Plaintiff without product in the market lacks standing

CareerFairs.com v. United Business Media LLC, 2011 WL 4527448 (S.D. Fla.)

CareerFairs.com’s basic claim was that UBM used CareerFairs.com’s idea for an online career fair interview format despite the execution of a confidentiality and non-compete agreement.

Among its claims was a Lanham Act false advertising claim, because it was unable to compete with the defendants in the university market because UBM falsely advertised that it originated the virtual career fair. Despite the apparent Dastar problem, the court instead focused on standing, the current path of least resistance, because plaintiff didn’t allege it had a competing product on the market. Using the Phoenix of Broward factors, plaintiff lacked standing. The Eleventh Circuit has rejected plaintiff’s argument, taken from the Ninth Circuit’s standard, that harm to “ability to compete” suffices (and anyway the Ninth Circuit requires actual or direct competition, which plaintiff didn’t allege). “[D]irect competition is essential to a finding of standing to bring a false advertising claim under the Lanham Act in the Eleventh Circuit.” (Note that this is a complete reversal of the idea motivating Conte Bros., the Third Circuit case whose test was adopted by Phoenix of Broward. In theory, the Conte Bros. approach potentially expanded standing beyond direct competitors with a multifactor test in which direct competition was not a necessary element. In practice, it’s used to deny standing to direct competitors, as this court also recognized.)

The Phoenix of Broward factors don’t expressly require the plaintiff to have a product in the market, but that’s indicative of direct competition. In Natural Answers, Inc. v. SmithKline Beecham Corp., 529 F.3d 1325 (11th Cir. 2008), the court held that a plaintiff that had ceased selling its product seven months before the defendant's launch of its own competing product “did not qualify as a direct competitor and was therefore unable to satisfy any of the five Phoenix Factors.” The Lanham Act false advertising claim was dismissed with prejudice.

Claims for misappropriation of business idea and trade secrets, and a resulting Florida Deceptive and Unfair Trade Practices Act (FDUTPA) claim, did survive. Even though plaintiff isn’t a consumer, the statute is designed to protect legitimate businesses from unfair competition and deceptive acts (here misappropriation).

Misallocation of damages has tax consequences

Healthpoint, Ltd. v. Commissioner, T.C. Memo. 2011-241, 2011 WL 4550112 (U.S. Tax Ct.)

I don’t think I’ve ever blogged a tax case before, but this involved the proceeds of a settlement agreement in a false advertising case. Healthpoint is a specialty pharmaco which sold, among other things, a successful prescription ointment called Accuzyme. Ethex introduced Ethezyme, marketed as a generic form of Accuzyme, but with an additional potentially harmful chemical and more active ingredient. This caused Healthpoint economic damage, and it sued for false advertising, unfair competition, and related claims. Actually, it sued twice, for new claims about a new formulation of Ethezyme that came too late to add to the older case.

The jury in the first case ruled for Healthpoint, finding false advertising and additionally finding that Ethex acted with malice under Texas law, though rejecting claims that Ethex had knowingly or intentionally diluted Healthpoint's trademark or disparaged Healthpoint's business. The jury awarded over $16 million, $5 million in actual damages, over $1.6 million in disgorgement of profits, over $3.1 million in punitive damages, and over $6.3 million in enhanced damages under the Lanham Act.

In the end, the parties settled the first case for $12 million and the second for $4.5 million. The parties agreed to a nondisparagement clause that permitted Healthpoint to use public domain documents to promote Accuzyme and distinguish it from Ethezyme, coupled with terms that prohibited Ethex from using the settlement agreement for those same purposes. Ethex proposed allocating $12 million to "compensatory damages arising out of alleged unintentional product disparagement" to settle Ethex I and $4.5 million with the same description to settle Ethex II.

Healthpoint’s tax counsel prepared an outline of the categories of damages, but didn’t assign amounts; Healthpoint then proposed a different allocation. Ethex refused to settle with any public statement “that might be associated with willful misconduct. We feel strongly that this characterization of our conduct is completely unjustified. These accusations have been injurious to our reputation, and we will not do anything that might be interpreted as conceding that we acted in a knowing manner.” Healthpoint subsequently acquiesced to Ethex's demand to eliminate allocations to misappropriation and punitive damages.

The ultimate agreement allocated damages in Ethex I of $10.45 million to damage to goodwill and reputation, and $1.35 million to lost profits/disgorgement. The corresponding figures for Ethex II were $4.05 million/$450,000. The settlement agreement also included the statement that "no part of the sums paid pursuant to this Agreement are for willful misconduct" or for punitive damages. There was also a nondisparagement clause that allowed Healthpoint to use publicly available documents from the lawsuit to distinguish the parties’ products.

Healthpoint didn’t have any business documentation of the goodwill or make any calculations during settlement negotiations to justify the allocations. It was aware of the potential tax benefits of characterizing money as capital gain, but its tax counsel wasn’t involved in the allocation.

Healthpoint reported $14.5 million in long-term capital gains from the settlement and $1.8 million in ordinary income. The IRS disagreed, though eventually conceded that the over $6.3 million in enhanced Lanham Act damages awarded by the jury in Ethex I were taxable as long-term capital gains.

Healthpoint argued that the IRS should respect the allocations made in the settlement agreement. Proceeds for goodwill or damage to reputation are taxable as capital gain, while proceeds determined to be lost or disgorged profits or punitive damages are taxable as ordinary income. The rule is that the tax consequences of damages received under a settlement depend on the nature of the claim that was the basis for the settlement, not the validity of the claim. An express allocation in the settlement agreement is generally followed if it was entered into at arm’s length and in good faith, but isn’t determinative if other facts indicate that the payments were for a different purpose.

In particular, the fact that a defendant didn’t desire to admit that it was paying punitive damages isn’t dispositive where there’s solid evidence that the prospect of punitive damages increased the amount the defendant paid in settlement. Though the parties were generally adverse, if they ultimately allocated the funds in a way that did not represent the claims they actually intended to settle, then the tax treatment need not respect the allocations made in the settlement agreement.

Here, Ethex refused to pay any amount labeled as punitive damages, but it still paid a negotiated sum. “Ethex was indifferent as to how Healthpoint chose to allocate the funds so long as the allocation did not imply intentional wrongdoing, and it permitted Healthpoint to assign the same amount of damages to any other category.” Thus, the allocations weren’t the product of negotiations between adverse parties. Healthpoint was aware that the proposed allocations would result in a more favorable tax rate, and the tax benefits were of more value to it than being able to tout that it had received punitive damages under the nondisparagement agreement. It proposed an allocation to punitive damages that was significantly less than the amount of the jury award, suggesting that tax considerations were foremost.

A jury verdict is the best indicator of the worth of a plaintiff’s claims, so, in light of the facts, the allocations made by the jury in Ethex I should be applied to that part of the settlement. There was never a jury verdict in Ethex II, though. But because the cases were very similar, and the settlement agreement allocated the damages in similar proportions, damages should be allocated in the same proportions.

This result also triggered an accuracy-related penalty for Healthpoint.

So, practice tip: consider the tax consequences of settlement—but have non-tax-related reasons for making the allocations you make!

Elf defense: parody defeats TM and copyright claims

CCA and B, LLC v. F W Media Inc., --- F.Supp.2d ----, 2011 WL 4583790 (N.D.Ga.)

Plaintiff sells The Elf on the Shelf, and defendant is about to sell The Elf off the Shelf, a self-described parody. Plaintiff sued for trademark infringement and dilution, copyright infringement, violation of ACPA, and coordinate state claims, but it sought a preliminary injunction only on the trademark and copyright infringement claims.

Elf On (yes, that’s the court’s shorthand) is “a popular children's Christmas book sold in a 10" by 10" by 2.5" box set with a plush toy elf doll 8.5 inches in height in a red costume.” It’s sold more than 1.5 million copies since 2005. Plaintiff registered copyrights in the elf doll and the sitting elf image on the cover. It also registered trademarks in the word mark "The Elf on the Shelf," the stylized logo used on the cover of its book, and the sitting elf image and operates www.elfontheshelf.com to promote its book.

Elf On “explains how Santa keeps track of who's naughty and nice each year and what are their wishes: by employing millions of "scout" elves around the world to monitor children's behavior. These friendly elves are dispatched to individual families to watch the children's behavior and report nightly back to Santa. The story warns children that the elf will report every "push or a shove" or broken rule, but reassures that ‘small acts of kindness will not be a loss.’ The elf encourages children to tell him their every gift desire so he can report their lists to Santa.” The illustrations are “subdued watercolor paintings that resemble the world of a child's imagination more than that of reality.”

