Friday, December 31, 2010

Today's right of publicity hypo

This "Barry White" white chocolate carries the slogan "A soulful love serenade." Reminds me of my favorite exam question ever. Actually, Jones Soda had a Berry White flavor as well.

Failure to dislose EPA-related troubles may make statement of success with FDA misleading

Harrison Research Laboratories, Inc. v. HCRAmerica, LLC, 2010 WL 5343197 (D.N.J.)

Harrison Research Laboratories sued Harrison Clinical Research Group GmbH and HCRAmerica for infringement of plaintiff’s registered marks HARRISON RESEARCH LABORATORIES, INC. and HRL for clinical research tests and testing of consumer products. Plaintiff moved to strike a portion of defendants’ counterclaims as impertinent and immaterial. Though defendants argued that they aren’t competitors, in the alternative, they argued that, if their services compete with plaintiff’s, they’re likely to be injured by plaintiff’s false and misleading ads.

Specifically, defendants alleged that plaintiff claimed to have passed “numerous” FDA audits, but in fact, plaintiff had been subject to very few FDA audits, and one audit by the EPA in the 1990s that resulted in plaintiff’s plea of guilty to felony obstruction of an EPA audit, with a $104,000 fine. In addition, plaintiff’s president pled guilty to testing pesticides (DEET) on subjects without informed consent. EPA press release.

Moreover, defendants alleged that plaintiff claims to perform “the full range of human testing" and that "Phase III tests are performed on such drugs as anti-fungals, acne products and other topically applied pharmaceuticals," while in fact it performs only a limited range of tests and has not conducted a Phase III test in a number of years.

Plaintiff moved to strike the EPA audit-related allegations and exhibits since the allegations were not relevant to the truth or falsity of the statement that "HRL passed numerous USA FDA audits." Defendants argued that plaintiff’s "grossly exaggerated claim … creates a very misleading portrait of its qualifications to prospective study sponsors," and that the facts relating to the EPA audit and convictions were relevant because prior wrongdoings are important to a study sponsor's decision whether to hire a company like plaintiff to participate in clinical trials for products that are subject to FDA pre-market approval, which defendants argued are the exact services it provides.

Courts have broad discretion in resolving motions to strike “redundant, immaterial, impertinent, or scandalous matter” under Rule 12(f), though such motions are viewed with disfavor unless the allegations have no possible relation to the controversy and may cause prejudice to one of the parties or confuse the issues.

The court determined that the allegations relating to the EPA audit/convictions supported defendants’ claims that plaintiff’s FDA audit statement was misleading to potential study sponsors because it omitted “potentially relevant and important information.” At this early stage in the litigation, the court couldn’t say that the EPA audit/convictions had no possible relation to defendants’ false advertising claims. A third party could assume based on the FDA audit statement that plaintiff also successfully passed other types of audits. Moreover, if potential clients found it relevant and important that plaintiff passed numerous audits by one federal agency, as the fact that plaintiff touted this statement indicated, then those clients might also find it relevant and important that plaintiff had been subject to criminal proceedings in connection with another federal agency’s audit. Thus, a third party might assume that if plaintiff disclosed its success with FDA audits, it also would have disclosed its EPA history, and that its silence meant that it hadn’t been subject to EPA proceedings. (In a footnote, the court noted that courts have interpreted New Jersey unfair competition law to be coextensive with the Lanham Act for both TM and false advertising, though many states have far more developed law about deceptive failure to disclose than Lanham Act precedent does, in part because many state laws make specific reference to deceptive omissions, often with an intent requirement lacking for affirmative misstatements.)

In addition, the court thought that the allegations were unlikely to cause plaintiff any prejudice, since pleadings aren’t read to the jury.

Finally, striking the allegations wouldn’t save time or expenses litigating issues that will not affect the outcome of this litigation since the facts recited in the allegations regarding the EPA audit and subsequent conviction were not in dispute. Although evidence of the conviction for impeachment and/or other purposes in connection with the trademark infringement claims might eventually be subject to motions in limine, that wasn’t sufficient to justify a motion to strike, especially given their potential relevance to the false advertising claims.

Thursday, December 30, 2010

False comparative advertising claim doesn't trigger insurance coverage

Clarcor, Inc. v. Columbia Casualty Co., 2010 WL 5211607 (M.D. Tenn.)

Clarcor sued Columbia for refusing to defend and indemnify against a suit by 3M, based on Clarcor’s advertising injury policy. The policy covered disparagement, use of another’s advertising idea, and infringing on copyright, trade dress, or slogan in an ad. It excluded advertising injury arising out of the failure of goods or services to conform with any statement of quality or performance made in an ad.

3M sued Clarcor for state and federal false advertising based on Clarcor’s alleged design of packaging and advertising for its new line of Purolator filters to resemble that of 3M's Filtrete line. 3M alleged that Clarcor made “false comparative performance claims,” including claims of"overall filtration efficiency," a "respiratory protection factor," and similarities in color.

For example, one 3M filter is the “Ultra Allergen,” sold in a purple package that labels the filter as "90% effective at attracting and capturing large airborne allergens like: pollen, mold spores and dust mite debris." Clarcor’s purple “Allergen” filter claimed "97% Overall Filtration Efficiency," which 3M alleged was false. In addition, 3M labels its filters with a Microparticle Performance Rating ("MPR"), designed to show how well each filter in its Filtrete product line performs relative to other Filtrete filters in the line. The Ultra Allergen has an MPR of 1250, while the red Micro Allergen has an MPR of 1000; 3M filters ranged from 300 to 2200. 3M alleged that Clarcor deliberately labeled its purple Allergen filter with a 1250 "Respiratory Protection Factor" ("RPF"), copying 3M’s MPR metric. The same thing happened with the red Micro Allergen and the Clarcor red filter. 3M alleged that these uses of colors, claims, and numbers falsely implied comparative superiority.

The court ruled that the claims were not covered by the policy. Clarcor argued that 3M set forth claims for disparagement because the alleged falsehoods harmed 3M. But false statements about Clarcor’s own product don’t state a claim for disparagement. Clarcor next argued that 3M set forth claims for use of another’s advertising idea: color scheme and numerical rating systems. But defendant argued that 3M was just setting forth its claim for false comparative advertising. Though I think Clarcor clearly has the better of this—it was the copying of 3M’s advertising ideas that allegedly turned Clarcor’s packaging into false comparative advertising—the court agreed with the insurer that this was just a false advertising claim. 3M didn’t allege a trademark in its color scheme or rating system. (But there’s a reason that the policy uses the term “advertising idea” and not “trademark”—indeed, had 3M alleged trademark infringement, the insurer would certainly have claimed an exclusion on that ground.)

An advertising idea is "an idea for advertising that is 'novel and new,' and 'definite and concrete,' such that it is capable of being identified as having been created by one party and stolen or appropriated by another." Purple isn’t a novel color, and Clarcor used its own rating system, RPF not MPR. (So what? If it is an information-conveying mechanism that has specific 3M-related meaning in the context of filters, as the complaint alleged, it seems like an advertising idea; the “novel and new” language seems more properly directed at instances where all the advertiser does is what everyone else does, e.g., claim superiority or some other standard technique.) The gravamen of the complaint was that Clarcor’s color scheme and rating system reinforced Clarcor’s false statements of filtering efficiency. Thus, 3M’s action didn’t involve an advertising idea. Nor did it allege claims for trade dress or slogan infringement, which would have required among other things allegations of secondary meaning.

Clarcor argued that its settlement with 3M, which required it to change packaging colors and rating scheme, was evidence that the preponderance of the dispute was related to copying 3M advertising ideas, but the test is the facts alleged in the complaint.

Finally, the failure to conform exclusion applied, because 3M’s complaint was that Clarcor’s product didn’t conform to its ads. Clarcor argued that 3M’s allegations about Clarcor’s use of color scheme and numerical rating weren’t statements of quality or performance, but the court disagreed (I found its reasoning a bit hard to follow, but it seems to be based on the idea that coverage is analyzed as if the claims in the complaint are true).

Wednesday, December 29, 2010

Copying generic mark could be unfair competition

PSK, LLC v. Hicklin, 2010 WL 4978878 (N.D. Iowa)

When can a plaintiff base an unfair competition claim on use of a generic term? In some circumstances, even a generic term can be part of a claim for passing off. Here, plaintiff PSK lost its claims for service mark/trade name infringement under state and federal law, as well as for dilution/injury to business reputation under state law, but still preserved a passing off claim.

Overhead Door Corp. makes garage doors and related products. It has registered trademarks in a red ribbon logo featuring the phrase OVERHEAD DOOR. Plaintiff, its authorized distributor in the Cedar Rapids/Iowa City area, does business as Overhead Door Company of Cedar Rapids and Iowa City. Plaintiff sells and services garage doors in the commercial and residential markets. It advertises extensively in local media.

Lots of other businesses use “overhead” in their trade names and marketing, most if not all of which sell garage door products and/or services. Several companies have “overhead”-including registered marks, including several who market garage door products and/or services. At least one other business in the parties’ market, "Dan's Overhead Doors & More," operates and advertises under a name that includes the term "overhead."

Defendants, the Hicklins, operate a residential garage door installation and repair business, under the names "Advanced Garage Door Repair" and "A-1 American Garage Door Repair." They entered the Cedar Rapids market, then the Johnson County market (including Iowa City), with one office in Sioux City where all service calls are answered for scheduling and a warehouse and local contractors in the Cedar Rapids area to respond to customer calls. During the first 12-18 months of operation, the Hicklins ran multiple Yellow Pages ads prominently featuring the term OVERHEAD and using a 319 (Cedar Rapids) area code, though resulting calls were routed to Sioux City. Several times the term OVERHEAD was in red, though other times it was not.

