Don't sell a business and then keep running it

Electrology Laboratory, Inc. v. Kunze, 169 F.Supp.3d 1119 (D. Colo. 2016)

Larry Paul Kunze a/k/a Lorenzo Kunzel sold his family business, plaintiff ELI (d/b/a Rocky Mountain Laser College/RMLC), “but couldn’t give it up. So, as the evidence revealed, even while negotiating the sale of ELI to the purchasers … , Mr. Kunze was trying to figure out how to continue the same business he was selling.”  The purchasers sued and, understandably, prevailed on most of their claims (though the court admirably resists the temptation to condemn all his conduct together, even the parts that would be unobjectionable on their own); Kunze did, however, show that he was entitled to relief on his counterclaim and third-party claim for breach of the Promissory Note given in partial payment for the purchase of ELI.

ELI operated RMLC to provide aesthetic laser use education and training; provided aesthetic laser services to clients; and earned income from the sale of laser equipment.  The laser education course provided 40 hours of training with a curriculum approved and regulated by the Colorado Department of Higher Education.  To market classes and sell laser equipment, ELI maintained a customer list identifying students who took the RMLC laser education course. ELI the files under lock and key and protected the lists on the computer system with a password.  ELI awarded its students “Certified Laser Specialist” or “CLS” certificates, showing they were trained at RMLC. The website at laserlaser.com was the primary source of ELI’s ads, though it also used a number of other domain names.  Because of his many years in the industry, Kunze was well known in the aesthetic laser education industry. But:

While Mr. Kunze was a “gifted” teacher, he was not as educated or experienced as he touted. While ELI’s business and Certified Laser Specialist were recognized by some in the industry, they were also not as Mr. Kunze represented. Instead, Mr. Kunze intentionally made numerous misrepresentations … , including misrepresentations concerning the extent of his education, experience, and certifications; the number of CLS certifications that ELI had awarded to RMLC students; and that Certified Laser Specialist was a registered trademark when it was not.

After the sale, Kunze kept teaching students, employees of a former ELI student, who thought that they were getting an education from RMLC. The former ELI student believed that “what was important was receiving a certificate from ROCKY MOUNTAIN LASER COLLEGE and being taught by Mr. Kunze.” She also thought that the Certified Laser Specialist certification was important because Kunze said it was. 

Kunze taught a shorter class for his own business, American Laser College, but still used ELI’s RMLC marks and curriculum as if they were his own. He handed out RMLC business cards, and used RMLC interchangeably with American Laser College so that the students thought the entities were the same. He awarded the students CERTIFIED LASER SPECIALIST certificates, and issued the certificates under RMLC’s name. Kunze backdated the certificates as if they were issued in 2010 and put a stamp on those certificates implying the certificate or course was sanctioned by the Texas Department of Education when it was not.

Kunze also made disparaging remarks about ELI and its new owners.  He continued to compete with ELI, using its curriculum, marks, pictures, and/or information to do so.  He used RMLC interchangeably with the name of his entity, American Laser College, as if they were affiliated. “He directed customers to contact him for laser education, but used ELI’s refund and other policies along with pictures of ELI’s facilities and students to do so.” The laserlaser.com website had no working link to ELI’s website, even though ELI was relying on the website to drive student traffic to its business.  Some of the students Kunze taught were surprised or confused when they received Certified Laser Technician certificates from an entity they had never heard of, Rock Creek.  However, the students were seeking laser certification and didn’t really care whether whether they’d be deemed Certified Laser Technicians or Certified Laser Specialists (the latters was what had been respresented to them).

After saving the information for his own account, Kunze also deleted about 60 gigabytes of data from ELI’s server, which included a list of ELI’s customers—its students and clients. There were other problems, but you get the idea.

For some of Kunze’s misrepresentations (e.g., his background and qualifications, the need for a CLS certificate), the court found no connection between them, even assuming the purchasers relied on them, and plaintiffs’ damages.  Also, ELI’s purchasers were skeptical of Kunze’s financial claims and conducted their own due diligence.  Kunze knowingly falsely represented to the purchasers that Certified Laser Specialist and CLS were registered trademarks, and these were material claims on which the purchasers relied.  ELI itself suffered damage from this—its diminished ability to protect its interest in the marks in this very suit and Kunze’s post-sale attempt to register the marks on his own behalf—but the purchasers didn’t establish damage in their own rights.  Kunze also knowingly concealed his failure to file ELI’s tax returns or pay ELI’s taxes, but that wasn’t material or harmful to the purchasers since ELI owed that amount anyway (and paying the resulting penalties only harmed ELI).  The court found that there were some breaches of contract, but not everything that plaintiffs alleged.

Defendants argued that the economic loss rule barred all of plaintiffs’ claims, including statutory claims, except for those based on breach of contract. However, a breach of a duty arising independently of any contract duties between the parties may support a tort action.  And “if the legislature intended to provide a remedy in addition to a contractual one, the statutory remedy would trump the economic loss rule.”

For trade secrets: neither ELI’s written materials nor the curriculum as a whole were trade secrets. Protection efforts were minimal, and the effort a competitor would require to recreate the materials wasn’t that great. Also, there wasn’t evidence of any “unified process, design and operation of which, in unique combination,” gave ELI a competitive advantage. “[W]hat ELI seeks to protect and to preclude Mr. Kunze from using are his skills and experience as a teacher—his interactive or engaging teaching style acquired over years of teaching the course. This is what was of great value to ELI.” But his general skill and experience isn’t a trade secret.

The student/customer list could be, and was, a trade secret, given ELI’s efforts to keep control over it.  ELI was entitled to injunctive relief and damages, including exemplary damages, for Kunze’s misappropriation of the list and use of the list to sell equipment to students.  This wasn’t precluded by the economic loss rule because state trade secret law created a duty on Kunze independent of his contractual duties.

So too with the Lanham Act claims, which didn’t arise from any contractual duty. Even if the Lanham Act claims had been within the scope of the contract, Congress intended to provide statutory rights and remedies independent of breach of contract. 

Here, Kunze’s use of the RMLC marks constituted false designation of origin, though his use of Certified Laser Specialist and CLS did not.  The RMLC marks had secondary meaning and Kunze’s use caused confusion.  But Certified Laser Specialist and CLS weren’t protectable marks, on this record.

False advertising: The Tenth Circuit hasn’t yet decided whether materiality is required separately from falsity/misleadingness, but even without materiality, ELI couldn’t win most of its claims.  ELI’s damages didn’t arise from Kunze’s misrepresentations about his “pedigree.”  Kunze intentionally and willfully

made numerous false and/or misleading statements concerning the nature, characteristics, or qualities of his goods and services. Such statements included his credentials to support his skills/abilities to perform laser education services (some false, others misleading); his affiliation with ROCKY MOUNTAIN LASER COLLEGE and ability to issue CERTIFIED LASER SPECIALIST certificates (false); that ROCKY MOUNTAIN LASER COLLEGE and American Laser College are affiliated or the same (false); and that CERTIFIED LASER SPECIALIST is a registered trademark (false).

The RMLC affiliation-related claims were material, but not the others. “[W]hile the evidence supports that receiving some certification was important to the consumers, for many consumers it mattered not whether it was a CLS or a CLT.”  Since the RMLC affiliation-related claims were literally false and intentional, no evidence of confusion was required; ELI was damaged thereby because students signed up for Kunze’s courses thinking they were RMLC courses but didn’t get RMLC certificates, so RMLC suffered in both sales and reputation.

The court exercised its equitable discretion to treble the damages it found ELI to have suffered (lost class revenues) because overall damages were hard to ascertain and Kunze’s actions were willful.  Because this was an “exceptional” case, the court also awarded attorneys’ fees.  Kunze “intentionally used ELI’s marks for his own benefit … and he continued to use the marks even after the Amendment was terminated and ELI requested Mr. Kunze to stop doing so. Mr. Kunze offered no credible explanation as to why he was entitled to do so.”  The court also awarded prejudgment interest.

