Monday, September 26, 2016

Advertiser's self-voting on positive reviews as "helpful" may be false advertising

Vitamins Online, Inc. v. HeartWise, Inc., 2016 WL 5106990, No. 13-CV-982 (D. Utah Sept. 19, 2016)

Following up on its previous opinion, the court rules again about the possible falsity of reviews posted in exchange for undisclosed gifts of the reviewed product.

Vitamins Online sells dietary supplements online, including on Amazon under the brand name NutriGold.  Defendant (NatureWise) does the same, selling competing garcinia cambogia and green coffee supplements. Vitamins Online sold its versions before 2010, but then Dr. Oz made them famous and caused competitors to enter the market.  NatureWise had its employees vote on the helpfulness of some of the reviews on its product pages, promoting positive reviews and demoting negative reviews. NatureWise also encouraged customers to post or repost their positive reviews on Amazon by offering them free products or gifts cards; “NatureWise would review and, in some cases, make minor edits to the reviews before asking the customers to post them on Amazon.”  The number of positive Amazon reviews a product receives affects that product’s position in Amazon search results.

NatureWise argued that it didn’t make any false or misleading statements, which led the court to a scholarly and thorough discussion of omissions under the Lanham Act.  Because the language of the Lanham Act bars “any word, term, name, symbol, or device, or any combination thereof, or any false designation of origin, false or misleading description of fact, or false or misleading representation of fact” that constitute infringement or false advertising, false advertising doesn’t “necessarily require a false or misleading description or representation of fact.”  In other words, “the statute unambiguously allows for a false advertising claim to be based on the ‘any word, term, name, symbol, or device’ language as long as the use of that conduct ‘in commercial advertising or promotion’ results in the unlawful effect of ‘misrepresent[ing] the nature, characteristics, qualities, or geographic origin of his or her or another person’s goods, services, or commercial activities.’”

The court thought that NatureWise’s Amazon-related conduct could fall under the concept of a “device.”  Offering free products was a mechanism to increase positive reviews; NatureWise also used a mechanism provided by Amazon “for the special purpose of increasing the visibility of positive reviews and decreasing the visibility of negative reviews.” 

NatureWise also argued that its conduct wasn’t “commercial advertising or promotion” because it wasn’t the source of the statements at issue (an argument already rejected above) and because there was no evidence that the statements at issue were viewed by a sufficient number of the relevant purchasing public.  The court rejected an actual viewing standard, and held that “the test only requires a showing that the information was sufficiently disseminated to the relevant purchasing public.” The information at issue—the reviews and helpfulness votes—was available on the NatureWise Amazon product pages.  NatureWise only sells the products at issue on Amazon, so that information was disseminated to all of NatureWise’s actual or potential customers, which was enough to satisfy the test.

But was there a misrepresentation?  Offering free products in exchange for positive reviews wasn’t enough to show that that NatureWise’s conduct gave a false or misleading representation of the nature, characteristics, or qualities of NatureWise’s goods or commercial activities. Vitamins Online failed to show that the reviews posted by the customers were not genuine.  But what about disclosing that they were in exchange for free products? The FTC thinks this disclosure is material to consumers to judge the credibility of the review and therefore required.  I agree—I do give less weight to positive reviews with the required disclosure, though I don’t discount them entirely.  The court doesn’t discuss whether the reviews failed to disclose the quid pro quo, just says that Vitamins Online didn’t show that the reviews were false or misleading.

However, manipulating the prominence of the reviews block voting on the helpfulness of the reviews could constitute a false or misleading representation.  (Note that the reason for this is essentially the same reason that quid-pro-quo reviews ought to be disclosed!)  “The representation being made by the placement of these reviews on the product page is that customers wrote, posted, and rated the reviews and that the reviews that appear first in the list are the ones that customers found to be most helpful.”  Distorted ranking of helpfulness could clearly deceive consumers about which reviews were most helpful.

NatureWise argued that, to be actionable, an omission has to relate to an affirmative claim, and that therefore there can be no liability when it didn’t make any affirmative claims.  But the court’s reasoning above disposes of that argument (and NatureWise did make affirmative claims about helpfulness/lack thereof of particular reviews to consumers).  “Because Vitamins Online has demonstrated that the reality, that some customers and a block of employees of the manufacturer voted on the helpfulness of some of the review, may be different than the implied representation, that a certain number of customers voted on the helpfulness of some of the reviews, the court concludes that genuine issues of material fact exist as to whether the statements are false by necessary implication.”

Section 43(a) is not a “federal codification of the overall law of unfair competition,” but the court concluded by noting that, even under its broad interpretation, several “causes of action related to unfair competition” would still not be covered by the Act, including “trade secret violations,” “[c]ontractual disputes,” and “false claims of trademark rights.”

Speech in study would be commercial if knowingly false, court rules

Crossfit, Inc. v. National Strength & Conditioning Ass’n, 2016 WL 5118530,  No. 14cv1191 (S.D. Cal. Sept. 21, 2016)

CrossFit generates revenue by credentialing and certifying fitness trainers for a fee and through licensing the CrossFit trademark and other intellectual property to affiliate gyms. The NSCA is a nonprofit corporation that is “dedicated to the educational and professional exchange of ideas in the areas of strength development, athletic performance, and fitness.” It offers educational publications and also certifies fitness professionals for a fee. One of the NSCA’s publications is its “flagship journal,” the Journal of Strength and Conditioning Research (JSCR).

In November 2013, the JSCR published “Crossfit-based high intensity power training improves maximal aerobic fitness and body composition.” Though much of the article praised CrossFit’s effectiveness, one passage says:

Out of the original 54 participants, a total of 43 (23 males, 20 females) fully completed the training program and returned for follow up testing. Of the 11 subjects who dropped out of the training program, two cited time concerns with the remaining nine subjects (16% of total recruited subjects) citing overuse or injury for failing to complete the program and finish follow up testing.