Plaintiff encourages parents to move the elf around the house each day “as evidence that the elf returns to the North Pole at night to tell Santa about their behavior,” and the book jacket said that the author discovered that this tradition helped children control themselves with “a gentle reminder that ‘the elf is watching.’”

Elf Off (yep) “tells a very different but related story. The elf narrator describes himself as a discount elf (sprung from a marked-down copy of Elf On) who is supposed to help Santa decide who's been naughty and nice. But the stories quickly diverge from this common ground. In Elf Off, the elf warns that he'll be ‘pissed’ if children give him a name he dislikes.… [Horace the Elf is] going to drink spiked eggnog, try to make his ‘move’ on Barbie while Ken's away at the Malibu dream house, watch pornography in the middle of the night, change the children's gift list so there's ‘something in it for me,’ and finally, run away to the tropics rather than return to the North Pole.”

The book jacket says that, prior to "being sent out to spy on and judge small children, [Horace] worked the assembly line in Santa's Workshop." Elf Off’s cover includes the book title in a font that is quite similar to plaintiff's stylized logo font, an image of an elf in a green costume dangling from a shelf, the subtitle "A Christmas Tradition Gone Bad," a byline attributing the story to Horace the Elf, and a final sentence, in red font: "A new holiday parody--for Mom and Dad!" The book is much thinner than plaintiff’s box set and doesn’t come with a doll or special packaging. The back cover “shows a photograph of the elf doll holding the Elf On book while surrounded by a remote control, Zombie Slayer DVD, and various gift cards” and also has a small-print disclaimer.

Elf Off is illustrated of photos of the Elf On doll in a green costume. “Photographs show the elf splayed on a table with spilled eggnog, snuggled in bed with Barbie, hanging out in the Christmas tree with a nutcracker, and lying behind a toilet after being tormented by the cat. The first page of the Elf Off story shows a small picture of Plaintiff's book, including the sitting elf image, partially obscured by ‘75% off’ and ‘super markdown’ stickers.” Defendant operates www.elfofftheshelf.com.

Plaintiff argued that defendant’s book undermines Elf On’s “wholesome and healthy” brand image, citing an article in Publisher's Weekly that reported that Elf Off is intended to "knock a holiday favorite off its perch." Defendant agreed, but said that that was a perfectly acceptable parodic goal.

Plaintiff alleged that defendant’s photos of the elf doll infringed its copyright in the elf doll, and that defendant’s use of the dangling elf and photos of plaintiff’s book infringed its copyright in the sitting elf image. In addition, plaintiff alleged that its trademarks in the book title, domain name, stylized word mark, and sitting elf image were infringed by the corresponding uses by defendant.

The court first asked whether Elf Off was a parody. Because we can’t let a question like that be simple in IP, the inquiries are similar, but not identical, for trademark and copyright. For copyright we look for comment on or critique of the original, and for trademark we look for whether the use is “clearly in jest.”

Copyright: the parody is clear,

albeit not particularly pungent. The question is simply whether a parody may reasonably be perceived in the content. borrows Elf On's elf-spy idea to tell the story of a very naughty elf with little interest in monitoring children's behavior. Elf Off may not render a scathing critique of Plaintiff's book, but by reporting his own mischief throughout the story, Horace highlights the perceived absurdity of a “big brother” type of elf reporting on small children in Elf On. The odd realism in Elf Off (with images, including the unflattering photograph of the elf doll lying next to a toilet, suggestive of an under-employed adult living with his parents) contrasts with the wonderland world of Elf On in a way that makes the idea of using an Elf "scout" (or spy) to encourage good behavior in one's children seem somehow unsavory. Horace is not hilarious, but he does use his foul mouth to say something pointedly different than the elf in Plaintiff's work.

But there’s conceptual trouble in parodyland—plaintiff wasn’t arguing that defendant’s book infringed plaintiff’s book, rather that defendant’s book infringed the elf doll and sitting elf image. (Side note: I question whether the sitting elf and dangling elf images are substantially similar.) Puzzlingly, the court found this distinction “relevant” but still concluded that the use was “in the context of a parody” and, without further analysis, found that there was comment or criticism of “the copyrighted work.” It would have been better, I think, to reject plaintiff’s attempt to divide up its interests in this way; there’s always some element of the original that isn’t itself transformed or criticized in a parody, but the question should be whether there is transformation overall, and the court functionally reaches this result, just adding in some awkward somersaults along the way.

Because Elf Off was itself the product being sold rather than an ad, its commercial purpose weighed only somewhat against fair use. Plus, it was transformative; where plaintiffs want parents to create the impression that the doll has a magical life of its own, defendant “depicts the doll in rather unromantic settings that similarly demystify the magical idea of the elf doll in Elf On.” The use of the sitting elf image in a photo of what looks like plaintiff’s book, that use furthers the attack “by showing the book covered with clearance stickers and next to a Zombie Slayer DVD.” This use was also very small “and primarily provides a distinguishing reference to the original,” and could thus be considered inconsequential.

As for the dangling elf image, it didn’t do much to advance defendant’s story or convey commentary, so it wasn’t as transformative as the photos of the elf, but it was still in the context of a parody and therefore transformative. Overall, factor one pointed towards fair use.

Plaintiff’s work was creative, but this factor is neutral in parody cases. Likewise, parodies may need to take the heart of the original. The elf doll and the sitting elf image are the heart of Elf On—but plaintiff argued that it was claiming infringement of the doll and the sitting elf image, not the book. Thus, defendant copied the entirety of those works. But, the court reasoned, those images make up only a small proportion of Elf Off. In Mattel, Inc. v. Walking Mountain Prods., 353 F.3d 792 (9th Cir. 2003), the court pointed out that it’s hard to use only a portion of a doll, and that adding material assists the defendant in such a case by creating a context around the copied material. The amount and substantiality copied was therefore reasonable.
Effect on the market: plaintiff failed to explain its theory of market harm. Here the slice-and-dice approach backfired: “Nothing in the record indicates the elf doll or sitting elf image, independent from the book, have any market value whatsoever.” The court found it unlikely that defendant’s book of photos of the elf doll would replace sales of the doll or the sitting elf image. Instead, plaintiff argued that Elf Off would degrade the market value of Elf On. “The flaw in this argument is that Plaintiff has not alleged infringement of the story contained in Elf On.” And anyway, it was unlikely that consumers would choose this inappropriate-for-children parody in place of the wholesome Elf On. Defendant’s hope to knock a holiday favorite off its perch was legitimate harm done by parody, not illegitimate replacement. Plaintiff was conflating trademark and copyright.

Thus, there was no likely success on the merits of the copyright claim.

Trademark: a trademark parody has to be successful in communicating both the reference to the original and some kind of ridicule of it. The court found that the differences between the works would be most clear side-by-side, but consumers might not view the products that way. The font and design are nearly identical, so a consumer might not immediately identify the parody; the dangling elf was a “subtle” alteration of the sitting elf. The difference between off and on and the different color schemes were also minor. But the subtitles "a new holiday parody--for Mom and Dad," “clearly provide additional cues that distinguish the marks.”

Citing the old Fourth Circuit PETA case, plaintiff argued that the court should only look at the cover and the domain names at issue, but as that court clarified/retreated in Lamparello v. Falwell, 420 F.3d 309 (4th Cir. 2005), context is highly relevant. Though this was a close question for trademark purposes looking just at the covers, the boldface parody statement plus the disclaimers on the back and inside pages, and multiple other visual cues were enough to change the overall impact “to present enough visual information to flag for consumers that the book is a parody for adults.” Likewise, the Elf Off website “presents the book cover immediately on arrival at the site and thus similarly communicates that the book and website parody the original.”

In a footnote, the court suggested ways that defendant could have done a better job of conveying its parodic purpose, and cautioned that “the facts at this early stage of the case do suggest an arguable possibility of consumer confusion. Plaintiff potentially could present survey evidence proving consumer confusion at trial. In light of this, Defendant may wish to consider taking additional measures to distinguish the cover of Elf Off before marketing it.” This highlights the ways in which trademark can underprotect expressive uses: I have no doubt that plaintiffs could, for enough money, get a survey suggesting likely confusion. But I don’t think the game is worth the candle.

