Your tax dollars at work, protecting America from infringing merchandise: I don't have much brief for protecting counterfeits, but I find it hard to believe this is the best use of public resources: "Gross misspellings of superstars’ names are one of the things that give away the dubious duds. But more sophisticated fakes are indistinguishable from $300 authentic jerseys hanging in the NFL shop set up in the Phoenix Convention Center. And it can be hard to persuade fans that saving several hundred dollars on a set of matching number 12 jerseys for the family is a bad idea." The gross misspellings seem unlikely to be confusing, and the "sophisticated fakes" don't harm consumers (and are probably not confusing either).
But the real offense comes when we learn that ICE's resources are also being devoted to suppress critical uses: "The profane debasing of a mascot — and really anything that denigrates a team — is guaranteed to be contraband, said Daniel Modricker, a spokesman for US Immigration and Customs Enforcement. That 'Yankees Suck' T-shirt you put on for special occasions? If it uses anything that looks like a team or league logo, it probably constitutes trademark infringement."
No, it really, really doesn't. "Profane debasing"--and when did mascots become sacred?--is not confusing. I don't think ICE has authority to seize diluting merchandise, and anyway very few of these will be using the profaned mascots "as a mark," meaning the dilution exceptions for parody and criticism apply. This is a blatant misunderstanding of the law, being perpetuated by a federal official with only the small reassurance that federal agents won't come down and rip a previously purchased shirt off your back.
Less annoying, but also sort of funny, is the attempt to answer the question "why are you spending so much time on fake jerseys" by pointing to problems caused by fake cribs and auto parts. The Superbowl is a good opportunity to highlight the issue!
Saturday, January 31, 2015
Friday, January 30, 2015
Advanced Fluid Systems, Inc. v. Huber, 28 F. Supp. 3d 306 (M.D. Pa. 2014)
AFS sued Huber for violations of the Lanham Act, the CFAA, the Pennsylvania Uniform Trade Secrets Act, and various common law claims. AFS designs and installs hydraulic systems used to move heavy machinery for complex operations. It created a system, TELHS for the Mid–Atlantic Regional Spaceport (MARS) under a contract with the Virginia Commercial Space Flight Authority (VCSFA). VCSFA hired AFS to provide the complete system for the Antares rocket’s hydraulic motion control system.
Orbital developed the Antares rocket and agreed to launch from MARS. In the process of completing the contract, AFS generated a lot of proprietary information; VCSFA got legal ownership to all inventions and works created under the contract, but AFS had physical possession of the relevant trade secrets and used them to fulfill its obligations. Defendant Huber served as AFS’s main point of contact with Orbital. Another defendant, Aufiero, supervised Huber until Aufiero resigned, and is now the hydraulic sales manager for defendant L&H, an AFS competitor. Huber had acess to AFS’s confidential technical information as well as its costs and quotes for its projects. Huber resigned in October 2012; when AFS retrieved his company-issued laptop and cellphone, it allegedly found that he attempted to erase all the data. AFS restored the information and allegedly discovered that Huber was working with L&H as early as January 2012, while still an AFS employee.
AFS alleged a conspiracy to access and use AFS’s confidential information to divert business from AFS. In November 2011, Huber allegedly used AFS’s server and email system to send L&H images of the Antares rocket test launches using TELHS. In January 2012, L&H allegedly granted Huber access to L&H’s network and set up an email address for Huber in its internal email system. Huber then allegedly organized a secret meeting at the MARS facility with L&H to discuss future upgrades to TELHS. He also allegedly accessed AFS’s server and downloaded lots of files unrelated to any of his projects, and, after he announced his resignation, began saving significant amounts of confidential information to an external drive. This included information about two of his past projects and all pending AFS quotes; this was all allegedly transmitted to AFS.
Huber then formed a company called INSYSMA, allegedly copying at least four AFS drawings of engineering plans and re-signing them for INSYSMA with his own initials. The INSYSMA website displayed a photograph of a successful launch of the Antares rocket using TELHS and stated that INSYSMA was currently working with Orbital in support of current and upcoming launches, allegedly falsely implying that INSYSMA designed and installed TELHS. Finally, L&H allegedly attempted to recruit AFS’s top electrical engineers.
AFS alleged that the conspiracy diverted AFS’s business opportunities. In Sept. 2012, Huber allegedly submitted an unusually high bid on behalf of AFS for upgrades to TELHS, while secretly and simultaneously submitting a substantially lower bid for L&H for the same project. L&H and INSYSMA won the contract. Later, for a larger upgrade, Huber allegedly sent Orbital a quote on behalf of L&H and got the contract. AFS alleged that it had been shut out of all future work with Orbital at other launch sites as well as VCSFA’s plan to further develop the MARS facility, and also that defendants usurped several other business opportunities. This included a Huber-sent bid listing Huber as L&H’s project manager that represented that L&H made and installed TELHS.
The court first found that AFS, as possessor of trade secrets even if not legal owner, could bring a trade secret claim. “[T]he knowledge-driven value of trade secrets compels a possession-based theory of liability rather than a purely ownership-based theory.” Pennsylvania’s UTSA, which preempts common law remedies for trade secret misappropriation, preempted the other claims only to the extent they were based on alleged misappropriation of trade secrets. At this stage of the case, the court couldn’t conclude that the allegedly misappropriated information was a trade secret or that the other tort claims only involved trade secrets.
AFS asserted CFAA claims against Huber and L&H for aiding and abetting/conspiracy to violate the CFAA. L&H argued that there was no cause of action against an end user of information unlawfully accessed by another. However, the complaint alleged an active conspiracy to access a protected computer. “The plain language of the CFAA requires only ‘access’—‘no modifying term suggesting the need for “personal access” is included.’” Thus, inducing another to access a protected computer that he or she is otherwise not authorized to use constitutes “access” within the meaning of the CFAA. AFS also alleged that L&H installed a VPN profile on AFS’s protected computer that allowed Huber to initiate a connection between that computer and L&H’s network. Even if direct access was a prerequisite to CFAA liability, then, the allegations in the complaint were sufficient.
However, AFS failed to state a claim for aiding and abetting; the CFAA doesn’t create a cause of action for that. In addition, the court found a narrow view of the CFAA more persuasive. Misuse of information an employee was authorized to access doesn’t violate the CFAA. That said, there were allegations that Huber continued his access through his company-issued laptop after he quit, which could violate the CFAA. But, for now, AFS failed to explain how it suffered more than $5000 in the kind of loss or damage the CFAA covers—to a computer or computer system. Conclusory allegations of damage were insufficient.
Lanham Act: AFS alleged that defendants “have falsely attributed to themselves the design, manufacture and installation of the Antares lift and launch retract system,” constituting false advertising and false designation of origin. Apparently not noticing that Dastar bars the false designation claim, defendants argued that AFS could have no remedy for misuse of a trademark it doesn’t own—arguing this as a matter of “standing.” Lexmark kills that argument (the court apparently applied Lexmark to both §43(a)(1)(A) and (B), as it should) given the allegations of damage to AFS’s commercial interest and reputation.
