Thursday, May 30, 2013

USDA approval of chicken soup doesn't preempt all claims against product line

Krzykwa v. Campbell Soup Co., --- F. Supp. 2d ----, 2013 WL 2319330 (S.D. Fla.)

Krzykwa sued Campbell’s for labeling vegetable soups containing genetically modified corn as “all natural.”  He alleged that the soups contain GMOs, “plants whose genetic makeup has been altered through biotechnology to exhibit characteristics that would not otherwise occur in nature,” which poses distinct risks from natural plant breeding and may risk harm to consumers’ health.  He alleged that he relied on the ads and the label, and that he wouldn’t have bought the soups if he’d known they contained GMOs and weren’t “100% Natural.”  He also alleged that he paid a substantial premium compared to soups not labeled “100% Natural.”  He brought claims for false and misleading advertising in violation the Florida Deceptive and Unfair Trade Practices Act (FDUTPA) and unjust enrichment.

Campbell argued that the claims were preempted, subject to the primary jurisdiction doctrine, and protected by Florida’s safe harbor doctrine because Campbell complied with federal law.  Krzykwa responded that he was merely attempting to apply standards identical to those of federal law.

Campbell contended that the Department of Agriculture preapproved the “100% Natural” statement on two cans from the 100% Natural Soups line that contained the same GMO ingredients, so the USDA inspection’s preemptive effect extended to all such products.  See Meaunrit v. ConAgra Foods Inc., No. C 09–02220 CRB, 2010 WL 2867393 (N.D. Cal. July 20, 2010) (“Because the [USDA] pre-approval process includes a determination of whether the labeling is false and misleading, and the gravamen of Plaintiff's attack on the label concerns whether [the heating instructions] are accurate, the plaintiff's state causes of action are preempted by federal law.”). In addition, Campbell argued that although the FDA rather than the USDA regulates the vegetable soups at issue (because they don’t contain chicken or beef), the two agencies have similar policies about the “natural” label.  Thus, this claim created an issue of first impression that couldn’t be resolved by a court.

The court disagreed.  “From a purely logical standpoint … , if the Court adopted Campbell's position, the Court finds that there would be no authentic reason to not also necessarily take the position that because the USDA approved two Campbell poultry meat soups not at issue in this case that no claims can be made in any case against any defendant that it is misleading to using label a food product containing GMO corn as ‘100% Natural.’”  In any event, it didn’t necessarily follow that the USDA’s approval of the chicken soup label was binding on every other federal agency.  “We do not even know whether, when reviewing the label for whether it was ‘misleading,’ the USDA even knew that the soup contained GMO corn, particularly as there is nothing on the soup label to so indicate.”  There was no preemption.

The court also declined to dismiss the case under the primary jurisdiction doctrine.  Campbell argued that the FDA has said no “special labeling” is required when bioengineered ingredients are used in foods.  Just because disclosure isn’t required, that doesn’t make all labeling of GMO foods nonmisleading.  And the FDA has repeatedly declined to define “natural” through formal rulemaking, meaning that dismissal would serve no purpose.

Of course, this also meant that the safe harbor defense didn’t preclude the claims as a matter of law.

The court also declined to dismiss the unjust enrichment claim, which was properly pled in the alternative to the FDUTPA claim.

EZ Seed has rough time in court

In re Scotts EZ Seed Litigation, 2013 WL 2303727 (S.D.N.Y.)

Plaintiffs sued Scotts, Lowe’s, and Home Depot, alleging that Scotts EZ Seed, made by Scotts and sold at Lowe's and Home Depot stores, doesn’t grow grass as advertised.  EZ Seed is a “combination mulch-grass seed product” labeled as growing grass “50% thicker with half the water” compared to “ordinary seed.”  Other label claims: “WaterSmart”; “Grows Anywhere! Guaranteed”; “Makes the Most Of Every Drop”; “Grows in Tough Conditions! Guaranteed!”; “Drought tolerant”; “[t]he revolutionary seeding mix that takes care of the seed for you, so you can grow thick, beautiful grass ANYWHERE,” including “Dry, sunny areas,” “Dense shade,” and “Even grows on pavement!”; and “premium quality … developed to thrive in virtually every condition—harsh sun, dense shade, and even spreads to repair wear and tear. The result—thicker, beautiful, long lasting grass!”

There was also a graphic purporting to show EZ Seed outperforming ordinary seed, labeled “50% THICKER WITH HALF THE WATER††.” Below the pictures were disclosures: “††Results 32 days after planting; each watered at half the recommended rate for ordinary seed. Results may vary. *Subject to proper care.”

Scotts also offers a “No Quibble Guarantee,” which provides: “If for any reason you, the consumer, are not satisfied after using this product, you are entitled to get your money back. Simply send us the original evidence of purchase and we will mail you a refund check promptly.” 

Home Depot and Lowe’s allegedly used in-store displays containing the same statements and reviewed and approved false and misleading materials for EZ Seed, including ads that bore their respective names/marks.

The plaintiffs, who each resided in New York or California, alleged that they bought EZ Seed in reliance on these representations and that it failed to perform as promised.  They cited studies by “the largest turfgrass development institution in North America” that suggested that EZ Seed failed to grow any grass when given half the amount of water recommended for ordinary seed over a thirty-two day period. One plaintiff sought a refund for four canisters, but Scotts only refunded the purchase price of two canisters.  Plaintiffs sued for violations of the Magnuson-Moss Warranty Act (MMWA), breach of warranty, California’s CLRA, UCL, and FAL, and NY GBL §§ 349 & 350, and related common-law claims.

Plaintiffs argued that the various statements on EZ Seed’s label and ads were written warranties under the MMWA because they promised that EZ seed would “meet a specific level of performance over a specified period of time,” as stated in the statutory definition.  They also alleged that the No Quibble guaranty was a promise to refund under the MMWA. 

The court found that some statements arguably promised a specific level of performance, such as “50% thicker with half the water,” but didn’t provide a specific period of time.  The FTC has interpreted the MMWA to mean that “[a] product information disclosure without a specified time period to which the disclosure relates is … not a written warranty.”  This may seem arbitrary, but a line must be drawn and this is it.  The only representation that came close to including a specific period of time was “50% thicker with half the water,” because directly below those words were images purporting to show EZ Seed having grown significantly more grass than ordinary seed “32 days after planting.” Thus, plaintiffs argue defendants promise that EZ Seed grows 50% thicker with half the water in 32 days.  But the “32 days” language was immediately followed by “each watered at half the recommended rate for ordinary seed. Results may vary.”  Thus, the label expressly cautioned purchasers that they might not get the promised result in 32 days.

The No Quibble guaranty might be a warranty under the MMWA, though.  One plaintiff alleged that she “sought a money-back refund for the four EZ Seed canisters she had purchased pursuant to the Scotts No Quibble Guarantee. However, Scotts refused to honor the No–Quibble Guarantee for two containers of the EZ Seed.” The court would draw the reasonable inference that she properly requested a refund, and Scotts failed to honor her request; that was entirely plausible.  Maybe the facts wouldn’t bear that out, but that was for later.

Turning to the state law warranty claims, the court found that most were merely nonactionable puffery: “WaterSmart”; “Drought tolerant”; “Grows Anywhere! Guaranteed!”; “Makes the Most Of Every Drop”; and “Grows in Tough Conditions! Guaranteed!”  However, some statements could be express warranties under the UCC: (1) EZ Seed grows grass “50% thicker with half the water” compared to “ordinary seed,” and (2) EZ Seed is “developed to thrive in virtually every condition—harsh sun, dense shade, and even spreads to repair wear and tear” and similar statements to the extent they promised that EZ Seed would grow grass in both sunny and shady areas. These statements promised specific, measurable performance, as did the No Quibble guaranty.

