Thursday, July 31, 2008
Though the Numa Numa video is a structuring device used throughout Wesch's presentation, Wesch doesn't bring in the IP issues--the first famous Numa Numa guy and everyone playing off of him are using the music without authorization--until the very end, though he then does make the point that unauthorized remix is at the core of much of this communicative and self-expressive ferment.
I did feel the presentation was overly tilted towards the optimistic side. Lots of human connection; very little mockery. But then, he's making a move in an argument, and there's no reason he ought to be required to make the case for the harms of peer production when many other people are quite willing to do it.
Wesch did point out that many of the videos weren't made for large groups to see, just for a few people. His use of Us was an example of what he calls "context collapse." Often when we see something bizarre on the internet, we don't stop and ask "well, is this for me?" Sometimes it's not bizarre to the group to which it's addressed. But it's often easier and more efficient to put that highly targeted production out there for anyone to find--the same dynamic that makes it easier and more efficient for Google to index as much of the web as it can rather than hand-selecting what's relevant to queries. Yet the social meaning of what it means for ontology to be overrated, or everything to be miscellaneous, is highly complex--not everyone will be happy with the associations created by dispersed, open, user-tagged information environments. I look forward to seeing more of Wesch's work on the bitter as well as the sweet of the connections forged by YouTube.
Roederer sells the upmarket champagne Cristal. Carrion sells wine from the Spanish winery Jaume Serra, including cava, a bubbly wine. Jaume Serra first used “Cristalino” as a mark for a cava sometime before 1987. By 1989, US sales began at a low volume. By 1997, US sales were at 400,000 bottles/year and Cristalino had nationwide penetration.
The initial label used “Cristalino Jaume Serra.” But in 1993, “Jaume Serra” was deemphasized, leaving “Cristalino” with sole prominence.
In 1998, Carrion began a 14-million-euro modernization project that expanded its capacity to produce all its wines, including Cristalino. Annual US sales for the next three years were about 700,000 bottles; 2002 saw seven-figure sales; and Carrion presently sells three million bottles a year in the US, about 27% of Carrion’s total cava production, making Carrion one of the largest cava exporters.
Increased sales brought increased publicity, starting with minor reviews by Wine & Spirits in 1991 and by The Wine Spectator and San Francisco Independent in 1993. The frequency of such mentions grew significantly by 1999. Carrion has marketed Cristalino in the US as a “value brand,” using standard wine advertising media and in-store promotions.
Roederer’s Cristal champagne, by contrast, is expensive and sold in distinctive, flat-bottomed crystal bottles. Roederer has a US registration for CRISTAL CHAMPAGNE and a related design. It opposed registration of CRISTALINO and similar marks by Carrion in various non-US jurisdictions, including Spain in 1982 and 1990, Colombia in 1991, and the EU in 2004. In 1995, as part of unrelated PTO proceedings, Roederer’s trademark attorneys received an affidavit indicating that Cristalino had been found on sale in California in 1995; the affidavit identified the bottler and included a photo of the bottles. Roederer did not object at the time, though its attorneys did submit an affidavit in response.
In 1997, the CRISTALINO JAUME SERRA mark was published for opposition; Roederer requested two extensions of time to file an opposition, but never did. The application, however, never matured to registration and was deemed abandoned in 2000. (The application was filed as an ITU, for reasons that do not appear obvious from the facts but might have to do with the presentation of the mark on the label.) In 2000, Carrion filed an application to register CRISTALINO, and this one was published for opposition in 2002. Roederer sent letters demanding that Carrion withdraw the application and cease using the mark; it ultimately filed an opposition, then sued, so the opposition has been stayed.
Carrion argued laches. The elements: plaintiff’s knowledge of the use; inexcusable delay; and prejudice to the defendant.
The court quickly disposed of Roederer’s argument that Carrion didn’t stand in the shoes of its predecessors for laches purposes. It owned the goodwill and continued to make the same product. Likewise, Carrion’s importer, though not a trademark owner, had standing to assert laches, just as it would be able to assert a statute of limitations defense (if the Lanham Act had one).
Roederer’s knowledge began no later than 1995, but it waited nearly seven years to object. This exceeds the analogous 6-year statute of limitations in Minnesota, and courts generally borrow analogous state laws for purposes of assessing Lanham Act laches.
The court also found prejudice. During the 7-year delay, Carrion marketed Cristalino, expanded production, and were rewarded by market success. Though Carrion could use its production facilities to make cava under another name, it would lose the benefit of any brand loyalty, which would devastate sales.
Roederer argued that any delay should be excused because the early acts weren’t enough to infringe—a trademark owner has no obligation to sue until there’s a substantial likelihood of confusion, and need not be trigger-happy. For laches purposes, the doctrine of progressive encroachment may require assessing delay from some point after the first instance of infringement, when a defendant comes more squarely in competition with the plaintiff. McCarthy states that, though “a slow, steady increase in the level of business attributable only to the normal growth of any business may not always be sufficient to excuse a prior delay, any change in the format or method of use of the mark or expansion into new product lines or territories should be sufficient to excuse a prior delay.”
The court rejected this argument. Cristalino’s sales have grown over time, but it has outsold Cristal since at least the mid-90s. Carrion’s quality control changed, but there was no evidence of significant changes in the product’s quality. And the label was largely stable by 1993. There was a “mere possibility” that older-style labels were around for some unknown period as inventory was depleted, and an older label may have been featured on the importer’s website for a while, but that didn’t change the court’s conclusion that Roederer should have acted much earlier.
Roederer then argued that laches does not bar injunctive relief. This is sometimes true, and sometimes not. When an injunction would cause substantial prejudice to a defendant’s investment in brand equity, laches may not apply. Here, given the equities, mechanical application of a rule allowing injunctive relief despite laches would be inappropriate.
The court was particularly attentive to Roederer’s minimal evidence of likely confusion; when laches applies, courts generally require strong or elevated proof of likely confusion, and sometimes even a threat to public safety. Here, the evidence was: (1) name similarity; (2) product similarity in that both are sparkling wines sold nationwide; (3) “one incident in which a bottle of Cristalino was sold as Cristal after the label had been altered to obscure the ‘ino’ in Cristalino (comment: I believe Inwood v. Ives has something to say about that); and (4) “photos and written passages taken from the internet featuring individuals discussing both Cristal and Cristalino or pretending that bottles of Cristalino are bottles of Cristal.” Here’s what I found in a quick search: Cristalino, Cristal’s younger, cheaper brother; Cristalino is what Cristal dreams of growing up to become;
from a newsletter for a wine tasting business;
from flickr (caption: not Cristal, but Cristalino!); and
(from Grape Finds, using Cristal Pop as a sort of headline for Cristalino; this is one that Roederer might well want to take up with Grape Finds, which is no stranger to litigation itself).
Roederer also submitted a shopping mall survey of likely buyers of imported sparkling wine who were familiar with Cristal. (Query: proper universe, given Cristal’s actual purchasers? Isn’t that kind of like saying that a Toyota buyer would be a good person to ask about potential confusion over a Lamborghini? Your answer may differ if your theory is dilution—though here I imagine there’d be an insurmountable barrier to proving that Cristal was famous before Cristalino’s use began.)
