Sunday, January 30, 2011

Copyright in maps: graphic elements or compilation, or both?

Nielsen Company (US), LLC v. Truck Ads, LLC, 2011 WL 221838 (N.D. Ill.)

Nielsen has created maps that divide the US into geographically-distinct marketing regions, known as "designated marketing areas" or DMAs. Nielsen sued Truck Ads for reproducing Nielsen’s DMA maps on Truck Ads’ website. Truck Ads counterclaimed for a declaratory judgment that the DMA data and regions depicted on the maps are not copyrightable and alleging copyright misuse. The court granted Nielsen’s motions to dismiss.

Nielsen alleged that it designed its maps using “a set of proprietary criteria and testing devices, as well as the experience and judgment of its analysts, to partition regions of the United States into geographically-distinct marketing regions, or designated marketing areas (the 'DMA Regions')...." The maps graphically depict its proprietary DMA regions and "are the product of a creative selection, arrangement and expression of variables and data sets" because the regions are ones that “Nielsen has determined constitute meaningful marketing areas." Nielsen also "produces statistical and demographic data and analyses based on its proprietary testing and research methods for each DMA Region," known as DMA data.

So far as the court was aware, it was only on the Truck Ads website that an internet user can find up-to-date nationwide DMA maps broken down to the county level. Truck Ads uses the maps to define advertising regions that it and its affiliates use to provide ads on the sides of trucks.

Nielsen alleged that Truck Ads’ use of the maps violated its copyright rights.

Nielsen argued that it was not now claiming that Truck Ads violated any copyright in DMA regions or DMA data, such that there was no subject matter jurisdiction over the validity counterclaim. Truck Ads argued that it currently uses and displays demographic and ranking data associated with DMA regions, obtained from the same place Nielsen gets it—the Census Bureau.

There was no justiciable controversy over census data, copyright to which was not claimed by Nielsen (nor, of course, could it be). The lawsuit is focused on the maps, which Nielsen contends are original compositions warranting copyright protection. Maps can be protected regardless of whether the underlying data are in the public domain or not. (Thus, creative choices in coloring the regions might be protected, in which case all a secondary user would need to do would be to take its own map of the US and color it in differently—if, and this is a big if under current doctrine, the choices in identifying the regions are noncopyrightable.)

Truck Ads argued that DMA regions don’t exist in any expressible form other than DMA maps, but the court accepted that it was plausible that region information could be represented in non-graphical form, such as a list of zip codes.

Nielsen alleged that Truck Ads created its map “not by reviewing and analyzing publicly-available data on its own and presenting that data in graphic form, but instead by simply copying Plaintiff's work.” In fact, Truck Ads’ CEO “effectively acknowledges that this is exactly what he has done. ‘If I saw a map that I thought was more accurate on the internet, I would--and more of a consensus that it was the market for the particular designated market area, then I would use--I would make an adjustment, a change.... But, again, all I'm doing is I'm just changing the color of the background of the county. I'm not doing anything else. There's no insignia, no indication there of anything except a county line and some color.’" Treating this statement (if there’s nothing else in the record) as an admission of copying copyrightable content, as contrasted to “reviewing and analyzing publicly-available data on its own” seems dangerously close to a sweat of the brow analysis. We really need to know what’s copyrightable about the maps; it’s not the outline of the states and counties, so if the color is different, what’s left?

The court somewhat puzzlingly quoted Emerson v. Davies, 8 F.Cas. 615 (C.C.Mass.1845) to the effect that a second-comer “has no right to publish a map taken substantially and designedly from the map of the other person, without any such exercise of skill, or labor, or expense,” then said that sweat of the brow was no longer valid. Copyright still extends to non-fact features of a map. “Essentially, Plaintiff and Defendant disagree about whether the DMA Maps themselves depict simple facts that are in the public domain and are represented without the requisite originality to warrant copyright protection, or whether the DMA Maps present an original compilation of public domain facts and proprietary market research in a form that warrants copyright protection.” In other words, they don’t seem to be fighting about the graphic elements; they are fighting about whether the choices that went into designating the regions convert the selection of the regions into copyrightable expression, something also implied by the court’s conclusion that the relevant data might be non-graphically represented.

Nielsen nonetheless argued that the court should not reach the issue of whether the DMA regions and data were protectable, because Truck Ads doesn’t possess or use any of that data other than by publishing the maps. But Nielsen’s threat letters and initial complaint did mention the regions and data separate from the maps. The court suggested that “[b]ecause there is no basis for the conclusion that Defendant actually possesses Plaintiff's DMA Maps or DMA Regions, there may well be no controversy that supports jurisdiction over the declaratory judgment counterclaim.”

Again, I’m puzzled. If the map copyrightability claim depends on selection/coordination, then Truck Ads has copied the copyrightable elements alleged to exist; it doesn’t matter whether Truck Ads possessed the underlying datafiles. But the court also correctly pointed out that the counterclaim merely restates an issue already before the court. To win, Nielsen will have to show that the maps consist of an original compilation, selection, and arrangement of facts. “Making such a case will necessarily require the court to review and consider the data underlying the maps, including the DMA Regions and DMA Data.” Counterclaim dismissed as redundant. Overall, the discussion indicates that this area of the law is really confusing, and if you don't start from a really specific identification of the allegedly copyrighted/original elements, you will likely spin your wheels to little effect.

The copyright misuse counterclaim was that, despite knowing that there was no valid copyright, Nielsen sued anyway. The Seventh Circuit has held that it could be copyright misuse to assert a copyright claim to prevent others’ access to public domain data. However, to constitute misuse, the underlying infringement claim must be wholly lacking in merit.

“A designated market area is not, however, a fixed idea capable of only one form of expression.” Different interpretations of the underlying data can lead to different DMAs. (It is also true that different interpretations of history can lead to different conclusions about what really happened, as in Hoehling, but that doesn’t make those conclusions protectable by copyright. If Nielsen’s DMA is best for purpose—and I wonder what its ads say about that—then there should be no protection. This is not to say that a court won’t ultimately find it protectable, because courts are very incoherent about these kinds of judgment-generated facts outside the context of history.)

Anyway, Nielsen will have the burden of proof on copyrightability, “but at this stage, the court is not prepared to say that its claim of copyright is abusive.”

The ultimate questions will be whether Nielsen’s selection and arrangement reflected sufficient creativity under Feist and whether Truck Ads copied without making its own selection and arrangement decisions.

There may be no copyright if a mapmaker “displays basic factual information and ‘employs standard cartographic features without originality.’" Truck Ads argued that the DMAs are “simple facts incapable of expression in any form other than that in which they have been expressed by Truck Ads and Nielsen,” but didn’t demonstrate that the “inescapable similarities” between its map and Nielsen’s were a function of having translated public-domain data into map form. Moreover, Truck Ads’ own reference to different versions of DMA maps belied any such claim. “It may not be possible to portray a street of a definite slope in two different ways using standard cartographic features; but it is possible to portray a DMA with shifting, manmade, and artificial boundaries in myriad ways.” Note again the slippage between graphic representation (the pictorial element of the work) and definition of the DMA boundaries (the compilation element of the work): if the boundaries of a particular DMA constitute unprotectable facts, then—unless we’re talking about line color and thickness, which the Copyright Office considers generally insufficient to make a map protectable—it’s pretty much like a street with a definite slope.

But anyway, at this stage, the allegations weren’t frivolous, even if Truck Ads has various paths to victory.

Finally, the court found that Truck Ads was unable to show damages from the alleged misuse other than the costs of defense. While it alleged that a potential business partner balked when it learned of the pending lawsuit, the record testimony showed that this was not true.

Friday, January 28, 2011

Kwikset reversed; misrepresentation about production can lead to lost money or property

Kwikset Corporation v. The Superior Court of Orange County, --- Cal.Rptr.3d ----, 2011 WL 240278 (Cal.)

Kwikset sold a number of locksets labeled “Made in U.S.A,” which a court found to be false. The question was how Proposition 64 affected the class action. The trial court enjoined Kwikset from labeling any lockset intended for sale in California “Made in USA” or the like if it contained any article, unit, or part that is made, manufactured, or produced outside of the United States. While it also ordered notification of California retailers and distributors that they could return or get replacements for improperly labeled locksets, the court denied Benson’s request for restitution on the grounds that it would be very expensive and that the equities weighed against it, given that the violations had ceased and that the misrepresentations were not “so deceptive or false as to warrant a return and/or refund program or other restitutionary relief to those who have been using their locksets without other complaint.” (Some parts came from and some assembly took place outside the US, but not a lot.)

As amended to meet Proposition 64’s new standing requirements (enacted while the case was on appeal), the complaint alleged that each class representative read and relied on Kwikset’s misrepresentations in deciding to purchase the locksets, thus causing each plaintiff to spend and lose the money paid for the locksets. The trial court held that plaintiffs adequately alleged standing when they pled that they were induced to buy products that they didn’t want and that were therefore unsatisfactory to them.

The court of appeal, reversing, reasoned that plaintiffs hadn’t alleged that their locksets were overpriced or defective, even if their desire to buy fully American-made products was frustrated. The allegation that plaintiffs would not have purchased the locksets but for the false labeling was insufficient to establish standing because it didn’t satisfy the requirement of “lost money or property.”

The California Supreme Court reversed. “Proposition 64 should be read in light of its apparent purposes, i.e., to eliminate standing for those who have not engaged in any business dealings with would-be defendants and thereby strip such unaffected parties of the ability to file ‘shakedown lawsuits,’ while preserving for actual victims of deception and other acts of unfair competition the ability to sue and enjoin such practices. Accordingly, plaintiffs who can truthfully allege they were deceived by a product's label into spending money to purchase the product, and would not have purchased it otherwise, have ‘lost money or property’ within the meaning of Proposition 64 and have standing to sue.”

The California Supreme Court began with the broad consumer-protective purposes of the UCL and FAL. The stubstantive reach of the statutes remains expansive even though the electorate “materially curtailed the universe of those who may enforce their provisions.” To prevail post-Proposition 64, a party must “(1) establish a loss or deprivation of money or property sufficient to qualify as injury in fact, i.e., economic injury, and (2) show that that economic injury was the result of, i.e., caused by, the unfair business practice or false advertising that is the gravamen of the claim.”

