Wednesday, November 30, 2011

Defamation/dilution suit against critic survives motion to dismiss

Doctor's Data, Inc. v. Barrett, 2011 WL 5903508 (N.D. Ill.)

Doctor’s Data sued Barrett and his organizations the National Council Against Health Fraud, Inc., and Quackwatch, Inc. for defamation, violation of the Lanham Act, and violation of several state laws. Doctor’s Data alleged that it’s a lab that analyzes samples for health care practitioners, including practitioners of alternative medicine.

Barrett is a retired doctor who lives in North Carolina. DD alleged that Barrett used his websites to disseminate false and misleading claims about DD and other labs. One of Barrett’s articles stated that Doctor's Data defrauds patients by processing urine tests that are misleading and are then “used to persuade patients they are toxic when they are not.” Another stated that a patient sued Doctor's Data alleging that he was incorrectly diagnosed “and the test used to diagnose [the patient]—Doctor's Data's urine toxic metals test—is a fraud.”

Barrett argued that he should be protected by Illinois’s SLAPP statute, which immunizes acts undertaken “in furtherance of the constitutional rights to petition, speech, association, and participation in government ... regardless of intent or purpose, except when not genuinely aimed at procuring favorable government action, result, or outcome.” The court disagreed. It applied Illinois choice of law rules; Illinois follows depecage, which cuts claims up into component parts. North Carolina has no anti-SLAPP statute.

Under depecage, whether a statement is defamatory is distinct from the issue of whether that statement is privileged. The parties agreed that Illinois law generally governs the torts, but the question was whether Barrett was restricted to defenses recognized in North Carolina. Though place of injury is generally a central factor in determining the choice of law, this is less important in the anti-SLAPP context. The law was designed to encourage the exercise of free speech, and thus the place where the allegedly tortious speech took place and the domicile of the speaker are central to the choice of law analysis. (I admit I’m not feeling the “and thus” there.)

A state has a strong interest in having its own anti-SLAPP law applied to the speech of its own citizens, at least when the speech came from within the state's borders. However, Barrett didn’t adequately explain why Illinois would have a significant interest in having its law applied to non-Illinois speakers. (Because it also doesn’t want Illinois citizens to squelch the speech of others?) By contrast, North Carolina had a significant interest in determining how much protection to give North Carolina speakers. No anti-SLAPP protection for Barrett; and anyway the court wouldn’t dismiss the state law claims at this stage even if it applied, because DD would be entitled to limited discovery on whether the law protected Barrett’s statements, specifically whether they were genuinely aimed at procuring government action.

DD, somewhat vaguely, claimed violations of the Lanham Act from false representations that confused and deceived the public. Barrett argued that DD failed to allege commercial competition. The court agreed that the Seventh Circuit has a blanket rule that false advertising claims under the Lanham Act can only be brought in cases of discernible competitive injury; DD failed to allege (and pretty obviously couldn’t allege) that Barrett was a competitor.

DD also alleged dilution under federal and state law. The court construed the allegation that Barrett's statements “caused and are likely to continue to cause confusion to the public and to health care practitioners as to whether to employ Doctor's Data for samples and testing analysis, or to employ a laboratory approved by [Barrett]” as relating to the dilution claim, which should give some indication of what I think are the obvious problems with the dilution claim. DD “does not allege that Barrett is in the business of testing medical samples; rather, it claims that Barrett is telling practitioners not to use Doctor's Data, and this is the manner in which Doctor's Data and its trademark are being harmed.” In other words, dilution through criticism, just about the most unconstitutional application of a dilution claim I can imagine. It’s not the mark that’s being allegedly harmed!

Perhaps because of the vagueness of the “Lanham Act” claim, Barrett apparently didn’t make any TDRA-specific arguments about dilution. (Indeed, it’s not even clear from the opinion that DD alleged that its mark was famous, as required by federal law.) The court found that DD had alleged that Doctor’s Data “is a registered and active trade name and trademark” and that Barrett’s use “damages Doctor's Data's name and business, and misrepresents the nature of Doctor's Data's services to the public.” Barrett argued that his use was not commercial, but in the nature of reporting. The court found that allegations that Barrett “solicits donations and contributions,” has ads on his site, and gets referral fees from advertisers were sufficient to allege use in commerce, which of course isn’t the real question.