In any event, the survey began by showing participants a bottle of Cristal. The bottle was removed, and then test cell subjects were shown four other bottles of sparkling wine. They were then asked whether they saw the same brand; whether they saw a wine produced by the same company; whether they saw a wine affiliated with the company that produced the first bottle; and whether permission from the company that made the first bottle was required to produce any of the sparkling wines. (Comment: Those aren’t leading at all, especially in combination! Now, there may not be many better ways to elucidate likely confusion, but I think the repetition here seems likely to drive up “yes” answers in a way that won’t necessarily be controlled for by the presence of a control group. The respondents are prodded to think about whether there’s a connection, and if there’s even a tiny hook to hang that idea on, they may say yes even though they’d never come to the same conclusion in the wild and even though they’ll say “no” when presented with four bottles with no wording similarity. This is perhaps another reason to cut back on our overly expansive concept of “confusion” as any suggestion of affiliation or connection—a concept that broad is too hard to measure in any reliable way.)
Results: “6.9% of respondents believed the bottle of Cristalino was the same brand as the bottle of Cristal, 9.2% believed Cristal and Cristalino were produced by the same company, 4.6% believed the Cristal and Cristalino were produced by affiliated companies, and 2.3% believed that permission from the maker of Cristal was required in order to produce Cristalino.” The court didn’t mention the percentages among the control group. But it considered the survey insufficient, quoting McCarthy’s summary that 25-50% percentages have been considered “solid support” for a confusion finding. Here, in light of the other evidence, the survey showed only a possibility of confusion, not a likelihood.
The dramatically different price points and differences between the names and labels were important factors. Cristal’s distinctive bottle further differentiated the products, and (aside from the case of the altered label) there was no evidence of actual marketplace confusion. And lack of evidence of confusion over an extended period of time is good evidence that there isn’t a likelihood of confusion. Roederer’s internet evidence showed that people recognize similarity between the two names, but none of it showed confusion.
As a result, defendants won summary judgment on laches.
Monday, July 28, 2008
If I had my druthers, the iPhone would allow a stylus as well as a finger, for greater writing accuracy. But then I've been using a tablet PC for several years now, and I like handwriting digital comments. The point is: deliver enough style and performance, and many customers will forgive you on price. The question is, will the lawyers?
Thursday, July 24, 2008
Marketing Information Masters, Inc. v. Board of Trustees of California State University System, 552 F.Supp.2d 1088 (S.D. Cal. 2008)
Plaintiff does marketing research studies. It sued defendants for copyright infringement, conversion, misappropriation, and unfair business practices, alleging that it performed studies on the economic impact of the Holiday Bowl on San Diego, which were memorialized in written reports provided to the Holiday Bowl organization at below-market rates. When plaintiff told the Holiday Bowl organization that it would need to pay market rates for futher studies, the organization allegedly copied and “plagiarized” plaintiff’s 2003 report to prepare its 2004 report.
The state defendants argued they were entitled to sovereign immunity from the copyright claims. The district court, unsurprisingly, agreed despite the existence of the Copyright Remedy Clarification Act, which indicates that state entities are liable for copyright infringement. Under the Florida Prepaid cases, this wasn’t good enough, because there was no Fourteenth Amendment violation to correct, so Congress couldn’t abrogate sovereign immunity. Plaintiff could still pursue the named plaintiff insofar as it alleged that he acted in his individual capacity, however.
The state law claims, likewise, had to be dismissed against the state defendants due to sovereign immunity. Defendants also argued that the state law claims were preempted by copyright law. On conversion, plaintiff alleged that defendants interfered with its ownership of “tangible materials and intangible ideas.” On misappropriation, plaintiff alleged that material not expressly incorporated into its reports was “confidential, proprietary, and trade secret information” that was used in preparing the 2004 report. And on unfair business practices, plaintiff alleged that defendants were unjustly enriched.
Because defendants didn’t make arguments specific to unfair business practices, the court refused to dismiss that claim. (This seems like a pure technical error: unjust enrichment is regularly preempted when the allegations are like this—the claim is that the defendants failed to pay for something within the subject matter of copyright.)
Plaintiff argued that it was seeking protection for “the methodologies for evaluation, the questionnaires developed by Plaintiff, work papers generated while conducting the impact studies and ‘other intangible property and ideas’ not contained in the 2003 survey.” Since the methodologies were turned into results, and the questionnaires and work papers were fixed, I can’t figure out how this possibly averts preemption. And indeed, the court noted that ideas are regularly considered within the scope of the Copyright Act for preemption purposes, though copyright does not protect ideas. Moreover, the allegations made clear that the rights asserted were equivalent to rights protected under the Copyright Act. The conversion claim wasn’t really for return of tangible property, but for damages caused by reproduction. The misappropriation claim didn’t work because there was no allegation of disclosure of confidential information in breach of a specific duty. Plaintiff was, however, given the opportunity to amend.
My take: a business that thinks that “plagiarism” is actionable, and that it can defeat sovereign immunity, is unlikely to succeed in its next bite at the apple.
Tuesday, July 22, 2008
The proposed Term Extension Directive will alienate a younger generation that fails to see a principled basisAnyone remember back in Eldred, where US term extension was justified on the ground of "harmonization"? This term extension business reminds me of nothing so much as the Sesame Street sketch in which Ernie tries to make sure that both he and Bert have the same size slice of pizza and the same amount of grape juice; he does this by eating some of whichever slice is bigger and drinking some from whichever glass has more, and since he always overshoots a bit, he ends up consuming it all.
Sir, Europe’s recorded music was about to experience a wave of innovation. For the first time, a major set of culturally important artefacts was to enter the public domain: the sound recordings of the 1950s and 1960s. Apparently not so. If the European Commission has its way, re-releases and reworkings of recorded sounds will remain at the mercy of right owners for another 45 years (report, July 17). Why?
The record industry succeeded to supply the Commission with evidence that was not opened to public scrutiny: evidence that claims that consumer prices will not rise, that performing artists will earn more, and that the record industry will invest in discovering new talents, as if exclusive rights for 50 years had not provided an opportunity to earn returns.
The Commission’s explanatory memorandum states: “There was no need for external expertise.” Yet, independent external expertise exists. Unanimously, the European centres for intellectual property research have opposed the proposal. The empirical evidence has been summarised succinctly in at least three studies: the Cambridge Study for the UK Gowers Review of 2006; a study conducted by the Amsterdam Institute for Information Law for the Commission itself (2006); and the Bournemouth University statement signed by 50 leading academics in June 2008.
The simple truth is that copyright extension benefits most those who already hold rights. It benefits incumbent holders of major back-catalogues, be they record companies, ageing rock stars or, increasingly, artists’ estates. It does nothing for innovation and creativity. The proposed Term Extension Directive undermines the credibility of the copyright system. It will further alienate a younger generation that, justifiably, fails to see a principled basis.
Many of us sympathise with the financial difficulties that aspiring performers face. However, measures to benefit performers would look rather different. They would target unreasonably exploitative contracts during the existing term, and evaluate remuneration during the performer’s lifetime, not 95 years.
We call on politicians of all parties to examine the case presented to them by right holders in the light of independent evidence.
Here's hoping Europe doesn't accept Ernie's flimflam.
Monday, July 21, 2008
Bonus question: how do the cartoons that copy The New Yorker's name and/or font fare under Rogers v. Grimaldi and the like? Are they literally false designations of origin? Or would we want to say that here, there's no trademark use/use as a mark?