The text of Proposition 64 established expressly that in selecting the phrase “injur[y] in fact” the drafters and voters intended to incorporate the established federal meaning. Under federal law, injury in fact is an invasion of a legally protected interest which is concrete and particularized, and actual or imminent, not conjectural or hypothetical. Particularized means simply that the injury must affect the plaintiff in a personal and individual way. Proof of injury in fact will in many instances overlap with proof of “lost money or property.”

This phrase clearly requires plaintiffs to show some form of economic injury. “There are innumerable ways in which economic injury from unfair competition may be shown. A plaintiff may (1) surrender in a transaction more, or acquire in a transaction less, than he or she otherwise would have; (2) have a present or future property interest diminished; (3) be deprived of money or property to which he or she has a cognizable claim; or (4) be required to enter into a transaction, costing money or property, that would otherwise have been unnecessary,” and that’s not an exhaustive list. Economic injury is a “classic” form of injury in fact; though intangible injuries may also constitute injury in fact, Proposition 64 precludes reliance on purely non-economic injuries.

However, while Prop. 64 is qualitatively more restrictive, there was no justification in its text for considering it quantitatively more difficult to satisfy than federal injury in fact. “Rather, we may infer from the text of Proposition 64 that the quantum of lost money or property necessary to show standing is only so much as would suffice to establish injury in fact; if more were needed, the drafters could and would have so specified.” An “identifiable trifle” is enough.

And, of course, the plaintiff must show that his or her economic injury came as a result of the unfair competition or violation of the FAL. As to that:
Simply stated: labels matter. The marketing industry is based on the premise that labels matter, that consumers will choose one product over another similar product based on its label and various tangible and intangible qualities they may come to associate with a particular source. An entire body of law, trademark law, exists to protect commercial and consumer interests in accurate label representations as to source, because consumers rely on the accuracy of those representations in making their buying decisions.

To some consumers, processes and places of origin matter. (See Kysar, Preferences for Processes: The Process/Product Distinction and the Regulation of Consumer Choice (2004) 118 Harv. L.Rev. 525, 529["[C]onsumer preferences may be heavily influenced by information regarding the manner in which goods are produced."]; ibid. [Although the circumstances of production "generally do not bear on the functioning, performance, or safety of the product, they nevertheless can, and often do, influence the willingness of consumers to purchase the product."].) Whether a particular food is kosher or halal may be of enormous consequence to an observant Jew or Muslim. Whether a wine is from a particular locale may matter to the oenophile who values subtle regional differences. Whether a diamond is conflict free may matter to the fiancée who wishes not to think of supporting bloodshed and human rights violations each time she looks at the ring on her finger. And whether food was harvested or a product manufactured by union workers may matter to still others.
Specifically, “Made in U.S.A.” matters to some consumers. “A range of motivations may fuel this preference, from the desire to support domestic jobs, to beliefs about quality, to concerns about overseas environmental or labor conditions, to simple patriotism.” The legislature responded to the materiality of this representation by specifically outlawing deceptive “Made in U.S.A.” representations.

Comments: Compare this reasoning to that in Amestoy, where the court said that the legislature could not require disclosure of the use of rBST in producing milk just because consumers thought that it made a difference, where the legislature had not itself found that real differences existed (and of course such findings would be resisted by our trade partners in this case). Also, nice to see Doug Kysar’s excellent article recognized.

Moving on: how is this lost money or property? “For each consumer who relies on the truth and accuracy of a label and is deceived by misrepresentations into making a purchase, the economic harm is the same: the consumer has purchased a product that he or she paid more for than he or she otherwise might have been willing to pay if the product had been labeled accurately.” But what if the product works just as well?
This economic harm … is the same whether or not a court might objectively view the products as functionally equivalent. A counterfeit Rolex might be proven to tell the time as accurately as a genuine Rolex and in other ways be functionally equivalent, but we do not doubt the consumer (as well as the company that was deprived of a sale) has been economically harmed by the substitution in a manner sufficient to create standing to sue. Two wines might to almost any palate taste indistinguishable--but to serious oenophiles, the difference between one year and the next, between grapes from one valley and another nearby, might be sufficient to carry with it real economic differences in how much they would pay. Nonkosher meat might taste and in every respect be nutritionally identical to kosher meat, but to an observant Jew who keeps kosher, the former would be worthless.
As a result, consumers who rely on misrepresentations can have standing by alleging, as plaintiffs did here, that they wouldn’t have bought the product but for the misrepresentation. “From the original purchasing decision we know the consumer valued the product as labeled more than the money he or she parted with; from the complaint's allegations we know the consumer valued the money he or she parted with more than the product as it actually is; and from the combination we know that because of the misrepresentation the consumer (allegedly) was made to part with more money than he or she otherwise would have been willing to expend, i.e., that the consumer paid more than he or she actually valued the product. That increment, the extra money paid, is economic injury and affords the consumer standing to sue.”

The dissent didn’t like considering a plaintiff’s subjective motivations in this way. But such considerations are “a routine part of common law deceit actions: we will allow one party who subjectively relied on a particular deception in entering a transaction to sue, while simultaneously precluding another who subjectively did not so rely from suing.” Once the pleading threshold has been crossed, the plaintiff has the burden of proof in his or her case, and a court can exercise its discretion in determining which, if any, of the various equitable and injunctive remedies provided for by the law are warranted in a given case.

The alternative would be to end private consumer enforcement with respect to many label misrepresentations. “That public prosecutors can still sue is of limited solace, given the significant role we have recognized private consumer enforcement plays for many categories of unfair business practices. … [I]f we were to deny standing to consumers who have been deceived by label misrepresentations in making purchases, we would impair the ability of consumers to rely on labels, place those businesses that do not engage in misrepresentations at a competitive disadvantage, and encourage the marketplace to dispense with accuracy in favor of deceit.”

None of the court of appeal’s arguments to the contrary sufficed. First, plaintiffs didn’t allege any overcharge or functional defects in the locksets. But cognizable economic harm is not confined by the phrase “lost money or property” to objective functional differences. Also, “the economic injuries the Court of Appeal would require in order to allow one to sue for misrepresentation are in many instances wholly unrelated to any alleged misrepresentation. An allegation that Kwikset's products are of inferior quality, for example, even if it might demonstrate lost money or property, would not demonstrate lost money or property ‘as a result of’ unfair competition or false advertising about the product's origins.”

The core of the argument is that plaintiffs received the benefit of their bargain, even if they relied on misrepresentations in purchasing. But the problem with this argument is that plaintiffs didn’t. They bought Kwikset locksets at least in part because they were “Made in U.S.A.”; they wouldn’t have bought the locksets otherwise; and we can infer that they value what they actually received less than the money they spent or less than working locksets actually made in the U.S. “They bargained for locksets that were made in the United States; they got ones that were not.… The observant Jew who purchases food represented to be, but not in fact, kosher; the Muslim who purchases food represented to be, but not in fact, halal; the parent who purchases food for his or her child represented to be, but not in fact, organic, has in each instance not received the benefit of his or her bargain.” [Any bets on whether this decision will be cited to show “creeping sharia” in US law?]

The court went on to unpack the benefit-of-the-bargain argument as resting on one of two unstated assumptions—that the misrepresentation at issue should be deemed immaterial, or that, “even if the consumer does not value what he or she received as much as what he or she paid, the marketplace would, and its valuation should be dispositive.”

As to the first, a misrepresentation is material if a reasonable person would attach importance to its existence or nonexistence in determining a choice about the transaction at issue (or if the maker of the representation knows or has reason to know that the recipient thinks of the misrepresentation as important to his or her choice, even if a reasonable person wouldn’t). “Here, the Legislature has by statute made clear that whether a product is manufactured in the United States or elsewhere is precisely the sort of consideration reasonable people can and do attach importance to in their purchasing decisions,” and the U.S. government even requires its agencies to privilege U.S.-made goods. In fact, Kwikset itself used labels like "All American Made & Proud Of It" and "Made in U.S.A." because it concluded that such marketing might sway reasonable people in their purchasing decisions. Anyway, as materiality is generally a question of fact, it wasn’t a basis for dismissing the case on the pleadings.

The second theory is that a consumer hasn’t lost money or property if the marketplace would continue to value the product as highly as the amount the consumer paid for it, whether or not he or she would do so. In theory, the deceived consumer could turn around and sell the locksets to someone else for the same price.

The court identified four problems with this theory:
First, it assumes there is a functioning aftermarket for resale that would allow a plaintiff to liquidate the good in question by reselling it to those for whom the misrepresentation is immaterial. This plainly is not so in many instances. While there are certainly consumers for whom the kosher or halal or organic quality of food is immaterial, there is no functioning aftermarket that would permit easy resale of, for example, perishable foodstuffs and small-ticket consumer goods. A gallon of nonorganic "organic" milk cannot be resold. A consumer who has purchased products mislabeled in this fashion cannot recoup his or her purchase price.

Second, it assumes a consumer has no qualms--religious, ethical, or otherwise--that would preclude his or her partaking in resale of the mislabeled product, or at least none that the law should respect.

Third, it assumes that resale will not involve transaction costs and that an individual consumer will be able to resell the mislabeled product at the same price. But even for goods where there is a functioning aftermarket, resale will generally require the deceived buyer to sell at a reduced price to account for the facts the good is being resold and the source (an individual consumer) is less reliable than the original seller (a commercial establishment). In such instances, there still has been a loss of money.

Fourth, it ignores that the law generally disregards such "pass-on" sales. Kwikset's argument, that a deceived buyer has lost nothing because he or she has the value of the item still possessed, can be viewed as a pass-on defense in disguise: the buyer has an item that, through a presumed functioning aftermarket, he or she could convert back into an equivalent amount of money, recouping through the subsequent sale any perceived loss. But in the eyes of the law, a buyer forced to pay more than he or she would have is harmed at the moment of purchase, and further inquiry into such subsequent transactions, actual or hypothesized, ordinarily is unnecessary.

In a footnote, the court further characterized this second argument as one that “the materiality of a representation must be proven by reference to a market that charges more for products that carry a particular label.” As the court recognized, this would have significant effects on the scope of consumer protection law. “In any market with generally parallel pricing (whether through conscious parallelism or otherwise), where competitors use representations about features principally to increase market share rather than to charge a premium, any deception in such representations would no longer be privately enforceable by consumers. We do not see expressed in Proposition 64 any intent to deregulate the commercial speech marketplace of ideas to this extent.”

