Top three results for "Stephen King guns" on Amazon

Many things could be said about the Freudian aspects of these responses to Stephen King's Guns (and I've always wondered why flag towels and flag paper plates and napkins are apparently ok, just as the second respondent thought that sticking the flag upside down was a good idea, but burning a flag is disrespectful and unpatriotic), but I'll just note that here we have more examples of why "no more than necessary" for nominative fair use shouldn't be interpreted very restrictively.

Discovery violations may lead to default false advertising judgment

Aviva Sports, Inc. v. Fingerhut Direct Marketing, Inc., 2013 WL 449775 (D. Minn.) (magistrate judge)

This “garden variety false advertising and patent infringement case” is of interest because of Aviva’s nearly 4-year battle to secure defendant Manley’s compliance with American rules.  Manley’s misconduct was so severe that the magistrate judge recommended entry of default judgment on liability and damages on Aviva’s false advertising claims.

As the magistrate judge began, “[w]hat has transpired should serve as a cautionary tale regarding the difficulties American lawyers may face when working with clients who do not operate within a system of jurisprudence that approximates the American system and who apparently have no fear about disregarding court orders.”  Manley ignored several court orders, and its “many American lawyers,” some of whom Manley was also apparently failing to pay, had little or no control or influence over their client.

The judge quoted the WSJ:

[C]hinese companies are especially prone to making big mistakes that spring from their failure to learn even basic principles about an American system that is very different from what they have at home. ... In China, litigants are not required to show their cards to each other. When an American lawyer talks about providing the opposing party with documents that might hurt the Chinese client's case, the Chinese company tends to view the lawyer as naïve. If, as too often occurs, the Chinese company second-guesses its American lawyer and fails to comply fully with the discovery process, it loses important credibility with the court…. Then, there are the complications when a Chinese litigant loses. The American system offers far more options for forcing a defendant to pay. Companies in China are notorious for shutting down their operations one day and then starting them a few days later under a new name to avoid paying a judgment.

Dan Harris, Chinese Companies Court Disaster, August 18, 2010.  The judge emphasized that compliance problems aren’t limited to Chinese companies, but “the difficulties Aviva and Manley's counsel were experiencing arose from Manley's profound lack of understanding of its responsibilities as a defendant in a U.S. lawsuit.”

Manley’s misconduct, at times facilitated by its American lawyers, included defiance of its basic discovery obligations: Manley refused to produce relevant documents, quite possibly moved documents from California to China to make discovery more difficult, produced huge numbers of untranslated Chinese documents, 90% of which turned out to be irrelevant (the production was over 500,000 pages), etc.  Manley’s counsel “rationalized this disaster” by stating that a “box” means something different, and bigger, in China than in the US. 

The judge noted that the lawyers “should have known that they needed to be more directly involved with their client's production. The ‘disconnect’ was obviously between Manley and its counsel.”  No American attorney for Manley ever went to China to oversee the production, violating FRCP 26(g), which imposes an affirmative duty on lawyers “to engage in discovery in a responsible manner that is consistent with the spirit and purpose of Rules 26 through 37... [and] obliges each attorney to stop and think about the legitimacy of a discovery ... response.”  Manley argued that it fulfilled its discovery obligations because it produced documents as they were kept in the normal course of business, including paper that had been used on one side and “recycled” by using the blank side for something else.  However, no one from Manley’s firm or counsel in China oversaw the document production for responsiveness.

The judge was also critical of Manley’s attorneys for acting as “passive conduits of Manley's indefensible positions and statements,” and occasionally compounding Manley’s intransigience with their own.  Practice note: attorneys should not “grant [themselves] a three-week extension of time” to comply with an order, fail to read an order, or the like.  (If Manley doesn’t pay up, query whether counsel can be made to pay at least some of the costs from the discovery dispute, which are on top of the liability for false advertising.)

Entry of default judgment is an extreme sanction, but justified given Manley’s defiance of explicit and detailed judicial instructions, including orders to pay costs.  “Manley has intentionally disobeyed every Order, has never offered any viable excuse for its willful conduct, and Aviva has been irreparably prejudiced in its ability to prepare for trial by the drain on its resources. Manley very clearly believes that compliance with the Orders of this Court is optional and that the Court is powerless to compel it to comply.”  A high standard for entry of default judgment is not insurmountable, and Manley managed to surmount it. 

The court concluded that lesser sanctions wouldn’t work; previous measures to secure Manley’s compliance, including monetary sanctions, had proved ineffective.  The only issue was the scope of the default judgment.  The discovery order and fee award that triggered this judgment addressed information related to damages, but that wasn’t the limit of Manley’s misconduct.  Default judgment was warranted for the totality of Manley’s misbehavior, including failure to provide discovery regarding how the products were advertised, whether returns were related to consumer deception, and how accurate the advertising was—issues that went to liability as well as damages.

Manley was willing to stipulate to damages in lieu of a liability finding, but Manley obstructed Aviva’s discovery into Manley’s costs and profits, severely limiting Aviva's ability to calculate damages.  The judge strongly suspected that Manley believed that Aviva’s damages calculations were too low.  (Manley submitted an answer to an interrogatory that purported to show that Manley wasn’t making any profit, but this was “absurd and completely unsupported,” and the court concluded that it was “created out of whole cloth.”)  “Limiting sanctions to a stipulation on damages, but forcing Aviva to prove liability, would reward Manley for its conduct.”  Since none of the orders Manley defied related to the patent infringement claims, it was appropriate to recommend default judgment only on the false advertising claims.

For damages, Aviva would be allowed to submit proof of its damages, and Manley wouldn’t be permitted to oppose its submission.  Aviva could also seek reasonable fees and costs under both state and federal false advertising laws.  The Minnesota DTPA allows a fee award for the prevailing party when a cause of action benefits the public, while the Lanham Act allows awards in “exceptional cases.”  Manley was also ordered to pay its existing obligations for the violations of earlier orders, presently over $360,000.

Conference announcement: disclosure and its discontents

The Washington Law Review will be hosting an upcoming symposium at the University of Washington School of Law on "The Disclosure Crisis." It invites those in the Pacific Northwest will be able to attend.

Announcement:

Mandatory disclosure is a popular form of regulation. From privacy to healthcare, politics to “payola,” laws requiring disclosure have proliferated in recent decades. This symposium features panel discussions by top scholars and practitioners on why we love—or love to hate—disclosure, why it seems to never work, and what solutions exist. 

Feb. 28, 2013

9:30 AM - 6:30 PM

UNIVERSITY OF WASHINGTON SCHOOL OF LAW

WILLIAM H. GATES HALL ROOM 138

Register by Feb. 26

-------------------------------------------------------------------------------- 

Preliminary Schedule, Subject to Change

 Welcome

Dean Kathryn Watts

 The Failure of Mandated Disclosure

Professor Carl Schneider, University of Michigan Law School

 Responses to The Failure of Mandated Disclosure

Professors Richard Craswell, Stanford University Law School and Ryan Calo, UW School of Law

 Disclosure: Alternative Contexts and Responses

Moderated by: Elizabeth Porter, UW School of Law

Panelists: Jeremy Sheff, St. John's University School of Law, Zahr Said, UW School of Law and Woodrow N. Hartzog, Cumberland School of Law Samford University

Disclosure in the Online Environment

Moderated by: Martin Kaste, National Public Radio, Correspondent, National Desk, Seattle

Panelists: Deven Desai, Thomas Jefferson School of Law, Kathryn Decker, Federal Trade Commission, and Susan Lyon, Cooley, LLP

Keynote Presentation by U.S. Attorney Jenny A. Durkan

Introduction by Dean Kellye Y. Testy

Sponsored by Law, Technology & Arts Group

Reception

Sponsored by Law, Technology & Arts Group

single sale in US creates trademark rights against allegedly perfidious licensee

Medimport, S.R.L. v. Cabreja, 2013 WL 443975 (S.D. Fla.) (magistrate judge)

Medimport sued defendants alleging that they conspired to usurp Medimport’s business opportunities by conducting business under Medimport's registered trademark and trade name, Halimed Medical Equipment, without authorization.  Cabreja and others entered into an exclusive distribution agreement to sell Halimed products in the US, South America, and the Carribean, but then allegedly misrepresented their sales, engaging in multiple sales under the Halimed name that weren’t disclosed to Medimport.  Defendants allegedly tried to get the Halimed name for themselves through various maneuvers.  Medimport sued for unfair competition, breach of contract, fraudulent inducement, misappropriation of trade secrets, etc.

