K & N Engineering, Inc. v. Spectre Performance, 2011 WL 6133258 (C.D. Cal.)
Previous coverage of the denial of summary judgment on Spectre's counterclaims. Hey look, sometimes a trial does what it's supposed to and reveals more facts!
The parties’ false advertising claims under state and federal law were tried simultaneously to the court and a jury. The jury returned a special verdict in favor of plaintiff K&N both on its affirmative claims and on the counterclaims raised by Spectre.
The parties compete in the market for automotive air intake products, including air filters and intake systems, which replace the entire factory-installed air path to the engine and include an air filter. These filters and systems “are designed to reduce the restriction on the amount of air flowing into a vehicle's engine caused by the stock air filter and intake, and thereby potentially increasing the vehicle's engine power.” Air intake systems aren’t highway-legal in California unless the the California Air Resources Board (“CARB”) has issued an Executive Order for a particular application (model, make, year, and engine size). Many systems fit more than one application. Sellers of systems for applications as to which there is no Executive Order are required to include a disclaimer with every California ad, making clear that the systems are not legal for highway use in California.
Without getting into the details, K&N challenged Spectre’s fuel economy claims; filtration claims; performance (horsepower and air flow) claims; and claims relating to the pollution control legality of Spectre intake systems.
Spectre claimed that using its filter “Saves Gas,” and some packaging stated “Government studies show that an efficient air filter can give you up to 10% better fuel economy, which translates to money in your pocket.” These statements, based on government websites, were both false. Since 2009, the Department of Energy has stated, “NEW INFORMATION: Replacing a Clogged Air Filter on Modern Cars Improves Performance but Not MPG. A new study shows that replacing a clogged air filter on cars with fuel-injected, computer-controlled gasoline engines does not improve fuel economy but it can improve acceleration time by around 6 to 11 percent. This kind of engine is prevalent on most gasoline cars manufactured from the early 1980s onward.” The website continued that replacing a clogged filter on an older care with a carburated engine might improve fuel economy 2-6% under normal conditions, or 14% if the car was so severely affected that it was almost undrivable.
The court noted that the “saves gas” claims didn’t compare its filters with clogged filters at the end of their useful lives. Instead, they stated that using an “efficient” filter such as Spectre’s would improve fuel economy, and that was false. Moreover, almost all of the filters with the “saves gas” claim were intended for use on cars manufactured from the early 1980s onward with fuel-injected, computer-controlled engines—“the cars for which the government study shows that replacing even clogged air filters will not increase fuel economy.”
Likewise, testing-based claims that “[a]ll Speed By Spectre hpR filters are tested at independent labs using ISO 5011 standards, and have been proven to filter 99.6% of particles” were false. This was based on a single test of a single filter, and it wasn’t a filter from a production run. It was extensively hand-oiled: “the tested filter contained approximately 41ml of oil, whereas Spectre's production filters indicated only 30ml of oil was required.” Practice tip: Don’t jigger your tests! Spectre didn’t commission any ISO 5011 tests on any production filters, and, since the filtration efficiency of a filter is affected by a large number of characteristics, there was no basis on which to conclude that any of the filters it sold would have the same efficiency as the sample filter that was tested. K&N’s own tests by the same independent lab, in which it told the lab to choose the parameters the lab believed appropriate, showed filtration efficiencies of 93.96%, 94.85%, and 97.44%; one filter couldn’t be tested because it stopped functioning.
Likewise, the packaging for Spectre’s PowerAdder line of products included a chart labeled “Filter Particle Retention” claiming that the Spectre PowerAdder filter trapped a higher percentage of particles of various sizes than “Brand K” air filters. Trial evidence proved that “Brand K” was a K&N filter, but Spectre had test results showing that Spectre filters performed materially worse.
Spectre’s performance claims to improve horsepower and air flow were also false. There was no evidence that replacing a stock air filter with a Spectre air filter would materially increase horsepower or torque, or show the substantial increases in peak horsepower and torque depicted on Spectre’s graphs on its packaging. The graphs were not supported by tests. Spectre’s horsepower ratings weren’t derived from tests corresponding to actual conditions; the airflow and pressure numbers it used in its extrapolations wouldn’t occur in a car, and even then it rounded up to obtain a “marketing” rating. Spectre had no data indicating that its filters would actually work in those conditions, and the court found that the air intake systems, as installed, were incapable of effectively allowing the claimed performance. Moreover, internal emails showed that Spectre understood that its ratings were marketing tools bearing no relationship to actual achievable horsepower.
Spectre’s catalog, now taken down from its website, even admitted the lack of real-world applicability of its ratings. It said: “The CFM and Horsepower ratings are what the filter will support in a naturally aspirated engine with no measurable loss due to restriction. This is important to know if the vehicle has been modified for increased performance as it tells you how much power the filter will support. These filters are rated at a much higher number than the requirements of the engine. Like speed ratings on a tire, it's always better to have more.”
This statement was insufficient as a disclaimer to correct the falsity. The court noted that “(1) the ratings are prominently featured on the packaging for Spectre products without such disclaimer; (2) the disclaimer appeared on a single page of Spectre's catalog separated by several pages from the portions of the catalogs that state the ‘ratings’ for specific air intake systems and air filters; and (3) the catalog was removed from Spectre's web site by October 26, 2009, while the ratings have remained on the packaging.”
As for the legality of Spectre systems, Spectre had three CARB Executive Orders allowing highway use in California of certain air intake systems for specific models of vehicles. However, Spectre sold systems in California that weren’t covered by an Executive Order without limiting them to non-highway use. The Executive Orders specifically provided that “No claim of any kind, such as ‘Approved by the Air Resources Board,’ may be made with respect to the action taken herein in any advertising or other oral or written communication.” Spectre nevertheless stated on its packaging, advertising and marketing in California that its systems covered by Executive Orders were “CARB–Approved.” It also advertised “C.A.R.B. Approval Pending” for a number of systems months before it applied for an Executive Order covering those air intake systems. But parts sold before the CARB issues an Executive Order covering them are not legal for highway use in California, either before or after the Executive Order issues.
The court concluded that Spectre made sales as a result of its false advertising, and the jury found that K&N suffered injury from the false advertising.
Legally, the case is notable because, as the court pointed out, though the California Section 17200 and 17500 claims were largely duplicative of the Lanham Act claim tried to the jury, there were two important differences. First, because Section 17200 covers unlawful business acts or practices even without false advertising, the court could deal with Spectre’s violation of CARB regulations by enjoining it from selling air intake systems not subject to an Executive Order without providing the required disclaimer or advertising its air intake systems as “CARB Approved,” regardless of whether such conduct is actionable under the Lanham Act. Second, Section 17500 allows an injunction against misleading conduct even without proof of actual deception or confusion, avoiding the Lanham Act’s explicit/implicit divide.
The court, like the jury, found in favor of K&N both on the claims and the counterclaims; Spectre challenged ads by AutoAnything.com, but the court found that California law doesn’t authorize claims for vicarious liability based upon the failure to control another party's advertisements.
Finally, based on the “overwhelming evidence” of Spectre’s “repeated, deliberate, and willful use of false statements and matter in its advertising,” the court found that this was an exceptional case. Time for a fee award! (It’s not clear from the published opinion what’s going on with damages.)
Thursday, December 15, 2011
Claims of international scope count as "designation of origin"
Benihana of Tokyo, Inc. v. Benihana, Inc., --- F.Supp.2d ----, 2011 WL 6187098 (D. Del.)
Plaintiff Benihana of Tokyo (BOT) sued defendants (for convenience, Benihana) for breach of contract, false designation of origin, trademark infringement, and conversion. An earlier agreement transferred BOT’s trademarks in the US, Central America, South America, and the Caribbean islands to Benihana, while BOT owned the marks outside that territory. The parties agreed not to use the marks to reduce their value or usefulness to the other party. In 2010, though, Benihana applied for a WIPO international registration seeking protection in Iceland, Iran, Monaco, Singapore, Ukraine, Vietnam and Zambia, as well as Cuba. BOT sued for breach of the agreement; Benihana then renounced the registration except for as to Cuba.
BOT’s claims focused on three acts: (1) seeking registration of the BENIHANA trademark in the disputed countries, particularly with respect to Singapore and Vietnam where plaintiff had obtained prior registration; (2) purporting to be BOT or to be authorized by BOT in seeking the registration; and (3) falsely advertising that defendants have “[l]ocations throughout the United States, Latin America and the Caribbean.” BOT claimed trademark infringement based on Singaporean and Vietnamese trademark law.
The court refused to dismiss BOT’s conversion claim. Under the applicable law, Florida’s, a conversion claim can cover wrongful taking of intangible assets in a business venture.
The false designation of origin claim was predicated on Benihana’s allegedly deliberate use of plaintiff's name in applying for the registration. However, defendants showed as a matter of law that the “Benihana of Tokyo” reference was an error on the part of the USPTO and not the result of defendants’ intentional action, and thus the court granted the motion to dismiss. (That seems right, though it’s an interesting question what would have happened if there had been an intentionally deceptive act—yes, it’s a use in commerce, and yes, it’s probably likely to cause confusion, but this still doesn’t seem like the conduct that 43(a) of the Lanham Act is supposed to cover; it would be more like fraud on the PTO.)
False advertising: BOT alleged that, “In marketing [their] services, defendants advertise that they have ‘locations throughout the United States, Latin America and the Caribbean,” and that this was a false designation of origin because BOT owns the rights in Mexico. Defendants argued that this was a false advertising claim, and that BOT failed to plead that the misrepresentation involved an inherent or material quality of the product. However, BOT argued that “defendants' paraphrasing of the statutory provision relating to materiality omitted ‘geographic origin of his or her or another person's goods, services, or commercial activities.’”
BOT alleged literal falsity since defendants are precluded from operating in a large portion of Latin America. BOT also argued that geographic origin was material to the services offered. (I’m not sure that “geographic origin” extends as far as “licensed to operate in X”—unless it was offering franchise opportunities, it doesn’t really seem like Benihana was claiming to deliver services that originated in Latin America.) The court ruled that, on the pleadings, BOT sufficiently alleged a false advertising claim.
The court, however, declined to exercise its supplemental jurisdiction over BOT’s trademark claims under foreign laws based on the threat that Benihana might open restaurants in Singapore and Vietnam. “[I]nternational treaty obligations, comity, judicial economy, and other exceptional circumstances” justified this exercise of discretion.
Plaintiff Benihana of Tokyo (BOT) sued defendants (for convenience, Benihana) for breach of contract, false designation of origin, trademark infringement, and conversion. An earlier agreement transferred BOT’s trademarks in the US, Central America, South America, and the Caribbean islands to Benihana, while BOT owned the marks outside that territory. The parties agreed not to use the marks to reduce their value or usefulness to the other party. In 2010, though, Benihana applied for a WIPO international registration seeking protection in Iceland, Iran, Monaco, Singapore, Ukraine, Vietnam and Zambia, as well as Cuba. BOT sued for breach of the agreement; Benihana then renounced the registration except for as to Cuba.
BOT’s claims focused on three acts: (1) seeking registration of the BENIHANA trademark in the disputed countries, particularly with respect to Singapore and Vietnam where plaintiff had obtained prior registration; (2) purporting to be BOT or to be authorized by BOT in seeking the registration; and (3) falsely advertising that defendants have “[l]ocations throughout the United States, Latin America and the Caribbean.” BOT claimed trademark infringement based on Singaporean and Vietnamese trademark law.
The court refused to dismiss BOT’s conversion claim. Under the applicable law, Florida’s, a conversion claim can cover wrongful taking of intangible assets in a business venture.
The false designation of origin claim was predicated on Benihana’s allegedly deliberate use of plaintiff's name in applying for the registration. However, defendants showed as a matter of law that the “Benihana of Tokyo” reference was an error on the part of the USPTO and not the result of defendants’ intentional action, and thus the court granted the motion to dismiss. (That seems right, though it’s an interesting question what would have happened if there had been an intentionally deceptive act—yes, it’s a use in commerce, and yes, it’s probably likely to cause confusion, but this still doesn’t seem like the conduct that 43(a) of the Lanham Act is supposed to cover; it would be more like fraud on the PTO.)
