In re Salvatore, 2011 WL 2115816 (Bankr. D.N.J.)
Plaintiff Green alleged that the debtor/defendant violated the New Jersey Consumer Fraud Act by fraudulently inducing her to sign a home improvement contract by making false representations concerning the scope of services and the quality of workmanship that he and/or his company would provide. She sought trebled damages and a determination that her damages were nondischargeable in bankruptcy. She won a judgment under the NJCFA but not a declaration of nondischargeability.
Salvatore promoted his business as having highly skilled, conscientious technicians” performing "guaranteed work" with no "maintenance headaches." His ads also said, “We handle all phases of the job, from getting the permits to cleaning up the site and hauling away all debris. You will receive a written proposal for you[r] project. You'll always know what we're doing and why we're doing it. Everything is included, no hidden surprises.”
Salvatore, however, did not secure the required permits. Salvatore claimed that Green was the one who didn’t want to bother with permits, which he testified he told her would involve additional cost. In the normal course, he admitted, he wouldn’t have started work without a permit. Though the court found that credibility didn’t affect the outcome, it credited Green’s version. The debtor destroyed his own credibility when he proffered a “Certificate of Completion” allegedly signed by Green and expressing her satisfaction with the work; comparing the signature on that document with other examples of Green’s signature in the record raised serious questions of authenticity.
Green ultimately identified significant deficiencies in Salvatore’s work, including large white stains appearing on her kitchen panels, buckling laminate, missing or poorly aligned trim, faulty wiring and plumbing, and so on. Salvatore refused to return to fix the problems. Green sued. Two years later, Salvatore filed under Chapter 13, listing Green as a non-priority unsecured claimant.
Liability for affirmative acts under the NJCFA doesn’t require proof of intent or evidence of actual deception, as long as a statement is material, made to induce the plaintiff to enter the agreement, and false. Salvatore argued that the ads here weren’t part of the final formal agreement between the parties. But that’s not a defense under the NJCFA, if the ad has the capacity to mislead the average consumer.
The claim that "We handle all phases of the job, from getting the permits to cleaning up the site and hauling away all debris," was material, made to induce the plaintiff to enter into the agreement, and made contemporaneously with the agreement. Getting the permits was material because permits are prerequisites for most home renovation projects under the law.
So, did the ad have the capacity to mislead the average consumer? The reference to "handle all phases of the job" could include getting the permits, but the defendant argued that it was something they could contract to do, not would. The court found that the potential was there for the plaintiff’s interpretation, especially with the additional statement that "[e]verything is included, no hidden surprises." This was a factual claim, not puffery, and thus an affirmative misrepresentation.
What about the statement that the work would be performed in a "good workmanlike manner"? The plaintiff argued that this was a misrepresentation of quality, and that the poor quality of the work itself was an unconscionable commercial practice. The claim of performance in a "highly skilled, conscientious manner" was puffery, made in a vacuum without reference to particular work, and thus nonactionable. Poor workmanship was also not unconscionable under the NJCFA absent any bad faith or lack of fair dealing.
The defendant’s regulatory violations were also an unlawful practice under the NJCFA; regulatory violations make a defendant strictly liable. Here, the law required him to state the dates/time period in which work was to begin and be completed in written proposals. He argued that he failed to obtain permits and copies of inspection certificates, as required by law, because it was the plaintiff’s choice to forego permits, which would have triggered inspections. New Jersey regulations don’t place the burden on the contractor to obtain permits, but they do ban commencing work before the contractor is “sure” that any required permits have been obtained. This duty can’t be contracted away, and thus defendant violated the law by failing to ensure that the permits were in place and that the work was properly inspected.
Plaintiff also suffered ascertainable loss causally related to the unlawful practices. The question was not whether the poor workmanship caused the loss, but whether the misrepresentations and regulatory violations did so. Failure to obtain permits/inspections allowed substandard work to continue unimpeded, and thus the necessary causal connection existed.
Was this debt dischargeable in bankruptcy? The burden is on the plaintiff to show this. Debts obtained through fraud are generally nondischargeable. For bankruptcy purposes, fraud requires moral turpitude or intentional wrong. Intent, reliance and materiality—elements of common law fraud—are routinely required. Here, the plaintiff failed to show a material misrepresentation, knowledge of falsity, or intent to deceive.
General representations regarding a contractor-debtor’s expected work performance and quality of workmanship don’t qualify as misrepresentations, just as broken promises, without more inidcation that the debtor knew of the falsity of the representations when they were made or made them with gross recklessness. Though these claims may have been material, plaintiff still failed to show knowledge of falsity and intent to deceive.
The claims to “handle all phases of the job,” including necessary permits, were made in an ad mailed to an unknown number of recipients. At the time, the debtor had no way of knowing whether permits would be required. There wasn’t enough evidence of reckless disregard, even though the ad was potentially misleading. The same with intent to deceive.
So, the plaintiff ended up with a dischargeable claim for slightly over $130,000 plus attorneys’ fees.
Friday, June 03, 2011
Monday, May 30, 2011
Seen around town: today's TM hypo
The NASA reference seems to be classic nominative fair use. The logo, not so much.
Phto: Zachary Schrag
Court dismisses ridiculous TM claims added on to trade secret case
Dow Corning Corp. v. Xiao, 2011 WL 2015517 (E.D. Mich.)
Dow alleged that Xiao and related entities stole Dow’s trade secrets and misused its trademarks to lure customers away from Dow’s trichlorosilane ("TCS") and polysilicon businesses.
Xiao and Michael Little, a chemical engineer formerly employed by Dow for nearly 25 years before he left the company, started LXEng. Little led Dow’s TCS production facility for a period of time and signed nondisclosure agreements.
In the course of contracting with customers/potential customers, Dow alleged, Little and Xiao disclosed Dow trade secrets. Little also allegedly conducted aerial surveillance of Dow’s facilities in Michigan and used that information to explain the manufacturing process to prospective clients. Little then died in a plane crash. Xiao and his company contacted other Dow employees and placed ads in Michigan publications seeking to hire Dow employees with relevant experience. Dow’s counsel wrote to Xiao and LXEng expressing concern that Little may have shared Dow’s trade secrets. Dow asked them to consent to an independent inspection of Little’s laptop, but they refused.
Xiao, allegedly concerned about potential liability to Dow, formed a new company, LXE Solar, which continued LXEng’s business. Although Little was never affiliated with LXE Solar, Dow alleged that the trade secrets Little shared with Xiao and LXEng were still in use.
Dow alleged that the misuse of its trademarks and trade secrets had caused significant harm given Dow’s reputation and the fact that TCS and polysilicon manufacturing requires a multi-step process that has proven difficult to replicate.
Trademark: defendants argued that their use of the marks was not “in commerce,” but the court declined to construe this jurisdictional hook narrowly. The allegations sufficed to allege use in commerce: Dow alleged that, in recruiting new clients, defendants emphasized that they had "pull[ed] all experiences from Dow Corning" and that their technology was "based on both Dow Corning" and another company's products. Defendants allegedly repeatedly used Dow’s trademarks to identify their products, and admitted that that they used Dow’s name as a point of comparison, a source of Little’s experience, and an explanation of the services they could deliver: this was “in commerce.”
But does this state a claim for infringement? Confusion over sponsorship, affiliation or approval would be sufficient to be actionable. Dow argued that it had alleged that each of the factors tilted in its favor: fame, close relationship of the parties’ goods and services, defendants’ use of “Dow Corning” to describe “its” [sic] products, actual confusion (on information and belief), direct competition, likelihood of confusion among purchasers, who "may ... associate the quality" of defendants' goods and services with Dow Corning even if they realize there is no affiliation between defendants and Dow Corning, and specific intent to use the mark to profit from consumer associations. Dow alleged point of sale, post-sale, and initial interest confusion.
Defendants argued that the complaint did not include sufficient allegations to make the claim plausible, despite reciting the elements of a confusion claim. They pointed out that the relevant consumers are sophisticated businesses spending millions on highly technical products.
The court emphasized that this was not a typical trademark case. (Indeed, in other circuits, we’d call it a nominative fair use case.) The parties’ marks were not similar in any way. The only argument here was some kind of affiliation claim. If defendants weren’t using the Dow marks "in a way that identifies the source of [Defendants'] goods" or services, they weren’t using the marks in a "trademark way" and there could be no liability for trademark infringement. So, if they were using the marks only as a point of comparison and to identify the source of Little’s experience, there could be no Lanham Act liability. “Although the complaint alleges substantial wrongdoing by Defendants, it does not plausibly allege that Defendants' used Plaintiffs' trademarks in a
‘trademark way.’” The allegation of confusion as to source or association was implausible.
The Sixth Circuit has defined “non-trademark” use as truthfully describing a past association with another trademark owner. Here, Dow didn’t claim that defendants marked their products with Dow marks, or that they used a similar mark for their own products/services. Rather, it complained about defendants’ marketing materials, but none of those suggested that Dow was the source of defendants’ products or affiliated with Dow in any way.
For example, in one email, Xiao used Dow’s mark, but not in a way that could cause source confusion: “LX is focusing on getting all questions answered and inputs incorporated in designs by collectively pulling all experiences from Dow Corning (Mike downloaded most of his experiences into LX and CDI's process designs), REC and MEMC.” “While Defendants used the Dow Corning mark in marketing communications, they used it as a point of comparison and as a source of Mike Little's experience, but they did not use it to identify the source of their products or suggest an affiliation with Dow Corning. As such, they have not included factual allegations that ‘allow[ ] the court to draw the reasonable inference’ that Plaintiffs will be able to demonstrate likelihood of confusion.”
The court went on to reach the same conclusion using the multifactor test. Though the Dow mark was strong, at least within the relevant industry, and the parties compete, defendants didn’t use a similar mark. Actual confusion favored neither party at the pleading stage; Dow claimed that evidence of confusion would be revealed during discovery. (It’s pretty hard to do the multifactor test at the motion to dismiss stage! That the court is willing to do so, at least where there is a strong policy consideration (comparative advertising/nominative fair use) in play, is good evidence for the proposition that the multifactor test is not really about likely confusion in an empirical sense.)
The marketing channels factor favored defendants, since the challenged communications were “direct contacts targeted at specific consumers where the sender has been clearly identified. It seems that the consumer is less likely to be confused by a targeted communication than by a broad advertisement targeted at a general audience, such as one might see on the Internet or in a newspaper.”
Degree of purchaser care also strongly favored defendants. It was highly unlikely that such “sophisticated and focused consumers” would be confused. “Little's experience as a longtime Dow Corning employee is featured prominently in the materials to demonstrate LXEng's ability to compete in the industry. Sophisticated business clients are unlikely to mistake those references for a suggestion that Dow Corning is sponsoring LXEng or otherwise affiliated with the new company.”
Intent and bridging the gap were not particularly relevant. As to intent, it was clear that defendants referenced Dow’s marks (really, they referenced Dow, not its marks, which is the point of nominative fair use) in an attempt to compare their products favorably to Dow’s. But they didn’t deliberately choose a mark similar to Dow’s, and thus they can’t be said to have chosen a mark in an attempt to confuse consumers.
Defendants also argued fair use. Given the wackiness that is the Sixth Circuit’s handling of these issues, they couldn’t plead nominative fair use, even though that’s what it is. So the court held that they used the Dow mark “descriptively,” to identify Little’s former employer and the source of his knowledge. However, the court rejected the defense at this stage of the case: “While potential customers were unlikely to be confused about the affiliation or source of Defendants' products, they may nevertheless have been misled about the technology underlying the products. As a result, the descriptive use of the mark may not have been in ‘good faith.’” I’m not sure that “good faith” should extend to require the defendant to act above reproach with respect to non-trademark matters, but it doesn’t matter here.
False advertising: initially, the court rejected the attempt to require §43(a)(1)(B) claims to be pled with particularity, though my impression is that the trend is to apply Rule 9(b) to such claims.