Medimport’s initial motion for preliminary injunction based on its unfair competition, state unfair trade practices, and breach of contract claims was denied.  However, the magistrate judge did find that the court had subject matter jurisdiction based on the Lanham Act claim, the sole federal claim.  Defendants argued that direct competition in US commerce was required, but the judge disagreed and held that Medimport had constitutional and prudential standing.  Even if direct competition in the US were required, competition existed between Medimport (albeit through its representative Cabreja) and Cabreja (on behalf of himself).  Medimport showed a substantial likelihood of prevailing on the merits, but failed to demonstrate irreparable harm because defendants stopped using the Halimed name and Cabreja represented that they wouldn’t restart.

On further proceedings, defendants renewed their argument that Medimport lacked rights because they weren’t using the mark in the US.  But, under the distribution agreement, Cabreja and another defendant had exclusive rights to promote and sell Halimed products in the US, and the complaint alleged that Cabreja in fact made a sale in Florida under the agreement.  That was enough for US use.

Defendants also challenged Medimport’s constitutional and prudential standing, and the judge found it worthwhile to use the awful Phoenix of Broward standard, even though this wasn’t a false advertising case.  (For Article III purposes, Medimport alleged an actual injury fairly traceable to defendants' alleged misconduct that would be redressed by the relief sought.)  Of course, the factors were useless and mechanically favored the alleged trademark owner in this trademark case: false association is the type of harm the Lanham Act aims to prevent; the injury of infringement to a trademark owner is direct; no one else has a greater interest; there’s a causal link between the alleged misconduct and the alleged harm; and there was no risk of duplicative damages from another owner.

The magistrate judge also rejected the argument that the economic loss rule barred most of Medimport’s claims, including its Lanham Act claim.  Unfortunately the reasoning was bizarre: Florida’s economic loss rule doesn’t bar intentional torts, and “[t]rademark infringement and unfair competition are intentional torts.” I’m pretty sure a better reason would be that federal trademark infringement (which does not require intent) can’t be governed by Florida rules (not to mention that Florida’s unfair trade practices statute has its own rules).  Furthermore, Medimport alleged more than just breach of contract; the allegedly deceptive acts and usurpation of corporate opportunities were enough to plead a valid FDUPTA claim.

tax predictions unreliable as matter of law

Brakke v. Economic Concepts, Inc., --- Cal.Rptr.3d ----, 2013 WL 441606 (Cal. App. 4 Dist.)

Brakke and other principals of Dealer Management Group sued American General Life Insurance, Economic Concepts (EC), and other parties for alleged misrepresentations about a pension plan.  Defendants allegedly persuaded Brakke et al. to establish the pension plan by representing that contributions were tax deductible. Subsequently, the IRS determined that the pension plan didn’t qualify for favorable tax treatment, resulting in back taxes and penalties. The trial court rejected the claims for fraud, violation of the consumer protection law, etc. on the pleadings, and the court of appeals affirmed.

Plaintiffs alleged that defendants told them that the plan was legal and that contributions would be tax deductible.  EC’s marketing materials said that EC “has secured a letter opinion of ‘more likely than not’ from” a named law firm, and “[a]ll participating employers in the ... [p]lan will receive an individual IRS letter opinion approving the plan.”  After 3 years, though, the IRS audited the plan and determined that it failed to comply with certain requirements.  Plaintiffs alleged that defendants knew that their statements were false or had no reasonable ground to believe them to be true.

The trial court accepted the argument that the claims failed as a matter of law because they were based on future predictions about tax law on which plaintiffs couldn’t have justifiably relied.  It wasn’t until 2004, after plaintiffs established the plan, that the IRS declared such plans unlawful.

The plans at issue required careful design to comply with the law, and the 2004 IRS ruling was designed to clear up ambiguities that had developed.  As a matter of law, 2004 rulings couldn’t be used to show that earlier statements were false when made.  Berry v. Indianapolis Life Ins. Co., 638 F. Supp. 2d 732 (N.D. Tex. 2009) (rejecting claims similar to these).

There are exceptions to the general rule that misrepresentations are only actionable if they relate to existing fact, not to opinions or predictions.  These exceptions are  “(1) where a party holds himself out to be specially qualified and the other party is so situated that he may reasonably rely upon the former's superior knowledge; (2) where the opinion is by a fiduciary or other trusted person;  (3) where a party states his opinion as an existing fact or as implying facts which justify a belief in the truth of the opinion.”  However, as Berry held, it’s inherently unreasonable for anyone to rely on a prediction of future IRS enactment, enforcement, or non-enforcement of the law from someone who isn’t affiliated with the US government.

Plaintiffs argued that, based on earlier IRS administrative materials, they could show that the IRS had long criticized many of the features that characterized their plan, and could amend their complaint to allege that the IRS had begun scrutinizing plans similar to theirs.  Thus, they argued, defendants shouldn’t have emphatically promised tax deductibility. The court of appeals didn’t agree.  The IRS documents mentioned failed to provide definitive guidance and didn’t support the idea that the defendants knew their representations were false when made. 

Although the UCL only requires likely deception, deception requires that the public have had an expectation or assumption about the matter in question. Absent a duty to disclose, failure to disclose doesn’t support a UCL claim.  Given EC’s representations about the “more likely than not” qualification for favorable tax treatment, plaintiffs couldn’t allege that they could reasonably expect or assume that the IRS would never disqualify their plan or revise its interpretation of the tax laws, or that EC would have a duty to tell clients about a possible future change in tax law.

If you like the FTC's substantiation rule, you'll love NAD's?

I don’t often blog NAD decisions, but this is a rare false advertising claim about the “If you like X, you’ll love Y” ad form, and thus of great interest to me insofar as American law has allocated such claims to the domain of false advertising, not to trademark law.

Kraft Foods, Inc. (Gevalia Kaffe for Tassimo), NAD Case #5542 (01/03/13)

Starbucks and Kraft, which makes single-cup coffee pods for Tassimo brewers, ended an earlier agreement for Kraft to sell Starbucks pods.  Kraft then introduced Gevalia brand pods with ad claims in the form: “NEW!” If you like STARBUCKS® [Breakfast Blend/Caffe Verona/House Blend] try this!*”  The asterisk went to a small disclaimer of affiliation. 

Starbucks argued that this falsely implied that the varieties tasted the same or similar to the coordinate Starbucks blend.