On to infringement: for purposes of this motion, the parties agreed that the marks were strong and that Elf Off used similar marks. In the Eleventh Circuit, parody is not itself a defense but influences the way the likely confusion factors are applied. The court treated the Elf Off book title and the Elf Off domain name the same because the website prominently displays the book cover.

Mark strength may reduce the likelihood of confusion in a parody case, because consumers are more likely to get the joke. Here, though the parties agreed that the marks were strong, the court was still uncertain about distinctiveness. “The use of an elf in a Christmas-theme gift set is not a unique idea. At best, Elf On is well known within a particular sub-set of the population.” Then, though, the court pointed out that the sub-set comprised both parties’ target audience. Assuming the mark is strong, this factor favored the defendant.

Similarity: did defendant borrow so much that its use became ineffective as parody and instead seemed to be affiliated with or sponsored by plaintiff? The court found that the sight and sound were extremely similar, but somewhat more risk of confusion should be tolerated in cases of parodic artistic expression. “Although at first glance consumers might not notice all the distinctions between the two products, the first glance is not decisive.” Momentary confusion can be tolerated when it would be readily dispelled by further consideration by an ordinarily prudent consumer. “Reasonable consumers faced with purchasing a children's book are likely to open the book to see what they are buying for their children.” Examination of defendant’s book would reveal the “parody” designation, and on any given page consumers would likely see that this wasn’t a children’s book. “They may see the bizarre rhymes about ‘that stupid toy train’ or Barbie being a prude. They may notice the photographs of an elf watching x-rated videos like ‘Elves Gone WILD.’ These multiple distinctions go far to dispel consumer confusion.… Consumers, particularly those buying books, are likely to notice significant literary distinctions.” So similarity of marks also favored defendant.

Similarity of products: they’re both books; the addition of the toy doll isn’t very significant. However, if differences in the marks indicate parody, then a use on an identical product can be noninfringing. “Because some amount of similarity is required to accomplish the parody, it is difficult to imagine how Defendant could have created its parody without a book, although this book need not have been identical in length and width dimensions or "first glance" presentation as Elf On. Defendant notably did not include an elf doll, which suggests this factor weighs only slightly in favor of Plaintiff.”

Sales channels/customers: Defendant planned to market its book using the same major retail outlets, including Amazon.com and Barnes & Noble. It targeted an adult audience, but both children and adults buy Elf On. “However, the Court finds that parents are usually the purchasers even when the target audience for a book is children, so the argument that child consumers will be confused is not persuasive.” The overlap in target market and sales channels favored plaintiff. Similarity in advertising methods was neutral at this stage—it was unclear whether defendant was trying to make its product or website show up in searches for Elf On. (Why would this increase confusion any more than negative reviews or other competing products showing up?)

Intent: Defendant’s criticism of plaintiff’s book plus its clear disclaimer weighed in its favor.

Actual confusion: There was no evidence of actual confusion, which is frequently key in parody cases. At this stage, though, the absence of evidence was just neutral.

Overall, while parodies may be confusing, that’s usually because they lack expressive elements or clear indications of parody. “Where some aspect of the work clearly communicates to consumers that it is a parody, or where the medium in which the marks are used is inherently expressive (such as artistic photographs), courts protect that expression.” Especially given the First Amendment concerns at issue, the factors weighed against finding likely confusion.

Without likely success, there wasn’t going to be a preliminary injunction. The court also pointed out that an injunction would destroy defendant’s plan to market Elf Off for the 2011 holiday season and take advantage “of a growing trend of made-for-adult parodies of children's books, a fad that may end before a trial on the merits is completed.” Plus, the public interest favors free speech.

Trademark expo Oct. 14-15

The PTO's announcement of this free two-day event is on its website. Were it not for my full-day commitment to AALS on both days I would love to go to see what exactly this entails, but the PTO says that the expo "is designed to educate the public about the value of trademarks in the global marketplace":

The Expo will highlight such themes as “Unusual Trademarks” and “Brand Evolution,” and will feature educational workshops for adults and children, exhibits of authentic and counterfeit goods, and costumed characters.

The opening ceremony on October 14, 2011 at 10 a.m. will feature music by the U.S Air Force’s rock band, Max Impact, and a guest appearance by Chubby Checker.

Click fraud securities case revived

FindWhat Investor Group v. FindWhat.com, -- F.3d --, 2011 WL 4506180 (11th Cir.)

Eric Goldman pointed me to this securities fraud case, of possible interest because it involves advertising-related claims. The investors sued defendant MIVA (aka FindWhat.com) and some principal officers for eleven false or misleading statements to the public, in violation of § 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. The statements allegedly artificially inflated the price of MIVA’s stock until the truth came out, at which point the stock dropped and plaintiffs lost money.

The district court rejected all the claims, nine on the pleadings and two on summary judgment on the grounds that plaintiffs failed to show loss causation and damages. Plaintiffs appealed on two of the claims dismissed on the pleadings and on the claims on which summary judgment was granted.

The court of appeals affirmed on the first set and reversed on the second. Basically, earlier false statements weren't actionable, but later ones that perpetuated the falsehood were actionable for sustaining the stock price longer than it would have had the truth come out earlier.

MIVA provides pay-per-click ad services, putting ads on its distribution partners/affiliates’ websites. MIVA shares a portion of its ad revenue with its affiliates. MIVA uses keyword targeting; advertisers bid for a position in search results. MIVA’s revenue is determined by advertisers’ bidding price and the number of clicks MIVA generates. Bidding price itself depends on the conversion rate from clicks to sales.

Because of the pay-for-click arrangement, click fraud (clicking on ads just to get the advertiser to pay) can be very costly. Click fraud can come through automated or human intervention; it results in lower conversion rates because the source of the click is uninterested in purchase.

According to the complaint, in 2003 two of MIVA’s top revenue-generating partners, Saveli and Dmitri, who together accounted for almost 1/3 of MIVA’s revenue from 2003-2005, began using automated click fraud to generate revenue. “According to a former Business Development Manager at MIVA, Saveli and Dmitri were ‘turn and burn guys’ who focused primarily on driving in a lot of traffic, regardless of its quality.” (One thing advertising folks may find notable in securities cases these days is that, because of heightened pleading requirements and judicial hostility to such cases, the average securities fraud pleading is likely to have a lot of detail acquired from independent investigations, usually relying on informants with inside knowledge of the defendant’s operation—by contrast, in an advertising case the plaintiff may have a lot of knowledge of the parties’ products or services, but is less likely to be able to plead about the defendant’s internal operations with specificity.)

The resulting low-quality traffic caused advertisers to lower their bids, decreasing MIVA’s revenue. A former account manager described the result as “serious, serious bid deflation.” Revenue per click dropped from $0.20-$0.21 in early 2003 to $0.12 by June 2005. This had a domino effect, driving away high-quality distribution partners. In a downward spiral, plaintiffs alleged, MIVA increasingly relied on “greedy and unscrupulous distribution partners who were focused on only short-term gain.”

Thus, by summer 2005, MIVA’s “supposedly extensive and diversified partner network had shrunk, with 95 percent of the Company's click revenue coming from its top fifty distribution partners—the top two being Saveli and Dmitri.” The network, according to a former marketing manager, was now best described as a "house of cards ... held together by a thread."

The short-term gains from click fraud allegedly enabled MIVA to report an uninterrupted string of quarter-by-quarter financial gains, meeting or exceeding analyst growth expectations in every single quarter since 2003. “Perhaps demonstrating the Company's obsession with meeting Wall Street's forecasts, these expectations were sometimes met by as little as a penny.” (Maybe I don’t read about them, but are there any nonfraudulent companies that can do this for a multiyear period? Either analysts are just terrible, in which case I don’t get why people rely on them, or their projections exert pressure to commit fraud in a short-term-focused company and the market might want to apply a discount to exceeding expectations at least as much as it punishes falling short of them.) “Between 2003 and 2005, the Defendants issued public statements reporting seemingly unstoppable growth stemming from its primary pay-per-click business.”

Thus, plaintiffs alleged, that despite MIVA’s actual bid deflation, defendants allowed click fraud to continue to meet growth expectations at the expense of the company’s long-term health.