Defendants first argued that their communications weren’t widespread enough to be “commercial advertising or promotion.” Here, the relevant market is extremely small, at most 128 companies who have made or will make multimillion-dollar investments and won’t respond to ads in general interest publications or even mass mailings. They require individual targeting in tailored communications. Under the circumstances, a handful of emails is enough to constitute commercial advertising or promotion.
Defendants next argued that Dow hadn’t properly pled actual or likely deception. Dow pled that element, and identified specific communications, such as one in which Xiao assured a reluctant customer following Little's death that Little had earlier "downloaded most of his experiences." But, while confusion about affiliation was unlikely, it was still plausible that sophisticated customers could be deceived “about the extent to which Little had access to Dow Corning's proprietary information and his ability to deliver that information to customers.” This could also plausibly be material.
Dilution: Dow argued blurring and tarnishment. There could be no traditional dilution claim because defendants’ marks weren’t similar to Dow’s marks. Dow nonetheless argued that using the actual Dow mark tarnished and blurred it.
In Audi AG v. D'Amato, 469 F.3d 534 (6th Cir.2006), D’Amato ran www.audisport.com, where he sold merchandise with the "Audi Sport" logo and Audi's distinctive "ring" mark. The site said: "Who are we? We are a cooperative with Audi of America, and will be providing the latest products for your Audi's [sic] and information on Audisport North America." This was not true. The Sixth Circuit found dilution.
Here, however, defendants didn’t use Dow’s marks to label their own product, pretend that they were Dow, or pretend that they were authorized or sponsored by Dow. They used Dow’s mark in a descriptive, comaparative manner, and emphasized differences between the products, “even suggesting that their products would be better than Dow Corning's products because they would combine the best of several available technologies.” This can’t be called dilution, and also it’s specifically exempted by the federal dilution statute in the provision for nominative or descriptive fair use. (Note the tension with the conclusion above that defendants didn’t make out a descriptive fair use defense as a matter of law on the pleadings; I think this time the court got it right.) “There is a difference between Defendants' suggestion to their customers that they had acquired proprietary Dow Corning technology and were prepared to capitalize on that technology to develop Defendants' own products, and the assertion by the defendant in Audi that their products were actually affiliated with or sponsored by Audi. While the latter is actionable under the dilution statute, the former is not.”
The court also commented that, while it was sympathetic to defendants’ arguments that Dow Corning was not a federally famous mark, Dow had properly pled federal fame.
Dow also properly stated a trade secret misappropriation claim and an unfair competition claim under Michigan common law. Dow’s Michigan Consumer Protection Act claim failed because neither party was engaged in “trade or commerce” as defined in the statute, which means “the conduct of a business providing goods, property, or service primarily for personal, family, or household purposes.”
Defendants argued that Dow’s tortious interference claim, which alleged that defendants persuaded Little to breach his confidentiality agreements with Dow, was preempted by the Michigan Uniform Trade Secrets Act. This was true only for alleged misappropriation of a trade secret; to the extent that Dow sought a remedy for disclosure of confidential information protected by the agreements that was not a trade secret, it could still bring its tortious interference claim. I’m not sure what confidential information would be protected but not be a trade secret, but I’m not up on the law of trade secret.
Dow alleged that Xiao and related entities stole Dow’s trade secrets and misused its trademarks to lure customers away from Dow’s trichlorosilane ("TCS") and polysilicon businesses.
Xiao and Michael Little, a chemical engineer formerly employed by Dow for nearly 25 years before he left the company, started LXEng. Little led Dow’s TCS production facility for a period of time and signed nondisclosure agreements.
In the course of contracting with customers/potential customers, Dow alleged, Little and Xiao disclosed Dow trade secrets. Little also allegedly conducted aerial surveillance of Dow’s facilities in Michigan and used that information to explain the manufacturing process to prospective clients. Little then died in a plane crash. Xiao and his company contacted other Dow employees and placed ads in Michigan publications seeking to hire Dow employees with relevant experience. Dow’s counsel wrote to Xiao and LXEng expressing concern that Little may have shared Dow’s trade secrets. Dow asked them to consent to an independent inspection of Little’s laptop, but they refused.
Xiao, allegedly concerned about potential liability to Dow, formed a new company, LXE Solar, which continued LXEng’s business. Although Little was never affiliated with LXE Solar, Dow alleged that the trade secrets Little shared with Xiao and LXEng were still in use.
Dow alleged that the misuse of its trademarks and trade secrets had caused significant harm given Dow’s reputation and the fact that TCS and polysilicon manufacturing requires a multi-step process that has proven difficult to replicate.
Trademark: defendants argued that their use of the marks was not “in commerce,” but the court declined to construe this jurisdictional hook narrowly. The allegations sufficed to allege use in commerce: Dow alleged that, in recruiting new clients, defendants emphasized that they had "pull[ed] all experiences from Dow Corning" and that their technology was "based on both Dow Corning" and another company's products. Defendants allegedly repeatedly used Dow’s trademarks to identify their products, and admitted that that they used Dow’s name as a point of comparison, a source of Little’s experience, and an explanation of the services they could deliver: this was “in commerce.”
But does this state a claim for infringement? Confusion over sponsorship, affiliation or approval would be sufficient to be actionable. Dow argued that it had alleged that each of the factors tilted in its favor: fame, close relationship of the parties’ goods and services, defendants’ use of “Dow Corning” to describe “its” [sic] products, actual confusion (on information and belief), direct competition, likelihood of confusion among purchasers, who "may ... associate the quality" of defendants' goods and services with Dow Corning even if they realize there is no affiliation between defendants and Dow Corning, and specific intent to use the mark to profit from consumer associations. Dow alleged point of sale, post-sale, and initial interest confusion.
Defendants argued that the complaint did not include sufficient allegations to make the claim plausible, despite reciting the elements of a confusion claim. They pointed out that the relevant consumers are sophisticated businesses spending millions on highly technical products.
The court emphasized that this was not a typical trademark case. (Indeed, in other circuits, we’d call it a nominative fair use case.) The parties’ marks were not similar in any way. The only argument here was some kind of affiliation claim. If defendants weren’t using the Dow marks "in a way that identifies the source of [Defendants'] goods" or services, they weren’t using the marks in a "trademark way" and there could be no liability for trademark infringement. So, if they were using the marks only as a point of comparison and to identify the source of Little’s experience, there could be no Lanham Act liability. “Although the complaint alleges substantial wrongdoing by Defendants, it does not plausibly allege that Defendants' used Plaintiffs' trademarks in a
‘trademark way.’” The allegation of confusion as to source or association was implausible.
The Sixth Circuit has defined “non-trademark” use as truthfully describing a past association with another trademark owner. Here, Dow didn’t claim that defendants marked their products with Dow marks, or that they used a similar mark for their own products/services. Rather, it complained about defendants’ marketing materials, but none of those suggested that Dow was the source of defendants’ products or affiliated with Dow in any way.
For example, in one email, Xiao used Dow’s mark, but not in a way that could cause source confusion: “LX is focusing on getting all questions answered and inputs incorporated in designs by collectively pulling all experiences from Dow Corning (Mike downloaded most of his experiences into LX and CDI's process designs), REC and MEMC.” “While Defendants used the Dow Corning mark in marketing communications, they used it as a point of comparison and as a source of Mike Little's experience, but they did not use it to identify the source of their products or suggest an affiliation with Dow Corning. As such, they have not included factual allegations that ‘allow[ ] the court to draw the reasonable inference’ that Plaintiffs will be able to demonstrate likelihood of confusion.”
The court went on to reach the same conclusion using the multifactor test. Though the Dow mark was strong, at least within the relevant industry, and the parties compete, defendants didn’t use a similar mark. Actual confusion favored neither party at the pleading stage; Dow claimed that evidence of confusion would be revealed during discovery. (It’s pretty hard to do the multifactor test at the motion to dismiss stage! That the court is willing to do so, at least where there is a strong policy consideration (comparative advertising/nominative fair use) in play, is good evidence for the proposition that the multifactor test is not really about likely confusion in an empirical sense.)
The marketing channels factor favored defendants, since the challenged communications were “direct contacts targeted at specific consumers where the sender has been clearly identified. It seems that the consumer is less likely to be confused by a targeted communication than by a broad advertisement targeted at a general audience, such as one might see on the Internet or in a newspaper.”
Degree of purchaser care also strongly favored defendants. It was highly unlikely that such “sophisticated and focused consumers” would be confused. “Little's experience as a longtime Dow Corning employee is featured prominently in the materials to demonstrate LXEng's ability to compete in the industry. Sophisticated business clients are unlikely to mistake those references for a suggestion that Dow Corning is sponsoring LXEng or otherwise affiliated with the new company.”
Intent and bridging the gap were not particularly relevant. As to intent, it was clear that defendants referenced Dow’s marks (really, they referenced Dow, not its marks, which is the point of nominative fair use) in an attempt to compare their products favorably to Dow’s. But they didn’t deliberately choose a mark similar to Dow’s, and thus they can’t be said to have chosen a mark in an attempt to confuse consumers.
Defendants also argued fair use. Given the wackiness that is the Sixth Circuit’s handling of these issues, they couldn’t plead nominative fair use, even though that’s what it is. So the court held that they used the Dow mark “descriptively,” to identify Little’s former employer and the source of his knowledge. However, the court rejected the defense at this stage of the case: “While potential customers were unlikely to be confused about the affiliation or source of Defendants' products, they may nevertheless have been misled about the technology underlying the products. As a result, the descriptive use of the mark may not have been in ‘good faith.’” I’m not sure that “good faith” should extend to require the defendant to act above reproach with respect to non-trademark matters, but it doesn’t matter here.
False advertising: initially, the court rejected the attempt to require §43(a)(1)(B) claims to be pled with particularity, though my impression is that the trend is to apply Rule 9(b) to such claims.
Defendants first argued that their communications weren’t widespread enough to be “commercial advertising or promotion.” Here, the relevant market is extremely small, at most 128 companies who have made or will make multimillion-dollar investments and won’t respond to ads in general interest publications or even mass mailings. They require individual targeting in tailored communications. Under the circumstances, a handful of emails is enough to constitute commercial advertising or promotion.
Defendants next argued that Dow hadn’t properly pled actual or likely deception. Dow pled that element, and identified specific communications, such as one in which Xiao assured a reluctant customer following Little's death that Little had earlier "downloaded most of his experiences." But, while confusion about affiliation was unlikely, it was still plausible that sophisticated customers could be deceived “about the extent to which Little had access to Dow Corning's proprietary information and his ability to deliver that information to customers.” This could also plausibly be material.
Dilution: Dow argued blurring and tarnishment. There could be no traditional dilution claim because defendants’ marks weren’t similar to Dow’s marks. Dow nonetheless argued that using the actual Dow mark tarnished and blurred it.
In Audi AG v. D'Amato, 469 F.3d 534 (6th Cir.2006), D’Amato ran www.audisport.com, where he sold merchandise with the "Audi Sport" logo and Audi's distinctive "ring" mark. The site said: "Who are we? We are a cooperative with Audi of America, and will be providing the latest products for your Audi's [sic] and information on Audisport North America." This was not true. The Sixth Circuit found dilution.
Here, however, defendants didn’t use Dow’s marks to label their own product, pretend that they were Dow, or pretend that they were authorized or sponsored by Dow. They used Dow’s mark in a descriptive, comaparative manner, and emphasized differences between the products, “even suggesting that their products would be better than Dow Corning's products because they would combine the best of several available technologies.” This can’t be called dilution, and also it’s specifically exempted by the federal dilution statute in the provision for nominative or descriptive fair use. (Note the tension with the conclusion above that defendants didn’t make out a descriptive fair use defense as a matter of law on the pleadings; I think this time the court got it right.) “There is a difference between Defendants' suggestion to their customers that they had acquired proprietary Dow Corning technology and were prepared to capitalize on that technology to develop Defendants' own products, and the assertion by the defendant in Audi that their products were actually affiliated with or sponsored by Audi. While the latter is actionable under the dilution statute, the former is not.”
The court also commented that, while it was sympathetic to defendants’ arguments that Dow Corning was not a federally famous mark, Dow had properly pled federal fame.
