Friday, November 21, 2014

Transformative work of the day: Barbie the Computer Engineer

Organization for Transformative Works volunteer Casey Fiesler explains in Slate.

Reading list: Orly Lobel on employment law as IP law

Orly Lobel, The New Cognitive Property: Human Capital Law and the Reach of Intellectual Property.  Abstract:
Contemporary law has become grounded in the conviction that not only the outputs of innovation – artistic expressions, scientific methods, and technological advances – but also the inputs of innovation – skills, experience, know-how, professional relationships, creativity and entrepreneurial energies – are subject to control and propertization. In other words, we now face a reality of not only the expansion of intellectual property but also cognitive property. The new cognitive property has emerged under the radar, commodifying intellectual intangibles which have traditionally been kept outside of the scope of intellectual property law. Regulatory and contractual controls on human capital – post-employment restrictions including non-competition contracts, non-solicitation, non-poaching, and anti-dealing agreements; collusive do-not-hire talent cartels; pre-invention assignment agreements of patents, copyright, as well as non-patentable and non-copyrightable ideas; and non-disclosure agreements, expansion of trade secret laws, and economic espionage prosecution against former insiders – are among the fastest growing frontiers of market battles. This article introduces the growing field of human capital law, at the intersections of IP, contract and employment law, and antitrust law, and cautions against the devastating effects of the growing enclosure of cognitive capacities in contemporary markets.
A very important piece--recommended.

Lamborghini going to pot?

If "anything can signify anything," is this equation of a pot with a Lamborghini nominative fair use?  (It's just an object. It doesn't mean what you think.)
Anything can signify anything billboard, Washington DC
Photo by Zach Schrag.

Thursday, November 20, 2014

organic cosmetics class certified

Brown v. Hain Celestial Group, Inc., No. C 11-03082, 2014 WL 6306581 (N.D. Cal. Nov. 14, 2014)

Hain has staved off class actions several times, but not here: the court certified a class of purchasers of Avalon Organics and Jason cosmetic products, based on allegations that they were labeled “organic” when they weren’t, in violation of California’s Organic Products Act (COPA), the UCL, the CLRA, and express warranty.  Before 2011, the product lines contained less than 70% organic ingredients, with few exceptions.  In 2011, Hain changed the formulations and labels of substantially all the products.  Plaintiffs bought products from the two lines, in the belief that they were completely/mostly made from organic ingredients, and were willing to pay more for that feature.

Federal law governing foods requires that food labeled “organic” or “made with organic” must be at least 70% organic.  This doesn’t apply to cosmetics, but plaintiffs alleged that the federal definition shaped consumer expectations for all organic products, including cosmetics.  Moreover, COPA requires that cosmetic products advertised, marketed, sold, labeled, or represented as organic in California be made of at least 70% organic ingredients; plaintiffs alleged that COPA was a “legislative determination” that it is deceptive to represent as organic cosmetic products that have insufficient organic content. 

Jason’s tagline “Pure, Natural & Organic” and Avalon Organics’s name and “pro-organic” pledge on their front labels allegedly misled consumers, given that they didn’t comply with the 70% rule, whether measured by weight or volume.  For example, only the 9th out of 19 listed ingredients in Jason Face Wash was certified organic, which can’t possibly be 70%.  (Hain argued that after the 2011 reformulation, Avalon Organics products contained more than 70% organic ingredients; plaintiffs disagreed.  The answer turned on whether one could count water added to reconstitute dehydrated aloe powder as part of the percentage of organic ingredients. If yes, then the products all had more than 70% organic ingredients; if no, they didn’t.)

Hain challenged the class definitions as containing non-actionable products and as non-ascertainable because based on self-identification without receipts. The court found that the class definition for Jason products tracked the temporal use of the “Pure, Natural, & Organic” tagline, and properly excluded products that are USDA-certified as organic.  The Avalon Organics class was similar; post-June 2011 purchasers were part of the class, but if water used to rehydtrate aloe powder counts towards the 70% threshold, they’d lose on the merits—something the court wasn’t going to resolve before certification.