DD alleged that posting articles about “shady” labs and “quack” physicians who defraud patients in association with the DD mark “diluted the quality” of the mark. The court found this sufficient to survive a motion to dismiss. Questions: (1) How could Doctor’s Data have possibly pled fame under Iqbal and Twombly? Sub-question: would you worry about fees if you claimed federal fame on behalf of this client, especially if you're in the Seventh Circuit? (2) Did anyone draw the court's attention to the exclusions in the federal dilution statute for criticism and commentary? Dilution is not and should not be a doctrine about being nasty to a party that happens to be known by its trademark. We have defamation for that. Dilution is about associating an existing mark with an unrelated product or service, even if there’s no confusion. Talking about DD—even talking smack about DD—cannot dilute, and even in the absence of an anti-SLAPP law it should be obvious that the First Amendment protects such activity if it’s not defamatory.

Anyway, the court then turned to the state law ICFA/IUDTPA claims. The Seventh Circuit has assumed that these are the same as Lanham Act false advertising claims, and district courts have applied that to standing in cases brought by non-consumers. So those went too.

DD’s claims for defamation per se survived at this stage of the litigation; Barrett’s defenses of truth, opinion, etc., as well as his statute of limitations defense, had to wait. “Barrett must await discovery and obtain or offer hard evidence before challenging the defamation claim based on those defenses.” (Technically, won’t DD have to offer hard evidence as to falsity?) The defamation per quod claims (where extrinsic facts are required to explain the defamatory meaning) failed because DD didn’t plead special damages with particularity. Claims that Barrett’s statements had and would cause damage to its business, or that DD’s reputation had been harmed, were insufficient; DD failed to allege actual lost customers or other harm of a pecuniary nature.

DD also alleged interference with contracts with existing and prospective clients. Though Barrett argued that DD didn’t point to any valid contracts, for purposes of a motion to dismiss DD only had to allege facts allowing the reasonable inference that Barrett interfered with an existing contract. DD did so by alleging that Barrett posted information on his websites for the purpose of inducing physicians who “[r]ely on Doctor's Data and its services in their medical practices and in the treatment of their patients” to halt referrals to Doctor's Data and employ other labs instead. “Viewing this allegation in the light most favorable to Doctor's Data, it is plausible that Doctor's Data has, or had, valid agreements (whether oral or written) with physicians who use its testing services.” The tortious interference with prospective business relationships claim also survived at this stage, even though Barrett argued that he couldn’t be held liable for disseminating truthful information: that’s for a later day.

Thus, the related conspiracy claim also survived with respect to tortious interference (and defamation). I note that the conspiracy allegations make the anti-SLAPP defense sound somewhat more plausible had it applied, given the alleged connection to lawsuits: DD alleged that Barrett conspired with David J. Wilzig, an attorney “who is well known for filing lawsuits promoting Barrett's causes.” DD alleged that “Barrett and Wilzig work together to intentionally harm Doctor's Data's reputation and business by disseminating defamatory information on the internet and inducing Doctor's Data's clients to file frivolous lawsuits against Doctor's Data.”

DD’s common-law fraud claim failed because DD wasn’t fraudulently induced to do anything by the alleged misstatements. Third-party reliance on fraudulent statements may be actionable, but only when the defendant’s statement was made for the purpose of inducing the plaintiff to act, which wasn’t the case here.

Open wide and say misuse

Paul Alan Levy on a class action complaint against a dentist who claims copyright in all posts about her. Ouch: "suppression of criticism is unfair to other doctors and dentists whose superior qualities make it unnecessary for them to use such contracts."

King of wishful thinking: naked licensing dooms ownership claim

Original Rex, L.L.C. v. Beautiful Brands International, LLC, 792 F. Supp. 2d 1242 (N.D. Okl. 2011)

(This is from earlier in the year, but it just showed up in Westclip now. It’s a good reminder of how complicated facts can get on the ground.) Original Rex sued BB for trademark infringement over BB’s use of the registered mark “Rex’s Chicken.” BB counterclaimed for abandonment, seeking cancellation of the registration.