Starbucks' case: it submitted an internet survey using an image of the Dark House Blend.  Respondents were asked to look at it carefully “as if you are shopping in a store,” then asked what brand of coffee was in the package; 74% identified Gevalia and went on to the remaining questions, which continued with open-ended questions about the main idea of the package.  They were then asked whether the package referred to any other brand and given six choices, including Starbucks, as well as write-in and “unsure” options.  Those who identified Starbucks (62% of the original 253) were asked “Do you recall whether or not the package said: ‘If you like Starbucks House Blend try this!’”  Those who said no or didn’t remember were filtered out, leaving 53%.  These were asked “which of these ideas, if any does that [statement] communicate to you?”  The options were (1) the taste is similar; (2) Gevalia is less expensive than Starbucks; (3) “Neither of the ideas is being communicated. It is only suggesting that people try Gevalia Dark House Blend”; and (4) don’t know/no opinion.

In response to this closed-ended question, almost all of the remaining participants, or 48% total, took away a taste similarity message, while only 4% received a cost message and 1% didn’t know or had no opinion.  Also, the results on the open-ended questions corroborated the closed-ended results: 83% of those who remembered the “if you like” claim volunteered a taste similarity answer in response to the open-ended questions.  Starbucks further argued that, because the ad said nothing about cost, the answer that Gevalia was less expensive operated as an “internal control” for noise: asking a reasonable question that isn’t answered in the ad can control for respondents’ mention of ideas that don’t really appear in the ad based on preexisting beliefs.  No alternate control ad was possible, because that would require removing the comparative element.

Starbucks and Kraft fought over coding, but Starbucks argued that responses about preference that didn’t specifically mention “taste” or “flavor” should be coded as favoring Starbucks because consumers select blends based on taste.  In addition, even only looking at specific references to taste flavor, 28% of respondents volunteered that type of response to the open-ended questions.

Starbucks’ next hurdle: was the claim of taste similarity false or unsubstantiated?  NAD requires advertisers to substantiate reasonable interpretations of their claims.  To disprove the claim, Starbucks conducted taste tests of the three pairs, with a total of 150 participants tasting each pair in five major cities.  Participants were asked to prepare the coffee “as you normally do when drinking coffee,” taking care to “prepare both coffees exactly the same way,” and shown their answer choices so they’d know their objective.  (This is going to distort results of taste tests—verbal overshadowing and all that.)  They were asked to eat some cracker and sip some water before each taste, and offered the opportunity to taste the coffees a second time.  Then they were asked to choose from the options “The coffees taste very different from each other,” “The coffees taste somewhat different from each other,” and “The coffees taste similar to each other.”  In each case, from 64-74% of participants chose “very different” or “somewhat different.” 

Kraft argued that the “if you like Starbucks, try Gevalia” claim communicated only that Gevalia was a new alternative worthy of being tried.  “Try this!” simply encouraged action, rather than making a factual claim.  While Starbucks claimed that consumers would only try another coffee because of similar taste, Kraft rejoined that consumers could just as easily act out of curiosity or the desire for a different taste within the same general range (e.g., dark roast).  Indeed, NAD and the courts have not found vague or ambiguous terms such as “like” or “try” to be falsifiable.

Kraft also had a number of objections to the survey.  As for the closed-ended questions, Kraft argued that the survey steered respondents by underlining the words “is less expensive to buy” and “is similar to,” cuing them to those two answers as the ones that were more likely to be “right.”  And because the “less expensive” message was so implausible as a takeaway from the ad, participants were actually steered to the “similar” response.  In an online survey, where participants’ attention can’t be controlled, this was especially problematic.  Here, moreover, the survey underlined “is similar to” but not “taste,” and so rushed participants might easily overlook “taste” and focus on general similarity, such as similarity in blend.  (The initial survey description sounded good, but the underlining does seem problematic to me for precisely these reasons.) 

Kraft had other objections, including that the final option (“Neither of the above ideas is being communicated. It is only suggesting that people try Gevalia Dark House Blend”) was two separate and unrelated answer choices combined into a single convoluted option, and didn’t fairly present Kraft’s intended message—try Gevalia—as a choice.  It also disputed the coding of some responses, such as responses simply using the words “comparable,” “similar,” “just as good,” etc., as taste similarity claims.  Moreover, taste similarity could just mean that they fit into the same general categories such as bold, dark roasts; the survey wasn’t able to distinguish between “trivial” similarity and “tastes just like” similarity.

Kraft also criticized the taste test, arguing that the surveyor represented, either expressly or by implication, that the coffees were different.  Kraft argued that many respondents see tests of this kind as tests of their ability to make distinctions.  (FWIW, this is my understanding of the research as well.)  There is a standard control for this, which Starbucks didn’t use: give a control group the exact same coffee twice and ask them the same questions.

NAD found in favor of Starbucks.  An advertiser is responsible for supporting all reasonable interpretations of its advertising claims, and NAD agreed that a reasonable implication of “if you like X blend, try Y!” for coffee is that Y tastes the same as or similar to X.  The online survey was generally reasonable, though NAD was troubled by the closed-ended question and questioned whether the “less expensive” choice was a suitable internal control. NAD also didn’t like the failure to fully rotate the options (so that only the first two rotated), and agreed with Kraft’s criticism that the third option, containing Kraft’s intended message, wasn’t well phrased.  Further, the underlining was problematic.  So NAD didn’t rely on the answers to that question.

However, NAD was more inclined toward Starbucks’ position on the open-ended questions.  By NAD’s count, 66 out of 253 respondents, or 26%, referred to either the taste or flavor of the two products being similar or the same. Combined with NAD’s independent evaluation of the claim, this was enough to determine that the language communicated more than a mere invitation to try Gevalia.  It would be reasonable for a consumer to take away a “similar taste” message given the hedonic appeal of “like.”  However, NAD cautioned that a mere mention of a competitor wouldn’t in and of itself convey a comparative taste message.

There was no record evidence about whether consumers preferred one coffee over the other.  NAD noted Kraft’s criticisms of the taste tests, but Kraft itself provided no evidence substantiating the claim.  Because the burden of substantiation is on the advertiser, NAD recommended that the claim be modified or discontinued.  Kraft, of course, respectfully disagreed with NAD’s conclusion, but for “various business reasons” is changing the claim anyway.

Reverse passing off and Dastar's limits

Genometrica Research Inc. v. Gorbovitski, 2013 WL 394892 (E.D.N.Y.)

Genometrica is developing a medical device, a DNA analyzer/sequencer.  It was formed by one of the two individual defendants, Gorfinkel, and Gorbovitski was its sole director and executive officer for a time, but after they sold their stakes, they allegedly created a new company, Advanced BioMedical Machines, in order to compete directly with Genometrica to develop ABMM’s own sequencer.  This sequencer is allegedly substantially similar or identical to Genometrica’s, and ABMM allegedly “states in its marketing materials that its device employs and exploits inventions, technology patents, know-how, trade secrets and related intellectual property and other information that belongs to Genometrica.”  In addition, its website allegedly offers to sell ABMM’s sequencer, a “version” of Genometrica’s device, without authorization.

Without discussing Dastar, the court refused to dismiss the false designation of origin/false advertising claims, even though the allegations were that ABMM was “holding out and representing to the public in interstate commerce that it is the owner of all rights, title and interest to the website and the intellectual property contained therein, including the Medical Device” and that this was false because the image of the sequencer on the website clearly showed the Genometrica’s former corporate name and was taken from a brochure prepared by Gorbovitski as Genometrica’s officer. 

