Wednesday, October 30, 2013

Delay notifying insurer until after $13.5 million verdict probably harmless

National Union Fire Ins. Co. of Pittsburgh, Pa. v. Mead Johnson..., --- F.3d ----, 2013 WL 5788652 (7th Cir. 2013)

An advertising injury case from Posner, with a bonus picture from the underlying dispute … and it’s not even my birthday.  Mead Johnson bought a CGL policy from National Union, with a $2 million limit for personal/advertising injury, and an excess liability policy from Lexington with a $25 million limit (both are subsidiaries of AIG).

PBM’s third lawsuit against Mead Johnson for false advertising resulted in a jury award of $13.5 million.  PBM Products, LLC v. Mead Johnson & Co., 639 F.3d 111 (4th Cir. 2011).  “Mead wants its insurers to pay that judgment, plus the $15 million settlement that it made to resolve the [resulting follow-on] class action suit.”  PBM’s suit claimed that Mead falsely disparaged PBM’s less expensive store brand by claiming that it lacked key lipids that promote brain and eye development.  Mead Johnson’s insurance policies expressly covered disparagement as advertising injury, but Mead Johnson didn’t notify its insurers until after the damages verdict was handed down.  (Why? Posner doesn’t know.  How about: companies, like Soylent Green, are made of people, and people forget relevant information all the time.)

Both policies required notice of any claim or occurrence “as soon as practicable”; the excess liability policy required notice only if a claim or suit was “reasonably likely” to trigger damages of more than $2 million.  The notice provisions entitle insurers to control the insured’s defense, subject to their fiduciary duty to the insured. 

Mead Johnson said that its Director of Risk Management didn’t learn of the PBM lawsuit until the trial ended, which would be required for its duty of providing notice to kick in for “occurrences,” per an amendment to the agreement. The court found it hard to believe that the Director of Risk Management didn’t know, and anyway a lawsuit was a suit, not an “occurrence.”  Posner understood why insureds wouldn’t want their duty of notice to kick in for any trivial “occurrence,” e.g., “baby cried after swallowing Enfamil; crack appeared in Enfamil container.”  “But it would be absurd to allow a company served with a summons and complaint or other legal claim to obtain an indefinite extension of its duty of notice simply by hiding the claim from its Director of Risk Management,” especially for a claim of this size (PBM asked for $500 million in damages) by a competitor who’d gotten more than $46 million from Mead Johnson in settling two previous similar suits.  Mead Johnson delayed inexcusably in informing both insurers.

However, this failure allowed the insurers to disclaim coverage only if they were prejudiced by the late notice.  Late notice creates a presumption of harm, shifting the burden to the insured to show some evidence, but probably doesn’t shift the burden of persuasion. 

The court found National Union unlikely to have incurred harm from late notice.  “Its policy limit was only $2 million, and we are hard pressed to understand how, had it conducted the defense of PBM’s suit, it could have obtained either a jury verdict or a settlement of less than $2 million.”  Not only were the damages much higher than that, but Mead Johnson used the same firm, and even the same lawyer, that National Union had hired to defend Mead Johnson in PBM’s previous lawsuits.  Had it defended Mead Johnson, National Union would also have had to pay the fees and expenses of the defense, but National Union didn’t argue it would have paid less, and had it skimped on legal expenses the ultimate jury verdict might have been higher, allowing Mead Johnson to claim a breach of fiduciary duty.  The court was tempted to direct entry of judgment for Mead on the National Union/PBM matter, but remanded for factual development on the issue of harm—at oral argument, National Union’s counsel essentially conceded she couldn’t show harm, “[b]ut we hesitate to base a decision on a concession made in the heat of oral argument under a barrage by the judges.”

Lexington’s situation differed: “Conceivably if placed in control of the defense it could have bargained to a settlement of less than $13.5 million or, failing that, have presented evidence or argument that would have convinced the jury to award PBM less.”  But the insurers’ joint defense made no real argument about this, treating Lexington “as the tail to National Union’s kite,” perhaps because of their shared parent.  So the insurers hadn’t shown that it would have made any difference if they, rather than Mead Johnson, had hired the same law firm, but also Mead Johnson had only offered the bare facts that the firm was the same and that $13.5 million was less than $41.5 million, one of the previous settlement amounts.  And the district court erred by holding that when untimely notice is given by an insured after trial in the underlying suit, the presumption of harm became irrebuttable.  The district court should have said that later notice makes it harder to rebut the presumption of harm, but the presumption is never irrebuttable.  So, remand.

Turning to the second question: was National Union entitled to decline coverage of Mead Johnson’s claims resulting from the consumer class action?  The advertising injury policy covered “oral or written publication, in any manner, of material that ... disparages a person’s or organization’s goods, products or services.”  The policy required “pay[ment to the insured of] those sums that the insured becomes legally obligated to pay as damages because of ... advertising injury.”

The class members were consumers who bought Enfamil in preference to cheaper brands of infant formula “on the basis of the same false representations by Mead Johnson that underlay PBM’s suit.” The court saw this as a consumer fraud claim, not a product disparagement claim, since no product sold by the class members was disparaged.  Instead, Mead Johnson’s disparagement induced consumers to buy Enfamil.  But Mead Johnson argued that the policy covered damages for an injury “arising out of” disparaging material.  The court disagreed: the policy said that damages must arise out of the “offense,” here product disparagement; damages merely having their origin in disparagement were insufficient.  A mere indirect causal link was insufficient.  “Such a chain of equations can’t be taken literally, for that would imply that the claims in the class ‘arise out of’ the invention of infant formula.”  (Hunh?  So what?  Is that covered by any policy?  Also, the disparagement sure seems like proximate cause to me, not just but for cause, but the court disagreed.)

Mead Johnson’s argument for “arising out of” went too far:

Suppose that a mother who has been feeding her baby a store-brand infant formula made by PBM reads Mead Johnson’s ad which states that “mothers who buy store brand infant formula to save baby expenses are cutting back on nutrition compared to Enfamil,” or, worse, sees Mead’s visual-acuity ad, reproduced below, that tells mom that if fed Enfamil her baby will see an adorable rubber ducky with butterflies, while if fed a store brand, baby will be able to make out only a blurry yellow monster chased by bats. Mom, fearing that she has done irrevocable harm to her precious child, has a nervous breakdown precipitated by Mead’s false, alarmist advertising. If she sues Mead Johnson for infliction of emotional distress, can Mead require National Union to defend and indemnify it on the ground that the mother’s nervous breakdown arose from product disparagement? An affirmative answer—the answer implied by Mead Johnson’s argument—would, by expanding coverage to remote consequences, make it very difficult for an insurer to estimate liability and thus fix a premium for injuries caused by product disparagement.

RT: Except that the consequences at issue in the actual consumer protection claim are not at all remote. They are, indeed, the very consequences that the disparagement aimed at: consumers would buy more from Mead Johnson and less from house brands like PBM, enriching Mead Johnson and causing damages to PBM.  If the damages to PBM were proximately caused by the disparagement, so too were the damages to consumers.

In conclusion, the court cautioned that the underlying tort claim didn’t need to use the magic word disparagement to trigger coverage, as long as the claim fit the legal definition thereof.

Georgetown Law Journal technology symposium, Nov. 8

The Georgetown Law Journal cordially invites you to its Volume 102 Symposium, “Law in an Age of Disruptive Technology”
Featuring a Keynote Address by Professor Neal Katyal and panels on:

3-D Printing
Chaired by Professors Deven Desai and Gerard Magliocca

Driverless Cars & Tort Liability
Chaired by Professor Bryant Walker Smith

Mass Surveillance Technology
Chaired by Professor Christopher Slobogin

Friday, Nov. 8, 9 am
Gewirz Hall, 12th Floor
Georgetown University Law Center
600 New Jersey Avenue, Northwest
Washington, District of Columbia
Click here to RSVP
Facebook Page and Website
This event is sponsored in part by ACLU, NSLS, and the Federalist Society

Transformative work of the year

I know, we still have a couple of months, but I find it hard to imagine this being topped: the Golden Girls, reimagined as Cold War superspies/soldiers.