Kwikset argued by analogy to real property fraud cases measuring the damages for fraud by the difference in the actual value of what was parted with and what was received. But that rule provided the measure of damages, not a limit on standing or on the availability of equitable remedies, a conclusion actually made explicit in California’s Civil Code. Civ. Code, § 3343, subd. (b)(2) (damages rule shall not be used to "[d]eny to any person having a cause of action for fraud or deceit any legal or equitable remedies to which such person may be entitled"). Especially since a damages remedy is unavailable under the UCL, there was no reason to think that the electorate intended to borrow this rule for a wholly unrelated purpose, a restriction on standing:
Indeed, doing so would render standing under the UCL and false advertising law substantially more difficult to establish than standing to assert common law deceit: As Kwikset's counsel properly acknowledged at oral argument, a consumer who purchased a product in reliance on an alleged misrepresentation would under the common law have standing to sue for fraud, misrepresentation, and rescission without having first to prove, as Kwikset argues the UCL and false advertising law now require, that the product received was worth less than the money paid for it. While Proposition 64 clearly was intended to abolish the portions of the UCL and false advertising law that made suing under them easier than under other comparable statutory and common law torts, it was not intended to make their standing requirements comparatively more onerous.
The court pointed to Prop. 64’s findings and declarations of purposes in the voter information guide (as its precedent dictated in interpreting propositions, by analogy to legislative history). These expressed concerns that UCL suits were being brought by clients who hadn’t used the defendant’s product or service, viewed the targeted ads, or had any other business dealing with the defendants, as in the Kasky case. “In short, voters focused on curbing shakedown suits by parties who had never engaged in any transactions with would-be defendants. No corresponding concern was expressed about suits by those who had had business dealings with a given defendant, and nothing suggests the voters contemplated eliminating statutory standing for consumers actually deceived by a defendant's representations.”

Finally, the court of appeal relied on a line of cases reading “lost money or property” to confine standing under section 17204 to people who suffer losses eligible for restitution. Because plaintiffs weren’t entitled to restitution, they then necessarily lacked standing. However, the standards for standing and for eligibility for restitution under section 17203 are “wholly distinct.” Prop. 64 amended both sections; it would have been easy to make standing under section 17204 expressly dependent on eligibility for restitution, but that’s not what happened. (By comparison, the CLRA requires that a consumer be able to prove damages in order to have standing.) The court refused to conflate standing with the question of the remedies to which a party might be entitled.

Standing should not be dependent on eligibility for restitution for another reason: restitution is confined to restoration of money taken from the plaintiff by the defendant. But unfair business practices may cause economic injury without any corresponding gain to the defendant, such as diminished value of a plaintiff’s assets from defamation. Such injuries are lost money or property and permit injunctive relief even without any basis for restitution.

The larger point was that to make standing dependent on eligibility for restitution “would turn the remedial scheme of the UCL on its head.” Injunctions are the primary form of relief under the UCL, with restitution a form of ancillary relief. Tobacco II noted that Prop. 64 didn’t amend the remedies provision of the UCL, and so there was no reason to conclude that standing should depend on eligibility for restitution, making injunctive relief an appendage.

Judge Chin (also a dissenter in Kasky) dissented. The voters unequivocally intended to narrow the category of persons who could sue under the UCL. “By failing to expressly define ‘lost money or property’ and instead equating it with economic injury, the majority effectively collapses the two separate requirements of section 17204 into one.” The dissent argued that plaintiffs’ subjective purchase motivations shouldn’t count. “Whatever value the consumer may subjectively assign to the product …, plaintiffs have failed to allege that their personal preference is reflected in any cost differential between the mislabeled and correctly labeled products.” This objection is not directed at reliance, but at the fact that now a plaintiff must only allege “‘I would not have bought the product but for the misrepresentation,’ to establish not only causation but also an injury cognizable under section 17204. An allegation that merely identifies the party's subjective motivation clearly does not track the language of the section.”

The dissent found it unclear what constituted the “extra money paid” in this context. The counterfeit Rolex and mislabeled kosher, halal, or organic food examples were inapposite. “One can hardly dispute that these genuine products have greater value placed on them than on their mislabeled counterparts, and consumers who buy the latter may allege and prove they actually paid (and therefore, lost) extra money based on the mislabeling.” However, under the majority’s rule, plaintiffs need not allege any price differential, even though counterfeit Rolexes are “clearly overpriced” because a typical counterfeit is inferior in quality, just as kosher, halal, and organic foods are typically more expensive.

Comments: But what if the watch is not inferior? Also, I don’t think that Campbell’s halal soups cost more than its non-halal soups—this is the majority’s point about markets where the issue is market share, or consumers’ willingness to participate in the market at all. It’s a little disconcerting to see efficient markets theory, positing that prices are already exactly where they should be, creep into an area of the law that is entirely about how bad information distorts markets and prevents efficiency. I can in fact see a partial defense of the dissent that goes to the question of whether the material misrepresentation prevents the plaintiff from making any economically significant use of the product—with respect to the kosher/halal example, you really do have to give or throw the stuff away when you find out the truth, regardless of any price differential, whereas you probably don’t stop using the lockset. But even this seems like a weird description of the harm in the kosher/halal case, which generally involves food that’s already been consumed before the deception was discovered and in which the economic harm is really that you paid money for a product that you would not have purchased had you known the truth—not the price differential, but the resource misallocation. I think the proper rule is that the product need not be worthless to you; it need only be worth less.

Back to the dissent: An allegation that the consumer wouldn’t have bought the product but for the misrepresentation is too low a threshold to meet. The issue “is not that a plaintiff must show that he or she personally suffered harm, but that the harm alleged must be an actual measurable loss of money or property.” The majority conflated "injury in fact" with "lost money or property,” and focused too heavily on the genesis of Prop. 64, misuse of UCL lawsuits, instead of its actual language. Indeed, proponents of Prop. 64 “included the underlying action on their Web site as an example of a ‘shakedown’ lawsuit,” and newspapers mentioned it as well. “While these may not constitute official materials presented to voters, these materials, at the very least, undermine the majority's assertion that voters were concerned only about suits by parties who had no business dealings with a given defendant and, more importantly, they underscore the question we must answer here--what does ‘lost money or property’ mean in this context?”

The dissent also rejected the idea that its interpretation would sound the death knell for private enforcement against label misrepresentations. In other situations, plaintiffs could allege that a mislabeled product was overpriced and that they did lose money. Moreover, Kwikset’s competitors could sue: “A competitor who properly labeled its locksets ‘Made in U.S.A.’ and alleges it was forced to charge higher prices for such locksets, and another who manufactured its locksets outside the United States and alleges it lost customers to Kwikset, could both claim they were at a competitive and economic disadvantage to Kwikset. In each instance, these competitors could allege not only injury in fact, but also economic injury for lost sales and profits due to Kwikset's misrepresentation.” (Interestingly, as I recall, plaintiffs argued that they could replead to allege that competing foreign-made and properly labeled locksets were cheaper, but the court denied them leave to do so; as it turns out the defendants’ bar probably would have preferred that scenario!)

Thursday, January 27, 2011

Manufacturer has standing when competitor claims to use its patented ingredient

Advanced Oral Technologies, L.L.C v. Nutrex Research, Inc., 2011 WL 198029 (D.N.J.)

Plaintiff AOT sued Nutrex for putting 2nitrooxy ethyl2amino 3methylbutanoate on the ingredient list of Nutrex’s bodybuilding supplement Hemo Rage Black. In fact, the molecule is patented and AOT is the exclusive licensee. The court denied a preliminary injunction given the steps Nutrex had taken to cure the problem, but the case continued with Nutrex’s motion to dismiss.

When Hemo Rage Black was first introduced in August 2009 the label listed 56 different ingredients, including the molecule, on the back of the bottle in size 6.5 font. Nutrex argued that it made a mistake: it originally intended to license the molecule from AOT, but then didn’t and inadvertently failed to correct the labels, which had been designed and produced before the supplement was made. (An interesting window into the production process.)

AOT first thought Nutrex was infringing, but then found out the truth; it demanded that Nutrex stop distributing the erroneously labeled product. Negotiations broke down, and on April 1, 2010 Nutrex removed the reference to the molecule from its website and other advertising, and had new labels printed for future manufacturing runs. To correct the faulty labels on existing inventory held in its warehouse, Nutrex crossed out the reference to the molecule with a black marker. Codefendant retailers also removed all references to the molecule in their advertising materials. (Okay, if they didn’t remove the reference from the website, at least, the moment the problem was pointed out, and if this sequence is otherwise correct, I’m seriously unimpressed. Even if they had hopes of negotiating a license, that didn’t put the molecule in any of the existing product; negotiations at best would solve the business problem, leaving the consumer protection problem untouched.)

Despite these efforts at correction, there are still mislabeled bottles available for purchase, some untouched and some allegedly only partially covered or covered with marker that can wear off.

AOT sued for unfair competition, RICO violations, tortious interference, unfair competition, and misappropriation. I’m only going to talk about the Lanham Act claims; several other claims were dismissed for insufficient pleading.

Constitutional standing: Nutrex argued that AOT failed to allege injury in fact or a causal nexus between Nutrex’s actions and harm to AOT. The court thought the injury was “straightforward.” AOT alleged that it markets eNoxide, a supplement containing the molecule; that the molecule’s unique properties give it substantial commercial value; and that consumers recognize the long ingredient name as AOT’s molecule and associate it with those unique properties. AOT further alleged that sales of a product falsely claiming to have the molecule undermine AOT’s goodwill at a critical time in the launch of AOT’s products. (Weirdly, though the product is advertised on several websites I checked, the allegations are couched as if eNoxide has yet to launch.) The allegations were more than sufficient at the pleading stage. “While the damages arising from this conduct may be difficult to quantify, the alleged injury is clear, it is clearly attributable to Defendant's conduct, and a favorable judicial decision (awarding either damages or injunctive relief) will clearly remedy the situation.”