Revisiting the point, the article says, “[a] unique concern with any high intensity training programs such as HIPT or other similar programs is the risk of overuse injury. In spite of a deliberate periodization and supervision of our Crossfit-based training program by certified fitness professionals, a notable percentage of our subjects (16%) did not complete the training program and return for follow-up testing.”  The study received attention in social media outlets and from news media.

CrossFit identified the individuals who purportedly did not complete the study because of “overuse or injury,” and many of these individuals provided declarations explaining their actual reasons for not completing the challenge, which weren’t based on overuse or injury. The initial manuscript submitted to the JSCR did not include any injury data, and the study’s author said that he only included them after “the peer reviewers and JSCR editors requested information about why 11 participants failed to test out.” CrossFit argued that the inclusion of these data at the JSCR editorial staff’s direction was evidence of the NSCA’s desire to “manufacture a ‘scientific’ study concluding CrossFit training was unsafe.” JSCR’s Managing Editor wrote: “You also need to caution readers as to the context of your findings due to the fact many people do get injured doing these types of workouts,” directing the study’s author to another study finding CrossFit to be dangerous, authored by the Managing Editor himself.

The JSCR published an erratum stating:

After the article was published, 10 of the 11 participants who did not complete the study have provided their reasons for not finishing, with only 2 mentioning injury or health conditions that prevented them from completing follow-up testing. In light of this information, injury rate should not be considered a factor in this study. This change does not affect the overall conclusion of the article.

CrossFit submitted a consumer survey on materiality. Some participants saw the original statement reporting a 16% injury rate and others saw a modified version with the language “CrossFit’s programs injury rates are very much in line with injury rates for the physical fitness industry as a whole.” Respondents exposed to the former “[w[ere 2.4 times as likely to rate CrossFit training as dangerous,” and were “twice as unlikely to say they would purchase a 12 month trial membership for CrossFit training.”

The court granted summary judgment on literal falsity, though other elements of CrossFit’s claims remained.  In particular, the NSCA argued that the journal article was noncommercial speech fully protected by the First Amendment and not subject to the Lanham Act.

The court noted that speech can be commercial even when it contains “discussions of important public issues.” Further, courts must be particularly careful when reviewing causes of action directed toward academic works, “because academic freedom is ‘a special concern of the First Amendment.’ “ ONY, Inc. v. Cornerstone Therapeutics, Inc., 720 F.3d 490 (2d Cir. 2013).  However, ONY was careful to limit its scope to cases in which “a speaker or author draws conclusions from non-fraudulent data, based on accurate descriptions of the data and methodology underlying those conclusions, on subjects about which there is legitimate ongoing scientific disagreement.”  ONY noted that “it is relevant that plaintiff does not allege that the data presented in the article were fabricated or fraudulently created.”  Query: Why does falsity of data bear on the classification of the article as commercial or noncommercial speech?  ONY actually doesn’t present itself as a commercial speech case—defendants were allowed to make their claims, as long as they were accurate descriptions of the data and methodology, in classic ads too.  Nonetheless, the court here held:

a reasonable fact finder could conclude that the NSCA fabricated the injury data and published them in the JSCR knowing they were false with the intention of protecting its market share in the fitness industry and diminishing the burgeoning popularity of the CrossFit program. If the trier of fact were to draw that conclusion from the evidence, the injury data would be commercial speech.

Analytically speaking, this puts the cart before the horse—you only know if it’s commercial speech once you know it’s false.  (Next query: what if this wasn’t knowing falsity, just falsity, which is generally sufficient under the Lanham Act and which the court has already found to exist?  Why would state of mind be relevant to whether this is commercial speech?)  It might be a reasonable practical compromise, however, especially given that I’m no great fan of ONY.

The court here continued that the paper as a whole was far more than a proposed commercial transaction, “but the excerpts based on potentially fabricated data about a competitor’s product may nonetheless be commercial speech.” A reasonable fact finder

could conclude that the NSCA pressured the authors to include data disparaging CrossFit’s exercise regimen, and the editor-in-chief’s admonition—“[r]emember the paper can still be rejected if the reviewers are not impressed with the sophistication of the revisions made”—could be construed as a veiled threat that the JSCR would not be interested in publishing the Devor Study if it did not include information showing “the fact many people do get injured doing these types of workouts,” whether or not that “fact” was true in this qualitative study.

However, a reasonable factfinder could also conclude that “the editor-in-chief was simply bringing his knowledge of the fitness industry to bear and sincerely believed (or for that matter still believes) that CrossFit has a high injury rate, as opposed to an attempt to denigrate CrossFit for the NSCA’s benefit.”

Under the Bolger factors, the study didn’t explicitly promote the NSCA’s products or services, and wasn’t typical advertising content. The factor dealing with reference to a specific product, though typically geared to self-promotion, could also apply to disparagement of another’s product, especially given that the Lanham Act explicitly reaches such disparagement.  And NSCA had an economic motive for publishing the data.  Nor were the noncommercial elements of the study inextricably intertwined with commercial speech:

[A]ssuming the injury data were false and injected into the article to deride CrossFit’s product, it would have been easy enough to publish an article with data that were not made up, and one could easily imagine the Devor Study without the statements premised on these false data. In fact, the Erratum shows that the parts of the article that may constitute commercial speech are not inextricably intertwined with the remainder of the article.

The court also allowed California FAL and trade libel claims to proceed.  Though trade libel usually requires a showing of special damages, some cases have allowed plaintiffs to show instead a “general loss of custom[ers],” by “showing an established business, the amount of sales for a substantial period preceding the publication, the amount of sales subsequent to the publication, [and] facts showing that such loss in sales were the natural and probable result of such publication.”  CrossFit might be able to satisfy that standard.

