Wednesday, February 22, 2006

Consumer protection and pleading with particularity

Bacon v. American International Group, 2006 WL 305970 (N.D.Cal.)

What are the pleading requirements for consumer protection claims under California state law? As this case shows, fraud-based allegations must be pled with particularity, but not all consumer protection claims are fraud-based.

Plaintiff, a 91-year-old under a conservatorship, brought a purported class action on behalf of all people 65 and older who purchased a deferred annuity from or marketed by the defendants and who have suffered or could suffer a penalty/surrender charge, including those incurred because of death, for accessing their money before its maturity date. Allegedly, sales agents purporting to offer free financial advice exploited plaintiff’s trust and manipulated her into buying deferred annuities that, though profitable for the defendants, are obviously unsuitable for seniors because they tie up money for many years, often beyond the seniors’ life expectancy, and because they may have little return. Defendants’ deceptive and obfuscatory sales tactics allegedly drive sales of deferred annuities to seniors.

Defendants argued that plaintiff hadn’t pled her fraud allegations with particularity; the court agreed, and dismissed the fraud claim with leave to amend. Defendants argued that her other claims, including consumer protection claims, should likewise be dismissed. Along with fraudulent conduct, however, plaintiff also alleged conduct that was unlawful and unfair, including negligently misleading statements. Thus, some of her causes of action survived, but, to the extent the plaintiff sought to rely on averments of fraudulent conduct, she had to plead them with particularity. (Courts have divided on what to do in the Lanham Act context; if some of the plaintiff’s allegations involve fraud but others don’t, some courts allow the entire claim to proceed without satisfying Rule 9’s heightened pleading requirements, which seems sensible since the plaintiff doesn’t need to prove fraud to win.)

Plaintiff’s Consumer Legal Remedies Act claim was dismissed because the CLRA covers only sales or leases of “goods or services,” and annuities are neither goods nor services but some tertium quid.

Epstein on Google, continued

My comments on Epstein on Google Book Search: Seeing fair use as being fundamentally about the necessity of quotation for critical purposes is a mistake; there are plenty of noncritical uses that are also important to a robust speech environment, including repetition of religious texts and positive reviews.

Epstein responded that fair use for positive reviews is also good because a positive review means more if the reader knows it didn’t require the copyright owner’s prior approval, and thus we can assume a kind of implied consent for fair use for any kind of review. But that is a just-so story; it relies on an awful lot of unevidenced assumptions about consumer knowledge and behavior. The justification should not be the implied consent of the copyright owner at all.

Epstein then turned the discussion to the situation in Texaco, where he argued that individual copying was okay because it provided an indirect benefit to the copyright holder (by increasing the value of a subscription), but when individual copying was aggregated, price discrimination became an issue. You don't want a uniform price for intensive and nonintensive users, so you license copying, at least once metering becomes possible. I'm not convinced this is an answer to my point about the purpose of fair use, but okay.

Now more from me: Epstein thinks that a market for a database of digitized books can develop. But right now, blanket licensing isn’t possible. The publishers don’t necessarily own the rights to books bearing their imprints, especially the older books. The fact that the Authors Guild has also filed suit is a harbinger of ownership disputes to come, just as the record companies and the recording artists started to fight about ownership in Napster. (C.E. Petit said a similar thing about rights ownership, from a very different perspective.)

This also affects Epstein's argument that Google's business model for net search is protected by implied consent even though it's not for Book Search: Google was sued for online copying despite the robots.txt opt-out, so not everyone has gotten the message that putting material on the web implies consent to copy. On the other side, if the publishers don’t own most of the books in the University of Michigan library, as noted above, then their lawsuit isn’t evidence that most owners reject digitization.

Epstein agreed that there were big ownership problems, though he thought that made Google's opt-out policy even less sensible. Someone will pop up claiming ownership in many cases, and Google will have to invest a lot to figure out who has the valid claim (or will just take a book out whenever a claim is asserted, valid or not). This is already occurring with the non-Library Project books in Book Search. Epstein's preferred solution was more radical. For low-revenue/old works, he'd have a fixed statutory royalty for use, paid into a fund: a weak compulsory license. For high-revenue/young works, you'd need the copyright owner's consent. (I didn't ask whether there'd be a payment for digitization, a payment for showing a snippet in a search result, or a payment when a searcher clicked on the result, or some combination, but that's only the first of the hard questions.) Given the huge problem of rights fragmentation, we need a voluntary or statutory blanket licensing scheme. With recent works, rights are clear enough that voluntary transactions can go forward.