Colorado Consumer Protection Act: The CCPA requires a significant impact on the public, for which relevant considerations include: “(1) the number of consumers directly affected by the challenged practice, (2) the relative sophistication and bargaining power of the consumers affected by the challenged practice, and (3) evidence that the challenged practice has previously impacted other consumers or has the significant potential to do so in the future.” Making defamatory statements about ELI was purely a private wrong.  However, the false website advertising directed to the market generally had a public impact, given the length of time and the number of websites on which Kunze posted his false and misleading advertisement.  Students were likely to be unsophisticated consumers with bargaining weaknesses, and some enrolled believing they’d get a RMLC certificate.  However, there was insufficient evidence that Kunze’s false claims about his affiliations with other organizations, his credentials, and the like affected any consumers.  Given the court’s finding of bad faith in the actionable misrepresentations, it also trebled ELI’s damages under state law.

Kunze also lost on defamation/libel per se based on statements to ELI’s landlord, one plaintiff’s banker, ELI’s laser supplier, and ELI’s students.  The plaintiffs were private figures, and the statements were defamatory per se (about ELI’s financial solvency), so defamation was presumed; the court awarded a total of $50,000.

The court also granted injunctive relief.  ELI would suffer irreparable harm because competing sales of laser equipment would erode its customer base, and damages would be difficult to determine because ELI wouldn’t be able to monitor Kunze’s sales.  “ELI presented insufficient evidence of continuing sales to support an award of damages subsequent to the termination of the parties’ relationship, but it is this very difficulty in discovering Mr. Kunze’s use (and resulting damages) that supports the issuance of injunctive relief.”

GW Design Law: Ecommerce remedies

AFTERNOON SESSION 1: Design Patents & Ecommerce

Moderator: Judy Yee, Microsoft

Howard Hogan, Gibson, Dunn & Crutcher: Counterfeiting is a growing problem, but sometimes they don’t use a copyrighted work of authorship but are still selling a knockoff of a design. © and TM have more developed bodies of law on secondary infringement.  Contributory & vicarious liability—right to supervise & financial interest in continuing infringement = liability.

Gucci v. Frontline (SDNY 2010).  Companies that process credit card payments are effectively giving loans to merchants. We looked at merchants’ applications; they weren’t particularly shy about the fact they were selling fakes. Used words like “replica” or admitted sourcing Gucci from China.  Entity called Durango, going out to midmarket banks, saying you only get 2% on a typical transaction, but if you take a high risk credit card merchant you can get 4-5%. Asserted Durango was inducing infringement, encouraging banks to get in the business of helping the sale of infringing goods. Against banks, we asserted contributory infringement. Opposite to Perfect 10, you’re allowing sites to take orders/materially contributing to the infringement.  SDNY issued a decision that purports not to disagree w/Perfect 10 but really does; cites a lot to the dissent. Can be held contributorily liable if they help sites take orders w/ their eyes open.

Christopher V. Carani, McAndrews, Held & Malloy, Ltd.: WD Wash, Milo & Gabby v. Amazon, fully briefed at the 9^th Circuit though no argument scheduled. Design patent case: not interested in selling on Amazon, only boutique children’s items.  Found third-party seller using pictures of makers’ own children using the pillows. No dispute that there is infringement of registered design patents (though we don’t know what people actually received).  Is this “offering for sale” when Amazon provides its website?  Amazon calls itself a virtual shopping mall, which isn’t liable for goods particular vendors sell, pre-notice. They don’t have title or the ability to transfer title. This case could open up the floodgates/create a firewall for the gears of commerce. [Not sure about these metaphors.]  District court rules that Amazon isn’t liable, but said it was troubled by that conclusion and impact on small retailers. Amazon can disavow responsibility for offering to sell.  The statute requires: make, use, offer to sell, sell, or import; also a specific provision for active inducement of a patent. Requires knowledge of the patent, knowledge of the infringement for inducement. 

What about fulfilled by Amazon?  3d party sellers who put their products up on Amazon: seller uses Amazon as a warehouse.

When ecommerce sites appear notice: different from TM situation b/c word searching can easily find Tiffany knockoffs.  Design patent infringement analysis requires more expert analysis.  Not conducive to spot judgment. Customs also knows this—will allow © and TM as predicate but they won’t use design patent, patent, or even trade dress w/o order from court or ITC.  Amazon points out that it took down M&G copiers within a week.

Hogan: Taking the patentee position in this debate; not always his position.  Brick & mortar principles not automatically abrogated online. There’s no intent element.  Liability exists if you do infringe/sell infringing goods. Mom & pop shops on a larger scale; they don’t have teams of att’ys go through each product, but can be liable if they sell infringing goods.  Customer doesn’t care who has title to the good or in whose warehouse it sits. Online marketplace should also be held liable like a brick and mortar store.

Carani: that same theory would apply without any knowledge at all. Craigslist would have the same liability. FedEx sells a package and delivers it.

Yee: but Amazon takes a portion of the sale.

Carani: but that’s a factor independent of knowledge—it would sweep even the NYT, FedEx, etc.  A lot of design patent att’ys are filing junk claims on partial designs.  Impact on damages is huge, but consider partial designs & injunctive relief.  You’re asking us to pull stuff down, but you might not even be able to get an injunction. Why should we have to police when we wouldn’t be ordered to take it down?

Yee: Staff required to respond to requests is an issue, but TM and © takedowns do work. Can imagine a similar system for design patents where you have to provide the claim chart. Shouldn’t be as rigorous as on the utility side.

Carani: Congress did respond with the DMCA, and Congress didn’t do that for design patent. eBay came up with VERO, self-regulation. A little of fox guarding henhouse—false positives. Concept fallacy: people have a design patent on a multicomponent tool and think they can stop any other version of the tool.

Hogan: there is a difference in kinds of online mktplaces. The more involved the platform is in determining what consumers see, the more it’s fair to hold them liable for infringing products. eBay and Amazon both have algorithms to get consumers shown products they’re likely to want. Agnostic as to which merchant makes the sale. Alibaba is different.  Biggest retailer in the world. They make their money selling “assessed status” to merchants—paying Alibaba to come up in searches on their site. They go to factories, create videos, involved in marketing. Then get a percentage of all transactions through their payment system.

Carani: we don’t hold the NYT liable for advertising, or for housing a product in their warehouse, or for delivering a product.  The ability to combine all these services into a convenient one-stop shop shouldn’t be penalized—it’s efficient.

Yee: what about a company whose product is knocked off by hundreds of companies through your website? What should they do?

Carani: look at reviews of sellers. Some of the responsibility is on the consumers.  Buyer beware. But ultimately you may have to go to the source.

Hogan: courts in the US are there to protect US businesses and US consumers. Companies that invest in developing products deserve protection. Who should bear the burden? The company that can more easily write the algorithm to identify goods being sold at suspiciously low prices/coming from incorrect sources? [How does the algorithm know suspicious prices or sources?]  On eBay, more than 70% of sellers are from outside the US.

Carani: ITC is active here; Razr scooters.  China does include design patents etc; it creates painful problems in China where they just don’t have the information to make the difficult conclusions—just too cumbersome to take on, especially given Amazon’s size.

Hogan: it used to be easier to store large quantities of infringing goods: trucks, warehouses. Increasingly, products are drop-shipped one at a time.  So customs will always be important, but more come through small orders shipped directly to the buyer.  You don’t want to hold customs liable for a mistake; but a physical store would be liable if it let an infringing good through.

Carani: indemnification is a real thing that can flow down. Box stores are in much the same situation—Wal-Mart is selling 50 million products. We like the online marketplace b/c of the variety.  There is much more of a vetting process; if we impose liability on Amazon, there will be more vetting of everyone and that will increase transaction costs/the overall costs of the products themselves.

Q: images are misleading—can you get them taken down?

Yee: Online marketplaces respond more quickly to TM/© takedowns, but they give the sellers the opportunity to respond and come back with just slight changes. Design patent requests come down and stay down if they come down at all.

Hogan: M&G case: they didn’t assert © in the Cozy Critters themselves, but in images of their son in front of the pillow. Image search tech is growing by leaps and bounds.  Often the most dangerous third-party merchants are taking photos right off of brand website. Does require diligence; counterfeiters are inventive in getting around screening.