As for ascertainability, the court rejected the Third Circuit rule requiring receipts or external identification of class members as gutting the Rule 23(b)(3) class action precisely where it’s most needed—where individual harm is small but aggregate impact significant.  While reliance on affidavits can be problematic, the analysis must be case by case.  Extreme variety in covered products might make memory and affidavits unreliable, but here all but 8 of 362 products were the same with regard to the organic claims and product formulations used as the basis for the claims; the 8 were Jason products that weren’t popular.  Consumers could reasonably be expected to recall the word “organic,” which was even part of the Avalon Organics name.  Given the likelihood that consumers could correctly recall their purchases, self-identification by affidavit was acceptable for a small-ticket claim, especially since the alternative would be lack of redress for false advertising.  This conclusion was bolstered by the fact that “total damages” would be proved and fixed at trial, because they were restitutionary. Hain’s profit “will be measured without regard to any individual plaintiff; then, after the total figure is set, individual claimants will divide the award.”

Numerosity, commonality, typicality, and adequacy were satisfied.  Because COPA, the UCL, and the CLRA all use an objective reasonable consumer standard, once the claim was proved material to that objective reasonable consumer, inferences of reliance and causation would arise. Hain argued that both Avalon Organics and Jason products bore “other label statements (such as ‘no parabens’ and ‘no animal testing’) that surely influenced some consumers’ purchase decisions.”  But that didn’t destroy typicality, given the inference of reliance that would arise from material misrepresentations.  One plaintiff bought from an online vendor and paid less than wholesale; this didn’t make him atypical, only affected his individual damages.  Here, as distinct from in cases where certification was denied for want of typicality, uniform misrepresentations about one word on the products’ labels were at issue across the entire class:

Whatever the precise formulations and uses of Hain’s various products, and whatever additional reasons consumers had for buying them, the plaintiffs’ claims against them are simple and uniform: the products were presented as organic when, under COPA, they were not. The plaintiffs’ claims, in other words, have nothing to do with the unique characteristics of the various Hain products; they have to do only with what is allegedly shared by all those products. The court thus thinks that the plaintiffs’ core claims can be adequately proved, for example, by someone who has bought shampoo for someone who has bought hand cream.

For similar reasons, the court found predominance. While, accepting Hain’s characterizations, 6 of 184 Jason products had no organic representation, and 2 had 70% organic content, that represented only a small percentage of products that could be easily excluded and didn’t destroy predominance. 

Nor would materiality, reliance, and causation raise individual issues under California law given the objective reasonable consumer standard.  This standard “reflects the UCL’s focus on the defendant’s conduct, rather than the plaintiff’s damages, in service of the statute’s larger purpose of protecting the general public against unscrupulous business practices.”  Moreover, even if other representations also motivated purchases, there can be more than one material reason for purchase.  “This is how consumers shop: they buy products all the time for more than one reason.”  In addition, plaintiffs adequately showed that, if they proved their claims on the merits, they could show that an “organic premium” existed and would’ve been paid by all consumers, regardless of their reasons for purchase. Thus all would have suffered injury regardless of purchase motive.

This brought the court to the issue of damages models.  The plaintiffs offered the declaration of Dr. Stephen Hamilton, chair of the Department of Economic s at California Polytechnic State University, San Luis Obispo.  He calculated Hain’s revenue/profit from sales of the products at issues, and also calculated a price premium for the “organic” attribute, not based on individualized information about class members.  Hain challenged Hamilton’s models with testimony from an economist, arguing that his methods wrongly defined restitutions and flunked the Supreme Court’s requirements for damages models set forth in Comcast.

Under circuit precedent, plaintiffs needed to present a damages model that ties damages to their theory of liability. And, to comport with due process, the court must “preserve” the defendant’s right “to raise any individual defenses it might have at the damages phase.”  The court concluded that plaintiffs adequately showed that damages could be calculated on a classwide basis in a way adequately tied to the plaintiffs’ liability theory.  Hamilton used three different methods to separate out the “organic” premium from other product features.  The fact that he hadn’t performed the calculations dictated by his models wasn’t dispositive; in part this was apparently because discovery was ongoing.  “The point for Rule 23 purposes is to determine whether there is an acceptable class-wide approach, not to actually calculate under that approach before liability is established.”  Hain could offer any defenses to individual claims in the damages phase.

The class action, naturally, was superior to no lawsuit, which was the only realistic alternative.