Randy Hicklin testified that he chose the term "OVERHEAD" as the most prominent term in the initial advertisements because "[i]t's the most descriptive word for consumers to know the type of work that I do and what they are looking for." However, not all their ads used the term OVERHEAD, and Hicklin testified that he thought those ads could be effective too.

Lemke, an installer hired by Advanced in 2007, testified that he encountered three to four customers each week who had actually intended to contact plaintiff, that when he found such customers he’d leave without doing the work, and that Randy Hicklin wanted him to stay and charge for a service call. Lemke further testified that he told Hicklin that the ads were confusing people because of the size of “overhead” in the ad, and that Hicklin responded that Advanced was right beside that term. Finally, he testified that, during his training, they were "going up the interstate, and [Randy Hicklin] passed one of Overhead's trucks, and he looked out and kind of laughed and said, we're going to get a lot of their business."

Hicklin acknowledged that there had been some confusion, but attributed it to his “advertising large in the [telephone] book in a descriptive way,” whereas plaintiff hadn’t been doing enough advertising. He also conceded that customers had called his business looking for plaintiff, but that his employees identified the business as Advanced. “We do overhead repair and if they ask, is this the Overhead Door Company, we tell them no, and if they ask if we have their phone number, which sometimes we are actually nice enough to look it up for them.” Three technicians reported incidents in which they arrived at a customer’s home and the customer thought they were having Overhead Door Company of Cedar Rapids and Iowa City do the repairs. Several of plaintiff’s customers testified to similar experiences (and that they associated the term “overhead” with plaintiff), though they generally also testified that they hadn’t paid much attention when they made their calls. One testified that he asked when he called, "is this Overhead Door of Cedar Rapids or Iowa City[?]" and that the woman who answered said "yes, yeah."

Plaintiff also commissioned a survey among general consumers and current customers, who were asked whether a company or companies come to mind when they hear the word "overhead." Sixty-eight percent of consumers said yes, while 81% of Plaintiff's customers said yes. Of the consumers, 60% associate the term "overhead" with plaintiff (41% overall) and 39% associate it with Dan's Overhead Doors & More. Of plaintiff's customers, 83% associate the term with plaintiff (68% overall) and 22% associate "overhead" with Dan's Overhead Doors & More.

Finally, the Hicklins represent that their technicians are certified. The certification is not independent, but based solely on a list created by Randy Hicklin. One technician testified that Randy Hicklin trained and certified him when he was hired. The Hicklins removed the word “certified” from their Yellow Pages ad when challenged.

The court first found that “overhead” is generic as a matter of law: it is the common name of the general category of goods or services. Competitors use the term to identify their products and services, including Dan’s Overhead Doors & More, which plaintiff never protested. The dictionary definition of “overhead” likewise supported a finding of genericness. Generic terms don’t get trademark protection even if they develop de facto secondary meaning.

Thus, plaintiff’s argument that its customers associated “overhead” with a company failed. Survey evidence may be relevant when a term was coined but is alleged to have become generic. However, when the term was commonly used prior to its association with the source at issue, then there’s no need to inquire whether it’s become generic through common use. Even instances of confusion are not evidence of non-genericness, since the Hicklins were using “overhead” in accordance with its accepted meaning.

Plaintiff argued that “overhead” is descriptive rather than generic because telephone directories don’t have a separate listing for “overhead” garage doors, but only doors and garage doors. This was not the law, as a case finding “brick oven” generic for pizza demonstrated. “The genericness of a term is not synonymous or co-extensive with that term's stature as a separate category in a telephone directory.” Basically, plaintiff was trying to expand the “genus” at issue from overhead doors to garage doors. To the extent that this was an argument that adjectives can’t be generic, it was wrong, as a case finding “honey brown” generic for beer showed. “[T]he existence of more general terms does not preclude a finding that ‘overhead’ is a generic term.” McCarthy’s examples of nouns plus modifiers producing similarly generic names that can’t be monopolized by a single seller: “red wine; dinner table; flat screen TV; laptop computer; woman's business suit.”

As a result, plaintiff can have no protectible interest in “overhead,” and its claims for service mark and trade name infringement failed.

However, plaintiff also alleged unfair competition under §43(a): that the use of “overhead” in the context of defendants’ advertising and other representations to consumers was unfair and/or a false designation of origin. This was essentially a claim of passing off, where the Hicklins allegedly deliberately styled their ads to palm off their services as coming from plaintiff.

The passing off claim was not barred by the finding that “overhead” is generic, which only means that it’s not protected against copying. If a generic term has de facto secondary meaning, relief may be appropriate to require the copier to take reasonable measures against confusion. Use of a generic term, without more, can’t give rise to a §43(a) claim, but a defendant’s failure to adequately identify itself as the source, or use of other confusion-generating practices, might do so. What’s required is a showing of (de facto) secondary meaning plus likely confusion; however, liability is inappropriate if defendants used every reasonable means to prevent confusion.

The court found a genuine issue of material fact as to whether “overhead” had secondary meaning. Among other things, the record contained sufficient evidence for a juror to conclude that the Hicklins intentionally used and emphasized the term "overhead" in their advertisements in an effort to confuse or deceive consumers, which can be circumstantial evidence of secondary meaning. However, plaintiff’s consumer survey conducted in February 2010 was irrelevant, because it was conducted approximately 3 years after defendants entered the market; even if it were relevant, it provided only marginal support for secondary meaning because it showed that consumers use “overhead” to identify both plaintiff and Dan's Overhead Doors and More, and associate the term "Garage Door" with the same sources.

Likewise, there was a factual issue about likely confusion (using the same test used for trademark infringement, for lack of a better way to go about it). The weakness of “overhead” weighed against likely confusion, but the parties’ emphasis on the term created similarity between their ads, especially since their goods and services were the same (though one would think that would have less weight when the term at issue is generic for the goods and services, and thus use of similar terms could be expected) and especially since consumers were unlikely to encounter the ads side by side. Likewise, a jury could conclude that defendants intended to deceive by, among other things, deliberately emphasizing “overhead” in ads rather than their own trade names. On actual confusion, there was customer testimony, though some of this was attributable to inattentiveness rather than actual confusion. To the extent that customers weren’t taking reasonable care, their mistakes don’t support a finding of likely confusion. But actual confusion evidence is not required.

In terms of consumers’ degree of care, there wasn’t really much evidence, except that several customers testified that they spent only a few minutes glancing at the phone book before calling defendants. But one could infer that buying a residential garage door is not a cheap, impulse buy, and customers are more likely to exercise a higher degree of care. But the parties also provide repair services, where customers may be more likely to be acting in haste. “In some instances, Plaintiff's customers did not even open the telephone book after noticing an advertisement or coupon on the cover or bottom of the directory. This may be the most likely response in the event of an unexpected garage door malfunction.” This degree of care might favor plaintiffs. “[T]he issue here is not what a perfectly attentive customer would do, but what amount of care can reasonably be expected of potential customers.”

False advertising: Plaintiff also claimed that defendants violated §43(a)(1)(B) by "claiming to have 'certified' technicians" and "misleading consumers that the Hicklins are based locally by using a phone number with a (319) area code that is answered in Sioux City." Though the only certification came from Randy Hicklin, not an independent third party, the court held that this was not literally false, because both Hicklin and a technician testified that he did in fact train and certify them. Without evidence of consumer perception, the defendants were entitled to summary judgment.

The same was true for the (319) area code claim. This wasn’t a literally false representation that calls were answered within that area code, and plaintiff had no evidence that anyone was fooled, or that it was material to consumers.

Finally, the court rejected plaintiffs’ state law dilution claim. Iowa law protects famous marks against dilution of their distinctive qualities. Apparently, no previous reported case applied the law. However, the court used the general law of trademark dilution, which occurs when consumers associate a famous mark with a new product, and is normally applied when similar marks are used on dissimilar goods. A dilution claim typically fails when the parties compete, and thus it did so here. Moreover, “overhead” isn’t famous. A mark too weak to be infringed is necessarily too weak to be diluted.

Consumer lacked standing to challenge false claims of discounts

[Hinojos] v. Kohl's Corp., 2010 WL 4916647 (C.D. Cal.)

Kohl’s removed this putative consumer protection class action to federal court. Plaintiff bought items including apparel and luggage from Kohl’s. He alleged that Kohl’s misrepresented the nature and amount of discounts he received, because the supposed “regular” or “original” retail prices were never the prevailing market retail prices, and that Kohl’s misrepresentations induced him to buy from Kohl’s instead of elsewhere.

The court found that plaintiff lacked standing under the UCL or the FAL because he didn’t lose money or property as a result of defendants’ acts. Though he didn’t receive the full value of price discounts, he did receive the merchandise itself, which he didn’t allege was unsatisfactory or worth less than he paid for it. Other cases finding that plaintiffs lost money or property were distinguishable because they dealt with variation in the actual composition, effects, substance or origin of the products at issue. Despite not receiving exactly what he expected, the plaintiff nevertheless received the benefit of the bargain and consequently lacked standing.

Note: many state UCL laws, as well as the FTC’s Guides, explicitly bar misrepresentations about discounts from “normal” prices, regardless of whether the ultimate price is a fair value. Why is that, if consumers receive the benefit of their bargains?