Q: complaint about Amazon’s algorithm suggesting cheaper knockoffs even when a person has made an effort to find the seller’s actual page.

Q: another wrinkle is that there are a lot of grey market goods out there; may be represented as grey market goods even if they aren’t.

Q: Note that you can find the M&G pillows with the M&G pictures on Amazon right now, with a sale/review from August—isn’t Amazon on notice?

Yee: Amazon may not know that particular store is infringing.

Carani: that’s part of the case; every time they’ve been given notice, Amazon has taken the store down.  Survey of other countries: Japan, Europe, Korea—they all look at notice; once there’s notice, they attach liability.  Purist approach to US statute: even knowledge might not be enough.  Clarification: Notice means notice specific to the location/seller, not notice “this product is counterfeit”; may also require attention to sellers with previous strikes.

Q: platforms play games—they take down a seller but allow it to come back under a new name.

Carani: the problem is that they create new entities/new names.  If you see someone who’s never sold a good before, some of the responsibility rests with the consumer.

Q: unrealistic to expect brand owner to file serial DMCA notices.  Is it more onerous to platform or brand to but the duty on them? It’s not a close question.

Carani: Rests w/consumers as well.  Birkenstock pulled out of Amazon.

Q: not every brand has that market power.

Hogan: anonymity is an issue; we have to keep in mind the value of anonymity as well as the risks it creates.

Carani: Legal title was the key to the analysis in the M&G case below.

Hogan: statute doesn’t define “sale” or “offer for sale.”  Analogy: consignment stores.

GW Design Law conference: current state of the law

Morning Session 2: The Current State of the Law Under 35 U.S.C. § 102, 103 and 112

Moderator: Daniel Gajewski, Sterne, Kessler, Goldstein & Fox: Issues include continuation practice; maybe new rules coming.  Skechers sought invalidation of a Nike patent, alleging noncompliance w/ the written description requirement in 112 by the introduction of new matter.  Nike changed a photo to a line drawing, and dotted some lines out.  IPR case.  Changing certain lines, and changing lines to dotted lines claimed new matter.  Board found 112 satisfied despite relatively minor differences in way line drawing represented photo—Skechers went into too great detail rather than looking at it like an ordinary designer.  “Range of reasonableness” enough to provide sufficient written description via photos.  “Show and delineate” requirement—the shoe upper was reduced to broken lines; Skechers argued that one wouldn’t have recognized the design from the disclosure. Board disagreed.  We aren’t persuaded that the photos fail to clearly show and delineate the claimed midsole elements of the design in addition to the upper and outsole elements, showing that the inventor had possession of the invention.

Perry J. Saidman, Saidman DesignLaw Group: Black letter: must disclose every element. To anticipate a claim, the disclosure must anticipate each element of the claim.  1997: Anticipation requires the earlier design to be identical in all material respects to the claimed design.  Int’l Seaway v. Walgreens, Fed. Cir. 2009: the worst decision from the Fed. Cir.  What happened to the law of anticipation: ordinary observer test must logically be the sole test for anticipation.  If two designs are substantially the same there’s infringement; thus if the prior art is substantially the same as the design, the design is anticipated by prior art.  No longer required to be identical. But these are not the same things. 

Some people say this is no big deal.  Actual 102 rejections by the PTO show appalling consequence where prior art has an extra element that the design doesn’t.  Net effect: more anticipation rejections than ever before. Very subjective: no analysis necessary.  102 rejections w/o 103 rejections: Alice in Wonderland effect.  The PTO is now in the business of deciding infringement, if the anticipation test and the infringement test are the same. [Shouldn’t there be the possibility of 102 rejections w/o 103 if they are in fact separate bases?]  By focusing on 102, PTO avoids the rigorous test of 103 for primary and secondary references.  [Note that if vagueness is a First Amendment problem for TMs, design patent might have the same problems.]  Egyptian Goddess says you look at patented design and accused design in the context of the prior art.  This is now not being done, so if you get a 102 reference you should tell the PTO to evaluate the prior art in light of its prior art.

What is the basis for Int’l Seaway?  Peters v. Active, 1889 SCt case.  Maxim: that which infringes, if later, would anticipate, if earlier.  Graver Tank, 1950, created doctrine of equivalents for utility patents: substantially the same function in substantially the same way to produce the same result.  Fed. Cir. said in Lewmar, 1987, said that Peters v. Active had to be adjusted to take doctrine of equivalents into account. That which would literally infringe if later in time would anticipate if earlier.  Lee v. Dayton-Hudson, Fed. Cir. 1988, Gorham test inherently makes doctrine of equivalents inherent in infringement test.  The problem: the test for design patent infringement is doctrine of equivalents, but only in cases of literal infringement is there anticipation.  So infringement isn’t the same as anticipation.

Elizabeth Ferrill, Finnegan: Examples of obviousness from recent PTAB decisions. Design patent prosecution isn’t public unless the patent issues. Affirmance of rejection: we never see that unless there’s an appeal to the Fed. Cir.  PTAB heard about 15 appeals in design cases last year; ½ never become public.  PTAB cases also create bigger chances for argument—long briefs, long explanations of decisions.

Obviousness is not as simple as anticipation. Primary reference, from perspective of ordinary designer: design characteristics have to be basically the same as the claimed design: (1) does it discern the correct visual impression created by the patented design as a whole; (2) is the secondary reference creating “basically the same” visual impression.  Secondary reference can modify the primary reference to create a design that has the “same overall visual appearance” of the claimed design.  Appearance of certain ornamental features in one reference would suggest the application of another.  Even if one side looks very similar, other views might not.

Caterpillar v. Miller: Design is a warning triangle applied to a curved surface of a coupler for an excavator. Invalidated for obviousness. The appearance of the prior art doesn’t have to be identical to the claimed design.  Basically the same, but not exactly.  Secondary reference was another type of coupler which did show a curved surface.  Coupler manual + curved surface = motivation to combine. 

Premier Gem v. Wing Yee Gems: picking and choosing secondary references. Petitioner wasn’t successful in challenging registration of jewelry design; petitioner shouldn’t choose certain features from secondary references while ignoring others – hindsight bias.

William LaMarca, USPTO, Office of the Solicitor: We still apply the same test from the perspective of the ordinary skilled designer/artisan.  Int’l Seaway impacted anticipation, not obviousness. 

Ferrill: how could Int’l Seaway override a previous panel decision? 

LaMarca: previous SCt precedent controls. PTO is correctly following statute in applying ordinary skilled artisan for 103 obviousness; also following the Fed. Cir. We think we’re consistent even if there are problems.  Examiner can’t just ignore the legal standard. 

Ferrill: if the test is the same, you should have to apply it the way the courts should apply it.

LaMarca: MPEP does discuss and give examples of how they apply anticipation; they do say it doesn’t have to be identical. There is the further point that close but slight differences = view it in context of prior art; if you feel the examiner hasn’t done that you should argue it to the examiner and in your appeal.

Saidman: expresses doubt that an examiner taking the perspective of an ordinary observer would behave/react differently than an examiner taking the perspective of an ordinary designer.

Ferrill: depends on the degree of crowding in the art, but probably applied very similarly.

Design Law at GW Law: Design Patent Damages

Design Law 2016, GW Law

MORNING SESSION 1: Design Patent Damages

Moderator: Robert Katz, Banner & Witcoff: Recap of the patents in suit and damage award. Text of 289: whoever applies the patented design or colorable imitation thereof to any article of manufacture for the purpose of sale etc. shall be liable to the extent of his total profit.  Can’t twice recover profits.  $250 floor for damages, back to the 1890s, closer to $9000 today.  Maybe that doesn’t work today, though Samsung argued that other parts of the statute were outdated.