But were the challenged statements in “commercial advertising or promotion”? Purely private communications, such as those between Huber and the Air Force as a potential client, were not actionable under §43(a)(1)(B). However, displaying a photograph of TELHS on the INSYSMA website “without attributing the system’s design to AFS” constituted advertising and promotion. “An internet website is a broad advertising medium, offering wide-ranging and instantaneous dissemination of the false information.” Also: “The website, in its ambiguity, invites the logical inference that defendants, not AFS, designed and installed TELHS.” This is implicit falsity, and intentionally creating a false impression can lead to liability. (If the court were to follow several other courts, e.g., Baden and Antidote Films, Dastar would bar this theory as a false advertising theory too, not just as a false designation theory.) (Also, the false impression need not be intentional, just sayin’.)
Because nobody noticed the Dastar problem, AFS’s false designation claim survived, based on alleged false implications to prospective consumers and the general public that Huber and INSYSMA designed and manufactured the TELHS system installed at Wallops Island. Using the photo of the system on their website and failing to attribute it to AFS “implicitly brand[ed] the TELHS system as their own.” Defendants argued that the potential audience was too savvy to be fooled given the expense of the system, but that wasn’t a good argument on a motion to dismiss. AFS also successfully alleged causation and damages flowing from the “purposeful ambiguity” on INSYSMA’s website.
Tortious interference claims also survived, given that AFS sufficiently alleged a reasonable expectation of realizing its prospective contracts. AFS alleged more than a mere hope. Certainty isn’t required. Here, “AFS’s own employee was contacted by and solicited AFS’s prospective clients,” and AFS alleged that it had traditionally had a record of “success in bidding on similar projects.” Plus, for the TELHS contract, AFS alleged that it performed the initial contract with great success and historically had received upgrade contracts when its principal project was successful. Thus, AFS sufficiently pled a reasonable likelihood that, but for defendants’ collective diversionary tactics, it would have had an opportunity to bid on and receive several military contracts.
Ferris Mfg. Corp. v. Carr, No. 14 C 04663, 2015 WL 279355 (N.D. Ill. Jan. 21, 2015)
Ferris sued Roy Carr and Curaline. Ferris makes various wound care products, allegedly award-winning and covered by several patents. Carr was formerly a high-level Ferris employee, even a co-inventor on various Ferris patents related to wound dressings. He allegedly signed confidentiality agreements.
He left Carr in 2003, and a bit over a month later he and another former Ferris employee filed a confidential provisional patent application with the USPTO. Though this application was later abandoned, Carr became the COO of Curaline, a Ferris competitor that now markets a wound care product called DevraSorb. DevraSorb allegedly incorporated the Ferris information that was included in the patent application.
Ferris alleged breach of fiduciary duty and contract, as well as false designation/false advertising by “representing to the market that its DevraSorb products are innovative and unique” and “by failing to disclose that they are based on or derived from know-how that Carr had misappropriated from Ferris.”
The court denied the motion to dismiss the breach of contract and fiduciary duty claims before more facts emerged.
Moreover, the Lanham Act claim was sufficiently alleged to satisfy Rule 9(b). The complaint quoted Curaline’s marketing materials claiming that Curaline’s DevraSorb products are “innovative” and “unique” as well as Curaline’s own Department of Health and Human Services submission conversely claiming that Ferris’s PolyMem product was the “principal predicate” to Curaline’s DevraSorb product, and that DevraSorb is the “substantial equivalent” of Ferris’s PolyMem product.
Curaline argued that the Ferris information allegedly incorporated into DevraSorb wasn’t confidential or proprietary any more. But that didn’t go to whether Curaline misrepresented those products as “innovative” and “unique” and failed to disclose that they are instead “based on or derived from” Ferris’s information. (In a footnote, the court noted that the parties were unclear about whether this was a false designation of origin case or false advertising, but found the difference immaterial because the parties weren’t fighting about particular elements. That doesn’t matter, of course, since the false designation claim is clearly Dastar-barred, and only false advertising—with its crucial materiality element—is a possibility here.)
Sentius Int’l, LLC v. Microsoft Corp., No. 5:13-cv-00825, 2015 WL 331939 (N.D. Cal. Jan. 23, 2015) (magistrate judge)
A little different today: this is a survey in a patent case trying to determine the value of a patented feature to consumers. Despite Microsoft’s challenges, the court allows the survey, finding its flaws go merely to weight and not admissibility. Sentius’s expert Wecker surveyed customers for preferences for spelling and grammar checking features in the accused products.
Surveys conducted according to accepted principles will ordinarily be sufficiently reliable under Daubert to be admitted. “Unlike novel scientific theories, a jury should be able to determine whether asserted technical deficiencies undermine a survey’s probative value.” Once the survey is admitted, “issues of methodology, survey design, reliability, the experience and reputation of the expert, critique of conclusions, and the like go to the weight of the survey rather than its admissibility.”
The survey asked customers about their preferences for the accused “check spelling and grammar errors as you type” (ed. note: yuck) features compared to alternative user-initiated spell- and grammar-checkers which Sentius’s technical expert identified as the best noninfringing alternatives. Wecker asked direct, open-ended questions about consumers’ willingness to pay, but, recognizing that responses might overstate WTP, he adjusted his estimates by a “calibration factor.”
The survey asked respondents who had used and purchased an Office product and used the background or user-initiated features to suppose that Office included the user-initiated but not the check as you type options. About 14.7% of spell checker respondents said they wouldn’t have bought the accused products without the background spell checker, and 14.8% for the grammar checker. Wecker concluded that about 11.2% wouldn’t have bought the products without the accused features.
The court agreed that there were “significant concerns” about the structure of the survey and the way in which it was conducted, but these concerns went to weight rather than admissibility. The survey questions were adequately tied to the subject matter of the asserted patents, and framing of questions is generally an issue of weight. The description of the features in the survey did not vary so much from the patent that the survey failed to relate to any issue in the case. Microsoft argued that the questions didn’t distinguish between the patented and unpatented features of the background spell/grammar checkers—Sentius only claimed that certain subfeatures infringed. But this wasn’t enough variation to make the survey unrelated to the case. Microsoft also argued that Wecker didn’t ask questions about noninfringing alternatives that could implement the accused aspects of the background features. Microsoft did offer evidence that it could have implemented several noninfringing alternatives, but Sentius could at least argue that its choice of comparator was correct.