The court did not find the claims that EZ Seed was “revolutionary” and “takes care of the seed for you, so you can grow thick, beautiful grass ANYWHERE” actionable.  Apparently the claim that EZ Seed would even grow grass on pavement was exaggerated puffery, though to me the grow anywhere/even on pavement claim sounds exactly like a specific, surprising but possible claim the advertiser would want a buyer to believe in order to bolster its claims about ordinary performance, just like showing a blender pulverizing unexpected ingredients.  This link to an Amazon page shows Scotts using a photo of the product growing on pavement to prove how good it is, and here’s a Scotts on Facebook using a different photo to make the same claim, “EZ Seed is guaranteed to grow grass anywhere! Don’t believe us? Check out this photo, it even grows on pavement.” I’m pretty sure the FTC would consider that non-puffery.


Anyway, these warranty claims were only stated against Scotts, not Home Depot or Lowe’s, since they only appeared on EZ Seed’s labeling.  Plaintiffs failed to allege that the other defendants independently made the same promises when selling EZ Seed, as opposed to “merely passively displaying” Scotts’ promises.

Turning to breach of implied warranty, privity is usually required for such claims.  Plaintiffs argued that here, the retailers acted as Scotts’ agent, but the court rejected that theory.  As against the retailers, who argued that plaintiffs didn’t properly allege that EZ Seed failed its essential purpose, the court refused to dismiss the claim.  The purpose of EZ Seed was to grow grass; plaintiffs alleged that it didn’t grow; this was enough to allege that it wasn’t fit for the ordinary purposes for which it was used, and plaintiffs stated an implied warranty of merchantability claim against Home Depot and Lowe's.

The court turned to the California consumer protection statutes.  Again, puffery was not actionable, but some potentially actionable statements remained.  The claim against Scotts survived, but not against the retailers because of failure to plead fraud with particularity: plaintiffs didn’t identify what statements the retailers allegedly made, lumping them together with Scotts.  Plus plaintiffs didn’t plausibly allege that the retailers knew or should have known of the falsity.  (Sigh.)

The New York analysis was different because claims under §§ 349 & 350 aren’t subject to Rule 9’s heightened pleading requirements.  (This is purely historical/path-dependent, as far as I can tell; neither state requires knowledge of falsity for core liability, so application of Rule 9(b) depends on whether courts think terms like “fraudulent” etc. matter more than whether an actual common law fraud type claim is being brought; the court’s not wrong to cite differing precedents from different coasts, but I don’t think there’s an actual rationale underlying that difference.)  Plus, these claims don’t require reliance.  (… Like some of the California claims?)  And New York doesn’t require plaintiffs to plead that defendants knew or should’ve known that the statements were false or misleading. 

So, while the claims based on puffery were dismissed, the claims based on nonpuffery remained, because plaintiffs properly alleged that the challenged statements (1) were directed at consumers, (2) were misleading in a material way, and (3) caused plaintiffs to be injured.  The claims against Lowe’s were dismissed, though, because the only plaintiff who allegedly bought EZ Seed at Lowe’s did so in California.  Given the different pleading standards, though, the claim against Home Depot survived; plaintiffs didn’t have to allege reliance on particular statements made by Home Depot or Home Depot’s knowledge. Instead, they met the low pleading standard “by alleging Home Depot included some or all of the actionable representations in its in-store advertisements and on its website, and the plaintiffs who purchased EZ Seed at Home Depot were injured because the product did not work.”

Wednesday, May 29, 2013

Creation of allegedly fake website leads to broad discovery of internet activity

Corizon, Inc. v. Wexford Health Sources, Inc., 2013 WL 791788 (E.D. Mo.)

The parties compete to provide healthcare services for correctional facilities.  Wexford allegedly directed its PR firm CHT to create a website at (plaintiff is also known as CMS) and controlled the content, which allegedly included false statements, many of which purported to be from a “CMS insider” who criticized plaintiff's business practices and ethics.

Wexford moved to dismiss Corizon’s request for punitive damages as unavailable under the Lanham Act or Maryland common law unfair competition.  The court concluded that Missouri law applied; Wexford argued that punitive damages were still unavailable because they required an underlying award of actual damages, which Corizon wasn’t seeking.  Corizon argued that its requests for attorneys’ fees, costs of investigating the origin of the website, and corrective advertising constituted actual damages.  The court agreed that corrective advertising costs were compensatory, and met the definition of actual damages.  Thus, punitive damages might be available under state law, though not under the Lanham Act.

The court also granted Corizon’s motion to compel responses to requests for information regarding other websites defendants created, authored, or maintained about Corizon, along with postings or statements on other sites about Corizon.  Given Corizon’s request for punitive damages and the resulting need to demonstrate defendants’ evil motive or reckless indifference, evidence relating to conduct “similar to” the creation of was relevant for punitive damages and injunctive relief, whether or not the websites were ultimately made publicly available.  (Some of the witnesses already deposed testified that they didn’t remember which comments they’d made, though there was evidence that certain comments came from the IP address of a hotel at which one of them was staying.  Individual comments can be hard to remember, especially if they are part of a broader PR campaign, as these appear to have been; yet another reminder of the new perils of targeted advertising/nonbroadcast promotional claims.)

Particularity dooms another food case

Maxwell v. Unilever U.S., Inc., 2013 WL 1435232 (N.D. Cal.)

Maxwell sued defendants alleging that several food/beverage labels (mainly tea in bottles and bags) and related websites contained statements amounting to misbranding, in violation of California and federal law. The court granted defendants’ motion to dismiss.  She sought to define the products she was attacking as “1) any carbonated beverage manufactured, distributed or bottled under the authority of the Defendants that contained an artificial flavoring, artificial coloring, or chemical preservative but failed to bear a statement on its label disclosing that fact, or 2) any Lipton or Brisk tea products.”  She alleged various false/misleading/unlawful statements, including nutrient content claims, “natural” claims, failure to disclose artificial ingredients, and health claims/use of “healthy.” She alleged that she read and relied on these statements and wouldn’t have bought the products if she’d known the truth.

The court first dismissed her breach of warranty claims. The Song-Beverly Act provides a right of action for violations of express or implied warranties, but excludes consumables.  Maxwell argued that express warranties against a product defect for consumables were covered, but the claims at issue weren’t express warranties against a product defect, but rather product descriptions.  For similar reasons, there was no federal Magnuson-Moss Warranty Act claim.

Rule 9(b) applied to the remaining California claims.  And they weren’t clear and particular enough.  They didn’t unambiguously specify the particular products violating particular labeling requirements, the allegedly unlawful representations, or the particular statements on which Maxwell relied.  The carbonated beverage/Lipton or Brisk tea groups were “non-definite.”  Maxwell enumerated at least eight products that she bought, but also claimed to buy “Lipton Brisk tea products such as Lipton Brisk Lemon Iced Tea and Pepsi carbonated beverages such as Pepsi,” and “Misbranded Food Products.”  “The placement of the ambiguous assertion that she purchased a non-definite group of products alongside the enumerated list creates ambiguity and confusion as to precisely which products Plaintiff purchased.”

Similarly, she alleged that “Defendants have made multiple unlawful antioxidant claims about their tea and other beverage products,” and that “[t]he antioxidant labeling for Lipton Tea products violates federal and California law.” But while the complaint had a “thorough” discussion about the state and federal labeling requirements for antioxidant-related labeling statements, it failed to “unambiguously” identify which particular products' labeling violated these requirements and “present the precise language that constitutes misrepresentation.”  And in the section titled “Causes of Action,” she didn’t mention a single particular or specific product with allegedly unlawful labeling, only the indefinite “Misbranded Food Products.”