FTC wins second appellate victory over 230 defense

FTC v. LeadClick Media, LLC, 151009cv (2d Cir. Sept. 23, 2016)

The FTC and Connecticut sued LeadClick over its role in the use of deceptive websites to market weight loss products. LeadClick managed a network of aliates/publishers to advertise the products of LeadClick’s merchant client, LeanSpa.  Some affiliates created deceptive websites making false efficacy claims, including claims about independent testing and testimonials.  The FTC also sued CoreLogic, LeadClick’s parent company, as a relief defendant. The court of appeals rejected LeadClick’s §230 defense, but did let CoreLogic off the hook for $4.1 million in relief.

Facts: Until it went out of business in 2011, LeadClick operated an affiliatemarketing network, connecting merchant clients to thirdparty publishers/affiliates who advertised the merchant’s products. The affiliates used email marketing, banner ads, searchengine placement and websites they created. LeadClick managed the affiliate network through tracking software, referred to as “HitPath,” that would “track the flow of traffic from each individual affiliate’s marketing website to the merchant’s website while remaining invisible to the consumer.”

LeadClick’s affiliate managers were responsible for scouting and recruiting new affiliates, researching affiliates, and matching affiliates with particular merchant offers. “LeadClick would review and control which affiliates were selected to provide online advertising for each merchant’s offer.”  LeadClick also was a media buyer: it bought space for banner ads from well-known websites, then resold the space, sometimes to affiliate marketers, at a markup.

LeanSpa hired LeadClick in September 2010.  LeanSpa paid a set amount, typically $35 to $45, each time a publisher’s ad led a consumer to LeanSpa’s landing page and that consumer enrolled in LeanSpa’s freetrial program.  LeadClick paid 80-90% of that to the publisher and kept the rest. To track individual consumer actions, LeadClick routed consumers through the HitPath server to the LeanSpa website via publisher-unique links. 

LeadClick became LeanSpa’s primary marketing network, and LeanSpa became LeadClick’s top customer, responsible for about 85% of all eAdvertising division sales, or $22 million in billing.  LeanSpa was chronically behind on its payments to LeadClick, but ultimately paid LeadClick $11.9 million.  Following industry practice, LeadClick paid publishers before getting paid by LeanSpa, and ultimately terminated its business arrangement with LeanSpa.

Some of LeadClick’s affiliates used fake news sites, which “looked like genuine news sites: they had logos styled to look like news sites and included pictures of supposed reporters next to their articles.” Theygenerally represented that a reporter had performed independent tests that demonstrated the efficacy of the weight loss products and included a “consumer comment” section, where fake “consumers” praised the products.  The vast majority of LeadClick traffic to LeanSpa’s websites came from fake news sites.

The evidence showed that LeadClick (1) knew that fake news sites were common in the affiliate marketing industry and that some of its affiliates were using fake news sites, (2) approved of the use of these sites, and, (3) on occasion, provided affiliates with content to use on their fake news pages. For example, one LeadClick employee told an affiliate interested in marketing LeanSpa offers that “News Style landers are totally fine.” Another employee told a potential new client that “[a]ll of our traffic would be through display on fake article pages.” LeadClick’s standard contract with affiliate marketers also required affiliate marketers to submit their proposed marketing pages to LeadClick for approval before they were used. 

LeadClick employees also requested content edits to some fake news sites.  For example, after hearing of a state action against another network for false advertising, a LeadClick employee reached out to an affiliate to “make sure all [his] pages [were] set up good[,] like no crazy [misleading] info.” The affiliate responded that he was removing references to his page being a “news site” and thinking of “removing the reporter pics” from the site to be safe.  The LeadClick employee advised him not to stop using the fake reporter’s picture, but to “just add [the term] advertorial.” Another time, LeadClick employee advised the affiliate to delete references to acai berry on his fake news site and instead use words like “special [ingredient], formula, secret, bla, bla, bla” because “we noticed a huge increase in [actions] with stuff that doesn’t [s]ay acai.”  Providing feedback on another page, another employee stated that the site “looks good except you CANT say anything about a free trial.. [sic] I need that removed,” and noted that “[i]t is much more realistic if you say that someone lost 1012 lbs in 4 weeks rather than saying anything more than that.”

LeadClick also sometimes purchased ad space on genuine news sites for banner ads that would link to the fake news sites promoting LeanSpa’s products as part of its media buying business.  LeadClick sometimes identified fake news sites as destination pages for the banner ads when negotiating with media sellers by emailing the media seller a compressed version of an affiliate’s page or providing the web address for the destination page.

LeadClick argued that it couldn’t be held liable under Section 5(a) of the FTCA because it didn’t create the deceptive content, and the content wasn’t attributable to it.  The court of appeals responded that, “under the FTC Act, a defendant may be held liable for engaging in deceptive practices or acts if, with knowledge of the deception, it either directly participates in a deceptive scheme or has the authority to control the deceptive content at issue.”  This is consistent with the case law in other circuits, which also hold that “a deceptive scheme violating the FTC Act may have more than one perpetrator.”  The rule that a defendant who knows of another’s deceptive practices and has the authority to control those deceptive  acts or practices, but allows the deception to proceed, can be liable is consistent with the longstanding rule that “an omission in certain circumstances may constitute a deceptive or unfair practice.”  (Very nice equivocation on the meaning of “omission,” which in this context usually refers to an omitted statement, not an omitted action.)

Though the FTCA doesn’t expressly provide for aiding and abetting liability, that wasn’t the kind of liability being imposed.  A defendant with knowledge of deception who directly participates or who has the authority to control the deceptive practice, but doesn’t, is itself engaged in an deceptive practice.  