Dow also properly stated a trade secret misappropriation claim and an unfair competition claim under Michigan common law. Dow’s Michigan Consumer Protection Act claim failed because neither party was engaged in “trade or commerce” as defined in the statute, which means “the conduct of a business providing goods, property, or service primarily for personal, family, or household purposes.”
Defendants argued that Dow’s tortious interference claim, which alleged that defendants persuaded Little to breach his confidentiality agreements with Dow, was preempted by the Michigan Uniform Trade Secrets Act. This was true only for alleged misappropriation of a trade secret; to the extent that Dow sought a remedy for disclosure of confidential information protected by the agreements that was not a trade secret, it could still bring its tortious interference claim. I’m not sure what confidential information would be protected but not be a trade secret, but I’m not up on the law of trade secret.
Countersuit over press release not barred by Dastar
ZS Associates, Inc. v. Synygy, Inc., 2011 WL 2038513 (E.D. Pa.)
ZS sued Synygy for defamation, commercial disparagement, and violation of the Lanham Act. The parties are sales and marketing consulting firms that compete to sell “incentive compensation services” including consulting, administration, and software services. Synygy initially sued ZS and related defendants for a variety of business torts. In 2009, after amending its complaint, it issued a press release about the lawsuit.
The core of the press release repeated the allegations that ZS “knowingly and improperly copied and misappropriated components of Synygy's sales compensation software and other intellectual property, and in addition, intentionally hired former Synygy employees, despite knowing about the existence of their non-compete agreements with Synygy, to gain access to confidential information acquired during their tenure with Synygy.” The press release explained that Synygy was asking for, among other things, punitive damages for acts of willful copyright infringement, and included a quote from the president/CEO that “The lawsuit we filed today contends that ZS knowingly copied our software and other confidential information with the intent to use our intellectual property in direct competition with us. Our position is that ZS continues to use our software and other confidential information, causing us to lose substantial revenue, profit, and company valuation, while they profit from its use ….”
Synygy argued that its press release was protected by the fair report privilege, kicking out the defamation and commercial disparagement claims. The Restatement (Second) of Torts says "[t]he publication of defamatory matter concerning another in a report of an official action or proceeding or of a meeting open to the public that deals with a matter of public concern is privileged if the report is accurate and complete or a fair abridgement of the occurrence reported." The court disagreed. Fair report is for unrelated third parties. Comment c says “A person cannot confer this privilege upon himself by making the original defamatory publication himself and then reporting to other people what he had stated.” The court predicted that Pennsylvania would adopt this rule and that it precluded Synygy’s claim to the fair report privilege.
Synygy moved to dismiss the Lanham Act claim because a press release isn’t commercial advertising or promotion. The court disagreed. Commercial advertising or promotion need not be a traditional ad campaign. The press release was (1) commercial speech; (2) by a defendant in commercial competition with the plaintiff; (3) for the purposes of influencing consumers to buy the defendant's goods or services; and (4) that is sufficiently disseminated to the relevant purchasing public to constitute advertising or promotion within the industry.
As to the commercial speech element, the relevant questions were whether the speech was an ad, whether it referred to a specific product or service, and whether the speaker had an economic motivation for the speech. The press release described Synygy’s services and was intended not only to set forth its legal claims but also to persuade potential clients to pick Synygy over ZS. It had a (plainly boilerplate) section labeled “About Synygy” that stated that “Synygy is the largest and most experienced provider of sales performance management (SPM) software and services” and that “Synygy has achieved 18 continuous years of success.” This was sufficient to be commercial speech. It was also sufficiently disseminated. Synygy submitted the release to “influential media outlets including Reuters, Yahoo Finance and Intellectual Property Today.” Given that those outlets target an audience that would be interested in Synygy’s services, that was advertising or promotion.
Synygy argued that Dastar precluded liability for the claims in the press release. The court followed the majority applying Dastar to 43(a)(1)(B) claims, despite what the Supreme Court said in what the court here called dicta. So: any misrepresentations about who created Synygy’s sales performance management solutions, or other misrepresentations of authorship, were not actionable. This was necessary because if a plaintiff were allowed to bring suit on the grounds that the defendant falsely advertised that it originated the ideas/creative content of goods, the plaintiff would have what was in effect a perpetual copyright.
Thus, some of the allegedly false claims were not actionable: anything that alleged that Synygy’s press release falsely attributed to Synygy the authorship of ZS’s products and services, including the claim that the press release "falsely suggest[s] and impl[ies] that Synygy was the market innovator and that ZS's products and services are knock-offs of products and services that Synygy developed," and that it was false to claim that "we have invested many years and a lot of money in product development, which led to Synygy creating the SCM software that has propelled our success year after year." These statements “can only be false insofar as they assert that Synygy, and not ZS, created the products and services offered by Synygy” and were thus barred by Dastar.
Other claims, however, were not barred. Allegedly false claims that ZS stole Synygy's software and confidential information and hired its former employees "despite knowing about the existence of their non-compete agreements with Synygy, to gain access to confidential information acquired during their tenure with Synygy" implicated ZS’s “commercial activities.” Synygy argued that this was just repackaging false attribution, but the court thought this was of a “categorically different nature” because it alleged that ZS conducted its commercial activities unethically, not that it engaged in copyright or patent infringement. (Sounds a bit like an "extra element" test--but wouldn't knowing copyright/patent infringement of a competitor's IP always be unethical?) Also, the claim that ZS hired Synygy's employees in blatant disregard for the applicable non-competition agreements didn’t implicate Dastar in any way.
ZS also adequately alleged falsity/misleadingness to survive a motion to dismiss. “The fair import of the press release is that ZS stole software and confidential information from Synygy and that it hired Synygy's former employees in blatant disregard for their non-competition agreements.” Nor was specific evidence of actual deception or misleadingness required at the pleading stage. ZS alleged that the statements were false or misleading and that they harmed ZS’s reputation and goodwill, affecting sales demand.
ZS sued Synygy for defamation, commercial disparagement, and violation of the Lanham Act. The parties are sales and marketing consulting firms that compete to sell “incentive compensation services” including consulting, administration, and software services. Synygy initially sued ZS and related defendants for a variety of business torts. In 2009, after amending its complaint, it issued a press release about the lawsuit.
The core of the press release repeated the allegations that ZS “knowingly and improperly copied and misappropriated components of Synygy's sales compensation software and other intellectual property, and in addition, intentionally hired former Synygy employees, despite knowing about the existence of their non-compete agreements with Synygy, to gain access to confidential information acquired during their tenure with Synygy.” The press release explained that Synygy was asking for, among other things, punitive damages for acts of willful copyright infringement, and included a quote from the president/CEO that “The lawsuit we filed today contends that ZS knowingly copied our software and other confidential information with the intent to use our intellectual property in direct competition with us. Our position is that ZS continues to use our software and other confidential information, causing us to lose substantial revenue, profit, and company valuation, while they profit from its use ….”
Synygy argued that its press release was protected by the fair report privilege, kicking out the defamation and commercial disparagement claims. The Restatement (Second) of Torts says "[t]he publication of defamatory matter concerning another in a report of an official action or proceeding or of a meeting open to the public that deals with a matter of public concern is privileged if the report is accurate and complete or a fair abridgement of the occurrence reported." The court disagreed. Fair report is for unrelated third parties. Comment c says “A person cannot confer this privilege upon himself by making the original defamatory publication himself and then reporting to other people what he had stated.” The court predicted that Pennsylvania would adopt this rule and that it precluded Synygy’s claim to the fair report privilege.
Synygy moved to dismiss the Lanham Act claim because a press release isn’t commercial advertising or promotion. The court disagreed. Commercial advertising or promotion need not be a traditional ad campaign. The press release was (1) commercial speech; (2) by a defendant in commercial competition with the plaintiff; (3) for the purposes of influencing consumers to buy the defendant's goods or services; and (4) that is sufficiently disseminated to the relevant purchasing public to constitute advertising or promotion within the industry.
As to the commercial speech element, the relevant questions were whether the speech was an ad, whether it referred to a specific product or service, and whether the speaker had an economic motivation for the speech. The press release described Synygy’s services and was intended not only to set forth its legal claims but also to persuade potential clients to pick Synygy over ZS. It had a (plainly boilerplate) section labeled “About Synygy” that stated that “Synygy is the largest and most experienced provider of sales performance management (SPM) software and services” and that “Synygy has achieved 18 continuous years of success.” This was sufficient to be commercial speech. It was also sufficiently disseminated. Synygy submitted the release to “influential media outlets including Reuters, Yahoo Finance and Intellectual Property Today.” Given that those outlets target an audience that would be interested in Synygy’s services, that was advertising or promotion.
Synygy argued that Dastar precluded liability for the claims in the press release. The court followed the majority applying Dastar to 43(a)(1)(B) claims, despite what the Supreme Court said in what the court here called dicta. So: any misrepresentations about who created Synygy’s sales performance management solutions, or other misrepresentations of authorship, were not actionable. This was necessary because if a plaintiff were allowed to bring suit on the grounds that the defendant falsely advertised that it originated the ideas/creative content of goods, the plaintiff would have what was in effect a perpetual copyright.
Thus, some of the allegedly false claims were not actionable: anything that alleged that Synygy’s press release falsely attributed to Synygy the authorship of ZS’s products and services, including the claim that the press release "falsely suggest[s] and impl[ies] that Synygy was the market innovator and that ZS's products and services are knock-offs of products and services that Synygy developed," and that it was false to claim that "we have invested many years and a lot of money in product development, which led to Synygy creating the SCM software that has propelled our success year after year." These statements “can only be false insofar as they assert that Synygy, and not ZS, created the products and services offered by Synygy” and were thus barred by Dastar.
Other claims, however, were not barred. Allegedly false claims that ZS stole Synygy's software and confidential information and hired its former employees "despite knowing about the existence of their non-compete agreements with Synygy, to gain access to confidential information acquired during their tenure with Synygy" implicated ZS’s “commercial activities.” Synygy argued that this was just repackaging false attribution, but the court thought this was of a “categorically different nature” because it alleged that ZS conducted its commercial activities unethically, not that it engaged in copyright or patent infringement. (Sounds a bit like an "extra element" test--but wouldn't knowing copyright/patent infringement of a competitor's IP always be unethical?) Also, the claim that ZS hired Synygy's employees in blatant disregard for the applicable non-competition agreements didn’t implicate Dastar in any way.
ZS also adequately alleged falsity/misleadingness to survive a motion to dismiss. “The fair import of the press release is that ZS stole software and confidential information from Synygy and that it hired Synygy's former employees in blatant disregard for their non-competition agreements.” Nor was specific evidence of actual deception or misleadingness required at the pleading stage. ZS alleged that the statements were false or misleading and that they harmed ZS’s reputation and goodwill, affecting sales demand.
Friday, May 27, 2011
Sometimes, when someone has a crush on you, they'll make you a mix tape to give you a clue
Megan M. Carpenter, Space Age Love Song: The Mix Tape in a Digital Universe. Even though she doesn't cite me or the songs I cite.
Copying as free speech, today's version
Newsweek ran a story (apparently it was one of Newsweek's "content partners," but that wasn't so obvious) about dying cities, including Grand Rapids, Michigan. The citizenry of Grand Rapids, 5000 of them, responded with a "lip dub" to Don McLean's American Pie showing the city as a vital organism. I'm not quite sure why they picked American Pie, but I'd guess it has something to do with the song's position as iconic indicator of Americanness and persistence even when our best days might be behind us. So, who's going to do the fair use analysis?
Green drop greenwashing claim drops out
Hill v. Roll International Corp., --- Cal. Rptr. 3d ----, 2011 WL 2041574 (Cal. App. 1 Dist.) (N.B. Also owned by the owners of Pom--so possibly the hypothetical Pom litigation blog should cover Fiji litigation too.)
Hill bought bottles of Fiji water, on the label of which was a green drop, which allegedly represented that Fiji was environmentally superior to other waters and endorsed by a third-party organization. She filed a putative class action under California’s UCL, FAL, and CLRA, adding common-law fraud and unjust enrichment claims. The trial court found she failed to state a cause of action, and the court of appeals affirmed.