The picture might well ground a reverse passing off claim, but the broader “misrepresentation of IP ownership” allegations seem clearly Dastar-barred.  Still, the court accepted the general allegations that defendants’ conduct created a likelihood of confusion etc. as to “the affiliation, connection, and association between Defendants' ABMM Sequencer and Genometrica's Medical Device.”  That is, the complaint set out all the elements of false designation of origin (oddly, the court repeatedly referred to the device as a “work,” which suggests that it should have encountered Dastar)—but see below.

In addition, Genometrica stated a claim for false advertising because defendants allegedly made a false or misleading representation about the sequencer (which appears to be simply that it was defendants’) and otherwise alleged the elements.

Defendants apparently didn’t argue Dastar directly, even though it would’ve given them some purchase on the false advertising claims as well, given the case law.  Instead, they argued that Genometrica didn’t properly plead that it owned a trademark.  If the §43(a) claim was for infringement of an unregistered mark, Geometrica would need to allege the existence of a protectable mark.  But a false advertising §43(a)(1)(B) claim doesn’t require that, so that claim survived.

 

What about §43(a)(1)(A)?  The court determined that false designation of origin requires a protectable mark. Genometrica didn’t allege that it had a protectable mark for its former corporate name or for any other mark in connection with the sequencer.  Thus, allegations of false association and trading on Genometrica’s goodwill was insufficient to state a claim.  Alleging reverse passing off, in the absence of a mark, wasn’t sufficient to satisfy the statute.

Evaluating counterfeits

Does the NYT know it should be glad that SOPA/PIPA failed? Here’s a story about counterfeits on Canal Street, with reasonably clear explanations of how they were acquired and for what price, along with pictures of the results.

What's the proper scope of corrective advertising?

Merck Eprova AG v. Gnosis S.P.A., 2013 WL 364213 (S.D.N.Y.)

Merck also won a false advertising claim against Gnosis (and in this case, there were “egregious discovery violations”).  In this opinion, the court settled on an attorneys’ fee award and discussed the appropriate corrective advertising already ordered.  The award was over $1.9 million, and nearly $300,000 in costs.  Gnosis argued that this sum far exceeded their sales of the product at issue, $175,664.71, as well as the damages awarded by the court, $526,994.13.  But the actual stakes in the case were the market share of one of Merck’s flagship products, and Merck’s lawyers got a significant victory (including an injunction), making the fee reasonable.

Merck proposed tha the corrective advertising campaign (1) disclose that the campaign is court-ordered; (2) explain that Gnosis’s misrepresentations were found to be willful; (3) provide a link to the opinion hosted on Merck’s lawyers’ website; (4) run on Gnosis’s homepage; (5) run on third-party industry websites; and (6) run in trade magazines where Gnosis’s offending products were advertised.  Gnosis argued that the first two were punitive and unrelated to curing market confusion; that providing a link to the opinion was unnecessary and provided free advertising for the lawyers, given that the opinion is available free online; that the ads should only run on pages where the products are sold, not Gnosis’s homepage; and that the ads shouldn’t run on third-party websites or trade magazines because Gnosis itself didn’t advertise there.

Corrective advertising must be reasonable and causally related to the false advertising.  Some of Merck’s requests went beyond addressing consumer confusion.  So, the ads would have to disclose that the campaign is court-ordered to provide consumers with context for Gnosis’s clarification, but need not disclose that its misrepresentations were willful.  The ads had to provide a link to the opinion, but it need not be hosted on Alston & Bird’s website.  The ads had to be on Gnosis’s homepage as well as product sale pages “to ensure sufficient market dissemination,” but need only run elsewhere “where the offending products were or are presently advertised by Gnosis.”

The left hand of false advertising: counting to $11.6 million

Merck Eprova AG v. Brookstone Pharmaceuticals, LLC, --- F.Supp.2d ----, 2013 WL 363382 (S.D.N.Y.)

The court awarded Merck lost royalties based on what it would have charged to license the pure product to Acella, then trebled the damages because the proven damages weren’t full compensation and because Acella’s violations were willful.  However, the court didn’t award Acella’s profits.

Merck showed that its royalty calculations were a fair and reasonable approximation of its lost profits, which was all that was required.  Acella argued that Merck didn’t prove that lost sales were attributable to Acella, but that argument was “contradicted by Acella's entire business strategy.” Plus, the record showed that sales of Metafolin-containing products declined “for the first time, and markedly, when Xolafin entered the market.”  Merck calculated damages by multiplying Acella units sold by the net sales price of the corresponding Merck-licensed products, then multiplying that by .048, its net royalty rate, and subtracting variable expenses, for a total of nearly $3.9 million.

Acella’s damages expert contended that this ignored cross-price elasticity—the market-growing effect of a lower-priced product.  But given that Acella didn’t show that it marketed its products in any way other than database linkage, and thus that its sales depended on substitution for a prescribed Metafolin-containing product, elasticity was irrelevant. 

Acella also argued that Merck didn’t account for the market entry of another competitor, Trigen, whose products were also linked—in Acella’s view, all or much of its sales would have gone to Trigen rather than to Merck’s licensee because Trigen’s products were also cheaper.  But that wasn’t important, because Merck based its lost profits claim on Acella’s sales, not on sales lost to its licensee.  Unlike a typical competitive market, in this one Acella’s very presence depended on direct substitution.  So while a portion of those sales might have gone to Trigen in Acella’s absence, the close nexus between Acella’s sales and Merck’s losses, along with the established principle that doubts on the amount of damages should be resolved against the Lanham Act violator, meant that Xolafin sales were an appropriate measure of damages.

Plus, Merck’s royalty-based calculation reflects the profit Merck would have made from licensing to Acella, regardless of Trigen’s presence in the market.  (Wait, that can’t be completely right: there’s at least some chance that paying the license fee would have raised Xolafin’s price above Trigen’s price, shifting sales.)  Acella shouldn’t be rewarded with a windfall for its activity.  “[A]t a minimum, Merck is entitled to the amount it would have received had Acella legitimately licensed its product and not falsely claimed its likeness.”

The Lanham Act allows trebled damages as long as that’s compensatory, not a penalty.  However, trebling can serve a compensatory purpose when the damages are hard to quantify along with a deterrent purpose where the violation was willful.  Given the equities, Merck was entitled to treble damages.  First, awarding only lost royalties would amount to a forced license despite Merck’s rejection of Acella’s licensing attempt.  (How does that make the damages hard to quantify?)  Second, Acella’s “staggering volume” of sales, resulting in $50.2 million in profit, suggested that a similar volume of sales of higher-priced Metafolin-containing products would have resulted in even greater royalties for Merck.  (OK, I’m lost.  If the only sales effort was linking, then—subject to Trigen’s presence and whatever sales would’ve been lost to Trigen—why can’t we just figure this out from pure sales volume?  At a minimum, it seems to me that the only argument for damages being hard to quantify for this reason stems from Trigen’s presence.)

Furthermore, Acella was able to gain a foothold in the lucrative supplement market, the profits of which funded its development of a cost-effective folate supplement that, if properly labeled, could compete with Metafolin-containing goods.  “Thus, Acella's rise as a legitimate competitor today was premised on the production and false advertising of a willfully infringing product prior to this action.” These intangible benefits weren’t fully reflected in a calculation of damages, so the court trebled the damages to roughly $11.6 million.

The court declined to award Merck Acella’s profits.  Profits can be awarded after a finding of bad faith, in order to deter, to prevent unjust enrichment, and to compensate the plaintiff for harm.  Here, disgorging Acella’s profits would be an impermissible windfall to Merck.  “As the supplier of raw folate, Merck never stood to gain profit from the sale of a finished consumer product.” To the extent that any entity deserved an accounting, it would be Merck’s licensee.