Prudential standing: Standing was even easy under Conte Bros. AOT alleged direct competition, and also alleged that by falsely marketing a supplement as if it had the molecule, Nutrex seriously impaired AOT’s ability to convince the buying public that AOT’s product is effective and damaged its goodwill. This is “precisely the kind of competitive harm and reputational injury that was missing in Conte Bros.” Both the Lanham Act and the New Jersey Fair Trade Act are “designed to prohibit a broad array of misleading representations that undermine commercial interests. … [The Lanham Act] has consistently been used to rectify competitive harms resulting from literally false advertising. There is no reason to believe that it would not apply here ….” The reputational damage claimed was direct and foreseeable; AOT is directly injured, not remote; and, while damages may be difficult to assess, they weren’t so complex or tenuous as to mandate dismissal. Plus, AOT sought injunctive relief, which would require neither speculative damages nor apportionment.

Nutrex argued that the inclusion of the molecule on the label was not material. But plaintiffs aren’t required to offer evidence of materiality at the pleading stage.

The really amazing thing to me is that under Conte Bros. it's apparently worthwhile for a direct competitor to litigate standing even when there's an explicit reference to plaintiff's product.

I note as a point of interest that, while the allegations were enough for Lanham Act purposes, the court held that AOT failed to allege a concrete “injury to business or property” for RICO purposes. The tortious interference claims also failed; AOT didn’t plead facts suggesting that Nutrex actecd knowingly and with malice. When confronted, Nutrex volunteered to strike out the offending ingredient. “While this may or may not have sufficed to undo any damage done to Plaintiff's business or marketing efforts for the Molecule, it hardly suggests deliberate efforts by Defendants to undermine Plaintiff's ability to sell its products.” AOT also failed to sufficiently plead that it lost sales or business because of Nutrex’s interference. Similar pleading deficiencies attended its misappropriation claim.

Wednesday, January 26, 2011

FDLI part 2: Jonathan Emord, me, and counsel from Heinz

I wonder if I should add a "Pom" tag to go with my "Google" tag.

The Changing Landscape for Marketing Health and Nutrition Benefits, Part 2

Anne V. Maher, Partner, Kleinfeld, Kaplan &Becker

Pom Wonderful’s fight with the FTC about pomegranate juice health claims—30% decrease in arterial plaque, 40% effective as Viagra, etc. Complaint said the substantiation was inadequate: prostate cancer study wasn’t properly blinded/otherwise conducted; the evidence didn’t support the claim. Proposed consent order has similar requirements to Nestle and Iovate. FTC also settled with Pom’s (now former) VP of regulatory affairs; he will cooperate in litigation against Pom. Pom sued the FTC in federal court before the administrative complaint issued, arguing that the Nestle & Iovate consent orders wrongfully promulgated new rules that violated the First Amendment.

Jonathan W. Emord, Principal, Emord & Associates, P.C.

Problems with FTC methods on statutory and constitutional grounds. If we were to start all over, what should we do to ensure compliance with the First Amendment and the FTCA?

First, recognize that speech at issue is protected commercial speech. Second, reality of marketplace: we base decisions on inconclusive information all the time. We exercise our sovereignty to make bets all the time. Conclusive/near conclusive proof is not required to segregate false from true speech. There are shades of deceptiveness; qualification is often the best means to alert people to the potential that something won’t work.

Truthful representations of inconclusive science are permissible and protected under the First Amendment if they can be rendered truthful by disclaimer. In almost every case, we have inconclusive science. Relative levels of credibility are key. Science evolves. If the government acts against inconclusive speech, it censors/creates a chilling effect.

Speech the government condemns or thinks is inadequately supported is nonetheless protected if backed by credible evidence. The FDA’s standards for credibility are subject to scrutiny for consistency with First Amendment. If in the end, there is censorship of inconclusive science backed by credible information, the courts have in 6 decisions found the FDA to violate the First Amendment.

Consent order: the deceptive thing within the FTC is a shell game: the consent order is not a final order, but the industry should be guided by it. Mixed messages; creates confusion in marketplace and has a chilling effect. Never have a safe harbor; always a chilling effect even if you have a clinical trial your scientists tell you is well designed. There will always be opportunity to challenge the integrity.

Politics plays a role in this.

Disease claim: FTC has adopted a prior restraint. Without first evaluating the truthfulness of the science, they’ll accept FDA’s prior restraint: prospective speech must satisfy FDA requirements. Inviting application Pearson, which applies in prior restraint context. These consent orders are more than guidance; they are used in negotiating with industry.

Truth depends on qualification. Rather than have all or nothing paradigm, or one in which FTC issues CID forcing people to pay to defend their speech, allowing government bird’s eye view into their finances, merely based on a hunch and never having to prove actual deceptions or sound science, that shifts the burden of proof in an unconstitutional way. The burden of proof is on the government, but it has been shifted to the accused party by requiring contemporaneous documentary evidence proving to near certainty that what it said was true. Without substantiation, you’re presumptively a deceptive advertiser. And you’re required to substantiate without clear evidence of what’s required.

Fundamentally, we should be allowed to place our bets. If I know probiotics affect immunity, but not the cold or flu—is it a reasonable scientific conclusion that it may affect the cold or flu? Even if inconclusive, you should have a right to convey that to the public in a qualified manner that the evidence is suggestive but not conclusive. It’s not for the government to make the penultimate decision.

Constitutional crisis! We have difficulty maintaining judicial victories without first going through the regulatory process. Pom going to court has difficulty with standing, ripeness, justiciability. But a petition for rulemaking to the FTC will lead to a decision in defense of the existing regime. Suing on First Amendment grounds creates an interesting, narrow question.

Legislative action: Ron Paul had Emord draft a great bill, the Freedom of Health Speech Act, depriving FTC of power to act against party unless it possesses scientific evidence that the representation is false, before it begins highly intrusive inquiry; could only exact damages if it showed actual deception with market studies.

Rebecca L. Tushnet, Professor, Georgetown University Law Center

False or misleading commercial speech may be banned, unlike false or misleading political speech. From the procedural side: this standard will always require elaboration in particular cases; the FTC can and must always come in and say, given these claims, you need X evidence. Transparency here is desirable. Puzzled by statement that it’s not clear what’s required: new consent orders seem to represent a substantial improvement; you may not like the standard, but it’s certainly more predictable.

Prior restraint: just want to make clear, the foundation of the FDA’s jurisdiction is based on what you say about the product: if you don’t claim to treat a disease with your paint, it’s not a drug or device.

We all like science! But there are two kinds of science at issue here: the health claims and the behavioral/psychological/marketing science of information communication.

What does misleading mean? Two possibilities: how do consumers react? Or, how would someone who was paying sedulous attention to every aspect of the advertising and did their own homework react? I think only the first one is coherent; the case law on this is incredibly underdeveloped, with the Supreme Court just declaring something to be inherently misleading or merely potentially misleading, with none of the recourse to consumer evidence that we now expect from consumer litigation. I don’t honestly know what inherently misleading could mean other than asking whether it could be fixed, and I don’t know what it would mean to fix the claim other than to change it so that it doesn’t mislead a reasonable consumer.

So while it is definitely true that we make decisions with probabilistic information all the time, the matter doesn’t end there. If a statement induces a consumer to believe that the probability of its truth is much higher than it really is, the consumer is misled, and her ability to satisfy her preferences, including her preferences for risk, is impaired.

Advertisers know they face tough choices with the amount of information it’s possible to communicate: you can’t tell your customers everything you’d ideally want them to know; they just won’t absorb it. This is even more true with second order information such as level of confidence. So in practice we have to look at whether the kinds of disclaimers proposed are diminishing consumer mistakes at all.

Slides: Pearson-approved disclosures:
• 0.8 mg folic acid in a dietary supplement is more effective in reducing the risk of neural tube defects than a lower amount in foods in common form. FDA does not endorse this claim. Public health authorities recommend that women consume 0.4 mg folic [acid] daily from fortified foods or dietary supplements or both to reduce the risk of neural tube defects.
• As part of a well-balanced diet that is low in saturated fat and cholesterol, Folic Acid, Vitamin B6 and Vitamin B-12 may reduce the risk of vascular disease. FDA evaluated the above claim and found that, while it is known that diets low in saturated fat and cholesterol reduce the risk of heart disease and other vascular diseases, the evidence in support of the above claim is inconclusive.

Grade level required to read them, according to Microsoft Word: 11.8/17.1.

How well do these work? Terribly. Karen Russo France & Paula Fitzgerald Bone, Policy Makers’ Paradigms and Evidence from Consumer Interpretations of Dietary Supplement Labels: Disclosures about minimal scientific evidence and lack of FDA approval had no effects.

• DSHEA disclaimer produced no difference in consumer beliefs regarding the effectiveness of the supplement in preventing, treating or curing a disease
• Scientific certainty disclaimer produced no difference in consumer beliefs regarding the scientific certainty about the relationship between a particular disease and a particular supplement
• Disclaimer also produced no difference in consumer beliefs regarding the effectiveness of a dietary supplement in preventing treating or curing a particular disease
• Perhaps shockingly, “This statement has not been evaluated by the Food and Drug Administration” did not even change consumer beliefs regarding whether the FDA evaluated the statements made on the package label

As marketers, the federal judges who approved the Pearson disclosures should be fired.

FTC also has studies showing that longer disclaimers increase consumers’ confidence in the basic benefit claim. Consumers are unruly! They don’t behave as we wish they would. So what do you do? Take the consumers as you find them; judge advertising by its actual effects. If disclaimers don’t change the perception of the basic claim, then the basic claim remains misleading and the FTC has the authority to require advertisers to stop making it.

Amanda Beamon, Corporate Counsel, Law Department, H.J. Heinz Company

Heinz identified a need for tighter review procedures in mid 2010, driven by new FTC activity. Purpose: timely, efficient and accurate review of marketing materials while protecting Heinz corporate assets and reputation. Scope: consumer ads and materials going to customers (by which I understood her to mean retailers). Social media is included.

Old process had a lot of steps back and forth between ad agency, regulatory affairs, legal, PR. New process: agency proposes, internal marketing review, then review committee including legal, then back internally to the agency and done. Clear documentation and support for all claims; all relevant parties review material at one time avoiding rework and conflicting feedback; saves money with agency changes too.