Hill began with the FTC’s Green Guides, arguing that the processes used to make Fiji cause as much, if not more, environmental damage as those of competitors. (Defendant disagreed with this, but the court accepted it on the pleadings. This article offers an overview of the pros and cons claimed for the water, and a pure critique (no pun intended) is here.) She alleged that the green drop violated the FTC guides by looking like a seal of third-party approval and a claim of superiority over other waters, and also pointed to defendant’s website fijigreen.com and the tagline “every drop is green.”
Hill alleged that she relied to her detriment on Fiji’s representations, paying 15% more than for other bottled water. The court responded that, taking all this as true, “no reasonable consumer would be misled to think that the green drop on Fiji water represents a third party organization's endorsement or that Fiji water is environmentally superior to that of the competition.”
Hill relied on the Environmental Marketing Claims Act, which incorporates the Green Guides into its definition of “environmental marketing claim.” The EMCA provides that advertisers who use various “environmentally friendly”-type claims must maintain specific written documentation supporting those claims, and also bans false or misleading environmental marketing claims generally. Still, the gravamen of a CLRA action based on the EMCA is that a claim must be untruthful, deceptive, or misleading.
Hill argued that the green drop was a general environmental benefit claim, which was deceptive because it was not qualified to explain the specific benefits and thus deceptively conveyed that the product was “green” across every relevant axis. She analogized to the FTC Green Guide example about an environmental seal with a globe icon and the text “Earth Smart.” The FTC says that this “is likely to convey to consumers that the product is environmentally superior to other products. If the manufacturer cannot substantiate this broad claim, the claim would be deceptive.” Specifically, Hill argued that the green drop implied an independent third-party endorsement of Fiji water’s environmental superiority.
But a reasonable consumer would not so conclude. The standard is not the least sophisticated consumer, unless the advertising is specifically targeted to such a consumer. It’s also true that a reasonable consumer “need not be ‘exceptionally acute and sophisticated’” and might not “necessarily be wary or suspicious of advertising claims"; indeed, “in these days of inevitable and readily available Internet criticism and suspicion of virtually any corporate enterprise, … a reasonable consumer also does not include one who is overly suspicious.” It’s the ordinary target consumer.
So, does the green drop convey to a reasonable consumer that the product is endorsed as environmentally superior by a third-party organization? The court had a simple answer: no. The drop bore no name or recognized logo of any group, no TM symbol, and no other indication that it was anything other than a symbol of Fiji water. The FTC Green Guides do talk about a globe icon, “but a symbol of the Earth is more suggestive of a seal of an environmental organization and … could suggest the established Green Seal logo, with a stylized check mark and the words "Green Seal" contoured around a globe.” A drop is the most logical icon for water. The court assumed that reasonable consumers would view the green drop as a reference to the environment, but the Green Guides don’t prohibit touting green features.
For further context, the green drop on the back of the bottle appears right next to the website address, fijigreen.com, “further confirming to a reasonable consumer that the green drop symbol is by Fiji water, not an independent third party organization--and, of course, inviting consumers to visit the website for product information, which includes Fiji Water's explanation of its environmental efforts.” The “every drop is green” slogan doesn’t alter the overall impression.
The court distinguished the refusal to dismiss the class action complaint in Koh v. S.C. Johnson & Son, Inc., 2010 U.S. Dist. Lexis 654 (N.D. Jan. 6, 2010), on the ground that the label there was very different: “It made express representations of environmental superiority, used the trademarked name ‘Greenlist,’ a name not immediately apt to be associated with the product or its manufacturers, and identified the name as a rating system, which further suggested an independent source that rated other manufacturers’ products as well.”
The court agreed that Fiji obviously put the green drop on the label for a marketing purpose, to signify “something to do with the environment.” But no reasonable consumer would think that the green drop represented a third party endorsement or a claim of superiority to the competition.
Hill bought bottles of Fiji water, on the label of which was a green drop, which allegedly represented that Fiji was environmentally superior to other waters and endorsed by a third-party organization. She filed a putative class action under California’s UCL, FAL, and CLRA, adding common-law fraud and unjust enrichment claims. The trial court found she failed to state a cause of action, and the court of appeals affirmed.
Hill began with the FTC’s Green Guides, arguing that the processes used to make Fiji cause as much, if not more, environmental damage as those of competitors. (Defendant disagreed with this, but the court accepted it on the pleadings. This article offers an overview of the pros and cons claimed for the water, and a pure critique (no pun intended) is here.) She alleged that the green drop violated the FTC guides by looking like a seal of third-party approval and a claim of superiority over other waters, and also pointed to defendant’s website fijigreen.com and the tagline “every drop is green.”
Hill alleged that she relied to her detriment on Fiji’s representations, paying 15% more than for other bottled water. The court responded that, taking all this as true, “no reasonable consumer would be misled to think that the green drop on Fiji water represents a third party organization's endorsement or that Fiji water is environmentally superior to that of the competition.”
Hill relied on the Environmental Marketing Claims Act, which incorporates the Green Guides into its definition of “environmental marketing claim.” The EMCA provides that advertisers who use various “environmentally friendly”-type claims must maintain specific written documentation supporting those claims, and also bans false or misleading environmental marketing claims generally. Still, the gravamen of a CLRA action based on the EMCA is that a claim must be untruthful, deceptive, or misleading.
Hill argued that the green drop was a general environmental benefit claim, which was deceptive because it was not qualified to explain the specific benefits and thus deceptively conveyed that the product was “green” across every relevant axis. She analogized to the FTC Green Guide example about an environmental seal with a globe icon and the text “Earth Smart.” The FTC says that this “is likely to convey to consumers that the product is environmentally superior to other products. If the manufacturer cannot substantiate this broad claim, the claim would be deceptive.” Specifically, Hill argued that the green drop implied an independent third-party endorsement of Fiji water’s environmental superiority.
But a reasonable consumer would not so conclude. The standard is not the least sophisticated consumer, unless the advertising is specifically targeted to such a consumer. It’s also true that a reasonable consumer “need not be ‘exceptionally acute and sophisticated’” and might not “necessarily be wary or suspicious of advertising claims"; indeed, “in these days of inevitable and readily available Internet criticism and suspicion of virtually any corporate enterprise, … a reasonable consumer also does not include one who is overly suspicious.” It’s the ordinary target consumer.
So, does the green drop convey to a reasonable consumer that the product is endorsed as environmentally superior by a third-party organization? The court had a simple answer: no. The drop bore no name or recognized logo of any group, no TM symbol, and no other indication that it was anything other than a symbol of Fiji water. The FTC Green Guides do talk about a globe icon, “but a symbol of the Earth is more suggestive of a seal of an environmental organization and … could suggest the established Green Seal logo, with a stylized check mark and the words "Green Seal" contoured around a globe.” A drop is the most logical icon for water. The court assumed that reasonable consumers would view the green drop as a reference to the environment, but the Green Guides don’t prohibit touting green features.
For further context, the green drop on the back of the bottle appears right next to the website address, fijigreen.com, “further confirming to a reasonable consumer that the green drop symbol is by Fiji water, not an independent third party organization--and, of course, inviting consumers to visit the website for product information, which includes Fiji Water's explanation of its environmental efforts.” The “every drop is green” slogan doesn’t alter the overall impression.
The court distinguished the refusal to dismiss the class action complaint in Koh v. S.C. Johnson & Son, Inc., 2010 U.S. Dist. Lexis 654 (N.D. Jan. 6, 2010), on the ground that the label there was very different: “It made express representations of environmental superiority, used the trademarked name ‘Greenlist,’ a name not immediately apt to be associated with the product or its manufacturers, and identified the name as a rating system, which further suggested an independent source that rated other manufacturers’ products as well.”
The court agreed that Fiji obviously put the green drop on the label for a marketing purpose, to signify “something to do with the environment.” But no reasonable consumer would think that the green drop represented a third party endorsement or a claim of superiority to the competition.
Advertising Law Treatise
At long last, David Bernstein and Bruce Keller's The Law of Advertising, Marketing and Promotions is being published. It's available in hard copy and online. I will do a longer review when I have the time to sit down with it, but I can already recommend it as a resource.
NYSE claims trademark rights in images of NYSE in news stories
Story here. Outraged? I'm barely surprised.
Thursday, May 26, 2011
Allegedly infringing video site cuts down TM, some copyright claims
Flava Works, Inc. v. Gunter, 2011 WL 1791557 (N.D. Ill.)
Flava Works produces adult entertainment, including video and photographs. Gunter owns myVidster.com, allegedly a social networking website through which site members can store and bookmark video files and post links to files on other websites. Another defendant, Voxel Dot Net, provided webhosting for myVidster, though something (possibly this lawsuit) led to the end of the relationship.
Flava Works alleged infringement of its registered copyrights and trademarks because members/users of myVidster, including John Doe defendants, uploaded its videos and images, or links thereto, to myVidster, without authorization. MyVidster encourages users to invite others to view videos and offers inexpensive storage space for videos. Flava Works argued that this “purposefully created a system that makes it more difficult for copyright owners to monitor the site for infringement.” Flava Works alleged that it sent Gunter and his webhosting companies DMCA takedown notices and identified alleged repeat infringers. It sent 7 DMCA notices between May and December 2010. Though there was no allegation of noncompliance with the DMCA, the website allegedly continued to be updated with more infringing material, and myVidster had no filters in place to prevent reposting and allegedly took no action to stop or ban repeat infringers.
Flava Works sued for direct, contributory, and vicarious copyright infringement, as well as for inducement, and trademark infringement/false designation of origin under the Lanham Act and the common law.
Gunter and another related defendant moved to dismiss.
The case law provided no support for direct copyright infringement based on these allegations. Allowing users to store files is not direct copying, which requires volitional conduct causing a copy to be made.
The contributory copyright infringement claim, however, survived. This requires pleading (1) direct infringement by a third party; (2) defendant’s actual or constructive knowledge of infringement; and (3) defendant’s material contribution. Defendants argued that an allegation that they received DMCA notices, without more, was insufficient to impute knowledge. The court assumed that this was true, but Flava Works alleged facts allowing a reasonable inference that defendants actually or constructively knew of copyright infringement on myVidster. Notification plus failure to act to prevent future infringing uses or willful blindness can be sufficient for contributory infringement. Seven notices over a seven-month period specified specific infringing files and users as well as specific repeat infringers, and Flava Works alleged failure to deal with repeat infringers and failure to implement filters to prevent future similar infringing content, which sufficed to allege knowledge.
As to material contribution, it was enough to allege that defendants provide a website that stores infringing material, allows backup copies to be made, and encourages sharing, with no action to filter infringing content or ban repeat infringers.
Flava Works fared less well on vicarious infringement. It failed to allege the right and ability to supervise myVidster users via the terms of service. And from the allegation that Gunter owned and operated myVidster, the court was unwilling to infer that defendants could block infringers’ access to the website or ability to post infringing materials. Right and ability to control requires more than mere ownership and operation, though it doesn’t require pervasive participation in the infringing activity either.
As to direct financial interest, the other element of vicarious infringement, Flava Works didn’t need to allege that customers subscribed to myVidster because of infringing material or cancelled their subscriptions when infringing material was no longer available. All it needed was the allegation that the availability of infringing material was a draw for customers. Flava Works failed to clear this low hurdle: “While the complaint does allege that that inexpensive storage space and the ability to share videos attracts customers to myVidster, it does not allege that the presence of the infringing material on the site enhances the site's attractiveness or draws customers.” This count was dismissed with leave to amend.
Inducement: Under Grokster, “one who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties.” “[M]ere knowledge of infringing potential or of actual infringing uses would not be enough ... to subject a distributor to liability,” nor would ordinary acts incident to product distribution, such as offering customers technical support; only “purposeful, culpable expression and conduct” counts. Flava Works pled a formulaic recitation of inducement, but no facts plausibly suggesting entitlement to relief on this theory. “It is not enough to allege that myVidster provides storage for video files and encourages sharing (or even that it also knew that the website could be used to infringe). No clear expression of an infringing purpose is alleged, and no active steps taken to foster infringement, such as advertising an infringing use or instructing how to engage in an infringing use, are alleged.”