As an aside, Epstein thought we should also have much shorter copyright terms, which would go a ways towards solving this problem. Too bad it's not going to happen!

On the air rights comparison: I said that this dispute reminds me of the (relatively) old saw “The Internet perceives censorship as damage and routes around it.” Opt-outs are somewhat harmful to the completeness of the system, just as the result in Tasini was harmful to the completeness of the proprietary databases concerned, but they don’t destroy the value of the system. Indeed, since the whole is greater than the sum of its parts, opt-outs (at least at a low level) are less harmful than their individual merits might suggest. Whether opt-outs can be allowed depends on the specifics of technology and social organization; it’s not a defining feature of an anticommons problem. If the US had been settled at a uniform level of population density, airspace opt-outs wouldn’t have been as problematic as they would be when there are obvious paths flights should take. In other words, disallowing opt-out may not be a necessary part of a commons-type scheme.

Some audience questions: What about collateral uses of works? By "collateral," the questioner meant cases like Bond v. Blum, 317 F.3d 385 (4th Cir. 2003), the Fourth Circuit case finding fair use where a work was copied as evidence in a court case (it was used to show that the author shouldn't have child custody because of the bad things he confessed to doing in his unpublished autobiography, Self-Portrait of a Patricide: How I Got Away with Murder). Epstein didn't say much about this, nor do I think that Bond offers a common enough scenario to help us analyze Google Book Search. Precedents allowing copying for reverse engineering, as another comment suggested, might be more helpful. Epstein says Book Search is very different from reverse engineering. He's highly sympathetic to contractual restrictions on reverse engineering because they enable price discrimination, though the majority of copyright scholars are on the other side.

Question: Will every book eventually be searchable/available in a digital database? Answer: Yes, but when? The usual rule is that information loses 25% of its value every year. In publishing, you get 6 months of glory and an eternity of oblivion. In the end, the obvious gains to everyone will lead to the universal database; the issues involve reducing transaction costs. The publishers want to be a little better off than "better off," though they concede they'd be "better off" under Google Book Search. That is, Google's best argument is that its scheme is already Pareto optimal. Again, the intensity of use is key to the publishers' agenda. Publishers, like many owners, would like to switch from sales to licenses.

At this point, I asked Epstein how he felt about that as a libertarian. He felt fine, since licensing is just a voluntary transaction, and if licenses are more efficient than sales, they should be allowed. (The reason I asked is that some versions of libertarianism suggest moral values in individual property ownership, and a world in which most of us don't own property, only rent it, might create a different kind of character and politics.)

Question: What about Kelly v. Arriba Soft? Answer: It's pretty much the same thing. If snippets are samples for which publishers should get paid, thumbnails are too. Shrinking size, like putting a Rubens painting on a postcard, isn't fair use. (At this point, I've got to assume that Epstein's consistent choice of out-of-copyright examples is a deliberate effort to show how he's not seduced by contemporary popular culture -- but I'd still think that Hemingway and Picasso would be better examples.) The really interesting issue, he thinks, is trespass to chattels. He helped litigate the eBay case, in order to establish the basic principle that if you own a site, you can exclude others from using it. If a use is fair use, can the site owner exclude others from entering to get the work? Or is it still a trespass? This is an important ongoing issue.

Saturday, February 18, 2006

False advertising doesn't violate the Sherman Act

Briggs & Stratton Corp. v. Kohler Co., 405 F.Supp.2d 986 (W.D. Wis. 2005)

Plaintiff sued defendant for patent infringement relating to an internal combustion engine (are there external combustion engines?). Defendant counterclaimed for violations of the Sherman Act, state antitrust law, and common law unfair competition. Plaintiff moved to strike the portion of defendant’s antitrust counterclaims that alleged false advertising of plaintiff’s engines’ horsepower. The court agreed that false advertising, in the absence of monopoly power, does not violate the antitrust laws. In the Microsoft case, false advertising about Java compatibility was part of Microsoft’s strategy to exclude other operating systems from the market, and thus violated the Sherman Act. The false advertising here, however, didn’t exclude the defendant from the market.

Question: Why not assert false advertising counterclaims? Possible answer, depending on the parties’ market positions (also, of course, relevant to the antitrust issues): Lanham Act standing for false advertising requires a showing of likely harm, which means that the counterclaimant would have to provide reasons to think that sales were diverted from it in particular rather than from other competitors. Perhaps that would have been difficult to prove.

