Tobacco, trade and trademark

O’Neill Institute Colloquium 2011
Tobacco and Trade
Matthew Myers — President, Campaign for Tobacco-Free Kids

Tobacco is a unique product: kills ½ of longterm consumers when used exactly as intended. There’s no such thing as a safe level. It’s addictive, and US courts have found that the industry manipulates the nicotine in its products to enhance the addiction. Virtually all new users are children; long-term users start as children. If it were introduced today, tobacco would be banned.

When trade lawyers say tobacco is just a legal consumer product, that’s just an historic accident, and we don’t have to ignore 60 years of knowledge in making trade policy. From the day that anyone learned that tobacco caused disease, the industry engaged in a campaign of deception, undermining government efforts, selling products without regard to social cost. 1600-page decision in US v. Philip Morris so found.

This industry has demonstrated by its behavior that it’s willing to let anyone die to sell its product. Magnitude of harm is also unique: #1 case of premature preventable death in the US and now globally. Kills more than 400,000 in the US annually. More than 8 million Americans suffer from tobacco-related disease. Nearly 90% of lung cancer deaths, 1/3 of cancer deaths, and 1/5 of heart disease deaths are tobacco-related. Nearly $100 billion in health care costs in the US annually. This is a miniscule fraction of the global impact. 100 million people worldwide died from tobacco in the last century. 2000-2025, 150 million deaths predicted; a billion people in the 21st century.

Framework Convention on Tobacco Control, 2003, ratified by more than 170 nations: the only global health treaty.

Industry response: undermine public health actions, challenge them in court, and, when it has no national cause of action, use global trade agreements to claim the right to continue prohibited activities.

Framework Convention and US agree: strong warning labels on packs; tobacco industry shouldn’t be allowed to mislead consumers with terms like light and low tar, because consumers think those products are safer and the science shows they’re not; comprehensive ban on tobacco advertising, promotion and sponsorship consistent with a country’s constitution. We don’t want the industry to use the Marlboro Man to promote tobacco.

In 2009 the US finally granted the FDA broad authority over tobacco: allowing regulation of sale, marketing, and content of tobacco products for public health purposes. Applies to all cigarettes, not to protect the US tobacco industry.

Industry’s response to ban on “light” and “low tar” was to change packaging and identify different types with different colors. Stunning degree of uniformity across the brands and the world, backed by heavy ad campaign so that by the time the words disappeared consumers had the cues from color. Sent documents to retailers: when someone asks for “light,” give them the blue package. In countries that were slower in banning the terms, they ramped up the false advertising. In China, 2007: “a little lower means more loving care! Low harm cigarettes give you more loving care!” Claimed a guarantee of health for your smoking life. The picture has a father cuddling a baby!

Using cigarette packs as billboards. Marketing cigarettes to women in Russia as symbols of liberation.

US trade policy has never been in sync with US public health policy or the public health policy of our trading partners. In the 1980s and 1990s, used trade policy/threatened sanctions to force open the doors of countries with restrictions/local companies that were less efficient at selling cigarettes. In 1997 Congress banned some US personnel from promoting tobacco abroad, and in 2001 Clinton signed an executive order to the same effect for everyone. Stopped the USTR from initiating trade actions, but didn’t stop the US from including tobacco in all its free trade agreements, with bad consequences: no longer needed tobacco-specific promotion.

Tobacco companies have turned to trade law as the last resort after losing in democratic institutions, even though measures were not designed to discriminate against foreign trade or protect domestic industry.

Indonesia and the US: in the Act giving authority to the FDA, Congress was worried about a series of new products targeted to youth. Thus Congress said that there ought to be an immediate ban on flavored cigarettes, including clove cigarettes predominantly made in Indonesia. They’d just entered the market; no adult would be caught smoking a strawberry cigarette. But Congress saw menthol as different—over 25% of smokers smoke menthol, including ¾ African-Americans. So seemed to play a different role in youth use and also in terms of millions who were currently addicted. Thus, Congress banned all other flavored products and instructed FDA to examine menthol and determine what the response should be.

Response: Indonesia claimed trade violation: ban on clove cigarettes was discriminatory and unnecessary to protect the health of the public. The overwhelming majority of the other flavors were made in the US. The claim was brought under the Agreement on Technical Barriers to Trade, not GATT, so GATT’s Article XX allowing an exception for actions “necessary to protect human, animal or plant life or health” didn’t apply.

Panel rejected Indonesia’s claim that the ban was unnecessary to protect public health. Extensive scientific evidence supported the conclusion that banning clove and other flavored cigarettes could contribute to reducing youth smoking. But, the US lost because the ban failed to give national treatment to clove cigarettes, treating them less favorably than menthol. The products were “like products” within the meaning of the trade agreement.

Uruguay has strong restrictions, a world leader in reducing tobacco use. Tobacco companies redesigned cigarette packages. Domestic and foreign companies responded by color coding and instructing retailers how to transfer the information. Uruguay responded by expanding the size of the warnings to 80% of the package and also mandated that each brand could only have a single representation, so that color coding wouldn’t work. Philip Morris then sued Uruguay before a World Bank panel on investment disputes under a treaty between Uruguay and Switzerland. Claimed violations of TM rights, expropriation of their property, and diminished value of investment in Uruguay. Threatened to bankrupt Uruguay by claiming damages in the billions. Country decided to stand and fight, because other countries recognized that Philip Morris was trying to make an example of Uruguay. 80,000 customers in Uruguay when they brought the case; not about Uruguayan profits. Philip Morris has also announced intent to sue Australia over proposed plain paper packaging. Also last week announced that it would close its only manufacturing plant in Uruguay because “it could no longer make a profit”—another way to punish Uruguay.

Indonesia case taught US an important lesson: it could lose too. (US just asked for extension of time to appeal.)

Benn McGrady — O’Neill Institute Trade and Health Program Manager

Relevant questions: what’s the right level of regulation (global, local, etc.), and what are the substantive standards for what counts as a health reason? These determine the level of national sovereignty. Could reallocate authority or tinker with the substantive standards to achieve regulatory goals.

Indonesia example: not enough reason to distinguish between menthol and clove cigarettes. Changed the balance between enforcing trade commitments and domestic regulatory autonomy. Gov’ts have been reluctant to bring claims because of the potential for backlash to their own regulatory autonomy, but this is the first real test of the Agreement on Technical Barriers to Trade. There are WTO committees where members can raise issues and put pressure on other countries to remove barriers; if nothing happens, may result in a formal dispute. In 12-18 months, there have been 4-5 issues in the TBT and TRIPs councils relating to tobacco and noncommunicable diseases more generally, including Australia’s plan. Canada implemented measures similar to those in the US, questioned by a number of tobacco-growing countries; Brazil is in a similar position.

Thailand wants to be the first country to implement graphic warnings on alcoholic beverage: gave notice to the TBT committee. This is of great interest to alcohol-producing countries, pressuring Thailand not to use warning labels at all. Australia is arguing that its tobacco regulations are lawful, but at the behest of its wine/alcohol industry, has criticized the Thai proposals. Emblematic of failures of coordination within government. Trade authorities respond to industry; health authorities argue that they can regulate.