Historically, Heinz ketchup tied itself to benefits of lycopene, an antioxidant in tomatoes. In 1998, Heinz had been making qualified health claims: eating ketchup may lower the risk of prostate chancer and certain chronic ailments, including heart disease and other cancers, and directing consumers to for more information. Heinz, among others, had commissioned research on the topic. In 1999, received letter from the FTC. We discontinued the advertising in question; when discussing lycopenes, focused on tomatoes rather than ketchup and made clearer disclosures; also disclosed sponsorship of

On product packaging, Heinz said “Lycopene is another great reason to love Heinz Ketchup! … visit …” Appealed to FDA in 2005 to make qualified health claims on packaging, e.g., “Although the evidence is not conclusive, tomato lycopene may reduce the risk of prostate cancer.” (Applied for about 20, all pretty similar.) FDA ruled that they could say this, if they qualified it with a side warning that there was little scientific evidence supporting the claim. Here, Heinz was relying on the scientific studies, rather than on any consumer takeaway of that claim.

In recent years, Heinz changed marketing strategy to move away from this type of claim, but would look at the consent orders to figure out how to do so if they decided to go back to health claims.

Example: Smart Ones storyboard, suggesting that Smart Ones got the depicted person “back to fightin’ weight”—implied weight loss claim. Added word “help” to suggest that Smart Ones could only help and made sure the visual depiction wasn’t one of extensive weight loss.

Heinz wouldn’t have sued as Pom did—historically had conservative approach to health claims. Also, practical implications of suing FTC or government agency—PR perspective; relationship with the agency going forward, given that Heinz has been involved in major mergers; wouldn’t want to be a target for future advertising initiatives. Cost of the lawsuit is also significant. Has sympathy for Pom if they genuinely thought they had the basis for these claims; business strategy is basically gutted if they lose.

Q for Emord: say more about politics.

Emord has written extensively on politics, and refers those interested to Folic acid claims had a political context: recommendation to women that they consume 400 mcg/daily before becoming pregnant to decrease risks of neural tube deficits; 800 mcg could decrease risks more. This was all subject to debate, and FDA censored that information in the marketplace, because drug approval is big business and costs $600 million. A rarefied group of parties play. Political influences overrule scientific judgments of staff. All decisions made by the science staff are ultimately passed on by political appointees, who know where the bread is buttered. Vioxx was not a coincidence—despite recommendations against approval, FDA commissioner put it on the market.

Emord: Tushnet is internally inconsistent. Major premise: we must rely on government to perform the role of setting a high standard of review to determine whether or not speech should be allowed in the marketplace. Minor premise: disclaimers were ineffective. But what that means is that people came to their own conclusions apart from the official orthodoxy—that’s why they didn’t care about the qualification. Freedom hinges on sovereignty. Government can’t compel us to accept its orthodoxy on science.

RT: My public school would disagree re: government orthodoxy on science. Note that we are still talking about post-marketing enforcement, so “allowing” speech is a characterization with a conclusion embedded. Anyway, if you accept Emord’s interpretation of the evidence, then you have to say that people came to their own conclusions apart from the information the marketer imparted to them too. This seems implausible. Also, the FDA result contradicts this interpretation: they came to their own conclusions about whether the FDA had evaluated the claim? Rather, they read the main, first-order health claim and then applied their priors. You can’t fulfill your preferences if you’re making decsions on wrong information.

FDLI’s Food Advertising, Marketing and Labeling Conference

Setting the Stage/Framework/Scope of Advertising and Labeling
Stephen L. Lacey, Division Counsel, Abbott Laboratories

I came in near the end, but Lacey emphasized that a marketer needs to know the difference between labeling (FDA authority) and other material (FTC)—if you detail to pediatricians about foods with nutritional benefits, for example, FDA largely prohibits nutrient claims for kids under 2. However, he pointed out that the difference in formal standards—misleading v. materially misleading—was not the key; a marketer debating whether its communications are only misleading or materially misleading is already in a bad place.

State AGs are also active, often working jointly with the federal government; widespread in false claims matters for drug and device companies. Oregon AG settled with Kellogg, requiring destruction of packages, among other things.

Private lawsuits: increasing use of violation of federal regulation as basis for a complaint under state consumer protection laws, despite absence of private cause of action under FDCA or FTCA. Example: litigation over color additives used in salmon feed. FDA said any product made had to be labeled “color added.” Very few companies complied. The FDA didn’t bother to do anything about it. Plaintiffs sued major chains in California.

Christopher Hagenbush, FDLI Board: GMA’s new program for front of package information has received mixed reviews: mix of general nutrition information and promotional material. His perspective: FDA can’t stop you from putting info on the front of your package, but if it suggests your food is more desirable than others then FDA may respond badly to that. Media/consumer groups are suspicious of front of package labeling. The front of package statement may suggest that there are gradations of healthy/healthier foods.

Q: can FDA act against advertisers who encourage searchers to search for a particular term?

Lacey: FDA has taken issue with sponsored links for, say, rheumatoid arthritis. Not aware of the same thing for a food product (e.g., whole grain oats and cholesterol). Is the search term itself labeling? Most likely not, but the advertiser’s website might be depending on what statements it makes.

The Changing Landscape for Marketing Health and Nutrition Benefits, Part 1

Steven B. Steinborn, Partner, Hogan Lovells LLP

Understand the messages you’re conveying to your audience; substantiate your claims; but sometimes, labeling rules become a proxy for consumer protection. USDA has a lot of definitions. Some are archaic, most of them make sense. USDA doesn’t regulate ads, but you have to worry about FTC/private plaintiffs who will rely on USDA standards when challenging ads.

Short definition of advertising law: Liability depends on the claim you’re making and the support you have for that claim. Almost every FTC case involves a dispute over what claim was conveyed; not just what the advertiser intended but how the reasonable consumer reacted—with the FTC playing the role of the reasonable consumer. So, you need to know how reasonable consumers behave, and you also need to know how to evaluate science—as scientists do and as the FTC does. Most scientists are in love with their science; they are believers. Keep in mind that a regulator may look at the matter differently.

FTC consent orders: policy or unique to the facts? Historically companies have looked to consent orders to figure out what the FTC expects. So when do you need to do double-blinded trials given recent FTC consent orders—are they fact-specific or broader?

Keep in mind marketing, technical, regulatory, and legal folks all have to work together to cover the bases.

Richard Cleland, Assistant Director, Bureau of Consumer Protection, Division of Advertising Practices, Federal Trade Commission

Managing supervisor on Iovate, Nestle, and Dannon cases. Will offer discussion of thought processes/results in Nestle and Dannon, though his comments are his own opinions and not those of the FTC or of any individual commissioner.

Is the FTC targeting probiotics? No, not at all. There are lots of emerging claims about probiotics, but the principal focus that brought attention to Nestle and Dannon were the cold and flu claims. Compare to Airborne a few years back.

Nestle: Kids Essentials, probiotic straw and drink for children. Nothing wrong with the product; the issue was the claims. Claims: prevents upper respiratory tract infections, protects against cold and flue viruses, reducses absence from daycare or school due to illness, reduces general incidence of illness in children, reduces the duration of acute diarrhea in kids up to 13, etc.

Issues that came up for FTC on substantiation: while there were studies, the decent ones involved immune system related endpoints, not cold prevention benefits. The diarrhea claim for kids up to 13 required extrapolation that went beyond the population; the studies covered children under 2 (who are very different!). Confounding variables: studies tended to study a bunch of things at once; when you looked at claims about days absent from school, you couldn’t separate out other issues like fever from diarrhea. Core claim about reducing duration of diarrhea in children under 2 was really the best you could get. Also, studies on probiotics are strain-specific; submitting studies about strains not in your product is not going to be persuasive.

Dannon: DanActive and Activia, dairy drink and yogurt with probiotics. Challenged claims: DanActive: reduces the risk of colds and flu. Activia: relieves temporary irregularity and helps with slow intestinal transit time.

Issues that came up: again, endpoints. If your evidence relates to biomarkers like T cell counts, we don’t view those as substantiating a claim of reduced likelihood of cold and flu. There is also a problem with self-reported events. Some studies rely on parents’ reporting; not persuasive v. studies where a doctor confirms that the event occurred. Placebo controls are also very important, along with randomization and blinding. That can raise issues with probiotics. Dose-response is also critical. If you have a study where the doses do not match with what’s in the product, that will be an issue.

If you put a kid in a food ad about colds and flu, the FTC will probably interpret the ad as making a claim about reduced likelihood of colds and flu.

FTC orders: standard FTC order prohibits particular kinds of health claims unless the defendant possesses and relies on competent substantiation. What constitutes competent and reliable scientific evidence will vary based on product and claim. That doesn’t provide much guidance to defendants; it’s hard to enforce and led to protracted enforcement cases. Courts have misinterpreted the language.

FTC is making transparent in orders the analysis it already does to determine whether a claim is substantiated. One size does not fit all. Dietary supplement orders may look different from food orders. For some claims, FTC is using FDA determinations as a proxy for substantiation.

Three tiers (not every order has all three): Specified disease claims; other specified health-related claims; residual fencing-in provision for any other health-related claims. First tier: where defendant made claims that product could treat, cure, prevent or reduce the risk of disease, order will require such claims to be approved by FDA, whether through OTC drug monograph or approved NDA, or by regs under NLEA for foods. If there is a legal impediment to complying with FDA provisions, those are issues to discuss in negotiations with FTC. Bottom line: if the claim wouldn’t be permitted in labeling, the order won’t permit it in advertising.

His position: this is not so new. FTC has long said that the absence of an FDA determination that a health claim is scientifically valid will be a significant factor in the FTC’s assessment of substantiation’s adequacy. FTC regards “significant scientific agreement” in NLEA and FDA regulation to be the principal guide to what experts in the field of disease-diet relationships would consider sufficient substantiation. Case law says FTC has wide discretion to determining type of order necessary to remedy challenged practices; may go beyond illegal practices challenged so long as orders bear a reasonable relationship to the unlawful practices found.

Second tier: other specified health-related claims that have been investigated: based on the record of the investigation, and based on what experts would require, “competent and reliable scientific evidence” will be tailored, depending on the product/claim. One or more clinical trials may be required for particular claims/products.