FDA approval completely precludes NY false advertising/consumer protection claims

In re Fosamax (Alendronate Sodium) Products Liability Litigation, 2013 WL 1558697 (D.N.J.)

Plaintiffs Bernadette Glynn and Richard Glynn sued Merck, alleging that its Fosamax caused the former’s femur fracture and that Merck failed to warn about this risk.  Of relevance to this blog, the court dismissed the claims for violation of NY GBL §§ 349 & 350.  Compliance with FDA warning requirements is a complete defense to both statutes, and the court ruled that, since Fosamax had been FDA-approved, the approval was a complete defense (although the failure to warn/breach of implied warranty tort claims survived, so I’m a little confused about the interaction there--is it approval or compliance with all FDA requirements that matters?). In addition, there was no cause of action for false advertising because Glynn didn’t claim to have seen any Fosamax ads.

image of competitor's system ok as part of generic intro to technology

Global Traffic Technologies, LLC v. Emtrac Systems, Inc., 2013 WL 2297054 (D. Minn.)

This is mostly a patent infringement case with a false advertising side issue.  The patent involves a “traffic preemption system,” which allows emergency vehicles (and sometimes other public vehicles) to override ordinary stoplight timing to assist them in moving faster.  The current generation of traffic preemption systems uses GPS, and plaintiff GTT has a patent on an aspect of this, which Emtrac allegedly infringed.  Emtrac counterclaimed for, among other things, violation of the Lanham Act for using images of Emtrac’s system to market GTT’s own system.  Emtrac also alleged that GTT threatened Emtrac’s customers, telling them that they were infringers and that GTT would sue them for false advertising if they published positive reviews of the Emtrac system.

Along with denying summary judgment on patent validity, the court found genuine issues of material fact about whether GTT failed to comply with the patent marking statute, because it only marked the package, not the product, despite having space on the exterior of the product to do so.  GTT argued that the packaging was the most effective method of giving notice because the components of the system are hidden from public view when in use.  Courts have divided on literal and practical approaches to the marking statute.  “Whether marking on the packaging served as the most effective notice to the public of this product, given its multiple and hidden components, is a fact issue for trial.”

GTT won summary judgment on the state and federal false advertising claims, however.  As for the use of images of defendant’s system, this came in a seven-minute instructional video describing traffic preemption systems generically, then using animation to show exactly how the GTT system worked.  In the live portion of the video, the buses pictured apparently didn’t use the GTT system, but if they were simply representing buses in general, then there was no literal falsity.  The narrator never mentioned the particular buses (Minneapolis Metro Transit) and never claimed that GTT’s system was in use on them.  “Instead, the images serve as stock images of buses and traffic where a TPS system may be useful.”  In the absence of literal falsity and of evidence of consumer deception, the claim couldn’t survive summary judgment.

Defendants also claimed that an email newsletter was misleading for stating that “For more than 35 years [GTT], the innovator of Opticom priority control solutions, has provided reliable traffic management....”  But GTT didn’t exist 35 years ago.  Instead, a 3M business unit was divested in 2007 as part of an asset purchase agreement and became FTT.  The court concluded that, “[l]egally, if GTT is a continuation of 3M's Intelligent Transportation Systems unit, and if GTT retains the experience of 3M, then the ad is not literally false because GTT's experience incorporates 3M's.”  With no evidence of deception, again summary judgment was appropriate.  GTT also prevailed against tortious interference counterclaims, which are very hard to win when a patent hasn’t been invalidated.

Tuesday, May 28, 2013

Justin Bieber and issue ads

Something called the Employment Policy Institute is using Justin Bieber's image to suggest that the minimum wage is a bad idea.  Too bad it came too late for exam season!  But the HuffPo had a good line: "A cursory search of the heartthrob’s lyrics catalogue turns up no mention of the minimum wage or labor economics more generally."

Via an eagle-eyed student

LV Lord Voldemort sweatshirt
Though perhaps it doesn't take an eagle eye to spot the issues here ...


Standing and fact pleading, again

Lanovaz v. Twinings North America, Inc., 2013 WL 2285221 (N.D. Cal.)

Lanovaz sued Twinings alleging violation of FDA rules incorporated into California law, violating the UCL, FAL, and CLRA.  She bought Twinings’ green and black tea and alleged that she wouldn’t have done so but for unlawful labeling (“natural source of antioxidants”).  After the court struck some of her claims without prejudice, she amended her complaint, which brought on this renewed motion to dismiss/strike all statements about products that she didn’t buy and labels/ads she didn’t see or rely on, including sections of the Twinings website.

Lanovaz named numerous products she didn’t buy but had the exact same label as products she did buy.  The question was whether the products were sufficiently similar to allow her to represent purchasers of the other products.  Unlike many courts, this opinion looked to non-consumer protection cases.  The Ninth Circuit has cautioned that courts “must be careful not to employ too narrow or technical an approach. Rather, [courts] must examine the questions realistically: [they] must reject the temptation to parse too finely, and consider instead the context of the inquiry.” Armstrong v. Davis, 275 F.3d 849 (9th Cir. 2001) (finding that plaintiffs had standing to represent a class of disabled persons because they established the same injury—discrimination that resulted in the denial of a service—even though the disabilities and exact harm were different).  Likewise, Gratz v. Bollinger, 539 U.S. 244 (2003), held that a student had standing to challenge race-based admissions criteria for both freshmen and transfer applicants even though he had only applied as a freshman, because the use of race didn’t implicate a significantly different set of concerns in the two contexts.  The purpose of standing, after all, was to assure “sharply presented issues in a concrete factual setting and self-interested parties vigorously advocating opposing positions.” United States Parole Commission v. Geraghty, 445 U.S. 388 (1980).

However, this led back to the same place: the court concluded that this standard required claims related to unpurchased products to be “nearly identical” to the claims for the purchased product. Lanovaz’s claims related to 53 teas with the same label. Fifty-one were made from the same plant, camellia sinensis, the two varieties of red tea were made from the rooibos plant. Of the 53 teas, Lanovaz bought three varieties of green tea, three varieties of black tea, and no red or white tea.  The court found that she had standing for 51 of the varieties, the ones based on the same label describing the same product, camellia sinensis, but not the rooibos varieties.

As for whether she pled reliance with particularity, the court agreed that parts of the complaint were unclear, but altogether Lanovaz identified specific statements from the Twinings website, and alleged that she relied on parts of the website.  The complaint didn’t then outright state that those sections contained the exact language that she quoted in other paragraphs, but the court found that saying “as specified above” was sufficient.  However, the court struck certain allegations because Lanovaz didn’t allege that she read and relied those specific statements on the website, and also struck references to reliance on the “section regarding teas for sale as well as the link on the website entitled ‘Tea & Health’” because they weren’t sufficiently clear.   (Okay, this all strikes me as the kind of nonsense that the federal rules were supposed to get rid of, even 9(b).  What happened to who, what, when, where and how?  How is this possibly insufficient to give Twinings fair notice of what she’s complaining about?)

Monday, May 27, 2013

Insurer had duty to defend against its own claim against former agent

Gustafson v. American Family Mut. Ins. Co., 901 F. Supp. 2d 1289 (D. Colo. 2012)

Here’s one you don’t see every day: insurer trying to deny coverage to its former agent.  The facts have to make you wonder (as with the mortgage industry): what other clerical errors are insurers making, and how do they affect policyholders?

Gustafson worked for American Family for about 26 years, then voluntarily resigned in 2008.  He insured his business with American Family as an insurance agency, which included advertising injury coverage.  Advertising injury included “use of another's advertising idea in your ‘advertisement.’”  Knowing infliction of advertising injury was excluded. 