Christopher Burrell, Director & Senior Counsel, Samsung Electronics: Quoting Giles Rich, “the name of the game is the claim.” That’s the core of our position.  You can potentially get a design patent on the entire article/product being sold or smaller articles/components. W/the PTO allowing design patents on increasingly smaller components/tiny components that go into a larger product, to stay commensurate w/the scope of the rights and the statute, that needs to be the focus for the question “what are you getting total profits on?”  A multicomponent device can be comprised of many articles of manufacture; look at the patent claims to figure what components the design is applied to. From our perspective, that still provides a windfall in the sense that you get the total profits on that article, for example a scratch resistant touchscreen also subject to a design patent where the design only contributes some of the value—more than a reasonable royalty.  Another thing to keep in mind: the rulings about which infringed which patents are hard to understand; Apple got total profits on one phone and nothing for one highly similar phone; we think that cautions in favor of a more careful approach to design patents.

Jeff Myers, Lead Patent Counsel, Apple: Not going to relitigate the case.  The Justices talked about the VW Beetle example.  Instructive example: when you hear VW Beetle, you think of the iconic image, rather than about what’s in it.  Design drives a lot of what’s in the vehicle.  Shell has a peculiar value. Same thing for the iPhone. We think the statute is super clear. Infringer’s profits should be awarded as a whole. Congress had good reasons to do that: difficult to disentangle design from the overall value of the product; functionality is easier to separate.  If the patented design gives infringer’s product its peculiar/distinctive appearance, total profit should be awarded.

Three things that could occur: Justices might just say “law is law”; might say we need more facts; might say we need a new standard. If they do, what would that mean?  Design patents are about deterrent value. Big companies like Samsung and Apple can survive, but small/moderate companies w/o resources to bring massive survey evidence could have problem. Don’t want a situation where people don’t even bother with design patents, given their increasing use in fashion where there hasn’t been protection in the past.  Congress is the better place for questions.

Brian Racilla, USPTO, Office of the Solicitor: Historical context.  Article of manufacture as a signpost—Justices seemed amenable to using that.  The objective was to figure out what the article of manufacture is. Always construed broadly—factfinder should identify what most fairly may be said to embody the D’s appropriation of the P’s design. Factors: Scope of the claimed design in drawing/written description; relative prominence of design in product as whole; whether design conceptually distinct from product as a whole; physical relationship b/t claimed design and product as whole—separability, separate manufacture, whether there’s a market for replacement parts.  We’re focusing on the accused infringer’s product here.

Burdens that US suggested: plaintiff to show overall, defendant to show article of manufacture.

Mark S. Davies, Orrick: Designers’ brief.  This isn’t a big case for the SCt.  Challenge for amicus: why should anyone read it? Our strategy: prominent names from the design community, over 100 great names.  Design sells the product; Samsung sales went up 20% after copying Apple’s product.  Second point: the design becomes the product.  The point of Coke example: the design becomes so famous that the taste doesn’t matter.  [This is an argument for functionality and indicates part of why design patent functionality is so screwed up.]

Mark Janis, Maurer School of Law: Themes distilled by reading group of amicus briefs, not including his.  Plain meaning/briefs focused on “total profits,” which seemed to be what the case was about until Tuesday’s argument.  Deterrence: purpose of 289 is not merely compensatory, but deterrent of counterfeiting/induce settlement.  Troll behavior: responsive arguments were that troll concerns were unfounded: there isn’t a design patent market b/c they protect brand identity; hard to use design patents to threaten entire mkt b/c designing around is easy; to the extent we think troll behavior is from nuisance suits from end users, they don’t have much profits to give, so disgorgement isn’t any worse for them.  Lots of pages on the general argument that design patents are important in a variety of ways to a variety of industries—brand maintenance; small businesses getting leverage v. large businesses; particular industries. 

Eclecticism: when you interpret 289, you have to understand that design patent law isn’t utility patent law + different modifier. It’s a mishmash of English law, utility patent, copyright, unique concepts. One should not take it as a given that just b/c apportionment works in utility patent for multicomponent innovation it is necessarily workable in design patent.  Congress certainly thought it wasn’t workable for designs.  Text/structure/history: “total profits” focus; article of manufacture issues—look at the statutory text. Clearly referring to the infringer’s article of manufacture.  Statute also says that it imposes liability on applying design to any article of manufacture. Have to conclude this calls into question the proposition that the name of the game is the claim for 289—it says “any” article of manufacture—at least needs to debate that. We think that the proposed test on article of manufacture is an invitation for courts to engage in the equivalent of apportionment. What I find strange about that is that under the guise of interpreting the statute, we’re going to say that Congress slammed the door on apportionment by using “total profits” but opened the door wide by incorporating “article of manufacture,” allowing the same thing through a different analytical route, which seems policy-driven result.

You could say it’s still good policy to rely on article of manufacture b/c avoids absurd results, such as the cupholder on the car.  We argue that the policy consequences might be more mixed than that.  History: Congress was focused on another type of result that it deemed absurd, which is the carpet manufacturer who proves infringement and gets nothing.  Congress makes a choice between risks of absurd results.  Choice is a legislative matter.

Rebecca Tushnet, Georgetown Law: Concerns of those supporting Samsung: Now that the seal on mentioning trolls has been broken.  Design patent trolls are a real threat: one example that surfaced for me quite by accident was someone who has a relatively recent design patent for novelty sunglasses with plastic slats across the opening for the lenses, which I seem to recall being a thing for Devo in the 1980s—and yet the patentee was extracting licensing fees from and even suing retailers around the country.  Compare to the concern for small designers: the US fashion industry as an industry has been pretty innovative for a while without historical reliance on design patents—Chris Sprigman and Kal Raustiala have a book about this.

History has already mentioned: historically, no protection for small parts of an overall design; now that’s patentable, and there is a strong equitable and logical argument that patentees shouldn’t be able to have their cake and eat it too: that is, claim rights in just the corners of a design, which is only a small part of the overall appearance, but profits from the whole product sold to the consumer.  Design patent for a logo: carpet mfgr gets a design patent on the logo it puts on the label, on the underside. Then what?

Another possibility, of course, would be to go back to the historical practice of not granting design patents except on an entire design.  That would also require difficult decisions about what the protected design is, but the damages discussion clearly demonstrates that difficult decisions are inescapable.

IP professors: use causation to create awards only for profits attributable to the infringement—the reference in the statute to not allowing double recovery for profits attributable to the infringement indicates a causation requirement.  Constitutional basis for this idea in ideas of due process as well as the Patent & Copyright Clauses.  Not much interest in that at oral argument, but an understandable definition of article of manufacture could accomplish much of the same goal in many cases where design patents are for small elements of an overall product.

A few other points about article of manufacture: figuring out the defendant’s article of manufacture as the measure of total profits might theoretically differ from the plaintiff’s article of manufacture; in most cases, though, they should be the same, although this is also tied into the question of whether the design must relate to a particular article of manufacture. For example, look at Janis’ “any article of manufacture” argument: could I get a design patent for a USB drive in the shape of a rubber duck because no one had ever applied the rubber duck to a USB drive?  If that’s the case because prior art inquiries should be limited to the general area of the article claimed, presumably only another USB drive could infringe my design patent and not a bar of soap in the shape of a rubber duck.  This is another way for me to say that while damages issues may seem separable from scope and validity, they aren’t really.

Question for discussion: what might the article of manufacture be where the infringing design is the icon for an app that doesn’t ship with the device but is downloaded from the app store?  Does the defendant even have an article of manufacture in that case?  Does the plaintiff?

Q: anything surprising at oral argument?

Davies: that the Justices weren’t particularly interested in the details of this particular case.  Apple argued that article of manufacture had not been raised below, but the Justices didn’t seem to care.  4-5 Justices embraced design as in itself valuable.

Burrell: encouraging that Justices grappled w/practice of granting partial design patents in tension w/historical practice.  There’s no dispute here that both parties think design is valuable.  Samsung’s #1 US holder of design patents; 1700 designers around the world. The question is the appropriate measure of damages, and Justices were rightly focused on that.

Janis: had hoped for some question about whether this was an exercise in statutory interpretation or trying to amend the statute.  I didn’t know that Samsung would go just to article of manufacture, though not terribly surprised given the gov’t’s advocacy of that as middle ground was very effective advocacy. 

Q for Davies: facts of the case—last design patent case?

Davies: 1880s.