Treat those orders the same way you’d treat any other guidance from the FTC; if a company not under FTC order comes in with a large, multicenter study and makes the case that it has a reasonable basis, that’s what the law requires. The inquiry will always be on the adequacy of substantiation, not prejudged. Various FTC orders have required studies conducted by different researchers, independently of each others—to correct against conscious or unconscious bias, or even fraud, all of which we’ve seen. Studies must conform to acceptable designs and protocols; matched to the right endpoints. Studies’ results must be considered in light of the entire body of relevant and reliable scientific evidence—if you have 2 studies your way and 8 the other, that may not be enough.

Two definitions of adequate and well-controlled human clinical studies: first, where it’s possible to conduct a randomized, double-blinded, and placebo-controlled study; second, where it may not be possible to double-blind, you have to do the other things right.

Third tier: broad categories of products and claims. Claims about health benefits, performance, or efficacy need sufficient substantiation—the quality and quantity of the evidence must meet accepted scientific norms, and the studies must be evaluated in the context of the entire body of relevant evidence.

James E. Hoadley, PhD, Senior Consultant, EAS Consulting Group, LLC

Types of scientific evidence: lab studies—in vitro, experimental animals, studies of absorption, distribution, metabolism, and excretion (ADME). Vital foundational information. For evaluating health claims, we need direct evidence of the relationship between the substance and the disease etc. in humans. In vitro and animal studies provide useful background only.

Human trials: descriptive, observational, interventional. Descriptive: anecdotal/case reports; population studies where you compare population statistics, e.g., “the Mediterrranean diet.” Cross-sectional studies: compare some measurable factor among groups with and without a disease, such as blood cholesterol. No scientific conclusions can be made based on descriptive reports.

Observational studies: retrospective and prospective. Retrospective: enroll subjects diagnosed with a disease and look at their histories. E.g., case-control studies where each diagnosed person is matched with a disease-free control subject (matched on age, gender, socioeconomic status, etc.). They’re fast, but they provide little information for health claims because it’s hard to get information on diet patterns. People’s recollections on what they ate are influenced by what they’ve been eating recently, and people who are sick change how they eat.

Prospective studies: enroll healthy subjects and follow them for extended periods of time. May have them keep diaries to track what they eat. Cohort studies: a population picked from a relatively homogenous group that will commit to following the study and have accessible medical records for confirmation. Male physicians, female nurses in Iowa, California 7th Day Adventists. A nested case-control lets you analyze disease cases in the cohort versus matched non-disease cases.

Observational human evidence shows associations only, not cause and effect. Good observational studies produce questions: why is green tea consumption associated with cancer risk?

Intervention: exposure to the test substance is controlled by the investigator. Clinical trials can provide evidence of cause and effect. Gold standard: placebo-controlled, double-blind, randomized clinical trial. Other methods can suggest cause and effect but are less reliable.

FDA has issued guidance: Evidence-Based Review System for the Scientific Evaluation of Health Claims (2009). Describes FDA’s systematic procedure for evaluation of the strength of the credible evidence to support a health claim, and establishes written criteria for what evidence is credible.

Step one: eliminate studies from which no substance/disease conclusions can be made, looking only at how a study was done, not at the results. Questions: was the substance that was the subject of the claim measured? One study of selenium, for example, used an estimate of selenium content in the body based on regional variations; this was excluded. Did the subjects have the disease that is the subject of the claim? Was the disease that is the subject of the claim specified and measured? Was the disease measured as a primary endpoint? Did the study include a concurrent control group? Was the study designed to identify the independent role of the substance on disease risk (e.g., the substance is zinc, but the intervention was a multivitamin with zinc)? Were baseline data different between control and intervention groups? How were the results statistically analyzed? What type of biomarker of disease risk was measured? Was the study long enough to ensure that any change in endpoint was in response to the intervention/any change in endpoint had time to show up? When the intervention is dietary advice, was there follow-up to show that the advice changed intake? Where was the study conducted? (If in an area where there are chronic shortages not present in American diets, for example, that will be inappropriate.)

Step 2: rate the methodological quality—high, moderate, or low—of remaining studies. Low quality studies are excluded. Was the study randomized, blinded, and placebo-controlled? Were the inclusion/exclusion criteria and other key study populations identified? Was subject attrition assessed, explained, and reasonable? How was compliance with study protocol verified?

Step 3: evaluate the totality of credible scientific evidence. Number of studies, consistency, quality, relevance to general US population.

Step 4: assess significant scientific agreement. Where there is a sufficient boty of relevant, publicly available scientific evidence showing consistency across studies and researchers, FDA looks at opinions of experts outside FDA for evidence of SSA, including recommendations from federal bodies like NIH and opinions of independent expert bodies like the American Cancer Society.

Step 5: determine language for qualified health claims.

Case study: selenium/cancer claim: 221 scientific documents available for review; three qualified health claims allowed, each beginning “one (or two) weak study suggests …” Attrition was significant!

Q: what about health claims for specific populations, like women or racial groups?

Hoadley: acceptable with substantiation for that specific population.

Q: a lot of times researchers are more interested in studying effects in a diseased population—probiotics in people who suffer from indigestion. Can you look at a disease population study as substantiation for the general public?

Hoadley: most heart disease claims are about lowering cholesterol; FDA has included people who have high cholesterol in relevant population, accepting that lowering cholesterol in heart disease-free people with high cholesterol works in the same way as helping people with heart disease does. But if you make a cancer claim, that’s unlikely to be accepted in the same way with people with cancer.

Q: are probiotics good for me?

Cleland: the right ones are wonderful!

Q: Dannon claims immunity, FTC thought the evidence wasn’t there?

Cleland: we never challenged the immunity claim. We challenged it in the context of the ad, when it made an implied prevention/reduction of risk of cold and flu claim. From our perspective, the studies that showed positive benefits of the strains of probiotics used in the products on the immune system did not substantiate the claim that it would reduce the risk of cold and flu.

Q: but you guys are the ones that made that connection.

Cleland: look at the ads. Little kids running around getting sneezed on; images of umbrellas coming out to protect the kids. Why else as a consumer do I care about the immune system of my kids? Because it will prevent illnesses, especially cold and flu, the usual problems for kids. We didn’t think the ad claimed that the product prevented cancer.

Q: so if the product label just said “immunity” without the ad campaign, would the FTC have reacted?

Cleland: he thinks not.

Q: using the consent order as guidance, but someone could come in with a good multicenter study—is this a rebuttable presumption?

Cleland: for advertisers in the first instance, it’s still an issue of reasonable basis. In most of our cases, we never reach the issue (before an order) of what counts as generally accepted substantiation among relevant experts because the evidence on the table is just not good enough. Iovate: Generally accepted standard in the area of weight loss is two well-controlled studies. In a de novo enforcement action, we’d have to address the specific substantiation; FTC would have to show the substantiation was not viable. If you’re looking for guidance, you can look at what the FTC says in these orders and have comfort in complying with the standards for those specific claims.

Q: isn’t there too bright a line between observation and intervention, at least when you have a prospective study? If the epidemiological study is conducted properly, it can control for confounding variables like socioeconomic status, other dietary habits, etc. Doesn’t this exalt the intervention study over the observational, when both have their defects (clinical trials have human variation).

Hoadley: he would agree, but we have to look at the substance that’s the subject of the claim. If it’s whole grains, observational studies may be helpful. But if the subject is some specific strain of probiotics, observational studies are not going to work. Some FDA approved claims are based wholly on observational studies—fresh fruit etc.

Tuesday, January 25, 2011

Dastar and CMI

Agence France Presse v. Morel, 2011 WL 147718 (S.D.N.Y.)

AFP copied photos of the aftermath of the earthquake in Haiti from someone who did not in fact take them. Morel did take them and was not best pleased. AFP sued for a declaratory judgment of noninfringement, and Morel counterclaimed for infringement, violation of the DMCA’s CMI provisions, and violation of the Lanham Act. Venkat Balasubramani and Eric Goldman cover the decision in good detail here

The court ruled that Dastar barred all Lanham Act claims. Even though Dastar was about “origin,” “its reasoning applies with equal force to bar claims, also brought under section 43(a)(1)(A), for false representation of ‘affiliation’ between the author and a distributor of communicative products.” Thus, falsely crediting Morel turns out to be different than falsely invoking a celebrity identity as endorser; query whether this is really required by Dastar (and whether it leaves Gilliam good law; I’ve always thought that affirmative misrepresentations of authorship should survive Dastar or else authors get treated worse than random celebrities, but there is obviously disagreement on this).

Dastar also barred the false advertising claim (apparently I’m the only one who remembers that the Dastar Court explicitly left open this prospect). False statements that the counterclaim defendants were authorized to distribute the images, and that another person was the author, did not concern the “nature, characteristics, qualities, or geographic origin" of the photographs. Anyway, the allegations supporting the false advertising claim were identical to those supporting the false representation claim. “The import of Dastar that an author's recourse for unauthorized use is in copyright cannot be avoided by shoe-horning a claim into section 43(a)(1)(B) rather than 43(a)(1)(A).”

But what Morel lost in the Lanham Act he gained back in the court’s broad reading of CMI, such that copying the pictures without copying the authorship information beside them could violate the DMCA. I agree with Balasubramani and Goldman that there’s some concern in reading the definition of CMI broadly that we get a backdoor right of attribution claim rejected in Dastar. However, in many cases, there will be no plausible connection to copyright infringement (e.g., the defendant’s product incudes components produced by the plaintiff but doesn’t disclose this). In other cases, though it might be possible to plead intent to induce/facilitate/etc. copyright infringement (depending on how the judge at issue applies Iqbal and Twombly), it will end up being very difficult producing sufficient evidence of intent to survive summary judgment. This isn’t insignificant—the difference between a motion to dismiss and a summary judgment motion can be a lot of money and time—but it is a limit.

Here, with respect to falsifying CMI, Morel alleged that AFP mislabeled his photos with credit lines wrongfully crediting someone else or wrongfully suggesting that AFP had the right to license them. (Notably, AFP didn’t contest that the credit lines it applied to the photos were CMI—something that hurts it here, but helps it elsewhere, so the issue was not necessarily litigated with the vigor we would see from someone who doesn’t expect to be more routinely a plaintiff than a defendant in such cases.) The court then found that Morel had sufficiently pled a factual basis for alleging that AFP knew the CMI was false and intended to facilitate infringement. “Morel alleges that an AFP photo editor viewed his photos before asking about identical photos on Suero's Twitpic page, and that when Morel failed to respond to the editor's email, AFP downloaded the pictures from Suero.” Given that Morel alleged that he was a well-known photographer, and that AFP had no reason to think Suero took the pictures, that was enough to allege knowledge of falsity.