In 1975, Vernon McFarland acquired the exclusive rights to the Rex process and name for boneless, skinless, bite size chicken for Oklahoma, Missouri, Arkansas and Texas, and in 1981, these rights were expanded to include Kansas, Colorado, Louisiana and New Mexico. He formed MDI in 1976 and opened the first Rex Restaurant in Oklahoma. McFarland incorporated Rex Chicken Company in 1977 in Oklahoma to sell chicken to purported licensees.

Beginning in the mid-1970s, MDI entered into various franchise and license agreements with independent restaurant operators. Some used the “REX” name; others operated under a different name but displayed “REX”; and others did not identify the chicken products using “REX” at all. In 1977, Rex Chicken Co. entered into a franchise agreement with John Ballard/Ballard’s Drive-In, giving it the right to use the name “Rex Chicken” in connection with the sale of “boneless food products.” The agreement required sourcing from Rex Chicken Co. or an approved source and a royalty based on pounds sold. It allowed transfer of the license if the transferee agreed to assume all of the transferor’s obligations and Rex agreed in writing. It also contained quality control provisions. Vernon McFarland visited Ballard’s to deliver chicken about every other week until his death in 1988, and never complained about the restaurant.

Vernon served as president of MDI until he died, at which point his widow Dollie took over. Rex Chicken Co. at some point around 1979 ended its legal existence; there was no written assignment of its rights to MDI, and Ballard never received written notice of any assignment, though the plaintiff contended that everyone understood that an assignment had taken place and that the franchise agreement remained in effect.

After Vernon McFarland died, Dollie and other family members would visit the Drive-In once every two or three years. They only ever complimented the restaurant. Dollie testified that the visits were only partly social because she continued to own an interest in Rex Chicken, LLC, until 2000 and was still very interested in the product.

In 1989, MDI applied to register the Rex’s Chicken mark, alleging first use in 1989. (According to the court, Ballard also began using the Rex’s Chicken mark in connection with the sale of boneless chicken in 1989, limited to use at the Drive-In and surrounding community, though I’m not sure what “began” means here.) The registration issued in 1991, along with another registration for REX THE ORIGINAL.

MDI’s VP of franchise development sent Ballard a letter in March 1992, notifying Ballard that his franchise contract was the last such contract in existence and was set to expire in May. The letter said:
At Dollie's request, we are extending your agreement another year as proposed in the attached Modification Agreement. Dollie recognizes your long relationship with and loyalty to the Rex concept. As she discussed with you, the right to sell the Rex product is yours personally and cannot be sold to anyone else.
Please review and sign two copies of the enclosed Modification Agreement and return both to me in the enclosed envelope. We will then return to you one fully executed copy.
But no executed agreement was produced in the litigation.

The VP testified that MDI’s intent was to terminate Ballard’s franchise agreement and license, as part of the systematic termination of all then-existing licenses, and that any pre-existing users still using the name were defying MDI, though Dollie disagreed with that last statement.

MDI then sold all its assets to Rex Chicken, LLC, and recorded an assignment of the mark. Rex Chicken, LLC, was a wholly owned subsidiary of Magnum Foods, a corporation which was a licensee of Little Caesars Pizza. No written notice of an assignment was produced in the litigation and no written notice was given to Ballard.

Meanwhile, Ballard continuously operated his restaurant and sold Rex chicken since 1977, and since 1989 he used the Rex Chicken mark in advertising. He testified that at some point before the 1993 MDI-Rex sale, Dollie stopped requiring him to pay royalties; that he’d stopped receiving spice packs for Rex Chicken and had been making his own for 3-4 years; and that he’d been obtaining chicken on his own for more than 5-7 years and maybe over 10 years. Since 2002, he hadn’t purchased any products or supplies from Rex Chicken Co. or its successors in interest.

Troy Beats, a former President of Rex Chicken, LLC, testified that he could not define Ballard's relationship as a franchisee or licensee because “they sell a whole different menu that was not what I would consider Rex Chicken. Just the product was what they were selling.” Beats never talked to anyone at Ballard's and Rex Chicken, LLC, didn’t assess Ballard’s operation because they didn’t consider it a franchise. Troy Beats closed all of his Rex Chicken restaurants and ceased paying any royalties by 2002, at which point his relationship with the entity and the mark ceased.