Meanwhile, during 2004 and 2005, regulatory scrutiny of click fraud intensified. “In an effort to lull investors and advertisers into believing that the Company was proactive and aggressive about policing click fraud, Defendant CEO Pisaris-Henderson claimed during a Company conference call on February 23, 2005 that, in the fourth quarter of 2004, the Company had voluntarily removed distribution partners representing $70,000 in revenue per day because ‘our focus is to deliver traffic that converts rather than just clicks alone.’” However, according to the Senior Director of Business Development responsible for the oversight and management of all of MIVA's affiliates, “no traffic was taken off line in the fourth quarter of 2004.” This senior director said that the February announcement clearly referred to Saveli and Dmitri, because that’s what they earned in a day, but they weren’t removed from the network. A former marketing manager said that it was "an open secret within the Company that Dmitri and Saveli were not taken off line in December 2004, and neither was anyone else."

On March 16, 2005, in its Form 10-K annual report to the SEC, defendants repeated their claim that in the "fourth quarter of 2004, we ceased displaying advertisements with distribution partners ... whose traffic did not adequately convert to revenue for our advertisers," and that "the removal of these distribution partners reduced our average click-through revenue by approximately $70,000 per day," in conformity with its "long-stated goal of [providing] high quality traffic to our advertisers.” Miva also stated that "[w]e do not rely on 'spyware' for any purpose and it is not part of our product offerings," that "[w]e have implemented screening policies and procedures to .... detect[ ] fraudulent click-throughs, which are not billed to our advertisers," and that "[w]e have developed automated proprietary screening applications and procedures to minimize the effects of ... fraudulent clicks."

Before the Nasdaq opened on May 5, 2005, MIVA issued a press release announcing disappointing first quarter 2005 results and the resignation of Brenda Agius as CFO. Later that day, defendants CEO Craig Pisaris-Henderson and COO Phillip Thune revealed to the public that click fraud had indeed been responsible for some of the Company's revenues, stating in a conference call with analysts and investors that "a couple" of MIVA's distribution partners had been employing "capabilities ... to get additional traffic that just simply don't adhere to our standards." That day, MIVA's share price plummeted over 21 percent from the previous day, from $6.16 to $4.83, and continued to drop for the next few trading days, closing at $4.46 on May 9, 2005.

The court of appeals first addressed statements made on March 5, 2004 and July 26, 2004. The first was properly dismissed because plaintiffs failed to plead scienter with the requisite specificity and the second because the plaintiffs failed to allege falsity or misleadingness.

To survive a motion to dismiss, a 10b-5 claim must satisfy both Rule 9(b) and the additional pleading requirements of the PSLRA. For claims based on false/misleading statements, “the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." If scienter is required, "the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind."

As to the insufficient claims: One stemmed from MIVA’s March 5, 2004 10-K, which said, “The FindWhat.com Network is dedicated to delivering high-quality keyword ads as a result of an Internet user's search query. As such, we have written and strictly enforce advertising guidelines to try to ensure high relevancy standards.” It continued, “We employ an integrated system of numerous automated and human processes that continually monitor traffic quality, often eliminating any charges for low quality traffic proactively from the advertisers' accounts. We enforce strict guidelines with our Network partners to ensure the quality of traffic on the system.” It also stated that it “expect[ed]” that its business partners would behave lawfully and ethically.

The district court found that these statements weren’t misleading because MIVA wasn’t warranting that it lacked current questionable associations, and that a “dedication” to high-quality traffic wasn’t inconsistent with the existence of low-quality traffic. Moreover, the Form 10-K was mostly forward-looking statements that were appropriately accompanied by cautionary statements.

The court of appeals disagreed about whether this could be materially misleading. There were statements of present fact about MIVA’s “integrated system ... that continually monitor[s] traffic quality," and claims that "[w]e enforce strict guidelines ... to ensure the quality of traffic," which “unquestionably create the impression that MIVA maintains an active and sophisticated monitoring system for screening fraudulent traffic.” These statements could have misled a reasonable investor. Assuming the truth of the other facts alleged, these statements triggered a duty to disclose the system’s grave defects, and the failure to disclose wasn’t cured by any general cautionary or risk-disclosing language, since MIVA offered only general warnings about risks inherent to its business model, not specifically tailored to risks from click fraud. It would be deceptive to withhold information about actual known breaches of click-fraud monitoring systems already touted in the 10-K.

However, the court of appeals still affirmed because plaintiffs failed to plead scienter adequately. What was required was intent to defraud or severe recklessness, meaning highly unreasonable omissions or misrepresentations involving an extreme departure from the standards of ordinary care that present a danger of misleading others that is either known to the defendant or that is so obvious that the defendant must have known of it. The PSLRA requires that the complaint’s allegations create “a strong inference” of scienter, meaning that the inference must be more than plausible or reasonable. It must be at least as compelling as any alternative inference of nonfraudulent intent. Each act or omission must be evaluated separately and for each defendant, though the court’s inquiry must be holistic (it need not ignore the other acts or omissions when evaluating each one individually).

Essentially, plaintiffs didn't plead enough specifics to generate a strong inference of scienter until mid-2004 at the earliest, when there was a meeting to discuss terminating Saveli and Dmitri. This put the earlier statements off-limits. Defendants’ motives to meet Wall Street revenue expectations were insufficient to establish scienter—mere motive and opportunity is insufficient. (It’s tough out there for a securities plaintiff.)

On to the July 26, 2004 public conference call discussing second-quarter results. Defendant Thune, the COO, said that revenue was increasing by June and that “we believe that every one of our divisions can grow revenue from Q2 to Q3, despite the seasonal softness typical in the summer months, when individual Internet usage usually declines.” The future performance statement was non-actionable, and plaintiffs didn’t allege that revenue was not increasing by June.

Plaintiffs argued that this was misleading because the growth came from click fraud, and that by making affirmative claims MIVA had a duty to disclose other facts necessary to avoid an incomplete and misleading picture. However, a company has a duty to disclose only when the natural and normal implication of its statements would be misleading. Thune’s statement would be misleading only if it conveyed a false impression of the quality of MIVA’s click traffic. But a statement about total revenue, which also included MIVA’s recently acquired companies, conveyed no such message. It’s generally okay to tout past success, even if future prospects are less rosy.

On to the remaining two statements from 2005 (detailed above), the issue was whether plaintiffs’ expert report demonstrated genuine issues of material fact on loss causation and damages. The district court held that there were no triable issues of fact because the expert acknowledged that MIVA’s stock price was inflated by 26.44% before the first actionable misrepresentation and remained inflated after. The district court reasoned that because the stock price didn’t change, the otherwise actionable statements couldn’t have caused the plaintiffs’ losses.

This was error. Investors who purchased at inflated prices after the fraudulent statements were made may have sustained substantial losses they wouldn’t have suffered had the defendants revealed the truth at the start of the class period.

Fraud-on-the-market theory hypothesizes that disclosure of confirmatory information--information already known by the market--will not cause a change in the stock price. But publicly disseminated falsehoods will artificially inflate the stock price as long as they remain uncorrected, tainting the total mix of information. When the misinformation is corrected, the market will dissipate the artificial inflation.

Loss causation can frequently be shown circumstantially, when plaintiffs identify (1) a corrective disclosure, (2) a price drop soon thereafter, and (3) an absence of other possible explanations for the price drop. Plaintiffs’ expert report, which the district court assumed was admissible for purposes of the summary judgment motion, offered evidentiary support for both loss causation and damages. The expert conducted an event study, common in such cases, estimating the damages at $22.24 million.

The district court ruled that the inflation preexisted the actionable fraudulent statements, rendering the expert report irrelevant. The court of appeals held that this was a misapprehension of the nature of market fraud. “Inflation creates an ongoing risk of harm. Every investor who purchases at an inflated price--whether at the beginning, middle, or end of the inflationary period--is at risk of losing the inflationary component of his investment when the truth underlying the misrepresentation comes to light.”

Investors who buy and sell during the inflationary period overpaid, but they can recoup by selling at the same inflated price. But investors who buy at inflated prices and hold will suffer economic loss. “Because thousands of shares of stock are purchased each day, the longer that inflation remains within a stock price, the more shares that are purchased at inflated prices, and the more shares that stand to lose when the inflation subsequently dissipates from the price. Clearly then, a falsehood that endures within the marketplace for a longer period of time, all else being equal, will cause greater harm than one that endures for a shorter period of time.”

In conclusion, the court of appeals declined “to erect a per se rule that, once a market is already misinformed about a particular truth, corporations are free to knowingly and intentionally reinforce material misconceptions by repeating falsehoods with impunity.” So, even if the earlier nonactionable statements started the trouble, as long as the market believed that defendants had click fraud under control, the later false statements could cause continuing harm.

Another penny auction site faces consumer claims

Parino v. BidRack, Inc., 2011 WL 4479462 (N.D. Cal.)