Tuesday, October 29, 2013

9th Circuit requires arbitration for consumer protection claims

Ferguson v. Corinthian Colleges, Inc., --- F.3d ----, No. 11–56965, 2013 WL 5779514 (9th Cir. 2013)

Plaintiffs were former students at for-profit schools owned by Corinthian and sued alleging that Corinthian used deceptive practices to get them to enroll.  The court of appeals, reversing the district court, compelled arbitration of the claims under the UCL, FAL and CLRA, holding that the California Supreme Court’s exemption of claims for “public injunctive relief” from arbitration was preempted by the Federal Arbitration Act. 


Class ascertainability exists without purchase records

Thurston v. Bear Naked, Inc., No. 3:11–CV–02890, 2013 WL 5664985 (S.D. Cal. July 30, 2013)

The court certified a California class of purchasers of Bear Naked products marked as 100% natural that contained hexane-processed soy.  Of note, the court rejected Bear Naked’s argument that the class wasn’t ascertainable because nobody had purchase records.  The class definition wasn’t vague or confusing: it was purchasers of the products so labeled, and because the alleged misrepresentation was on the labels there was no issue of sweeping in people not exposed to the misrepresentation.  There’s no requirement that class members’ identity be known at the time of certification, and indeed that would destroy the class action mechanism.  As long as the definition is sufficiently definite to identify members, administrative challenges don’t defeat class certification.  Relatedly, the court rejected Bear Naked’s argument that the definition had to ensure that all class members had standing, and that some purchasers would have been unaffected by the misrepresentation and thus suffered no injury.  Standing of the named plaintiff was enough; causation on a classwide basis may be established by materiality.

"All Natural" too undefined to be the basis of a claim

Pelayo v. Nestle USA, Inc., 2013 WL 5764644, No. CV 13–5213 (C.D. Cal. Oct. 25, 2013)

Pelayo sued Nestle alleging claims about 13 Nestle stuffed pasta products using the term “All Natural” on the labeling while containing synthetic xanthan gum and soy lecithin. 

The court dismissed the claim because Pelayo failed to offer an objective or plausible definition of “All Natural.”  One possibility, “produced or existing in nature” and “not artificial or manufactured,” clearly wouldn’t apply to the manufactured pasta: the reasonable consumer is aware that Buitoni Pastas are not “springing fully-formed from Ravioli trees and Tortellini bushes.”  Nor were the other definitions Pelayo offered plausible.  She alleged that none of the ingredients in a “natural” product would be “artificial” under FDA definitions. But she failed to allege that any of the challenged ingredients were “artificial” as defined by the FDA; anyway, the cited definition only applied to flavor additives, and she didn’t allege that the challenged ingredients were added flavors.

Pelayo also alleged that none of the ingredients in a “natural” product are “synthetic” as that term is defined by the National Organic Program.  But the challenged products weren’t labeled as organic and the NOP didn’t apply. Plus, the challenged ingredients were expressly permitted in organic-labeled products (though they are defined as synthetic).  “Consumers generally conflate the notions of ‘natural’ and ‘organic,’ or hold products labeled ‘organic’ to a higher standard than products labeled “natural,” and, thus, it is implausible that a reasonable consumer would believe ingredients allowed in a product labeled ‘organic,’ such as the Challenged Ingredients, would not be allowed in a product labeled ‘all natural.’”

Then, Pelayo offered the FDA’s 1991 informal statement on “natural,” but that’s not a legal requirement.  The FDA/FTC declined to define natural because the term “may be used in numerous contexts and may convey different meanings depending on that context.”  Given that finding, it was implausible that a significant portion of the general consuming public or of targeted consumers would be deceived or mislead by the use of the term “All Natural” on the pastas.  Also, even the FDA’s informal policy would allow the use of some artificial and synthetic ingredients, such as the ones challenged here.

Finally, the ingredient list clarified any ambiguity about “All Natural,” and was consistent with the use of that term.  Thus, plaintiff failed to allege either a plausible objective definition or a subjective definition shared by the reasonable consumer.

Singaporean bank finds no relief from Lanham Act

Hong Leong Finance Limited (Singapore) v. Pinnacle Performance Ltd., 2013 WL 5746126, No. 12 Civ. 6010 (S.D.N.Y. Oct. 23, 2013)

My former classmate, the Honorable Jesse Furman, got this Lanham Act extraterritoriality case.

Plaintiff HLF sued Morgan Stanley and certain affiliates related to credit-linked notes issued by Morgan Stanley.  Morgan Stanley entered into a distribution agreement with HLF, and HLF then sold the notes to Singaporean investors.  Credit-linked notes shift credit risk associated with the “reference entities” from a “protection buyer” (the bank arranging the notes) to a “protection seller” (the note investors), which uses a special purpose vehicle to stand in the middle and engage in a credit default swap.  The principal received from the investors in the notes is used to buy highly-rated securities as collateral in the event that reference entities default.  Investors get interest in the form of credit protection payments from the sponsoring bank and any interest generated by the underlying assets.  The underlying assets are typically safe and liquid, but HLF alleged that Morgan Stanley selected very risky assets here—single-tranche synthetic CDOs (in other words, clusterbombs).  They weren’t just risky; they were allegedly designed to fail, because Morgan Stanley took a short position on those very same assets.

HLF alleged that Morgan Stanley persuaded HLF to sell the notes to its customers by emphasizing that they were “conservative” and “low-risk products” suitable for HLF’s customers: middleclass and working-class Singaporeans, and small—and medium-sized enterprises. HLF eventually sold its customers $72.4 million worth of notes.  When the notes failed, Singapore’s de facto central bank stepped in and mandated that HLF pay its investors over $32 million.

The Lanham Act claim, the sole basis of federal jurisdiction, was dismissed because it failed to allege facts supporting application of the statute extraterritorially.  The Lanham Act covers conduct outside the US when necessary to prevent harm to commerce in the US.  The Second Circuit looks at three factors: “(i) whether the defendant is a United States citizen; (ii) whether there exists a conflict between the defendant’s trademark rights under foreign law and the plaintiff’s trademark rights under domestic law; and (iii) whether the defendant’s conduct has a substantial effect on United States commerce.”  The first two factors are significant, but the third is “critical and often dispositive.”

Here, HLF failed to allege facts plausibly satisfying the third factor. There was no alleged consumer confusion or harm to HLF’s goodwill in the US, because HLF doesn’t exist in the US—indeed, it alleged that it had “no expertise in foreign markets”—and the customers Morgan Stanley screwed were middle-class and working-class Singaporeans.  HLF argued that Morgan Stanley’s scheme was executed largely in New York, but mere preparation of a scheme within US borders wasn’t enough.

In any event, HLF failed to allege domestic activity “sufficiently essential” to the allegedly unlawful activity abroad.  Morgan Stanley allegedly issued and structured the notes in and around NYC.  But the gravamen of the complaint was false advertising—whether Morgan Stanley made statements that were likely to deceive or confuse investors, not statements made to HLF.  And HLF didn’t allege that Morgan Stanley directed any false ads from the US to the Singaporean investors; there wasn’t even any allegation of contact with the investors, as opposed to contact with HLF.  There was therefore no nexus between US activities and the allegedly unlawful activities abroad.