In addition, the survey was based on reliable methodologies. True, it asked respondents only about their preferences for the two accused features when the accused products include thousands of features, and thus didn’t accurately capture the value of the claimed inventions, but again this goes to weight. Direct questioning was a generally accepted methodology even if it may have caused respondents to focus unduly on the accused features; a conjoint survey was not required for admissibility. Using an “omnibus” survey asking a bunch of other unrelated questions likely impacted the quality of the survey, but that’s again weight.
Wecker’s use of a calibration factor to adjust the bias in his survey was also reliable. He calculated his calibration factor based on a meta-analysis of 29 experimental studies. Microsoft argued that he didn’t show that this approach was generally accepted, but Microsoft failed to show that the presence of hypothetical bias/overvaluation of WTP was a reason to exclude the survey. Given that, an expert’s adjustment for that bias couldn’t be a reason to exclude a survey either.
Wednesday, January 28, 2015
Monday, January 26, 2015
Mighty Enterprises, Inc. v. She Hong Indus. Co. Ltd., 2015 WL 276771, No. 2:14–cv–06516 (C.D. Cal. Jan. 22, 2015)
Mighty distributes and services heavy machinery. She Hong makes heavy machinery under the name “Hartford.” Mighty sued She Hong for breach of contract and related claims, based on alleged breach of an oral contract granting Mighty exclusive rights to distribute and service Hartford machinery in the US. She Hong counterclaimed for false advertising and violation of California’s UCL.
She Hong alleged first sales of Hartford machinery in the US in 1982. But in 2014, Mighty applied to register the Hartford mark in the US, attaching pictures of She Hong’s machinery to its application. The registration was approved, and She Hong alleged that Mighty wrongfully applied for it. Mighty allegedly used the Hartford marks in its advertising to attract She Hong’s consumers, falsely suggesting association with She Hong or that Mighty was the manufacturer of Hartford products.
The court rejected She Hong’s legal theory as alleged, because She Hong doesn’t “presently own” the rights to the Hartford mark. Mighty’s registration was prima facie evidence of the validity of its mark. Given that “admitted” ownership, the theory that use of the mark was false advertising couldn’t work. It “put the cart before the horse—there can be no claim for false advertising against a company that advertises with a registered trademark it owns.”
She Hong’s position was “understandable,” but its legal theory depended on owning the rights to a mark it didn’t own. Since the counterclaim was permissible, the court wouldn’t let She Hong amend without an “exceedingly persuasive” argument. Comment: wouldn’t an “exceedingly persuasive” argument be: this registration is invalid because She Hong is the true owner; the registration should be cancelled/She Hong’s allegations if true would overcome the presumption of validity; after that the infringement/false advertising claims are cognizable? I wonder why the court didn’t point to this alternative theory.
Graiser v. Visionworks of America, 2015 WL 248003, No. 1:14–CV–01641 (N.D. Ohio Jan. 20, 2015)
Graiser sought an injunction on behalf of a putative class based on his false advertising claims, which alleged that Visionworks’s buy one get one free campaign for glasses was deceptive; Visionworks allegedly offered a single pair of glasses at a discounted price to customers who declined the “free” pair, and its disclaimers didn’t work. Graiser was quoted a price of $410 for the BOGO offer, but then told he could get one pair for $246 if he gave up a claim for the “free” second pair. He sought only injunctive relief under the Ohio Consumer Sales Practices Act.
Visionworks removed his state court complaint on the basis of diversity jurisdiction. The court found that Graiser lacked Article III standing to pursue a claim for injunctive relief and remanded.
At least one named plaintiff in a putative class needs Article III standing: injury, caused by the defendant, that can be redressed by a favorable resolution of the lawsuit. Although Graiser didn’t disclaim an intention to purchase the product again, the court still found that he wasn’t likely to suffer future injury—a future injury can’t be conjectural or hypothetical. He wasn’t at risk of being deceived again. A consumer not at risk of deception might still have standing—if the consumer prefers the product at issue for other reasons anyway, but is forced to pay a higher price because the deception allows the manufacturer to charge more.
The court thought that sort of analysis would provide Article III standing to “many” false advertising claims, when the false claim is about the product itself and the plaintiff intends to buy the product again. If Visionworks’s ad campaign allowed it to charge a higher price for the single pair without the “free” pair, Graiser would likely have Article III standing, but it was “far from clear” that the BOGO campaign would have any effect on the price of a single pair, or whether it would make the single pair cheaper or more expensive. (OK, that doesn’t make much sense. Presumably, if Visionworks had a relatively cheap single-pair offer to tout, it would do so instead. Also, the whole point of regulating bait-and-switch tactics is that they allow the seller to charge more, by interfering with consumers’ search costs.)
Moreover, mere exposure to false advertising isn’t a harm for Article III purposes. It doesn’t “guarantee the concrete adverseness that Article III standing requirements are meant to ensure.”
Finally, one could argue that the BOGO campaign compelled Visionworks to offer a free pair when someone bought at the lower price Graiser paid. This harm rests not on the misleading ad, but on Graiser’s failure to receive two pairs of glasses at the lower price. Yet Visionworks was under no obligation to sell two pairs at the lower price unless it continues the BOGO campaign and continues to offer a single pair at a lower price, so “an unconditional injunction requiring Visionworks to offer two pairs of glasses at the lower price would be improper.” A conditional injunction against continuing both practices “would have virtually no chance of remedying Graiser’s harm,” since Visionworks could respond in a number of ways: it could discontinue the BOGO offer; it could change it to a permissible volume discount (e.g., 1 pair for $200, 2 pairs for $350), or by discontinuing the lower price single pair. “But Visionworks would certainly not begin offering two pairs of glasses for the discounted price.” (If true, this seems to establish the misleadingness of the campaign.)
Thus, Graiser lacked standing in federal court. And he lacked standing to seek an injunction based on likely future harm to unnamed class members. Damages would be available in federal court if sufficient amounts were in controversy, and state courts aren’t bound by Article III so they might still offer relief after remand.
Friday, January 23, 2015
Tuesday, January 20, 2015
Steve Clowney argues that Prawsfblawg's disclosures of West-sponsored content aren't enough, given how much a sponsored post looks like a regular post. How would you advise a client to comply with the FTC's guidance here? Would the purported sophistication of legal readers matter?
Liveperson, Inc. v. 24/7 Customer, Inc., 2015 WL 170348, No. 14 Civ. 1559 (S.D.N.Y. Jan. 13, 2015)
LivePerson “provides customers with live-interaction and customer engagement technology for e-commerce websites, enabling businesses to interact in real-time with their website customers.” Its competitor 24/7 used to provide human call-center operators for customers’ call centers, but more recently developed its own live-interaction technology. The parties entered into cooperative marketing/service contracts to serve certain customers in order to offer joint solutions—LP’s tech and 24/7’s call center personnel. 24/7 thus obtained a limited license to access and use LP’s IP.