Monday, November 17, 2014

Koch and wine: punitive damages for wine fraud reduced but allowed

Koch v. Greenberg, 14 F. Supp. 3d 247 (S.D.N.Y. 2014)

There’s probably a good magazine article or two in this story.  William Koch, the “litigious younger brother” of Charles and David, bought over 2600 bottles of rare French wine consigned by Eric Greenberg to an auction house.  He subsequently determined that 24 were counterfeit, and sued Greenberg for fraud (both affirmative misrepresentation and fraudulent concealment) and violations of New York’s General Business Law.  A three-week jury trial resulted in a verdict for Koch on all his claims, awarding compensatory damages of $355,811 (the purchase price for the 24 bottles) and an additional $24,000 in statutory damages on one of Koch’s GBL claims ($1000 per bottle, pursuant to §349’s authorization of treble damages up to $1000 per violation). In addition, the jury awarded Koch $12 million in punitive damages.

The court reduced the compensatory damages award to $212,699 to take account of Koch’s prior settlement with the auction house Zachys.  It also remitted the punitive damages award to $711,622, denied Koch’s requests for attorneys’ fees and injunctive relief, and granted him pre- and post-judgment interest.

The court denied Greenberg’s motions for judgment as a matter of law and for a new trial.  Of interest to me, Greenberg argued that the statements at issue were non-actionable statements of opinion, and that Zachys, not Greenberg, made the relevant statements.  Opinion: the jury was properly instructed that statements of opinion are non-actionable unless the opinion is not sincerely held.  And the jury was properly instructed that puffery is non-actionable.  The jury is presumed to follow instructions, and along with vague superlatives, “the record contains several additional potential statements of fact, or potentially insincerely held opinions, that the jury could have reasonably construed as actionable misstatements.

As for statements in the Zachys auction catalogue, fraudulent misrepresentations don’t need to be made directly to the plaintiff as long as the plaintiff is among the class of persons intended to rely on the statement.  The jury could conclude that misrepresentations made to Zachys were intended to be communicated to purchasers like Koch and that the misrepresentations in the catalogue could ultimately be traced to Greenberg as the “driving force.”  The jury apparently rejected contrary evidence, apportioning blame for Koch’s GBL claims at 100% for Greenberg and 0% for Zachys with respect to the § 349 claim and at 75% for Greenberg and 25% for Zachys with respect to the § 350 claim. 

Likewise, the jury could properly have found fraudulent concealment, on the theory that Greenberg possessed superior knowledge with respect to material facts about the bottles and that therefore his silence or omission could constitute fraud. Greenberg’s counsel repeatedly emphasized that Koch had the opportunity to inspect the bottles at issue, and could have seen apparent indicators of their counterfeit status.  But the jury was free to reject that argument.  The record did indicate “surface-level problems with the bottles of wine—aberrational labels or irregular cork striations, for example,” but it also included numerous references to information Greenberg knew but chose not to share.  The jury could agree that no amount of inspection would’ve revealed what Greenberg knew.  It was properly instructed that buyers, especially sophisticated ones, have a duty to protect themselves in business transactions.  But it was also properly instructed that “a buyer is not required to conduct investigations to unearth facts and defects that are present, but not obvious,” meaning that “a buyer is not expected to discover that a house is infested with termites.”

Nor was Koch’s reliance unreasonable as a matter of law.  There was an “as-is” clause in the auction catalog, disclaiming the authenticity, provenance, and merchantability of the wine. The jury was instructed that specific disclaimers ordinarily “preclude a finding of justifiable reliance,” as required for a fraud claim.  But not always: where the material facts upon which a plaintiff relies are “peculiarly within the [defendant’s] knowledge,” and not discoverable by the plaintiff through “the exercise of ordinary intelligence,” such an “As–Is” clause will not act as a bar to a fraud claim.  The jury was also properly instructed that in determining whether Greenberg had “peculiar knowledge” it should consider the buyer’s sophistication and the accessibility of the underlying information.