Under bilateral treaties, the terms may specify that private companies can bring claims to protect their investments; this is common but not universal. (Australia now takes the position that it will never sign another treaty that allows private companies to bring claims, even though it’s a capital exporter that would like protections when its companies sign agreements with, say, Angola.) 100 years ago, more traditional international law approach was that gov’t would have to bring claim on behalf of its nationals: only WTO members/governments can bring WTO claims. There’s a problem of policy coordination, but at least the government can view the system as a whole. But in the investment context this was deemed a flaw; gov’ts didn’t want to bring claims on behalf of domestic consituencies very often because of political and other costs. That changes everything: whereas there’s been restraint at the WTO, int’l investment agreements are more likely to have challenges. There have been some claims against environmental health measures, but nothing comparable to the Philip Morris direct attack on public health measures.

Philip Morris argument: Uruguay’s acts constitute unfair expropriation for which it seeks compensation. Similar claim against Australia will be made: expropriating not only the TM but also their business; significant interference with use of their investments.

My Q: how do you think about the TM aspects of the tobacco companies’ arguments?

McGrady: rightsholders don’t have the right to use the TM. TM rights are a negative right: to exclude third parties from using the mark. Uruguay and Australia may be indirectly affecting the use of the right, but not prohibiting the registration. There would be no valid claim under TRIPs, which requires a country to object. An expropriation agreement under an investment treaty, which allows private companies to object, would require interpretation of whether domestic law has a positive right to use a TM. If there is a positive right, then the expropriation argument would be stronger, but there’s still a balancing question.

Australian rule deals with abandonment issues by providing that tobacco companies won’t lose marks for nonuse as a result of the rule, so the negative TM right would remain.

Myers: we’ve seen with big warnings that companies are still able to use their logos—even in Uruguay where the 80% restriction is in effect—Marlboro or Camel is small but visible. TM argument in Uruguay is very weak. No other country has threatened Uruguay under TRIPs. Only threats from other countries come from when regulation tinkers with the product itself.

(My reaction: the TM right asserted requires some careful back-and-forth between the abstract idea of a property right in a TM and the idea of brand value, with the tobacco companies appealing to the former and then the latter as suits their interests.)

Misleading and unfair garnishment letters lead to disgorgement

F.T.C. v. LoanPointe, LLC, 2011 WL 4348304 (D. Utah)

Defendants used GetECash.com to offer payday loans. The loan terms at issue included the following in fine print, albeit bold and underlined: “NOTICE: I agree to have my wages garnished to pay any delinquent amount on this loan.” Individual defendant Strom knew about this but believed it was lawful, and consulted a lawyer before authorizing the loan documents. Using this clause, defendants attempted to garnish consumers’ wages when they were in default. Eighty percent of these attempts failed, but defendants used the wage assignment clause to recover approximately 16% of all loan repayments from approximately 10% of all borrowers.

To garnish a consumer’s pay, defendants, using the name LoanPointe, sent a package to his or her employer including: 1) a “Letter to Employer & Important Notice to Employer”; 2) a “Wage Garnishment” document; 3) a “Wage Garnishment Worksheet”; and 4) an “Employer Certification.” “These document titles match exactly the document titles that the Treasury Department's Financial Management Service (“FMS”) includes in the wage garnishment package that it sends to employers when federal agencies seek to garnish wages.” The “Letter to Employer” also used wording similar to the FMS’s wording. The FMS says:

One of your employees has been identified as owing a delinquent nontax debt to the United States. The Debt Collection Improvement Act of 1996 (DCIA) permits Federal agencies to garnish the pay of individuals who owe such debt without first obtaining a court order. Enclosed is a Wage Garnishment Order directing you to withhold a portion of the employee's pay each period and to forward those amounts to us. We have previously notified the employee that this action was going to take place and have provided the employee with the opportunity to dispute the debt.

Defendants omitted “nontax,” replaced references to the US with references to GetECash, and removed “Federal” from the references to agencies. Defendants also sent copies of the consumer’s loan application, including the loan amount.

The Treasury Department informed defendants that the reference to the DCIA was inaccurate and unacceptable, and then defendants removed that language. They asked the Treasury agent if she had any other concerns with the letter, but received no response.

Defendants contended that they attempted to contact consumers several times prior to garnishment, warning them of the garnishment. The FTC submitted evidence of two consumers who were unaware of the garnishment threat until defendants contacted their employers, and another who didn’t understand that after reviewing the loan application. Several consumers complained that defendants’ contact with their employers exposed them to embarrassment and risk of adverse action, such as job loss.

Using the loan application with the wage assignment clause, defendants made at least 7,121 payday loans from which they have collected slightly over $3 million. Of that, $976,107.54 represents repayment of principal. Defendants used garnishment to collect $468,020.91.

The FTC filed a complaint alleging violations of the FTC Act, the Fair Debt Collection Practices Act, and the FTC's Trade Regulation Rule Concerning Credit Practices. The parties agreed to a preliminary injunction. The FTC then moved for summary judgment.

The FTC argued that defendants violated the FTCA by “misrepresenting to consumers' employers that they were authorized to garnish wages under the DCIA without a court order; misrepresenting to consumers' employers that they had notified consumers and given consumers an opportunity to dispute the debt prior to sending the garnishment request; and communicating with and disclosing the existence and amount of consumers' loans to consumers' employers without consumers' knowledge or consent.” The first two were deceptive, and the third unfair.

Defendants didn’t dispute the factual predicates. As to the first two statements, therefore, the questions were whether the misrepresentations were material and likely to mislead consumers. Defendants argued that there was no likelihood of misleading consumers because the letters went to employers, not consumers. The court found that the employers were the relevant consumers. Defendants sent them letters that looked identical to a government garnishment request and asserted a statutory right to garnish. While defendants could be expected to know the laws governing credit, the employers in various fields couldn’t be. They were therefore likely to be misled by the letters. Moreover, the letters said that defendants had given the employee a right to dispute the debt, and the employers couldn’t know the truth of that. Even if they asked their employees, they wouldn’t be able to verify whose version of the truth was correct. This also was likely to mislead the employers.

The claims were also material: they were likely to affect a consumer’s choice or conduct. Express claims are material because saying them shows the advertiser’s belief that they matter. Also, 20% of employers who received the letters actually garnished the wages, further proving materiality.

What about disclosing consumers’ debts to their employers without consumers’ prior approval? Unfairness requires that a practice be likely to cause substantial injury to consumers which is not reasonably avoidable by consumers and not outweighed by countervailing interests to consumers or competition. The disclosure was likely to cause substantial injury, as the FTC’s rulemaking record reflected: employers don’t like wage assignments and view failure to repay debt as a sign of irresponsibility, threatening employees’ jobs or benefits. Thus, defendants’ practices were unfair.

Likewise, the FTC argued that defendants violated the FDCPA through false representations and through prohibited communications. Defendants argued that the FDCPA didn’t apply to them because a lender collecting its own debts doesn’t fall within the scope of the law. However, a lender comes within the scope of the law if “in the process of collecting [its] own debts, [it] uses any name other than [its] own which would indicate that a third person is collecting or attempting to collect such debts.” 15 U.S.C. § 1692a(6). Defendants did this. Though their collection efforts were done in the name of GetECash, they used the name LoanPointe to create the impression that a separate entity was attempting to collect.