Student-athletes' right of publicity claims can ground antitrust claims

In re NCAA Student-Athlete Name & Likeness Licensing Litigation, No. C 09-1967 (N.D. Cal. Oct. 25, 2013) 

Plaintiffs, current and former college athletes, sued the NCAA; they also sued Collegiate Licensing Company and Electronic Arts, but settled those claims.  This decision concerned only the antitrust plaintiffs, not the pure right of publicity plaintiffs (whose allegations are that the NCAA misappropriated their names, images, and likenesses in direct violation of statutory and common law rights of publicity).  The antitrust plaintiffs, by contrast, alleged that the NCAA violated antitrust law law by conspiring with EA and CLC to restrain competition in the market for the commercial use of their names, images, and likenesses.        

The NCAA required student-athletes to sign releases in order to be eligible to compete.  The releases relinquished all of their righst to the commercial use of their images in perpetuity.  In reliance on these allegedly “purposefully misleading” forms and on its bylaws, the NCAA sold or licensed student-athletes’ identities to third parties like CLC and EA.  As a result of a price-fixing conspiracy/group boycott, student-athletes couldn’t receive compensation for the commercial exploitation of their identities after they stopped competing, allegedly interfering with their ability to compete in the market for the acquisition of “group licensing rights” for student-athletes’ identities in game broadcasts, rebroadcasts, and videogames.  The proposed class definition now covers student-athletes whose names, images, and likenesses were featured specifically “in game footage or in videogames” (down from an initial proposal covering apparel, highlight films, and other NCAA-branded merchandise). 

The court first rejected the NCAA’s argument that precedent barred the antitrust claim.  Turning to the specific publicity rights issues, the NCAA argued that the First Amendment, and California statutory law, barred any assertion of a right of publicity in the use of student-athlete identities in game broadcasts.  This was relevant because their antitrust claims depended, in part, on the existence of a “group licensing” market for such broadcasts/rebroadcasts.  Because of the recent terrible ruling on publicity rights in this litigation, the NCAA couldn’t make this argument for videogames, so the antitrust claims for that market remained.

Although the California statute provides that an individual has no right of publicity in the “use of [his or her] name, voice, signature, photograph, or likeness in connection with any news, public affairs, or sports broadcast or account,” that only covers California law.  Plaintiffs aren’t barred from licensing their publicity rights in any other state that recognizes the right of publicity, and the NCAA didn’t show that every other state has the same limits. 

Also, the First Amendment was not a limit.  “Neither the Supreme Court nor the federal courts of appeals have ever squarely addressed whether the First Amendment bars athletes from asserting a right of publicity in the use of their names, images, or likenesses during sports broadcasts.”  Zacchini didn’t provide clear guidance for a balancing test, but other cases have allowed related claims.  Pooley v. Nat’l Hole-In-One Ass’n89 F. Supp. 2d 1108 (D. Ariz. 2000), held that the First Amendment did not bar a professional golfer’s right-of-publicity claim against a company that used footage of him to promote its fundraising events, because of the “strictly commercial” purpose.  The original broadcast may have been protected, but not its “subsequent unauthorized reproduction.” Dreyer v. NFL, 689 F. Supp. 2d 1113 (D. Minn. 2010), involving NFL Films’ promotional videos, “also held that use of footage of an athlete’s past accomplishments is not entitled to First Amendment protection when it is done exclusively for commercial purposes.” 

Whether a use is primarily commercial involves a highly fact-specific analysis.  Though it’s a question of law, it can’t always be decided at the pleading stage.  The plaintiffs provided only general descriptions of the broadcasts and rebroadcasts in which they asserted publicity rights; the complaint mentioned live game broadcasts, rebroadcasts of “classic games,” highlight films, and “‘stock footage’ sold to corporate advertisers,” but offered scant details about each.  Still, construing the complaint in the light most favorable to plaintiffs, it was plausible that at least some of the footage, particularly promotional highlight films and stock footage sold to advertisers, was used “primarily” for commercial purposes.  If the NCAA re-raised the issue on summary judgment, plaintiffs would need to submit evidence that the relevant broadcast footage, including both archival games and live broadcasts, was used primarily for commercial purposes.

Finally, the court rejected the NCAA’s copyright preemption argument because plaintiffs weren’t seeking to protect their own copyrights but rather to license commercial uses of their images; persona isn’t copyrightable so §301 doesn’t apply; and the underlying claims were based principally on an injury to competition, not simply misappropriation.  “Intellectual property rights do not confer a privilege to violate the antitrust laws.”

Monday, October 28, 2013

First Amendment bars Lanham Act claim against university article repository

Pellegrini v. Northeastern University, No. 12–cv–40141, 2013 WL 5607019 (D. Mass. Aug. 23, 2013) (magistrate judge)

The magistrate began by characterizing this case as a high-stakes dispute involving “the First Amendment rights of a university and one of its faculty to publish research,” making the outcome clear.  Pellegrini sued Northeastern and Dr. Sun, alleging that a paper Sun wrote, and the university posted on its public digital archive, contained false and misleading information about Pellegrini’s patented technology in violation of the Lanham Act (and related state laws).

Pellegrini commercializes his IP and solicits funding for it through research grants and investments.  Northeastern also commercializes IP on a large scale.  Sun is an Associate Professor of Electrical Engineering who solicited private research grants to the University from Pellegrini. 

Pellegrini alleged: Fundamental to Pellegrini’s patent is the idea that a 20% discrepancy exists in the coupling coefficients of a certain substance, Metglas, which if true would violate standard thermodynamic laws.  Sun allegedly agreed that such a discrepancy existed and told Pellegrini he was going to publish this finding, including its effect on accepted thermodynamics. His draft paper named Pellegrini as co-author.  He allegedly told Pellegrini that these discrepancies allowed a “self-sustaining” energy generator to be built, which he intended to do.  In reliance on these assertions, Pellegrini allegedly sold an interest in his patent to a third party and used the money to finance a research grant to Northeastern, then took an unpaid research position with Northeastern to further the development and commercialization of his IP.

However, Pellegrini alleged, Sun submitted a very different paper to Applied Physics Letters, with a different title.  The paper asserted that the coupling coefficients of Metglas were equal, necessarily implying that no discrepancy existed. Though Pellegrini was listed as a co-author, Sun allegedly never consulted Pellegrini about the changes.  Northeastern posted the paper as published on its publicly-accessible digital archive “to showcase its facilities and personnel to funding sources.”  Pellegrini alleged that the falsehoods in the article would harm the value of his patent to investors.

The magistrate judge found that there was no commercial speech and therefore no commercial advertising or promotion.  Pellegrini largely conceded that the journal publication wasn’t commercial speech, but argued that Northeastern’s use of the paper, plus its alleged purpose of promoting Northeastern’s facilities and personnel as grant recipients, was commercial advertising or promotion. 

Commercial speech is generally defined as speech that does no more than propose a commercial transaction, or expression related solely to the economic interests of the speaker and its audience.  The paper didn’t propose a commercial transaction.  Nor was it aimed at dissuading consumers from buying Pellegrini’s goods or services.  It might imply that no discrepancy in coefficients existed, and thus might influence investors adversely with respect to the patent, but that didn’t satisfy the core requirement of either proposing a commercial transaction or relating solely to the economic interests of the speaker and its audience.

Pellegrini argued, however, that the use of the speech transformed it into commercial speech.  The case law recognizes that this can happen: secondary uses of First Amendment-protected speech in advertising or promotion can be subjected to the Lanham Act, as in Gordon & Breach, when the competitor employs the speech for the express purpose of influencing purchases/proposing transactions.  For example, “a restaurant clearly engages in commercial speech when it posts the New York Times review in its window, and General Motors engages in commercial speech when it announces in a television commercial that its car was ranked first by Consumer Reports.”  To find otherwise would risk leaving too much misleading speech unregulated.