Q: that’s what they do, ignore the facts of the case.

Davies: as a process matter, if you’re going to make complaints about suitability for review, it’s too late after cert is granted.  DIG is a possibility and a nonzero chance that they could decide they’re mistaken, but it’s not what he would predict.

RT: Push back against Janis’ statutory amendment argument. It’s perfectly normal for certain elements to overlap as between different possible tests.  Lexmark/Lanham Act: a lot of what was rejected in the prudential standing test comes back as causation, which Scalia heartily approves.  So the fact that you’d get some overlapping deductions from apportionment and from article of manufacture—but not identical—doesn’t make this anything other than an exercise in standard statutory interpretation.

Janis: there was partial claiming/design patents on logos at the time. Was Congress thinking about that? I doubt it.  We’ve asked that question; a lot of the design patents are on carpets, wallpapers, silverware, so when they say design drives demand, that’s what they’re thinking about. But again, if we say today their baseline assumption was incorrect, we should go back to Congress.

RT: But you don’t need to say Congress’ baseline assumption was incorrect if you focus on article of manufacture!  If it was just the logo on the label of the carpet that was infringed, you can look at the label to award total profits. And that is perfectly consistent w/what we think Congress was thinking—about a design patent covering the whole carpet—when it made the total profits rule.

Burrell: Gov’t’s brief did a nice job on the historical context.  Waiver etc. of issues raised below is also addressed in Samsung’s briefing.

Katz: we don’t like the idea of apportioning design—take burden from patentee to prove how much the design contributed.  Patentee has burden to prove total sales, but infringer has burden to prove deductions.  Gov’t suggests a similar rule w/r/t article of manufacture: is it unreasonable to shift the burdens to show what the infringer’s article of manufacture is?

Racilla: burden of proving infringement and damages falls to patentee.  Preponderance of evidence: total profits of defendant; most patentees will go for the full product sold to the market.  Maybe different if it’s just a cupholder.  Burden of production shifts to infringer w/superior knowledge of why they chose certain components.

Davies: experts’ reports all assumed that the article of manufacture was the phone; Samsung’s position was that it hadn’t been allowed to present evidence of anything else.

Burrell: There is some disagreement among the parties about how burdens would play out. Our view: correct rule is that article of manufacture would be first determined. Consistent w/patent cases, burdens largely on P both for establishing infringement and predicates for determining damages—proving up quantum of profits and article of manufacture.  Our view, esp. in our reply brief, is that burdens rest on P. Not fundamentally different than for utility patents.

Katz: but this was a special provision for design patent damages to remedy the inadequacy of utility patent damages.

Burrell: We don’t disagree that the statute was enacted in the wake of Dobson.  But unlike in ©, where there is explicit burden shifting, there is no such thing in the patent statute, which speaks to congressional intent given ordinary rules of litigation.

Davies: risk is that we parse SCt’s 100-year statements for every little nuance. The SCt will say something very high level and the Fed. Cir/dist. cts will have to work out the practicalities.

Katz: both sides can afford big teams of lawyers. Enforcing against small infringers, the Qs are different. Proving article of manufacture w/survey evidence or expert testimony as mentioned at oral argument=over $100,000. Would Ps ever get relief under this type of test?  If you’ve disclaimed part of the design, you could have difficulty defining the article and would have to take that into account before sending a C&D.

RT: Same as other issues you think about—asserting rights in an unregistered trade dress even though proving it up at trial might be expensive.

Myers: it depends on the product/its importance to the company.  Other companies would struggle with that b/c they are smaller.

Burrell: types of considerations: we would largely view it the same way. Refrigerator latch case, the piano case cases—the damages statute was applied in ways consistent w/ the rule we’re arguing for. Will this change the incentives? No, b/c we think this is where we’re already at fundamentally as the statute reads.

Katz: Refrigerator latch involved de minimis infringement.  [?]  In rare circumstances, there could be some de minimis approach where we keep enforcement as it is but a de minimis exception—is that workable, compared to the gov’t’s proposed 2-part test each of which has 4 subparts and may require accountants as well as survey evidence to define the article of manufacture?

Racilla: Kennedy floated de minimis idea and it didn’t seem to work.

Myers: it could be that in some situations a small part does make the product distinctive, so that would cause questions of its own.

Katz: we’re seeing more copies of car designs.  Recent Range Rover Evoque/compare Chinese Landwind E32.  Is the article of manufacture the shell of the auto body?  How would the gov’t’s test work with that?

Davies: have to show that someone was induced to purchase the product b/c of the design—have to prove deception.  [I think this is a misdescription as reflected by the jury verdict, and I think he might agree if I understand him correctly; can’t really be asking the jury that if we also have lots of design patents on parts—we’re asking “deceptive in isolation,” or whatever that means.]  Don’t know how the gov’t’s test applies with that standard.

Racilla: we’d look at what’s actually claimed—the wheels?  Whether it’s a prominent factor—the shell of the body of a car lends a lot to the visual appearance overall.

Katz: why does that matter as to whether it’s the article of manufacture?  If I make an ugly car w/great innards, and someone copies the appearance, why should the relationship matter to what the article of manufacture is?

Racilla: test is prominence in overall appearance, not driving sale. We look back to Gorham: the design is what gives distinctive appearance overall. [Which forces us to ask why if at all the PTO should be granting patents on small portions/logos/etc.  If that’s the design, then anything that doesn’t give the article its distinctive appearance overall should not be patentable!]

Burrell: By definition, if directed to entire exterior of car, then the article of manufacture is the entire exterior of the car. Not very hard to prove.  Profit calculation—we don’t necessarily think the statute proscribes any particular methodology. 

Katz: isn’t that just a forced royalty?

Burrell: No.  Key distinction is that under article of manufacture test, it’s the total profits on that article, including those that relate to contributions to its value coming from utility/function.  Front glass of phone as example: shape, scratch resistance, etc. Quite different from reasonable royalty which is focused on incremental value of patent.

Katz: Gorham patent covers handle, but not the entire flatware—spoons, forks not claimed. How would that work out in the gov’t’s test?  Is the article of manufacture the spoon or the spoon back?  [I can’t figure out what the argument for making it less than the spoon would be under the gov’t’s test.]

What about a Fendi bag?  The whole bag even if it’s got a nice interior?  [The panel isn’t willing to commit; this is my point about the lack of fit b/t granting patents on partial designs and then trying to figure out damages using a standard that assumes, with Gorham, that the design is that which gives the article its distinctive appearance.] [And this is why abandoning point of novelty, while understandable on its own, is messing with the overall design patent scheme—we need point of novelty in order to make design patents on a whole article possible in many cases.]

Perry Saidman: Small/medium clients: Wrote amicus on their behalf.  If the SCt adopts something like the four-factor analysis, it will break the system for these small/medium clients in the real world. Some say that their only ability to bring Wal-Mart to the table in $40,000 infringement case is the total profit rule.  They say: if you start slicing and dicing and giving retailers ammunition to slice and dice; we won’t even be able to get them to the table, and we’ll stop getting design patents and copying will become rampant.  Gov’t wrote: no apportionment.  That’s right. Second part: but, we can slice and dice the article of manufacture can be less than that to which the patented design is applied/the accused infringer is selling. That sounds like apportionment.  Justice Kennedy also asked that. How does the gov’t reconcile that?

Racilla: the definition of article of manufacture is how we reconcile that.  It may be a component of a larger product that’s sold. Or it may not be. There’s a fundamental difference b/t looking at the amount of design that drives sale v. looking at total profits of an article of manufacture, which is a component of a product, to which a design has been applied.

Q: interesting point from oral argument: residual effect/windfall; then we get to claim on entire article—there seems to be agreement that you’d get more than exoskeleton of the car itself, the functional aspects. No one would ever claim the car w/ the undercarriage.  Dishwasher: you never claim the back housing.  That’s the reality—it’s the appearance for the consuming public. There will always be dotted lines.  [For certain classes of goods; not so much carpets and wallpaper.] In reality, how will this work?