False advertising: BOT alleged that, “In marketing [their] services, defendants advertise that they have ‘locations throughout the United States, Latin America and the Caribbean,” and that this was a false designation of origin because BOT owns the rights in Mexico. Defendants argued that this was a false advertising claim, and that BOT failed to plead that the misrepresentation involved an inherent or material quality of the product. However, BOT argued that “defendants' paraphrasing of the statutory provision relating to materiality omitted ‘geographic origin of his or her or another person's goods, services, or commercial activities.’”
BOT alleged literal falsity since defendants are precluded from operating in a large portion of Latin America. BOT also argued that geographic origin was material to the services offered. (I’m not sure that “geographic origin” extends as far as “licensed to operate in X”—unless it was offering franchise opportunities, it doesn’t really seem like Benihana was claiming to deliver services that originated in Latin America.) The court ruled that, on the pleadings, BOT sufficiently alleged a false advertising claim.
The court, however, declined to exercise its supplemental jurisdiction over BOT’s trademark claims under foreign laws based on the threat that Benihana might open restaurants in Singapore and Vietnam. “[I]nternational treaty obligations, comity, judicial economy, and other exceptional circumstances” justified this exercise of discretion.
Tuesday, December 13, 2011
The bond Kevin Trudeau doesn't want you to know about
Federal Trade Commission v. Trudeau, --- F.3d ----, 2011 WL 5927435 (7th Cir.)
Some background. Kevin Trudeau violated a court-approved settlement with the FTC by misrepresenting the content of his book The Weight Loss Cure “They” Don't Want You to Know About. The district court held Trudeau in contempt and ordered him to pay $37.6 million to the FTC and banned him from making infomercials for three years. The Seventh Circuit affirmed the district court's finding of contempt but vacated the sanctions, holding that the district court needed to explain its calculation and how the resulting funds would be administered. The court of appeals further held that the infomercial ban was inappropriate as a civil sanction because it did not give Trudeau an opportunity to purge, that is, to comply with the underlying order not to misrepresent his publications.
On remand, the court reinstated the fine, explaining that it reached that figure by multiplying the price of the book by the 800-number orders, plus the cost of shipping, less returns. The court instructed the FTC to distribute the funds to those who bought Trudeau's book using the 800–number; any remainder not paid to victims or used in administering the redress would be returned to Trudeau. The district court imposed a $2 million performance bond, effective for at least five years.
Trudeau again appealed, arguing that the sanction was improperly based on consumer loss rather than on his gain and that the bond violated the First Amendment. The court of appeals this time affirmed. The original consent order was too weak to protect consumers from deception; Trudeau aired violative infomercials at least 32,000 times. “He should not now be surprised that he must pay for the loss he caused.”
The court considered the $37.6 million fine a conservative measure of consumer loss, since it only considered sales from the 800 number, not sales in bookstores carrying his “As Seen on TV” titles, even though the conspicuous “As Seen on TV” sticker on those books made the link between those sales and the infomercial “less than speculative.” Moreover, the figure was reliable; Trudeau himself used that figure.
It was acceptable to measure the fine by consumer loss. That’s what remedial sanctions are for, and it was within the district court’s discretion to determine that, “unless the remedial sanction was measured by consumer loss, the victims of Trudeau's contempt would not receive full relief for their actual loss. This conclusion is informed—but not limited—by the remedies available in the underlying FTC action.” The consent agreement was aimed at protecting consumers from misrepresentations that caused them economic injury. “When that agreement was breached flagrantly and repeatedly, the district court chose a remedial sanction that might come close to putting Trudeau's victims in the same position they would have been had Trudeau not misrepresented his books in infomercials in violation of the agreement.”
FTC v. Verity Int'l, Ltd., 443 F.3d 48 (2d Cir. 2006), which was not a contempt case, created a narrow “middleman” exception to the usual rule that consumer loss may be the proper measurement of damages, where the defendants only received their cuts after other parties had taken some money out of the stream. Trudeau argued that he was compensated only indirectly for sales of his books. But this was a completely different situation:
Moreover, the bond requirement did not violate the First Amendment. The only argument meriting discussion was whether Trudeau’s right to engage in commercial speech was violated by a requirement that he post a bond before participating in any infomercial, misleading or not. As applied to misleading commercial speech, “there is no possible First Amendment violation, of course, because misleading commercial speech gets no constitutional protection.” But the bond requirement was subject to intermediate scrutiny as a general restriction on commercial speech.
The FTC had the burden to show that (1) there was a substantial interest supporting the restriction, (2) the restriction directly advanced that substantial interest, and (3) the restriction was narrowly drawn. The first two requirements were obviously met: consumer protection is a substantial interest, and the performance bond directly advanced consumer protection by making it more likely that consumers would be compensated for future violations and less likely that there would be future violations via deterrence. As for tailoring, it was not a problem either. A restriction on commercial speech must not be more extensive than necessary, but a least-restrictive-means analysis is not required. Instead, the scope of the restriction must be proportionate and carefully calculated to the interest served, and not impose an inordinate cost.
The court of appeals found that the performance bond satisfied this standard. First, the bond applied only to infomercials, not books or any print medium, nor even to TV or radio ads under 2 minutes. It targeted only the commercial speech that had caused such “tremendous” harm in the past. Second, the district court took seriously Trudeau’s claim that he couldn’t afford $2 million by allowing him to file an audited financial statement and prove as much at a hearing. Third, the bond was proportional to the amount of harm Trudeau caused in the past; if anything, it was low, given that for nearly a year the infomercial sold thousands of books each day.
Some background. Kevin Trudeau violated a court-approved settlement with the FTC by misrepresenting the content of his book The Weight Loss Cure “They” Don't Want You to Know About. The district court held Trudeau in contempt and ordered him to pay $37.6 million to the FTC and banned him from making infomercials for three years. The Seventh Circuit affirmed the district court's finding of contempt but vacated the sanctions, holding that the district court needed to explain its calculation and how the resulting funds would be administered. The court of appeals further held that the infomercial ban was inappropriate as a civil sanction because it did not give Trudeau an opportunity to purge, that is, to comply with the underlying order not to misrepresent his publications.
On remand, the court reinstated the fine, explaining that it reached that figure by multiplying the price of the book by the 800-number orders, plus the cost of shipping, less returns. The court instructed the FTC to distribute the funds to those who bought Trudeau's book using the 800–number; any remainder not paid to victims or used in administering the redress would be returned to Trudeau. The district court imposed a $2 million performance bond, effective for at least five years.
Trudeau again appealed, arguing that the sanction was improperly based on consumer loss rather than on his gain and that the bond violated the First Amendment. The court of appeals this time affirmed. The original consent order was too weak to protect consumers from deception; Trudeau aired violative infomercials at least 32,000 times. “He should not now be surprised that he must pay for the loss he caused.”
The court considered the $37.6 million fine a conservative measure of consumer loss, since it only considered sales from the 800 number, not sales in bookstores carrying his “As Seen on TV” titles, even though the conspicuous “As Seen on TV” sticker on those books made the link between those sales and the infomercial “less than speculative.” Moreover, the figure was reliable; Trudeau himself used that figure.
It was acceptable to measure the fine by consumer loss. That’s what remedial sanctions are for, and it was within the district court’s discretion to determine that, “unless the remedial sanction was measured by consumer loss, the victims of Trudeau's contempt would not receive full relief for their actual loss. This conclusion is informed—but not limited—by the remedies available in the underlying FTC action.” The consent agreement was aimed at protecting consumers from misrepresentations that caused them economic injury. “When that agreement was breached flagrantly and repeatedly, the district court chose a remedial sanction that might come close to putting Trudeau's victims in the same position they would have been had Trudeau not misrepresented his books in infomercials in violation of the agreement.”
FTC v. Verity Int'l, Ltd., 443 F.3d 48 (2d Cir. 2006), which was not a contempt case, created a narrow “middleman” exception to the usual rule that consumer loss may be the proper measurement of damages, where the defendants only received their cuts after other parties had taken some money out of the stream. Trudeau argued that he was compensated only indirectly for sales of his books. But this was a completely different situation:
Trudeau assigned his rights to payment from his company's assets to ITV Global in exchange for ten years of monthly million-dollar checks. This was not about middlemen taking a cut for their services, but about steadying Trudeau's cash flow. Now, having received only $1.05 million from ITV Global, Trudeau argues that the fine should be capped there. But what if ITV Global had not paid him at all? Would the district court have been powerless to impose any remedial fine? Of course not. The district court recognized that precisely how Trudeau decided to get paid for selling his books through deceptive infomercials in violation of a court order is irrelevant to the proper measure of his remedial fine.The bond was also fine as a modification of the earlier consent order to increase the likelihood that Trudeau would comply going forward, in lieu of an infomercial ban. Instead, Trudeau has to post a $2 million bond before he participates in any “infomercial for any book, newsletter, or other informational publication, about the benefits, performance, or efficacy of any product, program or service referenced in any such [publication].” This is a purgeable sanction because the bond won’t be forfeited to the FTC unless Trudeau makes a deceptive infomercial. “After so many violations, the district court did not have to stick with the old plan.”
Moreover, the bond requirement did not violate the First Amendment. The only argument meriting discussion was whether Trudeau’s right to engage in commercial speech was violated by a requirement that he post a bond before participating in any infomercial, misleading or not. As applied to misleading commercial speech, “there is no possible First Amendment violation, of course, because misleading commercial speech gets no constitutional protection.” But the bond requirement was subject to intermediate scrutiny as a general restriction on commercial speech.
The FTC had the burden to show that (1) there was a substantial interest supporting the restriction, (2) the restriction directly advanced that substantial interest, and (3) the restriction was narrowly drawn. The first two requirements were obviously met: consumer protection is a substantial interest, and the performance bond directly advanced consumer protection by making it more likely that consumers would be compensated for future violations and less likely that there would be future violations via deterrence. As for tailoring, it was not a problem either. A restriction on commercial speech must not be more extensive than necessary, but a least-restrictive-means analysis is not required. Instead, the scope of the restriction must be proportionate and carefully calculated to the interest served, and not impose an inordinate cost.
The court of appeals found that the performance bond satisfied this standard. First, the bond applied only to infomercials, not books or any print medium, nor even to TV or radio ads under 2 minutes. It targeted only the commercial speech that had caused such “tremendous” harm in the past. Second, the district court took seriously Trudeau’s claim that he couldn’t afford $2 million by allowing him to file an audited financial statement and prove as much at a hearing. Third, the bond was proportional to the amount of harm Trudeau caused in the past; if anything, it was low, given that for nearly a year the infomercial sold thousands of books each day.
Larry Sager's Etsy store
Either a wealth of exam questions or a spectacle you can't unsee. Maybe both?
Rau/Bieber collage:
"This handsomely framed collage brings together everyone's favorite Contracts professor with Canada's most vapid cultural export. Like baby, baby, baby, oh!!"
There's also a Bedazzled Dukeminier & Krier (derivative work?) and several other altered casebooks.
Ada Initiative fundraising drive for women in open tech and culture
The Ada Initiative seeks to support women in open technology & culture, addressing the ways in which "open culture" and "open source" are in fact only open to certain people. (Cf. free as in beer; many women understand that there's not much free about a free beer.)
Friday, December 09, 2011
Megaupload
OK, I know that there is plenty to say about this video, including Megaupload's relationship to infringement, UMG's questionable takedown notice (unless there's something about the music itself, presumably the theory is that its artist contracts require transfer of all copyright in their works to UMG, but that doesn't make UMG the copyright owner of any of this video, only the possessor of a cause of action for breach of contract; I smell a 512(f) claim). But for all that, what I am really thinking when I watch the video is that this is the bastard child of the Fruity Oaty Bar and the Head-On commercials. I may have to send River Tam after the earworm.
Like beatings for elephants
Profant v. Have Trunk Will Travel, 2011 WL 6034370 (C.D. Cal.)
Plaintiffs sued HTWT and its owners for violating the UCL and FAL based on allegations that defendants mistreat the elephants they own and train for commercial purposes. Plaintiffs paid for tickets to see the film Water for Elephants. HTWT trained Tai, an elephant who appeared in the film. Plaintiffs alleged that they bought tickets in reliance on defendants’ representations that they trained Tai using humane techniques and did not use shock devices or bull hooks.
After they saw the movie, plaintiffs allegedly watched a video of defendants treating Tai and other elephants cruelly, including beating elephants with bull hooks and using electric shocks.