24/7 allegedly misappropriated LP’s software and sold it as its own, along with other alleged wrongdoing: accessing LP’s back-end systems to copy LP’s technology and interfering with LP’s client relationships. 24/7 allegedly designed its competing software to interfere with LP’s software, so that a customer using both technologies would experience poor performance from LP, and also designed the software to collect performance data from LP’s data. 24/7 also allegedly poached LP employees, falsely claimed that its software was the “first predictive or smart chat platform,” and disseminated fabricated and disparaging LP performance metrics to clients.
First, the court dismissed LP’s copyright infringement claim as inadequately pled because it didn’t explain when the infringement allegedly took place, neither as a start time or a period of infringement. However, alleging that 24/7 copied the entire software module adequately alleged that it copied protectable elements.
The DMCA claim was also inadequately pled. While courts have have held that password protection, DVD encryption measures, activation and validation keys, and a “secret handshake” protocol have all been found to be protected technological measures, the complaint didn’t allege any of this. LP alleged, somewhat contradictorily, that 24/7 had access to its back-end under their contractual relationship and misused its access and also that 24/7 improperly used its knowledge of LP’s customer-facing software to impersonate LP and gain unauthorized access to its secure internal system, at which point 24/7 allegedly installed spyware and code to degrade LP’s software’s functionality. Also, LP alleged that 24/7 reverse engineered LP’s software after accessing LP’s internal system.
The complaint didn’t allege that 24/7 used reverse engineering to circumvent LP’s security measures, but rather that 24/7 breached its computers in order to carry out reverse engineering. This didn’t allege circumvention. As for the alleged mimicking of LP to gain access to LP’s secure system, LP didn’t adequately allege what technological measure the mimicry circumvented. Successful complaints have “explicitly referenced a password, encryption system, software protocol, validation key, or some other measure designed to thwart unauthorized access to a protected work.” Alleging that 24/7 “circumvented LivePerson’s security measures” didn’t provide adequate notice.
The CFAA claim was also inadequately pled because LP didn’t plead facts showing that 24/7 exceeded its authorization, and also didn’t adequately allege damages. There’s legal uncertainty about whether a user who abuses authorized access can trigger the CFAA’s ban on exceeding authorized access. The Second Circuit hasn’t ruled on the issue and other circuits and other district courts within the Second Circuit are split. The court here joined the majority narrow approach, so that abusing authorized access isn’t actionable. Among other things, this avoids adding a subjective intent requirement to the Act; comports with the type of “loss” against which the CFAA protects (which don’t include losses related to misappropriation of information); and complies with the rule of lenity governing ambiguous criminal laws. Exceeding authorized access is therefore defined as having permission to access certain information on a computer, but accessing other information as to which there is no permission. Here, LP’s allegations focused on 24/7’s misuse of data obtained through authorized access, or didn’t explain the means by which 24/7 allegedly gained unauthorized access.
In addition, LP didn’t adequately allege damage or loss over $5000, because actionable damage or loss under the CFAA has to relate to LP’s computer systems. Allegations that 24/7’s conduct endangered LP’s relationships with several major clients, diluted its good will, injured its reputation, and misappropriated/devalued its IP didn’t qualify.
However, misappropriation of trade secrets and breach of contract were adequately pled, as well as some aspects of the intentional interference with prospective and existing economic relationships claims. LP alleged improper interference from providing inaccurate performance data to LP’s clients, when the data required access to LP’s confidential system and differed significantly from LP’s performance data shown when its technology was used by other call-center labor providers/employees. (Put that way, it sounds like LP did perform badly in conjunction with 24/7; inaccuracy isn’t really the complaint, but misleadingness about the source of the performance.) LP also alleged that it found 24/7 code “expressly designed to suppress the proper operation of LivePerson’s technology, such as preventing livechat sessions from being initiated, and/or eliminating LivePerson’s ‘chat’ button from appearing altogether” on its clients’ websites. That would constitute improper interference.
By contrast, the alleged interference with LP’s employees wasn’t adequately pled. LP didn’t allege noncompete agreements and failed to meet its high burden of alleging wrongful means, such as fraud or threats, to get employees to quit. Raiding isn’t itself wrongful means.
Further, the Lanham Act claim was adequately pled. LP alleged that 24/7 falsely claimed to have developed the first predictive chat platform, while LP actually did so, resulting in harm to LP’s goodwill and reputation as well as misappropriation and devaluation of its IP. (Dastar problem, especially with the misappropriation/devaluation parts?) LP didn’t provide the full context of the allegedly false ad, making it hard to evaluate the “entire mosaic” of the ad, as required. 24/7 correctly argued that context could establish truth, e.g., that 24/7 was promoting innovative, unique features; or “first” could be immaterial puffery, “considering the sophistication of the clients in this industry and the unlikelihood that claims of developing the ‘first’ such software would influence their purchasing decisions.” But materiality is generally a fact question not resolvable on the pleadings; LP was instead ordered to provide a more definite statement about context and materiality.
The common law unfair competition claim was also adequately pled. Unfair competition is generally limited to passing off, acting solely to destroy a rival, and using independently illegal methods. Here, allegedly embedding spyware on LP’s clients’ websites to engage in reverse engineering, injecting tracking markers into LP’s systems to facilitate unauthorized data mining, manipulating LP’s software on client deployments to reduce its performance, and deploying software code designed to suppress the proper operation of LP’s technology, would either be independently illegal or would constitute passing off. (Hunh? How is this passing off?)
Finally, unjust enrichment was adequately pled.
Fascinating story on top pinners on Pinterest, which suggests that Pinterest’s policies deter people from disclosing sponsorships (which the FTC wants them to do; could it go after Pinterest for deterring users' compliance?), and also contains the interesting note that one of the top pinners prides herself on introducing new, previously unpinned images to Pinterest—which might have some copyright implications.
Thursday, January 15, 2015
International Foundation of Employee Ben. Plans, Inc. v. Cottrell, No. WDQ–14–1269, 2015 WL 127839 (D. Md. Jan. 7, 2015)
IFEBP sued Cottrel, d/b/a HR Vantage, for false advertising, trademark infringement, and related claims. IFEBP is a nonprofit that trains and certifies professionals in employee benefits and compensation, with registrations for CEBS and Certified Employee Benefits Specialist (certification marks allowing certified individuals to use those designations). Cottrell provides disability retirement counseling to federal employees, and uses those designations on her website and LinkedIn profile, but doesn’t have certification from IFEBP.
IFEBP alleged harm in the form of “lost sales of [IFEBP’s] educational and examination fees,” as well as harm to its reputation because Cottrell “is providing substandard services,” and “customers receiving such sub-standard services from Cottrell will presume ... that [IFEBP has] certified [Cottrell’s] sub-standard services.”