Burrell: point of clarification: our view: functional aspects whose contributions is ignored in our scheme would be the functional aspects of the article, which is VW’s body—the fact that the door opens & closes, not the functional aspects of the engine. Our view is that it depends on the claim—all the exterior portions to which the design is applied. If it turned out that the Beetle was basically just things for selling the shell, you could probably show that the profits from the exterior are very high. Our rule is commensurate w/article of manufacture that PTO is allowing the person to claim.

Katz: maybe we could craft a system where innocent infringement/infringement that didn’t drive sale would get lesser damages; we could think about alternatives in the statute.

Copyright Office Ringer Fellow Opportunities

From the Copyright Office: The Copyright Office’s Barbara A. Ringer Copyright Honors Program is an eighteen to twenty-four month paid fellowship designed for attorneys in the early stages of their career with a dedicated interest in copyright law.  During this program, Ringer Fellows work closely with senior attorneys in the Copyright Office on cutting-edge issues of copyright law and policy before Congress, the courts, and with other government agencies.  A current Ringer Fellow is listed on the cover of the government’s Supreme Court brief in the Star Athletica v. Varsity Brands case, "a well-deserved recognition of her contributions."

The application period for fall 2017 spots in the program is closing on October 17th. 

Interested applicants can visit http://www.copyright.gov/about/special-programs/ringer.html for more information.  If any of your students have any questions, they can send an email to RingerHonorsProgram@loc.gov.

biased survey dooms "ask your doctor" ad campaign for 5-Hour Energy

Washington v. Living Essentials, LLC, NO. 14-2-19684-9 (King County Super. Ct. Oct. 10, 2016)

The state sued Living Essentials seeking injunctive and declaratory relief under Washington’s Consumer Protection Act.  While the court found that some of the challenged 5-Hour Energy claims had not been shown to be unsubstantiated (specifically, claims that the vitamins in the product offered benefits and that the product wouldn’t cause a sugar crash), the court found violations of the CPA relating to claims that (1) 5-Hour Energy lasts longer than a cup of coffee because of the synergistic or interactive effects of caffeine, B vitamins and nutrients in the product; (2) Decaf 5-Hour Energy would provide energy, alertness and focus that lasts for hours; and (3) doctors recommended 5-Hour Energy.

Vitamin claims included the tag lines “B Vitamins for Energy; Amino Acids Focus & Better Mood.” The ads expressly claimed that the vitamins and nutrients in 5-Hour Energy played a role in providing energy, alertness and focus and worked synergistically with caffeine to make the biochemical or physiological effects last longer than caffeine alone.  The court found that Living Essentials didn’t downplay or minimize the effects of caffeine. Rather, Living Essentials claimed that the duration of the recognized physiological benefits of caffeine would be extended because of the non-caffeine ingredients in 5-Hour Energy.

 

Vitamins/amino acids taglines

vitamin claims

more vitamin claims

In addition, Living Essentials introduced a decaf version, marketing it with a press release claiming that the decaf product provides “a sustained energy boost” for people sensitive to caffeine. The Living Essentials website claimed that Decaf 5-Hour Energy “gently” works to provide alertness, which it attributes to the presence of choline. These were objective claims about physiological benefits.

 

Decaf claims

And Living Essentials also claimed to avoid the “crash” effect of combining sugar and caffeine, leading consumers to experience a glucose drop when they consumed competing, sugary caffeinated beverages.  After NAD investigation, Living Essentials modified its advertisements to qualify the “no crash” language by including an asterisk directing consumers to a small print disclaimer saying “No crash means no sugar crash.”

 

Does your energy drink make you crash?

sugar and caffeine are to blame!

Finally, Living Essentials created an “Ask Your Doctor” ad campaign.  Living Essentials retained Thomas Maronick, Ph.D., a professor of marketing at Towson University in Maryland and the former Director of Impact Evaluation in the Bureau of Consumer Protection at the FTC to create an online survey of 503 physicians. Instead of asking doctors their general opinions about energy drinks/supplements, the survey asked whether they’d recommend a low calorie/low sodium energy drink for patients who already consumed such products. “Not surprisingly, the majority of doctors said ‘Yes’”—73.6%, to be exact.  The survey also showed respondents a 5-Hour Energy label and a brief description of the product, and asked them if they would recommend 5-Hour Energy to their healthy patients who use energy drinks; 47.7% of the doctors said yes, while about 25% said no.

Living Essentials also conducted a follow-up paper survey done in connection with sales staff’s in-person promotional visits to doctors’ offices, in which they’d leave samples of the product and brochures describing 5-Hour Energy’s ingredients. Dr. Maronick wasn’t involved in the paper survey process and had concerns about whether such a method would suffer from biased responses.  Living Essentials received 2,659 paper surveys in which about 90% of the respondents indicated that they would recommend a low-calorie energy supplement to patients who use energy supplements, and 74% would specifically recommend 5-Hour Energy. Living Essentials created ads with scripts such as:

We asked over 3,000 doctors to review 5-Hour Energy. And what they said was amazing. Over 73 percent who reviewed 5-Hour Energy said they would recommend a low calorie energy supplement to their healthy patients who use energy supplements. Seventy-three percent. 5-Hour Energy has four calories and it’s used over nine million times a week. Is 5-Hour Energy right for you? Ask your doctor. We already asked 3,000.

Placed next to the ad spokeswoman was a large stack of papers, which she flipped through or gestured to while speaking.  ABC and NBC refused to run the ads without some changes, and consumers also complained.

 

Ask your doctor ad

The court considered evidence about the effects of the various ingredients, including evidence developed after the ads aired, which could “shed light on pre-claim studies” used to substantiate claims. The state argued that caffeine was the sole active ingredient in 5-Hour Energy, in the sense of having a physiological effect on the human body. The court disagreed, because B vitamins, taurine, tyrosine and choline are bioactive.  However, that didn’t mean that these bioactive ingredients, in the amounts found in 5-Hour Energy, would provide the advertised benefits of “energy, alertness, and focus.” There was disagreement among the experts about whether healthy, well-nourished adults could benefit from the vitamins and amino acids or whether they’d simply be excreted.  The court found that the state hadn’t shown there was no benefit whatsoever from these ingredients.  However, the state did show that claims that the other ingredients had a synergistic effect with caffeine for the promised benefits of “energy, alertness and focus” were unsubstantiated; the evidence Living Essentials offered was incapable of distinguishing the effects of caffeine from the overall effects of the product.  Likewise, the study of the decaf product was insufficiently reliable to substantiate Living Essentials’ claims.

Living Essentials presented evidence that it complied with industry standards in substantiating its ad claims, first, by having its advertising director conduct internet research on the formula’s ingredients, then by instituting a process for legal and regulatory review by an outside law firm, followed by retaining others to perform literature reviews, and finally by commissioning clinical studies.  The advertising director’s internet research was not adequate substantiation because he “had no ability or training to assess the scientific reliability of anything he read online.”  Nor was regulatory or legal review reasonable substantiation.  “There is simply no evidence in the record that anyone with any science training ever assessed the ad claims and the science backing up those claims against the FTC substantiation guidelines.”  Nor was there any evidence that anyone in the company ever looked at the literature reviews.   Living Essentials did act reasonably in undertaking clinical studies, but the key question was whether the studies were adequate to support the ads’ claims.

Living Essentials also submitted the expert testimony of J. Howard Beales, III, the former Director of the Consumer Protection Division of the Federal Trade Commission.  He testified that the claims in Living Essentials’ ads were all subjective, rather than objective, and thus could not be deceptive.  The court disagreed:

The company intentionally promoted the product’s ingredients as changing the way the body functioned. It promoted the product as a healthy way to achieve these physiological results. The company spent a significant amount of money on clinical studies to establish that 5-Hour Energy was having a biochemical or physiological effect on the bodies of its consumers. As Dr. Beale admitted, if an advertiser claims that a product will change or affect the physiological functioning of the body, that is an objective claim for which scientific substantiation [can] exist. 