Tuesday, December 28, 2010

No certification in light cigarettes case

In re Light Cigarettes Marketing Sales Practices Litigation, --- F.Supp.2d ----, 2010 WL 4901785 (D. Me.)

Each side in this putative class action picked two jurisdictions under which to examine whether certification was appropriate, and ended up with classes of smokers of light cigarettes inCalifornia, Illinois, Maine, and the District of Columbia. The court found that common issues did not predominate and denied certification for all classes based on their consumer protection law and unjust enrichment claims.

The arguments most interesting to me concerned the idea that smokers of light cigarettes unconsciously compensate for the lightness by smoking more heavily in various ways. Because this is an unconscious response, plaintiffs argued, individual testimony about conscious decisions to smoke would be unhelpful and even misleading. Defendants countered that not every light cigarette smoker fully compensated (for example, people who never smoked regular cigarettes would have nothing to compensate for).

Eleven of 13 previous class actions on behalf of purchasers of light cigarettes failed to get certification, while two succeeded. The courts in the majority emphasized differences among smokers, including their beliefs about health risks and motivations for smoking, concluding that these individual issues defeated commonality, typicality, predominance of common issues, and superiority of class treatment.

The court found typicality, and also rejected a challenge to adequacy that the class representatives waived potentially more lucrative personal injury claims on behalf of certain absent class members. But the causes of action here allege economic injury, not physical harm; future claims for personal injury would remain available in individual cases (and likely couldn’t be treated on a class basis anyway).

The problem was predominance. The court found that the fact of damage would require an individual inquiry: how much smokers compensate when smoking light cigarettes varies, and has to be assessed individually. “If smokers did not fully compensate, they were not injured by the misrepresentations because they received lower levels of tar and nicotine.” There was also significant record evidence that many smokers didn’t believe defendants’ lower tar and nicotine claims and smoked light cigarettes for other reasons, including flavor. Given this, it was inappropriate to infer damage or reliance. Nor was it unjust for defendants to retain money from purchasers who didn’t believe their misrepresentations when purchasing, didn’t purchase because of their misrepresentations, or received the benefit promised.

California’s UCL requires class representatives to prove injury and reliance but excuses the requirement for class members. Thus, the economic harm the law is designed to prevent and redress is “deception in the marketplace.” But Article III standing limits the jurisdiction of federal courts, requiring plaintiffs to have suffered an injury in fact. Though class members ened not make individual showings of standing, federal courts can’t certify a class that contains members lacking Article III standing. “Here, the proposed classes include class members without standing. Each state's class effectively includes everyone who purchased light cigarettes in the respective limitations periods, and this group necessarily includes class members who knew light cigarettes were not healthier than other cigarettes, notwithstanding Defendants’ alleged representations to the contrary. Those class members were not injured by the Defendants' misconduct and thus do not have standing. Furthermore, in view of the proliferation of information decrying the health risks of all cigarettes, there is no telling how many potential class members are similarly situated.”

The court considered another argument: by treating purchase of a misrepresented product as injury, state legislatures have created a legal right that confers standing. Statutes may create legal rights, the invasion of which creates standing. But the state statutes at issue here “purport to excuse injury, not redefine it”—they apply whether or not any consumer is in fact misled, deceived, or damaged thereby. This is not redefining injury but eliminating it as an element. (Compare Greenwood v. Compucredit Corporation, 2010 WL 4807095 (N.D. Cal.), discussed yesterday.)

Even assuming that California (and Washington, DC) recognize an injury for having been exposed to misrepresentations, plaintiffs still needed to prove that each class member bought a misrepresented product, but they couldn’t prove that misrepresentations were made to each class member.

The court also held that the available affirmative defenses, which couldn’t be decided on a class-wide basis, weighed against certification. The statute of limitation and the voluntary payment doctrine were individual inquiries. “Certain class members may have actually known the truth about light cigarettes well before other class members reasonably should have known it,” and whether an individual class member should have known of the misrepresentation would vary by age, level of sophistication, and other specific circumstances. Individual issues surrounding damages further undermined the superiority of class certification, because class members would find it difficult to prove how many cigarettes they bought.

Plaintiff’s claim for injunctive relief barring false or misleading terms such as “light” was moot because of the 2009 Family Smoking Prevention and Tobacco Control Act, which prohibits descriptors that imply a tobacco product is "less harmful" than other tobacco products or has a "reduced level [,] ... presents a reduced exposure to[,] ... or is free of a substance" unless specifically approved by the government. This was broader than the relief plaintiffs sought.

Supplier doesn't have protectable Lanham Act interest against manufacturer

Enzymotec Ltd. v. NBTY, Inc., --- F.Supp.2d ----, 2010 WL 4959883 (E.D.N.Y.)

Enzymotec sells a raw material called phosphatidylserine (PS), and has also sold soft-gel capsules containing PS to wholesalers, distributors and retailers. NBTY is the nation’s largest manufacturer, marketer and distributor of various nutritional supplements, including Neuro-PS and store brand formulations. The principal ingredient of these is PS-20, 20% PS by weight. NBTY buys raw PS-20 that it processes into soft-gel capsules.

According to Enzymotec, it is one of four major PS suppliers, and from 2005 through 2007 it was the only supplier that could provide stable PS-20. It thus sought to become NBTY's exclusive PS-20 supplier. The parties disputed the facts relating to approximately two and a half years of negotiations. Enzymotec promoted itself by, among other things, telling NBTY that it had tested Neuro-PS and found it to have much less PS-20 than indicated on the label, at a time when NBTY was buying raw PS-20 from Lipogen. NBTY bought PS-20 from Enzymotec for a year, but also maintained a relationship with Lipogen, allegedly resulting in product on the shelves not containing stable PS.

Enzymotec sued for various contract-related claims, which I will not discuss.

The Lanham Act claim: Enzymotec alleged that NBTY violated the Lanham Act by misrepresenting the character, nature, and quality of its products when it was aware that the label on the Neuro-PS products misrepresented that they contained 100mg of PS-20, and yet continued to sell the products without disclosing the problem to its customers and recalling the product.

Enzymotec could not produce evidence of any entities that reduced their purchases of PS-20 from Enzymotec as a result of NBTY’s alleged mislabeling or otherwise show decreased sales. Its theory of harm was that it supplied raw PS to NBTY’s competitors, and, absent the misrepresentation, NBTY’s sales of Neuro-PS would have decreased, causing competitors’ sales to increase and thus causing Enzymotec’s sales of raw materials to those competitors to increase. Enzymotec argued that this was not an attentuated causal chain because it was relying specifically on the theory that NBTY should have recalled the Neuro-PS on shelves, creating a big gap in the market.

Under Famous Horse, Lanham Act standing requires (1) a reasonable interest to be protected against the alleged false advertising and (2) a reasonable basis for believing that the interest is likely to be damaged by the alleged false advertising. A reasonable interest includescommercial interests, direct pecuniary interests, and even a future potential for a commercial or competitive injury. A reasonable basis requires both likely injury and a causal nexus to the false advertising. Where the plaintiff isn’t obviously in competition with the defendant, and there’s no comparative advertising, a plaintiff must make a more substantial showing of injury and causation to satisfy prong (2).

The parties agreed that Enzymotec had a reasonable interest: it was a commercial actor with a pecuniary interest potentially affected by the false advertising. There was at least a possibility of direct competition in the sale of PS-20 to retailers, by way of Enzymotec’s sales of raw PS-20 to wholesalers and distributors who in turn directly competed with NBTY: even if the parties themselves were not in direct competition, their products were. This was directly analogous to the situation in Famous Horse. There was also some evidence that Enzymotec sold soft-gel capsules directly to retailers, thus creating direct competition.

However, Enzymotec was not entitled to a presumption of injury and causation just because it might be in direct competition with NBTY. The proof required to show injury and causation varies with the circumstances; literally false comparative advertising creates a presumption of both, as does a situation where the parties are “obviously in competition” so that even without a specific name a false ad is clearly directed towards the plaintiff’s product, such as where there are only two major players in the market. This was not that situation. “[I]t is not simply direct competition that relieves a plaintiff of the burden to present evidence of a reasonable belief of injury and causation, but direct competition coupled with a false advertising claim based on comparative advertising.”

Enzymotec didn’t provide enough evidence to raise a genuine issue of fact as to whether it had a reasonable basis to believe its interest was damaged by the alleged false labeling. Although Enzymotec might have raised an issue of fact as to whether Enzymotec's sales would have increased if the alleged mislabeling had led to a void in the market, Enzymotec failed to show “a causal link between the mislabeling and the decrease in NBTY sales that would have led to the potential increase in Enzymotec's sales.”

Enzymotec argued that it was one of four major PS-20 manufacturers, with a 30% market share, and the only one from 2005-2007 that could supply stable PS. But it didn’t provide evidence on market share or unique stability, and it didn’t provide any evidence that it would have increased sales to retailers had NBTY recalled Neuro-PS. However, the court found that, had NBTY recalled Neuro-PS, NBTY might have bought more PS from Enzymotec. Thus, there was a genuine issue of fact on whether Enzymotec would have had increased sales had there been a recall-induced void in the market.