The court first found that plaintiffs had standing. The court found there was no requirement that plaintiffs have directly used defendants’ services in order to be injured. A consumer suffers an injury in fact where she alleges that she wouldn’t have bought a product but for the misrepresentation. Plaintiffs here alleged that they researched defendants’ training mechanisms, and in reliance on defendants’ representations spent money on movie tickets. This was sufficient allegation of an injury in fact for standing.
The court also found the pleadings sufficient under Rule 9(b). Plaintiffs specified the misrepresentations alleged:(1) a February 2011 online article from Tai's veterinarian stating that Tai “has never known mistreatment”; (2) a statement on HTWT's website stating that HTWT is “helping to establish the high standard of care and humane treatment that elephants deserve”; (3) a press release for Water for Elephants where Defendant Gary Johnson states “Tai was never hit in any way at all”; and (4) a December 2008 statement to the media that “[HTWT] ... does [not] condone using electrical devices to discipline and control elephants except in situations where elephant or human safety is at risk.”
However, plaintiffs weren’t entitled to any relief, because compensatory damages and disgorgement aren’t recoverable under the UCL or FAL. Restitution, injunctive relief, and declaratory relief were all inappropriate. Restitution wouldn’t work because plaintiffs failed to allege that defendants got any money, directly or indirectly, from the movie tickets, and it wasn’t clear that defendants’ payment was in any way based on ticket sales.
As for injunctive or declaratory relief, plaintiffs needed to demonstrate that they were realistically threatened by a repetition of the violation. “Plaintiffs allege that they will face future harm by not being able to trust Defendants, and therefore will be unable to see movies starring their elephants. Plaintiffs allege that they want to watch elephants in movies in the future, but do not allege that they immediately anticipate watching such a movie. This future harm is conjectural and too speculative to satisfy the standing requirements to seek injunctive and declaratory relief in federal court. Therefore, Plaintiffs' allegations do not support injunctive or declaratory relief as a matter of law.”
Plaintiffs sued HTWT and its owners for violating the UCL and FAL based on allegations that defendants mistreat the elephants they own and train for commercial purposes. Plaintiffs paid for tickets to see the film Water for Elephants. HTWT trained Tai, an elephant who appeared in the film. Plaintiffs alleged that they bought tickets in reliance on defendants’ representations that they trained Tai using humane techniques and did not use shock devices or bull hooks.
After they saw the movie, plaintiffs allegedly watched a video of defendants treating Tai and other elephants cruelly, including beating elephants with bull hooks and using electric shocks.
The court first found that plaintiffs had standing. The court found there was no requirement that plaintiffs have directly used defendants’ services in order to be injured. A consumer suffers an injury in fact where she alleges that she wouldn’t have bought a product but for the misrepresentation. Plaintiffs here alleged that they researched defendants’ training mechanisms, and in reliance on defendants’ representations spent money on movie tickets. This was sufficient allegation of an injury in fact for standing.
The court also found the pleadings sufficient under Rule 9(b). Plaintiffs specified the misrepresentations alleged:(1) a February 2011 online article from Tai's veterinarian stating that Tai “has never known mistreatment”; (2) a statement on HTWT's website stating that HTWT is “helping to establish the high standard of care and humane treatment that elephants deserve”; (3) a press release for Water for Elephants where Defendant Gary Johnson states “Tai was never hit in any way at all”; and (4) a December 2008 statement to the media that “[HTWT] ... does [not] condone using electrical devices to discipline and control elephants except in situations where elephant or human safety is at risk.”
However, plaintiffs weren’t entitled to any relief, because compensatory damages and disgorgement aren’t recoverable under the UCL or FAL. Restitution, injunctive relief, and declaratory relief were all inappropriate. Restitution wouldn’t work because plaintiffs failed to allege that defendants got any money, directly or indirectly, from the movie tickets, and it wasn’t clear that defendants’ payment was in any way based on ticket sales.
As for injunctive or declaratory relief, plaintiffs needed to demonstrate that they were realistically threatened by a repetition of the violation. “Plaintiffs allege that they will face future harm by not being able to trust Defendants, and therefore will be unable to see movies starring their elephants. Plaintiffs allege that they want to watch elephants in movies in the future, but do not allege that they immediately anticipate watching such a movie. This future harm is conjectural and too speculative to satisfy the standing requirements to seek injunctive and declaratory relief in federal court. Therefore, Plaintiffs' allegations do not support injunctive or declaratory relief as a matter of law.”
Insured's bad behavior destroys coverage for TM infringement
State Farm Fire & Casualty Co. v. King Sports, Inc., --- F. Supp. 2d ---, 2011 WL 6062222 (N.D. Ga.)
King Sports sold golf clubs online and had a business liability policy with State Farm as of Dec. 2002 that listed Jimmy Chang as the owner and primary contact. In late 2007, State Farm received notice of two separate lawsuits filed against King Sports by Callaway Golf and Nike for alleged trademark infringement. State Farm hired counsel and King Sports settled both suits, paying Callaway $18,500 and Nike $17,500. State Farm paid the full amount of the Callaway settlement and $15,000 of the Nike settlement.
In mid-2008, Cleveland Golf sent King Sports a C&D alleging trademark infringement. State Farm sent King Sports a letter stating that State Farm reserved its right to not defend or indemnify King Sports under certain policy exclusions. State Farm sent another letter a few days later stating that State Farm was trying to talk to Chang about Cleveland’s letter and requesting that Chang contact the insurer immediately to discuss the issue.
King Sports continued to sell the allegedly infringing products, and in mid-2009 Cleveland Golf sued. State Farm informed King Sports and Chang that (1) State Farm had hired Bruce Hedrick to represent them, and (2) the policy required them to cooperate with State Farm in defending the lawsuit. However, according to Hedrick, King Sports and Chang completely failed to communicate with him, despite numerous telephone calls, text messages, email, and regular mail. The only person Hedrick ever managed to talk to was employee Andy Lee, who gave mixed messages about his authority, and contact with him ceased in early 2010 when he told Hedrick that he was no longer affiliated with King Sports.
On its own, State Farm also failed to make contact, despite sending nine letters over a 1-year period. In November 2009, a claim representative visited the business address listed on the policy but found it vacant. State Farm also had no working telephone number for Chang, so State Farm personnel searched the Internet trying to find working contact information, and used its own internal investigation division to search for names, addresses, and phone numbers for Chang and King Sports.
In January 2010, after receiving numerous extensions from the Court, Hedrick filed an answer in the underlying suit, but he testified that he didn’t feel that his answer was adequate due to his inability to communicate with his clients. In March, he filed a motion to withdraw due to his clients' complete lack of cooperation.
Also in March, Cleveland Golf’s counsel sent King Sports and Chang an email in Mandarin and English stating that a failure to cooperate and communicate with Hedrick could jeopardize insurance coverage. Cleveland Golf’s counsel included a message from Hedrick stating that if King Sports and Chang wanted Hedrick to represent them they needed to contact him immediately. Though the email supplied extensive contact information, there was no result, and a few weeks later the court granted the motion to withdraw.
According to Lee's deposition, Cleveland Golf told him that if he would sign a settlement agreement, then Cleveland Golf would stop contacting King Sports. State Farm discovered these discussions and in June sent King Sports and Chang another letter reiterating the contact request and quoting the relevant portion of the policy prohibiting them from settling with Cleveland Golf without State Farm’s consent. No result; in July, King Sports and Cleveland Golf settled in an agreement executed by Lee as “owner.” King Sports consented to a $1 million judgment, “a decidedly larger sum than Cleveland Golf had negotiated in prior settlement agreements with other alleged infringers in similar cases.” Indeed, of the about 50 settlements Cleveland Golf had entered into with alleged infringers in the past ten years, none involved more than $10,000. King Sports assigned its claims against State Farm to Cleveland Golf.
In January 2010, State Farm filed a complaint for declaratory judgment against King Sports and Cleveland Golf for a declaration that it owed King Sports and Chang no coverage; Cleveland Golf counterclaimed for breach of the duty to defend and indemnify.
The court first rejected State Farm’s argument that the policy’s exclusion of willful advertising or personal injury insulated it from any claims. State Farm’s evidence of willfulness was insufficient. Lee testified that King Sport knew it was selling imitation Cleveland Golf merchandise “the entire time” he worked for the company. But that didn’t definitively show that King Sports knew that its actions would result in advertising injury to Cleveland Golf. Lee’s other answers were “far from clear.” When asked whether King Sport knew that its actions could “violate” Cleveland Golf’s trademark, he said, “I believe that a normal person all know about his knowledge on that,” and when that was followed up with “So did you know that selling imitation golf clubs of Cleveland Golf violated their trademarks?” he responded, “I only received these mails and I send out orders. Anything that's to do with these [sic] merchandise, that is the owner's business.” This “wonderfully imprecise” testimony didn’t show that as a matter of law King Sports knew that its actions would result in infringement. “Lee provides no direct answers to the questions, and to say the least, it is difficult to understand what he believed King Sports knew.” In addition, State Farm’s coverage ended in December 2008 and Lee didn’t start working at King Sports until February 2009, so he didn’t have knowledge of the relevant time period.
The court also rejected State Farm’s argument that the Callaway and Nike lawsuits placed King Sports on notice. State Farm didn’t provide enough evidence that the situations were so similar that King Sports should have known that it was infringing Cleveland Golf’s marks. The earlier cases settled without a verdict, and King Sports might not have known which activities actually constituted infringement. Moreover, State Farm had no authority to support the idea that an infringement lawsuit by one entity constitutes notice to the insured that the same type of activity is infringing another’s rights. The court found notice “conceivable” under such circumstances, but the other lawsuits weren’t themselves sufficient as a matter of law.
Finally, State Farm pointed to the testimony of Stephen Gingrich, vice-president of global legal enforcement for Cleveland Golf. Based on the June 2008 C&D and emails in October and November 2009, Gingrich was “quite confident” that King Sports knew it was violating Cleveland Golf’s rights. But State Farm didn’t provide a copy of the C&D or prove that King Sports ever received it. The emails were irrelevant because they related to King Sports's knowledge outside the coverage period.
Have no fear for State Farm, however: King Sports and Chang breached the policy condition requiring them to cooperate in good faith in the defense and investigation of the underlying suit, and were entitled to no coverage. Failure to cooperate must be material, not technical or inconsequential, and it was here. Hedrick was unable to get information from Chang or King Sports about the allegedly infringing products and ads, discuss Cleveland Golf’s settlement offer, or file mandatory initial disclosures. Where the insured cooperates to some degree or explains its noncooperation, a jury must resolve the factual questions, but here King Sports and Chang provided Hedrick with no substantive information in the underlying suit. Hedrick did speak with Lee a bunch of times, but their conversations were about how Hedrick needed to talk to the person in charge.
State Farm also needed to show that King Sports acted acted willfully and fraudulently, which it did. Though Lee told Hedrick that Lee was no longer affiliated with King Sports and asked Hedrick to stop contacting him, Lee continued to communicate with Cleveland Golf. Lee testified that he knew State Farm should be contacted first, but he signed a settlement agreement to get Cleveland Sports to stop harassing King Sports.
Finally, State Farm also needed to show that it acted diligently and in good faith in securing information from King Sports and Chang. It did so through its extensive contact efforts. Along with letters, calls, and emails, State Farm even sent an agent to a new address it found for Chang. The person who answered the door said that Chang didn’t live there, but did keep some of his stuff there. The agent left copies of several letters there.
These efforts resulted in only three responses. In September 2009, a man called, identifying himself as Jimmy Chang. “He stated that he had received the contact letter from State Farm and wanted to know what it was in reference to. When asked if he was the owner of King Sports, he said that he was not and that Jimmy Chang was out of the country but that he might be able to get a message to him.” In July 2010, a man identifying himself as Jimmy Chang's father called State Farm and stated that Chang had nothing to do with the lawsuit. In August 2010, a man identifying himself as Jimmy Chang claimed that he was not the same Jimmy Chang as the one named in the lawsuit and asked that State Farm not contact him any further. (I feel sympathy for any other Jimmy Changs who may have gotten caught up in the hunt.)
Cleveland Golf argued that State Farm manufactured a non-cooperation defense, and that as of November 2009, after only two contact attempts, State Farm decided that King Sports wasn’t cooperating. The central evidence was a voicemail from Hedrick to Cleveland Golf’s counsel from November 2009 in which Hedrick said, “I think State Farm had made a compromise settlement offer to your client at some point, and was sort of in a window where, from what State Farm has told me, they're going to pay that but about to just move forward with the dec action because the insured is not cooperating with them and unfortunately, at the moment, not cooperating with me to enable me to file an answer. I think an answer is due here in a couple of days so I'll have to figure out how to deal with that situation. But to the extent that your client had any settlement interest relative to State Farm, now would be the time, it appears.”