Merck also requested a permanent injunction preventing Acella from (1) labeling its Xolafin and Xolafin–B products with the name “L-methylfolate” or any synonyms thereof, and (2) selling any methylfolate product for a period of five years and ordering a corrective advertising campaign.  The court granted part of the requested relief.

Irreparable harm for permanent injunctive relief can be established by showing competition plus a logical causal connection between the false advertising and the plaintiff’s sales position, both of which had been shown.  Damages couldn’t compensate Merck for Acella’s market position acquired due to false advertising.  The court ordered a corrective advertising campaign to explain to the relevant consumers that Xolafin products contain a mixture of the D- and L-isomers. But Acella wasn’t permanently enjoined from using the name of the L-isomer.  Instead, Acella had to “label its methylfolate products in the future in a way that alerts consumers to the presence and relative amounts of both the D- and L-isomers in the products.”  Truthful use of the L-isomer’s name was allowed.  Nor would the court ban Acella from selling any methylfolate product for five years, as requested.  Courts don’t ban noninfringing products; this remedy wouldn’t be narrowly tailored to fit the specific legal violations (even though above, the court accepted the argument that Acella’s position is based on past illegalities), and would harm the public interest in lower-cost, truthfully labeled products.

The court then found that there was sufficient bad faith to constitute exceptional circumstances justifying an award of attorneys’ fees.  “Acella's defense—premised as it was on a post hoc rationalization of its willfully infringing conduct—smacked of disdain for this Court.”  Acella’s testimony about its labeling decision “directly conflicted with FDA guidance, Acella's own practice with respect to all ingredients other than D,L-methylfolate, and Acella's internal communications.”  Though the FDA guidance isn’t mandatory, Acella identified all the compounds in its supplements, including D,L-prefixes, except the racemic folate mixture, so that one label read “dl-alpha tocopheryl acetate” and then “L-methylfolate” (which to me confirms the falsity by necessary implication argument).  The “glaring conflicts” between Acella’s private and public statements convinced the court that Acella’s practices were deliberately misleading and that a fee award was justified.  (In a related case, the fee award was $1.9 million; hard to imagine it will be lower here.)

The left hand of false advertising: liability phase

Merck Eprova AG v. Brookstone Pharmaceuticals, LLC, --- F.Supp.2d ----, 2013 WL 363382 (S.D.N.Y.)

Merck sued Acella, which sells low-cost vitamins and nutritional supplements, and two of its officers.  It alleged that Acella falsely labeled its folate products, leading customers to believe that Acella’s mixtures were the same as Merck’s purer product (pure here refers to a specific ingredient, of which more in a moment, not to manufacturing impurities or the like).  The labeling prompted pharma databases to link the parties’ products, which then led to large-scale substitutions by pharmacies and others, despite their different compositions.  After a bench trial, the court found Acella and its two employees liable for false advertising and contributory false advertising, though it rejected Merck’s NY GBL §§ 349 & 350 claims.  The court awarded over $11.6 million plus interest in damages, as well as injunctive relief and attorneys’ fees.

Merck's customers use Merck’s ingredients to make their own consumer products. Acella sells its own lower-cost consumer products.  The relevant ingredient here is folate.  Background: stereoisomers are molecules with the same atomic composition that may differ in the arrangement of atoms.  Even with identical molecular formulas, molecules’ physical, chemical, and biological properties may differ, with resulting difference in effects on the human body.  While stereoisomers can be identified by several prefixes, here we’ll use D- and L-. 

The predominant naturally occurring form of folate, L-tetrahydrofolate, is more easily metabolized and processed by the human body than the easily-synthesized folic acid.  But when it’s synthetically manufactured, it comes out with its other stereoisomer, the D-version.  The mixture created in the synthetic manufacturing process is known as D,L-5-MTHF.  Unlike the friendly L-version, D-tetrahydrofolate isn’t active in the body, isn’t easily absorbed, and its impact on the body is unclear.

Merck was the first company to offer a substantially pure L-product.  Its Metafolin contained at least 99% L-5-MTHF. Metafolin “both set and satisfied the international standard for L-5-MTHF purity,” a standard adopted by the FDA, WHO, and the European Food & Safety Authority.  Metafolin began to outpace competitors who’d previously offered D,L-products with an approximately 50-50 balance.  Merck built a following of customers who touted Metafolin’s inclusion in their products as a unique selling point.

Acella initially tried to license the L-version from Merck; when Merck rejected this, Acella began to develop its own folate source.  They followed an internet ad (seriously, those work?) from a Chinese manufacturer for the “racemic” form—that is, a D,L-mixture with equal parts D and L—to China, and bought it.  Acella entered into a supply agreement with the Chinese producer, specifying the racemic form. Acella then developed its own folate product, Xolafin, with that mixture.  Despite the mixed contents of its product, Acella labeled its folate source as L-methylfolate, without acknowledging the presence of the D-version.  Other products on the market using a 50-50 mixture used “D,L-methylfolate” on the label, as Acella knew.  (In 2010, Acella introduced Xolafin-B, which contains between 90-95% of the L-version.)

After Acella entered the market, sales of Merck-licensed products plummeted for the first time.  This apparently occurred because of pharmaceutical substitution, in which a less expensive generic is substituted for the product specifically prescribed by a healthcare professional.  Pharmacists use databases which collect information from manufacturers, such as labels and package inserts, and decide whether to link products.  Databases generally don’t link products whose active ingredients differ.  Pharmacies and health care professionals use the databases, often subject to state law governing pharmaceutical substitutions, to decide whether to substitute one product for another.

Acella provided databases with the labels and package inserts for its Xolafin-containing products for the admitted purpose of being linked to higher-priced Metafolin-containing products.  If the labels had differed, there’d be a significant risk that databases wouldn’t link the products—a risk of which Acella was quite aware given at least one database’s refusal to link its product with a brand name version due to a temporary label difference.  Thus, Acella actively monitored the labels of Metafolin-containing products and made sure its labels were identical.  “Every single time a Metafolin-containing product changed its label, Acella made a corresponding change to the labels of its products to avoid ‘delinkage.’”

Though Merck wasn’t Acella’s direct competitor, the court found Lanham Act standing an easy question, because they both produce competing sources of folate for use in dietary supplements—Acella just carries that further in-house.

Next, the court found that Xolafin’s labels weren’t literally false, since they did contain the L-methylfolate on the label, and properly identified the net amount of that isomer, even if they did not identify the presence and amount of the inactive D-isomer. Because the labels were thus “susceptible to more than one reasonable interpretation,” there wasn’t literal falsity.  (I do not understand why the court didn’t at least analyze falsity by necessary implication.)

Still, the court found implied falsity, based both on consumer surveys and on Acella’s intent to deceive (that intent is why I think there’s a good case for falsity by necessary implication—Acella relied on the ordinary functioning of implicature under the circumstances).

Merck’s first survey showed physicians and pharmacists Acella labels/package inserts using “Folate (L-methylfolate as Xolafin 600 mcg)”; the control group saw instead labels that read “Folate (D,L-methylfolate as Xolafin 600 mcg).”  The survey asked, “What, if anything, does this communicate to you about the folate ingredient termed Xolafin contained in this vitamin?”, and, “Do you think that the folate ingredient termed Xolafin contained in this vitamin is or is not a substantially pure isomer?” Among pharmacists, 45% answered that the L-version was a substantially pure isomer, and 9% said it wasn’t.  In the control group, 24% said the D,L-version was a substantially pure isomer, leading to a net 21% who were deceived by the label (and, it seems, a majority who have no idea what an isomer is). The physicians did worse (or maybe I mean better, in that slightly more seemed to admit their ignorance): in the test cell, 37% said the L-version was a substantially pure isomer and 4% said it wasn’t, whereas 26% in the control group said that the D,L-version was a substantially pure isomer, netting 11%.