However, a reasonable basis also requires that the injury not be speculative, which requires a causal connection between the alleged mislabeling and the potential injury. But Enzymotec couldn’t prove that NBTY’s direct competitors were injured by the mislabeling (that is, that market share would have gone to them if customers were aware of the mislabeling) or that a recall should have occurred. The only evidence in support of the former theory is an allegation that one of Enzymotec's distributors told Enzymotec that one of their customers had chosen not to purchase NBTY's product because of the low quality of PS-20, but this vague hearsay about an unnamed customer was insufficient to defeat a motion for summary judgment. Likewise, Enzymotec could not show that the recall was more than hypothetical—it couldn’t show that NBTY promised to recall the mislabeled products or that any rule or regulation required a recall.

Finally, the court was troubled that Enzymotec knowingly kept the mislabeling quiet in order to protect NBTY from losing customers, therefore protecting its future financial interest. The fact that Enzymotec deliberately chose not to act at the time undermined its claim of injury.

Monday, December 27, 2010

post-warranty TV failures can't sustain class action

In re Sony Grand WEGA KDF-E A10/A20 Series Rear Projection HDTV Television Litigation, 2010 WL 4892114 (S.D. Cal.)

The court dismissed this putative class action for failure to state a claim. Plaintiffs bought the named TVs sold in the second half of 2005 for $2500 or more. Sony marketed the televisions as offering superior picture quality to that of standard televisions and being capable of taking full advantage of HDTV programming. The express limited warranty was for one year, at which point the warranty provided that all express and implied warranties would be waived.

Some time after the warranty period ended, plaintiffs alleged, the televisions began to display anomalies, including bright blue, yellow, and green spots, stains, and haze, allegedly caused by an inherent defect in the LCD rear-projection technology. Replacing the relevant part costs $1500, and Sony refused to do so at no cost because the warranty had expired.

The court first held that the causes of action under California and other states’ consumer protection statutes failed. Plaintiffs alleged that Sony knew of the latent defect at the time of sale, but still misrepresented the quality of the TVs by claiming they were of "high," "superior," and "excellent" quality and failing to disclose the defect. These theories sounded in fraudulent concealment and fraudulent misrepresentation and had to satisfy Rule 9(b)'s heightened pleading requirements, which they did not. First, the alleged misrepresentations were nothing more than puffery. Second, even if Sony made representations related to absolute characteristics, plaintiffs didn’t sufficiently allege that the representations were untrue or misleading when made: “Plaintiffs have only alleged that the televisions stopped rendering a quality image after some unspecified period of time--but, in any event, not until after the warranty period expired. A manufacturer's failure to disclose a fact that it has no affirmative duty to disclose cannot be ‘likely to deceive’ reasonable consumers. For a statement to be deceptive or misleading, consumers must have held expectations about the matter in question. Where a manufacturer has expressly warranted a product, consumers can only expect that product to function properly for the length of the manufacturer's express warranty.”

Finally, plaintiffs failed to offer sufficiently particularized allegations showing that Sony was aware of the defect when they bought their TVs. Plaintiffs pointed to patent applications filed by Sony between 1998 and 2006, but those didn’t show knowledge of the 2005 defect. Though language from the applications discusses certain "disadvantages" of LCD technology, that language was about the state of LCD technology generally, not about defects specific to any Sony models, and it didn’t indicate any awareness on Sony’s part that the defects would manifest themselves shortly after the warranty expired. Nor was Sony’s experience with predecessor models helpful to plaintiffs, since they didn’t allege that the 2005 models used identical technology to that in predecessor models or identify specific similarities in the technology.

Plaintiffs’ claims under the Song-Beverly Act and the Magnuson-Moss Warranty Act also failed.

What about “unfair” conduct under the UCL? This requires substantial consumer injury, not outweighed by any countervailing benefits, that consumers themselves could not reasonably have avoided. The court held that failure to disclose a defect that might shorten the effective life span of a component part doesn’t constitute a "substantial injury" where the product functions as warranted throughout the term of its express warranty.

In addition, with respect to the FAL claims, plaintiffs failed to identify specific ads, when and where they were shown, or why they were untrue or misleading. This flunked both Rule 9(b) and Rule 8’s pleading requirements, failing to provide Sony with adequate notice.

Under the CLRA, meanwhile, a manufacturer's duty to disclose information related to a defect that manifests after the expiration of an express warranty is limited to issues related to product safety. Disappointed expectations of other sorts are not sufficient, because to hold otherwise would render limits on express warranties meaningless. Even though some cases speak about concealing or suppressing “material” facts, the court found that this actually meant safety-related.

The state-law claims from other states also failed because they weren’t pled with sufficient particularity.

Decertification rejected in deceptive credit card marketing case

Greenwood v. Compucredit Corporation, 2010 WL 4807095 (N.D. Cal.)

Plaintiffs sued for violations of the federal Credit Repair Organization Act (CROA) and California's Unfair Competition Law (UCL). Defendants moved to decertify the class, and the court denied the motion.

Plaintiffs alleged that Compucredit deceptively marketed a subprime credit card, the Aspire Visa (some interesting reviews here), to consumers with low or weak credit scores as a way to "rebuild your credit," "rebuild poor credit," and "improve your credit rating." The ads stated that there was "no deposit required," and that consumers would immediately receive $300 in available credit, but in fact, the issuer required a twenty dollar purchase payment to activate the card and immediately assessed numerous fees. These fees, which were hidden in fine print among other information, reduced the available funds by more than half.

The court certified the class because, among other things, the common issues in the UCL claim predominated over individualized issues, because under Tobacco II UCL claims for misrepresentation do not require that absent class members individually demonstrate reliance.

Defendants argued lack of standing, relying on Avritt v. Reliastar Life Ins. Co., 615 F.3d 1023 (8th Cir. 2010), to argue that absent class members must establish injury in fact by demonstrating reliance on the alleged misrepresentations. In Avritt, class plaintiffs alleged fraud under the California UCL due to misrepresentations in marketing an annuity product. The annuities were marketed by a sales force that included thousands of independent agents, who were not required to follow a particular sales script. The Eighth Circuit first disapproved of Tobacco II's holding that absent class members did not need to show individual reliance, because "a named plaintiff cannot represent a class of persons who lack the ability to bring suit themselves." Also, there was no predominance: because sales happened in many different ways, individual issues of reliance were key.

The court here found Avritt unpersuasive. Federal courts don’t require that each member of a class submit evidence of personal standing. Instead, the representative class members must have standing, and then the requirements of Rule 23 determine whether class treatment is appropriate. Unlike in Avritt, the class members here had by definition been exposed to defendants’ advertising, since the class was defined as California residents who were mailed a solicitation for an Aspire Visa. The marketing here was substantially more uniform than that in Avritt; though defendants argued that the marketing materials changed over time, they all allegedly contained the same or almost the same combination of deceptive features.

The court’s conclusions were “bolstered by the principle that in UCL claims for false advertising, a material misrepresentation results in a presumption, or at least an inference, of individualized reliance.” Such a presumption reinforces the conclusions that class members suffered Article III injury and that individualized issues of reliance do not overcome the predominance of common issues. Responses to interrogatories indicating various levels of information about the fees didn’t disprove predominance or reliance either, because they mostly showed that class members learned about the fees through telephone calls, not through the initial allegedly deceptive mailers, and that frequently the calls didn’t fully inform class members, who were often surprised by additional fees. “The interrogatories overall indicate that Plaintiffs consistently lacked key information about the fees, terms and conditions, and relied on the representation that the card would help improve their credit scores.” Motion for decertification rejected.

Friday, December 24, 2010

Shutting distributor out doesn't violate Lanham Act

TriState HVAC Equipment, LLP v. Big Belly Solar, Inc., --- F.Supp.2d ----, 2010 WL 4139285 (E.D. Pa.)

TriState sued Big Belly for breach of contract, breach of the implied covenant of good faith and fair dealing, tortious interference with a prospective contractual relation, unjust enrichment, and unfair competition.

The facts relevant to the Lanham Act claim: TriState was a nonexclusive distributor for Big Belly solar-powered trash compactors. Big Belly reserved the right to sell directly to key and national accounts, a list of which was supposed to be provided by Big Belly but allegedly never was. If Big Belly did involve TriState in sales to those accounts, TriState would be entitled to 25% of its normal margin. Big Belly also reserved the right not to accept, in its sole discretion, any order submitted by a distributor.

TriState targeted the City of Philadelphia, and Big Belly allegedly confirmed that it wouldn’t be pursuing the City as one of its own accounts. At some point, Big Belly started pursuing the City itself, and entered into a sole-source contract with the City. City representatives told TriState that Big Belly had informed it that the City could purchase trash compactors with the desired wireless configuration only from Big Belly, that Big Belly could give the City the best price, and that the City did not need to purchase the trash compactors through a Big Belly distributor or put the contract out for bidding by distributors.

TriState argued that these statements were false and misleading. The court granted Big Belly’s motion to dismiss the Lanham Act claims. Because Big Belly reserved the right not to accept any order placed by a distributor, and could have refused to accept TriState’s order to supply the City, its statements that the City could buy only from Big Belly were neither false nor misleading. Whether TriState could have provided the desired wireless configuration is irrelevant since Big Belly could have rejected its order regardless. Big Belly may have breached its contractual obligations, but that doesn’t implicate the Lanham Act.

I can't believe it's not pragmatics

Rosen v. Unilever United States, Inc., 2010 WL 4807100 (N.D. Cal.)

Rosen filed a putative class action under California law alleging that Unilever misrepresented the ingredients of “I Can’t Believe It’s Not Butter” by claiming on the package that it’s “Made With A Blend of Nutritious Oils,” when in fact it contains partially hydrogenated oil, which has no nutritional value and is known to cause a number of health problems.