Cottrell argued that IFEBP didn’t show harm causation from her alleged use of its marks and that its claims failed because they weren’t competitors. The court found that her competition-based argument applied to both the §43(a) false designation and the §43(a) false advertising claims. The court then reasoned that Lexmark applied to both prongs of §43(a). The Supreme Court relied on the Lanham Act’s purpose, which applies to all its provisions; “there is no reason to think the Supreme Court would apply different standing requirements to a false designation claim.” Indeed, the Court then observed that “[m]ost of the enumerated purposes are relevant to false-association cases.” Thus, direct competition wasn’t required for either claim.
IFEBP plausibly alleged a likelihood of confusion. And confusion wasn’t a necessary element of its false advertising claim; when a representation “is literally false, a violation may be established without evidence of consumer deception.” The allegations sufficiently delineated literal falsity. Plus, IFEBP alleged economic and reputational injury: Cottrell displayed its certification without paying “educational and examination fees,” and customers would believe that IFEBP “certified [Cottrell’s] sub-standard services.” (That first injury doesn’t really seem like Lexmark injury. It occurs to IFEBP as vendor of services, the flip side of injury suffered as a customer, which isn’t within the Lanham Act’s definition of harm according to the Supreme Court.)
Ecore International, Inc., v. Downey, No. 12–2729, 2015 WL 127316 (E.D. Pa. Jan. 7, 2015)
Ecore makes recycled rubber flooring; defendants allegedly relabeled and resold Ecore’s goods as its own. Downey owns an engineering consulting company that provided consulting services to Ecore, and founded and was the sole shareholder of defendant Pliteq, also in the business of sound-control flooring products. Defendants bought Ecore products through third parties, first buying unlabeled goods and adding Pliteq labels. Later, defendants had workers remove the Ecore labels and replace them with Pliteq ones. Defendants allegedly took precautions to prevent the relabeling from being discovered, including instructing employees not to mention Pliteq when communicating with Ecore. Defendants also published marketing materialis misrepresenting that Pliteq created and manufactured the products.
Defendants argued that there was an email agreement between Downey and Ecore to relabel to deal with some competitors, and that Ecore used similar private labeling strategies with other partners. Ecore denied this and denied that the relevant person even read the part of the message at issue. The court found that the relevant email, while it appeared to discuss competitors’ products, was “difficult to comprehend fully from an outside perspective, even with the benefit of some deposition testimony.” The key portion says:
If Irvine is willing to accept alternates, I have told Mark that we will sell a private label of QT [Ecore’s product brand], called Pliteq GenieMat, through our distributor at $0.75/SF. It won’t have the same level of testing, or say QT on it, but at least is comparable with the SoundSeal testing, and we can provide a letter saying it is a private label as manufactured by Ecore. This should alleviate their need for lowest price.
Ecore’s response email said “F* * * them ... cut their throat on price....this is a war and our nuclear device is not ready yet. The USRR suit is going to cost a f* * *ing fortune to defend. Take no prisoners ... we’ll clean up the market mess once we have the reissue in hand” (ellipses in original). Ecore said that the recipient didn’t even read the relevant portion of the email, and also noted that defendants’ conduct was inconsistent with the alleged proposal because the relabeling never came with any sort of “letter saying it is a private label as manufactured by Ecore.” Plus, defendants resold the products at a higher price, which didn’t seem in keeping with the alleged agreement.
Given the highly factual nature of the dispute, the court denied summary judgment for Ecore. The court also noted that defendants’ argument that relabeling/private labeling was common wasn’t sufficiently shown. They cited a case finding that, “because it was common in the clothing industry for retailers to add their own labels, retailer labels do not express or are not understood by consumers as a designation of origin at all, and thus they cannot constitute false designations of origin for the second element of a reverse passing off claim.” But defendants only offered examples of Ecore’s own private labeling agreements; they didn’t show a common industry practice. Plus, defendants didn’t just relabel. They made express statements of origin on their website and in marketing materials. However, the existence of private labeling agreements did potentially enhance the credibility of the claim that Ecore had a similar agreement with defendants, further showing that the issue should be for the jury.
The false advertising claims were based on largely the same misrepresentations as to the source of the products in marketing materials. Ecore argued that actual deception and materiality could be presumed given literal falsity. But this presumption only applied for injunctive relief, not money damages. Ecore’s off-hand reference to evidence that two actual consumers were misled wasn’t enough to grant it summary judgment. Those incidents involved a sales rep who wrongly tried to push customers into buying defendants’ products rather than Ecore’s, which had little or nothing to do with the advertising statements at issue.
Wednesday, January 14, 2015
Medscript Pharmacy, LLC v.My Script, LLC, LLC, No. 14 C 0469, 2015 WL 149062 (N.D. Ill. Jan. 12, 2015)
The complaint alleged that Medscript was a Professional Compounding Centers of America (PCCA) certified compounding pharmacy, while defendants are compounding pharmacies/former owners and members of Medscript. The non-pharmacy defendants sold their interests in Medscript and received a patient list containing health information to verify the amount of payments they’d get from Medscript post-closing. The non-pharmacy defendants allegedly gave the patient list to My Script and defendant Valuscript to market those pharmacies and get prescribers to fill prescriptions with those pharmacies, in alleged violation of HIPAA.
My Script employees or agents allegedly falsely told Medscript patients and prescribers that (1) Medscript was out of business and My Script was taking over its patients and would fill the patients’ prescriptions, or (2) Medscript had changed its name to My Script, and My Script would fill the patients’ prescriptions going forward. My Script also made these false statements to prescribers. Also, Valuscript allegedly sent patients unauthorized prescriptions that were supposed to be filled by Medscript, and billed the patients’ insurance carriers for the prescriptions. Finally, My Script and Valuscript allegedly sent their representatives prescription pads to give to prescribers that had Medscript’s name on them but My Script’s and Valuscript’s fax numbers. Thus, prescribers would believe they were filling prescriptions with Medscript but were unknowingly filling them with My Script and Valuscript.
First, defendants argued that the complaint didn’t plead with sufficient specificity under Rule 9(b), and the court agreed that allegations of false statements/passing off with the prescription pads triggered Rule 9(b). But the complaint adequately alleged the who (My Script employees), what (out of business/name change/prescription pads—direct quotes not needed), where (to Medscript patients and prescribers), when (after they received the patient list), and how (use of the patient list). Thus, the Lanham Act claims and related claims survived Rule 9(b) scrutiny. (Note the interesting fact that the court applies Rule 9(b) to what’s ordinarily considered a classic trademark claim, passing off, and courts don’t often do that with §43(a)(1)(A) claims.) But the civil conspiracy claim wasn’t pled with sufficient particularity.
Defendants argued that the allegations didn’t establish “commercial advertising or promotion” because the statements weren’t made to the general population or a significant portion of the industry, but were person-to-person communications. Advertising or promotion is usually directed to a subset of the public. But the Lanham Act requires that communications be made to a significant portion of the relevant industry. Here, the relevant industry was the compounding pharmacy industry. It was plausible that Medscript’s patients and prescribers contacted by defendants represented a significant portion of that industry, though factual development might ultimately show otherwise. Thus both Lanham Act and related state law claims (including tortious interference) survived.