That standard was satisfied here, as the evidence showed. Direct participation was shown by the facts that a LeadClick employee “scouted” fake news websites to recruit potential affiliates for the LeanSpa account; LeadClick employees required alterations to the content of its affiliates’ fake news pages by instructing them to revise their pages to comply with explicit directives from LeanSpa; a LeadClick employee instructed an affiliate to check that his fake news site was not “crazy [misleading]” and advising him not to remove the reporter photograph, but to “just add advertorial”; LeadClick employees advised affiliates on the content to include in their pages to increase consumer traffic (telling an affiliate “[i]t is much more realistic if you say that someone lost 1012 lbs[.] in 4 weeks rather than saying anything more than that”); and LeadClick purchased banner ad space on genuine news sites to resell that space to affiliates running fake news pages to “generat[e] quality traffic in very lucrative placements.”

Likewise, LeadClick had the authority to control the deceptive practices of affiliates that joined its network, but didn’t.  Ultimately, “[a]s the manager of the affiliate network, LeadClick had a responsibility to ensure that the advertisements produced by its affiliate network were not deceptive or misleading. By failing to do so and allowing the use of fake news sites on its network, despite its knowledge of the deception, LeadClick engaged in a deceptive practice for which it may be held directly liable under the FTC Act.”  Moreover, LeadClick was directly liable “regardless of whether it intended to deceive consumers ‐‐ it is enough that it orchestrated a scheme that was likely to mislead reasonable consumers.” 

What about the CDA? Under §230, a provider of an interactive computer service won’t be held responsible “unless it assisted in the development of what made the content unlawful.”  See FTC v. Accusearch Inc., 570 F.3d 1187 (10th Cir. 2009).  The court here doubted whether LeadClick was even an interactive service provider, because it didn’t provide “computer access in the sense of an internet service provider, website exchange system, online message board, or search engine.”  Its routing of consumers from its affiliates’ webpages to LeanSpa’s websites via the HitPath server “was wholly unrelated to its potential liability under the statute”—that is, none of the acts for which it was being held liable depended on the fact that it provided that routing, which was just done to keep track of who it was supposed to pay.  If it had contracted out that function, it would still have been the actor responsible for all the acts the court previously deemed to justify direct liability.

More disturbingly, the court reasoned that this “service”—access to the HitPath server—wasn’t the kind of activity Congress intended to protect in granting immunity, because the routing “was invisible to consumers and did not benefit them in any way. Its purpose was not to encourage discourse but to keep track of the business referred from its affiliate network.”

But none of this matters, because LeadClick was an information content provider with respect to the content at issue. It participated in the development of the deceptive content: it recruited affiliates for the LeanSpa account that used false news sites; it paid those affiliates to advertise LeanSpa products online, knowing that false news sites were common in the industry (if this is participation, §230 protection is a dead letter); it occasionally advised affiliates to edit content on affiliate pages to avoid being “crazy [misleading],” and to make a report of alleged weight loss appear more “realistic”; and it bought ad space from legitimate news sites, “thereby increasing the likelihood that a consumer would be deceived” by the fake news sites.  LeanClick’s managerial role “far exceeded that of neutral assistance.”

Further, LeadClick wasn’t being held liable as a publisher or speaker of another’s content, but for its own deceptive acts or practices.  This is a version of the agency argument I’ve made before, I think, but it means we have to be very careful about when failure to act (omission) counts as a deceptive act or practice. Here, the court reiterated that LeadClick’s own conduct was “providing edits to affiliate webpages, … purchasing media space on real news sites with the intent to resell that space to its affiliates using fake news sites, and [having] the authority to control those affiliates and allow[ing] them to publish deceptive statements.”  I imagine Eric Goldman will be none too pleased, but it does seem significant that the editing suggested was to increase deceptiveness, not just to increase the attractiveness of the content.

Finally, relief defendant liability: In 2005, CoreLogic’s predecessor bought LeadClick (as an indirect owner through its wholly owned subsidiary CLUSI). In 2010, LeadClick became a direct subsidiary of CoreLogic, and a sister company to CLUSI.  During the restructuring, CoreLogic transitioned LeadClick and six of its sister subsidiaries into a “shared services system” to streamline and enhance back office functions across the subsidiaries. Shared services programs allow related entities to consolidate some or all of their backoffice functions, such as accounting, legal and compliance, human resources, and information technology, into a single office.

When LeadClick accrued a payable expense, CoreLogic would make the payment directly on its behalf, and track the payment as an advance to LeadClick. Both LeadClick and CoreLogic intended that LeadClick would later reimburse CoreLogic for those advances, and ultimately LeadClick repaid a total of $8.2 million of its advance balance to CoreLogic.  Half of this amount was repaid in a single cash transfer of $4.1 million in August 2011, the month before LeadClick ceased business.  The district court treated that transfer as gratuitous and held CoreLogic liable as a relief defendant.

The court of appeals found that CoreLogic was not an appropriate relief defendant because CoreLogic had a legitimate claim to repayment of its prior advances to LeadClick.  A relief defendant needs a legitimate claim, which can be based on an outstanding loan, but not on a gratuitious transfer.  Though CoreLogic lacked a formal loan agreement, the transfer of $4.1 million was  the repayment of an outstanding intercompany loan, implemented as part of its shared services agreement under which CoreLogic had previously paid LeadClick’s accounts payable. Shared services agreements generally don’t involve formal debtor-creditor relationships, since such documentation “is incompatible with the very purpose of shared services: streamlining operations and increasing efficiency by reducing excess paperwork.” Because the companies were consolidated under general accounting principles for public companies, an interest charge would be inappropriate. “Under these circumstances, the lack of a formal loan agreement does not create suspicion that the transactions were a sham.”

43(a) question of the day

Actors who played doctors on TV evoke their roles for Cigna ad:  any false endorsement implications for Cigna? Tagline: “They’ve saved lives on TV, but now they’re helping save lives for real by teaming up with Cigna to encourage America to get an annual check-up. Get ready to go, know and take control of your health with the TV Doctors of America.”