Parino, putative class representation, alleged that BidRack owns and operates bidrack.com, a penny auction site. Allegedly, BidRack attracts consumers via "a series of sponsored advertisements and fake news stories," which "overtly misrepresent the services and products offered by BidRack." The homepage "heavily emphasizes that registration is 'completely FREE!' " and "free" is frequently repeated on the site. The site also contains fake news stories, endorsements, and consumer testimonials. During “free” registration, customers are sent to a page with "a cluttered assortment of boxes, graphs, arrows, bright colors, charts, logos, and numbers" and are directed to enter shipping and credit card information "to pay for items, shipping, or bids when they choose to buy them." Instead of requiring explicit acknowledgement of a credit card charge, the customer simply clicks a button labeled "START WINNING" to complete registration.

Parino allegedly incurred an unwanted charge to buy a “bid pack,” after she’d viewed and relied on ads on the site including videos of purported news programs and "alleged endorsements of BidRack.com that appeared next to logos for organizations such as the New York Times and BBC." She alleged that she did not see any statements on the website that her credit card would be charged, but she was charged $99. When she discovered this, she contacted customer service to dispute the charge, to no avail. She also contacted her credit card company, which also did not give her a refund.

She alleged violations of California’s FAL, CLRA, and UCL, as well as fraud in the inducement, breach of contract, and related claims. BidRack moved to dismiss for failure to satisfy Rule 9(b). The court noted that some of her claims were subject to 9(b) and some weren’t.

Parino pled sufficient facts to state a claim under the FAL and UCL. The allegedly false and misleading statements included that registration was free, that supposed reviews from satisfied customers were actually created by defendants, and that BidRack was affiliated with respectable news outlets such as the NYT, legitimizing the website. Parino pled knowing falsity because defendants allegedly were the ones who faked the endorsements. For 9(b) purposes, she alleged enough the who (BidRack), what ("free"), where (BidRack.com), when (May 20, 2011), and how ("free" repeated numerous times in tandem with the call to register).

The CLRA separately prohibits misrepresenting the “source, sponsorship, approval, or certification of goods or services” and misrepresenting the “affiliation, connection, or association with, or certification by, another,” along with advertising goods or services “with intent not to sell them as advertised.” (As a matter of TM law, I don’t think that running actual clips from the NYT suggests any affiliation etc. with the NYT, so I’d want to be careful with this claim, but at the same time I do think there can be false endorsements in this situation, and if the defendants did fake stories that suggested that the NYT had found BidRack to be a legitimate site that should be actionable, if not by the NYT then by deceived consumers.) The same allegations of false and deceptive advertising, misrepresentation of the cost of registering with BidRack, and use of false news stories and endorsements leading Parino to believe the site was safe to register with for free stated a CLRA claim.

Fraud in the inducement exists when the promisor knows what she’s signing but her consent is induced by fraud, which itself requires (a) a misrepresentation (false representation, concealment, or nondisclosure); (b) scienter or knowledge of its falsity; (c) intent to induce reliance; (d) justifiable reliance; and (e) resulting damage. This too was sufficiently alleged under 9(b). BidRack knew that its claim of free registration was untrue because it was the one charging customers for registrations. Moreover, Parino’s reliance on the representations about free registration was justifiable, especially in light of the allegedly fraudulent news stories and endorsements lending BidRack credibility. Her claims for conspiracy to commit fraud in the inducement with an unknown John Doe marketer weren’t sufficient enough, though.

She did state a breach of contract claim, where the contract was that she’d get free registration. Her allegation of unjust enrichment, available only where there is no contract or where a contract was procured by fraud or is unenforceable, was properly pled in the alternative. Nor were her claims barred by the voluntary payment doctrine, which applies when a plaintiff voluntarily paid money with full knowledge of the facts. BidRack argued that Parino knew the facts once she saw her credit card statement, and that once she paid her bill she shouldn’t be able to recover. The cases BidRack cited were easily distinguishable because they involved disputes that only arose after plaintiffs made multiple payments over a long period of time.

Here, Parino disputed the charge immediately after she noticed it and requested a refund from BidRack, putting it on notice of her claim. Even if she paid her credit card bill, “payment to her credit card company so that she could stay in good standing with creditors while pursuing this action would not bar her claim.”

BidRack’s objections to the class allegations were not well taken at this point and should wait for the class certification stage.

Policy on accepting transgenic grain isn't commercial speech

Syngenta Seeds, Inc. v. Bunge North America, Inc., 2011 WL 4478510 (N.D. Iowa)

As is so often the case, this Lanham Act litigation offers a window into a corner of the business world, here grain storage. The court framed the issue this way: “Can a grain elevator company refuse to accept certain corn at its facilities, on the ground that the corn has not received approval from ‘major’ export destinations, and post signs stating this, when the seed producer has received clearances from the United States and several foreign countries, but not from China or the European Union?” The court found no violation of the United States Warehouse Act (USWA), 7 U.S.C. § 241 et seq., or the Lanham Act (and related state law claims).

Syngenta is a major agribusiness company. Bunge operates a number of grain and milling facilities and grain warehouses. Syngenta has developed transgenic corn sold as Agrisure Viptera; the genetic modification is designed to control insects, and also reduces the development of fungus and mycotoxins in stored corn. Viptera corn, indeed, is a federally-registered pesticide licensed under the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA). Based on good experience with growers, “[p]rior to the parties' dispute, Syngenta had projected that Viptera seed sales would exceed twenty percent of the United States corn seed market in future years.”

Then Bunge refused to accept Viptera corn at any of its facilities, on the proffered ground that key countries (China and the EU) had not yet given it regulatory approval. Meanwhile, the USDA and EPA are totally fine with Viptera, as are Canada, Japan, Australia, Brazil, Mexico, New Zealand, the Philippines, Korea, Russia, and Taiwan. Syngenta anticipates Chinese approval by March 2012.

In Spring 2010, when Japanese and Korean approval had yet to materialize, Bunge said that it was unable to accept delivery of Viptera because it hadn’t received those approvals and those are major export destinations. Because all Bunge facilities were “integrated into the export market,” they wouldn’t accept grains or oilseeds containing unapproved products, but the notice said that Bunge would accept Viptera once it was approved in Japan and Korea.

In June, Syngenta got its Japanese approval, whereupon Bunge changed its notice to remove any reference to a specific country (and add another product to the excluded list). Syngenta got Korean approval thereafter, and Bunge changed its posted policy to remove references to Viptera. At that point, Bunge had no policy to reject Viptera until July 2011. After planting time for the 2011-2012 crop year, Bunge again changed its policy.

Bunge wanted China to speed up its approval process, because of concerns about lost sales in the US while grain handlers insisted on awaiting Chinese approval; although China has traditionally been the second largest source of corn in the world (behind the US) and thus not an importer, China suddenly increased corn imports, making it the seventh largest US market for 2009-2010 with a projected rise into the top five for 2011-2012. Bunge had several large contracts to export US corn to China. At the time, Bunge anticipated that commercial Viptera yields in 2011 would be less than half of what Syngenta claimed in this litigation. Bunge decided not to accept Viptera corn in 2011.

Thus, in early July 2011, Bunge posted a new policy on its website and at its facilities rejecting Viptera because it had not received “necessary international approval from major export destinations for the U.S.”

The parties disputed whether China was a “major importer” of US corn. Despite its past history, Bunge had sold millions of dollars of corn to China for late 2011 delivery, and China has a zero tolerance policy pursuant to which it will reject corn deliveries that contain any percentage of corn with unapproved genetic traits. It is relatively common within non-genetically modified corn markets to see a purity level of 98.5 percent; by contrast to China, the EU will accept low levels of unapproved biotech traits.

Syngenta argued that Bunge could reasonably segregate Viptera for non-export uses. But that’s not how Bunge’s facilities are currently set up, and Bunge presented testimony that it would cost $6-8 million per facility to preserve Viptera’s identity, which isn’t commercially reasonable or feasible. Other grain elevators in the same areas may accept Viptera-produced grain or have stated that they will work with farmers so that the warehouses can accept Viptera-produced grain at harvest or direct farmers to facilities that will accept Viptera corn; however, neither Cargill nor ADM will accept Viptera corn at any of their North American wet milling plants until Viptera corn receives regulatory approval from the EU. Unlike Bunge, Cargill operates feed lots and other domestic outlets it can use for such corn.