Friday, February 17, 2006

Epstein on the Google Print Library Project

On Wednesday I introduced and commented on a presentation by Professor Richard Epstein of the University of Chicago on Google Print and Copyright, cosponsored by the Georgetown Federalist Society and Student Intellectual Property Law Association. Professor Epstein is an impressive speaker who speaks apparently extemporaneously. He also speaks fast with few wasted words, so my notes are necessarily incomplete.

Epstein identified a bicoastal split on academic assessments of Google. By this he meant that Jane Ginsburg at Columbia is pro-copyright owner, whereas the Left Coast inclines towards Google. Where you come from determines how you think on IP; he comes from real and personal property. A large number of academics start with a preference for the commons, with exceptions as islands of property therein. Epstein isn’t squarely on the other side, since his starting point is Roman law, which provides a framework for asking why some things are common and others privatized.

Land is relatively compact and permanent. To get development, the developers need a return on investment; thus, property. Reaping what you sow is the metaphor for a reason. Property allows internalization of costs/benefits. Water is more complicated; privatization destroys the going concern value of a river, so you get a mix of commons and private rights.

IP is more like water. With respect to land, use requires exclusion of others; not so with respect to ideas. So the explanation for any exclusion has to be instrumental, and it is: incentives to create. IP is a constant duet between the need for incentives and the waste generated by exclusions. Both are inescapable.

Law attempts approximation of a social ideal. With land, problems come up with exclusion: necessity (shelter from a storm) and eminent domain, and the law responds by allowing exceptions, with or without compensation. It’s the same with IP – private rights should yield in some circumstances. Epstein sees fair use as analogous to defamation’s fair comment privilege, necessary for open and robust debate. Fair use had the same narrow origins, protecting criticism by allowing quotation. We do, however, want to avoid surreptitious reproduction that undermines the core right – so we don’t allow reproduction of A Tale of Two Cities with a negative preface (odd example, given that we allow reproduction of that work in every possible way, but substitute in the latest Harry Potter if you like).

The question of Google Print is whether you have to bypass a market to create a good thing. Shall transfers be accomplished by consent (licensing) or necessity (fair use)? Google’s ambition is large, to make anything digital and easily searched, which allows extraction of value not replicable by traditional techniques. The really hot question is what Google will do with its copy. The publishers don’t fear the snippets; what they fear is unknown uses of the database to extract value – to show what works consumers prefer, for example, so as to advise young authors what’s hot. In Epstein’s discussions with publishers, this was their main concern; they feared being preempted out of their market (emphasis mine, not his).

What about opt-out as a solution? Google is using “opt-out” as a term of art, since it dictates the terms and conditions. Harper & Row won’t just be able to send a letter saying “take all our books out,” since Google is requiring specific ISBN and other information. There’s a deeper problem: If Google Print is fair use, Google’s entitled to do this independent of the publishers’ consent (I wrote about this before).

Google isn’t the only one who wants to organize the world’s information: Yahoo!, Amazon, etc. are looking for blanket licenses, suggesting that market transactions are possible. If they can work out ways to share advertising revenue with publishers, now that microtransactions are feasible, than no fair use will be necessary.

Epstein noted that his analysis hadn’t mentioned the statutory fair use factors. Indeed, those factors are not key; the critical issue is whether a viable market on a voluntary basis is possible. In earlier discussions, Robert Merges had said that Google’s project was no problem because there was no viable cash market, but later he qualified that claim – there may be a market in two years. It’s fair use now, but maybe not in 2008. (My question: Does the same logic apply to Sony v. Universal? My guess is that the answer’s yes, though we needn’t wait for 2008 for the market.) Then the issue is how to organize the transition.

Epstein believes that a voluntary market is feasible. If MSN and Yahoo! can deal, so can Google.

What about implied consent? People argue that, if the Google Print for Libraries model is defective, then Google itself is defective with respect to the web as a whole. Opt-out works the same way online. How to distinguish the situations? Epstein’s answer is both practical and theoretical. Practically, the publishers brought a class action rather than sending Google their ISBNs, showing that there is not really implied consent. We should imply consent when a formal consent requirement would debilitate the market too much, destroying the usefulness of the resource (here, the search engine); when there’s a high probability of people wanting in, as there is online, we can presume consent in the absence of objection, but that’s not so in print.