Unilever first argued preemption by the Nutrition Labeling and Education Act ("NLEA") and the dormant commerce clause (first time I’ve seen that in a while). The product’s label states that it has "0g Trans Fat" in compliance with FDA regulations. Rosen responded that the lawsuit wasn’t attacking that statement, but the claims for nutrition and healthiness, including the “blend of nutritious oils” and other claims in ad campaigns such as a claim on Uniliver’s website that "our soft spreads are a better nutrition option than butter because they are made with a blend of nutritious oils, including canola and soybean ...."

These claims weren’t preempted by the NLEA, because they weren’t directed at the trans fat disclosure or at any other label statement regulated by the NLEA.

However, Unilever succeeded on its motion to dismiss for failure to state a claim. The court understood the gravamen of the complaint to be that Unilever’s statements were misleading because they implied that the product contains only nutritious oils. The court found this implausible.

The court took the opportunity to discuss formal logic, which seems to me inappropriate when we’re dealing with ordinary language communication, which does not follow the rules of formal logic. The court described the plaintiff’s proposed syllogism as follows: “For the representation ‘blend of nutritious oils’ to be true, all constituent oils must be nutritious. One of the constituent oils in the product [partially hydrogenated oil] is not nutritious. Therefore, the product representation is false.”

Under Iqbal, the major premise was a mere conclusion that needed to be supported by allegations of fact elsewhere in the complaint, but it wasn’t. Since the plaintiff conceded that some of the oils in the blend were nutritious, he failed to allege any facts to support the conclusion that blending nutritious and non-nutritious oils created a non-nutritious result. (Compare what should have happened in a Lanham Act case: this is an implicit falsehood case, so what if the plaintiff had alleged that a substantial number of reasonable consumers interpreted the claim to mean that all the oils in the blend were nutritious? What if the plaintiff had alleged that it had survey evidence proving this?)

Likewise, the minor premise, that partially hydrogenated oil is not nutritious, lacked supporting factual allegations, and was contrary to federal regulations defining trans fat as a “nutrient” whose quantity is required to appear on food labels, so plaintiff couldn’t truthfully allege that partially hydrogenated oil is not a nutrient. (I don’t think that’s what “nutrient” means for these purposes; there’s a difference between a regulated “nutrient” and something that is in common parlance “nutritious,” the same way that there is a difference between “organic” food and “organic” chemistry.  If I wanted to be snarky, I might suggest that the court was engaging in equivocation.)

Anyway, even if the court assumed that partially hydrogenated oil was not a nutrient, the legal theory was implausible under Iqbal, because of three logical fallacies: petitio principii (begging the question), "fallacy of composition" and the "fallacy of division."

Begging the question is assuming the conclusion one sets forth to prove. Here, plaintiff assumed that, for the representation "blend of nutritious oils" to be true, all constituent oils must be nutritious. The fallacy of composition is taking the properties of a part as indicative of the properties of the whole. But things joined together may have different properties as a whole than they do separately. It does not logically follow that, because one oil in a blend is not nutritious, the blend is not nutritious. The fallacy of division is the opposite: reasoning that what’s true of a whole must be true of its parts. “To reason that since a blend of oils is represented as being nutritious, if partially hydrogenated oil is part of the blend, it must also be nutritious commits the fallacy of division.” (Note that, to the extent that this fallacy is common and fools people, this supports rather than detracts from plaintiff’s claim: people not thinking very hard may reason that if the blend is nutritious then each component is also nutritious.)

Comment: I really want to send the court a book on pragmatics and implicature.  It may well be that the complaint should have been dismissed. But not for these reasons, and not without leave to amend (see below); a consumer reading a label is not a logician looking only for necessary entailments of the claims thereupon. Consider a hypothetical product that was a blend of nutritious oils and cyanide oil. I highly doubt any reasonable English speaker would consider the resulting product “nutritious,” or even to be made with a nutritious blend. The key questions center around whether partially hydrogenated oil is so unhealthy as to make the blend non-nutritious and whether the presence of partially hydrogenated oil is material to consumers.

The court concluded that, even assuming that plaintiff’s allegations about the nature of partially hydrogenated oil were true, the “illogical” relationships plaintiff alleged between those facts and Unilever’s representations rendered the complaint implausible on its face. Because there was no cure for the lack of logical tie, any amendment would be futile.

Thursday, December 23, 2010

Formalism run amok?

Ansel Adams Publishing Rights Trust v. PRS Media Partners, LLC, 2010 WL 4974114 (N.D. Cal.)

The Trust claims to own all Ansel Adams IP. Defendant Norsigian claims to possess 65 lost Ansel Adams negatives. The Trust disagrees that the negatives were created by Adams. The Trust sued for trademark infringement, false advertising, false endorsement, trademark dilution, and violation of the right of publicity.

Defendants argued that the false designation of origin claim was barred by Dastar, but the court held that they failed to show how Dastar applied. Defendants further argued that the Lanham Act claims were barred by nominative fair use. Because the allegation was that defendants used the plaintiff’s mark to describe defendants’ prints and posters, nominative fair use was inapplicable.

Comment: what? Okay, either this case is extremely poorly litigated or the court is extremely confused. There are two possibilities: either the negatives can properly be described as having been created by Adams, or they can’t be. In the first case, defendant wins; if we want, we can call that nominative fair use, since the only good way to explain that you have Adams prints for sale is to use Adams’ name. While this issue clearly can’t be decided on a motion to dismiss if the Trust properly pled that the negatives don’t come from Adams, the best I can figure is that the court has been confused into a formalistic distinction between descriptive and nominative fair use that is simply unhelpful when the issue involves a communicative product and a mark that is also the name of a creator.

As for false advertising, the defendants argued that the term “Ansel Adams Lost Negatives” was a noncommercial statement of opinion, since their use of the term related only to the negatives and not to their prints therefrom. But the Trust alleged that defendants claimed that the prints and posters they offer for sale are the works of Ansel Adams. This was commercial speech.

Defendants then argued that the First Amendment barred the Trust's right to publicity claim because their "use of the Ansel Adams name and likeness is related to a matter of great concern--the possible discovery of 65 glass negatives created by the iconic Ansel Adams." Under Saderup, the right of publicity may trump advertisers’ right to use celebrities’ names, but the right to comment on celebrities must be given broad scope. Transformative uses will be protected by the First Amendment, but here defendants didn’t address whether their use of Ansel Adams’ name and likeness was transformative. The Trust alleged that the use of Ansel Adams’ name and likeness was for purely commercial purposes: to market and sell prints and posters.

Comment: again, what on earth is going on? If these are Ansel Adams negatives, then there is no right of publicity violation, whether one invokes the First Amendment’s protection for truthful commercial speech or simply the extremely intuitive proposition that a celebrity (or his/her estate) has no right to suppress association of his or her name with something that he or she actually made. Transformativeness is beside the point; it would matter if somebody else had created a work about/depicting the celebrity. Indeed, arguably it's more transformative to attach Ansel Adams' name to something he didn't make than something he did; there's certainly more new meaning and message to the former, as many an appropriation artist could testify.

Again: a motion to dismiss should be denied if it is properly pled that these aren't Ansel Adams negatives.  But that's the only issue, and the fact that the case law apparently led the court to think that anything else mattered is evidence that our trademark and right of publicity doctrines have lost all connection to common sense.  

Belated notes: Wharton Colloquium on Media & Communications Law

Wharton Colloquium on Media and Communications Law (papers available at link; due to a hilarious series of barriers and unforced errors, I only attended the Saturday session)

Christopher Yoo, The Federal Takeover of the U.S. Telephone System During World War I

He wants to use the history of the WWI takeover to change our understanding of how telecom developed in the US—for example, time of day pricing came out of the period of government control. Bell System’s financial history: 1895—earnings went into freefall with competition. 1913-1918—not a huge recovery, despite reconsolidation; revenues take off with the gov’t takeover, and a bunch of mergers that the takeover allowed/encouraged because the gov’t believed in common ownership.

Economies of scale: true with mechanical switching, not switchboard operators, who don’t scale; mechanical switching only came into use in the 1920s, but the consolidation was before then. There were problems of switching, of trunk lines, and signaling: there was no way to tell when someone was done with a call other than the operator monitoring the line. Thus increased connections increased the burden nonlinearly. Traditional economies of scale justification for reconsolidation is probably false.

Network effects: there’s never been a proper study of the independent telephone industry. The independents were not like Bell, only smaller; didn’t use long distance tech, but attached adjacent exchanges, but tech may have been much better. In Muncie, AT&T can give you Chicago, but the independents could give you Fort Wayne, which was more important to most callers. Independents had much more density in Midwest; would have expected network effects to work in their favor. Didn’t want to interconnect with the Bell system. They were racing to own the market. Unclaimed customers existed—wanted to outbuild, not interconnect, to force a choice by the customer they were racing to claim.

Independents had integrated systems, and 50% market share in 1907. By 1913 it was 45%. Bell was not a monolith then (when gov’t began monopoly oversight). Some argued that the government didn’t enforce antitrust enough, but there was no real consolidation until WWI. Bell cut way back on acquisitions 1912-1918, so Yoo thinks gov’t signals worked to slow consolidation. Independents started to want Bell deals because they were at the end of greenfields, undeveloped markets and entering a period of expensive intensive competition to get revenue from existing customers. He thinks this is an untold part of the story affecting gov’t regulators.

Primary driver for reconsolidation was the federal gov’t: didn’t want duplication, instead postalization. Very different story.