Greenberg argued that, even if it was difficult to inspect over 2000 bottles of wine, that was a difficulty of Koch’s own making, and Koch’s wealth and sophistication weighed against a finding of peculiar knowledge.  But it was reasonable for the jury to conclude that, in light of all the circumstances, and despite Koch’s sophistication and his right to inspect the bottles, it was unreasonably difficult or impossible for him to have discovered what Greenberg knew.  Under the circumstances, Koch wasn’t unreasonable as a matter of law to fail to recognize various indicia of inauthenticity or hire an expert to spend 25 minutes per bottle on inspection at the time of purchase.  The jury could therefore find fraud notwithstanding the presence of an explicit disclaimer.

As for the GBL claims, GBL § 349 claim requires that (1) “the defendant has engaged in an act or practice that is deceptive or misleading in a material way”; (2) the “plaintiff has been injured by reason thereof”; and (3) the deceptive act or practice is “consumer oriented.”  Consumer-oriented conduct has to be more than a private contract dispute, but it need not involve repetition or a pattern as long as it was aimed at the public at large.  Given the large number of bottles Greenberg consigned, other consumers at the auction could have been affected by the alleged misconduct.  The finding of liability under §349 also survived.

The court then found that the exclusion of Greenberg’s refund offers as evidence during the liability phase was proper, though it was properly admitted when the jury was considering whether to award punitive damages.  Refunds as a remedy for counterfeits might provide limited insight into wine industry practices, but not necessarily into Greenberg’s state of mind at the time of the key events, but their probative value was outweighed by the prejudicial effects of portraying Koch as unreasonable and litigious in not accepting the money.

The court also upheld the award of punitive damages; the jury heard sufficient evidence from which it could conclude that Greenberg acted with wanton disregard for potential buyers’ rights, and that this auction was not the first time Greenberg had sold counterfeit wine. However, the award was reduced because of due process concerns.

The reprehensibility of the conduct at issue was the most important factor: the harm was economic as opposed to physical or potentially physical (these bottles were collector’s items, not for drinking), and the targets—Koch and other potential buyers—were not financially vulnerable, and the subject wasn’t a core asset like a home or business.  “Greenberg deceived a wealthy collector whose hobby involves expenditures that most people will never contemplate.”  Some punitive award was nonetheless appropriate, given that “[t]o deceive for one’s personal, pecuniary gain and exploit one’s superior knowledge—the gravamen of the fraud here—reflects reprehensibility that warrants some sanction.”  The jury evidently rejected Greenberg’s argument that his refund offer proved his good faith.

The high ratio of the jury’s award to its compensatory award (33x the initial amount, and 56x the reduced amount) signalled a constitutional problem.  Given the economic nature of the fraud, its lack of relation to liberty or dignity, and its lack of disruption of Koch’s life, this wasn’t a case that justified going up to the limits of the Due Process Clause.  A six-figure compensatory award was already significant in the absolute sense, but less so in the relative sense, “particularly in the context of high-end wine auctions where a single bottle may sell for $20,000, and in light of the wealth of the inevitable participants in such auctions, including Greenberg.”  Thus, a punitive award less than the compensatory award wouldn’t likely have much deterrent effect.  Thus, the court remitted the award to $711,622, twice the initial compensatory damages award.  The court didn’t use the setoff from the Zachys settlement in its calculation, given that the jury awarded punitive damages on the fraud claim—a claim brought only against Greenberg when Zachys settled—and given that the jury allocated 100% liability to Greenberg (and 0% to Zachys) on the GBL § 349 claim.

Attorneys’ fees: Koch sought nearly $7.9 million in attorneys’ fees.  The GBL allows an award of reasonable fees to a prevailing plaintiff, at the trial court’s discretion.  The court declined to do so, for several reasons.  The fees “bore no relationship to the amount of actual damages at issue,” given the aggressive “battle royale” fought by the parties for six years, for a compensatory damage award of only $355,811.  In addition, the compensatory damages for Koch’s commercial injury did capture the extent of his success at trial, as opposed to other situations in which intangible rights are vindicated. 

Also, the purposes of the GBL didn’t support an award of fees; the potential for punitive damages on the fraud claim was the only reason the case wasn’t mooted by Greenberg’s refund offers, but only the GBL claims provided a basis for fee-shifting.  This wasn’t a case within the heartland of GBL fee-shifting, because it didn’t involve vulnerable or disadvantaged consumers, and it didn’t involve conduct with a broad impact on consumers in general, even though Greenberg’s conduct was consumer-oriented. 