Ultimately, we have to balance the potential gain from the database versus transaction costs. All copyrighted works are not created equal (I’d say, they may be created equal, but they don’t make it to the finish line equal, but that’s either a quibble or a disagreement far too profound for this space). With a 1950 work, it’s so great to have online access that a copyright owner would probably be happy to have it online. But with the latest Stephen King (short review: creepy premise plus competent execution produces decent midlevel King), precise management of the property is critical and thus a voluntary market should prevail. In the latter case, the value of price discrimination and other work-specific techniques dwarfs the transaction costs of consent. We need to separate low- from high-value works and make different rules for each, as we do with respect to allowing solicitors onto property.

The only wrong argument, in Epstein’s opinion: We shouldn’t think of Google Print like the overflight problem (see the exquisite William Empson poem reproduced in comments: fair use?). The ancient ad coelum doctrine said that property owners could exclude others all the way down and all the way up into the sky, but once airplanes appeared, that created huge problems: everyone could exclude and no one could use the skies (the anticommons, though Epstein didn't use that term), destroying the value of this new mode of transport. To avoid this, we forced the top slice of property into the commons, redesignating the upper air as a highway. There were no losers from this change (my comment: really?). For technical reasons, we can never allow any opt-out from the air rights cutoff; only 1-2% optout would destroy the system.

This isn't the case with Google. No library requires all the books in the world to operate. Thus there's no overflight problem.

Back to the beginning: if the evidence is unclear (as it always is in copyright), people stick with their initial presumptions. Shall it be property or commons?

Long post already; comments period next. Possibly with more articles!

Thursday, February 16, 2006

Protect your skin from false claims

Kennedy Industries, Inc. v. Aparo, 2005 WL 3752270 (E.D.Pa.)

Plaintiff sells skin protection and skin cream for wrestlers; its product protects skin from chafing and the FDA has determined that its main ingredient is safe as a skin protectant. Defendant Driving Force (Aparo is its president) sells competing products under the brand “99.”
Plaintiff sued defendant and several distributors for false advertising under the Lanham Act.

At various times, Driving Force has claimed, among other things, that 99 kills 99.99% of harmful bacteria on contact; kills 99.9% of disease-causing germs, including the scary VRE and MRSA; provides up to four hours of protection from the above; is more effective than alcohol-based products; exceeds the U.S. FDA protocols required for classification as a Health Care Personnel Hand Wash and as a First-Aid Antiseptic; rapidly sanitizes skin with a broad-spectrum kill that prevents the development of resistant germs; is safe to use in any environment; maintains skin integrity and cleanses more effectively; is fully FDA compliant; has a two year shelf life; and is specifically designed and developed for the wrestling community.

Driving Force attacked plaintiff directly in comparative advertising, stating “Kill or be Killed” and offering a graphic comparison:


Kennedy Skin Protectant

Kills Ringworm



Kills Impetigo



Kills Staph



Kills Strep



Kills E-Coli



Kills 99.9% of harmful bacteria



Kills Athlete’s Foot



Kills Planter’s [sic] warts



Hours of Kill Power



Plaintiff’s experts, a dermatologist and an organic chemist, opined that all these claims (and more) were false and without scientific basis. The court credited their testimony. For example, there are many strains of bateria, and only a few had been tested with any product containing 99’s active ingredient, benzethonium chloride. Driving Force doesn’t manufacture 99 and never had it tested to determine its exact chemical composition (and doesn’t even know what other ingredients it has!). Thus, it doesn’t know how the other ingredients interact with the active ingredient. Moreover, the tests on which Driving Force relied were mostly in vitro, not in vivo. In sum, no evidence supports Driving Force’s claims.

In addition, the FDA has not approved benzethonium chloride as a skin protectant, but rather lists it as a substance not shown to be safe and effective as a skin protectant and antifungal.

The court appears to be treating most of the claims as necessarily implied establishment claims, which makes sense, as consumers are likely to believe that tests support medical/percentage claims of this sort, and possibly that the FDA has approved such claims. (The "special formulation for wrestlers" claim is not like the others, but that was shown to be false, too, since it was just a general product relabeled for wrestlers.) Alternatively, the court invoked the doctrine of Novartis Consumer Health v. Johnson & Johnson-Merck Consumer Pharm. Co., 290 F.3d 578 (3d Cir.2002), that completely unsubstantiated claims are literally false.

Driving Force "recognized reality" and said that it would discontinue many of these claims, but the court found that it was still making them in its catalogs and other advertising. It sent out new ad materials to distributors but didn't recall old, falsely labeled product or tell its distributors to stop making the false claims, which many of them continued to do. Plaintiff, which had been driven out of the market by its inability to compete with the miracles promised by 99, convinced the court that it would reenter if guaranteed a "level mat." (The opinion has other wrestling references, but I'll omit them out of kindness.) Thus, a permanent injunction was warranted.