Trademark/false designation of origin: Flava Works failed to allege that defendants used its marks in commerce. It alleged only that its copyrighted material posted to myVidster without authorization “often contains” its trademarks or trade dress and that defendants’ unauthorized distribution causes confusion about its origin. That’s not an allegation that defendants used plaintiff’s marks at all, or in commerce. (Dastar might merit a mention as much as use in commerce.)
Flava Works produces adult entertainment, including video and photographs. Gunter owns myVidster.com, allegedly a social networking website through which site members can store and bookmark video files and post links to files on other websites. Another defendant, Voxel Dot Net, provided webhosting for myVidster, though something (possibly this lawsuit) led to the end of the relationship.
Flava Works alleged infringement of its registered copyrights and trademarks because members/users of myVidster, including John Doe defendants, uploaded its videos and images, or links thereto, to myVidster, without authorization. MyVidster encourages users to invite others to view videos and offers inexpensive storage space for videos. Flava Works argued that this “purposefully created a system that makes it more difficult for copyright owners to monitor the site for infringement.” Flava Works alleged that it sent Gunter and his webhosting companies DMCA takedown notices and identified alleged repeat infringers. It sent 7 DMCA notices between May and December 2010. Though there was no allegation of noncompliance with the DMCA, the website allegedly continued to be updated with more infringing material, and myVidster had no filters in place to prevent reposting and allegedly took no action to stop or ban repeat infringers.
Flava Works sued for direct, contributory, and vicarious copyright infringement, as well as for inducement, and trademark infringement/false designation of origin under the Lanham Act and the common law.
Gunter and another related defendant moved to dismiss.
The case law provided no support for direct copyright infringement based on these allegations. Allowing users to store files is not direct copying, which requires volitional conduct causing a copy to be made.
The contributory copyright infringement claim, however, survived. This requires pleading (1) direct infringement by a third party; (2) defendant’s actual or constructive knowledge of infringement; and (3) defendant’s material contribution. Defendants argued that an allegation that they received DMCA notices, without more, was insufficient to impute knowledge. The court assumed that this was true, but Flava Works alleged facts allowing a reasonable inference that defendants actually or constructively knew of copyright infringement on myVidster. Notification plus failure to act to prevent future infringing uses or willful blindness can be sufficient for contributory infringement. Seven notices over a seven-month period specified specific infringing files and users as well as specific repeat infringers, and Flava Works alleged failure to deal with repeat infringers and failure to implement filters to prevent future similar infringing content, which sufficed to allege knowledge.
As to material contribution, it was enough to allege that defendants provide a website that stores infringing material, allows backup copies to be made, and encourages sharing, with no action to filter infringing content or ban repeat infringers.
Flava Works fared less well on vicarious infringement. It failed to allege the right and ability to supervise myVidster users via the terms of service. And from the allegation that Gunter owned and operated myVidster, the court was unwilling to infer that defendants could block infringers’ access to the website or ability to post infringing materials. Right and ability to control requires more than mere ownership and operation, though it doesn’t require pervasive participation in the infringing activity either.
As to direct financial interest, the other element of vicarious infringement, Flava Works didn’t need to allege that customers subscribed to myVidster because of infringing material or cancelled their subscriptions when infringing material was no longer available. All it needed was the allegation that the availability of infringing material was a draw for customers. Flava Works failed to clear this low hurdle: “While the complaint does allege that that inexpensive storage space and the ability to share videos attracts customers to myVidster, it does not allege that the presence of the infringing material on the site enhances the site's attractiveness or draws customers.” This count was dismissed with leave to amend.
Inducement: Under Grokster, “one who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties.” “[M]ere knowledge of infringing potential or of actual infringing uses would not be enough ... to subject a distributor to liability,” nor would ordinary acts incident to product distribution, such as offering customers technical support; only “purposeful, culpable expression and conduct” counts. Flava Works pled a formulaic recitation of inducement, but no facts plausibly suggesting entitlement to relief on this theory. “It is not enough to allege that myVidster provides storage for video files and encourages sharing (or even that it also knew that the website could be used to infringe). No clear expression of an infringing purpose is alleged, and no active steps taken to foster infringement, such as advertising an infringing use or instructing how to engage in an infringing use, are alleged.”
Trademark/false designation of origin: Flava Works failed to allege that defendants used its marks in commerce. It alleged only that its copyrighted material posted to myVidster without authorization “often contains” its trademarks or trade dress and that defendants’ unauthorized distribution causes confusion about its origin. That’s not an allegation that defendants used plaintiff’s marks at all, or in commerce. (Dastar might merit a mention as much as use in commerce.)
Wednesday, May 25, 2011
Boykin Anchor Co. v. AT&T Corp., 2011 WL 1930629 (E.D.N.C.)
Boykin sued in state court for unfair and deceptive trade practices, gross negligence, negligence, and libel. Defendants removed, and plaintiff added a Lanham Act false advertising claim and some more defendants.
Boykin makes seismic anchors for the telecom industry. As you might expect, they anchor equipment to concrete floors. Boykin’s anchors have been used since 1996 and approved for use by AT&T since 2002. Boykin’s sole competitor for AT&T-related business is Hilti, Inc.; Boykin alleges that Hilti’s anchors are inferior but cost more.
Defendant Wong is an employee of AT&T Services and “an industry insider whose advice has an impact on what products are used by telecommunications companies.” He developed a personal relationship with Hilti, and wrote an email stating that there were "concerns over product performance based on testing conducted years ago" over Boykin anchors, and recommended in internet postings that Boykin’s anchors shouldn’t be used because of “performance questions.” He also stated that consumers should only use Hilti anchors “per most recent AT&T requirements." However, there were no performance questions regarding Boykin anchors, nor was there any AT&T requirement to use Hilti anchors. Boykin alleged that distributors stopped buying Boykin anchors.
Some of Wong’s statements were inside the statute of limitations for libel, and so that claim survived for another day with respect to those more recent statements.
The Lanham Act claim foundered because it wasn’t made in a commercial advertisement. Using the Gordon & Breach Science Publishers v. American Institute of Physics, 859 F.Supp. 1521 (S.D.N.Y.1994), test, a commercial ad is (1) commercial speech; (2) by a defendant who is in commercial competition with plaintiff; (3) for the purpose of influencing consumers to buy defendant's goods or services (4) which is disseminated sufficiently to the relevant purchasing public. Boykin argued that the court shouldn’t require commercial competition between the parties. Though there was no binding circuit precedent, other circuits’ decisions weighed strongly in favor of adopting the four-part test, and the court did so. (The dominant Gordon & Breach test is another reason the Conte Bros./Phoenix of Broward standing case law is so misguided.) The competition requirement was particularly consistent with the Fourth Circuit’s statement that the Lanham Act is for plaintiffs whose “commercial interests have been harmed by a competitor's false advertising." Made in the USA Found, v. Phillips Foods, Inc., 365 F.3d 278, 281 (4th Cir. 2004).
The Lanham Act claims failed. Wong’s statement wasn’t commercial speech, because it wasn’t speech that did no more than propose a commercial transaction, nor was it speech related solely to the economic interests of speaker and audience. Also, neither AT&T Services nor Wong was in commercial competition with Boykin. AT&T Services is a consumer of Boykin’s products, or an interested third party, and Wong was just an “employee attempting to influence the decisions of his employer and others in the industry to use a specific product.” There was no indication that Wong's internet postings were designed to influence consumers to buy products or services provided by Wong or AT&T Services.
Boykin argued that Wong counted as a direct competitor because of his personal relationship with Hilti employees. The court disagreed, because that didn’t make him an agent of Hilti’s.
Boykin also alleged that defendants acted negligently by making false statements about Boykin anchors, and then failing to retract these statements once notified of their falsity. The court held that these claims properly sounded in defamation, not negligence or gross negligence. There was no case law suggesting that an individual has a duty to avoid making false statements about others separate and distinct from defamation. “Courts have traditionally been very cognizant of the distinctions between defamation on the one hand and negligence on the other, and have resisted efforts by plaintiffs to recast an action sounding in the former into one sounding in the latter.”
Boykin sued in state court for unfair and deceptive trade practices, gross negligence, negligence, and libel. Defendants removed, and plaintiff added a Lanham Act false advertising claim and some more defendants.
Boykin makes seismic anchors for the telecom industry. As you might expect, they anchor equipment to concrete floors. Boykin’s anchors have been used since 1996 and approved for use by AT&T since 2002. Boykin’s sole competitor for AT&T-related business is Hilti, Inc.; Boykin alleges that Hilti’s anchors are inferior but cost more.
Defendant Wong is an employee of AT&T Services and “an industry insider whose advice has an impact on what products are used by telecommunications companies.” He developed a personal relationship with Hilti, and wrote an email stating that there were "concerns over product performance based on testing conducted years ago" over Boykin anchors, and recommended in internet postings that Boykin’s anchors shouldn’t be used because of “performance questions.” He also stated that consumers should only use Hilti anchors “per most recent AT&T requirements." However, there were no performance questions regarding Boykin anchors, nor was there any AT&T requirement to use Hilti anchors. Boykin alleged that distributors stopped buying Boykin anchors.
Some of Wong’s statements were inside the statute of limitations for libel, and so that claim survived for another day with respect to those more recent statements.
The Lanham Act claim foundered because it wasn’t made in a commercial advertisement. Using the Gordon & Breach Science Publishers v. American Institute of Physics, 859 F.Supp. 1521 (S.D.N.Y.1994), test, a commercial ad is (1) commercial speech; (2) by a defendant who is in commercial competition with plaintiff; (3) for the purpose of influencing consumers to buy defendant's goods or services (4) which is disseminated sufficiently to the relevant purchasing public. Boykin argued that the court shouldn’t require commercial competition between the parties. Though there was no binding circuit precedent, other circuits’ decisions weighed strongly in favor of adopting the four-part test, and the court did so. (The dominant Gordon & Breach test is another reason the Conte Bros./Phoenix of Broward standing case law is so misguided.) The competition requirement was particularly consistent with the Fourth Circuit’s statement that the Lanham Act is for plaintiffs whose “commercial interests have been harmed by a competitor's false advertising." Made in the USA Found, v. Phillips Foods, Inc., 365 F.3d 278, 281 (4th Cir. 2004).
The Lanham Act claims failed. Wong’s statement wasn’t commercial speech, because it wasn’t speech that did no more than propose a commercial transaction, nor was it speech related solely to the economic interests of speaker and audience. Also, neither AT&T Services nor Wong was in commercial competition with Boykin. AT&T Services is a consumer of Boykin’s products, or an interested third party, and Wong was just an “employee attempting to influence the decisions of his employer and others in the industry to use a specific product.” There was no indication that Wong's internet postings were designed to influence consumers to buy products or services provided by Wong or AT&T Services.
Boykin argued that Wong counted as a direct competitor because of his personal relationship with Hilti employees. The court disagreed, because that didn’t make him an agent of Hilti’s.
Boykin also alleged that defendants acted negligently by making false statements about Boykin anchors, and then failing to retract these statements once notified of their falsity. The court held that these claims properly sounded in defamation, not negligence or gross negligence. There was no case law suggesting that an individual has a duty to avoid making false statements about others separate and distinct from defamation. “Courts have traditionally been very cognizant of the distinctions between defamation on the one hand and negligence on the other, and have resisted efforts by plaintiffs to recast an action sounding in the former into one sounding in the latter.”
Pom Wonderful hearing
Pom Wonderful FTC ALJ hearing, opening day
Personal milestone: my very first press pass! They were a bit confused about the status of bloggers, I think.