Plus, Koch did refuse a full refund and insist on trial, “in the hopes of sending a message and exposing what he perceived as Greenberg’s wrongdoing.”  He did so, and the court accepted that Koch felt strongly about the matter, but this was really “a litigation of choice and of principle, rather than of necessity or monetary recompense.”  Though neither Koch’s wealth nor his sophistication barred an award of fees, it was still relevant that Koch could’ve gotten his compensation years earlier but chose to spare no expense in litigation.

Koch also requested broad injunctive relief against Greenberg, barring him from (among other things) engaging in deceptive acts or practices in selling wine.  The GBL allows private parties to obtain injunctive relief, but it wasn’t clear whether eBay applied.  The case law suggested that, while government entities didn’t need to meet the traditional equitable requirements in seeking injunctions, private plaintiffs did. Just because the New York statute specifically authorized injunctive relief didn’t mean eBay’s equitable principles were displaced; so too does the Lanham Act. The alternative would be absurd: automatic injunctive relief for any prevailing plaintiff, no matter how small the violation.  Given the absence of specific statutory conditions for injunctive relief, the court applied the ordinary rules.

Koch didn’t suffer irreparable injury; money fully compensated him.  Though Koch argued that Greenberg consigned more than the 24 counterfeits proven at trial, that was beyond the scope of the trial and not the proper subject of a permanent injunction.  Compensatory and punitive damages were adequate to make Koch whole. 

As to the balance of hardships, Koch requested extensive and damaging mandatory disclosures not required of other consigners in the wine industry.  “Koch has made efforts to change the auction practices in the industry that permit this type of deceit to occur. However, it does not follow from the jury’s finding that Greenberg engaged in GBL violations that he must now be the symbol for changed norms within the wine industry.” An injunction wouldn’t serve the overall public interest.  Rather, “this costly litigation, intense public scrutiny, and a punitive damages award are sufficient to dissuade Greenberg from engaging in deceptive acts or practices in the future.”


Friday, November 14, 2014

NPR story on apple varieties and TM as substitute for patent

The story suggests that control over new varieties could last forever, instead of expiring as previous patents on new varities have, because the varieties are "trademarked." Query: if the public knows the apple as SweeTango, why isn't that word the generic term for that kind of apple?

Wednesday, November 12, 2014

bills, applications and manuals can be commercial speech

Heartland Payment Systems, Inc. v. Mercury Payment Systems, LLC, 2014 WL 5812294, No. C 14–0437 (N.D. Cal. Nov. 7, 2014)

Heartland and Mercury compete to provide electronic payment processing to small and medium-sized merchants through point of sale (POS) systems, which allow merchants to accept credit cards and debit cards. POS systems, allow banks and credit card companies to receive their fees, merchants to receive the proceeds from sales, and consumers to have their accounts charged. Both companies use an “interchange-plus pricing model”: banks and credit card brands charge a fee, typically as a percentage of the transaction plus a per-transaction fee. POS systems providers then charge an additional fee to the merchants as their price.  POS systems providers can’t control the interchange fee, but do control the plus fee, which is “usually in some combination of basis points and cents-per-transaction.”  Both plus and interchange fees can be reset as often as twice per year.

Heartland alleged that Mercury took advantage of the interchange fee adjustment to increase its fees and deceptively blame increases on the credit card brands.  Mercury allegedly falsely told merchants that it would pass on the interchange fees at cost, with no markup.  Heartland alleged that the deceptions worked through Mercury’s merchant application; the representations of third-party POS dealers who sell Mercury’s product; its website; and “other advertising and promotional materials distributed to merchants and potential merchants.” Moreover, Heartland alleged that Mercury’s Operating Guide contained deceptive language that misrepresents how Mercury bills its merchants.  In its review of nearly 300 of Mercury’s monthly billing statements, Heartland alleged, it found that in 75% Mercury actually charged a fee higher than disclosed.  Heartland alleged that merchants didn’t know the actual network fees and couldn’t easily determine them based on Mercury’s statements.  Further, Heartland identified thirty merchants who switched from Heartland to Mercury, and believed that its bid was deceptively undercut.  The resulting statement allegedly showed Mercury’s bid-upon amount as the “plus” fee, but also “falsely inflated network charges to impose an additional four cent fee per card transaction.”