Defendants also argued that they were exempt because GetECash and LoanPointe are related by common ownership or affiliated by corporate control. But this statutory exception only applies if the principal business of the person collecting the debt is not the collection of debts. “Inherent in the payday lending business is collecting on the loans.” Thus, collecting was part of defendants’ principal business. (Would this also apply to mortgage lenders? What about car dealerships which almost always finance purchases? What about businesses that routinely supply services then bill for them later? Does it create a bright line that defendants are selling access to money, rather than something else? I don’t know this area of the law, and there may be very easy answers.)

The FDCPA prohibits the use of “any false, deceptive, or misleading representation or means in connection with the collection of any debt.” So defendants violated it. The law “also bars debt collectors from communicating with third parties other than for the purpose of obtaining a consumer's home or workplace address or telephone number, unless the consumer consents to third-party communication or the communication is reasonably necessary to effectuate a post-judgment judicial remedy.” Defendants also violated this provision.

Further, the FTC argued that defendants violated its Credit Practices Rule, which generally prohibits the use of wage assignment clauses, unless the wage assignment: (i) is, by its terms, revocable at the will of the debtor; (ii) is a payroll deduction plan or preauthorized payment plan, commencing at the time of the transaction, in which the consumer authorizes a series of wage deductions as a method of making each payment; or (iii) applies only to wages or other earnings already earned at the time of the assignment. 16 C.F.R. § 444.2(a)(3). Defendants’ wage assignment clause didn’t qualify. “Even though several consumers refused to allow Defendants to garnish their wages upon request, the wage assignment clause was still not revocable by its terms.”

Defendants argued, wrongly, that the FTC was required to show that the violation was deceptive or unfair. But that’s the point of rulemaking: the FTC has already determined that all conduct violating the Rule is unfair. Defendants argued that they didn’t know that their wage assignment clause is illegal. But good faith is no defense to liability under the FTCA, nor is reliance on counsel.

Good faith may be relevant to the scope of injunctive relief, because permanent injunctions should only be granted if there’s some danger of a recurring violation. This involves two factors: 1) the deliberateness and seriousness of the present violation and 2) the violator's past record with respect to unfair advertising practices. Here, however, defendants’ ignorance didn’t negate the need for a permanent injunction, because the conduct was still deliberate and serious, and because defendants “should have been diligent in understanding the law relating to their chosen line of business.”

Defendants’ good faith argument reinforced, rather than excused, the need for permanent injunctive relief to protect consumers from them. “Defendants' inability to demonstrate that they are capable of understanding the law relating to credit practices and debt collection makes a permanent injunction, with monitoring by the FTC, a proper remedy in this case.”

Because the defendants had shared ownership and control, they were a common enterprise (and individual defendant Strom had the authority to control the corporations’ activities and knew about and participated in the wrongful acts, he was individually liable). They were all subject to the injunction and jointly liable for monetary remedies.

Turning to monetary relief: Disgorgement is appropriate to deprive the wrongdoer of its ill-gotten gains. The FTC argued that disgorgement should include all gains flowing from the illegal activities, without the need for the FTC to show actual consumer loss.

The FTC argued that the over $3 million collected from consumers on loans with a wage assignment clause should count, and that over $2 million of that was interest rather than principal that should be disgorged. Moreover, the FTC argued that the $468,020.91 taken in through garnishment should be disgorged.

Defendants argued that courts have distinguished between legally and illegally obtained profits in considering disgorgement. They contended that they did not collect any money that was not owed, and thus were not unjustly enriched by their deceptive practices.

The court reasoned that it only had equitable power over “property that is causally related to the illegal actions of the defendant.” Consumers agreed to pay defendants’ terms. “[T]here is no argument in this case that the other terms of repayment were misleading, deceptive, or inappropriate.” Thus, the court was forced to balance the need to hold defendants accountable for their deceptive and unfair practices with their right to repayment of the loans. First, the court ruled, consumers who repaid their loans in compliance with the terms weren’t harmed by the garnishment clause; there was no basis for concluding that the garnishment clause affected those repayments.

Thus, the relevant consumers were those who had garnishment letters sent to their employers. These letters violated federal law, but the court concluded that defendants shouldn’t be required to disgorge the principal. “To the extent that disgorgement applies to ‘ill-gotten gains,’ a return of the loan principal lent to the consumer is not actually a ‘gain’ to Defendants.” This seems to me a mistake about the level of risk of losing the principal involved in the loans, which was among other things likely reflected in the interest rate (which was, it should be noted, paid by people whose wages weren’t garnished too). Defendants received both interest they might not have received otherwise and principal they might not have recovered otherwise as a result of their misconduct. Both the interest and the principal were part of the contract; either they were entitled to both or neither, and neither seems like the appropriate deterrent. However, the court awarded only the interest as appropriate disgorgement.

“Technically, Defendants may have been entitled to the interest payments under the terms of the loans.” But requiring disgorgement of interest would fulfill one purpose of the remedy, which is supposed to make violations unprofitable. “If Defendants were subject to only an injunction, the resulting message would be that improper wage assignment clauses can be included in loan applications until discovered, at which point, the only consequence would be to stop violations of the law in the future. … This disgorgement also serves to equalize the marketplace. Defendants' violations should not allow them to profit more than other similar businesses who have complied with the law.” (Note again how this justification seems equally applicable to recovery of principal.)

DMCA Exemptions, education edition

Passing this on from Patricia Aufderheide, who writes:

Teachers and students have many situations where they might want to access unlicensed copyrighted materials, employing their fair use rights. (Does your assignment permit critiquing media? Might a student who is preparing a paper for digital posting want to quote from an e-version of a book? Are you incorporating copyrighted material into a slideshow for a workshop or conference lecture? etc.)
...
We are looking for two kinds of evidence:
1) Are you able to use [the existing] exemption--to break encryption on DVDs to teach/research better--now? If so, how do you use it? (Renewal is not guaranteed; if it turns out nobody cares, well then maybe it's not necessary, the Office could reasonably argue).
2) Are there any situations in which you find yourself thwarted from teaching or researching because you can't legally break encryption on some piece of media, or now that you think of it you might like to expand your practice to be able to do something with encrypted media that you've "taken off the table" because you "knew" you couldn't get at it legally?

Examples have proved highly persuasive to the Copyright Office in the past; please consider contributing any you have. Further information is available at Patricia's earlier blog post on the educational exemptions.

you gotta reinforce the places they're likely to attack

Wired piece on secure content delivery via Ultraviolet. The author is not impressed. xkcd, as usual, had the definitive take.

Unsuccessful copying isn't unfair competition

Jewel Source, Inc. v. Primus Jewels, LLC, 2011 WL 4634019 (S.D.N.Y.)

Jewel pleaded itself out of court. Jewel sued Primus for copyright infringement, unfair competition, tortious interference, and related claims. Primus moved to dismiss, and the court granted the motion.

Jewel alleged that it makes “distinctive” jewelry, which it sells to wholesalers and retailers. The court was disturbed by the lack of detail here. But the complaint alleged that Primus bought pieces bearing Jewel’s mark, took photos of them, sent the photos to wholesalers and retailers—including Jewel’s customers—and claimed that it had made the pieces. These customers contacted Jewel and told it what Primus was doing. Jewel also submitted an affidavit adding some facts: Primus sent an email to QVC including pictures of Jewel merchandise, which it claimed to have produced, and offered to provide the jewelry on the cheap. QVC responded that it had already bought such items from another supplier, and Primus replied, “I know. That is precisely our point.” Primus further indicated that it had “long carefully studied and made product for [QVC's] existing vendors.” QVC declined, stating that it is “protective of [its] vendor community,” then contacted Jewel. The court noted that, even if it considered the facts in the affidavit, it would still have granted the motion (converted, in that case, into a motion for summary judgment).