Saturday, July 19, 2008
Earlier rounds in this case (about an Amway distributor’s reiterations of false rumors about Procter & Gamble’s connections with Satanism) resulted in an important ruling on the scope of “commercial speech” under the Lanham Act. At long last, the case went to trial, with a $19.25 million verdict for P&G. Defendants moved for judgment as a matter of law and for a new trial. The court rejected all their arguments, including a challenge based on post-verdict juror statements and numerous claims directed at the jury instructions.
The broadest legal arguments defendants made concerned whether P&G had adequately proven damages. According to defendants, recovery of damages required proof of actual consumer deception. However, given that it was undisputed that the Satanism claim was literally false, there was a presumption of actual confusion. The court ruled that, without evidence rebutting that presumption, P&G didn’t need to present further evidence. Defendants contended that the presumption only applied to claims for injunctive relief, but the court disagreed. (There was also some survey evidence, though its weight was disputed.)
As a general matter, I think it’s a mistake to drive the treatment of literal falsity and misleading claims so far apart in terms of what burdens a plaintiff has—it puts too much of a premium on drawing a line on what is actually a continuum, not a clear divide. Presumptions are useful and are often better than requiring expensive and uncertain proof of the fairly obvious, but I’m more comfortable with a presumption of harm in injunction cases than in damages cases.
Defendants also argued that there was insufficient evidence of proximate causation. But aside from the survey, the false Amway message targeted a specific product list, and P&G submitted evidence that sales of those products grew at a “substantially lower rate” than those of P&G’s other products. Though other causes might have accounted for this, the jury was able to weigh the possibilities. The fact that P&G continued to experience growth was not dispositive: the Lanham Act protects profitable companies and products whose sales are increasing; a damage award requires proof of damage, not “complete economic reversal.”
Defendants then argued that the Amway message wasn’t sufficiently disseminated to the relevant purchasing public to count as “commercial advertising or promotion.” They argued that P&G’s market is nationwide, even worldwide. Thus, distributing the false rumor to only a few hundred or thousand people was insufficient.
P&G responded that the relevant purchasing public was Amway distributors. The Tenth Circuit, years ago, found that there was a genuine issue of material fact on “commercial advertising or promotion” due to “the uncertainty as to the number of Amway distributors-part of the ‘relevant purchasing public.’”
The broader question was whether the false claims at issue were disseminated sufficiently to the relevant purchasing public to constitute “advertising” or “promotion.” In the Tenth Circuit, covered speech need not be made in a classic ad campaign, but can be more informal, and a “relatively modest” amount of activity may suffice in a particular context. But some level of public dissemination is necessary. Other cases look to the market the defendant sought to target, which can be key when the defendant is an intermediary or, as here, a multilevel marketer.
In the context of a business that relies exclusively on promotion by sales reps, distributing claims to a large distributor/sales rep group—as occurred here—constituted “advertising and promotion.” The false message had “limited but significant distribution” using an established communication system routinely used by Amway distributors in their businesses. Haugen, the person who put the rumor into the Amway system, forwarded it to his “frontline distributors,” who in turn forwarded it to their frontline distributors. In fact, it was expected that each distributor would immediately pass such messages on down through the marketing levels “to reach and motivate the broadest possible audience.” And P&G had evidence that Haugen’s use of Amway’s system was successful: the message spread through his network of 60,000, then through many states, then crossed over into two other distributor networks, where it spread further. Consumer calls to P&G about the issue spiked. Churches announced the rumor from the pulpit, and someone printed and distributed flyers repeating it. The evidence of lost sales growth was further evidence that a substantial number of consumers were influenced by the false rumor, and thus that it was significant enough to count as advertising or promotion.
In sum, the court concluded with a flourish, “[t]he issue is not, as Defendants argue, whether any specific percentage of the customers in this nation’s consumer goods market received the Amvox Message. Under Defendants’ reasoning, when the company was as large as Plaintiff, nothing short of an advertisement during the Super Bowl could be found to have reached a large enough percentage of customers to be disseminated sufficiently to establish a Lanham Act violation” (footnote omitted). The jury’s conclusion was supported by the evidence.
Defendants also sought remittitur, arguing that $19.25 million was so excessive as to shock the conscience and was overwhelmingly against the weight of the evidence. A losing defendant faces a “steep uphill climb”; the court should allow the award to stand unless no reasonable jury could have come up with it. Even where the defendant’s story of why the damage award was contrary to law is “persuasive,” the possibility of a proper award, “[h]owever slight the chance,” requires the court to sustain the award. Here, the defendants argued that the amount represented only out-of-pocket expenses and was thus unreasonable. But that was based on inadmissible post-trial juror statements which could not be used to impeach the verdict in any way, including by attempting to show that the damages were awarded on an improper basis.
Indeed, P&G presented damage estimates running from $62 million to over $544 million. Thus—even with the uncertainty that might be generated by that great range—there was more than a mere “possibility” of a proper award. In fact, the award was fairly moderate, given the evidence.
And so, perhaps, this “bitter” case has neared its end.
Friday, July 18, 2008
Jay-Z's sarcastic "Wonderwall" illustrates a deeper truth about cross-genre covers in general (indie boys covering teen starlets, lounge lizards covering metalheads, bookish singer-songwriters covering R&B Casanovas, etc.): These songs often contain a thorny tangle of value judgments, power dynamics, and aesthetic agendas. Unlike polyglot MP3 blogs, mash-ups, and the iPod's shuffle function—all of which enable exhilarating collisions and unlikely harmonies between different sounds, reflecting a digital-era erosion of musical boundaries—cross-genre covers don't necessarily reflect anything so utopian. The seemingly neutral act of singing someone else's song can function as an argument, a slap, a grenade toss.That something is critical, of course, doesn't make it right or good. It just makes it critical:
... Snobbery animates many cross-genre covers. Alanis Morrissette's best song in years was her 2007 re-envisioning of the Black Eyed Peas' giddily inane "My Humps."
A band as ridiculous as Oasis can sustain—deserves, even—all sorts of mockery. By contrast, there can be something smug and unseemly about indie-rock jabs at big-money pop. One wonders why Ben Gibbard bothered with his live cover of Avril Lavigne's "Complicated" if he was going to snicker so much throughout it. "No, no, it's a serious song!" he shouts in false protest when the crowd snickers, too. With his band Death Cab for Cutie, Gibbard spares no syllable in his quest to detail even the most trivial emotional state; his goal here seems to be to fault Lavigne for failing to bring the same nuance to her pubescent social drama. "The thing about that song I love is, I don't really understand what's so complicated!" he says to rapturous laughter when the cover is done. "It seems pretty cut-and-dry!" There's something genuinely admiring in parts of his performance, but it's smothered by a greasy layer of condescension.
.... Even homage ... can involve a form of snobbery. For a while, the British rock group Travis included a cover of Britney Spears' "Hit Me Baby One More Time" in its set list. Travis' version wasn't mocking, but—intentionally or not—the cover carried a patronizing subtext: that the ProTooled pop ditty needs an honest-to-goodness rocker to ride along, scrub away the deadening Top 40 luster, and exhume the fine song hidden beneath. Rather than break down aesthetic prejudices, such covers can reinforce them, implying that the so-called frivolous pop song has value but that this value is only revealed and affirmed in an "authentic," rock-based iteration.