Anthony Antonellis creates art objects/sculptures with bottles of Poland Spring water and knockoff wristbands. Nestle objects, claiming likely confusion. What is the appropriate test? Rogers or something else? Antonellis is looking for a pro bono lawyer.
Friday, January 09, 2015
Thursday, January 08, 2015
Barbara Biasi & Petra Moser, Does Cheap Access Encourage Science? Evidence from the WWII Book Replication Program.
Policies that reduce the costs of accessing prior knowledge (which is covered by copyrights) are becoming increasingly prominent, even though systematic empirical evidence on their effects continues to be scarce. This paper examines the effects of the 1942 Book Republication Program (BRP), which allowed US publishers to replicate science books that German publishers had copyrighted in the United States, on the production of new knowledge in mathematics and chemistry. Citations data indicate a dramatic increase in citations to BRP books after 1942 compared with Swiss books in the same fields. This increase is larger for BRP books that experienced a larger decline in price under the program. We also find that effects on citations are larger for disciplines in which knowledge production is less dependent on physical capital: Citations to BRP books increased substantially more for mathematics (which depends almost exclusively on human capital) than chemistry (which is more dependent on physical capital).
Wednesday, January 07, 2015
Via Sarah Burstein:
Worldwide Diamond Trademark S, Ltd., v. Blue Nile, Inc., No. 14-cv-03521 (S.D.N.Y. Nov. 6, 2014)
Worldwide sought a preliminary injunction in its patent and trade dress lawsuit against Blue Nile for allegedly copying its Hearts and Arrows trade dress/diamond design. The court declined, citing Worldwide’s failure to show irreparable harm; any lost sales or goodwill could be adequately compensated with damages, since the only record evidence was that Worldwide had lost some business/business opportunities. Other posited harms were speculative and remote.
Worldwide makes cushion-cut diamonds, called the Ideal Cushion, which generate a “hearts and arrows” pattern visible in the presence of light at low magnification. It has a patent for the design of its cushion-shaped diamond and a pending application for “Ideal Cushion with corresponding diamond design.” Worldwide diamonds come from Canada and thus cost more than diamonds from other sources; to maintain its profits, Worldwide charges a premium, and allegedly cultivated a reputation of exclusivity by telling customers that the Ideal Cushion cannot be obtained from any other source. Worldwide only sells its proprietary cuts to brick and mortar retailers. It also has a relationship with De Beers allowing it to obtain high quality rough diamonds, and certifications from Forevermark, the De Beers brand reserved for the most exclusive and reputable diamond manufacturers.
Blue Nile, an online retailer, also sells cushion-cut diamonds that generate a hearts and arrows pattern. Blue Nile also has a patent for its diamonds.
Worldwide sought a preliminary injunction, and irreparable harm is the most important prerequisite. Irreparable injury requires injury that is neither remote nor speculative, but actual and imminent.
The evidence the court discussed was as follows: Worldwide marketed itself as the exclusive provider of cushion-cut diamonds that generate a hearts and arrows pattern, enabling it to charge a premium. But soon after its introduction, Blue Nile began selling the Blue Nile diamond. Worldwide claimed that an unidentified number of its retailers returned an unquantified number of the Ideal Cushion diamonds t because their customers believed that they could purchase similar diamonds directly from Blue Nile. In addition, Worldwide claimed that it lost other opportunities for new business because customers were expressing doubt that Worldwide Diamond was the exclusive provider of cushion-cut diamonds that generate a hearts and arrows pattern. A Malaysian diamond retailer decided to delay a contract with Worldwide and a U.S. based jewelry manufacturer and distributor “withdrew [its] interest” in selling the Ideal Cushion. Worldwide was also concerned that loss of exclusivity could threaten its relationship with Forevermark, De Beers, and two U.S. retailers, which could negatively impact its reputation, sales, and revenues. Finally, Worldwide argued that Blue Nile’s competition would force Worldwide to lower its prices, leading to insolvency.
But the mere possibility of irreparable harm was insufficient. Worldwide only provided speculation about the risk of losing additional customers. It claimed to have suffered returns because of the Blue Nile diamonds, but didn’t produce affidavits, emails, letters, or any other form of correspondence from these retailers or customers to substantiate this claim. A subjective belief in injury was insufficient. Worldwide didn’t offer evidence that sales decreased from prior years or below projections since the Blue Nile diamonds entered the market, and even if it had, it would have needed to show a causal connection.
Nor did Worldwide show evidence that its business relationship with either Forevermark or De Beers was in jeopardy. Neither Forevermark nor De Beers had indicated that these relationships were at risk. As for price erosion, Worldwide hadn’t lowered its prices, and had no expert or other testimony about the likelihood of price erosion, or evidence that retail customers had requested price reductions because of the Blue Nile diamonds.
Moreover, any injury would be compensable with money damages. If Worldwide ultimately prevailed, Worldwide’s sales could be compared against its established track record and its reasonable forecasts to determine the extent of its damages. What about goodwill? Well, when a product has a sales record and its loss wouldn’t affect other aspects of business, damages could generally be proven. “In general, injury resulting from the loss of goodwill is irreparable only when ‘the very viability of the plaintiff’s business, or substantial losses of sales beyond those of the terminated product, have been threatened.’”
Here, however, Worldwide’s history of operation allowed it to calculate money damages for any lost goodwill. Worldwide had sold more than 7,600 diamonds that generate the hearts and arrows pattern, and made at least fifteen different types of proprietary cut diamonds. By contrast, Blue Nile sold a redacted but apparently non-significant number of Blue Nile diamonds; even if every Blue Nile sale constituted a lost sale to Worldwide, the court held, it was “inconceivable” that those losses would completely destroy Worldwide’s business.
At the hearing, Worldwide didn’t identify what percentage of its business was based on sales of the Ideal Cushion or quantify the number of retailers who returned diamonds or how many were returned. Without that, the court wouldn’t speculate that such returns or loss of goodwill would threaten the viability of Worldwide’s overall business. Thus, Worldwide failed to show that any harm resulting from the loss of goodwill was irreparable.
Worldwide’s alleged lost business opportunities with a Malaysian diamond retailer and U.S. manufacturer didn’t come with evidence about the stage of negotiations, the length or term of the contract, or the quantity of products to be provided, so it was “entirely unclear” that Worldwide lost an actual, tangible, business opportunity as a result of the alleged infringement. Moreover, Worldwide failed to establish a causal link between Blue Nile diamonds and its lost opportunities. It also didn’t assert obstacles to calculating damages for these lost business opportunities.
Finally, Blue Nile averred that it could satisfy any damage award in the event liability
Injunctive relief denied.