The court found that, even if State Farm intended to file a declaratory judgment action, that didn’t deprive it of good faith. State Farm waited until January 2010, after many additional efforts, to file, and in any event State Farm already had good reason to believe that King Sports would be uncooperative. It had received no response to its June 2008 letters asking King and Chang Sports to contact it regarding Cleveland Golf's C&D letter. At that time, Jimmy Chang's son Ike Chang, who had previously cooperated in the Nike and Callaway cases, told State Farm that he was unwilling to assist in the Cleveland matter. When State Farm attempted to call King Sports on August 20, 2009, the number was disconnected.
Cleveland Golf argued that State Farm acted in bad faith because it did not alert Hedrick that Chang only spoke Mandarin. The court found that argument meritless. “The policy was written in English, and Lee, who represented to Hedrick that he was authorized to communicate on King Sports's behalf, spoke English and communicated with Hedrick in English several times.” Hedrick also testified that he had about five correspondences translated into Mandarin and would have had more translated on request. But most importantly, the insurance policy was written in English and the insured was a business located in the United States, so the court wasn’t willing to impose a translation duty on State Farm.
State Farm did deviate from its own policy of immediately “splitting the file” to make sure that information received in defense of a case isn’t used to invalidate coverage, but Cleveland Golf didn’t explain how that decision to wait to split the file shows bad faith. Cleveland Golf does not identify what sensitive information State Farm was able to gain and use against King Sports and Chang due to the unsplit file, nor did it even show that State Farm had a duty to split the file.
State Farm won summary judgment. Even without breach of the cooperation clause, State Farm would still win because King Sports violated the policy by voluntarily assuming obligations in the settlement and assigning its rights without State Farm's knowledge or consent. While an insurer waives its ability to enforce settlement and assignment provisions when it refuses to defend, State Farm didn’t refuse to defend here. Its failure to appoint new counsel after Hedrick withdrew wasn’t based on any claim of a policy exclusion covering the claims at issue. State Farm wasn’t required to hire replacement counsel under the circumstances, which made clear that assigning new counsel would have been an exercise in futility.
King Sports sold golf clubs online and had a business liability policy with State Farm as of Dec. 2002 that listed Jimmy Chang as the owner and primary contact. In late 2007, State Farm received notice of two separate lawsuits filed against King Sports by Callaway Golf and Nike for alleged trademark infringement. State Farm hired counsel and King Sports settled both suits, paying Callaway $18,500 and Nike $17,500. State Farm paid the full amount of the Callaway settlement and $15,000 of the Nike settlement.
In mid-2008, Cleveland Golf sent King Sports a C&D alleging trademark infringement. State Farm sent King Sports a letter stating that State Farm reserved its right to not defend or indemnify King Sports under certain policy exclusions. State Farm sent another letter a few days later stating that State Farm was trying to talk to Chang about Cleveland’s letter and requesting that Chang contact the insurer immediately to discuss the issue.
King Sports continued to sell the allegedly infringing products, and in mid-2009 Cleveland Golf sued. State Farm informed King Sports and Chang that (1) State Farm had hired Bruce Hedrick to represent them, and (2) the policy required them to cooperate with State Farm in defending the lawsuit. However, according to Hedrick, King Sports and Chang completely failed to communicate with him, despite numerous telephone calls, text messages, email, and regular mail. The only person Hedrick ever managed to talk to was employee Andy Lee, who gave mixed messages about his authority, and contact with him ceased in early 2010 when he told Hedrick that he was no longer affiliated with King Sports.
On its own, State Farm also failed to make contact, despite sending nine letters over a 1-year period. In November 2009, a claim representative visited the business address listed on the policy but found it vacant. State Farm also had no working telephone number for Chang, so State Farm personnel searched the Internet trying to find working contact information, and used its own internal investigation division to search for names, addresses, and phone numbers for Chang and King Sports.
In January 2010, after receiving numerous extensions from the Court, Hedrick filed an answer in the underlying suit, but he testified that he didn’t feel that his answer was adequate due to his inability to communicate with his clients. In March, he filed a motion to withdraw due to his clients' complete lack of cooperation.
Also in March, Cleveland Golf’s counsel sent King Sports and Chang an email in Mandarin and English stating that a failure to cooperate and communicate with Hedrick could jeopardize insurance coverage. Cleveland Golf’s counsel included a message from Hedrick stating that if King Sports and Chang wanted Hedrick to represent them they needed to contact him immediately. Though the email supplied extensive contact information, there was no result, and a few weeks later the court granted the motion to withdraw.
According to Lee's deposition, Cleveland Golf told him that if he would sign a settlement agreement, then Cleveland Golf would stop contacting King Sports. State Farm discovered these discussions and in June sent King Sports and Chang another letter reiterating the contact request and quoting the relevant portion of the policy prohibiting them from settling with Cleveland Golf without State Farm’s consent. No result; in July, King Sports and Cleveland Golf settled in an agreement executed by Lee as “owner.” King Sports consented to a $1 million judgment, “a decidedly larger sum than Cleveland Golf had negotiated in prior settlement agreements with other alleged infringers in similar cases.” Indeed, of the about 50 settlements Cleveland Golf had entered into with alleged infringers in the past ten years, none involved more than $10,000. King Sports assigned its claims against State Farm to Cleveland Golf.
In January 2010, State Farm filed a complaint for declaratory judgment against King Sports and Cleveland Golf for a declaration that it owed King Sports and Chang no coverage; Cleveland Golf counterclaimed for breach of the duty to defend and indemnify.
The court first rejected State Farm’s argument that the policy’s exclusion of willful advertising or personal injury insulated it from any claims. State Farm’s evidence of willfulness was insufficient. Lee testified that King Sport knew it was selling imitation Cleveland Golf merchandise “the entire time” he worked for the company. But that didn’t definitively show that King Sports knew that its actions would result in advertising injury to Cleveland Golf. Lee’s other answers were “far from clear.” When asked whether King Sport knew that its actions could “violate” Cleveland Golf’s trademark, he said, “I believe that a normal person all know about his knowledge on that,” and when that was followed up with “So did you know that selling imitation golf clubs of Cleveland Golf violated their trademarks?” he responded, “I only received these mails and I send out orders. Anything that's to do with these [sic] merchandise, that is the owner's business.” This “wonderfully imprecise” testimony didn’t show that as a matter of law King Sports knew that its actions would result in infringement. “Lee provides no direct answers to the questions, and to say the least, it is difficult to understand what he believed King Sports knew.” In addition, State Farm’s coverage ended in December 2008 and Lee didn’t start working at King Sports until February 2009, so he didn’t have knowledge of the relevant time period.
The court also rejected State Farm’s argument that the Callaway and Nike lawsuits placed King Sports on notice. State Farm didn’t provide enough evidence that the situations were so similar that King Sports should have known that it was infringing Cleveland Golf’s marks. The earlier cases settled without a verdict, and King Sports might not have known which activities actually constituted infringement. Moreover, State Farm had no authority to support the idea that an infringement lawsuit by one entity constitutes notice to the insured that the same type of activity is infringing another’s rights. The court found notice “conceivable” under such circumstances, but the other lawsuits weren’t themselves sufficient as a matter of law.
Finally, State Farm pointed to the testimony of Stephen Gingrich, vice-president of global legal enforcement for Cleveland Golf. Based on the June 2008 C&D and emails in October and November 2009, Gingrich was “quite confident” that King Sports knew it was violating Cleveland Golf’s rights. But State Farm didn’t provide a copy of the C&D or prove that King Sports ever received it. The emails were irrelevant because they related to King Sports's knowledge outside the coverage period.
Have no fear for State Farm, however: King Sports and Chang breached the policy condition requiring them to cooperate in good faith in the defense and investigation of the underlying suit, and were entitled to no coverage. Failure to cooperate must be material, not technical or inconsequential, and it was here. Hedrick was unable to get information from Chang or King Sports about the allegedly infringing products and ads, discuss Cleveland Golf’s settlement offer, or file mandatory initial disclosures. Where the insured cooperates to some degree or explains its noncooperation, a jury must resolve the factual questions, but here King Sports and Chang provided Hedrick with no substantive information in the underlying suit. Hedrick did speak with Lee a bunch of times, but their conversations were about how Hedrick needed to talk to the person in charge.
State Farm also needed to show that King Sports acted acted willfully and fraudulently, which it did. Though Lee told Hedrick that Lee was no longer affiliated with King Sports and asked Hedrick to stop contacting him, Lee continued to communicate with Cleveland Golf. Lee testified that he knew State Farm should be contacted first, but he signed a settlement agreement to get Cleveland Sports to stop harassing King Sports.
Finally, State Farm also needed to show that it acted diligently and in good faith in securing information from King Sports and Chang. It did so through its extensive contact efforts. Along with letters, calls, and emails, State Farm even sent an agent to a new address it found for Chang. The person who answered the door said that Chang didn’t live there, but did keep some of his stuff there. The agent left copies of several letters there.
These efforts resulted in only three responses. In September 2009, a man called, identifying himself as Jimmy Chang. “He stated that he had received the contact letter from State Farm and wanted to know what it was in reference to. When asked if he was the owner of King Sports, he said that he was not and that Jimmy Chang was out of the country but that he might be able to get a message to him.” In July 2010, a man identifying himself as Jimmy Chang's father called State Farm and stated that Chang had nothing to do with the lawsuit. In August 2010, a man identifying himself as Jimmy Chang claimed that he was not the same Jimmy Chang as the one named in the lawsuit and asked that State Farm not contact him any further. (I feel sympathy for any other Jimmy Changs who may have gotten caught up in the hunt.)
Cleveland Golf argued that State Farm manufactured a non-cooperation defense, and that as of November 2009, after only two contact attempts, State Farm decided that King Sports wasn’t cooperating. The central evidence was a voicemail from Hedrick to Cleveland Golf’s counsel from November 2009 in which Hedrick said, “I think State Farm had made a compromise settlement offer to your client at some point, and was sort of in a window where, from what State Farm has told me, they're going to pay that but about to just move forward with the dec action because the insured is not cooperating with them and unfortunately, at the moment, not cooperating with me to enable me to file an answer. I think an answer is due here in a couple of days so I'll have to figure out how to deal with that situation. But to the extent that your client had any settlement interest relative to State Farm, now would be the time, it appears.”
The court found that, even if State Farm intended to file a declaratory judgment action, that didn’t deprive it of good faith. State Farm waited until January 2010, after many additional efforts, to file, and in any event State Farm already had good reason to believe that King Sports would be uncooperative. It had received no response to its June 2008 letters asking King and Chang Sports to contact it regarding Cleveland Golf's C&D letter. At that time, Jimmy Chang's son Ike Chang, who had previously cooperated in the Nike and Callaway cases, told State Farm that he was unwilling to assist in the Cleveland matter. When State Farm attempted to call King Sports on August 20, 2009, the number was disconnected.
Cleveland Golf argued that State Farm acted in bad faith because it did not alert Hedrick that Chang only spoke Mandarin. The court found that argument meritless. “The policy was written in English, and Lee, who represented to Hedrick that he was authorized to communicate on King Sports's behalf, spoke English and communicated with Hedrick in English several times.” Hedrick also testified that he had about five correspondences translated into Mandarin and would have had more translated on request. But most importantly, the insurance policy was written in English and the insured was a business located in the United States, so the court wasn’t willing to impose a translation duty on State Farm.
State Farm did deviate from its own policy of immediately “splitting the file” to make sure that information received in defense of a case isn’t used to invalidate coverage, but Cleveland Golf didn’t explain how that decision to wait to split the file shows bad faith. Cleveland Golf does not identify what sensitive information State Farm was able to gain and use against King Sports and Chang due to the unsplit file, nor did it even show that State Farm had a duty to split the file.
State Farm won summary judgment. Even without breach of the cooperation clause, State Farm would still win because King Sports violated the policy by voluntarily assuming obligations in the settlement and assigning its rights without State Farm's knowledge or consent. While an insurer waives its ability to enforce settlement and assignment provisions when it refuses to defend, State Farm didn’t refuse to defend here. Its failure to appoint new counsel after Hedrick withdrew wasn’t based on any claim of a policy exclusion covering the claims at issue. State Farm wasn’t required to hire replacement counsel under the circumstances, which made clear that assigning new counsel would have been an exercise in futility.