Pellegrini thus contended that Northeastern commercialized the scientific paper by posting it to a “publicly accessible digital archive” that “has as its expressed [sic] purpose to ‘showcase’ NU’s facilities and personnel to ‘funding sources.’”  However, Northeastern didn’t alter the paper in any way, as other speakers found to have been engaged in commercial speech did when they summarized  or otherwise altered the underlying scientific research for promotional purposes.  And Northeastern didn’t post the paper to propose a commercial transaction, even if the purpose of the archive as a whole is to showcase Northeastern’s personnel and facilities.  Although the posting might result in a funder’s decision to give research money to Northeastern, that’s not enough to make the speech commercial, given the importance of avoiding the chill of nonprofits’ participation in public discourse.  Anyway, there was no allegation that the posting targeted sources of research grants or some other relevant consumer group; instead it was open to the public.  That’s different than posting a favorable review in a restaurant window, which “targets consumers making dining decisions.”  This and other examples involved “an express appeal to buy the speaker’s product” (comment: or at least a necessary implication of an appeal).

Even accepting Pellegrini’s disputed allegation that he competed with Northeastern, this wasn’t like other cases that found commercial speech, where the use of scientific papers occurred in the context of a full-scale marketing plan to compete with the relevant plaintiffs.  Given that the dissemination here wasn’t targeted at consumers, and given that defendants were “in the ‘business’ of academia, which is a much more protected field than the business of publishing that was involved in Gordon & Breach,” this case was much more clearly protected than others.

Moreover, the use was not one that related solely to the economic interests of the speaker and its audience.  Even accepting that Northeastern had an economic motive to post the paper, that wasn’t enough.  First, Northeastern is an educational institution, with “substantial, non-commercial purposes for the posting of its academic output: to educate the public, stimulate debate among teachers and students, and promote testing and experimentation. Non-profits and universities are presumed to have a non-commercial purpose for their speech, and are therefore afforded broad protection from regulation.” This protects academic freedom.
Second, the paper’s content was itself noncommercial.  Its subject matter was constitutionally protected, unlike painkillers or motor oil.  (This is kind of nonsensical. An academic paper on painkillers would also be constitutionally protected; it’s not really the subject matter that makes the difference.) 
Third, the paper related to non-economic interests of the audience.  Given its openness, the audience could be presumed to include individuals who were just interested and had no economic motive.  (Note that “relate solely to the economic interests of the speaker and its audience” has a more sensible meaning here than some other courts have given it—of course there will always be reasons for those economic interests, and that shouldn’t convert commercial speech into noncommercial speech.  But a large noncommercially interested audience is a different matter.)

Versace embraces counterfeit style

Versace's collaboration with M.I.A. (since this kind of co-branding is now "collaboration"--some interesting work could be done on the double meaning there) involves copying counterfeit styles themselves copying Versace.  Some images here, not that I could recognize what makes them either Versace or counterfeit-like.  Also of note: I got this story through AIPLA's daily headline delivery service.  I follow a lot of news feeds, but AIPLA's relatively new offering adds more value than average, exposing me to legal news from around the world--from corporate counsel's perspective, of course!

Reading list: empirical study of fertility clinic advertising

Jim Hawkins, Selling ART: An Empirical Assessment of Advertising on Fertility Clinics’ Websites, 88 Indiana Law Journal 1147 (2013) (SSRN version): Nice study on what claims clinics actually make versus what claims scholars have worried about—answer, some overlap but not complete, particularly with respect to claims about success rates. Also, self-regulation hasn’t worked. Notable also because it cites and quotes our casebook!

AAI amicus in Lexmark

The American Antitrust Institute’s amicus brief in favor of respondent in Lexmark is out.

belated defense of law reviews

Sadly, this post has been delayed while I got an overdue article off my plate!  The NYT’s Adam Liptak writes about law reviews, with this unhelpful comparison: “The judge, lawyer or ordinary reader looking for accessible and timely accounts or critiques of legal developments is much better off turning to the many excellent law blogs.”  Look, I flatter myself that 43(b)log might count among the latter, but “timely accounts” and “critiques” are meaningless without a broader conceptual apparatus allowing us—professors and practicing lawyers alike—to explain what they mean, and you don’t get that from a blog alone, unless perhaps you are Marty Lederman (who, not for nothing, ended up publishing his work in a conventional and high-ranked place as well, where he had a different audience and time to elaborate and revise). 

The cited study, which unfortunately isn’t up on a free archive, shows that many people surveyed, including many law professors, advocate reforms such as peer review and blind review (also, fewer bad edits).  This isn’t a flaw in the survey, but it is a flaw in the prescriptions: saying we should have peer review and blind review is like saying we should add water and also decrease the moisture content.  I have been asked to do peer review on a number of articles over the past few years—see, law reviews are listening!—and they’ve always been formally “blinded” and I’ve always known without doing any research who wrote them, because I go to WIPIP.  This is a well-recognized effect of peer review.  Maybe blinding on intake (by hypothesis, when the less experienced law review editors are inadvertently basing their initial screening less on field-specific knowledge and more on reputation) would help even if the ultimate peer review isn’t blind.  That’s not how peer review works in other fields, but that doesn’t make it wrong for law reviews.

Relatedly, a feature of asking respondents what reforms they support, from a list of possibilities, is that they favor stuff that helps them even if it creates burdens elsewhere in the system—professors wanted articles editors to explain their rejections!  And the methodology has trouble capturing tradeoffs like peer review/blind review.  So nobody but professors was enthusiastic about getting rid of the standard requirement that a citation has to be provided for (almost) every assertion, but everybody thought that law reviews were too long.  Like my colleagues, I would’ve thought that citation metastasis was low-hanging fruit there, but apparently not for many of the respondents—because “cite everything” has different functions for law review editors and people who are reading in order to cherry-pick arguments that are useful for them than it does for writers and other readers.  Nobody is wrong here, but we can’t all be satisfied. 

As for the overediting complaints aired in the study, fair enough.  Lord knows I’ve gotten annoying edits (but I’ve also gotten fantastic edits by students who did incredible work).  But I believe working with editors who ask for weird things serves a pedagogical purpose.  By contrast, most of my non-law review experience has involved minimal editing, for pure copyediting errors at most, and it’s deprived me of input on whether I’m communicating in the way I want to.

Thursday, October 17, 2013

INTA's brief in Lexmark

Stop the presses: INTA and I are in agreement! 

When is a sale not a sale?

When employees are directed to pretend it isn't unless you're a preferred customer, Mark Ellwood writes in Slate.  I'm guessing that if a small sign stating "sale" is a legal requirement, the NY AG wouldn't be happy with the deceptive implementation:
Walk-ins from the street who inspect a shoe and spot the same dot will be told it’s stocktaking (dismissive and deceptive, sure, but technically true). Calling the subterfuge “a huge pain in the ass,” one former sales assistant explains that he was asked to demur when casual passersby would dawdle or ask what the dots meant. It was easy, given the minimal evidence.

law barring "surcharge for credit" signs unconstitutional

Expressions Hair Design v. Schneiderman, 13 Civ. 3775, 2013 WL 5477607 (S.D.N.Y. Oct. 3, 2013)

Under NY GBL § 518, a vendor who wants to impose a surcharge for using a credit card to compensate for the credit card companies’ surcharges risks criminal prosecution if it labels its credit card price a surcharge rather than advertising that it offers a discount for using cash.  The court found this restriction unconstitutional.  Section 518 provides: “No seller in any sales transaction may impose a surcharge on a holder who elects to use a credit card in lieu of payment by cash, check, or similar means.”  Everyone agreed, however that the statute didn’t bar “discounts” for cash.