Comment: In recent years, “falsity by lack of any evidence” has joined “falsity by necessary implication” as a way of decreasing the burden on plaintiffs challenging shady ad claims. The reckless claims here – which implicate public health – illustrate why courts are attracted to such doctrines.

As of Feb. 14, 2006, at least one site was still advertising that Driving Force’s 99 Antimicrobial Skin Sanitizer “is the only product specifically formulated for grapplers that actually kills harmful bacteria on contact.” The claims Driving Force makes for its 99 line on its site are now substantially more limited:

- Non-greasy
- No Alcohol Formulation - no sting!
- Non-aerosol can; safe for travel
- Non-Flammable
- Dye and Fragrance Free

A far cry from preventing VRE!

As long as it's the good kind of hate

An opposition has been filed to the registration of DYKES ON BIKES as a trademark for various services. Marty Schwimmer comments pithily: "Opposer argues that registration of the mark DYKES ON BIKES would foster hatred of men, because, you know, lesbians hate men. Although not so much hate as in a tracking them down and killing them kind of hate, but more of sort of a not having sex with them hate."

As he points out, the registration is likely to succeed despite the opposition. With all the reports of various agencies' politicization under this administration, the PTO may yet be exempt -- though recently an examiner refused LIAR LIAR BUSH ON FIRE and KATRINA BLOWS, BUSH SUCKS on the grounds that they were disparaging.

Thursday, February 09, 2006

Today's inducement questions

When I bought my newly-arrived "World War II Campaigns in Europe" video set from an Ebay shop, did I induce infringement of the distribution right? Does it matter that I live in the Fourth Circuit, with its definition of distribution that includes "making available to the public"? What if I'd seen it in a friend's home and offered to take it off his hands for $20? Should it matter that purchasing an unauthorized copy doesn't violate any right of the copyright owner?

(The picture of the box, along with a picture of the Crusade in Europe DVD, will be available on the IP Teaching Resources database as soon as I hook my camera up to my computer.)

Tuesday, February 07, 2006

A non-Katrina-caused problem in New Orleans

Chiarella v. Sprint Spectrum LP, 2005 WL 3704505 (La.App. 4 Cir.)

Class certification in this consumer fraud case was reversed because, among other things, the representative plaintiffs had suffered too much harm to be truly representative – not something you see every day.

Plaintiffs alleged that Sprint had made false representations about the consistency and quality of service available in the New Orleans area – essentially, Sprint expanded into the area before it had the necessary switches and towers to provide the advertised service, so calls were constantly being dropped or failing to go through. Sprint’s statistics suggested that about 7% of calls were dropped or blocked in the relevant period. Plaintiffs, however, testified that 20-60% of their calls didn’t go through.

Many of the plaintiffs’ claims were preempted by federal law; when the FCC allowed Sprint to enter the New Orleans area, it necessarily determined that Sprint’s capacity was sufficient to justify the entry, and the Federal Communications Act bars state or local government from regulating entry or rates charged by any commercial mobile service. Granting relief on most of plaintiffs’ claims would necessarily be ruling that Sprint should have done more than was required by the FCC: providing more towers, clearer signals or lower rates. Breach of contract and false advertising claims, however, could be founded on the difference between what Sprint promised and what it delivered, which would not necessarily interfere with the FCC’s jurisdiction.

Class certification on those remaining claims, however, was improperly granted for a variety of reasons. The court first held that it could not assume that all of the Sprint subscribers in the area during the relevant period – the class as certified – were unhappy with their service, since some consumers would have experienced fewer than average lost calls. (This is a misdescription of the relevant standard; unhappy and defrauded are separate issues, and deception used to sell a product is deception even if the consumer does not complain.)

More in line with other cases denying class certification, the court also reasoned that common issues did not predominate, as the nature of the representations made to each plaintiff, and that plaintiff’s reliance, would have to be individually determined. Relatedly, appropriate damages would be difficult to determine, since each consumer suffered different blocked and dropped calls, and they would only have been charged extra if they’d been over their monthly minute plan and the system didn’t recognize a call as a dropped call for which no charge should be made. (Some of Sprint’s claims about difficulty of measuring harm seem disingenuous, including the idea that you’d have to add up the time of a dropped and a reconnected call to see if there was an extra minute charged – the conversation about the dropped call itself takes time and causes inconvenience – but apparently Sprint has no automated way of measuring who exceeds their monthly minute bundles, which seems a bit odd.)