Thursday, December 08, 2011
Bank plaintiffs mostly lose data breach-based claims against processor
In re Heartland Payment Systems, Inc. Customer Data Security Breach Litigation, 2011 WL 6012598 (S.D. Tex.)
In January 2009, Heartland disclosed that hackers had breached its computer systems and obtained access to confidential payment-card information for over one hundred million consumers. The resulting lawsuits were consolidated; this opinion deals with financial institution plaintiffs. They filed a master complaint asserting causes of action for breach of contract and implied contract, negligence and negligence per se, negligent and intentional misrepresentation, and violations of consumer protection statutes. The court granted Heartland’s motion to dismiss with prejudice and without leave to amend for the negligence claims and for the New Jersey, New York, and Washington consumer protection law claims. The court also granted a motion to dismiss with leave to amend for the breach of contract; breach of implied contract; express misrepresentation; negligent misrepresentation based on nondisclosure; and violations of the California, Colorado, Illinois, and Texas consumer protection law claims. The court denied Heartland’s motion to dismiss the Florida consumer protection law claim.
When consumers swipe their payment cards at merchants, the information goes from the point of sale, to an acquirer bank, across the credit-card network, to the issuer bank, and back. “Acquirer banks contract with merchants to process their transactions, while issuer banks provide credit to consumers and issue payment cards.” The acquirer bank forwards the information to the issuer bank over the network (e.g., Visa and MasterCard) for approval, which if secured leads to the issuer sending money to the acquirer, which then sends the money to the merchant. Banks often act as both issuers and acquirers, and outsource processing to other companies. Credit card networks such as MasterCard and Visa impose extensive regulations on the acquirer and issuer banks with whom they contract, and require the banks to impose these regulations on the merchants who submit transactions for processing and on the entities that process the transactions.
The financial institution plaintiffs were nine banks suing as issuers. Heartland processed merchant transactions on behalf of two acquirer banks. Heartland’s contracts with the acquirers required it to comply with the Visa and MasterCard network regulations, which trumped the terms of Heartland’s contracts with banks where the two differed.
At least as early as December 2007, three hackers infiltrated Heartland’s computer systems. In October 2008, Visa alerted Heartland to suspicious accunt activity; Heartland discovered suspicious files in its systems in January 2009, then found the program creating those files. Shortly thereafter, Heartland publicly announced the breach. The hackers got card numbers and expiration dates for 130 million accounts, and in some instances cardholder names. They didn’t get addresses, meaning that the stolen information generally could only be used in person.
Plaintiffs alleged that the breach resulted from Heartland’s failure to follow industry security standards known as PCI–DSS. They incurred significant expenses replacing payment cards and reimbursing fraudulent transactions.
I won’t go into detail on all the claims. The sticking point on most was the contracts, which didn’t make the plaintiffs into third-party beneficiaries and generally limited recovery for economic loss. Though Visa found Heartland to be in violation of its regulations, and both Visa and MasterCard fined Heartland Bank and KeyBank, the network members that had retained Heartland, the court found generally that network regulations, not tort law, were the appropriate means for any relief. With a cite to my colleague Adam Levitin, the court noted that many people have written about the fairness and effectiveness (or lack thereof) of those rules, but the plaintiffs accepted them and issued payment cards under them. Moreover, the damages sought were the kinds ordinarily expected to flow from a data breach, which could thus be addressed in contracts instead of in negligence.
Plaintiffs also alleged fraud and negligent misrepresentation under New Jersey law. Heartland’s statements in SEC filings and analyst calls, on Heartland’s logo and website allegedly suggested that its security measures were better than they were. Plaintiffs also alleged misleading nondisclosure. Heartland, by participating in the Visa and MasterCard networks, allegedly represented that it would follow the network security regulations.
Common-law fraud has five elements: (1) a material misrepresentation of a presently existing or past fact; (2) knowledge or belief by the defendant of its falsity; (3) an intention that the other person rely on it; (4) reasonable reliance thereon by the other person; and (5) resulting damages. Negligent misrepresentation requires neither intent to deceive nor knowledge that the statement is false.
FRCP 9(b) requires pleading with particularity for fraud, though the parties disputed whether the negligent misrepresentation allegations were subject to 9(b). The court found, regardless, that the allegations failed to satisfy Rule 8 under Iqbal etc.
First, Heartland argued that many of the alleged misrepresentations were mere vague and subjective puffery on which it was not reasonable to rely. The court first found that to the extent that Heartland purported to guarantee absolute data security, reliance would be unreasonable as a matter of law. Heartland's slogans—“The Highest Standards” and “The Most Trusted Transactions”—were also puffery, as were statements that Heartland used “layers of state-of-the-art security, technology and techniques to safeguard sensitive credit and debit card account information”; that it used the “state-of-the-art [Heartland] Exchange”; and that its “success is the result of the combination of a superior long-term customer relationship sales model and the premier technology processing platform in the industry today.”
One alleged misrepresentation came after the public disclosure of the breach. The website Heartland created about the breach stated that “Heartland is deeply committed to maintaining the security of cardholder data, and we will continue doing everything reasonably possible to achieve this objective.” That couldn’t form the basis of a misrepresentation claim because it couldn’t have been material to banks’ and merchants’ decisions to contract with Heartland.
Heartland made other statements, such as “we have limited our use of consumer information solely to providing services to other businesses and financial institutions,” and “[w]e limit sharing of non-public personal information to that necessary to complete the transactions on behalf of the consumer and the merchant and to that permitted by federal and state laws.” But the court found that these weren’t statements about data security but rather about intentional data sharing.
However, some statements were sufficiently definite and verifiable to support a claim for negligent misrepresentation: e.g., “[w]e maintain current updates of network and operating system security releases and virus definitions, and have engaged a third party to regularly test our systems for vulnerability to unauthorized access”; “we encrypt the cardholder numbers that are stored in our databases using triple-DES protocols, which represent the highest commercially available standard for encryption”; Heartland’s “Exchange has passed an independent verification process validating compliance with VISA requirements for data security.”
Heartland argued that the complaint insufficiently alleged reliance. The court agreed, finding the allegations wholly conclusory, claiming only “justifiable reliance” and “reasonable reliance.” “It is unclear, for example, if the issuer banks' reliance was through their joining, remaining in, or withdrawing from the Visa and MasterCard networks, or what relationship the statements have to any such actions.” Thus, these claims were dismissed with leave to amend.
Implied misrepresentation: plaintiffs alleged that “by accepting and agreeing to process the credit cards and/or debit cards issued by [the Financial Institution Plaintiffs], Heartland impliedly agreed that it would adequately protect the sensitive information contained in these cards, as well as comply with applicable standards to safeguard data.” Plaintiffs alleged that Heartland knew they were relying on it for appropriate data security. The Massachusetts Supreme Judicial Court has rejected the same theory in litigation arising out of a similar data breach. It reasoned that the payment networks’ regulations explicitly provide for fines for breach of data storage requirements, showing that the system was designed with the possibility of breaches in mind. Issuers also insure themselves against fraudulent charges, anticipating breach. Thus, plaintiffs knew that data breaches could occur, notwithstanding Heartland’s contractual obligation to follow the regulations. (What about the risk that breach would occur?) Under New Jersey law, it’s unreasonable to rely on a representation when a financial arrangement exists to provide compensation if circumstances later prove that representation false.
Nondisclosure/deliberate suppression of material fact: Duties to disclose arise under New Jersey law where there’s a fiduciary relationship, where the nature of the transaction calls for perfect good faith and full disclosure, where one party expressly reposes trust and confidence in the other, or where necessary to correct a material misrepresentation. The court found that the complaint alleged insufficient facts to find a duty to disclose, though there was a possible theory for an amended complaint that, having held itself out as having adequate security, Heartland had a duty to disclose its flaws.
The court then turned to the consumer protection claims, based on the laws of the states in which the plaintiffs were based. Heartland, unusually for a defendant, sought the application only of New Jersey law, arguing that multiple states’ laws couldn’t apply to the same set of misrepresentations. But courts have applied multiple state consumer protection laws where choice of law rules produce that result.
NJCFA: A business may sue under the NJCFA, but claims are generally limited to consumer-oriented situations. Competitors generally lack standing, according to the cases found persuasive by the court here. Wholesalers aren’t protected because they don’t consume merchandise but just pass it on. Even when a business is a consumer, other factors may make the NJCFA inapplicable. The law applies only to “goods or services generally sold to the public at large.” Past cases have found such goods or services to include yachts, computer peripherals, cranes, concrete, and commercial-renovation services, but not sales of complex business franchises and custom services targeted to businesses. “The presence of large transactions or sophisticated business plaintiffs is a factor weighing against the NJCFA's applicability.”
The complaint alleged that the plaintiffs were “consumers in the marketplace for, inter alia, credit card and/or debit card transaction processing services, and have been injured in this capacity.” However, the complaint didn’t allege that the plaintiffs bought any services from Heartland. Their relationship existed because they all participated in the Visa/MasterCard networks, which the court distinguished between a “direct, downstream” relationship between a consumer and the manufacturer of a good. The network regulations explicitly contemplate the existence of third-party processors, and the plaintiffs had no control over who those would be. Moreover, payment-card processing isn’t offered to the general public, but rather to members of the networks. Network regulations offer significant protection to the plaintiffs through loss-allocation rules and a cost-recovery process, and in turn plaintiffs and other issuer banks are required to maintain fraud-detection programs. These characteristics made NJCFA coverage inappropriate.
California UCL: dismissed with leave to amend because of the same conclusory assertion of reliance discussed above.
Colorado Consumer Protection Act: dismissed with leave to amend because it referred to a subsection of the law that only covers claims about price.
Florida Deceptive and Unfair Trade Practices Act: Given specific amendments to the FDUTPA to replace “consumer” with “person” in relevant provisions and otherwise clarify that businesses could bring suits, Heartland’s motion to dismiss on lack of standing grounds was denied.
Illinois Consumer Fraud and Deceptive Business Practices Act: Dismissed without prejudice for failure to adequately allege that Heartland intended plaintiffs to rely, since its statements weren’t directed to issuer banks. “Because issuers have no direct dealings with payment-card processors, it is implausible that Heartland intended statements in documents not directed to the Financial Institution Plaintiffs to be relied on by them or by any issuer banks. The master complaint conclusorily alleges reliance, insufficient to state a claim.” Moreover, nonconsumers must show that the conduct at issue implicates consumer protection concerns to sue under the law.
New York General Business Law §349: A consumer, for § 349 purposes, is one who purchases goods and services for personal, family or household use. Complex transactions involving sophisticated parties are not generally covered under the law, which requires a consumer-oriented act. Plaintiffs didn’t count as consumers, nor was the conduct consumer-oriented under NY law since the statements at issue were about services neither marketed nor offered to individual consumers. Claim dismissed with prejudice.
Texas Deceptive Trade Practices-Consumer Protection Act: Dismissed with leave to amend because of conclusory allegations of reliance. The court didn’t rule on Heartland’s argument that the complaint failed to allege that Lone Star National Bank, the only Texas plaintiff, has less than $25 million in assets, as required to satisfy the state definition of “consumer.”
Washington Consumer Protection Act: The state law requires an effect on the public interest, which means a likelihood that additional people have been or will be injured in the same fashion. Courts consider several factors, including whether defendants advertised to the public in general and whether the parties occupied unequal bargaining positions. The court found that the complaint failed to allege sufficient facts suggesting that the claim here affected the public interest. “The only group likely to be injured in the same fashion—incurring expenses for replacement cards and fraudulent transactions—consists of other issuer banks. Such a group is both too small and too specialized to constitute a substantial portion of the public.” Plus, they had sufficient sophistication to remove them from the class subject to exploitation.
“The master complaint vaguely alleges that Heartland intended its statements to lull the public into believing that its data security was better than it actually was. That allegation is insufficient to show that a dispute between sophisticated banks that issue payment cards and the company hired by other banks to process payments for merchants affects the public interest.” Claim dismissed with prejudice.