Gustafson had a general umbrella policy insuring about 20 other business ventures, and consolidated them under one general umbrella policy, which required changing the policy number for his insurance agency. Though this should have had no effect on the substance, due to a clerical error, American Family described his business as a rental dwelling rather than as an insurance agent/broker office, which arguably cancelled coverage for insurance activities he conducted there.  American Family didn’t alert Gustafson to this change and he was otherwise unaware of it.  The court ruled that, under the circumstances, the previous coverage continued, given Gustafson’s reasonable expectations.

One day after he resigned from American Family, Gustafson opened his own insurance agency, Advantage Insurance, in the same location. He covered an American Family lawn sign in front of the office with a temporary vinyl sign he designed.   Because the lawn sign was backlit, “you could still see ‘American Family Insurance, Barry Gustafson Agency’ through” the temporary vinyl sign at night.  Shortly thereafter, hundreds of policyholders canceled their American Family policies and bought coverage with Advantage.  American Family alleged that Gustafson had broadly searched its customer database before resigning, and that at least one former American Family policyholder obtained coverage through Advantage before Gustafson resigned; Gustafson disputed American Family’s characterizations.

In late 2008, American Family sued Gustafson, including a claim for violation of the Colorado Consumer Protection Act, alleging that he falsely advertised to and solicited American Family customers by bringing them to his office and then redirecting them.  One of American Family’s witnesses said at his deposition that the CCPA claim was based on the fact that, at night, Gustafson’s temporary vinyl sign illuminated parts of the old American Family sign.

Gustafson requested that American Family defend him.  Because of the conflict of interest, American Family hired outside counsel to provide an opinion letter on coverage. The opnion letter said that there was no duty to defend because (1) the policy change had excluded the insurance business from coverage, (2) there was no advertising injury, and (3) the underlying complaint didn’t establish a causal link between the ad and American Family’s damages.

After the underlying action terminated in Gustafson’s favor, he sued American Family for breach of contract and claims related to bad faith refusal to defend.

The court found that American Family had a duty to defend him. As noted above, his insurance activities were covered by his policy.  Looking at the complaint, Gustafson had to show that it could be read to allege the use of another’s advertising idea in his ad, and that Gustafson’s advertising caused the injury forming the basis for the underlying action.  Most courts have held that “use of another's idea” means the “wrongful taking of the manner by which another advertises its goods or services.”   The underlying complaint could be read to allege “advertising injury”—falsely advertising, directing insureds to come into his office, and redirecting them to American Family offices could be read to allege that Gustafson used American Family’s advertising idea by falsely advertising himself as an American Family agent in an attempt to induce them to purchase from Advantage. 

The next question was whether the injury arose in the course of advertising—whether the advertising activities caused the injury, not merely exposed it.  The injury American Family claimed was redirection of business and loss of customers.  That established a direct link between Gustafson’s allegedly false advertising and American Family’s injury.  American Family thus had a duty to defend.

American Family raised three exclusions: injury caused with the knowledge that it would inflict advertising injury; injury arising from a breach of contract; and injury arising out of copyright, patent, trademark or trade secret infringement or other intellectual property rights.  Not so. The underlying complaint didn’t allege that Gustafson’s false advertising was done with the knowledge that it would inflict advertising injury; the consumer protection claim wasn’t based on breach of any contract; and the underlying complaint didn’t raise a claim for trademark or trade secret infringement.  So none of the exclusions applied.

However, American Family escaped liability for bad faith breach of contract etc. because it used outside counsel and Gustafson didn’t show that it had violated industry standards, as required to show that an insurer acted unreasonably with respect to a claim brought by a third person (here, American Family is also the third person) against an insured.

Implied disparagement covered by insurance, but no duty to defend because of TM exclusion

Tria Beauty, Inc. v. National Fire Ins. Co. of Hartford, 2013 WL 2181649 (N.D. Cal.)

Tria sells a laser hair-removal device for home use, and a light-based acne treatment product.  One competitor, Radiancy, sells competing products, and when Tria sued it for false advertising, Radiancy counterclaimed against Tria for false advertising and trademark infringement.  Tria sought coverage from its insurers, which was denied, and the court granted them summary judgment.  Though the disparagement clauses were triggered for both, exclusions applied for defendant Travelers.

Tria had coverage from National Fire through Jan. 1, 2010.  The policy covered advertising injury, including disparagement, with exclusions for failure to conform and infringement of trademark or other IP rights, but that exclusion didn’t apply to infringements in ads of “copyright, trade dress or slogan.”  The Travelers policy that followed also covered advertising injury, including disparagement, with similar exclusions for failure to conform and for infringement of trademark or other IP rights.  The Travelers exclusion didn’t apply to advertising injury arising out of infringement of copyright, title, or slogan, nor to any other personal injury or advertising injury alleged in any claim that also alleged such infringement.

In the underlying suit, Radiance challenged various advertising claims by Tria, including its claims that Tria Hair was safe, effective, and painless; that it was the first and only home laser hair removal device cleared by the FDA; that Tria Skin was “faster,” “superior,” “more powerful,” and more “advanced” than other acne treatment products on the market; and that it was “first and only” blue light acne treatment equivalent to blue light therapy available from dermatologists.  Radiancy also counterclaimed for infringement of its registered trademarks.

The court found that coverage was initially triggered by the implied disparagement of Radiancy’s products by Tria’s superiority claims. The policy language wasn’t limited to claims for disparagement that met the standards for trade libel; resolving ambiguity in favor of the insured, it was significant that the policy language didn’t delineate specific causes of action, leaving carveouts to the exclusions.  “Given this structure, reading the policy broadly to cover implied, ‘own-product’ disparagement would be consistent with a reasonable insured's objective expectations.”

However, Tria failed to show that the challenged statements took place during National Fire’s policy period.  Tria didn’t show that superiority claims (triggering implied disparagement coverage) were made during National Fire coverage, only that it claimed to be the first and only laser hair removal device cleared by the FDA for home use; because Radiancy’s product used a heated wire, these claims couldn’t be read to disparage Radiancy’s non-laser device.  Although they competed as a general matter, this wasn’t the same as a claim that Tria Hair was the only FDA-cleared product on the market.  Thus, this wasn’t plausibly read as implied disparagement.  Nor were statements by QVC hosts in the same ad attributable to Tria.  Tria argued that alleged statements on websites were within the policy period, but Radiancy only alleged a “last visited” date after that time.  Though impliedly disparaging statements may have existed before then, during the policy period, that was pure speculation.

The court turned to Travelers.  The nonconformity exception didn’t apply; it excluded coverage for injuries “arising out of the failure of goods, products or services to conform with any statement of quality or performance made in [the insured's] advertisement.” But the alleged injury here came from implied disparagement.  “Here, the harm did not proceed from whether Tria's products were indeed superior. It arose out of the implication from Tria's advertising that Radiancy's products were inferior.”

However, the IP exclusion did apply.  It excluded, along with coverage for an enumerated list of IP claims, “any other ... ‘advertising injury’ alleged in any claim or ‘suit’ that also alleges any such infringement or violation.”   This was clear and explicit.  There need be no logical or legal link between the trademark infringement and implied disparagement claims for the exclusion to apply.  There was no potential for coverage and thus no duty to defend.

Trademark claims survive despite Kirtsaeng first sale defense

AFL Telecommunications LLC v. Inc., 2013 WL 2211629 (D. Ariz.)

Lots of goodies in this case, including what counts as "commercial advertising or promotion" in the digital age.