Finally, as noted above, the court found that the class plaintiffs weren’t typical because, during the relevant time period, the system overall was experiencing 2%-3% dropped calls and 5%-9% blocked calls, whereas the five proposed representative parties who testified at the certification hearing reported dropped and blocked calls an order of magnitude greater. Three of the class representatives admitted that their experience was not “typical,” and all five had jobs that required a lot of travel around New Orleans.

Monday, February 06, 2006

Orphan works (and Google Book Search)

I talked to a group of graduate students in history at George Mason yesterday about emerging copyright issues. We spent some time on orphan works, a subject of great interest to all the historians of my acquaintance. The anti-injunction provisions in the Copyright Office's proposal cover instances "where the infringer has prepared or commenced preparation of a derivative work that recasts, transforms or adapts the infringed work with a significant amount of the infringer’s expression."

Especially for historians, who want to show you their evidence (or excerpts thereof), it's important to know whether direct quotation -- or, in the case of images particularly, complete reproduction -- can constitute recasting, transformation or adaptation. A fair number of cases suggest that the answer is yes, if the work in which the quote/copy is embedded has a different purpose than the original. What if a photo is used to illustrate a point, such as "Many Jewish immigrant families were proud of their involvement with socialist causes" (an actual example based on a photo of my husband's family holding up their favorite socialist paper, which was reprinted in a recently published book), but the photo is not otherwise analyzed or criticized in the text? I'd still say that falls within the definition of a transformative derivative work.

The proposed definition adds "with a significant amount of the infringer's expression" to the definition of a derivative work, which suggests a look at what the copier has added and not what s/he's copied, a rule that diverges from the test for infringement. What about a book like Wisconsin Death Trip, a compilation of death-related photos and news reports from the end of the nineteenth century -- does selection and arrangement count as the infringer's expression? I would think so, given that it does for purposes of the copyrightability of compilation works.

But this additional "significant amount" requirement appears to (deliberately?) exclude users like Google (who'd also be barred from using this new provision by the requirement of reasonable search for the copyright owner, since Google is relying on opt-out), who would not seem to be contributing original expression in assembling a searchable collection of documents. The Copyright Office report discusses large-scale users like libraries, but only contemplates them taking down a digitized work whose owner appears (thus avoiding any liability at all) or being able to continue distributing a book or movie that includes the work subject to the reasonable compensation requirement. The report does not consider the possibility that being part of a database is itself a type of transformation, which is obviously an important issue right now.

So, should copyright minimalists attempt to get "significant amount" taken out of the proposal? The idea that adding a short introduction shouldn't be enough to get someone into the reasonable-compensation-only category, which is the other obvious point of that requirement, is persuasive enough, but it might already be covered by the requirement that the orphan work be incorporated into a derivative work. Without sufficient transformation, maybe it's just a reproduction rather than a derivative work.

On the other hand, if the proposal is adopted with this wording, maybe it's more persuasive to say that database uses generally create derivative works (sometimes as fair use) since the implication will be that recasting, transforming and adapting can occur without the addition of significant new expression. Of course the Tasini and National Geographic cases have already gone into this problem in some detail, but I wonder if there are other similar database situations lurking out there.

Saturday, February 04, 2006

Superiority claims: puffery or actionable?

Daugherty v. Sony Electronics, Inc., 2006 WL 197090 (Tenn.Ct.App.)

Plaintiff filed a putative class action alleging that Sony marketed its DVD players as high quality, even though Sony knew they were inherently defective. The dismissal of his claims for breach of express warranty, breach of implied warranty, unjust enrichment, and money had and received were dismissed. There was no breach of the express warranty and there was no additional implied warranty. Given the existence of a limited warranty, the other two claims, which only apply when there is no contract between the parties, also failed.

Plaintiff’s Tennessee Consumer Protection Act (TCPA) claim, however, fared better on appeal. The complaint named several Sony ads touting Sony’s product quality, including that “the company has earned a solid reputation for quality, reliability, innovation and stylish design.” As to DVD players specifically, Sony’s ads claimed that its DVD players “set[] the standard” and were “superior.” Sony called itself “the groundbreaking technology innovator and market leader in DVD Video” and claimed to be responsive to “increasing consumer demands for high quality DVD performance.” Plaintiff alleged that Sony’s nondisclosures of defects and false and misleading statements induced plaintiff and other members of the class to buy Sony DVD players they wouldn’t otherwise have bought.