Syngenta, unsurprisingly, presented evidence of irreparable harm, though it didn’t show any instance in which a farmer was specifically turned away from a Bunge facility for bringing Viptera corn (presumably, most were well-informed enough not to show up). Syngenta argued that “farmers' anger at Syngenta suggests that farmers have been misled into believing that Syngenta did something wrong in marketing Viptera before obtaining all import approvals.” Indeed, Syngenta produced evidence that individual farmers, seed dealers, and local coops have blamed Syngenta for Bunge’s refusal to take Viptera, and one coop canceled an order for $1.5-2 million because of its displeasure over the problem. Syngenta gets between about 5 and 50 calls and about a half dozen e-mails per day from growers that are having difficulty locating outlets for Viptera corn. Some independent seed resellers believe that their own reputations have been injured because of Syngenta. The court had “little doubt” that this was substantial injury that would be difficult to measure in money damages.

Bunge said that this was Syngenta’s fault for putting Viptera on the market before China approved it. Bunge canceled approximately five growers' contracts, because they had grown Viptera corn, and though it has at times assisted farmers with determining where they could deliver Viptera corn, Bunge has no program to do so. Bunge thinks that’s Syngenta’s problem.

The court fond that, before the 2011 planting season, both parties were in a position to recognize that sales to China wouldn’t be possible, but neither made any effort to inform growers of that. Bunge’s contract spoke of rejecting goods “containing transgenic genes/traits that are not approved for sale in Japan, Mexico, The European Union and other U.S. export markets,” and Syngenta’s contract (called a Stewardship Agreement, which is of interest from a patent/bioengineering perspective) stated that “Grower agrees to ... [c]hannel grain produced from Seed to appropriate markets as necessary to prevent movement to markets where the grain has not yet received regulatory approval for import.”

As interesting as this is, does Syngenta have Lanham Act standing? No. Eighth Circuit precedent states that “commercial advertising or promotion” occurs only in statements made by a defendant in commercial competition with the plaintiff. While the parties have customers in common, their relations are at opposite ends of the production process; Syngenta doesn’t compete in grain storage and Bunge doesn’t compete in seed production.

The court went further, though, and held that Syngenta wasn’t likely to succeed because Bunge’s policy wasn’t commercial speech. The Eighth Circuit uses a three-factor test: (i) whether the communication is an advertisement, (ii) whether it refers to a specific product or service, and (iii) whether the speaker has an economic motivation for the speech. Bunge’s policy “relates” to commercial transactions, but doesn’t propose any transaction with Bunge or any rejection of a transaction with Syngenta. It’s a statement that Bunge won’t enter into transactions for Viptera. (Does this mean that refusals to deal are not commercial speech? I think the proper answer is “no,” because it can make sense to ask whether something is commercial speech for purposes of the Lanham Act and the answer might be different for application of the antitrust laws, but the doctrine is, to put it mildly, confused.) Anyway, it’s not enough that Bunge is not a “disinterested, non-commercial party”—there’s still no proposed commercial transaction and thus no likely success on the merits.

There are traditional state-law disparagement claims available against noncompetitors, but Syngenta may not be able to show the necessary level of fault, and the court here didn't give the state-law claims any separate attention.

Claim against contact lens solution preempted by FDCA

Degelmann v. Advanced Medical Optics Inc., --- F.3d ----, 2011 WL 4470641 (9th Cir.)

Degelmann represents a putative class of purchasers of contact lens solution, alleging violations of the UCL and FAL because AMO advertised Complete MoisturePlus as a product that cleans and disinfects lenses. In 2007, the CDC reported an increase in a serious eye infection associated with the use of MoisturePlus; AMO recalled it and established a refund program for unused product. The putative class did not include people who’d contracted an eye infection. The court of appeals affirmed denial of certification on different grounds than the trial court used.

Plaintiffs alleged that AMO knew that MoisturePlus was a poor disinfectant compared to other similar products, and that the company misled consumers into believing MoisturePlus was as effective as other solutions. But for the inaccuracy of AMO's labeling practices, they alleged, they would not have purchased MoisturePlus. The district court ruled that the class suffered no injury because (1) they never contracted AK, so they suffered no harm from use of MoisturePlus, (2) they were not forced by the product recall to discard unused product, and (3) they did not lose money because if they had not bought MoisturePlus, they would have bought another lens solution.

The court of appeals disagreed. Class representatives properly averred that they bought MoisturePlus in reliance on the disinfectant representation, which means they suffered injury in fact: economic harm. It’s probably true that they would have bought other contact lens solution had they not bought MoisturePlus, but that doesn’t mean they didn’t suffer economic harm. They presented evidence that they were deceived into purchasing a product that did not disinfect as well as it represented. With accurate labeling, they would not have been willing to pay as much for, or would have refused to buy it. The district court read “injury in fact” too narrowly.

However, the court of appeals found that the case was preempted, because the FDA provides criteria for a contact lens solution to be labeled as a “disinfecting solution,” preempting claims that use of the term “disinfects” was false or misleading. The Medical Device Amendments of 1976 to the FDCA include a provision that states can’t establish any requirement “(1) which is different from, or in addition to, any requirement applicable under [the FDCA] to the device, and (2) which relates to the safety or effectiveness of the device or to any other matter included in a requirement applicable to the device under this chapter.”

First, the court had to decide whether the FDA had promulgated a specific requirement that applies to contact lens solution. Lens care products are Class II devices, involving some risk of injury but not subject to the intensive pre-market approval process. Class II devices need only § 510(k) clearance, designed to ensure only that a product is substantially equivalent to a product that is already on the market. AMO argued that MoisturePlus was subject to special controls on the testing, manufacture, and labeling of multipurpose contact lens solutions, as laid out in an FDA Guidance Document for Contact Lens Care Products. It sets out requirements for a contact lens care solution to be labeled a “disinfecting solution.” One path to such labeling is to “meet the primary performance criteria of the standalone procedure for contact lens disinfecting products.” This AMO’s product undisputedly did, and the court found that these were specific requirements for preemption purposes.

Then the question was whether the lawsuit would impose a different or additional requirement on AMO. The court held that, in order for the class to recover, a court would have to hold that the UCL and FAL required something different than what the FDA required to label MoisturePlus a disinfectant: that AMO test for a specific pathogen and show that MoisturePlus kills it in sufficient quantities. This was preempted.

No state law standing for manufacturer against retailer

Aviva Sports, Inc. v. Fingerhut Direct Marketing, Inc., 2011 WL 4457956 (D.Minn.)

Aviva makes inflatable waterslides and pools, in competititon with Manley. The parties’ products are available through retailers including Fingerhut, Menard, and Kmart. Aviva argued that Manley’s ads violate the Lanham Act and Minnesota UDTPA by superimposing scaled-down images of children onto images of its products to make the products appear larger than they actually are. Interesting reviews here on that point. The court previously dismissed Wal-Mart as a defendant and denied a preliminary injunction.

Though a few of Aviva’s sales are through its website, almost all are retail. The defendants here are retailers who sell both parties’ products in stores and on their websites. Thus, Aviva lacked standing under the Lanham Act.

Under the UDTPA, "[a] person engages in a deceptive trade practice when, in the course of business, vocation, or occupation, the person ... (5) represents that goods or services have sponsorship, approval, characteristics, ingredients, uses, benefits, or quantities that they do not have ...; or (13) engages in any other conduct which similarly creates a likelihood of confusion or of misunderstanding." The law specifies that a plaintiff need not prove competition or actual confusion (this comes out of the UDTPA’s history as a trademark-plus statute).

Still, Aviva lost because it failed to show likely injury from defendants’ conduct. It alleged lost opportunity for sales. This was a competitive injury. Though Aviva argued that it didn’t need to be a competitor, the cases it cited did not involve allegations of competitive injury. (They involved allegations of false advertising causing injury to consumers, which current Lanham Act jurisprudence doesn’t cover.) “Where plaintiffs have not alleged competitive injuries, direct competition is not a requirement for standing.” But where competitive injury is asserted, requiring competition is a better fit with the plain language of the law. “Standing under the statute requires likelihood of damage--which may or may not require competition between the parties, depending on the type of damage alleged.” (This is probably the right result, but saying it’s based on plain language seems pretty weird. The statute requires damage and does not require competition; Aviva argued that defendants were a necessary part of the causal chain of lost sales, which sure seems like damage.)