In January 2009, Heartland disclosed that hackers had breached its computer systems and obtained access to confidential payment-card information for over one hundred million consumers. The resulting lawsuits were consolidated; this opinion deals with financial institution plaintiffs. They filed a master complaint asserting causes of action for breach of contract and implied contract, negligence and negligence per se, negligent and intentional misrepresentation, and violations of consumer protection statutes. The court granted Heartland’s motion to dismiss with prejudice and without leave to amend for the negligence claims and for the New Jersey, New York, and Washington consumer protection law claims. The court also granted a motion to dismiss with leave to amend for the breach of contract; breach of implied contract; express misrepresentation; negligent misrepresentation based on nondisclosure; and violations of the California, Colorado, Illinois, and Texas consumer protection law claims. The court denied Heartland’s motion to dismiss the Florida consumer protection law claim.
When consumers swipe their payment cards at merchants, the information goes from the point of sale, to an acquirer bank, across the credit-card network, to the issuer bank, and back. “Acquirer banks contract with merchants to process their transactions, while issuer banks provide credit to consumers and issue payment cards.” The acquirer bank forwards the information to the issuer bank over the network (e.g., Visa and MasterCard) for approval, which if secured leads to the issuer sending money to the acquirer, which then sends the money to the merchant. Banks often act as both issuers and acquirers, and outsource processing to other companies. Credit card networks such as MasterCard and Visa impose extensive regulations on the acquirer and issuer banks with whom they contract, and require the banks to impose these regulations on the merchants who submit transactions for processing and on the entities that process the transactions.
The financial institution plaintiffs were nine banks suing as issuers. Heartland processed merchant transactions on behalf of two acquirer banks. Heartland’s contracts with the acquirers required it to comply with the Visa and MasterCard network regulations, which trumped the terms of Heartland’s contracts with banks where the two differed.
At least as early as December 2007, three hackers infiltrated Heartland’s computer systems. In October 2008, Visa alerted Heartland to suspicious accunt activity; Heartland discovered suspicious files in its systems in January 2009, then found the program creating those files. Shortly thereafter, Heartland publicly announced the breach. The hackers got card numbers and expiration dates for 130 million accounts, and in some instances cardholder names. They didn’t get addresses, meaning that the stolen information generally could only be used in person.
Plaintiffs alleged that the breach resulted from Heartland’s failure to follow industry security standards known as PCI–DSS. They incurred significant expenses replacing payment cards and reimbursing fraudulent transactions.
I won’t go into detail on all the claims. The sticking point on most was the contracts, which didn’t make the plaintiffs into third-party beneficiaries and generally limited recovery for economic loss. Though Visa found Heartland to be in violation of its regulations, and both Visa and MasterCard fined Heartland Bank and KeyBank, the network members that had retained Heartland, the court found generally that network regulations, not tort law, were the appropriate means for any relief. With a cite to my colleague Adam Levitin, the court noted that many people have written about the fairness and effectiveness (or lack thereof) of those rules, but the plaintiffs accepted them and issued payment cards under them. Moreover, the damages sought were the kinds ordinarily expected to flow from a data breach, which could thus be addressed in contracts instead of in negligence.
Plaintiffs also alleged fraud and negligent misrepresentation under New Jersey law. Heartland’s statements in SEC filings and analyst calls, on Heartland’s logo and website allegedly suggested that its security measures were better than they were. Plaintiffs also alleged misleading nondisclosure. Heartland, by participating in the Visa and MasterCard networks, allegedly represented that it would follow the network security regulations.
Common-law fraud has five elements: (1) a material misrepresentation of a presently existing or past fact; (2) knowledge or belief by the defendant of its falsity; (3) an intention that the other person rely on it; (4) reasonable reliance thereon by the other person; and (5) resulting damages. Negligent misrepresentation requires neither intent to deceive nor knowledge that the statement is false.
FRCP 9(b) requires pleading with particularity for fraud, though the parties disputed whether the negligent misrepresentation allegations were subject to 9(b). The court found, regardless, that the allegations failed to satisfy Rule 8 under Iqbal etc.
First, Heartland argued that many of the alleged misrepresentations were mere vague and subjective puffery on which it was not reasonable to rely. The court first found that to the extent that Heartland purported to guarantee absolute data security, reliance would be unreasonable as a matter of law. Heartland's slogans—“The Highest Standards” and “The Most Trusted Transactions”—were also puffery, as were statements that Heartland used “layers of state-of-the-art security, technology and techniques to safeguard sensitive credit and debit card account information”; that it used the “state-of-the-art [Heartland] Exchange”; and that its “success is the result of the combination of a superior long-term customer relationship sales model and the premier technology processing platform in the industry today.”
One alleged misrepresentation came after the public disclosure of the breach. The website Heartland created about the breach stated that “Heartland is deeply committed to maintaining the security of cardholder data, and we will continue doing everything reasonably possible to achieve this objective.” That couldn’t form the basis of a misrepresentation claim because it couldn’t have been material to banks’ and merchants’ decisions to contract with Heartland.
Heartland made other statements, such as “we have limited our use of consumer information solely to providing services to other businesses and financial institutions,” and “[w]e limit sharing of non-public personal information to that necessary to complete the transactions on behalf of the consumer and the merchant and to that permitted by federal and state laws.” But the court found that these weren’t statements about data security but rather about intentional data sharing.
However, some statements were sufficiently definite and verifiable to support a claim for negligent misrepresentation: e.g., “[w]e maintain current updates of network and operating system security releases and virus definitions, and have engaged a third party to regularly test our systems for vulnerability to unauthorized access”; “we encrypt the cardholder numbers that are stored in our databases using triple-DES protocols, which represent the highest commercially available standard for encryption”; Heartland’s “Exchange has passed an independent verification process validating compliance with VISA requirements for data security.”
Heartland argued that the complaint insufficiently alleged reliance. The court agreed, finding the allegations wholly conclusory, claiming only “justifiable reliance” and “reasonable reliance.” “It is unclear, for example, if the issuer banks' reliance was through their joining, remaining in, or withdrawing from the Visa and MasterCard networks, or what relationship the statements have to any such actions.” Thus, these claims were dismissed with leave to amend.
Implied misrepresentation: plaintiffs alleged that “by accepting and agreeing to process the credit cards and/or debit cards issued by [the Financial Institution Plaintiffs], Heartland impliedly agreed that it would adequately protect the sensitive information contained in these cards, as well as comply with applicable standards to safeguard data.” Plaintiffs alleged that Heartland knew they were relying on it for appropriate data security. The Massachusetts Supreme Judicial Court has rejected the same theory in litigation arising out of a similar data breach. It reasoned that the payment networks’ regulations explicitly provide for fines for breach of data storage requirements, showing that the system was designed with the possibility of breaches in mind. Issuers also insure themselves against fraudulent charges, anticipating breach. Thus, plaintiffs knew that data breaches could occur, notwithstanding Heartland’s contractual obligation to follow the regulations. (What about the risk that breach would occur?) Under New Jersey law, it’s unreasonable to rely on a representation when a financial arrangement exists to provide compensation if circumstances later prove that representation false.
Nondisclosure/deliberate suppression of material fact: Duties to disclose arise under New Jersey law where there’s a fiduciary relationship, where the nature of the transaction calls for perfect good faith and full disclosure, where one party expressly reposes trust and confidence in the other, or where necessary to correct a material misrepresentation. The court found that the complaint alleged insufficient facts to find a duty to disclose, though there was a possible theory for an amended complaint that, having held itself out as having adequate security, Heartland had a duty to disclose its flaws.
The court then turned to the consumer protection claims, based on the laws of the states in which the plaintiffs were based. Heartland, unusually for a defendant, sought the application only of New Jersey law, arguing that multiple states’ laws couldn’t apply to the same set of misrepresentations. But courts have applied multiple state consumer protection laws where choice of law rules produce that result.
NJCFA: A business may sue under the NJCFA, but claims are generally limited to consumer-oriented situations. Competitors generally lack standing, according to the cases found persuasive by the court here. Wholesalers aren’t protected because they don’t consume merchandise but just pass it on. Even when a business is a consumer, other factors may make the NJCFA inapplicable. The law applies only to “goods or services generally sold to the public at large.” Past cases have found such goods or services to include yachts, computer peripherals, cranes, concrete, and commercial-renovation services, but not sales of complex business franchises and custom services targeted to businesses. “The presence of large transactions or sophisticated business plaintiffs is a factor weighing against the NJCFA's applicability.”
The complaint alleged that the plaintiffs were “consumers in the marketplace for, inter alia, credit card and/or debit card transaction processing services, and have been injured in this capacity.” However, the complaint didn’t allege that the plaintiffs bought any services from Heartland. Their relationship existed because they all participated in the Visa/MasterCard networks, which the court distinguished between a “direct, downstream” relationship between a consumer and the manufacturer of a good. The network regulations explicitly contemplate the existence of third-party processors, and the plaintiffs had no control over who those would be. Moreover, payment-card processing isn’t offered to the general public, but rather to members of the networks. Network regulations offer significant protection to the plaintiffs through loss-allocation rules and a cost-recovery process, and in turn plaintiffs and other issuer banks are required to maintain fraud-detection programs. These characteristics made NJCFA coverage inappropriate.
California UCL: dismissed with leave to amend because of the same conclusory assertion of reliance discussed above.
Colorado Consumer Protection Act: dismissed with leave to amend because it referred to a subsection of the law that only covers claims about price.
Florida Deceptive and Unfair Trade Practices Act: Given specific amendments to the FDUTPA to replace “consumer” with “person” in relevant provisions and otherwise clarify that businesses could bring suits, Heartland’s motion to dismiss on lack of standing grounds was denied.
Illinois Consumer Fraud and Deceptive Business Practices Act: Dismissed without prejudice for failure to adequately allege that Heartland intended plaintiffs to rely, since its statements weren’t directed to issuer banks. “Because issuers have no direct dealings with payment-card processors, it is implausible that Heartland intended statements in documents not directed to the Financial Institution Plaintiffs to be relied on by them or by any issuer banks. The master complaint conclusorily alleges reliance, insufficient to state a claim.” Moreover, nonconsumers must show that the conduct at issue implicates consumer protection concerns to sue under the law.
New York General Business Law §349: A consumer, for § 349 purposes, is one who purchases goods and services for personal, family or household use. Complex transactions involving sophisticated parties are not generally covered under the law, which requires a consumer-oriented act. Plaintiffs didn’t count as consumers, nor was the conduct consumer-oriented under NY law since the statements at issue were about services neither marketed nor offered to individual consumers. Claim dismissed with prejudice.
Texas Deceptive Trade Practices-Consumer Protection Act: Dismissed with leave to amend because of conclusory allegations of reliance. The court didn’t rule on Heartland’s argument that the complaint failed to allege that Lone Star National Bank, the only Texas plaintiff, has less than $25 million in assets, as required to satisfy the state definition of “consumer.”
Washington Consumer Protection Act: The state law requires an effect on the public interest, which means a likelihood that additional people have been or will be injured in the same fashion. Courts consider several factors, including whether defendants advertised to the public in general and whether the parties occupied unequal bargaining positions. The court found that the complaint failed to allege sufficient facts suggesting that the claim here affected the public interest. “The only group likely to be injured in the same fashion—incurring expenses for replacement cards and fraudulent transactions—consists of other issuer banks. Such a group is both too small and too specialized to constitute a substantial portion of the public.” Plus, they had sufficient sophistication to remove them from the class subject to exploitation.
“The master complaint vaguely alleges that Heartland intended its statements to lull the public into believing that its data security was better than it actually was. That allegation is insufficient to show that a dispute between sophisticated banks that issue payment cards and the company hired by other banks to process payments for merchants affects the public interest.” Claim dismissed with prejudice.
Failure to show actual product dooms survey
Innovation Ventures, LLC v. N2G Distributing, Inc., 2011 WL 6010206 (E.D. Mich.)
N2G sought to exclude Innovation’s study and expert report by Dr. Dan Sarel. The study was offered to show likely confusion between N2G’s 6 Hour Energy Shot and Innovation’s 5-Hour Energy. Innovation already won a preliminary injunction against the 6 Hour product (based mainly on trade dress), and also won summary judgment on its copyright infringement claim. Remaining for trial were trademark and false advertising claims, as well as damages issues.
Sarel opined that almost 2/3 of respondents were confused about the relationship between the parties’ marks. “In actual shopping situations where consumers are relying on their memory only, the perceived similarity of the names, especially for new and potential buyers, could cause major confusion.” Sarel used a mall intercept study targeting potential buyers of energy shots. They saw 6 TV ads, including one for 5-Hour Energy, then shown photos of the front side of N2G’s product and of the front side of a control product called ROCK ON, and then asked if either of the two energy drinks was advertised in the television ads the participant had just watched. Sarel concluded that 63.5 percent of the participants exhibited likely confusion.