Rebecca Tushnet, The Romantic Author and the Romance Writer: Resisting Gendered Concepts of Creativity, in DIVERSITY IN INTELLECTUAL PROPERTY, (Irene Calboli & Srividhya Ragavan eds., Cambridge Univ. Press, forthcoming 2015). Abstract:
Dominant narratives of creativity regularly expect female-associated forms of creativity to be provisioned naturally without need for the economic incentives provided by exclusive rights, just like housework and childcare. Even as the concept of Romantic authorship has come under sustained analytic assault, its challengers often look elsewhere–to the kinds of creativity in which men are more likely to participate–to find models of situated, always-influenced authorship. In this chapter, I examine one variant of the problem, in which certain arguments about copyright discount the value of forms that are predominantly produced and enjoyed by women. But creative works in these oft-denigrated genres, such as media fandom, open up new possibilities in sexual and gender relations, and women learn to see themselves as valuable speakers by becoming creators. As a result, increasing the visibility of women’s creative works, including explicitly transformative works based on specific copyrighted predecessors, is an important part of rejecting the fetishization of Romantic authorship and valuing diverse kinds of creativity.
Tuesday, January 06, 2015
First Data Merchant Services Corp. v. SecurityMetrics, Inc., 2014 WL 7409537, No. RDB–12–2568 (D. Md. Dec. 30, 2014)
Earlier ruling excluding false endorsement survey. Even earlier ruling allowing false endorsement theory to proceed.
This “contentious” case involved a soured business relationship and an earlier Utah settlement; this new filing alleged post-settlement misconduct by SecurityMetrics. After this decision, settlement-related claims and tortious interference claims remained, but the false advertising/trademark aspects were gone.
Background: issuers issue payment cards to consumers and collects from them. When a consumer uses a card to pay a merchant, an “acquirer” obtains authorization for the transaction from the consumer’s issuer and then clears and settles the transaction so that the merchant gets paid and the consumer’s account gets charged. Some payment cards have open networks that allow separate entities to operate as issuers and acquirers, in which case “processors” facilitate communication and settlement. First Data operates as an acquirer and payment processor. Sometimes First Data stands in the shoes of other acquirers and then deals with the acquirers’ merchants directly.
PCI is an acronym for “Payment Card Industry.” The PCI Security Standards Council was formed in 2006 by the major credit card brands and developed the PCI Data Security Standard, adopted by the major credit card brands as their data security compliance requirement for all merchants. While the PCI standard is universal, various payment card brands have different requirements for showing compliance. For the lower-volume merchants at issue here, they can use a self-assessment questionnaire, unless they sell over the internet, which requires vulnerability scans of their computer systems that must be approved by PCI Council-approved scanning vendors (ASV). SecurityMetrics is certified by the PCI Council as an ASV, but First Data is not.
First Data processed credit and debit card transactions for merchants and independent sales organizations (ISOs). SecurityMetrics provided compliance services to some merchants for whom First Data provides processing services. Where First Data provided acquirer services (~820,000 merchants), it instituted a PCI Standard compliance reporting program. The parties worked together for several years, with SecurityMetrics as First Data’s preferred vendor for validating compliance with PCI Standards. First Data then began offering PCI Rapid Comply, in competition with the services offered by SecurityMetrics. SecurityMetrics alleged various unfair practices in connection with First Data’s rollout of PCI Rapid Comply, including representations that First Data merchants who used other compliance verification vendors would have to pay for those services along with the cost of PCI Rapid Comply. Utah litigation resulted in a settlement; First Data then decided to wind down PCI Rapid Comply and partnered with Trustwave, a third-party PCI compliance vendor.
SecurityMetrics’ false advertising claims were based on First Data’s statements that if its clients used a third-party vendor for compliance services, they’d have to contract with and pay that vendor directly; that they’d still owe the Compliance Service Fee; and that if First Data’s PCI compliance services were contractually available to clients, they’d be charged for those services even if they used a third-party vendor. However, First Data allegedly actually provided refunds to merchants who used third-party vendors, covering the fee.
The court first determined that the statement at issue was not literally false. First Data charged a standard fee but in some cases provided a refund. Thus, the statements weren’t false, but omitted that a refund might be available. That was at best misleading, and there was no extrinsic evidence of actual consumer confusion. Thus, summary judgment for First Data was appropriate. The court commented that this same statement could go to a jury for a literal falsity determination in other circumstances: if First Data never charged the compliance fee, a jury would have to decide whether the statements were false. But no reasonable jury could conclude that the statement was false on its face given the actual facts.
False endorsement: SecurityMetrics argued that the name PCI Rapid Comply falsely suggested endorsement by the PCI Security Standards Council, and that First Data’s statement that “Claims that certain services offered by FDMS are not ‘approved’ by the PCI Security Council or that FDMS is selling PCI compliance products it is not authorized to sell are not true.” But without survey evidence about the name, there wasn’t enough evidence to proceed on that theory. The acronym alone didn’t unambiguously imply endorsement, so SecurityMetrics needed extrinsic evidence. (Note application of §43(a)(1)(B) standard to what’s generally a §43(a)(1)(A) theory, though this is arguably appropriate given that plaintiff isn’t claiming that the defendant is getting a false endorsement from the plaintiff, but rather from a third party.)
Likewise, SecurityMetrics argued that the “not true” statement was clearly false. First Data argued that the terms “approved” and “authorized” were ambiguous and there was no evidence that Rapid Comply was not “approved” or “authorized” by the PCI Council, especially given that the service operated for two years without any signs of disapproval from the PCI Council. The court found the statement “inherently ambiguous.” First, it referred to “certain services,” which lacked specificity, though presumably referred to Rapid Comply. (In context, that ambiguity seems to drop out.) Second, the statement could be interpreted in various ways. One meaning would be that the services are simply not authorized or approved because such authorizations and approvals are not made by the PCI Council. That wasn’t literally false and there was no extrinsic evidence of deception.
SecurityMetrics’ counterclaim for cancellation of First Data’s registered trademark in PCI Rapid Comply also failed for similar reasons, as did the Utah Truth in Advertising Claim.
Via Larry Solum. I haven't read this but I've been fascinated by plastination for years, and finally my interests unite. Kirill Ershov, A Macabre Fixation: Is Plastination Copyrightable?:
Abstract: Dr. Gunther von Hagens invented plastination as a process to preserve anatomical specimens. Plastination replaces water and fats in anatomical tissues with plastic polymers, allowing for indefinite preservation, ease of handling, and storage of the plastinated “objects.” .... Von Hagens claimed that his cadavers are unique in their manner of dissection and positioning and are entitled to copyright protection as original expressions of ideas fixed in tangible media .... This paper examines whether there is original expression in the type of plastinated exhibits presented by von Hagens, exploring in detail whether there is protected expression in the manner of dissection and the positioning of plastinated bodies.