Thursday, September 22, 2016

Advertising question of the day

Does the following pose any advertising issues?  Does it matter whether the business sells non-organic food?
Thanks to James Grimmelmann for the photo.

"unique" and "innovative" are puffery

LoggerHead Tools, LLC v. Sears Holdings Corp., 2016 WL 5080028, No. 12-cv-9033 (N.D. Ill. Sept. 20, 2016)

LoggerHead sued Sears under the Lanham Act and Illinois state law for false advertising; the court granted summary judgment to Sears.  LoggerHead sells a hand tool, the Bionic Wrench, which Sears sold from 2009.  In 2012, Sears sought a Bionic Wrench replacement to be sold under the Sears Craftsman brand and sent LoggerHead’s patent to a patent lawyer, who identified another patented tool that could be used as a model for a replacement wrench and that (he opined) would not infringe.  In late 2012, Sears began retailing the Max Axess Locking Wrench (MALW).

In DTC ads for the MALW, Sears stated: “[i]f you want maximum versatility in a single wrench, then you’ll love the latest innovation from Craftsman, the Max Axess Locking Wrench.” The product packaging for the MALW shows a picture of the wrench, the term “Unique Design,” and, underneath that, the phrase “Adapts to a wide range of fastener sizes and grips fasteners on all sides to prevent rounding.” The packaging also contains a dotted line going from the writing to the picture of the wrench.  Sears issued a press release with similar claims.
Craftsman package
LoggerHead argued that, taken in context, these features were literally false: (1) the “Unique Design” statement, (2) “Adapts to a wide range of fastener sizes and grips fasteners on all sides to prevent rounding” statement, (3) the illustration of the MALW and (4) the white line connecting them.  First, because the MALW copied its design from the Bionic Wrench, it wasn’t unique. Second, the “unique” claim was connected to the claim, “Adapts to a wide range of fastener sizes and grips fasteners on all sides to prevent rounding,” also false as a uniqueness claim, as was the connection between the “unique” claim and the image of the MALW’s tool head.

The court found no literal falsity in the uniqueness claim “given that there are admitted differences between the MALW and the Bionic Wrench.”  Plus, “unique” has previously been deemed puffery.  Although “unique design” might not be literally false, it could be misleading, but LoggerHead didn’t provide any consumer perception evidence.

What about “latest innovation from Craftsman” in the ads?  Sears argued that this couldn’t be false advertising because of Dastar, but the Supreme Court did not “hold that a false claim of origin is the only way to violate [the Lanham Act].” Gensler v. Strabala, 764 F.3d 735, 736 (7th Cir. 2014). Still, this statement wasn’t literally false, since it didn’t say what the innovation was, and courts have also found “innovative” to be puffery.

As for the press release, LoggerHead argued that it falsely stated: “Despite some visual similarities to other tools on the market, Craftsman Max Axess Locking Wrench operates in a different way, using a mechanism design[ed] in the 1950s.” LoggerHead claimed literal falsity because the MALW uses a mechanism designed by LoggerHead, and also alleged that the press release falsely implied that the MALW is made in America, when it is made in China.

Sears argued that the press release wasn’t commercial advertising or promotion.  The court thought that the press release had characteristics of commercial speech (product references, economic motivation for the speech) despite not being in a traditional ad format, but there was no evidence that the press release was sufficiently disseminated to the relevant purchasing public, even though it was posted on Sears’ website.

As for falsity, the press release didn’t say that the MALW was made in America and LoggerHead didn’t explain why the release was misleading on that point. The phrase “operates in a different way” was subjective and not literally false, since the MALW concededly contains some features that the Bionic Wrench does not, such as a locking mechanism. 

Wednesday, September 21, 2016

How does race affect copyrightable expression?

Fulks v. Knowles-Carter, No. 16-Civ-4278 (S.D.N.Y. Sept. 12, 2016), contains an interesting bit about race and copyrightable expression:

[P]laintiff argues that the “race of the characters in the [Film] is irrelevant to the total concept and feel of a film about relationships.” Plaintiff would be correct if the Film were just about relationships. But it is not, and plaintiff’s say-so does not overwhelm the plain meaning of the work. The Film depicts the protagonist’s journey from a particular perspective: that of an African-American woman in a predominantly African-American community. The Film repeatedly references and dramatizes generations of African-American women, and in the background of one scene, the observer hears an excerpt from a speech by Malcolm X to the effect that the Black woman is the most “neglected” person in America. This all takes place against what defendants accurately characterize as a “Southern Gothic feel.” The settings transition between areas of New Orleans, the abandoned Fort Macomb, and an Antebellum plantation. These significant differences in characters, mood, and setting further distinguish the total concept and feel in the Film from that in Palinoia.

In an opinion that goes from Voltaire to Taylor Swift to Oscar Wilde to Andy Warhol (that last one is just showing off), the court rejects the claim of substantial similarity between plaintiff’s 7-minute film about the aftermath of a relationship and Beyoncé’s Lemonade film and trailer.  Here, enjoy some more references from the opinion:

Plaintiff also argues that because the works all “portray a struggle of a relationship; the reasons for such struggle are unclear and irrelevant.” This is like saying that Casablanca, Sleepless in Seattle, and Ghostbusters are substantially similar despite the different motivating forces behind the struggles there portrayed (Nazis, capitalism, and ghosts, respectively). But “all fictional plots, when abstracted to a sufficient level of generalization, can be described as similar to other plots,” and that is why the differences do in fact matter. 