With respect to removing CMI, the court found it implausible that a viewer would not understand the designations “Morel” and “by photomorel” appearing next to Morel’s images on TwitPic to refer to authorship. While the location of CMI may go to intent, that couldn’t be resolved on a motion to dismiss. Morel was able to plead intent and knowledge because he alleged that the counterclaim defendants contacted him about his photos and then still copied and distributed them without permission.

So someone might argue that a broad reading of CMI does much more of what we would want a right of attribution to do, should we want such a thing, than the cause of action under §1125 rejected in Dastar did.

Final note: I don’t really understand how tumblr works. But as best as I can tell, tumblr makes photo attribution very difficult, or maybe it’s the culture of tumblr users that does. Either way, it seems like a massive CMI-stripping machine.

Monday, January 24, 2011

A mouse's tale: competing rodenticide claims enjoined

Reckitt Benckiser Inc. v. Motomco Ltd., No. 10 Civ. 6228 (RJS) (S.D.N.Y. Jan. 19, 2011)

HT: Randy Miller.

Our tale begins with US and NY regulators. In its 2008 Risk Mitigation Decision for Ten Rodenticides (RMD), the EPA stated that products intended for individual consumers containing a type of active ingredient (second-generation anticoagulants) should no longer be sold to individual consumers and that all consumer-size rodenticide bait products should be sold with a bait station. The EPA asked manufacturers to comply voluntarily, and warned of possible future regulatory activity. In October 2010, the New York State Department of Environmental Conservation (NYSDEC) announced that it would no longer register new products that failed to comply with the RMD and “discontinue the registration of any rodenticide products that do not comply with the decision at their next renewal.” In February 2010, NYSDEC informed companies that it intended to not continue the registration of second-generation anticoagulant rodenticide products packaged as pelleted, loose baits and meal after June 4, 2011 “unless acceptable updated final product labeling consistent with the requirements of the [EPA’s] Risk Management Decision [was] submitted to the Department.”

Plaintiff RB makes d-CON rodenticides, and defendant Motomco makes the competing Tomcat. Motomco decided to comply with the RMD. RB, by contrast, opted to fight in court. This litigation arose from things they said about the impact of the EPA and NYSDEC actions to buyers for major retail chains.

Among other things, Motomco distributed two “White Papers” to buyers. One had the heading
“NEW YORK STATE DEPARTMENT OF ENVIRONMENTAL CONSERVATION (NYSDEC)” and contained contact information for two NYSDEC officials. The other had the heading “EPA Rodenticide Mitigation Decision” and included photocopies of two EPA officials’ business cards. Neither identified Motomco as its author. RB sued for false advertising, asking for an injunction against use of the White Papers or other statements suggesting that d-CON had been subject to adverse regulatory action or that retailers carrying d-CON would experience disrupted business or other harm.

In August, the court denied a TRO, and Motomco filed an answer and counterclaims, as well as a cross-motion for a preliminary injunction. Motomco wanted RB to stop telling people that Motomco had voluntarily cancelled its current registrations for pre-mitigation consumer rodenticide products, and that RB had a special status allowing it, uniquely, to sell its products after June 2011 or was otherwise entitled not to comply with the RMD and NYSDEC decisions. This included claims that the EPA has been or would be enjoined (unless or until an injunction issued).

The court thus turned to the cross-motions.

In a footnote, the court stated that “[t]he lawfulness of a product is clearly a material quality.”

Irreparable harm is the single most important prerequisite for a preliminary injunction. For false advertising, likely injury and causation will not generally be presumed, but must be somehow shown, except when a comparative ad is literally false. Even without identifying a competing product by name, the presumption may apply where the plaintiff is an obvious competitor. This was the case here. “[T]he allegedly false statements were made in the context of advertising campaigns directly referencing, and indeed aimed at, the opposing manufacturer’s products.” Some mentioned the opponent directly; others were clearly in a comparative context, as when a Motomco sales manager sent a White Paper to a sales rep, instructing him to send it to a buyer at a supermarket chain to demonstrate that “d-CON is on the Titanic.”

The court commented that, though neither party had argued the issue, it might be the case that this presumption of irreparable harm is no longer permissible, despite longstanding precedent, after Salinger. (I myself am attracted to the argument that presumptions shouldn’t be applied across whole categories—all copyright cases, all patent cases, etc.—but can be justified in more narrowly targeted subcategories, such as the comparative ad situation. I don’t think eBay or Salinger rejected subcategories; the law of preliminary injunctions has not been wiped blank.)

But anyway, the court found that the parties independently showed irreparable harm. Irreparable harm exists when the parties are competitors and there’s a logical causal connection between the alleged false advertising and the harm to the challenger’s sales position. The parties were competitors, taking sales from one another. “Because of the uncertain regulatory climate, the parties are also effectively in a new market, where it would be difficult to quantify either party’s lost sales.” In addition, prospective loss of goodwill is sufficient to support a finding of irreparable harm. (This, on the other hand, seems shaky post-Salinger. “Goodwill,” if it means anything at all—which I’m not sure it does—means the ability to garner future sales, which means money. It may be hard to calculate the magnitude of the harm, but the harm is economic, and goodwill will always be at risk in every Lanham Act case; I have yet to see a good explanation of how a presumption based on goodwill won’t equate to an automatic presumption of irreparable harm once plaintiff shows likely success on the merits.)

Both parties demonstrated prospective damage to their reputations. Indeed, Motomco’s sales manager explicitly challenged RB’s “credibility,” while one RB presentation was titled “[Let’s] get our facts straight!” This was irreparable harm. 

Both parties argued literal falsity.

The court found that Motomco’s use of the White Papers, statements suggesting d-CON is subject to regulatory action, and statements suggesting that retailers will experience business disruption or penalties if they stock RB’s product were literally false, absent clarification that Motomco was only expressing its opinion about future events.

First, the headings and signature blocks of the White Papers were literally false in that they purported to issue from agencies. Both lacked any identification of true authorship.

Further, it was literally false for Defendant to state that the RMD is a law, regulation, or anything else having current legal force. The EPA stated that the RMD “itself did not change the legal status of any rodenticide product, now or in the future. EPA did not cancel or suspend any rodenticide registrations, nor did it prohibit the sale of registered rodenticides that did not incorporate the specified registration measures.” It was also literally false for Motomco to state, with absolute certainty, that retailers carrying RB’s products in New York State will experience disruptions to their businesses or penalties in 2011. Motomco’s presentations stated that retailers “will be liable for seizure o[f] products, quarantines and substantial fines if product remains on shel[ves].”

RB demonstrated that “its take on the current regulatory environment is accurate.” NYSDEC had renewed its products’ registrations through June 30, 2012. “NYSDEC representatives testified that whether the department will take future regulatory actions against manufacturers and retailers who persist in selling second-generation anticoagulants is up in the air and, at the very least, a long process would be required before NYSDEC could force Plaintiff or retailers to pull the products from the market.” Motomco may express its opinions about possible future NYSDEC actions, but only if it makes clear that these are its opinions. “As currently phrased, Defendant’s pronouncements as to the imminent seizures, quarantines, and fines awaiting retailers who carry Plaintiff’s products are literally false.”

(As I read this, it’s not really enough for Motomco to rephrase to say “In our opinion, seizures are imminent,” any more than it would be enough to avoid a defamation claim by starting the defamatory statement with “in our opinion.” The opinion has to bear some relationship to possible reality, and thus can’t represent that seizures are imminent, but could say that the future of the products at issue is unclear.)

The court also found certain RB statements literally false: that (1) Motomco voluntarily cancelled its registrations for pre-mitigation consumer rodenticide products, (2) RB has a special and unique exemption from the EPA allowing it to sell pre-mitigation consumer rodenticides to retailers after June 4, 2011, and (3) the EPA is currently or will be enjoined from enforcing the RMD.

RB admitted (1) and argued that it was true, but Motomco amended its registrations, and RB’s witness admitted that these are different. RB admitted that it didn’t have a special exemption but denied making statement (2). However, the court found that the record showed that its agents said (2). One witness testified that he was told by a buyer “that d-CON told him that they were going to get ‘special treatment’ while other rodenticide manufacturers would have to comply with the law.” Likewise, it was literally false to state that the EPA is enjoined from enforcing the RMD. RB could state that it expected to receive an injunction, so long as it was clear that it was speaking only about future expectations. Though the consequences of making inaccurate predictions to customers were unclear, “as long as Plaintiff discloses the forward-looking and uncertain nature of its expectations, such statements are beyond the reach of the Lanham Act and better left to the market.” The court expected that customers would be “unforgiving” to manufacturers whose predictions were wrong.

Other statements, however, were not literally false: (1) Plaintiff’s d-CON products can be legally sold after June 4, 2011, (2) Plaintiff can continue to sell second-generation products after June 4, 2011, and (3) retailers will suffer no adverse consequences from purchasing Plaintiff’s products in 2011. NYSDEC made clear that, at minimum, it would take a long time to force RB to stop distributing its products. Thus, it was impossible to say that these claims were false.

Balancing the equities, and considering the public interest in suppressing false advertising, an injunction was proper, with contours crafted to ensure that the parties could continue to offer their opinions on regulatory issues. Thus, the injunction barred Motomco from (1) using the White Papers “without clear language or graphics attributing the statements contained within to Defendant, not the EPA or NYSDEC,” (2) claiming that the RMD was a law or regulation and (3) claiming that retailers who carry d-CON in 2011 will experience disruption to their business, fines, or penalties, without making clear that Motomco is only expressing its opinion about possible future actions by regulators. (Hunh. I thought the evidence established that nothing was going to happen in 2011, so I would have thought that either the "in 2011" or the final clause was unnecessary/underinclusive.)

RB was enjoined from making the statements found to be false (except that if it does get an injunction against the EPA, it can say so).

Skin job: unauthorized reseller's bad acts doom it

Bad facts, bad law: an undisputed wrongdoer’s wrongful conduct is used to interpret Lanham Act (and potentially Copyright Act, given unclear facts) liability in ways with bad implications for legitimate businesses, sort of like what happened in INS v. AP where the Court treated wrongful methods and legitimate methods of acquisition as equivalent. Given that the defendant here proceeded pro se and that some of the key facts are unclear, this case is more a cautionary tale than a precedent affecting resellers of legitimate goods.