It's hard enough to identify criticism, especially in the current media environment. Staying away from good/bad or fair/unfair judgments of the copier is difficult, but important in any fair use assessment.
Wednesday, July 16, 2008
Park West’s suit against Fine Art Registry revolves in part around the Web site’s allegations that the company’s Dalí prints are inauthentic. The suit quotes, for example, a Fine Art Registry interview in which Mr. Hochman said of the signatures on these pieces: “They’re all the same. And we feel they’re done with an auto pencil device.”
Mr. Scaglione called those assertions “bogus.” He cited the credentials of his Dalí appraiser, Bernard Ewell, and described his Dalí material as “perfectly” authenticated — “our documentation is sometimes five or six inches thick.”
When asked about the Dalí expert Mr. Field’s exclusion of certain “Divine Comedy” prints with pencil signatures, Mr. Scaglione said, “That man was so senile at the end of his life, it’s insane.” (Mr. Field died in 1998, two years after the catalog was published.)
Mr. Scaglione also dismissed Mr. Field’s “official” catalog as “the most unofficial thing you can imagine,” adding that there are “150 well-known fakes in that book” that are presented as authentic.
Frank Hunter, Mr. Field’s successor at the Salvador Dalí Archives in New York, countered indignantly in a telephone interview, “That is absurd,” adding with emphasis, “I’d like him to show me one.”
So exactly how much emphasis do you have to use to get a NYT reporter to use italics in your quote?
Meanwhile, the Code of Best Practices for Fair Use in Online Video, in whose drafting I participated, has been released. Many different kinds of creations were represented in our discussions, including fanworks. The Center for Social Media has many similar valuable projects, and I'm encouraged to see growing activism in staking claims for fair use counter to the we-own-it-all attitude of some copyright owners. Formalizing informal practices, which have a lot of flexibility and local norms, is always a challenge, but I don't think we can continue without speaking at least some of the time about good copyright rules, counter to the claims of institutional advocates for total control like the RIAA, MPAA, and lately the AP.
Tuesday, July 15, 2008
US IP blogs are abuzz with the Tiffany’s v. eBay case. It’s certainly a major victory for eBay, and by extension perhaps numerous other internet services. The nominative fair use determinations for eBay’s on-site banners and off-site search engine optimization are particularly welcome. The decision on secondary liability seems well-reasoned to me. Eric Goldman does a general reaction post that touches all the bases.
I do want to point out, however, just how much Tiffany’s got out of eBay by pressure, in particular eBay’s willingness to prohibit “Tiffany style” and “inspired by Tiffany” in ads (with, as best I can tell by searching on eBay’s site, an exception for a “Tiffany-style setting” for diamond rings). This is troubling because “Tiffany style” is in itself an acceptable nominative use for certain products that are like, but are not, Tiffany jewelry. The presence of the word “style” means that initial interest confusion, that despicable animal, is unlikely. And the possible claim that “Tiffany style,” while not confusing to the buyer, would lead to post-sale confusion depends on the argument that the design of every piece of the underlying jewelry is protected by trade dress, an argument Tiffany’s did not make in this case. Of course, it may well be the case that “style” was so often a signal of counterfeit status that a ban was in order, but the evidence recited by the district court didn’t go to that.
The lesson is that eBay, like other internet aggregators, is interested in its own welfare, not in the maximum efficiency of the competitive system or in justice. So it will fight overreaching trademark claims precisely to the extent that it makes business sense to do so, and no further, just as our beloved Google prohibits even nominative fair use of other parties’ trademarks in the text of sponsored ads. (Speaking of our beloved Google, Scott Westerfeld’s recent novel So Yesterday has a narrator who’s sworn off mentioning famous brands in order to fight their famousness, but even he makes an exception for Google, because, he says, his story wouldn’t get very far without the ability to use the verb—and the search engine. That’s brand power, and it’s also why genericide has functionally disappeared for fanciful marks.)
Now, a bit about dilution: (1) The court adopts the interpretation that dilution requires that a defendant to use the mark to identify its own goods or services, which eBay didn’t do. (2) I found it amusing that the court’s careful discussion of the potential divergence between state and federal dilution law created by the very different wording of the TDRA ends with the same time-saving conclusion as every other court: might as well consider them together! And really, who’d want to do two dilution tests? (Who’d want to do one?)
Last, because my niche is advertising law, a word about the false advertising claims: The argument was that eBay advertised the availability of Tiffany jewelry, but, given the high percentage of counterfeits for sale on the site, that was as false as advertising that a model of car gets 35 mpg when only 25% of the actual cars do so. The court rejected this argument, and the basic intuition is similar to the one that’s hampered post-Dastar claims about false attribution as false advertising: when one’s core claim sounds in trademark, §43(a)(1)(B) should not serve as an end run around the requirements of trademark law.
Since authentic Tiffany jewelry was for sale on eBay, the claims were not literally false even if a buyer was more likely than not to get a counterfeit piece. Comment: Were it not for the trademark overlap, I’d find this a dubious conclusion, given the car analogy above. But, as the court pointed out, it had already found that the use of “Tiffany” was a protected nominative use.
In terms of implicit falsity, the court held that Tiffany’s claim depended on eBay’s knowledge of high counterfeiting levels. Again, as false advertising doctrine, this is wrong—false advertising is strict liability. But it is common in §43(a)(1)(B) cases brought over threats of patent infringement to hold that only knowingly false claims made about patent rights can be false advertising, while sincere but wrong claims are not actionable. Intent/knowledge here play the role of boundary markers more than elements of a false advertising cause of action: these subjective elements manage the scope of patent rights, or trademark rights, and are not true measures of whether false advertising has occurred in the abstract.
Finally, the court found that the false advertising was sellers’ responsibility, not eBay’s. Again, I don’t think much of this, to the extent that eBay itself chose to advertise the term “Tiffany & Co.” However, insofar as the court was suggesting a secondary liability analysis for false advertising in the context of online auctions, that makes more sense—just as eBay is not directly liable for trademark infringement by counterfeiters, it’s not directly liable for false advertising by sellers of bad merchandise.
The conclusion “it cannot be said that eBay was misleading customers when eBay was diligently removing listings from the website that were purportedly counterfeit” sounds factual, but it’s actually normative: it is logically possible and even plausible that buyers were misled despite eBay’s policing (and perhaps in part because of it)—indeed, the record contained numerous emails from buyers complaining about counterfeit Tiffany sales that slipped through the screening; such buyers were materially misled by the listings’ claim to offer authentic Tiffany jewelry. Nonetheless, the court was unwilling to impose liability. One way to think about this might be materiality: given the availability of authentic Tiffany merchandise on the site, there wasn’t a sufficient connection between eBay’s general advertising that Tiffany items could be found on the site and any particular auction listing.
Sunday, July 13, 2008
Federal Trade Commission v. Bronson Partners, LLC, -- F.Supp.2d --, 2008 WL 2698673 (D. Conn.)
The FTC brought an enforcement action against defendants for the claims made in their ads for Chinese Diet Tea and the Bio Slim Patch. Since defendants conceded liability on the Bio Slim Patch, the court only considered the ad claims made for Chinese Diet Tea, touting it as a weight-loss product. “[W]hen read objectively and in context,” the advertising “virtually guarantees the user that, by drinking the tea, the user will lose large quantities of weight in a relatively short period of time without dieting or exercising.”
The tea, however, is not materially different from any other green tea product on the market.