Heartland sued for false advertising under the Lanham Act and state law, and related business torts. The court first determined that Rule 9(b) applied to all claims, because Heartland alleged “a unified course of fraudulent conduct” as the basis of its claims, and sought punitive damages based on Mercury’s allegedly intentional and willful conduct.

Mercury argued that it wasn’t engaged in “advertising and promotion.”  First, Mercury argued that its monthly statements weren’t ads, because they “memorialize transactions that have already occurred”; that the Merchant Application was a contract, and not promotional; and that the Operating Guide, despite being on its website, is a mere “technical manual.”  (It seems to me that monthly statements don’t have to be ads; it’s the alleged misrepresentations that got merchants to engage in the transaction that are the core problem, and the statements then allegedly prevent the merchants from realizing the prior deception.)

The court found that, with respect to alleged oral statements, Heartland failed to plead with the requisite particularity.  Heartland didn’t disclose the name of the merchant it allegedly identified as a victim, or any other merchant.  It also didn’t allege facts to support the idea that a Mercury employee or representative made false statements, or engaged in commercial speech.  However, Heartland had no way to know exactly which employee drafted the written ads, so to the extent the complaint relied on written documents, Heartland didn’t need to identify exactly who wrote them and when.

The court did find that the monthly statements “could induce merchants to continue using Mercury’s services, and hence could be considered commercial speech designed to propose a continued business relationship.” Similarly, the Operating Guide “could be seen to propose a commercial transaction by providing information to a potential merchant who may be considering using Mercury’s services.” And the Merchant Application could be viewed as proposing a commercial transaction—not a contract, but an offer to enter into a contract. Thus, the complaint adequately alleged Mercury’s commercial speech.

The complaint still failed because Heartland didn’t allege sufficient facts to show that Mercury disclosed its pricing as Heartland alleged, or that Mercury charged something different from what it disclosed.  It needed to identify specific language to show that there wasn’t sufficient disclosure of pricing and fees.

For basically the same reasons, the UCL, FAL, and intentional interference with contract/prospective economic advantage claims were dismissed, with leave to amend.

Monday, November 10, 2014

Prior class settlement precludes state from seeking restitution for false advertising

California v. IntelliGender, LLC, -- F.3d ---, No. 13–56806, 2014 WL 5786718 (9th Cir. Nov. 7, 2014)

The 9th Circuit held that a CAFA-compliant settlement precluded the People of the State of California, acting through their representatives (here San Diego’s City Attorney), from seeking restitution for IntelliGender’s allegedly false advertising, but did not preclude other remedies. The district court approved a settlement for a nationwide class of buyers of the IntelliGender Prediction Test, touted as an accurate predictor of a fetus’s gender using the mother’s urine sample.  The State sought civil penalties, injunctive relief, and restitution, and IntelliGender sought to enjoin its action.  Because the State’s action was “designed to vindicate broader governmental interests than the class action,” the whole thing couldn’t be enjoined.  But because CAFA provides that the defendant has to provide notice to relevant state officials of any settlement, to allow them to object, and California didn’t, it couldn’t now obtain a duplicate recovery in the form of restitution of citizens who were bound by the bargained-for restitution in the settlement. [This result puts a premium on the FTC monitoring settlements, which is arguably a good thing but may strain resources; since so much of the FTC’s recovery in recent years has been restitution-based, the ability to cut that off at a comparatively low price could be incredibly valuable.] 

CAFA  requires notice of a proposed settlement to be served on the “appropriate” federal and state officials—typically the USAG and “the person in the State who has the primary regulatory or supervisory responsibility with respect to the defendant.” A court can’t order final approval of a proposed settlement until 90 days after the notification.  The state isn’t required to intervene, and it might not: “Aside from securing compensation for citizens, state enforcement actions serve other interests such as protecting citizens from future harm, and these interests might not be served by intervention in ongoing settlement proceedings.”  Being an objector could serve important interests, but direct enforcement actions serve equally if not more important public interests; CAFA doesn’t interfere with government’s power to bring enforcement actions.  Under California’s UCL, a public prosecutor can seek civil penalties, permanent injunctive relief, and restitution, but private individuals are limited to injunctive relief and restitution. Private suits can’t substitute for public enforcement actions, “which serve as a far greater deterrent and thus a greater protection.”