After Kirtsaeng, copyright first sale is much easier to assert than trademark first sale.  AFL sued SurplusEQ and other defendants for unfair competition, false advertising, and copyright infringement arising from Defendants' sale of fusion splicers (devices used to splice fiber optic cable) made by AFL's Japanese parent, Fujikura Ltd.  AFL is the exclusive authorized distributor of Fujikura splicers in North America.

The hardware and software on every splicer is identical, regardless of intended sale destination. The software has many available languages. During manufacturing, Fujikura “implements” a lock that changes the setting to display only the language sued to the region of intended sale. Afterwards, one must change the software settings to make another language available. In 2006, Fujikura added a “splash screen” to some of its splicers stating that the unit is licensed for a particular country or region. Each version of the software contains substantial code from the preceding version, plus new content.  Fujikura registered version 1.32b of the operating software for its FSM–60 series.  Its registration certificate’s “Limitation of copyright claim” section states: “Material excluded from this claim: Previous version.”

SurplusEQ sold several brands of fiber optic equipment over the internet.  In 2005, it began selling gray market Fujikura splicers it obtained from China and Hong Kong.  In a blog post, it referred to the splicers as “new,” purchased directly from the manufacturer, and covered by a manufacturer's warranty. On its website, SurplusEQ advertised some of its Fujikura splicers as “new and unused” and “[g]uaranteed not modified in any way.” It stopped selling gray market Fujikura splicers in late 2011.

Fujikura splicers sold in the US through authorized channels have a manufacturer’s warranty allowing buyers to get warranty service from AFL.  Gray market splicers don’t have a warranty, though SurplusEQ offered a one-year warranty.  In 2009, AFL added an additional year of warranty.

In 2009, a company called Entergy bought a Fujikura splicer from SurplusEQ. After about a year, Entergy contacted AFL for service. AFL determined that it was a gray market unit and offered Entergy a replacement in exchange.  AFL’s inspection revealed that the splicer’s serial number had been changed both on the outside of the unit and in a flash memory chip; the flash memory chip had been replaced; nearby components had been subjected to heat damage; and the splicer's protective coating had been damaged.

AFL and Fujikura developed a plan to eliminate gray market competition, including a copyright license agreement that provided AFL with the exclusive license to distribute the Fujikura software and to register such rights in AFL’s name.  The agreement also assigned AFL all existing claims for infringement.  (Query whether this suffices post-Righthaven.)  They also entered into a trademark license agreement.

AFL sought summary judgment on its trademark, false advertising, and copyright claims, and lost basically all its arguments but, because trademark doctrine is so expansive, got a chance to prove its trademark claims at trial.

For gray market goods, actionable trademark confusion stems from material differences between the allegedly infringing good and the authorized-in-the-US product.  “[C]onsumers may unwittingly purchase the goods on the basis of the domestic markholder's reputation only to be disappointed when the product does not meet their expectations.”  (One would think this would be a false advertising claim, not an infringement claim, at least when consumers aren’t confused about whether the sales are authorized; we see a bit of this in the discussion below.)  Material differences are likely to cause consumer confusion, and the threshold of materiality is always quite low—any difference that consumers would likely consider relevant creates a presumption of confusion.

AFL argued that there were material differences because of physical alterations, differences in warranty coverage, and software licensing issues.  AFL did not provide any evidence that the Entergy splicer had been altered before SurplusEQ sold it; it failed to meet its burden of proof on this. 

As for the warranty, defendants argued that they offered an identical warranty, but this clearly wasn’t true.  The Fujikura warranty allowed customers to seek repair from AFL, a Fujikura-authorized dealer; the SurplusEQ warranty required repair by SurplusEQ or someone else.  Defendants argued that they fully disclosed the differences between the products.  The court considered this an attempt to rebut the presumption of confusion, which would have to be done by showing by a preponderance of the evidence that consumers wouldn’t generally consider the differences in buying—which doesn’t make much sense; consumers could consider the warranty differences, but make the call that the lower price justified the lesser warranty, in full knowledge of the chance they were taking.  It’s the knowledge, not the lack of difference, that fixes the alleged confusion.

Defendants offered deposition testimony that they always disclosed the lack of authorization and that Fujikura wouldn’t repair splicers bought through them.  One employee stated that customers usually noted that it was a gray market unit and asked, and they’d be told that AFL wouldn’t service it.  The website also disclosed this fact, as did the invoice and stickers placed on the units.  The court found that this created a genuine issue of fact as to whether the warranty differences were material to consumers. 

As for software licensing, AFL argued that purchasers would consider their possible copyright liability for using unauthorized software to be material.  Though the court found this a close question (except that this is no longer a close question, since any attempt to sue the end users for copyright infringement should result in a fee award to the users after Kirtsaeng; the court seems to have missed this interaction), it wouldn’t support summary judgment for AFL.  Likely confusion is routinely submitted to juries, so materiality of software licensing was best left to the jury.

On false advertising, AFL alleged that SurplusEQ falsely advertised in a blog post that its splicers were“new,” the “same machine” provided by authorized sellers, purchased “direct from the manufacturer,” sold with “a full Manufacturers [sic] warranty,” and that it falsely advertised on its own website and its eBay store that it sold “new” and “guaranteed not modified in any way” Fujikura splicers.

Defendants argued that AFL failed to show that the blog post was sufficiently disseminated to constitute commercial advertising or promotion.  The court concluded that the blog post wasn’t a classic advertising campaign (!), and without any evidence establishing that the blog was disseminated to the purchasing public (! Was it password protected?  We don’t ask how many people actually saw/heard other forms of broadcast advertising), it wasn’t an ad and thus AFL’s summary judgment motion had to be denied.

However, the statements on SurplusEQ’s website and eBay webpage seemed like classic ad campaigns.  (Now I’m really confused.)  They were made for the purpose of influencing customers to buy splicers and included direct purchasing information.  But there were genuine issues of material fact about whether the splicers were in fact “new” and “not modified” when sold.

Turning to copyright, AFL argued that either it didn’t need to register the software because it was a non-US work, or its registration of a later version was sufficient because the registered version was a derivative work of earlier versions.  Whether it was a non-US work depended mostly on (place of) publication, and there was no evidence there, so that wouldn’t work on summary judgment.  The later registration also wasn’t clearly sufficient to maintain an action for infringement of earlier versions.  “Under the effective registration doctrine, the registration of a derivative work satisfies the registration requirement for an infringement action based on preexisting work not separately registered.”  But, as defendants argued, AFL failed to produce evidence of how the software was modified over time, and in any event the registration specifically excluded any “previous versions” from its claim. At the motion to dismiss stage, the court previously found that the effective registration doctrine applied because it was reasonable to infer from the complaint that each successive version incorporated preceding versions.  But given the specific disclaimer of previous versions, Streetwise (which held that registration of a derivative work protected the underlying work where the registration certificate stated that the work was derivative of previous versions) did not apply.

AFL provided no evidence that SurplusEQ sold splicers with the registered software version, and thus couldn’t get summary judgment on its claim for unauthorized distribution.

Turning to defendants’ motion for summary judgment, the court first declined to find laches, because the record didn’t demonstrate the absence of a genuine issue of material fact about when AFL learned that defendants were selling Fujikura splicers.

Defendants then argued that SurplusEQ fully disclosed the nature of what it was selling, preventing any confusion.  But they didn’t show that SurplusEQ dislcosed “differences related to software licensing and language settings.”  So they didn’t establish a lack of material differences or that all differences were disclosed.  (The language settings are not independently relevant, as far as I can tell; I can see no reason why they matter if (a) the copyright claim does not exist, as it does not, and (b) the fact that these are gray market goods intended for another region is disclosed.)