Complaint counsel’s opening statement: Rubies in the Orchard: a marketing book published by one of the individual defendants, Lynda Resnick, about marketing pomegranate juice and Pomx, a dietary supplement. Claims for scientific peer-reviewed research: there isn’t a man in America who shouldn’t drink 8 oz. per day because it keeps you from getting prostate cancer and keeps PSA from rising. False establishment claims and unsubstantiated health/efficacy claims lacking a reasonable basis.
Ads challenged focused on claims that Pom juice/Pomx prevent/treat heart disease, prostate cancer, and erectile dysfunction. The primary evidence of the claims made is the ad itself. [Showed an ad with a Pom bottle and a stethoscope with the tagline “Decompress.”] Claims and various characteristics can create an impression that claims are based on scientific proof. Intent is not required but if present is relevant to finding that claims were made and that they were material. Creative briefs from in-house ad agency show intent to make claims. Benefits to be communicated as stated in those briefs: general health/live forever and heart health/clean and healthy arteries/“floss your arteries daily”—reasons given were that healthy antioxidants fight free radicals which cause heart disease, premature aging, Alzheimer’s, and cancer. Other campaigns targeted men who are scared of prostate cancer, along with elderly supplement users and young health-conscious women. Strategies included having experts state that Pomx provides the same cardiovascular/prostate benefits as the juice.
Pom’s reasons to believe: backed by $25 million in research conducted using Pom juice; only guaranteed 100% pomegranate juice. Diabetes and other diseases associated with aging came up. Website’s health benefits section: tone was to be authoritative and approachable. Focus on heart disease, results of studies sponsored by Pom showing decrease in arterial plaque: patients who consumed 8 oz. daily for one year saw 30% decrease in plaque, and also improved blood flow. Prostate health: similar claims. Slower PSA doubling time could have a relationship to decreased cancer risk—headline was about “saving” men from prostate cancer.
Email to Linda Resnick about an LATimes article discussing problems with the Pom research—no placebo; article concluded that more research was needed and that eating healthy was better than obsessing over the superfruit of the moment. This shows knowledge of the flaws and the intent to convey the message.
Emails to consumers in response to questions from the public about an ad called “Cheat Death”—a Pom bottle with a hangman’s noose around the neck; controversial. Company’s response: our ad campaign is created with the intent of using imagery that irreverently and boldly conveys to the consumer that drinking our product may prevent disease. Pom has many distinct benefits that sets it apart from other products and research suggests it may reduce heart disease. Since heart disease is a big killer, it’s important to communicate to consumers the powerful benefits of drinking Pom.
Actual ads matched up with creative briefs: “drink and be healthy” has ad copy claiming medical studies show that 8 oz. daily minimize plaque buildup. References to clinical pilot studies reducing plaque up to 30%. Pom as “life support”—Pom bottle in place of IV bottle, with the same “reasons to believe” offered as dictated by the creative briefs. Floss your arteries daily: Pom bottle in the medicine cabinet. Amaze your cardiologist: Pom bottle with stethoscopes on it. “What gets your heart pumping?” Pom bottle in bikini—supported by $23 million of initial scientific research from leading universities which has uncovered evidence of cardiovascular and prostate health. Special “wrapped” editions of Time distributed to urologists’ offices claimed prostate health shown by studies.
Likewise, Pomx ads tracked the creative briefs, emphasizing scientific claims. “Hopeful results for men and prostate cancer.” Pomegranate juice may one day prove an effective weapon against prostate cancer. Another tagline: “Science not fiction.” The only pomegranates backed by $20 million in research. Medical imagery, highlighting the studies. “The only antioxidant supplement rated X”—a preliminary study on erectile function, reporting 50% more likely to get an erection compared to placebo, but that study had no valid endpoint and was not statistically significant. “24 scientific studies now in one easy-to-swallow pill.”
Reception and materiality: Pom’s own consumer research showed this. 86% said they bought Pom because it was good for their health, and over half of those said it was good for their hearts (close-ended/multiple choice questions). High percentage chose prostate claims. Many reported that they learned these claims from the ads. Traditional copy tests: Many reported based on exposure to ads that Pom had “proven” health benefits. Poster in urologists’ offices was also tested and many consumers received the prostate cancer treatment message.
Consumer communications with Pom show materiality. “I’m dosing my husband with your wonderful and hopefully miraculous juice”—he was treated for prostate cancer. (A lot of sad stories of people desperate for hope follow.) One inquiry asked about the 30% plaque reduction claim—if that’s true, if you take it for 4 years will the plaque all be gone? (This produced a rumble of amusement in the gallery, but seems a reasonable one to me.) Pom’s response: that was for people with severe arterial plaque and may not apply to all people, and it only followed 10 people for 1 year and 5 for longer, so it’s hard to extrapolate. Linked to a study but didn’t explain that the study showed no effect on people with mild to moderate heart disease.
The science: the appropriate level of substantiation for health claims is competent and reliable scientific evidence, based on the expertise of relevant professionals, conducted in an objective manner by qualified persons in a fashion generally accepted to yield reliable results. Advertiser must satisfy the relevant scientific community that the claim is true.
Not challenging claims about whole fruit or fresh fruit, but about Pom Wonderful juice and Pomx pills/liquid. Q: would they have the same problem with same claims about the fresh fruit? A: Some of the hard-hitting claims related to specific diseases/conditions; the point is that we aren’t challenging claims about the health benefits of fruits and vegetables. Their commercially manufactured juice doesn’t contain, for example, Vitamin C and fiber, two of the key reasons for eating fruits and vegetables. The product claims here must be supported by the testing on these specific products. Supplement claims should be made by testing on supplement; can’t go from whole pomegranate to the supplement, because they’re not the same any more than apples are the same as apple juice, which nutritionists generally agree is of little value.
Four experts in heart disease, prostate cancer, and epidemiology will testify about the level of substantiation they’d expect to support respondents’ claims. Studies are small—10 patients—and there were no controls in the key studies, including the arterial plaque reduction studies. Respondents touted 21% blood pressure reduction though it was actually 12% in 2 weeks. Another study was cut off after 3 months despite 12 month protocol; no change in blood pressure, though change in blood flow. Placebo-controlled test with 73 patients showed no change in blood pressure or plaque. 45-patient study showed no change in blood pressure or blood flow: unable to replicate small study. Largest study with endpoint in arterial plaque: 289 patients. No change in blood pressure. No change in arterial plaque reduction at 18 months. No replication of the 10-patient study used in the ads. Published 2009 (completed 2006). Other biomarkers analyzed: no changes. Another nonplacebo study of Pomx pills showed no change in blood pressure or other markers, except for one (a technical thing I didn’t get, something about T-bars). That’s the only study of Pomx.
Prostate cancer: one study, from UCLA, 48 subjects. Not placebo-controlled. Positive effect on mean PSA doubling time. Our experts: not a recognized biomarker for analyzing whether or not the product treats or prevents prostate cancer. Two ongoing studies are placebo-controlled, but we have no idea about the results. Another nonplacebo study shows increase in doubling time.
Erectile function: one was placebo-controlled, but not statistically significant. The respondents will say they got close to statistical significance, but only on an unvalidated measure, not on the validated one.
Summary of respondents’ own assessment of its science, prepared by respondents’ scientific director from 2005-2009, Mark Dreher. Shared with respondent Stuart Resnick to create strategic plan for medical research. Showed a lot of negative results. “Where do we go from here?” Options: prevent heart disease/lower blood pressure claim—need larger studies. Expensive/risky to do science necessary for it. Health claims: few options for health claims—could try reduce risk of heart disease/hypertension. Their own analysis: they needed 2 studies for either option: costs would be $3-5 million and 2 years for FDA approval. Assessment: probably not worth pursuing in part because claim wouldn’t be specific to Pom. Science risks: our data may not be strong enough. Another option: no more clinical research; publicize what we already have. That’s low risk, but our research has holes. Current research is only 3 on 1-10 scale according to doctors.
Produced similar assessment of prostate cancer studies. Prevent/treat claim would require 2 studies, 1000 patients; PSA wouldn’t be accepted as an endpoint. Pharma-grade manufacturing. Health claims would require 100 patients, with an endpoint of active surveillance of cancer. Another option: stick with what we have.
ED (erectile dysfunction): need a stronger study to get clinical significance. Again, another option would be to stick with what we have.
Respondents repeatedly ignored warning signs indicating that marketing didn’t match science. Had a keen understanding of the level of science required to make treatment/reduction of risk claims. 2 NAD decisions.
Ended with more clips from TV interviews showing the consistent message: there are health benefits, they’re proven by tests on humans, we’ve spent millions of dollars on this research.
Q: the government isn’t claiming that this is snake oil, but that they don’t have the right science.
A: yes, that they don’t have the science that they said they did.
Pom decided to wait for its opening statement until complaint counsel finished presenting witnesses.
Lynda Resnick, first witness (in response to various questions from complaint counsel):
Marketer in the family, building the brand. Opened a small ad agency in her late teens; 38 years ago switched to home-based business, then started running Teleflora. She believes that part of the intrinsic value of Pom is its “power to heal.” (Various statements made in her book.) 8000 year history of pomegranates as medicine, so it’s the entire body of evidence, not just research.
The fact that we’re so serious about our science is what makes us stand out from other fruits and vegetables—rarely see another natural food investing in science, and we want consumers to know about that.
Doesn’t specifically recall Oct. 2010 deposition in Tropicana case. Has been deposed in several Pom litigations. She doesn’t read all the body copy or hang tag or sales marketing sheet for the field force; hasn’t paid much attention to website for years. Her involvement since 2007 has decreased as she had more confidence in management of Pom. Looking at big picture and not minutia. Even before then she didn’t have final say on all marketing materials due to family and other brand responsibilities. Who did have final say over ad content? If she didn’t look at it, there were a couple of other people in marketing. People would sit down as a group and brainstorm big marketing initiatives.
Have a full-service in house ad agency that does PR, creative, and media buying.
Discussion of exhibits—she didn’t remember making various comments on proposed ad copy but considered it likely that they were hers; those comments reflected detailed involvement in the ad copy and in the health claims in particular.
I took off to get home in time for domestic responsibilities; I will probably check back in as the case continues.
Personal milestone: my very first press pass! They were a bit confused about the status of bloggers, I think.
Complaint counsel’s opening statement: Rubies in the Orchard: a marketing book published by one of the individual defendants, Lynda Resnick, about marketing pomegranate juice and Pomx, a dietary supplement. Claims for scientific peer-reviewed research: there isn’t a man in America who shouldn’t drink 8 oz. per day because it keeps you from getting prostate cancer and keeps PSA from rising. False establishment claims and unsubstantiated health/efficacy claims lacking a reasonable basis.
Ads challenged focused on claims that Pom juice/Pomx prevent/treat heart disease, prostate cancer, and erectile dysfunction. The primary evidence of the claims made is the ad itself. [Showed an ad with a Pom bottle and a stethoscope with the tagline “Decompress.”] Claims and various characteristics can create an impression that claims are based on scientific proof. Intent is not required but if present is relevant to finding that claims were made and that they were material. Creative briefs from in-house ad agency show intent to make claims. Benefits to be communicated as stated in those briefs: general health/live forever and heart health/clean and healthy arteries/“floss your arteries daily”—reasons given were that healthy antioxidants fight free radicals which cause heart disease, premature aging, Alzheimer’s, and cancer. Other campaigns targeted men who are scared of prostate cancer, along with elderly supplement users and young health-conscious women. Strategies included having experts state that Pomx provides the same cardiovascular/prostate benefits as the juice.
Pom’s reasons to believe: backed by $25 million in research conducted using Pom juice; only guaranteed 100% pomegranate juice. Diabetes and other diseases associated with aging came up. Website’s health benefits section: tone was to be authoritative and approachable. Focus on heart disease, results of studies sponsored by Pom showing decrease in arterial plaque: patients who consumed 8 oz. daily for one year saw 30% decrease in plaque, and also improved blood flow. Prostate health: similar claims. Slower PSA doubling time could have a relationship to decreased cancer risk—headline was about “saving” men from prostate cancer.