First, Jewel didn’t plead copyright registrations. Jewel argued that its works weren’t US works and thus required no registration. But a US work means a work first published in the US or published simultaneously in the US and another country. Taking the facts in the complaint as true, Jewel published its works in the US. “To the extent the complaint contains any factual matter, it asserts that Jewel has its ‘principal place of business’ in New York.” Since Jewel sells to wholesalers and retailers, it’s publishing, and such sale occurs principally in New York. Bye-bye copyright claims.

Jewel’s unfair competition claim failed for other reasons. “The complaint fails to provide adequate factual detail concerning why Primus's actions would likely confuse consumers. What detail it provides, moreover, leads to the opposite conclusion.” The only allegations were that customers contacted Jewel to warn it, showing that they weren’t confused. This also defeated the fraudulent misrepresentation claim: Jewel didn’t allege that anyone justifiably relied on Primus’s representations. Likewise for the intentional interference with contractual relations. “Just as Primus confused no customers, it also convinced no one it could manufacture Jewel's styles.”

The tortious interference with prospective business relations and prima facie tort claims failed because Jewel didn’t plead that Primus acted solely from malice/disinterested malevolence, as opposed to a desire to turn a profit, and unlawful motive is an element of both torts.

Court dismisses claims, dodges 230 false advertising issue

Wang v. OCZ Technology Group, Inc., 2011 WL 4903190 (N.D. Cal.)

Wang brought a putative class action representing purchasers of OCZ Agility 2 and Vertex 2 solid state drives (SSDs), alleging misrepresentations as to their storage capacity and performance in violation of California common law and the CLRA.

Allegations: Storage capacity and performance are important to consumers. Before 2011, OCZ marketed a predecessor line of Agility 2 and Vertex 2 SSDs that, like the current generation, use a controller that interacts with the flash memory in such a way that one or more modules of memory are rendered inaccessible to the user. In marketing the predecessor line, OCZ took this reduction into account, consistent with industry standards. Thus, it advertised 60GB for a device with 64GB of raw capacity, with 4GB reserved to the controller. But, before releasing the next generation, OCZ changed the number and type of flash memory chips, resulting in substantially decreased performance and increased memory reserved to the controller. Thus, the capacity of the drive marketed as 60GB allegedly dropped to 55GB with an average 25% drop in performance. Contrary to the industry standard and OCZ’s past practice, OCZ deliberately failed to disclose these material changes in capacity and performance, and instead used the same ads and packaging, along with the same model number and specifications. Wang relied on the misleading ads and marketing materials when he bought a 120GB Agility 2.

OCZ, following the current trend, challenged Wang’s constitutional standing, which requires (1) injury-in-fact, (2) causation, and (3) redressability. Wang didn’t allege that he overpaid or how much he paid for the drive, and thus OCZ argued that his allegations of injury were too conclusory and speculative. Moreover, OCZ contended that Wang failed to allege that he didn’t receive the benefit of the bargain, because the marketing materials show that OCZ disclaimed potential variations in speed and actual capacity, so Wang got what he paid for.

The court disagreed: Wang alleged that he bought the Agility 2 in reliance on OCZ’s performance and capacity representations, and that he didn’t get full value. He also alleged that he paid more for the product than he would have if he’d possessed the truth, and that he and other class members wouldn’t have bought their SSDs if they’d been marketed truthfully. This was enough for the pleading stage. The precise dollar value of losses is not required at pleading, so long as the plaintiff alleges a tangible loss that can be proved or disproved upon discovery.

OCZ’s website disclaimers alerting consumers to potential discrepancies in capacity and variations in rated speeds “may ultimately discredit Wang's claims that OCZ's marketing materials misled him and that he did not receive the benefit of the bargain.” But not for pleading injury and reliance.

OCZ also argued that Wang didn’t have standing to sue for injunctive relief because there was no likelihood that he’d suffer future injury. On this the court agreed; even though OCZ maintains the same marketing materials and therefore (as alleged) continues to violate the false advertising laws, the harm to Wang has already occurred. The possibility that Wang would be unable to buy competitive products (because of a market for lemons problem) was too speculative to warrant injunctive relief. Comment: other courts have, in my opinion rightly, rejected this reasoning in consumer class actions—it means that no consumer plaintiff can represent an injunctive class, because the representative plaintiff by definition knows she’s been fooled and won’t get fooled again. There’s a good article to be written on the use of standing to contract the protection conferred by substantive laws.

The court also agreed with OCZ that 5 of 6 of the causes of action sounded in fraud and were thus subject to Rule 9(b)’s heightened pleading standard: false advertising under the FAL; unfair competition under the UCL; violations of the CLRA; negligent misrepresentation, and unjust enrichment. Wang relied on his allegations identifying (1) who: OCZ as the source of the alleged misrepresentations, (2) when: an approximate time period during which the alleged misrepresentations began, (3) what/where: the location and content of deceptive and misleading statements, including on product packaging, in the model numbers, and on OCZ's product webpages, and (4) how: the substance of the misrepresentations. He also submitted web screenshots and product packaging images as a representative sample of the misrepresentation claimed and its location.

The court found that this wasn’t enough. Wang failed to allege when he saw or relied on OCZ’s representations, and he didn’t specify which of the marketing materials on which he relied. Moreover, he failed to specify how his drive fell short of its advertised qualities—what was its actual capacity and performance speed? Reliance on one of the Pom Wonderful cases, where it was enough to submit a beverage label and the URL of the defendant’s marketing website, was insufficient, because that was one company suing another for false advertising “based on the effect of the misrepresentation on consumers generally--a claim markedly different from that of an individual consumer who must plead his own exposure to and reliance upon the alleged misrepresentation.”

OCZ also argued that California law shouldn’t apply, because Wang is a Washington resident and the complaint didn’t allege where he bought his drive. The court agreed that it was reasonable to presume that the purchase, and thus the injury, occurred in Washington. But the place of injury isn’t solely determinative if OCZ’s alleged misrepresentations took place in California. For pleading purposes, Wang alleged enough to apply California law: he alleged that the misleading practices were "conceived, reviewed, approved or otherwise controlled from [OCZ's] headquarters in California." Moreover, he alleged that OCZ's executive offices are in California and that the company itself selects California law as its forum to address website-based complaints. “Taken as true for the purpose of a motion to dismiss, these allegations are more than sufficient to sustain Wang's California-based claims.”

OCZ also moved to strike two sets of allegations as immaterial. Such motions are generally disfavored. First, Wang alleged that OCZ’s website quoted third-party reviews and testimonials and linked directly to their sources. He alleged that these were based on the older versions of the drives and therefore false and misleading. OCZ urged the court to strike the allegations because any claims based on them would be barred by CDA §230. Wang responded that these allegations were material to his claims and that dismissal would be premature; in addition he contended precedent that the CDA is an affirmative defense, around which he was not required to plead.