The Washington CPA follows FTC interpretations, including the substantiation requirement.  “Where implied claims are conspicuous and reasonably clear from the face of the advertisement, extrinsic evidence is not required to prove the existence of implied claims.”  Also, the FTC can show misleadingness either through showing (1) actual falsity of express or implied claims; or (2) that the advertiser lacked a reasonable basis for asserting that the message was true. And here we get a little weird, because the court cited a case relying on the execrable In re GNC (not an FTC case) for the proposition that the FTC could show literal falsity “if all reasonable scientists would agree that the claims do not provide the benefits as asserted. The FTC may do this by showing the advertiser’s expert opinions are unreasonable or that no expert believes in the assertion.”

But the state was relying on the lack of reasonable basis theory, so the In re GNC dicta gets just a little worse without affecting this case, because the court declined to apply the “all reasonable scientists” standard to Living Essentials’ substantiation evidence.  “The advertiser has the burden of establishing what substantiation it relied on for a claim, and the State has burden of establishing that that substantiation is inadequate.”

Under FTC guidance to advertisers of dietary supplements, claims about the efficacy of dietary supplements must be supported by “competent and reliable scientific evidence,” defined as “tests, analyses, research, studies or other evidence, based on the expertise of professionals in the relevant area, that have been conducted and evaluated in an objective manner by persons qualified to do so, using procedures generally accepted in the profession to yield accurate and reliable results.” The FTC weighs multiple factors to establish the appropriate substantiation, including type of product, type of claim, benefits of truthful claims, costs of false claims, expert opinion about what substantiation is reasonable, and the cost or feasibility of developing substantiation. The court noted that “[t]his does not mean, however, that an advertiser can make any claim it wishes without substantiation, simply because the cost of research is too high.”

The FTC also tells advertisers not to cherry-pick studies and to ensure that studies are relevant to the claims made in ads, including consideration of the dosage and formulation of the advertised product compared to what was studied.

Under this standard, Living Essentials’ claims that that B vitamins promote energy and amino acids promote alertness and focus were not deceptive. However, it was deceptive to claim that these ingredients worked synergistically with caffeine to enhance caffeine-derived energy, alertness, and focus.  None of the studies Living Essentials submitted reliably tested that question. Likewise, the decaf ads were deceptive in claiming that the decaf product would generate energy and alertness that “lasts for hours.”  Living Essentials’ substantiation relied on studies involving daily dietary supplementation of taurine in 3000 mg or more; Decaf 5-Hour Energy contains only 483 mg of taurine.  And studies of the actual product didn’t show significant benefits at the 3-hour mark.

The “no crash” claims were ok, though, because Living Essentials switched to specifying “sugar crash,” and there was no empirical evidence of caffeine-related crashes in habituated users.

The “ask your doctor” ads were deceptive, because they were misleading.  An expert in the science of consumer behavior and persuasion tactics testified credibly that the clear takeaway from these ads was that “doctors would recommend” 5-Hour Energy. But the surveys didn’t ask doctors if they thought 5-Hour Energy was healthy or safe. Instead, they told doctors that 5-Hour Energy was a low fat, low calorie, low sodium, sugar-free drink and asked if the doctors would recommend 5-Hour Energy for healthy patients who already use energy supplements. These questions were  “biased, leading, and designed to elicit a limited response. Due to the phrasing of the questions that preceded this question, a ‘no’ response to this question suggested that the responding doctor would instead recommend a high fat, high calorie, or high sodium energy supplement, rather than allowing doctors the option of saying they do not recommend energy supplements at all.” 

 

question to doctors

Another problem was that the 73% claim in the ad was based on the online survey of 503 doctors, but the reference to “3,000 doctors” was a combination of both surveys. The survey methods used for the online survey and the paper survey “differed so dramatically that the surveys could not reasonably be combined and represented as the same survey.” The doctors who participated in the paper survey weren’t randomly selected. 

court says product reformulation might be deceptive if survey supports claim

Nutrition Distribution LLC v. Driven Sports, 2015 WL 12645002, No. LA CV13-06195  (C.D. Cal. Jan. 15, 2015)

Nutrition sued defendants over their sales of a nutrition supplement product called “Craze.” In July 2013, defendants discontinued the sale of the initial version of Craze after it was reported that the ingredients included amphetamine, amphetamine analogues and/or methamphetamine analogues, none of which was identified on the product label. The FDA sent a warning letter and defendants discontinued sales.  Defendant DS intends to sell Craze again with about 75% similarity to the prior formula.

Although the prior label was materially false, plaintiff couldn’t show irreparable injury with respect to that version, since there was no evidence the prior formula would be used again. Injunctive relief wasn’t justified; it would serve only a hypothetical public interest.

Plaintiff also sought to prevent defendants from using the Craze trademark in any new product.  Again, plaintiff couldn’t show irreparable harm; among other things, it couldn’t show that money damages would be inadequate if the revised Craze improperly diverted sales from plaintiff’s products.

The court also didn’t accept theory of misleadingness, which was that: (1) some members of the public are aware that the old version of Craze contained the prohibited substances, and will assume that the new version will as well, and for that reason will purchase it; or (2) some members of the public were unaware that the old version contained the prohibited substances, liked its effect and will, therefore, assume that the new version will be the same, and for that reason will purchase it. “Although these theories may have some equitable appeal, neither is supported by any evidence.” One could also hypothezie that “another group of those who used the earlier version of Craze learned that it was taken off the market because it contained the Substances, as a result, does not trust DS products, and will not purchase the new version of Craze even if DS represents that it does not contain any improper component.” A consumer survey could help validate plaintiff’s theories, but plaintiff offered none at this point in the case.

In a footnote, the court analogized to a cancellation request, which requires a plaintiff to “show a real and rational basis for his belief that he would be damaged by the registration sought to be cancelled, stemming from an actual commercial or pecuniary interest in his own [trade]mark.” As noted above, that evidence was missing.  Also, plaintiff didn’t show that such a request would be deemed timely under § 1064(1), which requires that a cancellation request be made within five years of a registration.  [NB: Cancellation on the basis of deceptiveness is not subject to the five-year limitation.]

Dual use of same mark on customized Jeeps not confusing, court rules

Moab Indus. v. FCA US, LLC, No. 3:12-cv-8247, 2016 WL 5859700 (D. Ariz. Oct. 6, 2016)

Moab sued FCA, aka Chrysler, for trademark infringement (via reverse confusion) and state-law dilution based on Chrysler’s use of MOAB on a limited edition version of its Jeep brand.  Chrysler counterclaimed for infringement and dilution because Moab customizes and “upfits” Jeeps and applies its Moab mark without removing Chrysler’s marks; the expansiveness of this claim caught my eye, though unfortunately the court doesn’t give a clear statement about just how implausible and dangerous that claim is.  The court conducted a bench trial and rejected everyone’s claims.

 

Chrysler's Moab Special edition

Moab Industries' customized Jeep

Moab has a registration for the service mark MOAB INDUSTRIES to plaintiff for “automotive conversion services, namely, installing specialty automotive equipment.” In 2012, Chrysler filed an ITU application for the trademark MOAB for use in connection with “[m]otor vehicles, namely, passenger automobiles, their structural parts, trim and badges.”  A 2012 trademark search revealed plaintiff’s MOAB INDUSTRIES mark, as well as MOAB TAXI for “taxi transport”; in Class 39 and MOAB STAR for “lights for vehicles,” as well as, inter alia, MOAB standing alone for “bicycles”; “retail store and online retail store services in the fields of clothing, camping gear, sporting goods”; “juices and fruit drinks”; and “eyewear; namely, eyeshields for use in sports activities.” The search results also included common law uses like MOAB 4X4 OUTPOST and MOAB OFFROAD,  both auto conversion businesses—the former actually located in Moab.  The PTO refused Chrysler’s application because of likely confusion with two registered marks, one of which was Moab’s.  The application has been suspended in light of the current lawsuit, filed in late 2012.  (Given B&B, it turns out that Moab might have been better off waiting—query whether there’s any reason to apply preclusion in the other direction!)

For model year 2013, Chrysler introduced a JEEP WRANGLER MOAB Special Edition vehicle and sold about 3,375 of them.  (Chrysler also sells a MOAB branded, after-market wheel, and has done so since before Moab began selling upfitted vehicles. The wheels themselves do not bear the MOAB mark and there was no evidence of likely confusion between the wheels and Moab’s services.)