The court granted summary judgment to defendants on the false advertising claim on the blog post, for the reasons noted above.  Though the blog post discussed SurplusEQ’s products and announced the arrival of Fujikura splicers, with a hyperlink to where consumers could buy them, AFL failed to point to evidence that the blog post was “disseminated”—that anyone actually saw it, “or, more importantly, that anyone responded to it and was influenced to purchase a splicer.” Content alone was insufficient to infer dissemination.  However, matters were different with the website and eBay store, so no summary judgment there.

As for copyright infringement, first sale protected defendants’ conduct.  Kirtsaeng.  Fujikura’s authorization of initial foreign sale exhausted its exclusive rights to distribute copies.  All subsequent owners, including SurplusEQ, were entitled to sell their copies.  (Which logically means that there are no material copyright-related differences between the grey market and authorized copies.  That AFL might theoretically assert a facially legally invalid claim in order to harass buyers surely can’t qualify as a material difference—especially since the buyers wouldn’t even be violating the distribution right, and there is no cause of action against possessing an infringing copy.)

Defendants argued that AFL couldn’t seek damages for the period before Fujikura granted it an exclusive license in 2011. The court disagreed.  AFL had been Fujikura’s exclusive splicer distributor in North America since 2003.  That was a sufficient commercial interest in the mark to give AFL standing to raise a Lanham Act unfair competition claim.  This included standing to pursue damages for sales that resulted in shipments out of the US, even though that was outside the scope of AFL’s license.

The court also granted in part AFL’s motion to seal certain exhibits relating to AFL’s efforts to combat gray market sales, because disclosing AFL’s tactics could cause competitive harm to its efforts if publicly divulged.

Thursday, May 23, 2013

Sins of a trademark owner: Rogers applies regardless of intent

Rebellion Developments Ltd. v. Stardock Entertainment, Inc., 2013 WL 1944888 (E.D. Mich.)

H/T Eric Goldman.

Rebellion sued Stardock alleging that Stardock’s game, Sins of a Solar Empire: Rebellion infringed its registered trademark for a game development company.  The court dismissed the complaint under Rogers v. Grimaldi.

Rebellion is a well-known British games company that has developed more than forty video games for major gaming consoles.  REBELLION is registered for, among other things, “entertainment and amusement machines and apparatus, namely, video games and electronic games.”   

Stardock, reviewers, and players sometimes refer to Sins of a Solar Empire: Rebellion as simply Rebellion (one can see why from the cover/posters).  There was “some evidence” of consumer confusion: a YouTube user mistakenly referred to Rebellion as the developer of Rebellion. 

Rebellion argued that Rogers didn’t apply because Stardock was a competitor labeling its commercial good with a confusingly similar mark; Stardock even filed a trademark application for the mark.  Thus, Stardock was using Rebellion solely to identify a source.

Video games are expressive works, and the Sixth Circuit has adopted Rogers, so that was the standard. Rogers itself recognized that titles could acquire secondary meaning and become eligible for trademark protection, but didn’t ask in its test whether a title can or did function as a source identifier.  Artistic and commercial elements are intwined in titles, and the commercial nature of artistic works doesn’t diminish their First Amendment protection.  Likewise, the fact that a title “attempts to attract public attention with stylized components” was irrelevant. 

Next, Rebellion argued that Rogers cases must involve defendants who were directly referring to the plaintiff, but there was no such reference here: Stardock was just using a suggestive trademark to brand its product, and limiting such expression via trademark didn’t violate the First Amendment.  Also no!  Reference is not required by either prong of Rogers.  Many cases have applied Rogers to uses that didn’t refer to the plaintiffs.

Moreover, Rogers could be applied on a motion to dismiss.  “Courts are cognizant of vindicating First Amendment protections through early dispositive motions to avoid chilling speech.”  Rebellion argued that the court shouldn’t make its own conclusions at the pleading stage, especially without the opportunity to examine the underlying work (which, not for nothing, I think the court could do, given that the game is incorporated by reference).  There’s no reason not to grant a motion to dismiss “where the undisputed facts conclusively establish an affirmative defense as a matter of law.” 

Now it’s all over but the crying.  “Rebellion” had some artistic relevance to Stardock’s game.  Within the game, players could choose to align with “loyalist” or “rebel” factions in the context of a civil war.  The requisite level of artistic relevance need only be above zero.  Stardock described the game as follows: “The time of Diplomacy is over. The length of the war and differing opinions on what should be done to bring the war to an end has led to a splintering of the  groups involved. The controlling powers-that-be have depleted arsenals and seemed to have exhausted all efforts of diplomacy. Trapped in a stalemate, sub-factions have rebelled and broken off the main alignments. Rebellion is upon us.”  This was clearly enough to meet the low threshold of relevance. (Although this was from Stardock’s website, the text was included in the complaint as screenshots.)

Nor was the title explicitly misleading as to source or content.  Pleading that the title was willfully misleading wasn’t enough.  Even if members of the public are misled, that’s not actionable without an overt misrepresentation.  Under Rogers, “factors that might establish likelihood of confusion—such as the Defendants' intent—are irrelevant.”

H&R Block can't plausibly plead confusion from comparative ads

H/T The Trademark Blog

H&R Block Eastern Enterprises, Inc. v. Intuit, Inc., No. 13-0072-CV-W-FJG  (W.D. Mo. May 22, 2013)

An anti-trademark-expansionist twofer: claim against comparative ad dismissed on the pleadings, and a holding that “confusion” doesn't mean just any kind of confusion. Now if only courts will start awarding fees ...

Intuit ran some comparative ads that H&R didn’t like, Master Plumber and Return Expert.  H&R sued for false advertising and trademark infringement.  The ads said “more Americans trusted their federal taxes to TurboTax last year than H&R Block stores and all other major tax stores combined” and showed a bar graph comparing TurboTax use versus other major tax stores, including H&R Block.

Intuit argued lack of confusion and nominative fair use; the court found it unnecessary to address nominative fair use.  Intuit argued that, looking at the confusion factors, confusion was implausible: the ad was comparative (making strength and similarity irrelevant), there was no allegation of intent to pass of Intuit’s services as H&R Block’s, there were no allegations of actual confusion, and the type of product and conditions of purchases differed between in-store customers of H&R Block versus Intuit’s do-it-yourself software.

“Realizing that they have not pled confusion about the source or origin of the service represented by the trademark, plaintiffs seem to argue that ‘confusion’ under trademark infringement law should be read more broadly so as to include general confusion about the quality and nature of plaintiffs’ and defendant’s services.”  Not so (that’s what §43(a)(1)(B) is for).  Cases outside the Eighth Circuit “seemingly stand for the proposition that, when 15 U.S.C. § 1114 was amended in 1962 to delete the phrase ‘purchasers as to the source of origin of such goods or services,’ from the end of the former definition, which now reads ‘likely to cause confusion, or to cause mistake, or to deceive,’ this broadened the Act so as to now cover any kind of consumer confusion, mistake, or deception.”  But in all those cases, the courts were examining infringement claims when the defendant had named its product or service similarly to that of plaintiff’s.  None applied to classic comparative advertising, as here. Moreover, the 1962 amendments were about protecting non-purchasers, not just purchasers.  (In fact, they were about protecting people who were potential purchasers, not just actual purchasers.  People with no potential to be purchasers weren’t of interest because confusion wouldn’t harm them.)