The court found that whether OCZ was an interactive service and whether it reproduced content in a manner potentially subjecting it to liability raised factual questions that couldn’t be resolved on a motion to strike. “Material should not be stricken from the pleadings, particularly before discovery has afforded the parties the opportunity to determine the material's relevance to claims or defenses, if there is a possibility that it may have bearing on the litigation.” Seems to me that a motion to dismiss might have been more appropriate; too bad we didn’t get a ruling on this very interesting and important issue, which hasn’t been dealt with since the bad handling of the Subway v. Quiznos court.

Finally, OCZ moved to strike allegations about Vertex drives and all Agility models that Wang didn’t purchase, since he didn’t suffer any injury from them. Wang argued that his allegations added detail and context to his claim that OCZ uniformly designed, constructed, and advertised its SSD products in such as way as to mislead consumers. There is conflicting precedent about standing to proceed with claims about a product the class representative didn’t purchase (again, see the contraction of standing). A motion to strike is not the place to deal with class allegations; OCZ was relying on standing cases, not on whether the allegations were "redundant, immaterial, [or] impertinent." “Although Wang's inability to allege injury based on products that he did not purchase may ultimately subject those claims to proper dismissal pursuant to a Rule 12(b) motion or motion for summary judgment, inclusion of those products at the pleading stage and prior to a motion for class certification is not improper.”

Motion to dismiss granted with leave to amend.

New FTC complaint on marketing to youth

Complaint on Doritos' marketing to adolescent and other materials, including video, on this site dedicated to interactive marketing. HT Angela Campbell.

Private AG actions not subject to Concepcion rule on arbitration

Ferguson v. Corinthian Colleges, 2011 WL 4852339 (C.D. Cal.)

Plaintiffs Ferguson and Muñiz sued on behalf of two classes who enrolled in and/or attended class at one of Corinthian Colleges' academic institutions, Everest and Heald. They alleged that students believe that they will receive a quality education at an affordable price, “when, in fact, they pay some of the highest tuition rates in the country, incur crippling student loans, and graduate with a degree that never qualifies nor prepares them for any job placement other than low-wage, low-skill employment.” They brought a variety of California common-law and statutory claims.

Corinthian argued that arbitration of their claims was mandatory. Ferguson’s enrollment agreement stated:

By my signature, I acknowledge that I understand that both I and The School are irrevocably waiving rights to a trial by jury, and are selecting instead to submit any and all claims to the decision of an arbitrator instead of a court. I understand that the award of the arbitrator will be binding, and not merely advisory. … I agree that any dispute arising from my enrollment, no matter how described, pleaded or styled, shall be resolved by binding arbitration under the Federal Arbitration Act conducted by the American Arbitration Association ("AAA") under its Consumer Rules.

Terms of Arbitration
1. Both I and the School irrevocably agree that any dispute between us shall be submitted to Arbitration.
...
4. I agree not to combine or consolidate any Claims with those of other students, such as in a class or mass action.

Muñiz's enrollment agreements said:

Any dispute arising from enrollment at Heald College, no matter how described, pleaded or styled, shall be resolved by binding arbitration by a single, neutral arbitrator under the Federal Arbitration Act conducted by the American Arbitration Association ("AAA") at Davis, CA (student's city, state) under its Commercial Rules.... I acknowledge that I understand that both Heald College and I are waiving our rights to a trial by jury….
Both Student and the College irrevocably agree that any dispute between them shall be submitted to Arbitration.

Plaintiffs alleged fraudulent misrepresentation in inducements to enroll, including deception about federal financial aid, the true total cost of attending Corinthian’s programs, the value of its accreditations, and the employment prospects and career placement services plaintiffs could expect. Moreover, they alleged that if they knew that students attending Corinthian’s institutions defaulted on their student loans at alarming rates, they would not have enrolled in the first place.

Corinthian argued that these claims all fell squarely within the relevant arbitration agreements, which cover "any dispute arising from [my] enrollment ...." Plaintiffs responded that their claims centered around deceptive marketing practices and representations made to prospective students in order to induce their enrollment, well before plaintiffs signed their enrollment agreements.

The court began with the "liberal federal policy favoring arbitration," citing Concepción. Here, the language of the agreements was sufficiently broad to encompass the claims asserted in the complaints. A plaintiff's factual allegations need only "touch matters" covered by the contract containing the arbitration clause, with all doubts resolved in favor of arbitrability. While some of the claims, such as fraudulent inducement, rely, in part, on factual allegations occurring before plaintiffs signed the agreements, paid tuition, or attended their first class, enrollment, not just what happened before enrollment, is central to their claims. For example, plaintiffs alleged that enrollment advisors pressure students to enroll and direct that financial aid paperwork be completed so loans come due immediately, and that the advisors continue to make false statements about financial aid and career prospects after students are enrolled.

However, plaintiffs argued that arbitration clauses are “narrow,” and arbitration should be compelled only to disputes "relating to the interpretation and performance of the contract itself," quoting Tracer Research Corp. v. Nat'l Envtl. Servs. Co., 42 F.3d 1292, 1295 (9th Cir.1994). An arbitration clause using “arising out of” language should therefore cover only contract claims, in contrast to a clause covering disputes “arising from or relating to” the agreement. The Ninth Circuit recently reaffirmed this distinction, so that when a tort claim constitutes an independent wrong from any breach of the contract it doesn’t require contractual interpretation and isn’t arbitrable.

However, the relevant language here wasn’t limited to disputes arising under the agreement, instead using broader language such as "any dispute arising from my enrollment,” "any and all claims," "any dispute," "any dispute between us," and "any dispute between [the student and the School]," without reference to the agreements. Thus, each plaintiff’s claim had to go to individual arbitration, with the exception of certain claims.

Plaintiffs argued that they’d be unable to vindicate their statutory rights as private attorneys general if forced to arbitrate their UCL, FAL, and CLRA claims. They contended that the injunctive relief they sought on behalf of the general public (which hasn’t and couldn’t consented to arbitration) couldn’t be sent to arbitration. Corinthian argued that Concepción necessarily means that the FAA preempts California's rule exempting public injunctive relief claims from arbitration.

Nelson v. AT & T Mobility, LLC, No. C10-4802 TEH, 2011 WL 3651153 (N.D.Cal. Aug.18, 2011), accepted this reasoning. A state can’t require a procedure inconsistent with the FAA no matter how desirable that rule would be.

The court here disagreed. “The California Legislature's decision to allow citizens to bring injunctive relief claims under the CLRA, UCL and FAL on behalf of the public is not inconsistent with the FAA. Notwithstanding Concepción, the Supreme Court previously acknowledged that ‘not ... all controversies implicating statutory rights are suitable for arbitration’” (citing Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 627 (1985)). The California Supreme Court has held that "when the primary purpose and effect of a statutory remedy is not to compensate for an individual wrong but to prohibit and enjoin conduct injurious to the general public, i.e., when the plaintiff is acting authentically as a private attorney general, such a remedy may be inherently incompatible with arbitration." Individual plaintiffs don’t benefit from injunctive relief in consumer protection cases; the benefits accrue to the general public, making the CLRA plaintiff a bona fide private attorney general.