The court found Sarel’s report inadmissible for want of a reliable foundation. First, participants were shown pictures, not actual bottles as would exist in market conditions. Innovation argued that defendants destroyed the actual 6 Hour bottles, but the court noted that it had an exhibit of 10 bottles on file since 2008 and that Innovation could have asked for more. Indeed, Innovation had two bottles in its possession at the time of the survey. Though one allegedly exploded, the survey could have gone with one since it didn’t need to be conducted everywhere on the same day. Innovation’s counsel said he possessed two bottles, one of which leaked, but that wasn’t a problem: “the participants were just to look at the two bottles, not drink from them.” Failure to use actual bottles “resulted in significantly flawed and therefore unreliable methodology in conducting Dr. Sarel's survey.”
The court attributed responsibility for this failure to counsel, not Sarel, but concluded that it was the most important problem with the study. In addition, respondents were asked leading, compound questions: First, “Was this energy drink advertised in any of the TV ads you saw, or not?” Then, “Do you think the company who makes the energy drink you saw in the TV ad, also makes this one, or not?” Last, “Was the name 6 Hour ENERGY approved, licensed or sponsored by the company who makes the energy drink you saw in the TV ad, or not?” The court found that the final question combined with the first two “clearly evidences the suggestiveness” of the trio of questions, making the study less reliable. (The court didn’t make clear how many respondents had already signalled agreement with the first two, and how many waited until question three, which would seem to be a highly relevant fact. If most of the “confused” respondents said yes to question 1, that seems like a very different result than if most of them waited until question 3.) Anyway, the court found that the questions were improperly designed to favor Innovation.
Moreover, participants weren’t informed that “don’t know” was an acceptable answer, and the court found that a properly designed study would have included “don’t know” or “no opinion” responses to reduce guessing; such options can lead to a 20-25% increase in don’t know/no opinion responses. Apparently, the survey included a “No/Don't know” option, but there was no evidence that the individuals administering the survey informed the participants that “don't know” was an acceptable answer. This contributed to a flawed and unreliable foundation for the survey results.
Finally, ROCK ON was not an adequate control because it was too dissimilar to the test stimulus. Except for being a competing energy shot, the trade dress was completely different: it had a gray/black label with two red/orange figures playing guitar and the words ROCK ON appearing vertically in silver lettering. The court noted differences in color, differences in text orientation, and lack of a durational description, and concluded that ROCK ON was an inadequate control.
Taken as a whole, the survey was so unreliable that it wouldn’t assist the jury and was excluded.
N2G sought to exclude Innovation’s study and expert report by Dr. Dan Sarel. The study was offered to show likely confusion between N2G’s 6 Hour Energy Shot and Innovation’s 5-Hour Energy. Innovation already won a preliminary injunction against the 6 Hour product (based mainly on trade dress), and also won summary judgment on its copyright infringement claim. Remaining for trial were trademark and false advertising claims, as well as damages issues.
Sarel opined that almost 2/3 of respondents were confused about the relationship between the parties’ marks. “In actual shopping situations where consumers are relying on their memory only, the perceived similarity of the names, especially for new and potential buyers, could cause major confusion.” Sarel used a mall intercept study targeting potential buyers of energy shots. They saw 6 TV ads, including one for 5-Hour Energy, then shown photos of the front side of N2G’s product and of the front side of a control product called ROCK ON, and then asked if either of the two energy drinks was advertised in the television ads the participant had just watched. Sarel concluded that 63.5 percent of the participants exhibited likely confusion.
The court found Sarel’s report inadmissible for want of a reliable foundation. First, participants were shown pictures, not actual bottles as would exist in market conditions. Innovation argued that defendants destroyed the actual 6 Hour bottles, but the court noted that it had an exhibit of 10 bottles on file since 2008 and that Innovation could have asked for more. Indeed, Innovation had two bottles in its possession at the time of the survey. Though one allegedly exploded, the survey could have gone with one since it didn’t need to be conducted everywhere on the same day. Innovation’s counsel said he possessed two bottles, one of which leaked, but that wasn’t a problem: “the participants were just to look at the two bottles, not drink from them.” Failure to use actual bottles “resulted in significantly flawed and therefore unreliable methodology in conducting Dr. Sarel's survey.”
The court attributed responsibility for this failure to counsel, not Sarel, but concluded that it was the most important problem with the study. In addition, respondents were asked leading, compound questions: First, “Was this energy drink advertised in any of the TV ads you saw, or not?” Then, “Do you think the company who makes the energy drink you saw in the TV ad, also makes this one, or not?” Last, “Was the name 6 Hour ENERGY approved, licensed or sponsored by the company who makes the energy drink you saw in the TV ad, or not?” The court found that the final question combined with the first two “clearly evidences the suggestiveness” of the trio of questions, making the study less reliable. (The court didn’t make clear how many respondents had already signalled agreement with the first two, and how many waited until question three, which would seem to be a highly relevant fact. If most of the “confused” respondents said yes to question 1, that seems like a very different result than if most of them waited until question 3.) Anyway, the court found that the questions were improperly designed to favor Innovation.
Moreover, participants weren’t informed that “don’t know” was an acceptable answer, and the court found that a properly designed study would have included “don’t know” or “no opinion” responses to reduce guessing; such options can lead to a 20-25% increase in don’t know/no opinion responses. Apparently, the survey included a “No/Don't know” option, but there was no evidence that the individuals administering the survey informed the participants that “don't know” was an acceptable answer. This contributed to a flawed and unreliable foundation for the survey results.
Finally, ROCK ON was not an adequate control because it was too dissimilar to the test stimulus. Except for being a competing energy shot, the trade dress was completely different: it had a gray/black label with two red/orange figures playing guitar and the words ROCK ON appearing vertically in silver lettering. The court noted differences in color, differences in text orientation, and lack of a durational description, and concluded that ROCK ON was an inadequate control.
Taken as a whole, the survey was so unreliable that it wouldn’t assist the jury and was excluded.
Wednesday, December 07, 2011
Reading list: on dilution
Sarah Lux, Evaluating Trade Mark Dilution From the Perspective of the Consumer, UNSW Law Journal Volume 34(3) (2011). A nice, short summary of the current state of play in dilution theory. A passage I liked:
... Reebok International has spent decades and millions trying to turn the mark REEBOK into a cultural symbol for individuality. In February 2005, Reebok launched a multi-million campaign built around the catch-phrase ‘I Am What I Am’, featuring enthusiastic testimonials of individuality from music icons Jay-Z, Daddy Yankee and 50 Cent, top athletes Allen Iverson, Donovan McNabb, Iker Casillas and Yao Ming, film stars Lucy Liu, John Leguizamo and Christina Ricci and skateboarder Stevie Williams. Despite this staggering investment, Reebok’s attempt to imbue its mark with cultural meaning has failed spectacularly. Rather than free-spirited self-expression, ‘[t]here are three major constructs that come to mind when looking at Reebok: change, confusion, and third tier.’ The Zippo Manufacturing Company, on the other hand, has had the opposite experience. The mark ZIPPO became a cultural icon during World War II when the lighter was chosen by American troops as the ultimate symbol of home. The Zippo was ‘the GI’s Friend’ and ‘the most coveted thing in the Army’ long before the company manufactured special edition lighters dedicated to the United States Army, Navy, Air Force, Marine Corps and Coast Guard in order to further develop these connotations of patriotism.
What was it that transformed the mark ZIPPO into a cultural artefact, if not just financial investment by its owner, and what was it that REEBOK lacked? Douglas Holt observes that brands are called on to ‘perform the particular myth society especially needs at a given historical moment, and they perform it charismatically’. Holt’s explanation is consistent with the above examples. Americans needed an emblem of patriotism during World War II and grasped onto the Zippo lighter to fulfil this need. Reebok, on the other hand, tried unilaterally to imbue its mark with meaning and failed. Holt’s analysis also goes a fair way towards explaining the expressive substitutability of brands, discussed in Part III(A)(2) above: when the mark BURBERRY became unavailable to consumers as a vehicle for expressions of prosperity, consumer communities simply looked for viable alternatives to meet their needs. The making of a mark into a valuable cultural artefact is not a one-sided investment decision made by a brand owner, but a cooperative process between a range of stakeholders.
Tuesday, December 06, 2011
Laws, like sausages, cease to inspire respect in proportion as we know how they are made.
Hemy v. Perdue Farms, Inc., 2011 U.S. Dist. LEXIS 137923 (D.N.J.)Plaintiffs alleged that Perdue inhumanely raised and slaughtered its chickens, yet falsely advertised to the contrary. Perdue makes Perdue-branded and Heartland-branded chicken. It allegedly prominently advertised that Harvestland, and some Perdue, chicken was “Humanely Raised.” It also allegedly charged a premium price for the labeled products. Perdue based its claims on the National Chicken Counsel's Animal Welfare Guidelines and Audit Checklist for Broilers. The NCC is an industry trade group, and its guidelines allegedly allow brutal treatment. Moreover, plaintiffs alleged that the guidelines allow each company to determine for itself whether or not it meets the guidelines. In fact, plaintiffs alleged, audits of various Perdue facilities revealed horrifying conditions.
Among other things: live chicks were found in Perdue's waste stream, chickens were held for excessive periods of time in trucks while awaiting slaughter, and Perdue's electrocution process and neck-cutting machines sometimes failed to quickly kill the birds thereby subjecting them to "paralysis, seizures, and cardiac arrest while still conscious." Plaintiffs contended that no reasonable consumer would expect that a “Humanely Raised” chicken had been treated in this fashion.
Separately, plaintiffs alleged that Perdue misleadingly advertised its chicken as “Raised Cage Free,” a meaningless and misleading claim because broiler chickens in the US are virtually never raised in cages, unlike egg-laying hens. Thus, the claim allegedly created a misleading comparison with competitors’ chickens.
Further, plaintiffs alleged that Perdue’s use of a USDA Process Verified shield was misleading, because this is a voluntary marketing tool. The USDA's Agricultural Marketing Service reviews a company's internally-generated guidelines and then conducts desk and on-site audits to determine whether the company follows its own guidelines. It does not compare the company’s practices to industry standards. The shield plus the “Humanely Raised” and “Raised Cage Free” markings allegedly misled consumers into believing that a reputable government agency had independently confirmed those claims.
Perdue allegedly aggressively marketed its use of its shield, as in brochures stating: "We've always known our Perdue chicken is good and with our new USDA Process Verified seal now we know it's Verifiably Good." Perdue also advertised the shield through its website and Facebook page, television commercials, and media and press statements. In a New Jersey Star Ledger article in 2010, a Perdue employee allegedly stated that the shield meant that the USDA had determined that Perdue's practices exceed industry standards.
The plaintiffs purchased Harvestland chicken allegedly relying on the “Humanely Raised” and “Raised Cage Free” labels and USDA shield. They brought claims based on the New Jersey Consumer Fraud Act, common law fraud, negligent misrepresentation, unjust enrichment, and breach of express warranty.
The Animal Welfare Institute moved to intervene or stay until the NAD issued a final ruling on the AWI’s pending challenge against Purdue based on the same claims. Because of this pending lawsuit, the NAD closed the investigation (though noting that it would reopen the investigation if a court didn’t make a determination on the truthfulness and accuracy of the challenged claims).
Though AWI waited five months to move to intervene, the suit was still in its infancy, and AWI’s delay was due to communicaitons with the parties to attempt to convince them to agree to a voluntary stay. The court concluded the motion was timely filed, but denied it anyway. There was no common claim or defense; the NAD proceeding was entirely voluntary, and the plaintiffs here already adequately represented the public interest against deception. Letting AWI intervene would cause undue delay. The court further indicated that it would have denied a stay anyway: resolution of the NAD proceeding would have no bearing on the case. The NAD’s rules were what led it to close the case, not any ruling from the court.
Perdue successfully argued that plaintiffs lacked standing to challenge Perdue brand products, because they only bought Harvestland products, not Perdue products.
The court began with the principle that standing requires an injury that affects the plaintiff in a personal and individual way; a plaintiff can’t rest a claim on the legal rights of third parties. Standing applies in putative class actions too, and can’t be predicated on injury the plaintiff hasn’t suffered. Class representatives must show they personally have been injured, not that other members of the class have been injured.