A surcharge for credit and a discount for cash are, in theory, equivalent.  But consumer psychology is different: “consumers perceive credit-card surcharges negatively as a kind of loss or penalty, while cash discounts are perceived positively as a kind of gain or bonus.”  (Citing, inter alia, my colleage Adam Levitin—albeit misspelling his name.)  Plaintiffs argued that “surcharge” was “an accurate and effective way to convey to consumers that paying with credit is actually more expensive than paying with cash,” given that the prices charged to merchants by credit card companies are among the largest and fastest-growing expenses for some merchants.  (Citing Levitin again.)  Using “surcharge” would, they argued, make consumers more likely to notice the fees and act to avoid them, producing downward pressure on the credit card fees, known as “swipe fees.”  When notice of surcharges was permitted in Australia, swipe fees there declined significantly.  Without using surcharges labeled as such, “some retailers cannot effectively call consumers’ attention to the price differences between cash and credit, and therefore must charge higher headline prices for everyone.”  Thus, surcharge bans force cash users to subsidize credit card users’ purchases, and this is a problem insofar as cash users tend to be disproportionately poor and minority.  The yearly subsidy from cash-using households has been estimated at $149, with $1333 transferred to each card user.

Defendants responded that the surcharge ban protected consumers from unfair surprise and deception, because consumers “tend to plan and anchor their expectations around the advertised sticker price of a given item they intend to purchase.” A consumer who later learns of a discount isn’t harmed, but if she learns of an additional charge for using credit, her expectations can be frustrated.

Credit card companies used to ban price differences by contract.  Then Congress amended TILA to bar that practice, but enacted a ban on using the word surcharge, as GBL § 518 did.  That law lapsed in 1984, which led the credit card companies to lobby states to enact similar laws, which was the genesis of § 518; credit card companies also barred use of “surcharge” by contract.  In 2013, Visa and MasterCard agreed to drop these prohibitions as part of a larger antitrust settlement.

The plaintiff businesses paid swipe fees and would like to charge higher prices for credit.  But they contended that framing this as a cash discount “would make advertised prices look higher than they are, without making it transparent that the higher price would be due solely to credit card transaction costs -- precisely the information [they] wish to convey to [their] consumers.”   Four of the five businesses thus simply charged the same price for all transactions.  The fifth used to post a sign that informed customers of a 3% additional charge for credit, until informed by a lawyer-customer that this was illegal.  It still charged more for credit, without characterizing that as a surcharge or extra charge for credit as opposed to a discount for cash. 

Defendants argued that § 518 was an anti-fraud law barring “surcharges” that were increases over the “regular price,” and that the “regular price” was the price communicated to consumers. Thus, defendants argued, if the credit card price was displayed at least as conspicuously as the cash price, then the credit card price would be the “regular price” and there’d be no violation of the law.  Some of the plaintiffs, defendants argued, didn’t propose to advertise credit card prices any less prominently than cash prices, and thus lacked standing.  However, several plaintiffs did want to advertise their surcharges only as a percentage fee on top of their cash prices, and would violate defendants’ reading of the statute.  In any event, the court rejected defendants’ “rather convoluted interpretation” of the statute, which on its face simply banned surcharges and thus chilled retailers from characterizing their prices as surcharges without providing guidance on how prominently prices had to be displayed.  The court found that there was a real risk of prosecution, as New York had enforced the law before, even against someone who testified that his signs clearly stated both the cash price and the credit price, and against people who didn’t post prices but only announced them orally.  While the (lapsed) federal definitions were designed to permit two-tier pricing systems as long as consumers were exposed to the highest price when they saw a tagged or posted price, New York hadn’t adopted those definitions.

After Sorrell v. IMS Health, content-based restrictions on speech require heightened scrutiny and are presumptively invalid, even for commercial speech (even though that category is defined by its content).  Under Caronia, criminal laws warrant even more careful scrutiny.  Plaintiffs argued that §518 restricted speech based on its content: describing an extra charge as a surcharge.  Defendants responded that §518 only regulated nonexpressive conduct, imposing a surcharge, and that in the alternative it only imposed a disclosure requirement, which required only rational basis review.

The court agreed with the plaintiffs. The law drew the line between prohibited surcharges and permissible discounts based on words and labels, not economic realities.  Anyway, even under defendants’ reading, the law still violated the First Amendment.  Though sellers could set the credit card price at any level they wanted, that was the conduct at issue; the speech was in how they communicated that price.  “Pricing is a routine subject of economic regulation, but the manner in which price information is conveyed to buyers is quintessentially expressive, and therefore protected by the First Amendment.”  (And the manner in which price information is conveyed can pretty easily misleading, given the many ways in which prices can be gamed, but we’re not worrying about that right now.)

The argument that § 518 was just a disclosure rule also failed.  Under the law, disclosure wasn’t sufficient; the statute also barred sellers “from advertising their cash price in a way that causes consumers to perceive it as the regular, baseline price against which all other prices are measured.”  By comparison, Minnesota’s surcharge law simply required a seller to inform the buyer of the surcharge both orally at the time of sale and by a conspicuously posted sign.  (Of course, that doesn’t really deal with the bait and switch issue of the consumer who’s already decided to buy then having to accept the higher price or leave, unless we assume—contrary to most of what we know about consumer behavior—that consumers read those signs.  Compare the litigation about the practice of posting “prices,” then charging consumers ablanket percentage over the posted price at checkout no matter what form of payment they used—the stores using that practice claimed that they did disclose it on signs in the store, but unsurprisingly it was still deceptive.  A real disclosure law would require posting cash price/credit price together.)   The court reasoned that a seller “who fully complied with Minnesota’s disclosure requirement would still violate defendants’ reading of section 518 if it displayed its cash price one iota more prominently than the credit card price.” That makes it an anti-disclosure statute, because it bars disclosures of cash prices “even marginally more conspicuously” than credit prices.  (By that standard, the FTC’s disclosure guidelines seem to be anti-disclosure guidelines as well, since they bar adding distractors to an ad that divert consumers from any required disclosures.)  Because § 518 was an outright bar on speech, the relaxed standard of Zauderer was inapplicable.

Thus, intermediate scrutiny applied, and § 518 failed it.  The court therefore didn’t reach plaintiffs’ argument that listing the prices of their goods and services wasn’t commercial speech, but shockingly indicated that it was inclined to agree.  Though commercial speech generally “does no more than propose a commercial transaction,” or is “related solely to the economic interests of the speaker and its audience,” and though price information “no doubt proposes a transaction and relates to economic interests,” this was “more than just a debate about how best to sell toothpaste,” whatever that means.  Plaintiffs wanted to explain why prices were at the level they were and who was responsible for that.  “Given current debates over swipe fees and financial regulation more generally, those questions have a powerful noncommercial valence” (emphasis added).  (WTF?  Look, there are debates about whether fluoride is dangerous and how to preserve dental hygiene “more generally”; that doesn’t mean “our toothpaste has flouride” is noncommercial speech.  This interpretation of “does no more than propose a commercial transaction” empties the category, since all proposals of commercial transactions implicitly and necessarily make arguments about why a person ought to have certain preferences or satisfy those preferences in a certain way.)

Anyhow, intermediate scrutiny: dual pricing was lawful in itself, and the speech covered was non-misleading.  Though surcharges might be misleading if they were hidden or inadequately disclosed, the cases teach that potentially misleading information can’t absolutely be banned if it can be presented in a nondeceptive way.  There was nothing “inherently misleading” about describing a price difference as a credit surcharge or about displaying a credit price “with marginally less prominence than the cash price.”  Truthfully and effectively conveying the true costs of using credit cards could actually make consumers more informed rather than less. 