Though the capacity to withdraw statutory rights from the scope of arbitration agreements is generally a congressional prerogative, the Supreme Court has never held that a state legislature may not restrict a private arbitration agreement when it inherently conflicts with a public statutory purpose that transcends private interests. Moreover, the FAA’s legislative history doesn’t suggest any contemplation of suppressing private AG actions. While state law can’t prohibit outright the arbitration of a particular type of claim, some injunctive relief claims may not be arbitrable under this framework, which asks whether legal constraints external to the parties’ agreements foreclose arbitration of the claims. “Because Plaintiffs' injunctive relief claims seek to enforce a public right, there is an inherent conflict with sending these claims to an arbitrator.”

As the court explained,

Defendants have identified an easy source of credit in federal student loans, including Title IV federal financial aid as well as military tuition assistance programs such as the Post-9/11 GI Bill. Defendants exploit a vulnerable consumer population by encouraging students to borrow amounts they will never be able to pay back, let alone ever discharge in bankruptcy, ruining the students' financial future for life. Defendants are able to tap into this easy source of credit, realize significant profits, and pass all of the down-side credit risk on to the students. Not only are the students harmed, but since the loans are federally guaranteed, U.S. taxpayers subsidize this scheme at the expense of the students and for the benefit of Defendants' bottom line.… Legal constraints such as the inability of arbitrators to enter an injunction affecting nonparties, as well as the inability to oversee injunctive remedies designed to protect the public as a whole create an inherent conflict and make arbitration unsuitable in this case.

The rest of the claims were stayed pending arbitration, and the public injunctive relief claims proceeded.

competitor who benefited from false advertising can't sustain claim

Pom Wonderful LLC v. Ocean Spray Cranberries, Inc., 2011 WL 4852472 (C.D. Cal.)

Pom sued Ocean Spray for false advertising of its "100% Juice Cranberry and Pomegranate" juice, which is comprised largely of apple and grape juice. Ocean Spray counterclaimed that Pom falsely advertises that Pom's pomegranate juice has health-related benefits. Pom moved for summary judgment for failure to show injury.

Ocean Spray acknowledged it had no evidence of any impact on Ocean Spray’s sales or profits, and stated that "there are so few dollars in real damages at stake" that Ocean Spray cannot quantify them. Still, in the absence of actual damages, a court can permit monetary relief based on the totality of the circumstances. However, that didn’t help Ocean Spray, which apparently benefited from Pom’s allegedly deceptive conduct. Ocean Spray’s COO testified that strong sales of Ocean Spray's pomegranate-flavored product were attributable, at least in part, to the popularity of pomegranate juice resulting from Pom's advertising. An award of profits with no proof of harm is an uncommon remedy in a false advertising suit not involving false comparative advertising, and there was no reason to award it here. Ocean Spray argued that this was a comparative advertising case, but the court disagreed. Though Pom compared its products to other drinks, including red wine, green tea, blueberry juice and cranberry juice cocktail, and though Ocean Spray argued that cranberry juice was its primary product and was readily associated with Ocean Spray, “Pom's reference to a generic product or class of products does not exhibit the specificity required of a comparative advertisement.”

Pom’s "Pomegranate Truth" features images of three non-Pom beverages, including Ocean Spray's Juice. Below each, the website lists each product's respective ingredients. But Ocean Spray didn’t show that any of the statements on this website were false or misleading. Had Pom made a false comparative statement about Ocean Spray, the image would likely be sufficiently specific to constitute a comparative advertisement. But those weren’t the facts.

The injunctive relief claim also failed because Ocean Spray couldn’t show even a likelihood of injury from Pom’s allegedly false statements.

Teleseminar on surveys in Lanham Act cases

I moderated an excellent presentation and discussion last week, following up on the Havana Club case. The audio file is now available.

Patent infringement as advertising injury

Dish Network Corp. v. Arch Specialty Ins. Co., --- F.3d ----, 2011 WL 4908108 (10th Cir.)

Dish got sued for patent infringement and its insurers refused to defend on the grounds that the underlying complaint didn’t allege advertising injury. The district court agreed with the insurers, and the court of appeals reversed.

The 23 patents in suit were allegedly infringed when Dish used “automated telephone systems, including without limitation the DISH Network customer service telephone system, that allow [Dish's] customers to perform pay-per-view ordering and customer service functions over the telephone.” Each patent outlined numerous possible applications; at least six of the claims Dish may have infringed explicitly mention advertising or product promotion.

Dish was insured by five insurers, each promising coverage for “advertising injury.” Most of the policies defined advertising injury as injury arising out of:
1. Oral or written publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services;
2. Oral or written publication of material that violates a person's right to privacy;
3. Misappropriation of advertising ideas or style of doing business; or
4. Infringement of copyright, title or slogan.
The National Union policy spoke of injury arising “solely” out of those types of offenses, and the Arch policy referred in relevant part to “[t]he use of another's advertising idea in your 'advertisement.'” Arch’s policy also excluded "any claim ... [a]rising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights," but the exclusion "does not apply to infringement, in [the insured's] 'advertisement,' of copyright, trade dress or slogan."

The district court ruled that the complained-of conduct was not “misappropriation of an advertising idea” because the complaint didn’t allege that the patented technologies were themselves incorporated as an element of Dish’s communications with consumers.

The court of appeals first held that patent infringement can be “advertising injury” in appropriate circumstances. It then found that the underlying complaint could be read to allege "misappropriation of advertising ideas or style of doing business" and that such misappropriation could be causally linked to the injury of which the underlying plaintiff complains.

Under Colorado law, courts compare the allegations of the underlying complaint with the terms of the applicable policy. There’s a duty to defend when the underlying complaint alleges any facts or claims that might fall within the ambit of the policy. “Any ambiguity in a policy must be construed against the insurer and in favor of coverage.” While numerous cases categorically rule out advertising injury coverage for patent infringement, many of them focus on the policy terms "misappropriation of style of doing business" or "infringement of title." Those cases are mostly distinguishable from the facts: they dealt with “products the insured happened to advertise, rather than a means of advertising that the insured used to market its own products.” Several courts have held that “where an advertising technique itself is patented, its infringement may constitute advertising injury.”

Dish’s policies don’t expressly cover patents, though they specifically list certain other intellectual property offenses. Other courts have accepted the argument that silence means exclusion. But the court here found that "misappropriation of advertising ideas," in context, was ambiguous and had to be construed in favor of coverage. The language is unambiguous with respect to patent claims about the product/service being sold, but ambiguous where the advertising idea misappropriated happens to be a patented technology. Faced with conflicting authority, the court of appeals concluded that an ordinary person wouldn’t reasonably expect the words "misappropriation of advertising ideas" to exclude coverage for a suit alleging the misappropriation of a patented advertising idea, “even if the word ‘patent’ appears nowhere in the policy.” “To rule otherwise would risk ‘ignoring the real contours of intellectual property litigation, which often proceeds under a bewildering variety of different labels covering the same material facts’” (quoting Frog, Switch & Mfg. Co. v. Travelers Ins. Co., 193 F.3d 742, 747 (3d Cir. 1999)). “Moreover, to categorically exclude patent coverage merely because a policy enumerates other intellectual property violations would conflict with the principle, well established in Colorado, that exclusions are strictly construed against the insurer and ‘must be written in clear and specific language.’” Further, the IP exclusion in Arch’s policy demonstrated that other insurers could have used more precise language if they’d wanted.