Tuesday, September 20, 2016

Packaging trade dress needs specific design, not just color, to be inherently distinctive

Forney Industries, Inc. v. Daco of Missouri, Inc., --- F.3d ----, 2016 WL 4501941 (10th Cir.. Aug. 29, 2016)

Forney makes retail metalworking parts and accessories and claimed a protected trade dress in the coloration of its packaging, described as:

a combination and arrangement of colors defined by a red into yellow background with a black banner/header that includes white letters. More specifically, the Forney Color Mark includes red and yellow as the dominate [sic] background colors. Red typically starts at the bottom of the packaging, continues up the packaging and may form borders. Red may also be used in accents including but not limited to lettering. Yellow typically begins higher than the red and continues up the packaging. Yellow may also provide borders and be used in accents including but not limited to lettering. A black banner is positioned toward the top of the package label or backer card. Black may also be used in accents including but not limited to lettering. White is used in lettering and accents.

Here are five pictures of its packaging over the years, reproduced below with Forney’s caption for each:
Four Forney designs

one more Forney design

Forney alleged infringement by Daco, as shown here:
Allegedly infringing packages side by side with Forney
The court of appeals affirmed, holding that “Forney’s use of color, which was not associated with any particular shape, pattern, or design, was not adequately defined to be inherently distinctive,” and Forney failed to show secondary meaning.

The court noted that courts have generally struggled to find a test for inherent distinctiveness of non-word marks, given that Abercrombie doesn’t translate very well.  “[I]t may be useful to supplement that test with the test first introduced in Seabrook Foods, Inc. v. Bar–Well Foods Ltd., 568 F.2d 1342, 1344 (C.C.P.A. 1977)”: (1) “whether it was a ‘common’ basic shape or design,” (2) “whether it was unique or unusual in a particular field,” and (3) “whether it was a mere refinement of a commonly-adopted and well-known form of ornamentation for a particular class of goods viewed by the public as a dress or ornamentation for the goods.”  But the Supreme Court has never adopted a test; Taco Cabana explicitly noted that the question of whether the restaurant trade dress there was inherently distinctive was not before the Court. 

We do know that color alone and product design can’t ever be inherently distinctive, and Wal-Mart’s other statements about avoiding strike suits and preserving competition are instructive about “the need for clear rules about what can be inherently distinctive.”  Seabrook, the Court specifically noted, “would rarely provide the basis for summary disposition of an anticompetitive strike suit.”  The Court also pointed to the availability of copyright and design patent as a reason not to worry too much about protecting design, and told lower courts to err on the side of classifying ambiguities as product design, thus requiring secondary meaning.

Based on these considerations, the court of appeals here ruled that “the use of color in product packaging can be inherently distinctive (so that it is unnecessary to show secondary meaning) only if specific colors are used in combination with a well-defined shape, pattern, or other distinctive design.”  This rule is consistent with the case law; cases involving a color scheme or palette “in isolation” have turned on secondary meaning. E.g., Board of Supervisors for Louisiana State University Agricultural and Mechanical. College. v. Smack Apparel Co., 550 F.3d 465 (5th Cir. 2008).  McCarthy agrees: “whether color is confined to a defined design can determine whether inherent distinctiveness is a possible alternative to proving secondary meaning.”

Here, Forney was out of luck.  It didn’t sufficiently articulate the protectable elements of its claimed mark.  This is especially important for product lines where the features aren’t identical across products.  A “vaguely defined” trade dress shouldn’t be protected.  Such a trade dress would complicate litigation; “courts will be unable to evaluate how unique and unexpected the design elements are in the relevant market.” Moreover, if descriptions are vague, “jurors viewing the same line of products may conceive the trade dress in terms of different elements and features, so that the verdict may be based on inconsistent findings.” Nor would courts be able to shape narrowly-tailored relief without a clear definition.  Perhaps most important, if courts can’t identify infringing designs, competitors certainly wouldn’t be able to know what might draw a lawsuit.

Regardless, Forney’s description did not comport with the court’s requirement that the color scheme be used in combination with a well-defined shape, pattern, or other distinctive design. Forney used words like “typically” and “may” in its description, and that wasn’t due to lack of proper drafting by counsel. “It is probably the best that one could do, given the variety of packaging that Forney has used on its products over the years.”  Without a consistent shape, pattern, or design, “[p]articularly in light of the Supreme Court’s instruction to be cautious about applying vague, litigation-friendly tests for inherent distinctiveness, we conclude that Forney has failed to establish an inherently distinctive trade dress.”

Forney also didn’t have sufficient evidence of secondary meaning.  Its extensive promotional and advertising efforts weren’t probative because “advertising alone is typically unhelpful to prove secondary meaning when it is not directed at highlighting the trade dress.” Here the district court found that Forney’s advertising “utterly fails to mention the Color Mark, or to emphasize it in any fashion.”  Sales data were similarly unhelpful.  Testimony about exclusive use for twenty years also wasn’t enough to survive summary judgment, even though extensive exclusive use could support a finding of secondary meaning.  First, the testimony was conclusory, and didn’t even claim uniqueness, just that Forney’s products using the claimed mark “were uncontested, extensive and exclusive for 20 years.” Forney also submitted pictures of four packages from its “primary” competitors that use different colors.  But defendants submitted several pictures showing product packages in the retail-metalworking sector that bear a close resemblance to Forney’s product packaging.

More importantly, there wasn’t continuous exclusive use of a definable trade dress. Forney’s packaging changed significantly over 20 years. “How then is a consumer supposed to have come to associate the packaging with Forney?”

Using photos of competitor's product confers statutory Lanham Act standing on competitor

Joseph Paul Corp. v. Trademark Custom Homes, Inc., 2016 WL 4944370, No. 3:16-CV-1651 (N.D. Tex. Sept. 16, 2016)

JP Homes sued Trademark, its principal, and homeowners for alleged violations of the Lanham Act and copyright infringement.  JP Homes alleged that it designs and builds custom homes, and that defendants copied and improperly appropriated original elements of JP Homes’s copyrighted work in one such home design, The Martinique. Further, Trademark allegedly used photos of a house designed by JP Homes in advertising its own products. JP Homes sought to halt the construction of the homeowners’ in-progress house and have it torn down or modified sufficiently so as not to infringe.