Defendants nonetheless advertised that the tea “SHEDS POUND AFTER POUND OF FAT-- FAST!” while allowing users to eat their favorite foods. The exemplar ad claimed that the tea “eliminates an amazing 91% of absorbed sugars[;] [p]revents 83% of fat absorption; [d]oubles your metabolic rate to burn calories fast”; et cetera. The ad went on to claim that “clinical trials” proved the weight loss claim (163 patients, all of whom lost between 18 and 75 pounds over 12 weeks) and to “guarantee” the weight loss. It offered “courses” of varying lengths, promising “You’ll lose up to 25 lbs” for the shortest and up to 75 pounds for the longest. There were also a number of testimonials claiming significant weight loss, including “After 10 weeks my weight was down to 104 lbs. I lost weight so fast my doctor ordered me to slow down” and “I have been on the program 6 weeks and have not religiously followed the schedule of a cup of tea after each meal. However, I have gone from 240 lbs. down to 210 lbs.”
Defendants, with the same bald-facedness that characterized the ads, argued that the ads didn’t make the false claims that the FTC alleged. First, they argued that some of the claims were “merely testimonial.” But that doesn’t render it weightless. Indeed, the FTC has long held that a testimonial is an implicit representation that the person providing it had a typical experience with the product. Nor does the case law (or common sense) suggest that consumers interpret testimonials with a more jaundiced eye than they do the rest of an ad.
Then, they argued that the FTC was required to provide extrinsic evidence of consumer perception. This was wrong on a number of levels. No extrinsic evidence is ever required when the claims at issue are express. (In a footnote, the court suggested that, as a matter of logic, all claims that are necessarily true if the express claims are true are necessarily implied by an express claim—thus, a claim that a car gets 30 mpg necessarily implies that the car gets “more than 10 mpg.” This seems to me true but not all that important, except insofar as defendants were ridiculously parsing the FTC’s expression of the claims made by their ads. It isn’t really what the doctrine of necessary implication in the Lanham Act covers; that doctrine is more about applying my favorite Gricean maxims of relevance, quality, etc.)
Moreover, even when claims are implied, the FTC is not necessarily required to submit extrinsic evidence of deceptiveness. The FTC can find that reasonably clear implied claims are conveyed to the audience by using common sense and administrative experience, as the Seventh Circuit held in its Kraft case. (I think this rule would make sense for some obvious implied claims in Lanham Act cases as well; in fact, that is some of what the necessary implication doctrine does—it adds common sense to the mix.)
And, regardless of one’s view of the law, the court had no doubt that the ad made the alleged claims: “The advertisement is not subtle. It does not employ innuendo, subliminal messages or hints to convey its message. It does not contain conflicting messages that are reasonably susceptible to different interpretations. It makes no meaningful qualifications. Instead, it is clear, stark and dramatic. Only four words in the entire advertisement do not relate to weight loss in some way: ‘makes great iced tea’” (footnote omitted).
Defendants argued that their “guarantee” was a “satisfaction” guarantee, not a weight loss guarantee, but “satisfaction” doesn’t appear anywhere in the ad, while weight loss claims do: e.g., “[a]ll participants lost between 18 lbs and 75 lbs over the 12 week period. If you do not lose similar amounts of weight we guarantee to refund your purchase price in full.” (Defendants never produced any evidence that any such clinical trial was conducted.) I should note that this is an instance in which easy cases might make bad law: even had the word “satisfaction” appeared in the ad, it would still have been a false representation of guaranteed weight loss.
To see what else the district court had to put up with, consider defendants’ argument that “SHED [ ] POUND AFTER POUND OF FAT--FAST!” only meant “at least two pounds,” since “pound” after “pound” makes two pounds. “Unreasonable,” the word the court used for this interpretation, seems charitable.
Defendants tried to highlight the ad’s statement that “drinking Chinese Green Diet Tea is not a license to gorge yourself.” But that isn’t close to the truth, which is that you’d still need to diet and/or exercise to lose weight. Even if it were true, “one true statement, in the presence of a mass of false and misleading statements, does not render an otherwise misleading advertisement non-misleading.”
So, the ad made the functional equivalent of the claims as the FTC stated them: clinical proof of rapid and significant weight loss for all users, without increased physical activity or decreased caloric intake, and while consuming high-fat and high-calorie foods such as “sweet buns and chocolate” (mmm, chocolate), as well as a fat- and sugar-blocking effect.
Defendants then argued that these claims were not false or misleading, because green tea promotes weight loss. They retained a professor from the University of Wisconsin-Madison, Dr. Hasan Mukhtar. His expertise is primarily in dermatology and cancer research, and he has no significant nutrition-related education or experience. Nonetheless, he was offered as a leading expert on green tea.
Mukhtar’s report suggested that green tea could be a useful part of a weight-loss program; that green tea helps reduce sugar and fat absorption; and that green tea increases metabolic rates. He concluded that green tea consumption “could” lead to weight loss. He relied on studies showing potential effects on various metabolic processes, including studies performed on rats and mice. One study was actually a double-blind placebo test on 46 women; it found “modest weight loss” from green tea.
This was all very nice, but even if true (which was unclear at best), nothing in this report supported the claims actually made by the ad. At deposition, Mukhtar even said that the ad’s claims were too strong. The ad claims themselves were either completely unsubstantiated or patently false—there were no clinical trials, no evidence that green tea eliminated most sugar and fat absorption, and no evidence of fast and significant weight loss in people. As the FTC’s expert noted, the claims were simply beyond the realm of scientific plausibility.
Blatant lies can work on people desperate for solutions they haven’t found elsewhere; this is why we need consumer protection law.
Thursday, July 10, 2008
Wednesday, July 09, 2008
The main event is a proposed rule change "to make the current disclosure requirement more obvious to the consumer by requiring that sponsorship identification announcements 1) have lettering of a particular size and 2) air for a particular amount of time," with a related request for any other proposals along those lines. From Commissioner Adelstein's statement:
Many current practices make a mockery of our regulatory requirement that consumers have a right to “full and fair” disclosure. If it takes a magnifying glass to see a tiny acknowledgement whizzing by the screen at the end of a show, that is evading the spirit of the law. More clarification is clearly needed. The main accomplishment of this Notice is that it seeks to establish specific guidelines addressing the nature of the disclosure, including font size of the sponsorship credits and the amount of time they are aired.The Commission also seeks comment on whether any change in children's programming-specific rules or cable-specific rules are required. And it invites "comment on issues raised by radio hosts’ personal, on-air endorsements of products or services that they may have been provided at little or no cost to them: should we presume that an 'exchange' of consideration for on-air mentions of the product or service has occurred, thus triggering the obligation to provide a sponsorship announcement; and does the 'obviousness' exception to the sponsorship announcement requirement apply to endorsements or favorable commentary by a radio host that are integrated into broadcast programming, i.e., made to sound like they are part of a radio host’s onair banter rather than an advertisement."