The issue was whether the complaint stated a cause of action. Though the ad claims here seem like puffery, the court wanted to be cautious and leave the issue to the jury as long as the circumstances indicate that the buyer reasonably understood that he or she was getting some kind of assurance about specific facts. Although courts interpreting the Lanham Act have held “superiority” claims to be mere puffing, the court of appeals noted that the Lanham Act and the TCPA are distinct, and the law requires courts to construe the TCPA broadly.

The court refused to hold Sony’s statements to be puffery as a matter of law. The rationale is bracing: the court rejected the legal conclusion that, “notwithstanding the amount of money that Sony spends on advertising its DVD players, Sony never intended for Plaintiff or any consumer actually to rely on so much as even one of these advertisements and, if there was such reliance by a consumer, it was altogether unjustified.”

Some academics have argued against the puffery doctrine on precisely these grounds – the seller, as master of its ad, presumably chooses claims it thinks likely to influence consumers, and if so we should give consumers a chance to prove that they were influenced.

It may be the case that the claims were too vague to make any real factual representation, and yet consumers did rely on them; what then? The concurring opinion takes up this issue, suggesting that a claim of superiority is non-actionable puffery because it’s nothing more than opinion. Superiority can’t be measured, since superiority in one aspect may be offset by inferiority in another, for example in a tradeoff between sound quality and durability. Superiority, like beauty, is in the eye of the beholder. Nonetheless, the concurring judge agreed that the facts needed further development before dismissal as a matter of law could be appropriate.

In a wreck, get a check - and a consumer protection lawsuit

Crowe v. Tull, --- P.3d ----, 2006 WL 39248 (Colo.)

Crowe hired a lawyer to represent him in a personal injury case; he settled for a low amount, less than Crowe’s existing losses and much less than his anticipated future losses. Crowe later brought a false advertising claim against the lawyer and his firm. He argued that, though he was induced to use the firm’s services by an advertising campaign that portrayed the firm as skilled at extracting money from insurance companies and getting full redress for injury, in fact the firm was a mill that existed to settle claims as quickly as possible and he was pressured into settling for a minimal amount. (Among the slogans defendants used was “In a wreck, get a check,” while another depicts the firm’s president as a strongman who muscles insurance adjusters into paying claims.)

The Colorado Supreme Court held that a client may sue an attorney for violating the Colorado Consumer Protection Act (CCPA), rejecting claims that the statute implicitly excluded attorney advertising and that false advertising claims would impermissibly conflict with/overlap with malpractice liability and other regulations of attorney conduct. The CCPA requires (1) knowledge of a deceptive trade practice – negligence will not suffice -- and (2) conduct that significantly affects the public, and so the court believed that CCPA claims would not cover much attorney conduct. In particular, the CCPA’s limitation to trade practices that significantly affect the public means that individualized statements and contracts cannot violate the law.

Nonetheless, the court believed that modern lawyer advertising – which does include a substantial amount of mass marketing – fit within the broad scope of the law:
Contemporary advertising and marketing practices for attorney services more closely reflect the commercial marketplace as a whole and do not reflect the traditional image of the small-town practitioner hanging up a shingle and relying on personal contacts to create business. Marketing consultants and branding advisors are common tools in legal circles now. Many law firms resemble mid-size corporations rather than the image of small groups of like-minded professionals that still retains some hold on the popular consciousness.
The court was concerned that the average consumer lacks much knowledge about how to distinguish between different legal service providers and may rely solely on the provider’s own statements – often “under the added pressure of a fast-running statute of limitations.” Lawyers (not “unscrupulous” lawyers, I note, just lawyers) may target unsophisticated and underprivileged clients because of their susceptibility to advertising. (The opinion displays just a bit of nostalgia for the pre-Bates days of limited attorney advertising.)

The defendants argued that Crowe’s injury was not caused by the firm’s ads but rather by the lawyer’s advice. The court found that Crowe had alleged a sufficient nexus between the ads and Crowe’s losses. Causation is a question of fact and can be found if the ads are a but-for cause of his damages. In other words, it is enough if an ad was the first link in a chain that led to the harm. This fairly broad statement makes sense, given the purpose of consumer protection statutes; a jury could accept or reject Crowe’s contention that the ads led him to the firm.