Universal service: Some say this is a post hoc rationalization for consolidation. Yoo’s contrary conclusion: there is cross subsidy from urban to rural areas; uniform pricing can be discriminatory if costs vary. Rate averaging was a tradition in the postal system as a conscious policy; Ulysses Grant used it as a reason for gov’t ownership of telegraph systems. WWI gov’t policy: keep rates low (that didn’t happen) and extend service; made rates uniform as a cross-subsidy.

Lessons: why did they give it back? They couldn’t afford it. Needed to raise capital to upgrade the equipment. Gov’ts need to finance out of acquisitions, not risk capital. Didn’t have institutional apparatus to run it, so kept all the industry people in place. When does gov’t ownership work best? Gov’ts have trouble raising capital, so if there’s dynamic tech change that may not work well, just as people argue that incumbents don’t like to explore tech.

Marsden: this is a very temporary, short period of gov’t control: was there really any battle over returning to private ownership? Also, compare the Civil War control of the telegraph system as a useful benchmark.

Yoo: Other interesting stuff was happening in WWI Europe; French telephone system sucked so they had to build their own systems.

Susan Crawford: Gov’t ownership may be a straw man: Teddy Roosevelt’s position—what we need is supervision. TR says: I don’t mind big companies as long as they’re not acting like the government.

Yoo: AT&T sought the middle ground of regulation. Progressives disagreed vehemently about this—e.g., Bob LaFollette; by 1924 his platform squarely endorses gov’t ownership, where in the early 1900s he had been more regulatory. Progressives struggled with scientific management, wanting centralized control.

Crawford: there was a lot of unhappiness with the service being provided. Discuss how that factored in.

Yoo: primary complaint—rates. Some complaints about service, but really it was that the rates were too high. Comparing per capita development in Europe/US, hugely favored the US. The fight was about rates versus coverage.

Christoper Marsden, Internet Co-Regulation: Towards a Theory of Constitutionalism

His paper focuses on the European approach to coregulation; needs more on the US. His book is about European content regulation of the internet. Mandatory filtering and other troubling developments are on the horizon. Human rights principles from European law are being used by big telecom companies to strike down recent UK regulation, railroaded through just before an election, which provides for stringent and nonjudicial remedies against those accused of unlawful downloading. Judicial review is pending.

Wikileaks: attempts to take down Wikileaks are a classic case study of private censorship—we don’t know if they broke any laws; haven’t been charged; yet things are happening with Mastercard, Paypal, Amazon’s cloud service, denying them access. Claim is that this is purely private, not a result of government pressure, but commercial decisions. He says this offends natural justice.

European system: coregulation, which at least appears to have formal intervention by government which can be reviewed, though this is mostly untested in terms of judicial review. Mostly a no-go in the US because of antitrust. US government doesn’t use carrots to control private behavior; Europe uses carrots as well as sticks. Blocking lists proposed in the UK: he thinks this is a terrible idea because the lists are badly constructed; it’s an ineffective alternative to going after the sites themselves—we could chase them as we do with phishing sites; it violates freedom of expression. Other countries have much cruder blocking in place, and other countries don’t; possibility of 27 different systems of blocking.

Soft law: solutions without statutory authority, a lot more in Europe than in US. European Commission has legislative initiative, and strong soft powers/industry liaison. Powers of patronage. EC can also issue Recommendations advising industry, such as 1998 recommendation Rec[98]460 on protection of minors and human dignity: detailed code of conduct for ISPs, updated 2006; forerunner to Ecommerce Directive. European Parliament/Council is highly critical because these are unilateral, nondemocratic, unaccountable.

EC likes to give out carrots, more than sticks. Companies need gov’t approval to avoid regulation. They’re generally happy to cooperate, even if it’s formally self-regulation.

What is civil society’s role? More than just industry is concerned with internet regulation. Legitimacy requires participation: when the European Commission carries on about ICANN, it’s doing its job.

Smarter self-regulation: Europe allows far closer relations between government and business than US on things like web blocking. In the US, there’d be First Amendment and antitrust barriers to getting dominant ISPs together to agree on how to treat speech.

EC now requires all large social networking sites to report on how they’re contributing to privacy and fundamental human rights of their users. Not a legal requirement, but a practical one. FB: do they need an “abuse” button on every page of their site to allow people to report cyberbullying, as Bebo had? (Drowned the Irish police in reports; they ended up forwarding the complaints to the schools, because most complaints were about kids bullying other kids; which also has privacy implications.) FB said “get lost,” and won.

We are moving towards formally recognized co-regulation, with statutory authority to step in where it doesn’t work. EC doesn’t prioritize innovation, think the technology is mature; many European politicians just hate the internet.

My comments: Maybe the US is just more corrupt—we don’t give carrots for behavior, we just give money to our private sector. This is why my assumption is that the gov’t is rarely in the driver’s seat in these partnerships.

As a theoretical matter, does co-regulation have to come from the executive/legislative branches? In other words, could we consider Google as co-regulator because of its relation to the judicial system? The paper’s model seems to suggest that government approval/threat of sanctions comes under the heading of co-regulation, which could encompass judicial approval/threat, but Marsden also suggested that the threat of gov’t takeover is the primary sanction, which wouldn’t fit the judicial model. Google and eBay (and Facebook and Twitter) appear to be privatizing TM law as well as copyright, perhaps more so in the US than in Europe. Judicial deference in US and Europe seems to be emerging (possibly could compare judicial concept of good faith in an intermediary as it affects secondary liability to other forms of government deference to industry consensus/rules).

Marsden: his concept is based on legislative power. The soft law aspects are not based on legislation, but they come from a body that has the power to make legislation if it’s ignored.

The closer the issue comes to national security/terrorism, the more the power shifts to the state, and the more nervous the firms get about working with the gov’t, because in those instances the gov’t has no interest in cost-benefit analysis or market barriers or anything else of concern to the private sector.

Andrea Matwyshyn, (Techno)Essentializing Breach

Paper is about whether there’s something special about breaches of contract that involve technology. Courts have increasingly accepted arguments that essentialize the impact of networks and computers on the contract itself. She disagrees. Focusing on the role of the computer is focusing on a salient but ultimately irrelevant characteristic from the standpoint of contract.

Ad: “terrorism: if you suspect it report it,” with pictures of cameras, computers, phones, luggage, and vans. Penn Gillette’s response, using the same pictures: “average people doing nothing wrong, leave them alone.” Tech is everywhere; is it special? Congress passed CFAA based in part about a freakout over the movie WarGames. (Talk about a moral panic.) Now, Microsoft sponsors the HacKid Conference, for kids who like to hack—hacking is a term that is not just a threat.

Some courts have accepted that breach of contract constitutes invalidation of authorization for purposes of the CFAA, making the access unauthorized and thus violative of the CFAA, potentially criminally so.

Crawford: point is it’s inappropriate to leverage breach of contract into a criminal violation. But that relies a lot on contract, and yet there’s so much academic and other questioning of the legitimacy of mass market contracts—should they be binding? These aren’t real contracts in the traditional sense; should we be treating them with the sanctity of contract?

Matwyshyn: To the extent that the harm that arises isn’t contemplated by the contract, there may be a CFAA claim, but it shouldn’t be based on breach of contract.

Crawford: but privity as a reason to cabin harms strikes her as odd.

Brett Frischmann: An act that constitutes breach could also constitute copyright infringement; so why couldn’t an act that constitutes breach also violate some other law like the CFAA? Do you want to push people into engaging in contracts more, or do you want to provide incentives for people to not engage in contracts for better protection under CFAA?

Matwyshyn: wants to push towards contract. The types of harms pushed into CFAA are harms that money can fix. To the extent that there’s some other category of equitable harm that isn’t covered by the contract, we might have a CFAA argument, but in general there are other regimes with other remedies. If there’s recourse for the harm, we’re not trying to fix the harm any more when we apply the CFAA.

My comment: (I agree with Crawford’s point re: being careful not to suggest that these contracts are or should be legitimate or even enforceable on all their terms under contract law.) I am not sure that the focus on hacking in the paper is warranted: if the basic claim is that a breach of contract isn’t enough to violate the CFAA, then you might need further emphasis on the point that it rarely takes hacking of any kind to breach a contract. The case of Lori Drew’s criminal prosecution for misstating biographical data on her profile didn’t involve hacking of any flavor; even if the legislative target was all hacking, the construction of the CFAA that encompasses pure breach would be a mistake.

Christian Sandvig: interested in paper’s discussion of developmental reasons to use tech. New tech always creates freakout about social status/kids (telephone: some people worried that a white person might talk to a black person and not know it!). Moral panic/technological essentialism—talk more about that.

Matwyshyn: Paul Ohm’s myth of the superuser also fits in: the devil of our time. There’s a psychology behind it: people trying to make sense of change and focusing on the salient aspects even if they’re not that important.

Today's false endorsement problem

This product is available at Barnes & Noble.  While it doesn't use any US Army insignia, protected by special provisions of the law, isn't there still a possible false endorsement claim? (Compare the trade dress of this US Army webpage.)  Or perhaps it is authorized, though it doesn't say so.

HT: Zachary Schrag

Wednesday, December 22, 2010

Indian Arts & Craft Act predictably survives constitutional challenge

Native American Arts, Inc. v. Contract Specialties, Inc., --- F.Supp.2d ----, 2010 WL 4823688 (D.R.I.)