The FCC also noted possible First Amendment issues:
[W]e invite comment on the arguments raised by WLF [Washington Legal Foundation] and FAC [Freedom to Advertise Coalition] in response to Commercial Alert’s petition. Would the imposition of concurrent disclosure requirements or other regulations infringe on the artistic integrity of entertainment programming, as WLF argues? Would such a regulation be paramount to a ban on embedded advertising, as asserted by WLF and FAC? Does the apparently common existing practice of superimposing unrelated promotional material at the bottom of the screen during a running program belie WLF’s and FAC’s contention that concurrent identification would effectively preclude product integration as a form of commercial speech because it would “infringe on artistic integrity”? [Comment: a beautifully snarky leading question! Congrats to the drafters.] Are the government interests at stake here substantial enough to justify any such requirements? How can the Commission ensure that any modified regulations are no more extensive than necessary to serve these interests?A couple of comments: of course, the WLF and FAC positions imply that the current sponsorship disclosure requirements are also unconstitutional, since it's not the font size or the noticeability that's the (alleged) problem. And the WLF and FAC positions also presuppose that failure to disclose commercial sponsorship does not make the sponsored programs into false or misleading commercial speech, since false or misleading commercial speech receives no First Amendment protection whatsoever.
There are two subissues here: (1) is it false or misleading to fail to disclose commercial sponsorship, and (2) does commercial sponsorship make a program commercial speech, at least for the limited purpose of requiring disclosure of such sponsorship? I think the FTC can reasonably answer (1) "yes," while (2) is a more complex question. Justice Stevens has, in recent years, sought to convert Central Hudson into an inquiry about the preservation of a fair bargaining process; commercial speech can, in his opinion, be regulated differently than other speech to the extent, and only to the extent, that it is bound up in commercial transactions.
Read that way, I think the answer to (2) is "yes." A movie full of product placement by BMW can be regulated as commercial speech to the extent that it is attempting to sell BMWs. The government can't regulate violence or sexuality or political content in that same movie without anything less than the full justification required for regulating purely noncommercial speech, because none of those things is tied to the advertising component. One virtue of this approach is that a reviewing court focuses on what behavior the regulation targets. If the regulation aims to ensure fairness in soliciting transactions, then it is allowed. We'll have a lot of debates about what counts as "fairness" and "soliciting transactions," but many of the crazy-making puzzles of defining commercial speech would be avoided. (And perhaps the legislature has greater leeway to define "fairness" and even "soliciting transactions" than it has to define "commercial speech.")
MDM Group Associates, Inc. v. Emerald Isle Realty, Inc., 2008 WL 2641271 (E.D.N.C.)
MDM, which sells insurance and other financial products and services, sued a number of North Carolina realty businesses. It alleged that it developed an “original product,” the “Peace of Mind Security Deposit Waiver Program.” It’s a type of insurance: Vacation renters would pay a small fee of $30-$50 instead of a much larger security deposit, and if damage occurs, they’d be protected up to $3000. To implement this, MDM drafted a form contract, and registered a copyright on the contract.
MDM alleged that some defendants did business with them, then stopped but kept using the contract, while other defendants copied the contract without ever having a business relationship with MDM.
The court denied defendants’ motion to dismiss the copyright infringement claim on grounds that it was inadequately pled, and their motion for a more definite statement. Allegations that defendants’ “marketing materials” infringe MDM’s copyright were sufficient to allow defendants to answer the complaint. Defendants’ motion to dismiss for lack of copyrightability was also premature—the complaint alleged originality, and the court can only consider a limited universe of documents and allegations on a motion to dismiss. Likewise, defendants’ merger argument was not appropriately resolved on a motion to dismiss. MDM’s civil conspiracy claim was also dismissed as preempted to the extent it relied on the copyright claims.
MDM’s Lanham Act claim fared worse. MDM alleged that defendants violated the Lanham Act and North Carolina law because their ads “inherently” include the representation that their products were “legal” insurance products, but the North Carolina Commissioner of Insurance had not approved those products. Sua sponte, the court declined to resolve defendants’ challenges to the claims, and ruled on an issue it considered dispositive: Under the Lanham Act, “neither an implied statement nor a failure to state constitutes a ‘description of fact’ or ‘representation of fact’” § 1125(a)(1).
This is, of course, entirely wrong. There is a rather large body of case law, in fact, devoted to analyzing when an implied statement violates the Lanham Act, and a smaller but robust cohort of cases discussing when the context of a statement creates implications that require disclosure of a relevant qualification in order to avoid misleadingness. (Perhaps the court’s egregious misstatement is simply evidence that courts would do better to ask the parties to brief issues that the judges believe are crucial even if the parties didn’t raise.)
There is, however, a more specific rationale here: For prudential reasons, courts have often refused to consider failure-to-disclose or implied falsity claims based on the theory that a regulator’s approval for a product or service was required but was not obtained, and that consumers inherently expect that advertisers will only advertise approved products or services. And it was to this rationale, mercifully, that the court turned.
Mylan Laboratories, Inc. v. Matkari, 7 F.3d 1130 (4th Cir.1993), held that an allegedly false implication that drugs were FDA-approved was not actionable. It was insufficient to allege that merely placing a drug on the market implies that the drug has been properly approved by the FDA. (I do not buy this rule as a statement about consumer expectations; it seems to me entirely reasonable for consumers to make precisely this inference. As a rule for managing the spheres of authority of the FDA and the courts, however, I see its place. I would simply call it what it is—an exclusion from the Lanham Act’s scope, rather than a conceptually problematic unrebuttable presumption of lack of deception.)
The court viewed MDM’s argument as identical to that in Mylan. The claim was that defendants put a product on the market without proper regulatory approval, and therefore falsely advertised its approval. Mylan precludes such a claim.
(In a footnote, the court discussed MDM’s original invocation of “false designation of origin,” which it apparently abandoned in the briefing—and properly so; as the court noted, Dastar was an insurmountable barrier to that theory.)
MDM also asserted a North Carolina Unfair and Deceptive Trade Practices Act claim. Its theory was the same—defendants sold unauthorized insurance products, which was “unfair and deceptive.” The court denied defendants’ motion to dismiss for lack of standing, though it noted that MDM’s UDTPA theory was somewhat unclear. I find it interesting that the court didn’t discuss the tension between sustaining MDM’s UDTPA claim and dismissing its Lanham Act claim. It’s certainly possible—maybe even likely—that North Carolina has chosen a different way of dividing responsibility between courts and regulators for insurance than Congress has for the FDA, but I would have thought the issue deserved a mention.
Tuesday, July 08, 2008
Now Harvard's Berkman Center is working on educational fair use best practices. They have a discussion draft of the proposal up, and seek feedback. There may also be some job openings available, given that the project is planned to take several years.
Saturday, July 05, 2008
Hart v. Comcast of Alameda, 2008 WL 2610787 (N.D. Cal.)
Hart sued Comcast for unfairly discriminating against peer-to-peer filesharing applications, in violation of the Computer Fraud & Abuse Act, California false advertising law, and other laws.
The court stayed the case using the primary jurisdiction doctrine, which applies when an initial decision should be made by a relevant agency rather than a court. The 9th Circuit uses a four-factor test: “(1) the need to resolve an issue that; (2) has been placed by Congress within the jurisdiction of an administrative body having regulatory authority; (3) pursuant to a statute that subjects an industry or activity to a comprehensive regulatory scheme that; (4) requires expertise or uniformity in administration.”
The test was satisfied here—plaintiff’s complaint alleged that discrimination against P2P services violated FCC policy. The question of whether “network management” of this type is reasonable is within the FCC’s extensive jurisdiction over broadband. Two petitions on the matter are currently pending before the FCC, asking for specific rules on (1) discriminating against particular internet applications and (2) barring Comcast from “managing” P2P applications. The FCC has announced that it will investigate Comcast’s conduct and has sought public comment. These issues also require expertise and uniformity in administration.