Wednesday, February 01, 2006

Born in the USA, but not stamped here

Colgan v. Leatherman Tool Group, Inc., --- Cal.Rptr.3d ----, 2006 WL 45836 (Cal.App. 2 Dist.) (amended)

Leatherman labeled and advertised 22 multifunction tools as “Made in U.S.A.,” when in fact parts were manufactured outside the US. The trial court granted summary judgment to the class plaintiffs under California’s (say it with me) False Advertising Law, Unfair Competition Law, and Consumer Legal Remedies Act, awarding restitution, an injunction (which included a mandatory component requiring corrective advertising on Leatherman’s website and in California newspapers), and attorneys’ fees.

The California Business & Professions Code prohibits Made in the USA representations when the goods or any part thereof “has been entirely or substantially made, manufactured, or produced outside of the United States.” Even though Leatherman’s products were designed, processed, and assembled in the US, parts of the tools were still “substantially made, manufactured or produced" outside the United States” as a matter of law. Significant working parts were cast, stamped, formed, hardened, cut, forged, polished or machined in various foreign countries. Plier jaws cast in Mexico, which were used in 20 of the 22 products at issue, had “USA” stamped onto the jaws themselves. After the lawsuit was filed, Leatherman stopped stamping “USA” onto the plier jaws and changed its packaging to state “Made in U.S.A. of U.S. and foreign components,” but didn’t do anything about existing packaged inventory, and didn’t change its unqualified “Made in U.S.A.” advertising.

Leatherman offered a number of reasons why it didn’t violate the law; the court rejected them all. As noted above, the court declined to rely on the fact that the tools were designed in the US; not only is design not manufacturing, but “made, manufactured or produced” is disjunctive, so all parts of the definition must be satisfied in order to make a Made in USA claim.

Leatherman also argued that “substantially” should be measured quantitatively rather than qualitatively, and that the comparison should involve an objective measure such as domestic and foreign production costs or relative worker hours. Domestic and foreign production costs … I wonder which of those is likely to be greater, and why, and whether that has any relationship at all to why a seller might want to make Made in USA claims without actually making the whole product in the US. In any event, the court declined to adopt such a standard. Its determination was bolstered by the FTC’s 1997 inquiry into the meaning of Made in the USA claims, which found that consumers are likely to understand such claims as meaning “all or virtually all” US origin.

In an unusual move for a consumer lawsuit, Leatherman alleged that extrinsic evidence such as a consumer survey was required to prove its advertising deceptive. The court of appeals disagreed, holding that the evidence that components were manufactured abroad was sufficient to make Leatherman’s claims deceptive without further evidence. Under California law, the primary evidence of whether an advertisement is misleading is the words of the ad itself, compared to the actual facts. Leatherman cited various federal cases that had applied Lanham Act standards, requiring a consumer survey, to misleading claims under the Unfair Competition Law. But the federal courts simply had not applied the proper standard under California law, as several California appellate courts have already held.

Given the rest of the holding – that the tools were not entirely or substantially made in the US – the same result could have occurred under the Lanham Act, as “Made in the U.S.A.” is explicitly false. Ruling this way allowed the court to define “made” as a matter of law rather than trying to assess consumer understanding of the term. Generally, courts applying the Lanham Act are also willing to resolve the meaning of single words without a consumer survey; it’s only when a claim requires putting several concepts together that implicit falsity comes into the picture. Explicit and implicit claims are really on a spectrum, as even the most explicit claim depends on consumer context as well as ad context. The growing importance of “falsity by necessary implication” and “falsity by absence of any susbtantiation” in Lanham Act cases indicates that courts are struggling to recognize the ways in which all advertising depends on consumer interpretation. Sometimes, as here, we can be pretty sure what that interpretation will be, in which case there’s no good reason to put the plaintiff to the expense and risks of a survey, which itself is subject to the manipulations of the surveyor’s black arts.

The court did reverse the restitution award because there was no evidence to support the trial court’s computation of the amount awarded ($13 million, 25% of the average wholesale unit price per tool sold in California during the relevant period). Substantial evidence is required to support a restitution award, and, though it was plain that Leatherman could charge a higher price for Made in the USA-labeled tools, the exact amount of the price premium couldn’t be determined with the available evidence. Remand was necessary to allow recomputation, and the resulting recomputation of attorneys’ fees.

Question: Will federal courts in California stop applying Lanham Act standards to UCL claims in competitor lawsuits, or will they wait for the California Supreme Court to rule? It seems that there’s little justification for waiting, since California case law points all in one pro-plaintiff direction.