The court found plaintiffs’ failure to allege that they purchased Purdue brand products critical because they therefore failed to sufficiently allege injury in fact with respect to those products. (This is part of a broader trend to contract standing, which I’ve discussed before. There is nothing obvious or natural about the court’s conclusion. In some sense, each class member suffers a different injury than each other member, even though it’s the same general kind of injury. So how do we tell how similar the injuries have to be to make up a class? Presumably, the court is not going to require a class representative for each particular Harvestland product—breasts, thighs, whole chickens, 8 ounces, 24 ounces, etc. That kind of distinction would seem to be a distinction without a difference, even though it is probably true that the people who buy 24 ounces of chicken at once have some systematic differences from the people who buy 8 ounces at once. They’re just unlikely to differ systematically in response to claims about the humaneness of the process that produced the chicken. At the very least, such differences would be something the defendant should probably have to show to defeat class treatment. Why isn’t it the same for Purdue/Harvestland? Why does the trademark on the package affect how people might respond to the exact same claims? I can see an argument that this might occur depending on other brand characteristics, but the court doesn’t offer any reasons, and again this seems like the wrong kind of issue—deeply factual—to decide at the pleading stage.)
Regardless, the challenges to Perdue brand products were dismissed with prejudice; the court continued with respect to Harvestland only.
The NJCFA requires (1) unlawful conduct; (2) ascertainable loss; and (3) a causal connection between them. Plaintiffs alleged that, despite the package claims, Perdue didn’t actually humanely raise and slaughter its chickens, and that “Raised Cage Free” was misleading because it suggested that uncaging broiler chickens is a value-added feature when, in fact, nobody’s broiler chickens are typically caged. Finally, plaintiffs alleged that Perdue's use of the USDA seal next to the other claims created the false impression that the other claims had been independently verified by a neutral government agency, and that Perdue made this independent verification claim in other ways as well.
The court began by noting that NJCFA claims have to meet Rule 9(b)’s standards. Plaintiffs alleged specific purchases motivated by specific claims, which they alleged were not true based on audits of "various Perdue facilities used to produce chicken products ultimately marketed as 'Humanely Raised'" and also alleged an ascertainable loss because they paid a premium for labeled products. Among the allegations: Perdue allowed live chicks to suffocate in the trash, Perdue abused chickens during catching and transportation, Perdue kept live birds in the "Dead on Arrival" bins for deceased birds, Perdue subjected chicks to sleep deprivation to encourage abnormal growth; chicks were thrown to the floor as they were mechanically separated from their shells shortly after hatching; and chicks developed gait defects that suggest inhumane raising. With respect to slaughter in particular, plaintiffs alleged that Perdue electrically shocked the chickens before they were unconscious and crammed chickens into trucks for hours while they awaited slaughter, among other things.
The court said that “at first blush” this appeared to satisfy Rule 9(b). But looking further, it didn’t, because the allegations didn’t specify that these suffering birds ended up as Harvestland branded chicken. Plaintiffs could file an amended complaint (the court also wanted more specificity about the audits that were the source of the allegations about mistreatment, linking the audits to Harvestland products and showing that the audits were done during the same times plaintiffs were making their purchases, though I can’t see why Rule 9(b) requires that the audits, rather than the conditions revealed in the audits, need to have been contemporaneous with the purchase).
“For the sake of completeness,” the court also addressed an additional argument: Perdue claimed that a bunch of these allegations were about the inhumane slaughter of the chickens, and that slaughter has nothing to do with raising, so its “Humanely Raised” claim couldn’t possibly deceive consumers into thinking it engaged in humane slaughtering practices. In yet another illustration of the variability of human perception, the court was persuaded! Perdue relied on the dictionary definition of “raised,” which doesn’t include slaughtering, and a Department of Labor regulation governing wage and hour exemptions and a USDA Agricultural Marketing Service regulation to the same effect. The court found that these sources showed that, in many contexts, “the commonly understood definition of raising does not include slaughter.” Dictionary definitions and governmental definitions are relevant evidence, showing that the meaning plaintiffs pled for “raised” “is not the commonly understood definition of that term.” Thus, the plaintiffs needed to allege facts explaining the basis for a reasonable consumer having a different interpretation.
Apparently, reasonable consumers would like to buy, and pay a premium for, chicken that was well treated just up to the point of slaughter, at which point consumers no longer care if the chickens die suffering. The context—an advertising claim about the suffering-minimizing treatment supposedly provided, not a processing directive about a point in the life cycle of the animal—obviously implies that the chickens were humanely treated until death, or what’s the point? “We hold off on the inhumane treatment until we’re nearly ready to kill the chickens” wouldn’t have the same selling power. The court, however, found this argument—that no reasonable consumer would expect humanely raised chickens to be inhumanely slaughtered—was purely conclusory and “fails to explain why the ordinary meaning of ‘raised’ should be broadened to include slaughter.” The complaint needed to plead facts indicating that raising includes slaughtering, and plaintiffs’ “conclusory” allegations that they assumed that this was the case were insufficient. “To properly plead the intent of a group of consumers, a plaintiff must put forth concrete facts from which the Court can determine the plausibility of that allegation.” A statement about what consumers would expect “is not entitled to a presumption of truth under modern pleading standards.” Queries: does this mean that all consumer fraud complaints must include survey evidence? What percentage of consumers is required before the assumption becomes reasonable? Are we going to conduct an inquiry into the adequacy of the survey on the pleadings instead of on the merits? I would submit that “modern pleading standards” do not go so far.
Still, the court ruled, the same analysis applied to the rest of the “reasonable consumer” allegations. Gory details about specific alleged slaughtering practices—for example, that the chickens were traumatized by handling that broke their bones and dislocated their joints—did not provide factual support for the assertion that reasonable consumers would expect that humanely raised chickens wouldn’t be slaughtered inhumanely. (I guess the judicial “common sense” hailed by Iqbal and Twombly only applies to defendants? Or maybe the court just thinks that anyone who eats chicken ought not to inquire too closely into the conditions of production.) The chickens may be slaughtered inhumanely, but that doesn’t connect up with Perdue’s claim that it humanely raised its chickens.
Additionally, plaintiffs’ claims of ascertainable loss were also deficient because they failed to quantify the difference in value promised and value received; they only alleged a “premium” price and didn’t compare it to the price of competing products.
The “Raised Cage Free” allegations also failed, in part for not being limited to Harvestland products, but also because the complaint didn’t dispute that the chickens were not caged. Plaintiffs “have not pointed to any case law suggesting that using an accurate advertising phrase to promote oneself is actionable under the NJCFA.” Nor did they allege that Perdue made explicit comparisons to other producers. Thus there were insufficient allegations of misleadingness, and this claim was dismissed with prejudice.
As to the USDA Process Verified Shield, plaintiffs alleged that the placement on the package, as well as in-store signs, placards, and brochures created a false impression of government endorsement. Purdue advertised, "We've always known our Perdue chicken is good and with our new USDA Process Verified seal, now we know it's Verifiably Good." Perdue's website and Facebook page stated that the USDA Process Verified shield means that consumers "can have full confidence in the way we raised our chickens ...." And a Purdue employee was quoted in the New Jersey Star-Ledger saying that "[t]he USDA Process Verified Program, which is audited by the USDA, verifies that we are exceeding the industry standards."
The court was unimpressed. First, plaintiffs didn’t properly distinguish between Harvestland and Perdue-branded products. And the allegations didn’t contain specific facts from which it could be inferred that Perdue’s ads suggested to a reasonable consumer that the USDA certified Perdue’s use of the “Humanely Raised” and “Raised Cage Free” labels. So, for example, the newspaper quote connects the USDA program with “exceeding the industry standards,” but that doesn’t suggest that the USDA verified that Perdue was humanely raising its chicken. Nor does “now we know it’s Verifiably Good” speak to the other claims. (Again, so much for common sense. Consumers are apparently supposed to parse claims like lawyers looking for contractual loopholes—and this standard is applied at the pleading stage, before any factual development.) Anyway, plaintiffs didn’t allege they read the newspaper article, so they couldn’t rely on it to satisfy Rule 9(b).
Likewise, allegations that Perdue stated on its website and Facebook page that Perdue is "the only poultry company with third-party audits by the USDA to ensure humane treatment of [its] birds," and that Perdue urged shoppers to "look for third-party verification of any non-USDA defined term used on poultry packaging" were insufficient because there were no allegations about when these statements were posted, and it wasn’t clear that plaintiffs personally viewed those statements prior to purchase.
(The court did note that the fact that Perdue was USDA-authorized to use the shield didn’t “completely undermine” the plaintiffs’ allegations, which were that the combination of the shield with the other claims was misleading.)
Plaintiffs’ common law fraud and negligent misrepresentation claims suffered the same fate. Unjust enrichment also failed because that requires a direct relationship between the parties, which wasn’t present here. The express warranty claims were also insufficient because plaintiffs failed to allege any non-conclusory facts to support their claim that Perdue breached its advertising-created agreement by failing to actually humanely raise their Harvestland chickens. Though literally true but misleading representations may provide the basis for an express warranty claim, plaintiffs failed to allege that “Humanely Raised” was otherwise misleading. Likewise, plaintiffs failed to allege that Perdue didn’t live up to its end of the bargain with respect to “Raised Cage Free,” so the court dismissed that claim with prejudice.
Plagiarism and ethnocentrism
Daniel E. Martin, Culture and unethical conduct: Understanding the impact of individualism and
collectivism on actual plagiarism
Martin used Turnitin to detect plagiarism, defined as 30 words in sequence, along with measures of individualism and collectivism. Among the findings: length of stay in the US decreased collectivism in Asian students.
From the discussion:
collectivism on actual plagiarism
Martin used Turnitin to detect plagiarism, defined as 30 words in sequence, along with measures of individualism and collectivism. Among the findings: length of stay in the US decreased collectivism in Asian students.
From the discussion:
While the literature is full of explanations for why Asians and collectivists are more prone to plagiarize given their belief in sharing and the educational norms of rote learning and recall, there are few explanations as to why individualists are more likely to plagiarize. Yet, we have now a consistent stream of findings, in the US and UK, using multiple methods of research – both self report and in our case, actual plagiarism, which indicates that individualists are more likely to plagiarize. Plagiarism is clearly considered unethical conduct according to modern western thinking and is described as such in most universities. Yet, as many ways as we analyze our data, we find that individualists plagiarize more than collectivists. (citations omitted)And yet, from the conclusion:
Business schools need to provide clear expectations and training to ensure all students develop skills to avoid plagiarism, increase international students understanding of cultural norms and ease cross-cultural adjustment. Baron and Strout-Drapez (2001) surveyed 123 U.S. universities and found adjusting to a new educational and library system was a significant challenge faced by international students. International students are placed in stressful environments that challenge their educational norms, and expected to perform with no new cultural tools ensuring a reliance tactics that might be accepted by their home culture, but not the host culture. Similar to expatriate training, the differences in systems and behavior should be linked to cultural norm differences, with experiential library workshops in avoiding plagiarism. Equal weight should be placed on faculty education, as despite research evidence to the contrary, the stereotype persists that Asian students plagiarize more often than their mainstream American peers. The findings of the current study should be included in faculty orientation programs so that faculty can be aware of potential stereotypes. (citations omitted)Notice how that first recommendation ignores the finding that acculturation to Western individualism increases cheating? Acculturation appears to be part of the problem, not part of the solution. Even in recognizing the mistakes of the Western-favorable hypothesis that it's those Eastern collectivists who are more inclined to cheat, the article replicates them. But when students who think they’re only in it for themselves also think the material is unimportant to them, how could we expect low rates of cheating?
Friday, December 02, 2011
Dilution review question of the day
How would you analyze the following: George Mason homecoming theme altered to be "not so focused on Disney"? The discussion is mostly about evocation. "The names of Homecoming events, including 'Be Our Guest,' and 'I Just Can’t Wait to be Mason Majesty,' are not expected to change because ... the names are not as synonymous with Disney and an instant connection to the brand isn’t as easily made." Earlier story about the Disney theme here. New picture:
Thursday, December 01, 2011
DMCA exemptions again
Links via Fred von Lohmann. Documentarians' request. Public Knowledge (space-shifting). EFF (including the remix renewal/expansion request I pitched in on). Peter Decherney's education request. Now to get ready for the hearings ...
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