The stay applied to all the claims, even though not all of them concerned the reasonableness of Comcast’s acts. The breach of contract and false advertising claims were “sufficiently interrelated” with the network management issue that the FCC’s conclusions could affect the resolution of those claims. If Comcast promoted and advertised fast speeds while severely limiting P2P speed, that might not be false advertising if it’s ok to limit P2P speed. (Comment: I squinted pretty hard at that. If it’s relevant to consumers, then there might be a need to disclose a qualification of a speed claim even if discrimination in speed is allowed by the FCC. The question, I would have thought, was whether reasonable consumers understood the speed claim to cover all services, not whether the law required Comcast to provide all services at equal speed. That said, if discrimination is not ok, then it becomes even more reasonable for consumers to expect equal speed—but again, it might be reasonable anyway.)
Friday, July 04, 2008
Super Duck Tours can use that name, the First Circuit recently ruled, despite the existence of Boston Duck Tours, because “duck tours” is generic. Check out the Super Duck Tours site and consider whether the defendants might have other IP problems. (It might help to have the sound on.)
The law may have the salutary effect of getting restaurants to change their ways. Nonas uses the example of Starbucks, which has reacted to the debate over menu labeling by switching its default milk from whole to 2 percent. Margo Wootan, director of nutrition policy for the Center for Science in the Public Interest, said getting restaurants to change what they serve can be just as important as getting customers to change what they order. "Maybe McDonald's will rethink whether a large shake really needs to have 1,200 calories," she said. "Could people be happy with a 900-calorie shake?"
Thursday, July 03, 2008
Cryptoxin, one of my favorite cultural analysts, linked to this post about Oliver Laric’s green-screened “remix” of Mariah Carey’s video for Touch My Body, in which everything except Carey has been edited out, apparently inviting other people to add a background in—much like Stephen Colbert’s green-screen challenges. Is this transformation by subtraction, like Garfield Minus Garfield? FourFour speculates that the video might be a comment on egocentrism or phoniness—I take it that the argument would be something like: Carey is supposedly inviting someone to touch her body, but it’s really all about viewing her, and the green-screen reveals the fundamental emptiness and lack of human relation in her proposition. Rhizome’s Marisa Olson has further analysis:
[Carey] sings, "If there's a camera up in here then it's gonna leave with me when I do. If there's a camera up in here then I best not catch this flick on YouTube." Naturally, this is exactly what Laric is hoping will happen--and no doubt Carey herself. ... The key point made by removing the superfluous imagery from the video's 5,000 frames is that, with her "come hither" gestures and the invitation "touch my body," Carey's certainly asking for it.
The comments take up the sexual-assault implications of “asking for it.” While I agree that Olson’s take has troubling politics—it invokes the trope that a woman who chooses to be sexually active with one man is therefore public property for anyone else—that’s nothing new in transformative fair use.
But what’s the “it” Carey is asking for? Here we have to deal with the distinction between image and body—no matter what strange or degrading things people do with the green-screen footage, they won’t be making Carey herself do anything. I must disagree with the Rhizome commenter that celebrities can control their public presentation and reception in the ways that they, and all other human beings, are entitled to control their physical bodies.
Here’s a portion of Olson’s response to the initial criticism:
I do think that Carey's lyrics (and video) invite sexual fantasy, but my article doesn't say that she is asking to be violated, it says that she's asking to be remixed. Of course, the slippage between the two that you identify is what's so interesting.
In an interview with Laric, he told me that he noticed that the video takes-on an increased sexual tone when all but Carey is masked out. He was interested in how this first-person invitation to "touch my body" could be construed as an invitation to remix the visage of her body (and/or the voice emitted from it), particularly given (a) the implicit link to digital culture embodied by both the lyrics and video, and (b) the fact that the remix is now such an important part of the media ecology of pop culture.
…. Discussions of why a remix is or isn't violent are interesting, as they get to questions of the status of the digital reproduction. Are we remixing a person or "just" her image, and what's the difference ... ? Carey's image was already manipulated before it came to us. In the interview with Laric, he pointed to a segment in the original video in which the shape of a cup becomes distorted as a result of distorting the footage to make the singer standing behind the cup appear slimmer. So this is already not her. If you listen closely, I believe there is also a question as to whether all of the voiced parts of the song are her, so the audio issue adds another layer to the phenomenological question of the brute force of the remix.
The original commenter responded that, while remix might be legitimate, it was especially problematic to blame Carey for the remix, as if she were doing something that was a special invitation here. This is something I find very interesting in certain discussions of transformative fair use, such as the rationale the Court of Appeals gave in the Wind Done Gone case, where transformation comes from bringing out something that “really was” present in the original all along. The commenter suggested that the remix, rather than challenging the construction and exploitation of celebrity, merely participated in it—a charge that can often be laid against unauthorized transformations. This is part of why it’s so dangerous for courts to assess literary and artistic merit. Reasonable people can readily disagree about the critical direction of a reworking, and about the line between exploitation and criticism.
As Walker’s commentary indicates, this “explanation” doesn’t pass the laugh test. It’s a slimy equivocation, and I suspect that better attention to Grice would help more people appreciate why.
Post title courtesy of Zachary Schrag; explanation here.
Wednesday, July 02, 2008
New York v. Applied Card Systems, Inc., --- N.E.2d ----, 2008 WL 2519797 (N.Y.)
New York’s AG sued various credit card providers for violations of New York’s consumer protection laws. Defendants argued that the federal Truth-in-Lending Act (TILA) preempted the claims that they engaged in fraudulent and deceptive credit card offers. The NY Court of Appeals (New York’s highest court) disagreed, though it held that res judicata from a prior nationwide class action settlement precluded the AG from recovering certain restitution.
Defendants targeted consumers with sub-prime credit. Basically, the AG argued that they misrepresented the credit limits that consumers could obtain from it and failed to disclose the effect its origination and annual fees had on available credit. They told consumers they were preapproved for a credit limit “up to” $2500 or $1000, though disclosed that the actual limit could be as low as $350—the average limit was $400. They explained that upon approval clients would incur a $100 account origination fee and a $50 annual fee, but their explanation that this would reduce available credit was, in the court’s words, “oblique.” These initial charges depleted the available credit for some consumers by 40% or more.
There were similar problems with marketing “secured cards” (secured by savings accounts, with a $10 monthly maintenance fee) with “no late fees*” and “no collections calls*,” where the asterisks were pretty significant. Likewise, defendants promoted a credit insurance program that didn’t deliver the promised benefits in New York and its $35 yearly cost was hard to avoid because the opt-out was confusing and hard to find. Defendants also marketed a “re-aging” service, which allowed banks to avoid writing off delinquent accounts by agreeing on a series of payments, but they didn’t explain that overlimit fees would continue to accrue, and those fees and previously imposed late fees would be due at the end of the re-aging process.
Moreover, the AG’s petition also discussed defendants’ late fees, finance charges, balance calculation method, and lack of any grace period for payments. TILA requires these all to be disclosed in any credit card solicitation, but the AG claimed that many consumers were unaware of how charges and penalties based on these terms were assessed, trapping unwary consumers in a “vicious cycle of pyramiding debt.”