The court found support in its review of the original UDTPA, drafted by the National Conference of Commissioners on Uniform State Laws and approved by the American Bar Association. The drafters commented that the no-competition provision was designed to "remove[ ] the enumerated factors as absolute bars to relief." They cited what we’d now call a trademark case involving false association between two businesses that didn’t directly compete. Thus, in certain contexts, especially in passing off/false association/trademark cases, competition need not be proved. But that doesn’t mean that a competitive injury won’t require competition. (So what exactly is damage to reputation or goodwill? If it’s not competitive injury, what is it?)

In addition, Minnesota courts have noted that the UDTPA generally mirrors the Federal Lanham Act and that claims under both statutes are analyzed in essentially the same way. The standing provisions are therefore similar: "any person who believes that he or she is or is likely to be damaged" may bring a civil action, 15 U.S.C. § 1125(a)(1), and "[a] person likely to be damaged by a deceptive trade practice of another" may do the same under state law, Minn.Stat. § 325D.45, subdiv. 1. “This parallel language strongly suggests that the requirements for standing under the UDTPA are the same as those under the Lanham Act.” Indeed, the original drafters commented that "[s]imilar phraseology determines standing to sue under Section 43(a) of the Lanham Trademark Act."

But doesn’t the UDTPA explicitly disavow a competition requirement? And don’t some circuits hold that competition is a Lanham Act requirement? The court reasoned that (1) this categorical test is not applicable under the UDTPA, but the multifactor/reasonable interest Lanham Act standing tests would be, and (2) there might or might not be a conflict on standing for consumers (you think?); fortunately, this case didn’t involve a consumer plaintiff.

Summary judgment for these defendants.

Copyright and pre-1978 dissertations on microfilm

Gail Clement and Melissa Levine have written an article on the topic concluding that such dissertations were considered "published" by the relevant scholarly community. Abstract:

We investigated whether American dissertations that were deposited in university libraries or disseminated on microfilm prior to 1978 were "published" for copyright purposes. This question has direct bearing on the copyright status of these works today. In the absence of a directly relevant legal decision to clarify the matter, the authors examined how the former community of practice interpreted the law in the context of dissertation dissemination. A content analysis of written communications by members of this community indicates that both forms of dissertation dissemination were considered to be legal publication under the 1909 Copyright Act.

HT Zach Schrag.

Of historical interest

(and not just to copyright scholars): The Digital Dead Sea Scrolls.

generic drug seller avoids injunction

Intendis, Inc. v. River's Edge Pharmaceuticals, LLC, 2011 WL 4442849 (D. Md.)

Intendis makes NeoBenz Wash Plus Pack, and defendants make the generic BP 7% Wash External Kit, both of which are prescription drugs. Intendis alleged that defendants make false or misleading statements about the BP wash on its product insert page and package label, and in marketing information distributed to national pharmacies and pharmacy databases. Intendis sought a preliminary injunction requiring defendants to submit supplemental information to the national pharmacy databases to correct or clarify the false or misleading statements made in their prior submissions to these databases and to post statements on their website; the court denied the motion.

The NeoBenz pack contains NeoBenz Micro Wash, a 7% benzoyl peroxide wash, and NeoBenz Micro SD, pre-filled sponge applicators with a 5.5% benzoyl peroxide cream. These are to be used in tandem to treat acne. The product insert states that the active ingredient, benzoyl peroxide, is incorporated into patented porous microspheres to "provide gradual release of active ingredient into the skin and absorb natural skin oils,” but it doesn’t disclose the specific release rate.

The BP Wash Kit contains a 7% benzoyl peroxide wash and a 5.5% benzoyl peroxide cream with sponge applicators. The product insert states that the active ingredient, benzoyl peroxide, is "incorporated into a series of microscopic concentric vesicules of oil and water .... [that] results in the release of the active ingredient into the skin over a sustained period of time." Rather than using the NeoBenz microsponge delivery system, it contains the skin conditioner Incroquat OSC, “a self-emulsifier and polymeric drug delivery system that incorporates the benzoyl peroxide into vesicules of oil and water.”

Intendis discovered the BP Wash Kit via an alert from Wolters Kluwer, a national pharmaceutical database. Wolters Kluwer, like other national pharmacy databases, classifies drugs based on: (1) active ingredient, (2) route of administration, (3) strength of active ingredient, and (4) dosage of active ingredient. The databases assign each drug a generic product identifier code ("GPI" or "GCN"). “Pharmacies rely on a drug's GPI code to make dispensing decisions and will substitute lower priced generic drugs for name-brand drugs with the same GPI unless otherwise prohibited by state law.” Pharmacies thus began to substitute the BP Wash Kit for NeoBenz prescriptions because the price of the former was significantly lower (pharmacies paid $96.47 versus 122.19 as of July 2010).

Intendis alleged a number of falsehoods: (1) the BP wash is a 7% benzoyl peroxide wash; (2) the BP Wash Kit provides sustained release of the active ingredient through the use of microscopic vesicules; (3) the BP Wash Kit contains microscopic vesicules; and (4) the BP Wash Kit has a shelf life of twenty-four months. Statements (1)-(3) are in the product insert and were separately submitted to the national pharmacy databases. The 24-month shelf life claim was in deal sheets submitted to national pharmacy chains and pharmacy database organizations to announce the product release. There were no explicit claims of equivalence or substitutability.

There’s an industry standard for gel and lotion benzoyl peroxide formulations: a gel must contain between 90% and 110% of the claimed label strength of active ingredient, while a lotion must contain between 90% and 125%. There’s no industry standard for washes and creams. Intendis had a testing company test two lots of the BP wash and cream. For the wash, one lot had between 88.0% and 90.0% of the claimed strength, and the other had between 80.1% and 80.5% of claimed label strength. For both lots of the BP cream tested, the results were between 93.8% and 95% of the strength claimed on the label. The margin of error was plus or minus 2%.

Defendants relied on the manufacturer’s tests. These tests on the wash showed results from 98.6% to 101% of label strength. In prior tests, a sample kept at room temperature had remained at 100% of label strength for twelve months, and a sample subjected to accelerated aging had decreased to 98.6% of label strength after three months. In the manufacturer’s tests of the BP cream, one lot started at 100% of label strength and remained at 100% after three months of accelerated aging and six months at room temperature. For other lots not tested by Intendis, the results were all “close, if not equal, to 100% of label strength and well within the industry standard monographs for gels and lotions.”

Dow (the tester Intendis used) calculated the shelf life of the BP wash and cream based on the idea that the shelf life expired when the active ingredient went below 90% of label strength. Using a steady rate of degradation for benzoyl peroxide, it calculated that one lot of the wash had a shelf life of less than two months and the other had an 8-month shelf life. For the cream, Dow calculated a shelf life of nine months and eleven months.

The parties also conducted their own tests of release rates. “The Franz Cell test is used to measure the in vitro permeation rate of active ingredients in solution. The test utilizes a Franz Cell apparatus that contains two distinct chambers separated by a membrane designed to represent human skin. The test solution is placed into the top chamber and measurements are taken from the bottom chamber at regular intervals to measure the amount of active ingredient that has diffused through the membrane.” Defendants’ expert’s tests showed that, on average, the BP wash released at a rate that was 15% slower than the NeoBenz wash.

Dow also conducted a Franz Cell test, but it was deemed inadmissible at the hearing for lack of proper foundation for authentication; this test was supposed to show that the BP wash released at a 50% slower rate.

Intendis had similar troubles introducing photographs that purportedly showed that, at high levels of magnification, microscopic vesicules couldn’t be seen in the BP products. Defendants submitted expert testimony that the photographs did not prove or disprove the presence of concentric vesicules of oil and water because the photos' exposure and lighting conditions rendered them inconclusive. Defendants’ expert opined that “one could infer the existence of concentric vesicules in the BP wash from the fact that it allows for extended release of the active ingredient and the fact that it contains Incroquat OSC.”

Intendis was able to show lost sales, though there’s now a third generic competitor that makes predictions about the impact of an injunction more complicated—if the BP product were enjoined, its sales might go to the new competitor instead of to River’s Edge.

In a footnote, the court explained that, though defendants initially argued that the product inserts weren’t commercial advertising or promotion, the evidence showed that the inserts were submitted to the databases as a way to advertise the BP wash kit.

Literal falsity of 7% benzoyl peroxide claim: Intendis only identified one lot with less than 90% of the claimed label strength, considering the margin of error, and the court wasn’t willing to find likely success on this record.