Bern Unlimited, Inc. v. Burton Corp., 25 F. Supp. 3d 170 (D. Mass. 2014)
Bern, which sells sports helmets, sued six competing helmet makers. It initially sued for design patent infringement, but dropped that claim and switched to trade dress infringement. In their answers to the third amended complaint, defendants brought counterclaims, which Bern moved to strike as too late and futile. The motion was granted in part and denied in part.
The complaint claimed the design elements the “rounded profile of the helmet, which is designed to follow the shape of the wearer’s head”; and “the distinctive visor.” Bern allegedly began selling the initial version in December 2005, followed in January 2007 by a design patent application, which became a registration in 2008. If you see an on-sale bar issue there, you’re not alone. Bern ultimately filed a statutory disclaimer of the patent.
In its marketing materials, Bern touted its patent protection, allegedly to discourage retailers from buying competitors’ helmets. The patent itself appears in many of Bern’s advertising catalogs. Ads also claim that Bern was the first to invent a helmet with a visor, and that its helmets were the “first visor helmet offering a protective visor cover in the front,” the “world’s first functional visor lid” (emphasis added because Bern probably now wishes it hadn’t said that), “the original,” and the “INDUSTRY’S FIRST VISOR.”
These statements were allegedly knowingly false and harmed competitors’ sales. [I wonder if there’s not a different theory of falsity: the reference to “functional” implies a utility patent; consumers might’ve thought there were functional benefits unique to Bern’s product.]
As to the alleged “first” and “original” claims, these were nonactionable puffery, rather than being specific and measurable. As to the allegedly false claims of patent coverage, however, defendants stated a counterclaim. Bern argued that its statements weren’t false or misleading because patent was in fact issued and patents are presumed to be valid, and it didn’t accuse defendants of infringing. But the presumption of validity can be overcome in a Lanham Act claim when the claimant shows objective and subjective bad faith. If the allegations in the counterclaims were true, Bern couldn’t have reasonably believed the patent was valid due to the on-sale bar, which would show objective bad faith.
Nor did statements have to refer directly to competitors to be actionable. The counterclaims alleged that Bern characterized competing helmets as imitations in the same marketing materials that included references to the patent. Defendants alleged that the combination of showing the first page of the patent with the statement, “Every single brand in the market now has a brim, but your customer wants the original!” would reasonably cause consumers to believe that competing helmets infringed.
The court characterized these allegations as “thin, at best.” (I think it depends on how savvy/patent-aware the relevant consumers—here, the retailers—are.) But they were sufficient to survive a motion to dismiss.
Bern also alleged that the counterclaims failed to allege injury/proximate cause under Lexmark. The court disagreed. Defendants alleged that Bern’s false advertising deceived customers, which resulted in increased sales for plaintiff and decreased sales for defendants. That’s harm directly caused by plaintiff’s false advertising.
Nor was there undue delay and unfair prejudice. Some additional discovery might be necessary. Even if literal falsity justifies a presumption of confusion, a claimant seeking damages needs to show actual harm. Plus, even with literal falsity, defendants would have to prove materiality with evidence. Thus, allowing the counterclaims would cause some prejudice, but much of the necessary discovery had already been done, and it would waste resources to require defendants to file a new action.
Monday, January 05, 2015
American Bullion, Inc. v. Regal Assets, LLC, 2014 WL 7404597, No. CV 14–01873 (C.D. Cal. Dec. 30, 2014)
Regal sought reconsideration of the court’s grant of a preliminary injunction on false advertising claims, which was granted in part. American Bullion and Regal compete in selling gold and other precious metals for individual retirement accounts. AB argued that Regal’s affiliate marketers falsely disparaged AB, misdirected potential customers to Regal, and failed to disclose financial relationships between Regal and the affiliates. The court concluded that Regal’s affiliates were likely its agents, that the relevant acts fell within the scope of their agency, and that AB was entitled to a preliminary injunction.
Regal argued that Winter’s preliminary injunction standard was inappropriate for speech cases, and that the injunction was an unconstitutional prior restraint. The cases Regal cited didn’t stand for the proposition that courts couldn’t enjoin any commercial speech; false and misleading commercial speech isn’t protected by the First Amendment, and preliminary injunctions regularly issue in false advertising cases even in the face of First Amendment arguments.
If Regal was arguing that there wasn’t yet evidence of falsity, the evidence before the court was otherwise; “there appeared to be little dispute that false statements were disseminated by some Regal affiliates.” Regal apparently acknowledged that “some Regal affiliate sites displayed images appropriated from obituaries as if to suggest that the deceased individual pictured endorsed Regal, contained completely fabricated personas and backgrounds of nonexistent endorsers, and explicitly and falsely stated that Plaintiff was found guilty in a fraud suit and was later sued by the U.S. Commodities Futures Trading Commission.” Even at the preliminary injunction stage, these statements were false and unprotected by the First Amendment.
However, the court modified the injunction in some respects to limit its burden and increase its clarity.
Regal also argued that the court wrongly entered a preliminary injunction based on a negligence theory, since AB argued only intentional acts. The court found this characterization questionable. Principals can be liable for their agents’ negligent actions within the scope of the agency, and also for other intentional acts, even those outside the scope of the agency, that are subsequently ratified by the principal. The court’s previous ruling focused on agency, and not negligent versus intentional acts, a distinction that wasn’t very important here.
Principal liability attaches where an intentional tort is a foreseeable “outgrowth” of the employment, “in the sense that the employment is such as predictably to create the risk employees will commit intentional torts of the type for which liability is sought.” Intentional acts outside the scope of agency create principal liability only if authorized or ratified; but even if ratification were required, Regal arguably ratified the acts “by paying affiliates for their lead and sales generating efforts, even when those efforts included dissemination of false and disparaging statements.”
Regal also argued that circumstances had changed. It retained an outside monitoring firm, hired a new, experienced General Counsel, and terminated 2100 affiliates. It also changed the provisions of the agreement between Regal and its affiliates. This last was the most significant, because the locked-in nature of Regal affiliates was a major factor in the court’s prior agency finding. Regal argued that it now encouraged affiliates to work for multiple companies, and that 12% did so. The court welcomed the changes, but found that the new agreement didn’t change the “fundamental nature” of the relationship between Regal and its affiliates. Regal affiliates were, “in essence, sales agents working on commission,” which was earned for generating sales and providing certain leads even if the leads didn’t result in sales. “No matter whether Regal has 2,000 affiliates or 200, so long as Regal pays affiliates to generate sales, it cannot avoid liability for affiliates’ actions in pursuit of that goal.”
Plus, if Regal allowed its agents to continue to disseminate false or misleading information, “such as by allowing agents who post to remain in the affiliate program and/or continuing to pay those agents for generating leads and sales for Regal,” Regal could be liable for punitive damages.