IntelliGender makes the IntelliGender Prediction Test that promises “immediate gender results in the privacy and comfort of the home. In minutes, the IntelliGender Gender Prediction Test indicates your gender result based upon an easy to read color match.”  IntelliGender settled a class action over its advertising, with proper notice to state and federal officials, by agreeing to pay $10.00 for each approved claim and to make a cy pres donation of $40,000 worth of product. In addition, it agreed to change its website’s advertising as well as the Test’s product insert and box. Changes to the product website included clarifying that the “Nobel Prize winning chemist [who] was added to the research team,” was actually “a graduate student” who was merely “part of a 1996 Nobel Prize winning research team in chemistry.” To receive the $10.00, a class member had to submit a valid claim form, requiring her to swear under penalty of perjury that the Test result was inaccurate as to her child’s gender.  [Note: this settlement indicates the compromise involved in settlement, perhaps too much here; those changes are tiny, and requiring inaccuracy as to the child’s gender seems misguided when flipping a coin would have been right roughly 50% of the time, thus undercompensating class members who were fooled but got lucky.]

Subsequently, the San Diego City Attorney sued for violations of the UCL and FAL (also alleged in the class action).  IntelliGender removed and the case was transferred to the judge who presided over the related class action.  IntelliGender sought an injunction under the All Writs Act and under principles of res judicata, but the district court refused, reasoning, in part, that the State’s claim was brought in the State’s sovereign capacity to protect its citizenry from unscrupulous business practices.

Federal courts can’t enjoin state court actions except under a few circumstances, including where necessary “to protect or effectuate the federal court’s judgments,” which reinforces res judicata and collateral estoppel. “Res judicata applies when the earlier suit: (1) reached a final judgment on the merits; (2) involved the same cause of action or claim; and (3) involved identical parties or privies.”  (The court of appeals noted that, because the issue was not argued, the court was using federal law without resolving whether the federal or state law of res judicata should apply.)

There was definitely a final judgment on the merits on the same causes of action, the UCL and FAL.  Privity was the key, and the Supreme Court has cautioned that “issuing an injunction under the relitigation exception is resorting to heavy artillery. For that reason, every benefit of the doubt goes toward the state court; an injunction can issue only if preclusion is clear beyond peradventure.”

The court found that the district court correctly denied IntelliGender’s motion to enjoin the State’s enforcement action in its entirety.  No class action settlement could bind the State in its sovereign capacity, where it asserted both public and private interests.  The fact that special penalties were available to the State showed the separate public interest.  The State’s failure to object to the settlement was irrelevant; an official objection or its absence is relevant to fairness, but CAFA specifically provides that the notification requirement does not “impose any obligations, duties, or responsibilities upon, Federal or State officials.”  To count failure to object as a reason to find res judicata would undermine the purpose of the statute.

But what about the State’s claims for restitution?  Insofar as it sought restitution for individual members of the settlement class, the action should have been enjoined under the court’s continuing jurisdiction to enforce and administer the settlement.  Courts should preclude double recovery by an individual, and when the government sues for the same relief a plaintiff has already pursued then the requisite closeness of interests for privity is present.  The individuals on whose behalf the State sought restitution were the same as the certified class, and it didn’t matter that the amounts sought were different.  The district court had reasoned that the class was limited to only those who bought the product and got an inaccurate result, whereas the State was seeking restitution for all purchasers—but that wasn’t true. It was just that only members who got an inaccurate result (and applied) got paid.  Members who didn’t get compensation are still bound by the settlement; if the State wanted compensation for them, it should have intervened after receiving notice.  “This is the method CAFA established for states to seek equitable compensation for class members.”  Compensation was res judicata.  The different amount sought didn’t matter, and just confirmed that the State was seeking double “(or at least better)” recovery.  “[T]he appropriate inquiry is not what relief was ultimately granted, but whether the government is suing for the same relief already pursued by the plaintiff.”  The district court abused its discretion in not granting an injunction, given the harms of relitigation to the class action system.  Allowing extra claims for restitution would decrease the incentive to settle and buy peace.