Email to Linda Resnick about an LATimes article discussing problems with the Pom research—no placebo; article concluded that more research was needed and that eating healthy was better than obsessing over the superfruit of the moment. This shows knowledge of the flaws and the intent to convey the message.
Emails to consumers in response to questions from the public about an ad called “Cheat Death”—a Pom bottle with a hangman’s noose around the neck; controversial. Company’s response: our ad campaign is created with the intent of using imagery that irreverently and boldly conveys to the consumer that drinking our product may prevent disease. Pom has many distinct benefits that sets it apart from other products and research suggests it may reduce heart disease. Since heart disease is a big killer, it’s important to communicate to consumers the powerful benefits of drinking Pom.
Actual ads matched up with creative briefs: “drink and be healthy” has ad copy claiming medical studies show that 8 oz. daily minimize plaque buildup. References to clinical pilot studies reducing plaque up to 30%. Pom as “life support”—Pom bottle in place of IV bottle, with the same “reasons to believe” offered as dictated by the creative briefs. Floss your arteries daily: Pom bottle in the medicine cabinet. Amaze your cardiologist: Pom bottle with stethoscopes on it. “What gets your heart pumping?” Pom bottle in bikini—supported by $23 million of initial scientific research from leading universities which has uncovered evidence of cardiovascular and prostate health. Special “wrapped” editions of Time distributed to urologists’ offices claimed prostate health shown by studies.
Likewise, Pomx ads tracked the creative briefs, emphasizing scientific claims. “Hopeful results for men and prostate cancer.” Pomegranate juice may one day prove an effective weapon against prostate cancer. Another tagline: “Science not fiction.” The only pomegranates backed by $20 million in research. Medical imagery, highlighting the studies. “The only antioxidant supplement rated X”—a preliminary study on erectile function, reporting 50% more likely to get an erection compared to placebo, but that study had no valid endpoint and was not statistically significant. “24 scientific studies now in one easy-to-swallow pill.”
Reception and materiality: Pom’s own consumer research showed this. 86% said they bought Pom because it was good for their health, and over half of those said it was good for their hearts (close-ended/multiple choice questions). High percentage chose prostate claims. Many reported that they learned these claims from the ads. Traditional copy tests: Many reported based on exposure to ads that Pom had “proven” health benefits. Poster in urologists’ offices was also tested and many consumers received the prostate cancer treatment message.
Consumer communications with Pom show materiality. “I’m dosing my husband with your wonderful and hopefully miraculous juice”—he was treated for prostate cancer. (A lot of sad stories of people desperate for hope follow.) One inquiry asked about the 30% plaque reduction claim—if that’s true, if you take it for 4 years will the plaque all be gone? (This produced a rumble of amusement in the gallery, but seems a reasonable one to me.) Pom’s response: that was for people with severe arterial plaque and may not apply to all people, and it only followed 10 people for 1 year and 5 for longer, so it’s hard to extrapolate. Linked to a study but didn’t explain that the study showed no effect on people with mild to moderate heart disease.
The science: the appropriate level of substantiation for health claims is competent and reliable scientific evidence, based on the expertise of relevant professionals, conducted in an objective manner by qualified persons in a fashion generally accepted to yield reliable results. Advertiser must satisfy the relevant scientific community that the claim is true.
Not challenging claims about whole fruit or fresh fruit, but about Pom Wonderful juice and Pomx pills/liquid. Q: would they have the same problem with same claims about the fresh fruit? A: Some of the hard-hitting claims related to specific diseases/conditions; the point is that we aren’t challenging claims about the health benefits of fruits and vegetables. Their commercially manufactured juice doesn’t contain, for example, Vitamin C and fiber, two of the key reasons for eating fruits and vegetables. The product claims here must be supported by the testing on these specific products. Supplement claims should be made by testing on supplement; can’t go from whole pomegranate to the supplement, because they’re not the same any more than apples are the same as apple juice, which nutritionists generally agree is of little value.
Four experts in heart disease, prostate cancer, and epidemiology will testify about the level of substantiation they’d expect to support respondents’ claims. Studies are small—10 patients—and there were no controls in the key studies, including the arterial plaque reduction studies. Respondents touted 21% blood pressure reduction though it was actually 12% in 2 weeks. Another study was cut off after 3 months despite 12 month protocol; no change in blood pressure, though change in blood flow. Placebo-controlled test with 73 patients showed no change in blood pressure or plaque. 45-patient study showed no change in blood pressure or blood flow: unable to replicate small study. Largest study with endpoint in arterial plaque: 289 patients. No change in blood pressure. No change in arterial plaque reduction at 18 months. No replication of the 10-patient study used in the ads. Published 2009 (completed 2006). Other biomarkers analyzed: no changes. Another nonplacebo study of Pomx pills showed no change in blood pressure or other markers, except for one (a technical thing I didn’t get, something about T-bars). That’s the only study of Pomx.
Prostate cancer: one study, from UCLA, 48 subjects. Not placebo-controlled. Positive effect on mean PSA doubling time. Our experts: not a recognized biomarker for analyzing whether or not the product treats or prevents prostate cancer. Two ongoing studies are placebo-controlled, but we have no idea about the results. Another nonplacebo study shows increase in doubling time.
Erectile function: one was placebo-controlled, but not statistically significant. The respondents will say they got close to statistical significance, but only on an unvalidated measure, not on the validated one.
Summary of respondents’ own assessment of its science, prepared by respondents’ scientific director from 2005-2009, Mark Dreher. Shared with respondent Stuart Resnick to create strategic plan for medical research. Showed a lot of negative results. “Where do we go from here?” Options: prevent heart disease/lower blood pressure claim—need larger studies. Expensive/risky to do science necessary for it. Health claims: few options for health claims—could try reduce risk of heart disease/hypertension. Their own analysis: they needed 2 studies for either option: costs would be $3-5 million and 2 years for FDA approval. Assessment: probably not worth pursuing in part because claim wouldn’t be specific to Pom. Science risks: our data may not be strong enough. Another option: no more clinical research; publicize what we already have. That’s low risk, but our research has holes. Current research is only 3 on 1-10 scale according to doctors.
Produced similar assessment of prostate cancer studies. Prevent/treat claim would require 2 studies, 1000 patients; PSA wouldn’t be accepted as an endpoint. Pharma-grade manufacturing. Health claims would require 100 patients, with an endpoint of active surveillance of cancer. Another option: stick with what we have.
ED (erectile dysfunction): need a stronger study to get clinical significance. Again, another option would be to stick with what we have.
Respondents repeatedly ignored warning signs indicating that marketing didn’t match science. Had a keen understanding of the level of science required to make treatment/reduction of risk claims. 2 NAD decisions.
Ended with more clips from TV interviews showing the consistent message: there are health benefits, they’re proven by tests on humans, we’ve spent millions of dollars on this research.
Q: the government isn’t claiming that this is snake oil, but that they don’t have the right science.
A: yes, that they don’t have the science that they said they did.
Pom decided to wait for its opening statement until complaint counsel finished presenting witnesses.
Lynda Resnick, first witness (in response to various questions from complaint counsel):
Marketer in the family, building the brand. Opened a small ad agency in her late teens; 38 years ago switched to home-based business, then started running Teleflora. She believes that part of the intrinsic value of Pom is its “power to heal.” (Various statements made in her book.) 8000 year history of pomegranates as medicine, so it’s the entire body of evidence, not just research.
The fact that we’re so serious about our science is what makes us stand out from other fruits and vegetables—rarely see another natural food investing in science, and we want consumers to know about that.
Doesn’t specifically recall Oct. 2010 deposition in Tropicana case. Has been deposed in several Pom litigations. She doesn’t read all the body copy or hang tag or sales marketing sheet for the field force; hasn’t paid much attention to website for years. Her involvement since 2007 has decreased as she had more confidence in management of Pom. Looking at big picture and not minutia. Even before then she didn’t have final say on all marketing materials due to family and other brand responsibilities. Who did have final say over ad content? If she didn’t look at it, there were a couple of other people in marketing. People would sit down as a group and brainstorm big marketing initiatives.
Have a full-service in house ad agency that does PR, creative, and media buying.
Discussion of exhibits—she didn’t remember making various comments on proposed ad copy but considered it likely that they were hers; those comments reflected detailed involvement in the ad copy and in the health claims in particular.
I took off to get home in time for domestic responsibilities; I will probably check back in as the case continues.
Monday, May 23, 2011
Failed false marking claim largely preempts related false advertising claims
Champion Laboratories, Inc. v. Parker-Hannifin Corp., 2011 WL 1883832 (E.D. Cal.)
Champion sued Parker for patent false marking, false advertising under the Lanham Act, and violation of California Business & Professions Code §§ 17200 et seq. The parties compete to sell auto parts to car manufacturers and have a history of litigation over patents and business practices. Both produce fuel filtration products for Ford trucks equipped with the Powerstroke diesel engine. Parker was the OEM and sold a replacement filter. Parker has and licenses a number of relevant patents, including '537 and '993 as relevant here. The patents, according to Parker, disclose a filter assembly that prevents an improper filter element from being used, reducing mess and environmental issues during an element change. It also sells other components of the filtration system and allegedly has the ability to control the design of the system.
Champion alleged that Parker falsely marked its replacement filter with the patent numbers even though the claims are inapplicable to that filter. Parker argued that a first-to-file limitation barred Champion’s false marking claim because a different plaintiff filed a separate false patent marking qui tam action against Parker based on the same material allegations three weeks before Champion filed. This claim was settled in January 2011.
One court has found the qui tam provision unconstitutional. Unique Product Solutions, Ltd. v. Hy-Grade Valve, Inc., --- F. Supp. 2d ----, No. 5:10-CV-1912, 2011 WL 649998 (N.D. Ohio Feb. 23, 2011), while several others subsequently rejected that decision. But the court could avoid the question, because the case law supported Parker’s argument that only one private individual can assert a qui tam cause of action under the statute. Champion argued that the prerequisites for claim preclusion weren’t satisfied, but it had no standing to challenge the earlier litigation (filed hours before this case) because the government was the real party in interest. Champion’s status as a competitor did not give it special status in a false marking case. Here, the government acknowledged the settlement and accepted its share (which was not disclosed), and relitigating the merits would be complex and burdensome.
Champion argued that the settlement was staged and lacked transparency. This was similar to the constitutional arguments that the government lacked sufficient control over the qui tam action. The court was unpersuaded (and noted the conflict between asserting that the statute is constitutional and that a settlement wasn’t fair to the government because of the government’s inability to control the terms). The government can assert its interests: it’s required to receive notice and it can intervene if it chooses. Thus, the false marking qui tam claim was dismissed with prejudice.
Champion’s Lanham Act and state law claims alleged an attempt to suppress competition through false and misleading patent claims about the replacement filter that were likely to cause consumer confusion. Champion also alleged as a basis of state law liability that Parker changed the filtration system to prevent competitors’ use of noninfringing replacement filters, incorporating meaningless features in order to suppress competition.
Parker argued that these claims were precluded because they were predicated on barred false marking claims. The court agreed that, to the extent that the claims were predicated only on false marking of the filters, they were preempted. It’s not enough to allege intentional or knowing false marking. The allegations that Parker incorporated a nonessential plastic structure into its filter design to "thwart competition from Champion's competing replacement filter" were also not specific enough under Iqbal and fell short of alleging “marketplace bad faith,” an additional element that avoids preemption.
The Lanham Act claim was also insufficient. Champion argued that it alleged that Parker wrongfully claimed patent rights through product packaging and other promotional material, but these allegations were conclusory and unclear; the alleged ad was apparently found inside the filter package and Champion didn’t explain how the consumer viewed the ad or how it impacted consumer choice. Also, the allegations relied solely on the alleged false marking, nothing more. They didn’t meet Iqbal’s standard for pleading facts instead of labels.
The non-false marking claims were dismissed with leave to amend to explain its claims with greater particularity.