(Look, I’m actually hugely sympathetic with the outcome here, except for that endorsement of displaying a credit price less prominently.  But this rationale is pretty misleading: the court is equivocating about who bears that “true cost.”  If I’m using credit, the “true cost” is a big benefit to me, according to the court’s own evidence.  It’s the dynamic effects that make a difference, once retailers feel that they can get away with charging a “surcharge” where they couldn’t be bothered to give a “discount,” given the realities of consumer behavior.  And those realities, not for nothing, indicate that consumers are not computers, which means we ought to recognize that displaying the credit price less prominently could easily confuse consumers even if it “shouldn’t”—the use of “discount for cash” instead of “surcharge for credit” shouldn’t affect consumers, but it plainly does.)

Compared to credit card surcharges aren’t misleadingly presented, §518 “perpetuates consumer confusion by preventing sellers from using the most effective means at their disposal to educate consumers about the true costs of credit-card usage.”  Thus, the law doesn’t directly advance consumer protection interests.

Also, §518 was riddled with numerous “exemptions and inconsistencies [that] bring into question the purpose” of the statute.  The bait-and-switch concern offered by defendants applied only to credit card surcharges, not other additional charges, and thus the law didn’t actually protect them, “since handling charges, shipping costs, service fees, processing fees, ‘suggested tips,’ and any number of other types of additional charges -- which consumers may or may not be able to take steps to avoid -- may still be added on top.”  Plus, New York exempted itself and some favored utilities from the statute, indicating that it wanted to escape the blame of higher prices but didn’t want to let other sellers do so.  “Defendants offer no explanation for why credit-card surcharges are somehow less deceptive when imposed by the Water Board, for example, than when imposed by ordinary commercial retailers like the plaintiffs.”

In addition, §518 was far broader than necessary to serve anti-fraud goals; New York could easily have regulated only surcharges that were deceptive or misleading, or it could have used Minnesota’s model.  Anyway, New York already had laws barring false advertising and deceptive acts and practices.  Thus, § 518 was overbroad and violated the First Amendment.

It was also impermissibly vague, since it failed to provide adequate notice of what was barred, as defendants interpreted it.  Making liability turn on the labels sellers used to describe their prices was impermissible because careful or sophisticated sellers could avoid liability by using “discount for cash” while more careless ones would be liable for using “credit price.”  (I don’t know why this is vague as opposed to credit card-company-favoring but ok.)  The narrowing interpretation offered by defendants—credit prices had to be displayed at least as prominently as cash prices—would present a closer question, but was too far from the statutory text to matter.

The court found that whether §518 was preempted as anticompetitive by the Sherman Act presented a factual question that couldn’t be resolved at this stage of the case.

photos can be false by necessary implication

Veve v. Corporan, No. 12–1073 (GAG), 2013 WL 5603263 (D.P.R.| Oct. 11, 2013)

Plaintiffs Veve and his business Batey Zipline Adventure sued defendants, Corporan and Atabey Eco Tours, for trademark infringement, trade dress infringement, false advertisement, and product disparagement.  They moved for default judgment and then summary judgment; the court granted summary judgment except as to the trade dress claim.

Batey Zipline Adventure offers eco-tour services: hiking and sightseeing tours in which customers learn about the natural ecosystems of the Tanamá region.  Plaintiffs spent about $90,000 in advertising and marketing the Batey brand, since 2008 including via the internet, the most effective advertising source with a worldwide reach.  Atabey began in late 2010, offering competing eco-tour services and using advertising banners in the same places Batey did and also using the internet. 

Plaintiffs received phone calls from confused prospective customers, and often had to explain that Batey and Atabey were different.  One witness stated that she constantly had to instruct customers to follow Batey road signs and not Atabey road signs, which confused many customers because they were often found side-by-side; customers complained of the phonetic similarity.  A Facebook chat documented a prospective customer’s confusion.  Atabey’s former half-owner stated that he often received calls at the Atabey phone number from customers asking about Batey services.  One witness stated that she questioned Corporan about the similarity of the names, but Corporan ignored her concerns.

On the Atabey webiste and Facebook page, there are various pictures of the region and of Atabey expeditions, but some images are purportedly of the property of Perez, a person associated with Batey, most noticeably a suspension bridge. Perez told Corpran that she couldn’t enter his property or use photos of his property to advertise her business; he permits other eco-tourism companies to do business on his property. 

Corporan also issued a “press release” regarding Batey and Perez personally, claiming that Batey was in violation of Puerto Rico law because Perez was responsible for cutting down an endemic species of plant, the caoba bush, and that she called the Natural Resources Department of Puerto Rico on him.  Perez denied the cutting and Corporan offered no proof . Corporan also falsely claimed that Batey operated without a business license and that it did not pay taxes.

Given the default, there’s not much to say here about the trademark claims, though the court was careful in running through the factors even without the defendant’s participation.  On the trade dress claims, default was not enough.  Because the claimed trade dress was unregistered, the burden was on plaintiffs to show distinctiveness and nonfunctionality.  The claimed trade dress was “an arrangement of elements that include: the suspension bridge, caves, hiking paths, a sustainable or eco-friendly farming system, forest and hills, and a network of platforms interconnected by zip lines (or canopies).”   But these elements were inherently functional: the suspension bridge, pathways, and ziplines all served a purpose, specifically movement from one place to another.  Since plaintiffs didn’t meet their burden of showing nonfunctionality, the court didn’t address distinctiveness or confusion.

The court also found false advertising based on the use of photos depicting plaintiffs’ property: pictures of the suspension bridge and caves located on their land.  These pictures constituted false statements of fact. Though they didn’t explicitly state that the bridge and caves were part of the Atabey experience, the necessary implication was that they comprised part of it.  That was also material because it depicted “attractive elements of the eco-tour experience,” which would likely influence purchasing decisions.  A statement that defendants were “the only certified sustainable operation endorsed by the Puerto Rico Tourism Company in the region” was also false because it was unsubstantiated by any evidence.

The court likewise found for plaintiffs on the commercial disparagement, defamation, and trespass claims.  For the former, the relevant statements were commercial speech because made with the intent to influence potential customers, and attacked an essential part of the quality of Batey’s services—safety and commitment to environmental protection. 

Tuesday, October 15, 2013

Static Control's brief in Lexmark

Available here.

Lanham Act and ACPA damages not dischargeable in bankruptcy

In re Butler (Skydive Arizona, Inc. v. Butler), Bkcy. No. 11–40930, No. 11–4037, 2013 WL 5591922 (N.D. Ca. Sept. 9, 2013)

Here, the debtor was unable to discharge his liability for violation of ACPA, trademark infringement, and false advertising, because of the collateral estoppel effect of judge and jury findings in the underling cause of action.  The judge granted summary judgment on the false advertising claim, while the jury found Butler (and other defendants) liable for trademark infringement and cybersquatting.  The jury found, by clear and convincing evidence, that the infringement and false advertising were willful.  The district court awarded attorneys’ fees, emphasizing the defendants’ “seeming disregard for the people they harmed or the reputation they sullied....” and that exceptionality can come from willfulness, which the jury had found.  While the Ninth Circuit reversed the district court’s punitive doubling of the jury’s award of actual damages, it did not touch the underlying factual findings.  Plaintiff’s proof of claim in the bankruptcy case was therefore diminished but still in the multimillion-dollar range.