Relevant factors: the MOAB mark was “relatively weak,” somewhere between suggestive and arbitrary; for these purposes, suggestive marks are conceptually weak, and Moab produced no evidence of commercial strength of either mark. Chrysler didn’t use MOAB on its vehicles any more.  This conceptual and commercial weakness decreased the likelihood of reverse confusion.

The goods were closely related, sold to the same class of purchasers for similar uses and functions, though Moab’s version had “a more robust stance,” whatever that means.  The marks were highly similar; both versions placed the MOAB mark in large letters on both sides of the hood of their vehicles, suggesting potential confusion.

Actual confusion: Moab produced witnesses testifying that web searches for “Moab” regularly turned up first a link to Chrysler.  But such searches did not suggest any connection between the parties, and Moab’s website expressly disclaimed any connection.  Two witnesses bought Moab upfitted Jeeps and later encountered Chrysler’s Moab special edition, but they weren’t potential customers; they both knew they owned Moab-upfitted vehicles. Another witness was clear that she knew that both parties were selling different Moab branded Jeeps, and she was in a client-banker relationship, not a buyer-seller relationship with Moab.  Leading questions caused some other witnesses to express “confusion,” but they simply had questions about the source of the Moab Special Edition, and there was no evidence linking their questions to any potential or actual effect on customers’ purchasing decisions.  [NB: Materiality is not usually required!] For example, one witness was a buyer for a dealership that bought and sold Moab-upfitted Jeeps. When he saw a Moab Special Edition, he recognized that it wasn’t a Moab Industries vehicle, so he went online and found information about the Special Edition.  “The lack of substantial evidence of actual confusion suggests little likelihood of confusion.”

The parties use very different marketing channels: Chrysler sells new vehicles through authorized dealers, while Moab buys those vehicles, upfits them, and then resells them through auction and resale dealers, “in some instances the used car lots of defendant’s authorized dealers. This factor suggests little likelihood of confusion.” Though Moab has aspirations to make vehicles, these are mere aspirations, and the parties are unlikely to expand into each other’s goods.

The parties’ goods are expensive and intended for off-highway use under difficult to extreme circumstances. “These are not purchases likely to be made without careful consideration and investigation of the product.”

Intent: Chrysler chose the Moab mark “largely in consideration of defendant’s long-standing participation in off-road jamborees at Moab, Utah.” There was no evidence of prior knowledge of Moab Industries by top management.  Chrysler’s Arizona VP knew about Moab Industries, as did Chrysler’s audit group; Chrysler designated Moab Industries as a fleet purchaser, but there was no evidence that this knowledge was ever conveyed to the legal department or top management before Chrysler’s CEO approved the Moab Special Edition.  The PTO’s finding of likely confusion was “entitled to very little weight inasmuch as the USPTO would not have had access to most of the evidence which is before the court.”

Overall, lack of actual confusion, marketing channels used, and degree of care weighed strongly in favor of finding confusion unlikely.

Chrysler counterclaimed to cancel the MOAB INDUSTRIES based on its use on vehicles manufactured by Chrysler, which Chrysler argued misrepresented the source of Chrysler’s vehicles. There was no evidence that Moab was claiming to have manufactured the Jeeps it resold. Moab’s advertising clearly advised potential customers that Moab’s MOAB vehicles weren’t endorsed by Chrysler, or that the sales had caused any economic harm to Chrysler or damaged its goodwill in any way.

Dilution: Again, there was no evidence of tarnishment, despite Chrysler’s “bold” assertions of inferior quality and speculation about the stability of upfitted vehicles. Owners of Moab-upfitted vehicles who testified were “well satisfied with their vehicles and plaintiff’s follow-up services.”

Trademark infringement: True, “the use of MOAB by both parties – and in particular, the fact that both plaintiff’s and defendant’s MOAB vehicles display defendant’s registered JEEP, JEEP GRILLE, and WRANGLER registered marks – gives rise to questions (some say confusion).” But there was no evidence of confusion, and Chrysler’s trademark attorney testified that she was not “aware of anybody in the world who expressed a belief that [plaintiff] was actually manufacturing Jeeps.”

Court deems Uber's safety claims to be puffery

XYZ Two Way Radio Service v. Uber Technologies, Inc., No. 15-cv-3015 (E.D.N.Y. Sept. 30, 2016)

Two black-car companies sued Uber for false advertising, false association, and tortious interference with contractual relations between them and their drivers. The court rejected all the claims.

The court found that the challenged statements were generally puffery, such as:

Wherever you are around the world, Uber is committed to connecting you to the safest ride on the road. This means setting the strictest safety standards possible, then working hard to improve them every day. The specifics vary depending on what local governments allow, but with each city we operate, we aim to go above and beyond local requirements to ensure your comfort and security—and what we’re doing in the US is an example of our standards around the world.

… Unlike the taxi industry, our background checking process and standards are consistent across the United States and often more rigorous than what is required to become a taxi driver. . . . We’ll continue innovating, refining, and working diligently to ensure we’re doing everything we can to make Uber the safest experience on the road.

Although “these statements are intended to convey the impression that Uber takes the safety of its passengers seriously,” they did so in ways that were clearly puffery:

The overall tone is boastful and self-congratulatory. Many of the statements are couched in aspirational terms—“committed to,” “aim to,” “believe deeply”—that cannot be proven true or false. Others are vague and hyperbolic; if Uber literally set the “strictest safety standards possible” at the outset, it could not “improve them every day.” In sum, the Court concludes that the challenged statements cannot reasonably be understood as specific representations of objective facts.

Query whether taxi companies, like Domino's Pizza, can exploit this ruling to their own advantage.

Plaintiffs focused on the background check, which they alleged was not “more rigorous than what is required to become a taxi driver,” because it does not require fingerprints, a medical clearance or a drug test, all of which NYC requires.  But the court found Uber’s background check claims to be not false.  First, they were qualified with “often,” and Uber’s website acknowledged that “[t]he specifics vary depending on what local governments allow,”  and that, “[i]n New York City, DMV and criminal background checks are conducted by the Taxi and Limousine Commission (TLC) according to their licensing standards.” Though drivers for UberX don’t need a commercial driver’s license in Connecticut or New Jersey, the website is clear that “[i]n order to drive with Uber in New York City, you need a TLC (Taxi and Limousine Commission) License,” and that Connecticut and New Jersey Drivers “CANNOT pick up anywhere in New York State.”

Plaintiffs also challenged Uber’s statements about its drivers as “partners,” some of which were clearly directed at potential drivers, not customers.  Plaintiffs alleged that “partners” was false because Uber considers its drivers independent contractors and expressly disclaims liability for their actions. But there was no reason to think that customers took “partners” as a legal term of art.  The term, “as used on Uber’s website, reads like euphemistic adspeak devoid of any inherent meaning.”  Thus it wasn’t actionable.

False association: some of plaintiffs’ drivers signed up as Uber “partners,” and used plaintiffs’ cars bearing plaintiffs’ service marks for Uber pickups. However, the court ruled, “[w]hen a driver employed by one of the plaintiffs decides to make an Uber pickup in a car bearing one of the plaintiffs’ services marks, it is the driver—not Uber—who is ‘using’ the mark.”  Interesting ruling—wonder how contributory infringement might go.

Tortious interference: nope.  Although drivers’ contracts were at-will, that didn’t make tortious interference with prospective contract impossible.  But tortious interference with business relations “requires a showing of malice or wrongful conduct,” which means something rising to the level of fraud, threats, or breach of fiduciary duty: “as a general rule, the defendant’s conduct must amount to a crime or an independent tort.” Plaintiffs didn’t allege those things.

Peter Jaszi lecture and festschrift upcoming at AU WCL, Nov. 17 and 18

Link to Lecture
Link to Festschrift Event

I'll be participating in the latter.

Trademark pun of the day

Seen at the local coffee shop.  "A Tribe Called FloydFest" coffee.  Apparently it was a theme at this year's FloydFest in Virginia.