In the Allec case, the California Superior Court approved a nationwide class action settlement for conduct predating January 1, 2002—only 12 New York members of the class opted out. The New York trial court applied res judicata to those claims, but rejected the TILA preemption argument. Based on evidence including more than 200 complaints and affidavits from defendants’ former collection employees, it found that defendants “repeatedly and persistently” engaged in fraud, deception, and false advertising. It enjoined defendants from such acts in the future and awarded over $9 million in restitution, damages, and penalties, an amount reduced somewhat on appeal.
The Court of Appeals affirmed. Applying a presumption against preemption, it held that New York could regulate false advertising without running afoul of TILA’s preemption provision relating to credit card applications and solicitations: “The provisions of [portions of] this title shall supersede any provision of the law of any State relating to the disclosure of information in any credit or charge card application or solicitation which is subject to the requirements of section 1637(c) of this title or any renewal notice which is subject to the requirements of section 1637(d) of this title, except that any State may employ or establish State laws for the purpose of enforcing the requirements of such sections.” 15 USC § 1610 [e].
The defendants argued that §1610(e) preempts every state law relating to the disclosure of information in any credit card solicitation. The AG responded that its claims were based on affirmative deception, not disclosure. The Court of Appeals agreed. TILA doesn’t preempt any state law that “could potentially touch upon any credit information that respondents might choose to include in their credit card applications and solicitations.” Rather, it preempts state laws relating to “disclosure of information” in applications and solicitations “subject to the requirements of section 1637(c).” Thus, preemption is limited to laws that “purport to alter the format, content, and manner of the TILA-required disclosures and those that require credit issuers to affirmatively disclose specific credit term information not embraced by TILA or Regulation Z [implementing TILA].” Because New York’s consumer protection law doesn’t require any disclosure, but does require businesses to refrain from fraud and false advertising, it’s not preempted.
Specifically, the misleading statements about potential credit limits, initially available credit, secured card benefits, credit insurance coverage, the benefits of re-aging, and the like were not disclosures “subject to the requirements of 1637(c),” which only requires the disclosure of APR, grace period, balance calculation methods, and certain fees. “Section 1610(e) preempts only those state laws that relate to the format, content, manner, or substance of the TILA-required disclosures.” The AG’s petition did refer to consumers’ unawareness of the information contained in the disclosures, but the AG didn’t contest the adequacy of defendants’ TILA disclosures and obtained no relief relating to those terms. Nor did the deceptive material “relat[e] to” the disclosure of such information sufficiently to trigger preemption. Defendants are only barred from affirmative misrepresentations about credit terms that currently aren’t regulated by TILA or Regulation Z.
Defendants argued that Congress intended to create a uniform system of disclosure in credit card applications. But the AG’s victory here doesn’t force them to change their disclosures or to affirmatively disclose any additional credit terms. Any indirect economic influence on their solicitation practices isn’t enough to overcome the presumption against preemption. Defendants’ position “assumes that Congress intended the TILA disclosures to provide consumers’ sole protection against credit card companies’ fraudulent and deceptive marketing practices.” The Court of Appeals believed that the limited nature of the preemption provision, and the legislative history, refuted that position. The Conference Report, for example, contemplated that state enforcement agencies could obtain settlements requiring disclosures beyond those required by TILA, which “stands in marked contrast” to the dissent’s claim that Congress intended to “cut off and fully supplant” all state regulation. More broadly, the legislative history was clear that state unfair competition and deceptive practices statutes would still apply to credit card solicitations and applications.
Proposed amendments to Regulation Z would require disclosure relating to some of the practices challenged by the AG here, such as the effect of fees and security deposits on an applicant’s credit limit. And proposed Regulation AA would simply prohibit some of the substantive practices at issue here, such as charging fees and security deposits that constitute a majority of a consumer’s credit limit. Since those amendments aren’t yet enacted, they have no preemptive effect, but they do justify the inference that TILA and Regulation Z don’t currently cover these practices.
Turning to res judicata, the court determined that the AG was in effect in privity with the consumers bound by the California class action settlement, even though the AG had not received notice and even though the AG (and 30 states’ AGs as amici) argued that this was an example of class action abuse—a class action settled at rock-bottom prices to preclude further, more properly valued claims. To the extent that the AG sought relief in the form of restitution for pre-January 1, 2002 claims, he was covering ground already covered by the settlement, which was a final and binding judgment and which had been determined to satisfy consumers’ claims. Though restitution is about making consumers whole, settlement class members “have already compromised their entitlement to a full-measure of make-whole relief in a proper judicial forum.” Respect for the validly entered judgments of other states required application of res judicata.
However, the AG could still seek restitution for people not bound by the settlement and for time periods not covered. And the claims for injunctive relief, civil penalties, and costs were untouched. Moreover, the AG might be able to obtain disgorgement, which is a remedy distinct from restitution.
Justice Read dissented, arguing that the history of TILA amendments revealed an ever-increasing scope of preemption, and that the majority’s interpretation returned to an earlier version of TILA in which only “inconsistent” state regulations, rather than all state regulations, were preempted. In other words, Read argued that TILA occupied the field, except that states could bring proceedings to enforce TILA.
The textual argument focused on §1610(e)’s language “The provisions of [TILA] shall supersede any provision of the law of any State relating to the disclosure of information in any credit or charge card application or solicitation which is subject to the requirements of section 1637(c) or any renewal notice which is subject to the requirements of section 1637(d).” Read argued that “which is subject to the requirements of section 1637(c)” modified “credit or charge card application or solicitation,” not “disclosure of information” as the majority seemed to believe.
However, the majority’s analysis doesn’t depend on what “which is subject …” modifies. The question is whether New York’s consumer protection law “relat[es] to the disclosure of information” in a solicitation or application. If it is true that there is a relevant difference between affirmative misrepresentation and disclosure, or failure to disclose, then New York’s law doesn’t relate to the disclosure of information and isn’t preempted.
Read also recounted the evolution of TILA over time, arguing that Congress ultimately abandoned a ban on requirements inconsistent with TILA in favor of a comprehensive system of requirements so that difference, rather than inconsistency, was enough to find preemption of a state regulation. A state may simply not use its consumer protection laws “to impose additional or different cost-of-credit disclosure on a creditor.” The majority, Read argued, allowed a “patchwork scheme” that ignored potential federal policy reasons not to mandate a particular disclosure that a state considers beneficial.
Again, this doesn’t address head-on the majority’s claim that affirmative misrepresentations are relevantly different. As to that, Read argued that the distinction was evanescent, especially given that TILA preempts state regulations that “relate to” disclosures, and “relate to” is a broad term. The only way for defendants to “dispel the complained-about ‘overall impression’” and comply with the injunction would be to change the form and content of its solicitations—that is, to make different disclosures. Neither the AG nor the majority explained how else defendants might eliminate the misrepresentations. (They could, of course, choose to stop offering such terms—given the intertwined concerns of form and substance here, as recognized in proposed Regulation AA, that might be the right result.)
In the end, Read concluded, “Congress essentially decided that the benefits from a uniform, nationwide regime for disclosure under the aegis of the Board outweighed any loss of protection to consumers under state law.” Thus, the AG’s good intentions, and the federal government’s arguable poor stewardship under TILA, were insufficient to override the Supremacy Clause’s mandate.
Note: for excellent continuing coverage of consumer credit issues, the Credit Slips blog is the place to go.