None of H&R Block’s cited cases “expand trademark infringement law to include alleged confusion where it is clear from the context of the ads that the plaintiff is not an originator, sponsor, or endorser of the ad.”  Thus, though consumer confusion is typically an issue of fact, the complaint here failed to plausibly plead confusion.  The type of confusion contemplated by trademark law is “confusion as to source, origin, sponsorship, affiliation, or endorsement of a good or service.”

economic loss doctrine doesn't bar New Jersey consumer fraud claim

Francis E. Parker Memorial Home, Inc. v. Georgia-Pacific LLC, --- F. Supp. 2d ----, 2013 WL 2177974 (D.N.J.)

Parker sued GP on behalf of a putative class alleging violations of the New Jersey Products Liability Act (PLA); breach of express warranty; and the New Jersey Consumer Fraud Act (CFA).  Parker alleged that GP misrepresented the quality of its exterior trim, PrimeTrim, which prematurely deteriorates and promotes the growth of mold, insects, etc. in the structures on which it’s installed.  GP allegedly knew this as early as 1998 and acknowledged it internally, but didn’t stop advertising the product for a wide range of uses without explaining that specially exacting installation was required.  GP allegedly rejected known design improvements due to their cost, while failing to test new versions of PrimeTrim and failing to test in actual installations despite the importance of such information.  GP’s allegedly false claims included that PrimeTrim: “offers up to four times more decay resistance than lumber[;]”“outperformed lumber through two years of direct exposure to sun, rain, and snow[;]” has “more than fifteen years with a track record of proven performance[;]” “[f]eatures superior moisture and decay resistance[;]” and was “proven in over four years of laboratory and field testing.” GP denied Parker’s warranty claim under its express warranty on the ground that the trim was misinstalled; Parker alleged that GP failed to provide adequate installation instructions, particularly omitting instructions on how to seal and prime site-cut ends despite knowing and intending that PrimeTrim would be cut to size on site.

Parker brought its claims on behalf of a damages class, with an economic loss damages subclass for property in which the PrimeTrim had been damaged but not other property.  The allegations relating to the subclass included that PrimeTrim’s failure typically began with its own deterioration, only later exposing other elements of the building to damage.

GP moved to dismiss the CFA claim as preempted/subsumed by the PLA.  The court denied the motion.  Economic losses due to harm to the product itself are recoverable under the CFA, whereas they are explicitly exempted from the PLA’s definition of harm to property: “physical damage to property, other than to the product itself.” A product liability action is “any claim or action brought by a claimant for harm caused by a product, irrespective of the theory underlying the claim, except actions for harm caused by breach of an express warranty.”

The Third Circuit has already examined the interaction between the PLA and the CLA in a case seeking failure to warn and design defect damages, plus a CFA claim for unconscionable consumer practices. Estate of Edward W. Knoster v. Ford Motor Co., 200 Fed. Appx. 106 (3d Cir. 2006). The court of appeals found no overlap.  The plaintiffs sought only economic damages resulting from the harm to the product itself, and the PLA excludes those damages from its definition of “harm,” so the CFA claim wasn’t a “product liability action”: “The PLA cannot subsume that which it explicitly excludes from its coverage.”

The New Jersey Supreme Court has said that, in order to overcome the presumption that the CFA applies to a covered activity, a court must be satisfied that there’s a direct and unavoidable conflict between application of the CFA and some other regulatory scheme, showing a legislative intent not to subject parties to multiple regulations that will work at cross purposes.  Lyle Real v. Radir Wheels, Inc., 198 N.J. 511 (2009).  A mere possibility of incompatibility is insufficient, given the importance of the CFA in combating fraud.

The court found that the CFA and PLA claims weren’t incompatible, at least not at this stage.  (Given the conclusion about “harm” here, how could they ever be as long as Parker restricted its economic damages claims to the value of the trim product itself?)  The degree to which consumers experienced damage to the PrimeTrim but not to adjacent materials was as yet unclear.  GP argued that the damage to the PrimeTrim would eventually cause rot to the adjacent structures, and “were damage to a class member's PrimeTrim to spread to adjacent property, the claims may arguably be in direct conflict.”  But there was no indication “that the Legislature intended to foreclose today's fraudbased remedies by providing a remedy for a tort-based harm which may or may not materialize in the future.” 
People who bought based on misrepresentations, but who hadn’t yet experienced harm to adjacent materials, “would have to sit on their rights and wait for the harm to spread to adjacent structures,” and that might bar relief altogether based on complications of notice inquiry/tolling the statute of limitations.  (I would think that if they didn’t have a complete cause of action today, the limitations period couldn’t run, but New Jersey is weird about limitations periods.)  Other cases have reasoned similarly, e.g., Rehberger v. Honeywell, No. 11–0085, 2011 U.S. Dist. LEXIS 19616 (M.D. Tenn. Feb. 2011) (“[T]he relevant harm was the plaintiff's decision to purchase the [product], which was caused by the defendant's alleged misrepresentations and omissions, not by the product. Indeed, this harm occurred before the plaintiff ever operated the [product]. Because the plaintiff has not asserted any ‘product liability’ claims, his claims are not subsumed by the PLA.”).

GP’s attack on Parker’s CFA standing was also premature.  Parker alleged that it bought the product at issue and suffered an injury in fact based on that purchase; its warranty claim was denied.  “Whether or not Parker will need to amend the pleading … to identify an adequate subclass representative is a question for another day.”

The court continued to find that Parker properly pled unlawful affirmative acts, knowing misrepresentations and unconscionable commercial practices under the CFA, but not regulatory violations.  GP argued that no misrepresentations were made to Parker, only to builders, subcontractors, and agents.  But Parker alleged misrepresentations within the 30-year express warranty, which was given to Parker; the allegations of misrepresentations to others were part of explaining why the product was defective and GP knew it.  Specificity isn’t required for specificity’s sake, but to put a defendant on notice of the precise misconduct with which it is charged, and the allegations here did so. 

Parker argued that the express warranty provided the crux of its CFA claim; the court didn’t reach whether lack of privity with regard to builders etc. would render the CFA inapplicable, but noted that the CFA explicitly covered both direct and indirect acts. Perth Amboy Iron Works, Inc. v. Am. Home Assur. Co., 226 N.J. Super. 200 (App. Div.1988), aff'd, 118 N.J. 249 (1990) (affirming the CFA's coverage of “acts of remote suppliers, including suppliers of component parts, whose products are passed on to a buyer and whose representations are made to or intended to be conveyed to the buyer”).

Parker also sufficiently alleged knowing concealment of a material fact with the intention that the consumer rely on the concealment. Actual reliance wasn’t required, only a causal nexus between an unlawful act and an ascertainable loss.  New Jersey implies a duty to disclose where that’s necessary to make a previous statement true. The complaint clearly alleged that GP knew of the defect and that “GP's senior sales personnel, over GP's own technical personnel's objections, actively sought to conceal these facts, continued to advertise to the contrary, and intentionally opted not to adopt available product improvements known to be effective, solely due to cost.”

GP then argued that its conduct didn’t qualify as an unconscionable commercial practice, one forbidden type of act in addition to fraud/deception/misrepresentation.  Unconscionability is an amorphous concept.  Breach of warranty isn’t per se unconscionable without substantial aggravating circumstances. Relevant factors include whether a supplier took advantage of a consumer’s inability to protect her interests; whether the price was grossly excessive compared to market prices; and whether the supplier made a misleading statement of opinion on which the consumer was likely to rely to her detriment.  This wasn’t clear before discovery, so the court denied the motion to dismiss.

However, the court found that Parker hadn’t properly pled a violation of the CFA due to regulatory violations; this kind of liability was strict. Rather than alleging violations of regulations promulgated pursuant to the CFA, Parker alleged that violations of other laws—here, the construction code—were actionable.