Exceptions to discharge are construed narrowly, but debts incurred by “willful and malicious injury by the debtor to another entity or to the property of another entity” are nondischargeable.  The question was the collateral estoppel effect of the earlier proceedings.  ACPA violations require both bad faith and an absence of safe harbor protection for a reasonable belief in fair/lawful use.  Thus, a finding of liability for cybersquatting requires an intent to cause harm and constitutes “willful and malicious injury,” and the debtor was collaterally estopped from asserting dischargeability.

The court reasoned similarly on the trademark infringement and false advertising claims, though intent is not a required element on those.  The jury specifically found that the trademark infringement was willful; though the verdict by itself didn’t specify whether the acts themselves were willful or they were willfully done with intent to cause harm, “intentional infringement is tantamount to intentional injury under bankruptcy law” because “the intent to infringe and the intent to deprive the mark’s owner of the value and benefit of his property are opposite sides of the same coin.”   Also, even in the absence of record evidence on the defendant’s intent to cause harm, the trial court’s additional findings on the need for attorney’s fees answered the question. 

The trial court’s finding took the damages award, as well as the fee award, into the nondischargeable category.  

The same logic applied to the false advertisng claims: the jury found willfulness and injury is an element of false advertising (note that it isn’t for trademark, apparently!).  “Therefore, a defendant could not willfully commit false advertising without intending to cause harm.”  The trial court found that defendants falsely claimed to own skydiving centers in various locations where they didn’t and unfairly used plaintiff’s photos on their own website. Combined with the court’s finding of exceptionality, this was enough for collateral estoppel to kick in.

Software update defeats class certification

Waller v. Hewlett–Packard Co., No. 11 cv0454, 2013 WL 5551642 (S.D. Cal. Sept. 29, 2013)

So I’m trying to cut down on California coverage and just give the highlights.  That said, I recommend this case for some of the most detailed discussion of the Article III standing v. class action mechanism issue that’s percolating (or perhaps just thrashing around) in the California district courts.  Here’s my previous discussion of the claim that HP misleadingly advertised hands-free automatic backup, when in fact backing up certain file types required individual customer programming.

As the court explained, it had stayed Waller’s motion for class certification pending the appeal of a different case, expecting that “the Ninth Circuit would confront and resolve a question that has become a kind of spike strip in the class certification of lawsuits” under the UCL—whether all members of a putative class must have Article III standing and what that would mean, given that the underlying claim has no injury requirement but Article III standing does.  The potential consequence of requiring Article III standing for every unnamed class member is that “[s]imple removal by the defendant would be a game-changer.”  Plus, a lot turns on whether actual reliance is required, or merely a purchase of a product with misleading labeling: the former would generally preclude certification.  Here, the court reconsidered its decision to stay the case and denied Waller’s motion with prejudice, while leaving him with individual claims.

The Ninth Circuit has held that UCL claims are governed by the reasonable consumer standard, meaning that individualized proof of reliance and causation isn’t necessarily required. Stearns v. Ticketmaster Corp., 655 F.3d 1013 (9th Cir. 2011).  Relatedly, there was no Article III problem as long as class members “were relieved of their money”; and only the standing of the representative party mattered anyway. Mazza v. American Honda Motor Co., Inc., 666 F.3d 581 (9th Cir. 2012), contained a throwaway line “[N]o class may be certified that contains members lacking Article III standing,” citing a Second Circuit case but then immediately citing Stearns and not explaining the contradiction, and then setting a low bar for standing: as the court here summarized, “[s]imply spending money on something that doesn’t do what it claims to do is all the injury absent class members need” under Mazza.  The district court opinions are also in disarray.

Considering the precedent, the court here concluded that where a class representative has standing, arguments about unnamed class members’ injuries should be analyzed through Rule 23, not through examining the Article III standing of unnamed class members.  For one thing, Mazza didn’t acknowledge what it was arguably saying or deal with earlier conflicting circuit and Supreme Court authority.  Lewis v. Casey, 518 U.S. 343, 395 (1996) (“One class representative has standing, and with the right to sue thus established ... the propriety of awarding classwide relief ... does not require a demonstration that some or all of the unnamed class could themselves satisfy the standing requirements for named plaintiffs.”) (Souter, J., concurring).  Also, HP removed this case to federal court, and it would be unfair to let HP do that and then “seize on federal constitutional standing requirements to say the case cannot proceed as a class action.… HP, for perfectly understandable reasons, doesn’t like that relief is available under the UCL without any proof of reliance or injury, and it is trying to backdoor those elements into this case with an Article III standing requirement.”

Even if the court was wrong about Article III, it would find that absent class members had Article III standing here.  The meaning of “injury in fact” isn’t entirely clear in a misrepresentation-based UCL case. Some cases suggest that “simply buying a product that doesn’t do what it claims is an automatic economic injury, even if the misrepresentation is irrelevant to the purchaser’s usage.”  But arguably the injury must be traceable to the defendant’s conduct “in some thicker sense: the plaintiff must have actually focused on the alleged misrepresentations in deciding to buy the product, and suffered some injury by relying on the misrepresentation.”  If misrepresentation is enough, then standing isn’t much of a barrier as long as absent class members bought a product of diminished capabilities and therefore diminished economic value.  But if reliance is required, that’s almost invariably a highly individualized inquiry. 

The court concluded that Article III would be satisfied by the purchase of a product containing the alleged misrepresentations.  First, a contrary rule would make class actions of this kind “dead on arrival in federal court.”  All a defendant would have to do would be to remove under CAFA and kill them.  Second, Article III’s requirements turn on the nature of the claim asserted, and in California UCL and FAL cases don’t require individualized proof of deception, reliance, and injury. The UCL is focused “on the defendant’s conduct, rather than the plaintiff’s damages, in service of the statute’s larger purpose of protecting the general public against unscrupulous business practices.”  “That being the law of the substantive claims at issue in this case, it makes little sense to concoct and impose a standard for Article III standing that effectively contains the very reliance and deception requirements the actual claims do not.”

Third, the court had a (relatedly) broader conception of Article III injury than HP argued for.  Reliance on misrepresentation causes loss.  But there’s also an economic loss “where a product simply doesn’t do something it purports to do—irrespective of whether that hampers the consumer’s intended use and irrespective of its hypothetical, retrospective impact on the consumer’s purchasing decision.”  That’s just basic economics: the market price has been inflated.  “A car with dysfunctional headlights, for example, is simply less useful and therefore less valuable than one with working headlights; it’s no rebuttal to say that the owner of the former doesn’t drive the car at all or drives it only in broad daylight and never in tunnels. Everyone who pays for a car is paying some amount of money for working headlights.”  Fourth, the court was unwilling to draw the fine distinction between product defects “that are imminent, unmitigatable, and pose a constant risk of harm, and defects that are hypothetical and may never cause a consumer any injury or loss in value.”  Defective airbag sensors, for example, only harm drivers who actually get in accidents.  “[O]n some level, the question of injury caused by a product will always be hypothetical; it will always turn on an individual’s particular usage of that product.”

Turning to class status, the court easily found numerosity and commonality (what HP represented its SimpleSave hard drive would do and whether that was misleading to a reasonable consumer).  Waller’s claim was typical: he alleged that he relied on HP’s misrepresentations about SimpleSave and lost money thereby; it didn’t matter that not every member of the class would’ve suffered a data loss, and some might not have had the “outlier” file types that weren’t automatically saved.  The representation at issue—that SimpleSave automatically backed up all file types—was either absolutely true or absolutely false.  “It may back up all of a purchaser’s files, but that just means the purchaser is lucky, and it doesn’t mean that he possesses a product that’s of less utility than is advertised.” Even customers with no outlier file types “bought and now own a device that just doesn’t do what it’s alleged to do, and is therefore of diminished utility and value.”

Waller and his counsel were also adequate representatives.