Klein-Becker USA, LLC v. Englert, 2011 WL 147893 (D. Utah)

Klein-Becker makes StriVectin, a topical cosmetic, packaged in “trademarked, copyrighted packaging that bears Klein-Becker's unique and distinctive trade dress.” It has “an exclusive and selective network of authorized manufacturers and distributors.” In addition, “Authorized Resellers are trained in and agree to meet Klein-Becker's quality control standards for storing and selling StriVectin-SD® products and for providing before and after sales support by personnel trained to assist customers to maximize the benefit of Klein-Becker products.”

Klein-Becker’s reseller purchase agreements restrict resale on the Internet or in e-commerce without Klein-Becker's express written authorization, and restrict sales to only individual customers as end-users. Resellers may also not copy any of Klein-Becker's trademarks, copyrighted materials, trade dress, marketing materials, or advertising materials without Klein-Becker's express permission.

Note: this may produce a contractual obligation, but copyright law itself expressly provides that sellers may show photos of the products they have to sell, even when those photos include copyrighted labels, without the permission of the copyright owner. 17 U.S.C. 113(c) (“In the case of a work lawfully reproduced in useful articles that have been offered for sale or other distribution to the public, copyright does not include any right to prevent the making, distribution, or display of pictures or photographs of such articles in connection with advertisements or commentaries related to the distribution or display of such articles, or in connection with news reports.”) Notably, and possibly relevant here, the question is whether the work has lawfully been reproduced in useful articles—not whether the defendant’s particular copy is being distributed within the copyright owner’s authorized distribution chain, which makes sense for a provision designed to protect both ads and reporting. The facts set forth in this opinion are insufficient to explain what exactly defendants did to infringe the copyrights at issue.

The court adopted Klein-Becker’s characterizations of its system as findings of fact, including that “the StriVectinTM brand name symbolizes high quality in the eyes of the consuming public and industry. In order to maintain the reputation and genuineness of the StriVectin-SD® line of products, the quality standards must be controlled by Klein-Becker.”

Defendants used various websites and email addresses, including,, Skin-Cream-Sales, and StriVectin Sales, among many others. They weren’t authorized resellers, but nonetheless dared to advertise and sell StriVectin products. (Horrors! Look, these are bad guys, as subsequent discussion will show. But there’s a difference between “not being an authorized reseller” and “selling illegitimate product,” which this opinion, by adopting the TM owner’s rhetoric, erases.) Their unauthorized sales “undermine the brand integrity, brand reputation and the goodwill associated with StriVectin-SD®,” because their websites don’t satisfy Klein-Becker’s criteria for Internet retailers, which require high quality and look and feel of the website, among other things. The unauthorized sales also damaged “Klein-Becker's relationships with authorized resellers, as well as their competitiveness in the cosmetics industry.”

Gross sales of StriVectin products were at least over $673,000.

Here comes the truly bad stuff: GNC stores are entitled to special prices from Klein-Becker. Englert posed as GNC stores, submitting fraudulent invoices. Klein-Becker’s direct damages from the unwarranted discount were over $78,000. Defendants also bought and sold stolen StriVectin. In 2007, thieves stole over $320,000 (retail) of StriVectin; the stolen items were marked with lot numbers that were never legitimately or legally sold. Pursuant to a seizure order granted by the court, Klein-Becker found 269 tubes of stolen product, with a retail value of more than $36,000, at defendant Patrick Englert's residence. Klein-Becker also seized numerous empty cardboard boxes marked with the stolen lot number, which would have contained at least another 84 tubes of stolen product. Klein-Becker bought 16 additional units of the stolen product off eBay from Englert. The court noted that Klein-Becker had determined that all stolen product, even if recovered, had to be destroyed because it had been out of Klein-Becker’s control.

The court found willfulness: the defendants were a large-volume unauthorized reseller who knew they were buying and selling StriVectin well below what they knew to be its actual wholesale price. In addition, Klein-Becker also found tubes with no lot number during the seizure and by buying from the defendants on eBay. The lack of a lot number likely indicates either counterfeiting or theft from the manufacturer prior to the manufacturer printing the lot number on the product package. (Not sure why this indicates knowledge, absent evidence that the significance of lot numbers is widely known among resellers.)

Defendants received StriVectin from Iowa Nutrition, an authorized customer. The invoices they received stated that the purchaser was not authorized to resell the product “via the Internet or in e-commerce or to other resellers, Internet sites, or auctions without express written authorization.” They knew about and induced authorized resellers to breach plaintiff’s reseller policy. (The evidence recited shows knowledge, but not inducement, unless paying for the product is inherently inducement; I’m not familiar enough with inducement of breach caselaw to say whether this is a standard result.)

Defendants also substantially obstructed discovery.

The court granted summary judgment on Klein-Becker’s claims for trademark infringement, copyright infringement, false advertising under federal and state law, intentional interference with existing and prospective business relations, fraud, and civil conspiracy. It only remained to calculate damages.

Lanham Act damages: Klein-Becker sought disgorgement of defendants’ profits. Defendants argued that this would be inappropriate because Klein-Becker didn’t show actual damages, didn’t show willfulness, and didn’t show defendants’ actual profits with reasonable certainty. Under circuit precedent, while a finding of actual damage is important in determining whether an award of profits is appropriate, a plaintiff could recover defendant’s profits without showing actual damage if the defendant acted willfully. Here, Klein-Becker showed actual damages: defendants agreed in their proposed findings of fact that their sales “undermine[] the reputation and goodwill of the StriVectin-SD® brand," and "damage Plaintiff's relationships with authorized resellers, as well as their competitiveness in the cosmetics industry." So, while the exact dollar amounts couldn’t be determined due to defendants’ misconduct in discovery and poor bookkeeping, they admitted that their infringement actually damaged Klein-Becker. And anyway, given defendants’ willfulness, the equities justified an award of profits regardless.

The equation of unauthorized with counterfeit/stolen bites again: Willfulness requires an intent to appropriate the goodwill of another’s mark. The court analogized to a case where a car manufacturer began marketing a warranty under a name nearly identical to that of a warranty offered by an aftermarket warranty dealer, in which the Tenth Circuit held that the deliberate adoption of “similar” marks could lead to an inference of intent to benefit from the dealer’s goodwill. The court considered this case “very similar,” because defendants “actually appropriated Klein-Becker's product.” Moreover, the court continued, their sales were aimed at those seeking to purchase actual StriVectin. The difference being, of course, with respect to the actual StriVectin, that defendants paid for and actually offered Klein-Becker’s product, which the defendants in the car case did not.

Further, defendants knew that their actions were prohibited by the reseller agreement. This creates an inference of intent to appropriate Klein-Becker’s goodwill. And thus are contracts converted into trademark rights.

Anyway, equity supported an award of profits, because the infringement likely diverted some customers from authorized resellers, and likely deceived consumers into believing they were purchasing Klein-Becker's product from an authorized reseller.

In calculating damages, some speculation is permissible, particularly when the need for it is attributable in part to defendants’ poor record-keeping. Defendants failed to show any elements of cost or deductions. Thus, the court awarded defendants’ gross sales as damages.

Klein-Becker also sought to multiply the damages under the Lanham Act, but the court declined because it was already awarding gross profits. The Act only provides for multiplying “the amount found as actual damages” where appropriate, and actual damages were indeterminate.

Copyright damages: The court found that defendants willfully infringed Klein-Becker’s copyright in its packaging. I presume this covers either the distribution of pure counterfeits or of copies as to which defendants were not actually the “owners” because they were stolen, because of course the product that merely got outside the distribution chain is subject to first sale.

The purpose of statutory damages is not just restitution but to discourage wrongful conduct. Because the copyright and Lanham Act damages were based on the same sales, the court considered the prospects of double recovery. Courts are split on this issue: some permit statutory damages in addition to actual Lanham Act damages, and some don’t; the central concern is whether the plaintiff receives a windfall. The Tenth Circuit hasn’t ruled on the issue, but has in the past disallowed double recovery when two claims arise from the same operative facts and seek identical relief. The Lanham Act clearly states that an award of defendant’s profits should be compensation, not a penalty, so additional compensation would likely result in a windfall for plaintiff. However, statutory damages also serve a punitive, deterrent purpose. Thus, awarding both is not impremissible double recovery.

Yet in determining appropriate statutory damages, a court considers the same factors as it does under the Lanham Act. Because Klein-Becker had already been compensated for its damages, only deterrence and willfulness were of much relevance. The court found that a $10,000 award was appropriate, compared to the $30,000 Klein-Becker sought. “Any lesser amount would be too easily absorbed as a cost of doing business by intentional violation of a copyright.”

Klein-Becker also got actual damages for the GNC fraud, which the court calculated as the difference between the GNC price and the retail price, which was the price defendants would have paid absent the fraud (since Klein-Becker wouldn’t have given them the wholesale price).

The Utah Truth in Advertising Act and Unfair Practices Act both allow recovery of three times actual damages or statutory damages of $2000, whichever is greater; Klein-Becker elected statutory damages. (Was this worth the litigation cost? Even assuming defendants actually pay an attorneys’ fee award that includes time spent on these counts, how much could a reasonable attorney charge for work on these counts?) Remember that prohibition on double recovery: whether relief is identical depends on whether the award is compensatory or punitive. Here, the statutory damages claim serves deterrent purposes, like the Copyright Act, and so no additional statutory damages were available for damages arising out of the same transaction. (Is Klein-Becker a prevailing party on these counts, then? I’m sure there’s law on this, but I thought that a simple declaration that its rights were violated isn’t enough to make it the prevailing party under current law.)

Klein-Becker did get an attorneys’ fees award under the Lanham Act, and would have been eligible for the same under the fraud the Truth in Advertising Act if that wouldn’t have been duplicative. Defendants’ conduct in discovery, plus its willful infringement, made the case exceptional for Lanham Act purposes: the defendants’ “business model itself is based on violations of Klein-Becker's trademark and copyright rights.”

Punitive damages could also have been available for the intentional torts, but weren’t warranted under the circumstances. Defendants had already been sanctioned for failure to comply with their duties as litigants, and the court already imposed statutory damages and awarded fees.