The underlying complaint’s allegations couldn’t reasonably be read to allege misappropriation of a style of doing business, but it could potentially allege misappropriation of advertising ideas. Except for the Arch policy, which the parties didn’t discuss separately, the policies didn’t define “advertising.” The insurers argued that advertising means widespread distribution of promotional materials to the public at large. But under any definition offered, the underlying complaint can be read to potentially allege the misappropriation of advertising ideas, since some of the patents explicitly claim the capacity for advertising. The underlying complaint provided insufficient insight into what "pay-per-view ordering and customer service functions" entailed. “We cannot rule out the possibility that these activities involve not only the passive acceptance of sales requests, but also the active promotion of products through the dissemination of information, such as pricing and programming options. [The patents] conceivably allow Dish not only to sell the product a consumer calls up to purchase, but also to make up-sell offers tailored to the specific caller.” This was enough to constitute advertising. Since there was potential coverage, the duty to defend could be triggered even if there might ultimately be no duty to indemnify.

The court of appeals disagreed with the district court’s reasoning that Dish couldn’t have misappropriated advertising ideas because it didn’t incorporate patented technologies as a substantive element of its communications and interactions with customers. Instead, it was sufficient that Dish allegedly misappropriated "a means of conveying content to and tailoring its interactions with its customers." The form, not the substance, of the ads was key.

Further, the court of appeals rejected the insurers’ argument that any promotion Dish engaged in must be excluded from coverage as "one-on-one solicitation" simply because a telephone conversation is a two-party interaction. Though the transaction may be customized, the feature was intended for use by the public at large. “[A]dvertisements do not become solicitation simply because they are not viewed by a multitude of potential customers simultaneously. Indeed, even a billboard advertisement on a public road may promote a product to only one driver at a time if traffic is light. It is the availability of an advertisement to the general public, as opposed to the number of people on the phone line at a given moment, that we consider dispositive.”

However, Dish didn’t misappropriate a style of doing business because it wasn’t alleged to have copied the specific manner in which the patent holder operated its own business or to have copied any trade dress. The court of appeals declined to decide whether a patented process could be so comprehensive and detailed as to constitute a style of doing business even absent any actual past usage by, or identification with, a particular business; the allegations here didn’t rise to that level, since they were only about certain patented technologies used as part of a business.

The next question was whether the complained-of injury arose in the course of advertising, as the policy language requires. Courts have split on causation: one line of cases finds causation if the alleged advertising activities alone would be actionable. The insurers, though, argued that the proper test was whether the injury could have arisen in the absence of advertising.

The court of appeals started with a determination of what the alleged injury actually is and where it arose. The insurers argued that the injury was inflicted by Dish's development of infringing technology, and "[t]he infringement was complete as soon as Dish developed the telephone system with advertising capabilities--before any customer actually heard the system's recorded material." “If true, this would be a strong argument against the existence of any causal connection ….” But there was no record evidence or case in support of the insurers’ argument, and the underlying complaint apparently contradicted it by alleging ongoing harm from the use of the patented technologies. Even if Dish had used the telephone systems only for advertising, the patentee could still have alleged infringement of some of the patent claims at issue. Thus, the advertising alone was potentially actionable. To the extent that cases decided under other states’ laws hold that there’s no coverage if harm could have occurred without advertising, they conflicted with Colorado’s rule that a duty to defend arises wherever the complaint even potentially alleges conduct within the policy language. Moreover, the insurers’ argument would seem to require that advertising be the sole cause of the injury, but only National Union used “solely” in its policy. “To impose a duty to defend under the other policies only if advertising alone, and nothing else, caused injury would give the other four insurers the benefit of a ‘more rigorous’ causation standard than they bargained for. Colorado law does not allow us to alter the parties' contracts in this way.”

Thus, the court of appeals reversed and remanded to deal with unresolved issues, including those relating to language variances in the Arch and National Union policies.

Never bring an injunction to a knife fight: eBay blocks injunctive relief

Leatherman Tool Group, Inc. v. Coast Cutlery Co., 2011 WL 4832566 (D. Or.)

Leatherman sued for a preliminary injunction based on the Lanham Act and common law unfair competition to (1) forbid its competitor Coast from falsely stating that its knives are made from 440C steel; (2) forbid Coast from falsely stating that its knives are hardened to between 57 and 59 HRC; (3) enjoin Coast from falsely stating that each of its knives is individually hardness tested; and (4) order Coast to send corrective notices to retailers and customers. Unfortunately, Leatherman failed to show irreparable harm.

Coast advertised some of its products as being constructed of 440C steel and having a hardness of 57 to 59 on the Rockwell C scale, a measure of "hardness" that is abbreviated "HRC." One example from Coast's 2011 product catalog: "COAST knives & tools use only the finest quality 440C specially treated cutlery steel from Seki, Japan. An excellent steel for performance and durability, 440C is a high-chromium stainless steel with a terrific balance between hardness and corrosion resistance. COAST steel is produced in small quantities exclusively for the production of knife blades."

Leatherman had 61 different types of Coast knives independently tested for the type of steel and hardness of the blade. None of the tested knives were made of 440C steel, and only two had a hardness of 57 to 59 HRC. Coast’s expert didn’t dispute the testing procedures, and his analysis of test results from another lab confirmed Leatherman’s findings. Also, in November 2010, Coast learned that its factory in China was using 420 stainless steel instead of the purported 440C steel. “In June 2011, after this lawsuit had been filed, Coast issued a press release to employees and sales representatives admitting that most of its products are made with 420J2 steel.”

Coast took other corrective actions, which Leatherman found insufficient. Coast claimed to remove all references to 440C steel in its catalogs, product packaging, and marketing materials and to have printed new materials. Coast advertises that its products are "now made with 420 stainless cutlery steel," though “now” is not exactly true—they were made with 420 stainless before as well. In June 2011, Coast sent a message to its e-retailers: “Due to some recently discovered sourcing issues in connection with the production of some of our knives and multi-tools, we suggest you review your website descriptions of all COAST Knives and Multi-Tools and make the following change. Where you currently use the term 440C stainless steel to describe any of our knives or multi-tools, please change that description to read ‘400 series stainless steel.’” Only eight out of 41 e-retailers have made this change.

The court found that Coast’s corrective actions were indirect admissions of literally false statements in commercial advertising. Literally false statements are presumed likely to deceive. Coast argued that its online survey of 400 consumers who had purchased a sport/outdoor knife or a multi-purpose tool in the past two years and were somewhat likely to purchase another one in the next 12 months rebutted the presumption, but the court found this survey unhelpful because the survey participants were never presented with the false statements.

Materiality: There was insufficient evidence that the 440C steel and individual testing claims were made intentionally, and thus the court declined to presume materiality. Nor did the declaration of Leatherman’s VP help; he stated that type of steel is one of the most important factors in a purchasing decision, but did not explain the basis of this opinion. (Really? This seems self-evident to me: type of steel affects durability and sharpness, and maybe I as consumer don’t know the details but I can get that far.) There was some evidence of materiality, such as a consumer who reviewed the Coast knife this way: "I just bought this exact same knife from a department store. I was impressed that it was so cheap for a knife that has a blade made from 440C stainless steel." Further, Coast’s president hoped to achieve this result: in his deposition, he stated that he used these false statements “because he thought they would be important to the consumer and would distinguish Coast's products from competitors.”