Plaintiff NAA is a wholly Indian-owned organization that sells Indian arts and crafts. Defendant Specialties also sells arts and crafts. NAA sued Specialties for violations of the Indian Arts and Crafts Act of 1990 and the Indian Arts and Crafts Enforcement Act of 2000 (collectively IACA), which forbid the offer or sale of a good in a manner that falsely suggests it is an Indian-made product. The complaint alleged that Specialties falsely suggested that its products were Indian-made by advertising them using the label "Indian" and names of tribes such as "Apache," "Navajo," "Kiowa," and "Cree," without qualifiers or disclaimers.

The complaint alleged that NAA and Specialties compete to sell similar products made in an Indian style, NAA’s authentic and Specialties’ fake, so that NAA suffered competitive injury in the form of lost sales, lowered prices, and damage to goodwill and reputation.

Specialties argued that NAA lacked standing. IACA was specifically amended to allow Indian arts and crafts organizations to sue on their own behalf, but Specialties argued that NAA could not demonstrate injury in fact (an "invasion of a legally protected interest" that is both "concrete and particularized" and "actual or imminent, not conjectural or hypothetical”). Specialties argued that it didn’t sell its “Indian” products in Illinois, NAA’s principal place of business, and that NAA had no employees, business locations, or other property in Rhode Island, Specialties’ principal place of business. NAA countered that the parties compete nationwide, but Specialties argued that the fact that both parties have some customers in the various states was insufficient. It argued that IACA should be interpreted similarlty to the Lanham Act, thus requiring inquiry into the parties’ areas of marketing, distribution, and concurrent use to determine actual competition.

The court took the challenge seriously: “It would be an alarming prospect if anyone who has had some sales, no matter how few (or perhaps even a single sale), of authentic Indian products in the United States could recover millions of dollars of statutory damages from any seller of fake Indian products in the nation--especially since such damages may significantly exceed a defendant's gross revenues for the period in question.” But holding that NAA had standing was not the same as holding that it was entitled to win and recover. At the motion to dismiss stage, it was enough for NAA to allege that it sells similar products and that its sales and reputation had been harmed by Specialties’ false labeling. Specialties’ concerns could be addressed on summary judgment, where NAA might well need to provide good evidence of competition, given Specialties’ distance from Illinois.

Specialties then argued that NAA was required to plead with particularity under Rule 9(b). However, the cause of action was one for misrepresentation, which does not require fraud or mistake or have any scienter requirement. The court specifically commented that cases applying Rule 9(b), after recognizing that IACA was a strict liability statute, seemed misguided. NAA's allegations that Specialties passed off certain specified non-Indian products as Indian by, among other things, describing them as "Indian," "Navajo," and "Apache" was sufficient to provide the required short and plain statement of the claim, and would be sufficient even if Rule 9(b) applied.

Specialties next invoked the First Amendment. The cause of action exists against a person who offers or sells a good in a manner that falsely suggests it is an "Indian product." The meaning of "Indian product" is determined by regulations promulgated by the Secretary of the Interior. The pertinent regulation provides, "[t]he term 'Indian product' means any art or craft product made by an Indian," with illustrations stating that the term "includes, but is not limited to ... Art made by an Indian that is in a traditional or non-traditional style or medium."

Specialties contended that the law thus permitted criminal liability simply for creating artwork in a traditional or non-traditional Indian style or medium, which is too vague given that artistic expression is protected by the First Amendment. This was wrong. The regulation did not say that every product made in a traditional or non-traditional style or medium was, or was represented to be, an Indian product. In fact, the regulation specifically stated that "[a]n 'Indian product' under the Act does not include ... [a] product in the style of an Indian art or craft product made by non-Indian labor." IACA regulates marketing, not artistic qualities.

Next, Specialties argued that IACA was unconstitutionally race-conscious legislation because it "grants Native Americans a right not enjoyed by other Americans, that is, a right to the protection of a special ethnic-based trademark for its style of goods that is not available to any other race or ethnicity." However, Supreme Court precedent establishes that laws dealing with Indians will not be disturbed "[a]s long as the special treatment can be tied rationally to the fulfillment of Congress' unique obligation toward the Indians." IACA survived rational basis review: Congress was acting to stem the heavy flow of counterfeit Indian products.

There was one potentially colorable equal protection argument: that instead of providing for a private right of action for aggrieved Indians only, the IACA should have extended a private right of action to all persons aggrieved by its violation. However, since this argument would hurt rather than help Specialties, the alleged violator, Specialties lacked standing to raise such a claim. (Presumably local vendors of properly-marked Indian-style but non-Indian art would have the requisite standing.)

The final issue was damages. IACA allows a prevailing plaintiff to elect either the greater of treble damages or "not less than $1,000 for each day on which the offer or display for sale or sale continues." Specialties argued that this language permitted a damages floor of $1,000 per day, regardless of the number of violative product types sold, while NAA argued that each product type justified a separate award. Specialties also made a “throwaway” argument that either way, the damages provision violated due process, which the court rejected mainly because the BMW v. Gore and Exxon v. Baker cases concerned jury awards of punitive damages. The statutory interpretation dispute was premature, even if it was safe to assume that NAA would elect the second method of calculation, because there was still summary judgment and trial ahead.

Jessica Litman was right, part eleven million

This month’s Self magazine illustrates how incomprehensible copyright law is to ordinary people, including those in a position to give information to lots of other people. The story says, “If isn’t giving you what you want, here’s your backup.” (a link provider and popup ad nightmare), (link provider, with prominence given to authorized sites like Hulu), and (streaming video; no contact information, including no DMCA information, and text suggesting that the author’s primary language is not English) do not appear to me to be the sites that the copyright owners would prefer you use, to put it lightly. Self says FastPass offers “every episode from the current season of shows like True Blood, often as soon as the night the show airs,” while SurfTheChannel “allows you to watch about 90 minutes before shutting you out” (I infer that this is because the writer of the story followed links to Megavideo, which behaves in this way for nonpaying customers), and “may claim that the site is hosting last night’s episode, but many shows are missing the most recent two seasons.”

Tell me again: what’s a red flag for infringement?  Also, what's Self's exposure here?

Tuesday, December 21, 2010

Different active ingredients, but pharmaceutically equivalent?

Pamlab L.L.C. v. Seton Pharmaceuticals, LLC, 2010 WL 4983170 (S.D.N.Y.)

Plaintiffs sought to stop certain claims by Seton about its drug Cavan-X. Under license from patentee-plaintiff Metabolite (the patent is for a composition treating, preventing, or reducing elevated metabolic levels), Pamlab markets Foltx, a medical food with 2 mg. of vitamin B12, 25 mg. of vitamin B6, and 2.5 mg. of folic acid (aka Folacin). Sublicensee-plaintiff Breckenridge markets Folbic as an "authorized generic" for Foltx. Folbic contains the same three active ingredients.

Defendant makes Cavan-X, which has the same amounts of vitamins B12 and B6, but 2.5 mg of folinic acid instead of folic acid. All three are prescription medical foods intended for people under treatment for hyperhomocysteinemia, a medical condition that increases the risk of artery disease.

Cavan-X’s initial label, until November 2010, didn’t use the term “folinic acid.” Instead, it listed the third active ingredient as Vitamin B9, followed by a footnote: "Vitamin B9 is a class of folates that includes folic acid and other vitamers-such as reduced folates." The revised label says: "Vitamin B9 is a class of folates that includes folic acid and reduced folates such as folinic acid."

Other relevant facts: pharmacists often consult one of two standard databases, First DataBank or Medi-Span, to find out whether there is one or more generic product that is pharmaceutically equivalent to a brand product. Generic manufacturers seeking substitution for brand name drugs inform database compilers on “new submission forms” that their generic products are “similar to” a particular brand and state the active ingredients. The list of active ingredients allows the compiler to figure out whether the generic is pharmaceutically equivalent to the brand name product: whether it has the same active ingredients in the same amounts. Compilers rely on generic manufacturers for this information. Products that are pharmaceutically equivalent are linked to one another in the databases.

In September 2010, defendant Seton submitted a new product submission form for Cavan-X, stating that the product was “similar to” Foltx, and that the ingredients were stated on the label. Medi-Span linked Cavan-X to Foltx and Folbic, and erroneously listed “folic acid” as Cavan-X’s third ingredient. Mid-November, Seton revised the label and communicated the revision to the two databases in these terms: "the Cavan-X label is being revised to state that vitamin B9 in Cavan-X is in the form of folinic acid. Ingested folic acid is metabolized into folinic acid." Medi-Span responded, "We have had a clinical team review this and it appears to be correct in our drug databases file."

In October, Plaintiffs moved for a TRO on patent infringement and Lanham Act grounds, which the court converted to a motion for a preliminary injunction. Plaintiffs then withdrew the request for injunctive relief on the patent claim because they had learned for the first time that Cavan-X didn’t have the same active ingredients. However, they proceeded with Lanham Act claims based on (1) misrepresentation of Cavan-X’s active ingredients on the label, and (2) an expiration date on the label not supported by adequate stability testing.

Falsity: plaintiffs argued that by failing to identify folinic acid as an ingredient, Seton made false statements about the active ingredients, as shown by Medi-Span’s treatment of Cavan-X. Plaintiffs also argued that vitamin B9 is folic acid, not folinic acid, while Seton argued that vitamin B9 includes folates, a family that includes both acids.

The court found that, though reference to folic acid might cause consumers to believe that Cavan-X contains folic acid, the label was not literally false to use the group label “vitamin B9” or “folates” to describe a specific member of that group. (But the initial label went further than using the group label—it then specified a member that was not an active ingredient; that seems like a good case for necessary implication.) The parties agreed that “folates” are a group of chemical compounds, including both acids. Moreover, for three of their own products, plaintiffs themselves designate "folate" as an active ingredient. The court found that, according to plaintiffs’ own expert, “vitamin B9” is used to refer to folates, not just folic acid.