The court first rejected defendants’ arguments that the court lacked jurisdiction/JP Homes lacked standing. The court determined that this was a statutory standing question, not an Article III question, and thus governed by Lexmark under Rule 12(b)(6). Although JP Homes alleged that it was in the Lanham Act’s zone of interests, Trademark argued that JP Homes failed to plead facts showing injury or proximate causation, and that its allegations were merely speculative. The court disagreed.  JP Homes alleged that Trademark wrongly received recognition as a good builder because of its copying; that the parties competed in the same area; and that the statements were likely to materially mislead consumers.  This was a classic false advertising claim, and the allegations that JP Homes suffered competitive or reputational injury as a result of Trademark’s conduct were not too remote. 

Further, while JP Homes didn’t specify an amount of actual loss, that wasn’t required. Lexmark says that “potential difficulty in ascertaining and apportioning damages is independent basis for denying standing where it is adequately alleged that a defendant’s conduct has proximately injured an interest of the plaintiff’s that the statute protects.” JP Homes might be entitled to injunctive relief or disgorgement of defendant’s profits even if it couldn’t quantify its losses with enough certainty to get damages.  

Turning to JP Homes’ motion for TRO/Preliminary Injunction, the court found that JP Homes failed to show irreparable injury.  JP Homes argued that likely success on a copyright claim raised a presumption of irreparable harm, but the Fifth Circuit never adopted that rule.  (No discussion of eBay v. MercExchange.)  JP Homes also argued that continuing infringement/construction of the house exposed it to the permanent loss of customers or lost goodwill. But JP Homes provided no evidence of this, only conclusory assertions.  JP Homes also didn’t explain why its damages would be unquantifiable or why money wouldn’t be adequate compensation.  JP Homes requested actual damages or statutory damages in its complaint, suggesting that it could develop a basis for a damage award.  (Careful about pleading in the alternative when it comes to irreparable harm.)

Reiterating its claims as arguments about damage to JP Homes’ “competitive position and brand” was unhelpful.  JP Homes didn’t allege wholesale copying of many of its key designs, but copying of a single work that wasn’t even identical copying.  Claims that harm to JP Homes in the community where that house was being built would spread elsewhere were “purely speculative.”  “While courts are willing to entertain a loss of customers or goodwill as a harm, the movant must come forward with evidence that such an injury is irreparable by showing that the loss cannot be measured in money damages and monetary damages would be inadequate.”

Arguments that JP Homes would be harmed if Trademark builds its designs at a lower price and quality, and that JP Homes’ reputation for uniqueness would be damaged because potential customers would see its designs as “common or run-of-the-mill” also failed. First, there was no evidencce that Trademark’s building was lower-quality.  Also, the alleged use of one design wasn’t enough to interfere with JP Homes’ “ability to market its designs and building services to potential customers for other architectural plans.”  Moreover, its claims that Trademark’s failure to attribute the design would cause JP Homes to lose business contradicted its argument that JP Homes would lose customers if people found out that Trademark was building a lower-quality version of the Martinique.

Finally, JP Homes’ delay in seeking relief weighed against an injunction.  As early as December 2015, an employee of JP Homes learned that the homeowners were not going to move forward with JP Homes building their home and had visited a real estate agent who refers customers to builders that often use architectural plans created by others.  She allegedly warned them (through their new real estate agent) to refrain from using any part of the architectural plan created by JP Homes. The agent allegedly responded by asking what percentage of the plan designed by JP Homes would have to be changed to not be considered the same plan. Nonetheless, JP Homes waited until June 2016 before filing suit and seeking injunctive relief, after construction on the McWhorters’ house was well underway.  Meanwhile, JP Homes submitted its registration materials for the Martinique to the Copyright Office, and threatened to take legal action in April 2016.  JP Homes’ “unexplained and undue delay of approximately six months strongly undercuts its claim of irreparable harm and contention regarding the need for urgent relief.”

Monday, September 19, 2016

Celebrity spokesperson isn't directly liable under California consumer protection law

Luman v. Theismann, 647 Fed.Appx. 804 (9th Cir. 2016)

Plaintiffs sued NAC Marketing Company and Joe Theismann for their advertising statements about NAC’s Super Beta Prostate product, bringing warranty claims as well as the usual California statutory claims.  Because one plaintiff’s individual claim for monetary relief was unpaid when he joined the lawsuit, he satisfied the injury in fact requirement and had standing to sue under Campbell–Ewald Co. v. Gomez, –––U.S. ––––, 136 S.Ct. 663 (2016). This portion of the case was remanded for further proceedings, though plaintiffs lacked standing to pursue injunctive relief because they didn’t allege any intent to purchase the product in the future and couldn’t show a likelihood of future injury.

As for Theismann, he was “merely the celebrity spokesperson for NAC and not the seller of SBP,” the district court properly dismissed the claims against him, given the California Commercial Code’s definition of a seller as “a person who sells or contracts to sell goods” and a sale as “the passing of title from the seller to the buyer for a price”; Theismann never had or passed title to the product.

Query whether secondary liability could be appropriate in the right circumstances. What level of fault would be appropriate for a celebrity spokesperson?