Coast’s survey also went to materiality. “Respondents were asked the open-ended question of which features or consideration were most important when purchasing a knife or multi-tool. The majority of respondents gave answers that related to the material or quality of the product. The type of steel and the hardness of the blades are directly related to the material and quality of a product. The survey also shows that 17% of respondents said that a particular type of steel ‘greatly influences’ the purchasing decision.” Coast argued that the statements weren’t material because consumers couldn’t recognize what 440C or the hardness scale specifically meant. The court disagreed. “Simply because consumers were unable to recognize the 440C descriptor does not mean they would not be influenced by the perception of a superior product. Coast's false claim of 440C steel leads consumers to believe that they are purchasing a better product for a similar price.” So the survey reinforced “common sense” and Leatherman established materiality.

Leatherman argued that it was entitled to a presumption of irreparable harm on showing a tendency to deceive. Coast responded that eBay negated any such presumption or categorical rule for irreparable harm. The court concluded that presumptions of irreparable harm are no longer allowed. (Can we tell that to courts deciding trademark cases?) Leatherman’s VP declared that consumers "will be diverted to Coast's falsely advertised 440C knives" and that this diversion "erodes Leatherman's overall market share." The court found this insufficient. It was unclear whether the lost sales were to Leatherman or to others. Demonstrating diverted sales would be difficult, but not impossible; the record was inadequate on irreparable harm.

Leatherman argued that there was no equitable or public interest in allowing false advertising. Coast responded that it would suffer reputational harm if required to send a second corrective notice. The court noted that the first notice was ineffective, since most e-retailers ignored it, and the notice wasn’t sent to any of Coast’s 10,000 retail outlets. Moreover, the court found it “ironic that Coast is concerned about the effect that a second corrective notice might have on its reputation. It seems Coast was not concerned about its reputation when it blindly made assertions as to the quality of its products. Coast relied on the word of its Chinese trading company, despite having had product quality issues in the past.” Coast knew about the falsity in November 2010, but took no action until Leatherman sued, and the 2011 catalog contains the false statements. “Coast seems content to continue to reap the benefits of these false statements. The balance of the equities favors Leatherman, not Coast.”

Thus, while signalling that Leatherman has a good chance of winning, quite possibly even on summary judgment, the court denied a preliminary injunction for lack of irreparable harm. Both parties now have reason to settle, which might well be the court’s fervent wish.

Secondary/agency liability claims against Postal Service fail

RPost Holdings, Inc. v. Trustifi Corp., 2011 WL 4802372 (C.D. Cal.)

RPost provides an email service allowing senders to “electronically sign, encrypt, contract, record, and diagnose message transmission metadata, prove the contents of an email message, and authenticate message metadata to reconstruct a validated original email message with all attachments.” Its proof of delivery product is “Registered Email.” (The opinion contained the ® symbol, but all I saw in TESS was a July 2011 application from someone who didn’t, on my admittedly casual inspection, appear to be the plaintiff.)

Anyway, RPost sued for violation of the Lanham Act and California’s FAL/UCL by defendants Trustifi, Authentidate, and the United States Postal Service. Trustifi sells an email authenticaiton service called Trustifi Postmarked Email, which it advertises allows users to prove when emails were sent, delivered, and received, such that it can be used to replace USPS Certified Mail and other similar services offered by private couriers. RPost, however, alleged that Trustifi can’t prove that an email was delivered to or received by the intended recipient. In a related patent infirngement suit, Trustifi asserted that its service only proves that a sender sent an email, not that a recipient received or read it. RPost further alleged that USPS authorized Authentidate to provide USPS’s Electronic Postmark (EPM), which provides proof of when an email was sent. Trustifi licenses EPM from Authentidate. Thus, RPost alleged, when Trustifi made its false statements, it was acting as the agent of the other two defendants in a “formal strategic alliance” in which USPS designated Trustifi as an authorized EPM provider. RPost also alleged that Trustifi had apparent authority to make false statements about its email verification services.

USPS argued that the Lanham Act claim should be dismissed because the agency allegations had to be pleaded with particularity and weren’t, and that the government can’t be held liable based on apparent authority. Several district courts have held that Lanham Act false advertising claims must be pleaded with particularity (and not Lanham Act trademark claims? Why the discrimination? Either both sound in fraud, or neither do, see the substantively identical operative language). Anyway, the Ninth Circuit has applied Rule 9(b) to other kinds of false advertising claims, so the court decided to do so here.

RPost didn’t allege false representations by USPS, merely that Trustifi was an agent because it had formed a strategic alliance with USPS. This was based on the fact that Trustifi advertised USPS’s EPM product on its website. But alleging agency was a legal conclusion, and RPost didn’t allege facts to support its false advertising agency theory or plead this theory with particularity.

RPost argued that Rule 9 didn’t apply to agency allegations, but Rule 9 is designed to give fair notice of fraud-based claims to a defendant. “Regardless of what theory Plaintiff uses to implicate USPS, because Rule 9(b) applies to the underlying claim, Plaintiff must plead all facts necessary to support the claim with particularity, including facts explaining USPS's role as a principal in the deception.” The strategic alliance allegation was insufficent; RPost didn’t explain what being an authorized EPM provider had to do with Trustifi's false statements, nor did it allege any of the elements of an agency relationship. The claim against USPS was dismissed without prejudice.

Apparent authority was no help either. Even assuming the theory worked, which was “doubtful,” RPost didn’t allege any facts in support: it didn’t explain how USPS caused third parites to believe that USPS authorized Trustifi to engage in false and misleading statements. (Shouldn’t that be “authorized Trustifi to make statements touting its products?)

The California law claims also failed, not just because of the 9(b) issues. It was unclear whehter RPost was required to exhaust administrative remedies under the FTCAin order to bring its FAL and UCL claims. A party may not maintain a tort claim under the FTCA until it first presents the claim to the appropriate federal agency. The court wasn’t convinced that UCL and FAL claims were tort claims. Some cases distinguish UCL claims from torts, while others call them statutory torts. The court didn’t resolve the issue, because other issues were fatal.

In Emery v. Visa Int'l Serv. Ass'n, 116 Cal. Rptr. 2d 25 (App. 2002), the court held that “[a] defendant's liability must be based on his personal participation in the unlawful practices and unbridled control over the practices that are found to violate sections 17200 or 17500” and that "there can be no civil liability for unfair practices" where the defendant "played no part in preparing or sending any 'statement' that might be construed as untrue or misleading under the unfair business practices statutes." It was Trustifi who made the allegedly false statements, not USPS. Thus, there was no vicarious liability under California law.

What, no Rosa Parks?

Here's a mix of songs named for actors. How about those 43(a) and right of publicity claims? And of course there's always Our Lawyer Made Us Change The Name Of This Song So We Wouldn't Get Sued.

Reading list: After class

Myriam Gilles & Gary Friedman, After Class: Aggregate Litigation in the Wake of AT&T Mobility v. Concepcion, 79 U. Chi. L. Rev. __ (forthcoming 2012): This excellent article looks at numerous restraints imposed on consumer class actions by various developments, including the “coup de grace” of AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011). What is to be done? The authors recommend outsourcing AGs’ consumer enforcement powers to private attorneys, with appropriate limits on maximum fees and scrutiny to avoid “pay-to-play” arrangements.