The court rejected HP’s arguments that individualized questions of reliance and injury defeated predominance because different users might’ve understood how SimpleSave worked differently.  This misunderstood what a UCL and FAL claim required: “very little.”  Deceptiveness was a question of materiality, which was for a jury to decide rather than a court at the certification stage.  As a policy matter, California focuses on the defendant’s objective conduct. “If a product is advertised with a misrepresentation, that is more or less the end of it; it can be presumed at the class certification stage that the consumer would have paid less for the product, or not purchased it at all, with more accurate information.”  HP argued that this produced a windfall to unharmed or oblivious consumers; this was true “to the extent that the UCL and FAL are extremely consumer-friendly statutes that require very little to establish liability.”  But there were checks on runaway liability: the UCL is an equitable statute generally limiting plaintiffs to injunctive relief and restitution, not damages or attorneys’ fees, and HP had “presentable” arguments for a small, relatively painless restitution award given that the files not automatically backed up were used by less than 1% of the population; studies showed that most people would’ve bought the product anyway; and the user manual also disclosed that the product could be programmed to back up the outlier files.  A trier of fact might well find no material misrepresentation or only a tiny one.  “Of course, Waller puts the value differential somewhere between $12 and $30 per hard drive, but these are all questions for the trier of fact to resolve.” 

A second check on runaway liability “is the requirement that class members at least have been exposed to the misrepresentation,” per Mazza.  HP argued that putative class members weren’t exposed to a uniform representation, since the 1 TB drive had different packaging from the 320 GB drive Waller bought, and since online purchasers didn’t all see the same representations: one website “neither described the SimpleSave or included text from the product packaging in the listing,” while Amazon apparently included the misrepresentations at issue but it wasn’t clear that the text was identical to the actual packaging or how responsible HP was for that description.  HP’s point could be addressed by modifying the class definition, possibly with a website-by-website analysis.  At a minimum, certification of a class of all in-store purchasers of SimpleSave devices could be appropriate.

However, “several months after Waller purchased his SimpleSave and after he filed his original complaint in this case, HP released a free software update for the SimpleSave that makes it automatically back up all file types.”  And already-purchased SimpleSave devices automatically checked for updates when connected to the internet.  The update remains available even though SimpleSave devices are no longer made or sold.  Indeed, Waller’s own SimpleSave had the update soon after it was released.  Waller conceded at his deposition that the update addressed his grievance.

HP argued that common questions couldn’t predominate given that individualized inquiries would be needed to determine when class members took advantage of the upgrade.  “Not only do individual issues potentially predominate when there’s an available remedy for the grievance of the putative class, but the availability of that remedy calls into question the Court’s very benefit-of-the-bargain theory of injury in this case.”  Once purchasers got a device that automatically saved all their files, they then had exactly what they paid for.

Relatedly, HP argued that Waller didn’t fairly and adequately protect the class’s interests given the remedy already available without a costly lawsuit.  When disappointed class members would be better off with refunds or replacements, the high transaction costs—notice and attorneys’ fees—arent’ justified.  This tied in to HP’s argument that the upgrade was superior to a class action.  Although Rule 23(b)(3) speaks of “other available methods for fairly and efficiently adjudicating the controversy,” and upgrades aren’t a form of “adjudication,” remedial measures taken by a defendant can be taken into account in superiority analysis. 

Even if the update didn’t affect predominance, it did bear on adequacy and superiority.  The upgrade also went to the core of the economic injury argument at the heart of UCL certification as the court interpreted it. “The UCL may not require any individualized proof of deception, reliance, and injury, but what that really means is that it doesn’t require proof of deception, reliance, and injury beyond a buyer paying more for a product than he otherwise would have.”  Without that threshold economic injury, there’s no UCL claim. Waller’s extra injuries—the cost of retrieving files that weren’t backed up—weren’t enough to satisfy the injury and causation requirements for standing in a restitution class action.  Thus, the update caused certification to fail.

The court did reject HP’s argument that Waller didn’t offer a reliable method for calculating restitution, something that need not be shown with certainty at the certification stage. The financial injury could be measured by calculating the cost differential between the price of the SimpleSave and the price of a device that had to be manually configured to save certain file types.

Willful false advertising insufficient to justify fee award

Eastman Chemical Co. v. Plastipure, Inc., No. A–12–CA–057, 2013 WL 5555373 (W.D. Tex. Oct. 4, 2013)

Previous discussion here.  Based on its successful Lanham Act false advertising trial result, Eastman sought attorneys’ fees and costs (the latter of which it got as a matter of course).  The court found the case unexceptional, at least in the relevant way, and declined to award fees.  Exceptional cases require underlying violations that are “malicious, fraudulent, deliberate, or willful,” and the required level of culpability is high and must be shown by clear and convincing evidence.

This case was really nothing more than a battle of experts, with testimony on both sides. Though the jury found willfulness, that didn’t bind the court on exceptionality.  The case required jurors to “sift through complex scientific testimony,” and the court would’ve upheld a verdict for defendants as well.  “From the evidence presented at trial, reasonable jurors could have found either side’s scientific testing to be flawed.”  Defendants’ belief in the validity of the testing and data underlying their statements was central to their defense theory, and a good faith belief should generally preclude a finding of exceptionality.  “Defendants presented considerable evidence demonstrating their good faith basis for believing the statements they made were true,” except possibly for the claim that plaintiff’s product Tritan itself was harmful to humans (um, seems like a pretty big “except”!).  Though no witness was willing to testify that Tritan was harmful because the relevant testing hasn’t been performed, that exception didn’t make the case exceptional in light of all the facts and circumstances.

Along with the “speculative nature” of liability, Eastman’s failure to prove money damages was also suggestive of nonexceptionality.  Eastman’s expert didn’t survey plastic manufacturers—Eastman’s direct customers—but instead surveyed end consumers, and her methodology was seriously called into question.  (The court also criticized her fee, “more than $65,000.00 for a basic Internet survey.”)

Eastman also asked the court to consider defendants’ litigation conduct, but the Fifth Circuit hadn’t endorsed that as a consideration: “the Court believes the safer course is to rely on the actual evidence rather than the squabblings of the attorneys who represented these parties.”  Even if it did consider litigation conduct, the court wouldn’t find the case exceptional.  There’s nothing exceptional about “petty discovery disputes and run-of-the-mill litigation tactics, particularly where both sides have willingly run up their fees to the tune of several million dollars.”  The case was aggressively litigated, but “neither side was sure what this case actually was until the trial was over. Pleaded causes of action, defenses, and other issues melted away as the actual evidence failed to provide any support for the parties’ asserted positions.”  Though Eastman failed even to seek money damages from the jury, before the trial its settlement offer was over $5 million plus other relief.  “Defendants had at least five million good reasons to proceed to trial, as even a total loss at the hands of the jury left Defendants in a better position than settling this case would have.”

In a footnote, the court snarked that this was an “exceptional” case in the lay rather than legal sense, since the lawyers spent more than $7 million on a one-issue case with no damages; the jury resolved the issue in under four hours of deliberation but the parties filed over 185 pages of post-trial motions; and there were multiple discovery disputes that contributed to the “needlessly contentious” litigation. “And who could forget the parties’ generous decision to extend the dispositive motions deadline by five weeks without seeking leave or even giving the Court notice, in violation of this Court’s rules? Truth be told, this case has been, and continues to be, an exceptional example of precisely how not to try a lawsuit.”  (Eek.  I have to say, I’m a bit more sympathetic to plaintiff here, given that defendant’s ads accused it of being harmful to people—that’s pretty disparaging, if untrue, and I can see why they would’ve considered it bet-the-company litigation.  That doesn’t mean the case was pleasant to try, or that every part of the burden can be placed on defendants’ shoulders, though.)