The second survey was of retail pharmacists, attempting to determine whether they treated Acella products as pharmaceutical equivalents of Merck products, which would result in substitution. The survey asked how similar the products were based on their labels, and whether mixture products would be an appropriate substitute for pure products.  Based on one survey, the expert concluded that over 45% of respondents believed that Acella products could appropriately be substituted for Merck products, most often because they believed that the products had the same ingredients.  (It would be interesting to know why the others rejected substitution.)  When asked whether a mixture product would be an appropriate substitute for the pure product, only 10% of respondents said that it would be without contacting the prescribing physician.  In a second survey, over 75% of respondents believed that Acella was an appropriate substitute, while only a third of pharmacists said that they’d substitute a racemic mixture product for the Merck product without contacting the prescribing doctor.

The court found both surveys reliable; they used adequate control groups and showed real labels.  The 21%, 11%, and higher levels of confusion showed that a substantial percentage of consumers received the misleading message.  Indeed, the labels were “plainly false and designed to confuse.”  As evidenced by others’ labeling practices, “in the context of folate sales, mixture products customarily identify the presence of the D-isomer. Acella's labels pointedly failed to do so.”  Its deliberate search for a racemic mixture underscored the deceptive nature of its labels.  Even a sophisticated target audience was deceived, “an unsurprising result given labeling customs and database linkage.”

Indeed, Acella’s deliberate misconduct justified a presumption of deception.  Although a high level of evidence is required to show the egregious misconduct required to trigger this presumption, Merck satisfied that requirement by showing Acella’s intentionally misleading marketing. The substances are distinct; Acella sought out the mixture knowing its differences; in internal communications, Acella referred to it as a mixture; but it labeled its mixture product as if it were pure.  The intentional deception was further proved by Acella’s continual labeling changes to avoid delinking.  Moreover, when questioned by the databases on the specific chemical makeup of the folate products, one of the key individuals “deliberately avoided answering the question, knowing that a truthful response would likely result in delinking.”

Acella argued that its labels merely reflected that the active ingredient was the L-isomer, and the D-isomer was just an impurity that didn’t need to be disclosed.  Its rationalizations were contradicted to its own internal references to the racemic product, as well as its use of subcomponents in other product labels.  Acella was aware of the FDA etc. labeling standard for pure folate products, which limits the presence of D-isomers to 1%.  Also, it would have been illogical for Acella to initiate development of Xolafin-B, with its purer makeup, if the amount of D-isomer were irrelevant.  The great lengths Acella went to in order to capture Merck's market also justified a presumption of consumer deception, from contracting with the Chinese purchaser to making labeling decisions (this, I don’t get—contracting to buy raw materials is something you’d do even with a truthful strategy; why does investing in a product count?).  Acella didn’t meet its burden of showing the absence of likely confusion.

Acella brazenly disputed materiality.  But the two isomers have different effects in the human body, and databases link products based on the apparent pharmaceutical equivalence of the products.  Acella’s own labeling practices, done to avoid delinking, themselves revealed that, at a minimum, consumer perception about L-isomer content was material.  The databases’ inquiries about whether the products were pure or mixtures also revealed materiality: “Though Acella avoided responding directly to the inquiry, the inquiry itself clearly suggests that the chemical makeup of Acella's products was material to databases. Moreover, had [the database] been given a direct and honest response, it likely would have considered delinking. Indeed, Acella's deliberate efforts to skirt the issue and avoid a direct response to [the] inquiry suggest Acella's awareness of the D-isomers's materiality.”  Even defense witnesses admitted that the difference was important to treatment decisions, making correct labeling important.  A Merck witness testified that he didn’t want his patients consuming any amount of D-isomer because of its potential biological effects, and that Acella’s labeling had deceived him.

In a footnote, the court clarified that there was no evidence here “to conclusively demonstrate the negative health consequences of consuming D-methylfolate,” but the fact that certain consumers attached significance to its presence made it material. (Compare the cases on milk from rBST-fed cows; the First Circuit has held that consumers’ desire to know of a difference, without a basis in health claims, can’t justify a disclosure requirement under the First Amendment. Given the result on the state claims, this holding is of particular interest.)

In addition, when the Acella labels led databases to link the Acella and Merck products, the law often required substitution.  Thus, the mislabeling “was material in every imaginable way: to the doctors prescribing it, the databases linking it, the pharmacists dispensing it, the patients consuming it, and, most importantly to Acella, to its own bottom line.”

The court next found that Acella engaged in contributory false advertising for intentionally inducing the databases to engage in false advertising.  (The analogy to trademark doesn’t really work here, except maybe in the Second Circuit with its less rigid standing test. Merck doesn’t compete with the databases, does it? Contributory liability requires an underlying liability, and I’m not sure even the Second Circuit would find the databases liable under §43(a)(1)(B).  Perhaps we implicitly attribute defendant’s standing to the databases, so that as long as they satisfy all the other elements of Lanham Act false advertising then contributory liability can attach even in the absence of direct liability—the same way that an individual can be liable for a company’s false advertising even though the individual doesn’t compete with the competition—but it is a bit of a conceptual lacuna.)

However, the court rejected the state law claims, which require a consumer-directed injury.  When the core of a claim is harm to another business, §§ 349-350 claims fail. While Merck’s experts posited potential health consequences from the D-isomer, “they offered little evidence to conclusively support such assertions,” especially as applied to a mixture—and given that Merck used to sell a mixture product itself, the court wasn’t going to speculate.

The court then found two individual employees personally liable, given the testimony that they directed, controlled, and otherwise orchestrated the false advertising.  Though Acella argued that most such individual liability occurs in counterfeiting cases or one-person corporation cases, the principle of individual liability is broader than that, and was satisfied here, where the named defendants were moving, active, conscious forces behind the false advertising.  Both testified that one of their considerations for using the L-isomer labeling was their desire to ensure that Acella products would be substituted for Metafolin-containing products.  No finding of intent to create confusion was required, though the evidence suggested that the individuals did indeed intend their products to be seen as identical to Metafolin-containing products.

Algorithms and the out of print

NPR recently ran a story on the excellent The Pushcart War by Jean Merrill.  Perhaps as a result, the out-of-print book will now set you back at least $48 on Amazon.  Bookfinder.com, however, a federated search engine, quickly returns a link to a more understandable $12.94.  I have to wonder if a spike of interest, related to the author's passing, drove up the price on Amazon despite the cheaper versions available from other sellers--and what this indicates about Amazon's marketplace power. (Merrill's other works don't seem to have suffered from the same amount of runup in price.)

P.S. Children's books for the Kindle are a great thing.  Talk about being willing to trade off price for convenience!

Also, for delightful transformative uses, check out these dramatizations/trailers/etc., now available on YouTube when they formerly would have been hidden inside a single classroom.

Lanham Act claims against textbook replacement not Dastar-barred

Pearson Educ., Inc. v. Boundless Learning, Inc., --- F.Supp.2d ----, 2013 WL 357631 (S.D.N.Y.)

Boundless makes textbooks that it advertises can be used in place of much more expensive, popular textbooks.  Plaintiffs sued Boundless for direct and secondary copyright infringement, as well as unfair competition, false designation of origin, and false advertising.  Boundless moved to dismiss the non-copyright claims, and the court denied the motion.

