not to be weighed as heavily as the right of people to use what they learn?

Gelman: That last is the right question. She thinks that an open, integrated internet is a better solution than a series of locked communities, and it’s hard to see how you can get that while also maintaining privacy. Open communities have huge benefits (comment: but maybe that just means that people have to bear their costs as well, which include sudden unpredictable infamy?). If we don’t fix privacy, people will opt out of these very valuable communities. (I think behavioral psychology might help with this—people might well underestimate the risks of exposure and thus overdisclose, maintaining the communities despite the risks.)

Joe Liu: Privacy traditionally thinks about rights not to disclose, but the paper suggests that privacy actually produces more, though limited, disclosure. We protect trade secrets in IP in part in order to allow businesses to disclose info to others and not lose control over the trade secret. We don’t require absolute discretion, just some limiting moves. (Good analogy!)

How do you convince people of the value of these new communities? He used to think that keeping your mouth shut was the best practice, but then he got on Facebook and started posting lots of stuff he never would have posted before. The system is designed to get you to do that! Also, do we need law, or can people figure this problem out on their own?

Gelman: Privacy and free speech are often promoted by the same advocates. Is there a free-speech-friendly argument for privacy? That’s her aim. You can’t get any value out of Facebook if you don’t disclose information (e.g., have a Wall).

Lee Tien, EFF: We are contrasting the online environment with a romantic image of the physical world which is disappearing, where we could meet physically without surveillance. Once the security cameras are everywhere, the camera on the corner will log me as I enter the AA meeting. It’s only a matter of time. He supports the idea of intermediate community formation, but is puzzled by implementation.

Roberta Kwall, DePaul: The relation between norms and law is shown by how newly internet-savvy judges change their interpretation of the law—top-down norms! Gossip, though, is a powerful human impulse. That can only be controlled by norms and law through extreme effort!

Comment: These days, you can’t go anywhere without having a picture taken. “Close your mouth” isn’t good enough any more. Stay in your room and don’t interact, that’s your only hope of being sure to not show up on someone else’s blog. Gelman’s proposal is a way to manage those tensions and allow participation.

Lidsky: Students do understand the privacy implications, but they think it’ll sort itself out because everyone understands that all sorts of information is in circulation.

Zittrain: That suggests we should just wait, and then everyone in a decisionmaking position will have drunken pictures of themselves floating around. Presence of a camera either inhibits behavior or disinhibits; maybe it averages out.

Mary Rose Papandreau, BC: For Gelman—be clear on the problem you’re trying to solve—the person posting info about herself that she wants limited, or about a third party that the third party wants limited. Megan Meier/Lori Drew case: why shouldn’t we know who Lori Drew is? She’s been prosecuted. (Comment: Though a newspaper decided not to name her, and the decision to prosecute was made only after her identity was widely disclosed; I’m not sure that’s independent of the dissemination of her information on the internet, rather than being a consequence of the changes.) Why be optimistic about neighborliness on the web? People on the internet are generally more free in what they say and share, as Lidsky says. Norms exist in some forums, like forums for cancer sufferers/survivors, but there doesn’t seem to be a problem of cancer exploitation.

Gelman: She’s trying to fill in where there aren’t norms already; there may be norms on the cancer forums and at dontdatehimgirl, but in other places there are shapeable norms if you confront people with expectations directly.

Fred Yen, BC: Concerned over creating a new kind of IP—if people tag information/photos to claim them, that will turn tort claims into property claims. Courts may assume people are asserting property rights in their own privacy.

He’s also not sure it’s a good idea to take risk away. Risk is what makes us slow down when we see a yellow light. (This reminds me of Eric Goldman’s take on dontdatehimgirl.) The problem isn’t that we saw a picture in which Michael Phelps had a bong in his hands at a party; the problem is that we’re shocked by the idea that this would happen. Zittrain rephrases him: Creating an architecture that lets people respond to those sensitivities reinforces those sensitivities, which is maybe a mistake.

I made my points about behavioral psychology (w/r/t Lidsky: making anonymous sources more credible than they should be in the long term, as people forget the original source, and w/r/t Gelman: leading people to discount the risk of context collapse, thus preserving communities against precautionary exit), and Zittrain pointed out that even asking questions about preferences/displaying a warning changes (the expression of) those preferences by increasing the salience of various concerns. This might be smart, or might not be, but it’s hard to say that it’s a reflection of the “true” preferences of the user.

Zittrain is reminded by Gelman’s project of a feature in Google News: if you’re mentioned or quoted, you have a special right to annotate the story. How do you show you’re you? Google just does its best to confirm it.

Removal attempt fails despite CAFA, preemption arguments

Asahi Kasei Pharma Corp. v. Actelion Ltd., 2009 WL 801555 (N.D. Cal.)

Asahi, a Japanese pharmaco, entered into a license agreement with defendant CoTherix to develop and market Fasudil, an allegedly promising new drug discovered by Asahi for treating pulmonary arterial hypertension (PAH) and stable angina. Asahi alleged that defendant Actelion interfered with the license agreement (or assumed then breached it) in order to protect its monopoly in treatment for PAH. That is, shortly after the license agreement, Actelion acquired CoTherix at a massive premium, which allegedly allowed Actelion to extend its sales of Tracleer, its PAH treatment, and delay Fasudil. Actelion notified Asahi, on behalf of CoTherix, that it intended to halt Fasudil “for—inter alia—business and commercial reasons, including other pipeline considerations.” These included a possible combination therapy using Tracleer and another PAH treatment from CoTherix, Ventavis. Asahi alleged that it couldn’t find another development partner, putting Fasudil on hold and delaying development in Japan because Asahi can’t use US clinical trial data in Japanese regulatory submissions.

Asahi sued defendants in California state court, alleging various breaches of contract, interference with prospective economic advantage, and violation of state unfair competition law. Its state false advertising claims allege that defendants

advertised Tracleer and Ventavis as a combined therapy for PAH using false or misleading statements of fact regarding the drugs, and promoted off-label combination therapy of the two drugs to medical professionals.

Actelion removed the case under CAFA and under preemption theories. The court scoffed at the attempt to use CAFA: Asahi didn’t bring a class action; using a consumer protection statute to redress one’s own harm is not the same thing as filing a class action, even though Asahi also alleged that consumers had been harmed.

Actelion also argued that Asahi’s claims were inextricably intertwined with violations of the FDCA. Asahi rejoined that the complaint’s references to the FDCA showed defendants’ liability, but are not necessary elements of its false advertising claims. The court agreed: Merrell Dow Pharmaceuticals, Inc. v. Thompson, 478 U.S. 804 (1986), held that a consumer claim against a drug company, based in part on the theory that a violation of the FDCA constituted negligence, did not present a federal question, and thus removal was improper. Asahi alleged that defendants falsely advertised Tracleer and Ventavis as a “perfect fit” and “a logical combination,” even though studies of the combination therapy were still underway and the FDA hadn’t approved combined use. The truth or falsity of these statements can be determined without interpreting the FDCA, though violations of the FDCA would be evidence of liability.

Defendants also argued complete preemption by the FDCA. There’s no precedent for this; complete preemption is rare and has only been applied by the Supreme Court to

the Labor-Management Relations Act, ERISA, and the National Bank Act. Lower courts have rejected the theory that the FDCA should be added to this list, and the court here did the same, especially since the FDCA does not provide a private right of action.

The court remanded to state court and deemed Asahi’s request for attorneys’ fees a “close call.” (Comment: even on the CAFA attempt? That doesn’t seem like an argument many litigators could make with a straight face, and frankly the ones who could scare me. But defense counsel apparently argued the court out of it.)