New Jersey courts have found CFA claims actionable when premised on violations of laws and rules independent of the CFA where the conduct evidenced unconscionable commercial practice. But a violation of the construction code in and of itself wasn’t actionable under the CFA.  And Parker only vaguely and generally asserted violations of parts of the code; this was inadequate.

Wednesday, May 22, 2013

A fresh face in challenges to Del Monte

It's my impression that defendant-favorable UCL-specific doctrines in California/9th Circuit law have not proved terrifically helpful in getting out of a case at the motion to dismiss stage, though I admit this is not based on any quantitative study.  Here's an example:

Kosta v. Del Monte Corp., 2013 WL 2147413 (N.D. Cal.)

Plaintiffs alleged that certain Del Monte products—Fruit Naturals fruit cups, FreshCut canned vegetables, and canned tomato products—were labeled in ways that violated the FDCA, as adopted into California law, and brought the usual California claims, including warranty claims and claims for restitution based on unjust enrichment and quasi-contract. They alleged that Del Monte unlawfully labeled products as “fresh” when they were actually thermally processed, pasteurized, and chemically preserved; labeled products “all natural,” “100% natural,” or natural despite their containing significant quantities of artificial ingredients/preservatives; failed to follow serving size guidelines, misleading consumers regarding the products’ sugar and calorie content per serving; made unlawful nutrient and antioxidant content claims (e.g., labeling products as “No Sugar Added” when they didn’t meet FDA calorie requirements for such a claim and making claims that their tomatoes were “an excellent source of” or “rich in” lycopene or lutein when they didn’t meet FDA minimums or otherwise didn’t comply with the regulations); and made unlawful and unapproved health claims for prevention/treatment of diseases such as cancer or heart disease (e.g., that the lycopene in Del Monte cooked tomatoes could “retard the aging process and stave off heart disease, cancer and major degenerative diseases”). 

On the first claim, based on Fruit Naturals, the lawsuit picks up on a related, successful Lanham Act suit against Del Monte: Plaintiffs alleged that packing the pasteurized and chemically preserved fruit in glass and plastic containers similar to those used for fresh fruit, putting them in the refrigerated produce section of the grocery store, and labeling them as “Must Be Refrigerated,” along with failing to identify ingredients as preservatives on the label, misled consumers into thinking the fruit was fresh.

Plaintiffs alleged that they read the labeling, were deceived, and bought/paid more for the products than they otherwise would have done.

The court rejected Del Monte’s preemption argument.  California can make violations of the FDCA and FDA regulations actionable under state law, and plaintiffs claimed only such violations.  “While Del Monte may disagree with Plaintiffs as to both the meaning of the FDA requirements at issue here and whether its products conform to those requirements, that disagreement does not mean that Plaintiffs are trying to impose additional requirements beyond the FDA's.” To the extent that Del Monte was arguing that it didn’t violate any regulations, that went to the merits and was beyond the scope of a motion to dismiss.

Like most courts to consider the issue (except the Pom district court on remand!), the court rejected the argument that Pom Wonderful LLC v. Coca–Cola Co., 679 F.3d 1170 (9th Cir. 2012), justified a preemption finding.  The Pom court of appeals explicitly declined to decide whether state law claims were preempted and didn’t deal with the presumption against preemption for state laws dealing with fraud and deception in the sale of food.  Pom “limited its discussion to whether the FDCA preempted Lanham Act claims that required the court to interpret FDA regulations; it did not analyze claims brought under a state law that mirrors the FDCA.”  The NLEA explicitly allows states to pass identical labeling laws, but Del Monte’s view of Pom “essentially would render [this provision] meaningless and … bar any private litigant from bringing actions predicated on a violation of analogous state labeling laws.”

Del Monte next unsuccessfully urged the court to stay or dismiss the case under the primary jurisdiction doctrine, which considers “(1) the need to resolve an issue that (2) has been placed by Congress within the jurisdiction of an administrative body having regulatory authority (3) pursuant to a statute that subjects an industry or activity that (4) requires expertise or uniformity in administration.”  Del Monte relied on Astiana v. The Hain Celestial Group, Inc., No. C 11–6342 PJH, 2012 WL 5873585 (N.D. Cal. Nov.19, 2012), which used the doctrine to avoid deciding a misbranding case involving cosmetics labeled “all natural.”  That decision turned on the “absence of any FDA rules or regulations (or even informal policy statements) regarding the use of the word ‘natural’ on cosmetic products ....” Here, however, plaintiffs sought only to enforce existing rules.  Unlike with cosmetics, the FDA has provided informal policy guidance with minimum standards for “natural” for food.  A judicial determination of whether Del Monte complied with the rules wouldn’t risk undercutting the FDA’s expertise and authority.  Misleadingness and effect on a reasonable consumers are within courts’ expertise.

Del Monte then argued, in vain, that plaintiffs lacked constitutional and statutory standing.  But like most plaintiffs, they’d figured out how to properly allege that they bought/paid a premium they wouldn’t have paid in the absence of false advertising.  Del Monte’s citations to cases where plaintiffs alleged that products were defective were inapposite.

Then Del Monte posited that plaintiffs didn’t plausibly plead reliance and deception, since no reasonable consumer would be deceived because reasonable consumers don’t know the details of what FDA regulations require in order to use certain terms.  But the court found it plausible that a reasonable consumer would rely on “front of the package” labeling claims like “fresh,” “all natural,” and “a natural source of antioxidants” when selecting food products. Also, a reasonable consumer, finding a plastic container of fruit in the refrigerated produce section labeled “Must Be Refrigerated,” and identifying no ingredients on the label as chemical preservatives could plausibly believe that the product is fresh cut fruit, and rely on that to buy it/pay a premium for it.

The Song-Beverly Consumer Warranty Act claim failed, though, because products intended for individual consumption are excluded from it.  And the Magnuson-Moss Warranty Act claim failed because claims about nutrient contents are typically product descriptions, not written warranties (promises of freedom from defect).

Plaintiffs’ claim for restitution based on unjust enrichment/quasi-contract also survived.  Del Monte argued that unjust enrichment wasn’t a cause of action, but a general principle synonymous with restitution.  But restitution was what plaintiffs sought, as disgorgement of a benefit unjustly conferred on Del Monte, so this claim was fine. The court thought that the alleged split on the existence of a “cause of action” for “unjust enrichment” under California law was “essentially founded on semantics, drawing a distinction—between unjust enrichment, restitution, and quasi-contract—without a difference. Regardless of whether the claim is labeled one for unjust enrichment, restitution, or some other equitable theory such as quasi-contract or constructive trust, the legal basis for relief is recognized in California law.”

The court also found that plaintiffs had pled fraud with sufficient particularity.   The who was Del Monte; the what was the specific allegedly deceptive claims on; the when was since 2008 and through the class period; and the where was the labels and website.  As for how the claims were deceptive, that was discussed above.

Nor did the court grant Del Monte’s motion to strike all allegations about statements plaintiffs didn’t see and products they didn’t buy. Plaintiffs argued that they had standing to represent a class as long as the products class members bought were sufficiently similar to the ones they actually purchased.  They argued that Del Monte’s nutrient claims weren’t limited to the tomato products they bought but also included spinach/lutein claims.  The critical inquiry was whether there was sufficient similarity in the products (and the representations).  Thus, Del Monte’s objections to references to apparently unbought products and unseen ads (including statements from Del Monte’s annual SEC report, store ad banners, and website claims) weren’t well taken.  “[I]n the Court's view, these products and representations are sufficiently similar to those purchased and seen by Plaintiffs, and any concerns regarding the differences among products at issue are better resolved at the class certification stage.”  The allegations were not “redundant, immaterial, impertinent, or scandalous” within the meaning of Rule 12(f).