Plaintiffs alleged that the unfair competition and false advertising came from (1) alleged copying of the selection, coordination and arrangement of topics and concepts from plaintiffs' textbooks (okay, that’s preempted by copyright!); (2) including the titles and covers of plaintiffs' textbooks in advertising for the Boundless textbooks (comparative advertising); and (3) advertising the Boundless textbooks as “versions” of plaintiffs’ textbooks or as “equivalent” to them. The use of covers and titles would purportedly cause consumers to believe that Boundless was authorized to produce its alternatives, and also Boundless allegedly misrepresented the nature, characteristics, and qualities of its textbooks.

Boundless alleged that Dastar barred these claims.  But Dastar only covered §43(a)(1)(A), not §43(a)(1)(B).  Did anyone tell the Antidote court?  This holding is interesting if you care about personal rights v. corporate rights—plaintiffs here apparently win because they allege misrepresentation of “source” but not “authorship.”  Which is kind of weird, since Dastar was also about a misrepresentation of “source.”  If the alleged misrepresentation comes just from defendants saying "hey, we have the same content," then Dastar does seem implicated, and as Mark McKenna has noted one should not be able to plead around Dastar by adding in the idea that identifying the thing you copied inherently conveys a sponsorship/authorization message.

 

The court held that “Dastar does not preclude a Lanham Act claim based on deceptive and confusing advertising of the tangible product in which the creative content is embodied.”  Plaintiffs had alleged that the titles of their textbooks were inherently distinctive and had secondary meaning.  The complaint went beyond alleging copying: plaintiffs pleaded that Boundless falsely represented that it offers a digital version of Plaintiffs' textbooks or something equivalent. That was actionable under §43(a)(1)(B).  (Since the court refuses to dismiss any of the claims, it seems to be sustaining the §43(a)(1)(A) claims too—Boundless is falsely claiming to have authorization to produce versions (§43(a)(1)(A)), or it is falsely claiming to have comparable products that aren’t in fact good enough to substitute for the assigned textbooks (§43(a)(1)(B)).  This fits into standard Lanham Act law, but I’d flag the issue of protecting comparative advertising generally.)

Online publication protected by first sale? or just fair use?

Stevo Design, Inc., v  SBR Marketing Ltd., 11-CV-00304 (D. Nev. Jan. 25, 2013)

Stevo sued SBR, mostly for copyright and trademark infringement. The court initially dismissed the complaint for lack of extraterritorial jurisdiction, but reversed itself on a Rule 59(e) motion and dismissed the complaint on other grounds.  Stevo sells pay per view and subscriptions to access “electronically-distributed sports betting reports, including compiled sports handicapping information.”  SBR, a foreign corporation with its principal place of business in Costa Rica, operates sbrforum.com, which publishes sports betting and handicapping information. Its message board allows users to post messages related to sports betting and handicapping.  Defendant Daniele, a Virginia resident, uses SBR.  SBR encourages visits through “loyalty points,” which are awarded for logging on and for contributing content to the message board.  Extra points are available for well-thought-out “original” content.  Users can also give each other loyalty points.  Loyalty points may be redeemed for credits at offshore gambling websites, and they’re even redeemable for cash as long as they’re gambled with first.

Stevo’s complaint alleged 65 causes of action, including trademark infringement, copyright infringement, and Florida and Nevada state law claims based on the unlicensed publication of Stevo’s works.  For example, Daniele allegedly purchased sports analysis from Stevo and then posted it on the message board.

The court initally dismissed the complaint for want of subject matter jurisdiction because the copyright and trademark laws lack extraterritorial force.  It revised its opinion because Stevo identified a US user who uploaded reports.  On reconsideration, the court determined that it had the power to hear the case, but that the claims weren’t properly pleaded.

On copyright, plaintiffs’ inconsistent copyright ownership allegations failed to state a claim: it alternately alleged that it owned the copyrights and that its websites did, and a parent may not assert the intellectual property rights of its subsidiary in a copyright infringement action. Had ownership been properly pleaded, the court observed, the claims would likely be within the reach of the Copyright Act, as the Lanham Act claims were.

Turning to the Lanham Act claims, the court found that it had subject matter jurisdiction because Stevo successfully pleaded that the actual or intended recipients of the alleged infringing acts were in the US.  “SBR’s U.S.-centric  content--English-language analysis of American professional and collegiate sports--supports the  notion that the SBR website’s ‘intended audience’ was United States consumers.”  Plus, the complaint alleged that at least one member of the actual audience came from Virginia.

However, the court found that the first sale doctrine protected the uses here.  (Oh, dear.  While this is Stevo’s fault for trying to turn its copyright claim into a trademark claim, the first sale doctrine doesn’t actually protect against copying.  Fortunately, the court gets it right immediately thereafter.)  Under first sale, a reseller who doesn’t materially change goods isn’t an infringer.  The court found that the same went for service marks, “at least where the service can be sold and resold without change to its ‘nature, quality, and genuineness,’” citing Tumblebus Inc. v. Cranmer,  399 F.3d 754 (6th Cir. 2005).  (This case doesn’t seem to stand for that proposition as I read it, though a ticket reseller should succeed under first sale, and we should also perhaps conceive of the information here as a “good” rather than a service given how it’s being used—the court is certainly correct that the thing of value, the information, isn’t being changed; indeed, that is the gravamen of Stevo’s complaint, and the court identifies the doctrine as applying to the “handicapping reports,” not the service of providing reports.  While first sale isn’t right here, this does raise the point that one should not be able to evade the first sale doctrine by claiming infringement of a service mark for the service of selling the branded goods.)

Anyway, Stevo’s alleged marks were the proper names of its sports analysts.  SBR users allegedly bought “trademarked” sports analysis from Stevo and then resold it or gave it away on SBR’s message board, usually repeating the analysis verbatim.  These acts weren’t infringements. 

Stevo argued that SBR’s publication created initial interest confusion as to the legitimate source of the handicapping reports; they argued that an exception to first sale applied to use of a trademark that causes the public to believe that the reseller is an authorized seller or franchisee. This was based on Stevo’s loss in the organic Googlefight: “a search for Stevo’s marks plus the word ‘picks’ (i.e., ‘Steve  Budin picks’) returns results in which SBR’s website is ranked higher than any of Stevo’s.”  That wasn’t enough to trigger an exception to first sale.  Among other things, the complaint identified comments critical of Stevo’s analysts on the SBR message board, making confusion as to authorization or sponsorship “incredible.”  Nor could the complaint be read to allege that SBR used Stevo’s marks in its ads or that it held itself out has having special access to Stevo. 

Stevo did allege that SBR advertised that visitors could obtain PPV sports analysis for free, but it didn’t offer any factual support, and also that wouldn’t create the type of confusion required to defeat first sale.  “Consumers would need to believe that a Stevo-authorized retailer provided for free what Stevo itself charged for. In context, therefore, it is implausible that such advertisements create the impression that SBR is an authorized retailer of Stevo’s services.”  Also, there was no allegation of search engine manipulation by keyword buys or metadata, “conduct at the heart of initial interest confusion on the internet.”  (Paging Eric Goldman!)