Sustained release/microscopic vesicules: The BP wash provided sustained release; the questions surrounded its rate and whether the release was accomplished by using microscopic vesicules. Defendants didn’t claim any particular rate or equivalence with NeoBenz’s rate. Thus there was no literal falsity as to rate. The evidence on vesicules was also insufficient; even had the photos been admitted, Intendis wouldn’t have won, because they did appear to contain at least some vesicules and because of defendants’ expert’s testimony.

Shelf life: Dow’s methodology for extrapolating shelf life was unreliable “because it was based on very limited data and incorporated assumptions that were unsubstantiated.” The FDA prefers a trend analysis “where one takes data over a period of time, takes the log of that activity, and then extrapolates over a two-year time period.” The manufacturer’s data was entitled to more weight because it used longer-term data and used an FDA-approved method of calculation. Intendis didn't successfully show falsity.

Intendis also argued that defendants failed to substantiate their establishment claims of product strength and shelf life. Defendants argued that there was no express claim that tests were conducted; to the extent their statements implied that tests were conducted, that’s only meaningful if a single test can prove truth; otherwise there’s no establishment claim. (I take the point that if it’s not clear what the tests were, then a broad range of tests might count as substantiation, but in a litigation context I have no idea what it would mean for a single test to be able to prove truth—it’s always possible to create some FUD about a particular test.)

The court rejected the establishment claim theory. First, the court said, this analysis is typically applied in comparative advertising cases. (What? “Tests prove” is a credible statement whether it’s “tests prove our product works” or “tests prove our product works better”; that’s why advertisers use it instead of “our product works.” Comparison has nothing to do with the underlying justification for the doctrine, which is that “tests prove” gives consumers a material reason to believe the underlying claim.) A defendant isn’t required to provide reliable test data for every factual statement in an ad. (True enough, but some claims necessarily imply scientific substantiation and some don’t; drug claims seem precisely the kind that fit in the former category.) Without an explicit tests prove or comparative superiority claim, there was no establishment claim.

Second, the claim failed on its merits: defendants provided test results confirming the percentage of active ingredient and shelf life. “The mere fact that Intendis conducted similar tests and reached different results is not sufficient to challenge the methodology and results provided by Defendants.”

The court also rejected Intendis’s arguments that defendants deliberately made false statements with the intent and effect of causing pharmacies to treat its BP wash as a substitute for NeoBenz, and made false claims of substitutability. There was no evidence that defendants ever claimed substitutability. (Given the modern pharmaceutical database system, can there have been any other intended result when the defendants submitted a product claimed to be the same across all four relevant attributes?) The data sheets sent to national buyers and retail chains explicitly disclaimed bioequivalence, and pharmacy databases don’t list the products as equivalents.

Comment: Is equivalence the same as substitutability? It seems not, by this description of the system, in which case I’d say there’s a necessarily implied claim of substitutability—but Intendis seems not to have proven that the substitutability claim is false. I think my reading is consistent with the court’s conclusion that “[i]t is not actionable to seek to obtain market share by manufacturing a comparable product that costs less if no false statements are made” (emphasis added).

Without likely success, there wasn’t going to be a preliminary injunction, but the court considered irreparable harm anyway. Intendis argued that, because the parties compete directly, defendants’ false advertising was likely to cause irreparable harm. Past cases applying a presumption of irreparable harm in literal falsity cases, however, predates Winter, in which the Supreme Court emphasized that a plaintiff must always show the likelihood of irreparable harm. Defendants argued that, because pharmaceutical sales are carefully tracked, it would be easy to calculate money damages, and that the entry of a third competitor would prevent Intendis’s market position from changing in any event.

Of course, Intendis couldn’t rely on the presumption of irreparable harm without showing literal falsity. Also, any lost sales could be calculated using information maintained by the national databases. Nor did Intendis submit evidence of less tangible forms of harm.

Naturally, the other factors didn’t favor Intendis either—there’s a public interest in avoiding deception, and in free competition for lower-priced alternatives, but in the end it was the absence of evidence of deception that was key.

No cause of action against purchaser under state consumer protection law

Benz Farm, LLP v. Cavendish Farms, Inc., --- N.W.2d ----, 2011 WL 4089954 (N.D.)

Benz sued Cavendish for breach of contract and violation of the North Dakota Unlawful Sales or Advertising Practices Act. Benz sells potatoes and Cavendish processes potatoes. The parties contracted for Benz to provide and Cavendish to buy 263,000 hundredweight of potatoes, to be stored after harvest by Benz until Cavendish directed they be delivered to its processing plant. They also entered into a written credit agreement for Cavendish to provide financing for Benz. There were quality provisions in the agreement.

Problems meeting the quality standards developed, and Benz sued, alleging among other things that Cavendish had, among other things, agreed to accept deliveries on certain dates, but failed to do so sufficiently, causing inefficiencies and additional expenses for Benz. The Unlawful Sales or Advertising Practices Act prohibits the use “by any person of any deceptive act or practice, fraud, false pretense, false promise, or misrepresentation, with the intent that others rely thereon in connection with the sale or advertisement of any merchandise,” allowing private lawsuits by any person against any person “who has acquired any moneys or property by means of any practice declared to be unlawful in this chapter.”

Here, Benz was the seller, and the court found that there was no statutory basis for holding purchasers liable under the Act. The act bars deception “in connection with the sale” of merchandise, and sale is defined as “any sale, offer for sale, or attempt to sell any merchandise for any consideration.” It doesn’t mention a purchase, offer to purchase, or attempt to purchase.

Because of provisions in the parties’ contracts, Benz was also required to pay Cavendish’s attorneys’ fees.

Abstract claim of lost goodwill isn't irreparable injury

AFL Telecommunications LLC v. Surpluseq.com, Inc., Tech Sales, LLC2011 WL 4102214 (D. Ariz.)

Same court, same gray market issue, different defendant, somewhat different result.

To recap, AFL is the exclusive authorized seller of Fujikura fusion splicers in North America. Defendants sell grey market Fujikura splicers.

Unfair competition: The key is whether there is likely confusion, which may occur if the products are materially different. In grey market cases, “the threshold of materiality must be kept low enough to take account of potentially confusing differences—differences that are not blatant enough to make it obvious to the average consumer that the origin of the product differs from his or her expectations.” Societe Des Produits Nestle, S.A., v. Casa Helvetia, Inc., 982 F.2d 633, 641 (1st Cir. 1992). AFL sufficiently alleged that defendants modified the splicers by changing their serial numbers and replacing memory chips in a way that damaged the products. These are material changes, according to AFL, and therefore AFL alleged facts sufficient to create a presumption of confusion (though the court dismissed its common-law unfair competition claim for failure to explain which theory of unfair competition it was using).

False advertising: The statements alleged to be false here were disseminated through defendants’ websites and blog. Defendants argued that their blog was informational, not commercial speech, but AFL alleged that the statements were published on sales sites as well, so whether or not this was true AFL had still stated a claim for false advertising.

Unlike the previous court, this court also found that AFL stated a claim for copyright infringement by pleading that it was the exclusive licensee of the software in the splicers and that defendants were distributing the splicers. Under Omega v. Costco, the first sale defense is limited to domestically made copies, and thus unavailable to defendants. Nor was it barred by a misuse defense (at least on the pleadings).

None of this guaranteed AFL a preliminary injunction. Irreparable harm is no longer presumed upon a showing of likely success on the merits. AFL argued that injury to reputation and goodwill, along with threatened loss of customers, was irreparable harm. But speculative injury isn’t irreparable injury. (This is a looming question: courts that say that they’re applying eBay, but then say that lost goodwill is irreparable injury without explaining what goodwill is, are in my opinion not making sense.) Here, AFL had no factual evidence of injury, and therefore no preliminary injunction was appropriate.

Eavesdrop on a Lanham Act Oral Argument

PDF of the invitation here. At this teleseminar, October 11, 2011, 12:30-2:00 pm eastern, sponsored by the Private Advertising Litigation subcommittee of the ABA's Antitrust Section, three experienced Lanham Act litigators will present a mock argument. As part of the mock case, the attorneys will debate the admissibility of a survey where the advertising claim is literally truthful — and arguably “unambiguous.” The defendant will rely on the recent “Havana Club” case, Pernod Ricard USA v. Bacardi (3d Cir. August 2011), which held that “a factually accurate and facially unambiguous statement is not open to attack through a consumer survey.”

litigators:

Steve Zalesin, Patterson Belknap Webb & Tyler LLP
Randy Miller, Arnold & Porter LLP

judge:

Randi Singer, Weil Gotshal & Manges LLP

I will moderate.

Sign up at www.LanhamActEvent.com.