No duty to disclose child labor production in California, court rules

Hodsdon v. Mars, Inc., 162 F.Supp.3d 1016  (N.D. Cal. 2016)

Mars sells chocolate, some of which comes from cocoa beans from Côte d’Ivoire, where trafficked children and forced laborers “wield dangerous tools, transport heavy loads, and face exposure to toxic substances….The working conditions on the farms are deplorable. Laborers often do not receive pay, sleep in locked quarters, and fear corporal punishment.”  Despite an agreement with other chocolate manufacturers in 2001, Mars and other signatories haven’t been able to implement certification procedures to eradicate the worst forms of child labor on cocoa farms. “According to the most recent reports, the number of children working on cocoa farms has increased since 2005. As of 2014, ‘[o]nly 36% of [Mars’s] cocoa was certified.’”

Most of Mars’ chocolate products don’t say anything about the supply chain, though the label for Dove chocolates says, “We buy cocoa from Rainforest Alliance Certified farms, traceable from the farms into our factory.” Hodsdon alleged that he “would not have purchased” or “paid as much for” Mars chocolate products had the labels included information about the labor practices of Mars’s cocoa suppliers.

The court found that these allegations properly alleged standing by alleging actual reliance and economic injury.  Hodsdon didn’t need to allege that he bought chocolate containing cocoa beans harvested by children or forced laborers; his alleged economic injury was sufficient.  Nor did he need to trace any of Mars’s chocolate to particular farms that use the objectionable labor practices.  His allegations clearly permitted the inference that he relied on the nondisclosure when buying.  “Hodsdon ties his harm to the lack of certainty about the source of the cocoa beans, not to consumption of cocoa products actually harvested by child and forced laborers. In so doing, he has established injury in fact.”

But do California’s consumer protection laws cover omissions?  The FAL bans “mak[ing] or disseminat[ing]...any statement...which is untrue or misleading, and which is known, or by the exercise of reasonable care should be known, to be untrue or misleading...” “with intent directly or indirectly to dispose of real or personal property.” Courts are divided on whether omissions can violate the FAL, but the court here held that the decisions could be harmonized by looking at whether the defendant made any statement at all about a subject; if it does, then it is responsible for material omissions made about that subject that render the affirmative statements misleading.  If it stays mum, however, there is no FAL liability.  That was the case here.

How about the CLRA and the UCL?  The CLRA bans “unfair methods of competition and unfair or deceptive acts or practices undertaken by any person in a transaction intended to result or which results in the sale or lease of goods or services to any consumer,” and prohibits conduct “likely to mislead a reasonable consumer,” The UCL prohibits “unfair competition” defined as “any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue, or misleading advertising.” In order to prevail, Hodsdon needed to show that Mars had a duty to disclose the information.  Mars argued that there was no duty to dislose information unrelated to a safety issue or product defect. Hodsdon argued that such a duty arises when “the defendant had exclusive knowledge of material facts not known to the plaintiff.”

“California courts have generally rejected a broad obligation to disclose,” except for omissions that are “‘contrary to a representation actually made by the defendant, or...omission[s] of a fact the defendant was obligated to disclose.’” The California Court of Appeal has held that a defendant did not have a duty to disclose product defects that did not pose any risk of physical injury or safety concerns.  Another case said the duty to disclose exists when “(1) when the defendant is in a fiduciary relationship with the plaintiff; (2) when the defendant had exclusive knowledge of material facts not known to the plaintiff; (3) when the defendant actively conceals a material fact from the plaintiff; and (4) when the defendant makes partial representations but also suppresses some material fact.”  However, the overwhelming authority limited the duty to disclose in situation (2) to product design/safety issues.  As the court pointed out, “[t]he definition of a material omission has stunning breadth, and could leave manufacturers (chocolate or otherwise) little guidance about what information, if any, it must disclose to avoid CLRA or UCL liability.”  This took care of the UCL “unlawful” and “fraudulent” claims.

As for “unfair,” the definition of this under the UCL is in flux.  Many courts have found a business practice “unfair” when it “offends an established public policy or when the practice is immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers.” This approach requires courts to “examine the practice’s ‘impact on its alleged victim, balanced against the reasons, justifications and motives of the alleged wrongdoer.’ ” But this may well be too amorphous; the public policy test requires that the UCL claim be tethered to some specific constitutional, statutory, or regulatory provisions.”

The court found that Hodsdon couldn’t show that the failure to disclose was immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers. Information about Mars’ labor policies and supply chain is “readily available to consumers on Mars’s website,” so the absence of information on the packaging is not immoral even though the underlying labor practices are.  A broader formulation, which defendants are likely to quote: “Mars’s failure to disclose information it had no duty to disclose in the first place is not substantially injurious, immoral, or unethical.”  Likewise, Hodsdon’s alleged harm wasn’t tethered to any “specific constitutional, statutory, or regulatory provisions.”

Mars also argued that it was entitled to a safe harbor under the Supply Chains Act, Cal. Civ. Code § 1714.43. “To forestall an action under the unfair competition law, another provision must actually ‘bar’ the action or clearly permit the conduct.”  The court was dubious.  That law requires retailers and manufacturers that earn more than $1,000,000 in gross receipts to disclose their “efforts to eradicate slavery and human trafficking from [their] direct supply chain for tangible goods offered for sale.”  They must post on their website’s homepage “a conspicuous and easily understood link to the required information,” or provide “written disclosure within 30 days of receiving a written request for the disclosure from a consumer.”

First, the SCA was about and human trafficking, not child labor. “While the distinction between child labor and forced labor may be thin, the safe harbor doctrine cautions against creating safe harbors in the absence of ‘specific legislation.’” Plus, the court wasn’t convinced that the legislature “considered a situation and concluded no action should lie.” Here, legislative history was silent about whether the legislature considered disclosures on labels. Plus, if the court accepted the safe harbor reasoning, then big businesses would be exempt from a disclosure requirement that smaller businesses not subject to the SCA would have, which would be “anomalous.”

Ebony Elizabeth Thomas & Amy Stornaiuolo, Restorying the Self: Bending Toward Textual Justice, 86 Harv. Educ. Rev. 313 (2016)