Okay, take all this discussion about first sale and apply it to nominative fair use.  In the 9^th Circuit, nominative fair use isn’t an affirmative defense but rather identifies uses that aren’t likely to confuse.  If a complaint fails to allege anything but nominative fair use, it fails to state a claim.  So here.  Users needed to use the marks to identify Stevo’s services and they used the marks only to do so. In addition, the message board criticism of Stevo’s analysists greatly reduced the likelihood of sponsorship/endorsement confusion.  Plus, the usernames under which the reports were posted (“Pin Fish,” “PepperMillRick,” “goldengreek,” etc.) didn’t suggest to visitors that either the posting user or SBR itself was the ultimate source of the report.  Initial interest confusion won’t defeat nominative fair use without “more indicia of endorsement” than alleged here, as in Abdul-Jabar v. General Motors Corp., where “the ‘commercial custom’ of celebrity endorsements in television commercials created an issue of fact as to whether the defendant’s commercial implied the celebrity plaintiff’s endorsement of its product,” or Downing v. Abercrombie & Fitch, where there was “an issue of fact with respect to endorsement when the mark was used to describe the defendant’s product rather than the plaintiff’s.”  Here there was neither a similar custom of sports analysts endorsing message boards nor use of Stevo’s marks to describe SBR’s own products or services.

Dilution and contributory infringement were therefore also out of the picture: nominative fair use does not dilute.  (Seriously?  Over 1000 paragraphs in the complaint and Stevo pled federal dilution, the kind that requires fame among the general consuming public of the US?  *cough*Rule 11*cough*.)  And without predicate acts of trademark infringement by SBR users, no contributory infringement either.

The court then turned to state-law claims against SBR and found them CDA § 230-barred. Under Roommates, SBR’s message board didn’t make SBR a developer of the content.  Indeed, §230 was specifically designed to overrule a court case holding a website responsible for a message posted on one of its message boards.  “‘[P]assive’ message boards with only occasional curation by message  board moderators warrant immunity under section 230.”  SBR’s practice of awarding loyalty points for posts didn’t make it a developer under the CDA.  Its encouragement wasn’t specifically directed at eliciting illegality.  Plus, SBR users could give loyalty points to each other; without reviewing every award, SBR couldn’t distinguish unlawful encouragement from perfectly legitimate encouragement, but § 230 was intended to relieve websites of that burden.  SBR’s policy of favoring original content also distinguished it from a developer.  Its allegedly “sporadic” attempts to eliminate infringing content “are precisely the type of thing that the CDA promotes,” by precluding liability based on imperfect monitoring.

The court then asked whether Stevo’s claims attempted to impose liability based on SBR’s status as a “publisher or speaker,” mindful of attempts to plead around that element.  The name of the cause of action isn’t important, but rather whether it inherently requires the court to treat the defendant as the “publisher or speaker” of  content provided by another.  Misappropriation of trade secrets did so: disclosure of trade secrets was publishing or speaking.  Unlawful acquisition of trade secrets would be a closer question in other circumstances, but the complaint didn’t allege any facts allowing the court to infer that the trade secrets were acquired in any other way than through users’ message board posts, making publication again critical.

Assuming, without deciding, that “misappropriation of licensable commercial property” was a cause of action in Florida, it was also CDA-barred.  Florida has a commercial misappropriation statute preventing the unauthorized use of “the name, portrait, photography, or other likeness of any natural person without consent,” but that would require Stevo to allege that it was authorized in writing to use those names, which it hadn’t done.  (And if it did, that would still be CDA-barred in the 9^th Circuit, since it’s a state IP law.)  General INS v. AP misappropriation, assuming Florida recognizes the tort, was CDA-barred because the alleged competitive injury—that SBR gave away for free what Stevo sold—was impossible without characterizing SBR as a speaker or publisher.

Stevo then tried “contributory misappropriation of licensable commercial property.”  Arguably, this doesn’t require that SBR speak or publish, only that it induce others to do so.  But that theory would swallow CDA immunity.  SBR generally encouraged users to post, but it didn’t tell them what information they should or must include and didn’t encourage or enhance any infringing content.  That wasn’t enough. Stevo’s Florida civil theft claim also failed, since the only plausible mechanism by which SBR obtained or used Stevo’s property was through publication.

Tortious interference claims failed too: Stevo didn’t allege that SBR knew about specific contracts its users had with Stevo in a manner that was more than speculative. Plus, the only interference came again from publication.

Finally, the court found that it lacked personal jurisdiction over Daniele.  Stevo alleged that SBR paid Daniele to publish infringing material on SBR’s  message board, that Daniele’s publications relate to the “sports wagering” industry in Nevada, and that Daniele’s online statements were accessible in Nevada.  These were insufficient contacts to give rise to personal jurisdiction.  Even if Daniele was SBR’s paid agent, a principal’s contacts may not be imputed to the agent for purposes of personal jurisdiction.  Moreover, merely discussing sports betting on an online message board doesn’t provide the people talking with a reasonable anticipation of being haled into Nevada courts, even if such bets are only legal in Nevada.  Advertising alone is insufficient to support jurisdiction in these circumstances; simple publication couldn’t be either.  Of course, internet availability doesn’t establish purposeful direction either, especially where the alleged victims of the postings weren’t forum residents.  (I am curious why they filed in Nevada, especially given the governing 9^th Circuit law.)

Samples aren't statements under the Lanham Act

Buffalo News, Inc. v. Metro Group, Inc., 2013 WL 321578 (W.D.N.Y.)

Buffalo News sued Metro for false advertising in state and federal flavors.  The News is the largest daily newspaper in the Buffalo metro area.  It sells inserts—stand-alone ads, typically on high-gloss, colored paper—and alleged that “the greater the number of inserts and the higher the name recognition of the other advertisers in the insert package, the more valuable the placement in the insert becomes, and the more likely [it becomes that an] advertiser is willing to pay to be included in the insert package.” It alleged that Metro, which publishes weekly and biweekly local community inserts, misrepresented “the nature and extent” of the ads it could deliver via inserts.  The promotional material, which the court described as “essentially samples,” sent to potential advertisers, “contains more inserts, from more nationally recognized retailers, than Metro is typically able to produce.”  This, News alleged, created the impression that advertisers who haven’t agreed to participate are in fact going to show up in the inserts.  (Query whether such advertisers have a §43(a) claim.)  And that allegedly diverted business from News.

The court found that there was no Lanham Act claim because there was no “statement” or “representation of fact.” Though images or words can qualify, “the amended complaint fails to identify a single statement or image that asserts anything.”  Instead, the mere inclusion of more inserts than Metro “typically” can provide (for example, one sample package contained 23 inserts when its publications typically included no more than two or three) was supposedly implicitly misleading.  (I would have thought that advertisers would fear getting lost in the crowd!)  But the court wasn’t convinced.  “Indeed, it is clear from the amended complaint that the inserts are meant merely as samples, and there is no allegation that Defendants have claimed that the inserts imply anything more.”

The court analogized to Mylan Laboratories, Inc. v. Matkari, 7 F.3d 1130 (4th Cir.1993), where the 4^th Circuit rejected the claim that the act of placing a drug on the market implies FDA approval.  “Like the plaintiff in Matkari, The News asks this Court to extrapolate a message from an act. But the mere presence of extra inserts in Defendants' sample packages cannot be considered a description or representation of fact under the Lanham Act.”

Comment: Why isn’t it plausible that consumers would expect the “samples” to be representative of what the defendant ordinarily offers?  That's my ordinary expectation of a sample.  Maybe market characteristics or other statements make clear that the “samples” are not actually representative but are best possible results because of the customization of the packages, but I don’t really understand why an ad showing/containing samples doesn’t send some message, even if the court wants to say it's not plausibly a deceptive one. 

With the Lanham Act claim dismissed, the court declined to exercise supplemental jurisdiction over the remaining claims.