In an evident caution to defendants, the court noted that Seton “could easily have properly identified the third active ingredient in Cavan-X as folinic acid. It appears that there was no reason for Defendant not to identify it as folinic acid, other than Defendant's desire to bolster its claim that Cavan-X is ‘similar to’--and thus should be ‘linked to’--Plaintiffs' products.” The footnote found that, for certain populations, the two acids have different impacts on the body, and “there remains more to be learned regarding possible differences between the two compounds.” Thus, a treating physician “would likely prefer to know that, when he/she prescribes either folic acid or folinic acid to a particular patient, the prescription will be filled as written,” and would likely expect to be able to rely on databases to state products’ specific ingredients. However, the Lanham Act does not require that level of specificity (at least, apparently, without proof of deception). This was not false by necessary implication, because “vitamin B9” and “folates” are ambiguous group labels susceptible to more than one reasonable interpretation.

The revised label now includes references to folinic acid and folic acid. Medi-Span will still apparently link Cavan-X to Foltx and Folbic. This makes the revised label less ambiguous than the original label.

Expiration date: Plaintiffs argued that the expiration date was an establishment claim indicating that sufficient stability data existed to support that date, even though the label says nothing about what kind of testing was performed. Seton argued that it relied on stability testing done on products similar to Cavan-X, and that it had begun accelerated and real time stability testing to verify the two-year expiration date, but it didn’t provide results to the court. Plaintiffs argued that performing stability testing on similar, but not identical, products didn’t meet the industry standard, and that results from the first two monts of Seton’s 3-month accelerated stability testing showed significant degradation, undermining its claim.

There is no FDA or other requirement that Cavan-X include an expiration date, but if one is included on a product like Cavan-X, then scientific justification using experimental data is required: that is, this is inherently an establishment claim.

Plaintiffs’ experts testified that industry practice rejects relying on stability data from “similar” products that don’t have the same active ingredients. Defendant’s expert witness, chief scientific officer for the company manufacturing Cavan-X for defendant, testified that she often used stability testing for similar products for an expiration date on a new product. The court found none of the experts experienced broadly enough to give dispositive testimony. With respect to expiration date testing for dietary supplements, the FDA found that views on the subject were far from uniform. Thus, plaintiffs failed to meet their burden of showing that the testing done was insufficient to support the expiration date given.

The court also rejected reliance on the first two months of accelerated stability testing, about which there was strong disagreement in any event. If the case proceeded to trial, more information might be available. Preliminary injunction denied.

Multimillion-dollar defamation verdict despite failed false attribution claim

Previous discussion of Profs. Rudovksy and Sosnov's case against West here.  According to this news report, plaintiffs received $3.4 million each for a misattributed pocket part, including punitive damages.

Monday, December 20, 2010

Creativity and timeframe

As legal scholars turn their attention to the nuts and bolts of creativity, I've seen a couple of people discuss creativity as process v. product and the related question of when creativity happens--flash of genius or organic evolution, or both and neither?  Here's an anecdote of possible relevance:
[Moon River, from Breakfast at Tiffany's,] was one of the toughest I have ever had to write. It took me a month to think it through.  What kind of song would this girl sing? What kind of melody was required? Should it be a jazz-flavored ballad? Would it be a blues?  One night at home, I was relaxing after dinner. I went out to my studio off the garage, sat down at the piano ..., and all of a sudden I played the first three notes of a tune.  It sounded attractive. ... It came quickly. It had taken me one month and half an hour to write that melody.
 Henry Mancini, Did They Mention the Music? (1989) (excerpt) in The Hollywood Film Music Reader, ed. Mervyn Cooke (2010)

Wednesday, December 15, 2010

Blizzard v. MDY question

MDY Industries, LLC v. Blizzard Entertainment, Inc., No. 09-15932 (9th Cir. 2010)

Other people will have plenty to say about this DMCA decision. What I am interested in is a small point about the tension between the court’s copyright/contract ruling and its DMCA reasoning. A licensee’s violation of the ToS generally doesn’t lead to infringement, the court ruled, unless the violation is also itself a violation of copyright law (this is oversimplification, but go with me); the result is that the plaintiff’s remedy in such an instance is in contract, not in copyright. The court made an “arguabl[e]” exception where breach of contract would constitute copyright infringement for “continuing to use the licensed work while failing to make required payments, even though a failure to make payments otherwise lacks a nexus to the licensor’s exclusive statutory rights,” because payment is sui generis.

Okay, then. But this conclusion takes at least one leg out of the panel’s reasoning that a DMCA violation needs no nexus to copyright infringement. According to the panel, the legislative history makes clear that no relationship to copyright infringement is necessary for a DMCA violation, because “[i]n § 1201(a), Congress was particularly concerned with encouraging copyright owners to make their works available in digital formats such as ‘on-demand’ or ‘pay-per-view,’ which allow consumers effectively to ‘borrow’ a copy of the work for a limited time or a limited number of uses.” But, given the court’s ruling in the previous section, isn’t it the case that a customer who circumvented access controls to avoid a payment requirement would be engaged in copyright infringement, thus creating a one-to-one nexus (more than the Chamberlain court required)?

Monday, December 13, 2010

Review: Richard Stim, Getting Permission

Richard Stim, Getting Permission: How to License & Clear Copyrighted Materials Online & Off: Free LibraryThing Early Reviewer book. I have some pretty detailed nits to pick with this book—most of them down to insufficient updating so that cases that were reversed are listed as good law—but I should emphasize that when it comes to books like this, I’m Mikey: I don’t like anything! That said, I thought this was a good practical overview, with a lot of useful forms, and introduced the concepts with a really pragmatic focus on risk management rather than the “always get permission” nonsense that no one who wants to get anything done ever does. In fact, I’d say that an “always get permission” ideology gets you in more trouble overall because when it is, inevitably, ignored, the people doing the ignoring often don’t know how to identify the real risks. Unfortunately, the book slips later into “it’s better just to get permission,” but I’d still recommend it for someone who needs to deal with disseminating material, whether informational or advertising, on behalf of an organization or business and doesn’t have a copyright background.

The trademark section and the discussion of linking are where the discussion tilts too heavily towards asking permission or just not mentioning the TM/not linking, especially with the latter. Stim recommends entering into “linking agreements” to avoid uncertainty, which is a rare triumph of legalism over common sense in the book. If you’re an Amazon Seller, follow Amazon’s policies with respect to linking, but taking that as a general rule for all types of online activity is just … odd.

On the law: Stim appears to endorse music publishers’ claim they’re entitled to double-dip on reproduction and performance rights from internet streaming and downloading, without mentioning that both the Copyright Office and the courts to have considered the publishers’ argument have rejected it. There’s a weird failure to update some cases—the printing is current enough to include the Harry Potter Lexicon case and the (now reversed) Salinger/60 Years Later district court opinion, but it discusses the district court opinion in Perfect 10 v. Google (reversed 2007) and the district court opinion in Hoffman v. Capital Cities (reversed 2001) as stating the respective outcomes. Stim wrongly says that the FCC bars product placement in made-for-TV-programming. He also says that one needs to negotiate for public performance rights to incorporate music into merchandise (e.g., a card that plays a tune on a MIDI chip), which seems as incorrect to me as saying that one must negotiate for public performance rights to produce music embodied in a CD. That all said, the book still strikes me as an immensely useful resource for the nonexpert who will be making small but commercial uses of existing works.

Misleading fruit vignettes

This morning, my husband asked me, "Are there any blackberries in this yogurt?"  The ingredient list didn't say so, though "natural flavors" were listed before carrot juice, but the picture on the front features pomegranates, strawberries, and blackberries.  If the amount of blackberry juice is so low that it can't be put on the label, then isn't the vignette misleading?  For earlier discussion, see here.

Thursday, December 09, 2010

New TM filing

Viacom is applying to register this mark for Comedy Central's entertainment/television broadcasting services.  Review question: how to analyze this in light of the existence of the common (c) symbol, as well as the Creative Commons symbol?  Also, it's an ITU--appropriate?

HT: Gena Feist.

ABA Consumer Protection Law Conference

Website here Feb. 3, 2011, at the George Washington University (Social Media Building), here in Washington D.C.

Speakers this year include:

§ FTC Commissioners Julie Brill, Edith Ramirez, and J. Thomas Rosch

§ Canada Privacy Commissioner Jennifer Stoddart

§ Tony West, Assistant Attorney General, DOJ

§ David Vladeck, Director, Bureau of Consumer Protection, FTC

§ Joel Winston, Associate Director, Division of Financial Practices, FTC

§ Sarah Mathias, Associate General Counsel, FTC

Also representatives from the California and Texas Attorneys General Offices, the National Advertising Division, the Center for Democracy & Technology, Electronic Frontier Foundation, the American Bankers Association, among others.

The speakers will address what to expect in 2011 in consumer protection enforcement; new advertising substantiation rules; new and evolving privacy law; the expanding scope of third party liability in the CP realm; ethical considerations relating to social media in investigations and litigation; and new strategies in private advertising litigation challenges. There's also a welcome reception the evening before.

The full program brochure and registration information are available on the ABA's website here. The significant discount for early bird registration ends in early January. (Note that there is also a significant discount for academics, and there are still a few free spots for law students if they register quickly).