Champion sued Parker for patent false marking, false advertising under the Lanham Act, and violation of California Business & Professions Code §§ 17200 et seq. The parties compete to sell auto parts to car manufacturers and have a history of litigation over patents and business practices. Both produce fuel filtration products for Ford trucks equipped with the Powerstroke diesel engine. Parker was the OEM and sold a replacement filter. Parker has and licenses a number of relevant patents, including '537 and '993 as relevant here. The patents, according to Parker, disclose a filter assembly that prevents an improper filter element from being used, reducing mess and environmental issues during an element change. It also sells other components of the filtration system and allegedly has the ability to control the design of the system.
Champion alleged that Parker falsely marked its replacement filter with the patent numbers even though the claims are inapplicable to that filter. Parker argued that a first-to-file limitation barred Champion’s false marking claim because a different plaintiff filed a separate false patent marking qui tam action against Parker based on the same material allegations three weeks before Champion filed. This claim was settled in January 2011.
One court has found the qui tam provision unconstitutional. Unique Product Solutions, Ltd. v. Hy-Grade Valve, Inc., --- F. Supp. 2d ----, No. 5:10-CV-1912, 2011 WL 649998 (N.D. Ohio Feb. 23, 2011), while several others subsequently rejected that decision. But the court could avoid the question, because the case law supported Parker’s argument that only one private individual can assert a qui tam cause of action under the statute. Champion argued that the prerequisites for claim preclusion weren’t satisfied, but it had no standing to challenge the earlier litigation (filed hours before this case) because the government was the real party in interest. Champion’s status as a competitor did not give it special status in a false marking case. Here, the government acknowledged the settlement and accepted its share (which was not disclosed), and relitigating the merits would be complex and burdensome.
Champion argued that the settlement was staged and lacked transparency. This was similar to the constitutional arguments that the government lacked sufficient control over the qui tam action. The court was unpersuaded (and noted the conflict between asserting that the statute is constitutional and that a settlement wasn’t fair to the government because of the government’s inability to control the terms). The government can assert its interests: it’s required to receive notice and it can intervene if it chooses. Thus, the false marking qui tam claim was dismissed with prejudice.
Champion’s Lanham Act and state law claims alleged an attempt to suppress competition through false and misleading patent claims about the replacement filter that were likely to cause consumer confusion. Champion also alleged as a basis of state law liability that Parker changed the filtration system to prevent competitors’ use of noninfringing replacement filters, incorporating meaningless features in order to suppress competition.
Parker argued that these claims were precluded because they were predicated on barred false marking claims. The court agreed that, to the extent that the claims were predicated only on false marking of the filters, they were preempted. It’s not enough to allege intentional or knowing false marking. The allegations that Parker incorporated a nonessential plastic structure into its filter design to "thwart competition from Champion's competing replacement filter" were also not specific enough under Iqbal and fell short of alleging “marketplace bad faith,” an additional element that avoids preemption.
The Lanham Act claim was also insufficient. Champion argued that it alleged that Parker wrongfully claimed patent rights through product packaging and other promotional material, but these allegations were conclusory and unclear; the alleged ad was apparently found inside the filter package and Champion didn’t explain how the consumer viewed the ad or how it impacted consumer choice. Also, the allegations relied solely on the alleged false marking, nothing more. They didn’t meet Iqbal’s standard for pleading facts instead of labels.
The non-false marking claims were dismissed with leave to amend to explain its claims with greater particularity.
Friday, May 20, 2011
Trump University loses early round in fraud claim
Makaeff v. Trump University, LLC, 2011 WL 1872886 (S.D. Cal.)
Another early loss for Trump. (This discussion of Trump’s real estate misrepresentation woes ends with a lawyer’s response that is, let’s say, unlikely to work. Stick to the procedural posture and some general disappointment/anticipation of the full day in court!)
This is a putative class action by people who enrolled in “Trump University” seminars “and now maintain they learned a much different lesson than they bargained for.” Plaintiffs claimed fraud and violation of various state consumer protection laws.
The court dismissed the claims for violation of New York's General Business Law § 349(a) with leave to amend because the complaint didn’t indicate that the misconduct alleged took place in New York. The seminars weren’t taken in New York. Though the law doesn’t only cover New York residents, it’s directed at deceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in New York. Trump University offered and conducted seminars and “coaching sessions” in NY, the court only looked at named plaintiffs’ claims, and none of them took classes in NY. TU (rhymes with something, I’m sure) also used its New York address to send correspondence to Plaintiffs and putative class members nationwide, but that’s not enough for §349 to apply.
The fraud/misrepresentation claims were pled with sufficient particularity for most of the named plaintiffs. TU argued that plaintiffs couldn’t have relied on any alleged misrepresentations because they were made after plaintiffs already paid for the seminars. However, plaintiffs sufficiently alleged that the misrepresentations were used to “upsell” customers to the next level. TU also claimed that the statements were mere opinion or puffery and that plaintiffs didn’t explain why the statements were false. (So, apparently one of the subtler Iqbal/Twombly consequences is defendants’ idea that plaintiffs have to explain what makes an allegedly false claim false, though I haven’t seen this idea get very far in the opinions I’ve read. Alleging that a specific factual statement is false is generally the kind of thing that I expect courts are to take on the face of the pleadings even after Iqbal.)
Anyway, with the exception of one plaintiff who failed to specify the allegedly false claims adequately, these arguments failed to launch, much like Trump’s presidential campaign.
Tarla Makaeff alleged that Trump University speaker Tiffany Brinkman persuaded Makaeff to sign up for a $35,000 seminar by falsely "guaranteeing" her that her first real estate deal would earn her enough to pay for the seminar. Ed Oberkrom alleged that in order to persuade the students in his class to sign up for a $25,000 seminar, the speaker told them that "the first students to sign up ... would be the first to get the best properties on a list, and access to get the best buyers," as well as “first access to an exclusive website of properties hand-picked by Donald Trump." In fact, he alleged, the properties were not handpicked by Donald Trump, and the website was not exclusive but was accessible to anyone for $39 a month. Brandon Keller alleged that a speaker falsely told his class that if they signed up for the $1,500 seminar and brought five to ten real estate leads, Trump University trainers would call the leads, and that they were guaranteed to make $5,000 to $10,000 within 30 days.
These allegations satisfied Rule 9(b) and negated TU’s argument that the timing of the misrepresentations precluded reliance. The court had already in a previous opinion rejected TU’s argument that plaintiffs expressly disclaimed reliance on any guarantees when they signed up for the seminars. (One legacy of the 1960s/1970s push for specific consumer protection law was to blunt the effect of integration clauses and the like used to disclaim promises made by salespeople that were contradicted by the ultimate sales contract. Recognizing that consumers reasonably rely on many such promises, regardless of what the fine print says, consumer protection law generally treats the advertising/sales pitch as actionable if it is (1) misleading and (2) effective. Defendants don’t like this rule, but it is often still applicable.) Maybe some of the statements were puffery, but TU didn’t raise the argument until its reply brief and didn’t identify which ones anyway.
In addition, Makaeff stated a false advertising claim under California law (Business & Professions Code §17500) by alleging that TU’s oral misrepresentations constituted false advertising.
Breach of contract claims also survived, and the court denied TU’s motions to strike several allegations. Most notably, though an elder abuse cause of action was no longer in the case, allegations regarding TU’s targeting of senior citizens help give a full understanding of the complaint and may still be relevant. In addition, statements made by a person named Noah Herrara were not immaterial, though TU argued that Herrera was not its agent or employee. But Makaeff alleged that a TU instructor facilitated a deal between Hererra and Makaeff, which ended badly for Makaeff in part because Hererra committed fraud. The deal, and the instructor’s failure to disclose an alleged conflict of interest, supported the claims that TU misrepresented the quality of its seminars in violation of the CLRA.
Another early loss for Trump. (This discussion of Trump’s real estate misrepresentation woes ends with a lawyer’s response that is, let’s say, unlikely to work. Stick to the procedural posture and some general disappointment/anticipation of the full day in court!)
This is a putative class action by people who enrolled in “Trump University” seminars “and now maintain they learned a much different lesson than they bargained for.” Plaintiffs claimed fraud and violation of various state consumer protection laws.
The court dismissed the claims for violation of New York's General Business Law § 349(a) with leave to amend because the complaint didn’t indicate that the misconduct alleged took place in New York. The seminars weren’t taken in New York. Though the law doesn’t only cover New York residents, it’s directed at deceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in New York. Trump University offered and conducted seminars and “coaching sessions” in NY, the court only looked at named plaintiffs’ claims, and none of them took classes in NY. TU (rhymes with something, I’m sure) also used its New York address to send correspondence to Plaintiffs and putative class members nationwide, but that’s not enough for §349 to apply.
The fraud/misrepresentation claims were pled with sufficient particularity for most of the named plaintiffs. TU argued that plaintiffs couldn’t have relied on any alleged misrepresentations because they were made after plaintiffs already paid for the seminars. However, plaintiffs sufficiently alleged that the misrepresentations were used to “upsell” customers to the next level. TU also claimed that the statements were mere opinion or puffery and that plaintiffs didn’t explain why the statements were false. (So, apparently one of the subtler Iqbal/Twombly consequences is defendants’ idea that plaintiffs have to explain what makes an allegedly false claim false, though I haven’t seen this idea get very far in the opinions I’ve read. Alleging that a specific factual statement is false is generally the kind of thing that I expect courts are to take on the face of the pleadings even after Iqbal.)
Anyway, with the exception of one plaintiff who failed to specify the allegedly false claims adequately, these arguments failed to launch, much like Trump’s presidential campaign.
Tarla Makaeff alleged that Trump University speaker Tiffany Brinkman persuaded Makaeff to sign up for a $35,000 seminar by falsely "guaranteeing" her that her first real estate deal would earn her enough to pay for the seminar. Ed Oberkrom alleged that in order to persuade the students in his class to sign up for a $25,000 seminar, the speaker told them that "the first students to sign up ... would be the first to get the best properties on a list, and access to get the best buyers," as well as “first access to an exclusive website of properties hand-picked by Donald Trump." In fact, he alleged, the properties were not handpicked by Donald Trump, and the website was not exclusive but was accessible to anyone for $39 a month. Brandon Keller alleged that a speaker falsely told his class that if they signed up for the $1,500 seminar and brought five to ten real estate leads, Trump University trainers would call the leads, and that they were guaranteed to make $5,000 to $10,000 within 30 days.
These allegations satisfied Rule 9(b) and negated TU’s argument that the timing of the misrepresentations precluded reliance. The court had already in a previous opinion rejected TU’s argument that plaintiffs expressly disclaimed reliance on any guarantees when they signed up for the seminars. (One legacy of the 1960s/1970s push for specific consumer protection law was to blunt the effect of integration clauses and the like used to disclaim promises made by salespeople that were contradicted by the ultimate sales contract. Recognizing that consumers reasonably rely on many such promises, regardless of what the fine print says, consumer protection law generally treats the advertising/sales pitch as actionable if it is (1) misleading and (2) effective. Defendants don’t like this rule, but it is often still applicable.) Maybe some of the statements were puffery, but TU didn’t raise the argument until its reply brief and didn’t identify which ones anyway.
In addition, Makaeff stated a false advertising claim under California law (Business & Professions Code §17500) by alleging that TU’s oral misrepresentations constituted false advertising.
Breach of contract claims also survived, and the court denied TU’s motions to strike several allegations. Most notably, though an elder abuse cause of action was no longer in the case, allegations regarding TU’s targeting of senior citizens help give a full understanding of the complaint and may still be relevant. In addition, statements made by a person named Noah Herrara were not immaterial, though TU argued that Herrera was not its agent or employee. But Makaeff alleged that a TU instructor facilitated a deal between Hererra and Makaeff, which ended badly for Makaeff in part because Hererra committed fraud. The deal, and the instructor’s failure to disclose an alleged conflict of interest, supported the claims that TU misrepresented the quality of its seminars in violation of the CLRA.
Boldly going!
These NASA mission posters, courtesy of the Christian Science Monitor, are a wonderful example of the human impulse to tweak popular culture to one's own needs. Even when one is already an astronaut. It's not just SF: there's Tarantino, the Beatles, Indiana Jones, and more.
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