So, we have an entity, Rex Chicken, LLC, that by its own admission ceased to operate the Rex Chicken franchise in November 2000, and claimed to have transferred all rights related to Rex Chicken to Magnum Foods. But there were no documents drafted to evidence that transfer, nor was an assignment of the mark registered. And of course there was no written notice to Ballard about the transfer.

Steven Price, Magnum’s president/CEO, and Teresa Coffman, Magnum’s controller who maintained the Rex Chicken marks with the PTO, also provided evidence. Price testified that he’d never seen the franchise agreement with Ballard, though he’d been to the Drive-In and had met with Ballard once in the late 1990s, or possibly 2000. He hadn’t conducted any oversight or inspection of the Drive-In since 2000, though he testified that he did make a “cordial” visit less than 6-7 years ago to order and eat the product. Coffman likewise testified that, since Magnum's last store closed in 2002, she’d done nothing to keep track of Ballard. His restaurant wasn’t in Magnum’s system and she wasn’t aware of any of his operations.

Ballard, meanwhile, testified that he’d never heard of Magnum and never met Price or Troy Beats. He was unaware of any entity not owned by the McFarland family that ever owned the Rex Chicken mark or franchise system. Moreover, Magnum never had any common ownership or control with Rex Chicken Company, MDI, or the McFarland family.

Despite having ceased to operate the franchise and having transferred its rights to another company in 2000, Rex Chicken, LLC (through Price) declared under oath in 2001 that it was using the Rex’s Chicken mark in commerce in order to renew its registration (though Magnum allowed the Rex “the Original” mark to be cancelled in 2002).

Price testified he closed the last restaurants franchised or operated by Magnum for business reasons. He wanted to cobrand Rex’s with Little Caesars, but nothing came of those discussions. Coffman and Price testified that Magnum intended to and did discontinue use of the mark indefinitely in 2002 because all its restaurants had closed, and because it had developed a replacement mark containing a ribbon logo, which it registered in 2000. The parties disagreed about whether the ribbon mark sufficiently resembled the Rex’s Chicken mark to have continuity of goodwill, but in any event the ribbon mark was cancelled in 2006. Rex Chicken, LLC filed its final tax return in 2002 and has never been revived or reinstated.

In March 2010, though its existence had been terminated by the Oklahoma Secretary of State 7 years past, Rex Chicken, LLC, (through Price) executed a purported assignment of the mark in favor of Dollie McFarland’s children, McAuliff and Johnson. In April 2010, a second assignment purporting to come from Rex Chicken, LLC, and Magnum did the same. (At some point thereafter, McAuliff “prepared an undated typed statement (“Clarification Statement”) purporting to be on behalf of Magnum and Price, stating that Magnum did not intend to abandon the Mark,” which Price then signed.

In April 2010, McAuliff and Johnson formed plaintiff Original Rex, LLC, and transferred the mark to it. (The Rex Chicken, LLC and McAuliff-Johnson transfers were recorded with the PTO.) Other than suing in this lawsuit, Original Rex conducts no other business, though it has a website that states it’s “coming soon” with an image of the cancelled Rex “the Original” mark. (Google didn’t help me find this site, but I did find reviews for a Tulsa Rex’s Chicken with the usual debates over whether it was as good as the “original Rex’s.”) Johnson testified that he’d spoken with one person about potential franchising or business.

Also in April 2010, at the behest of Dollie and her children, Ballard signed an affidavit/assignment “referencing his status as a franchisee and licensee pursuant to the 1977 Franchise Agreement and purporting to grant Dollie McFarland, Terri McAuliff and Joe Johnson all rights he may have in the ‘Rex’ marks, subject to his continuing right to use the marks.”

In 2008, defendant Coney Beach, Inc., began to sell bite size boneless chicken as “Rex’s Chicken.” Plaintiff argued that defendant Beautiful Brands, Inc. and CBI were aware of the mark’s history and goodwill. In October 2008, defendant RFS applied to register Rex’s Chicken, but its application was refused in April 2010 based on likely confusion between that and the REX mark. In June 2010, CBI reopened a restaurant under the name Rex’s Chicken; it’s operated and owned by defendant Big Rex, LLC, pursuant to an agreement with RFS. Plaintiff argued that consumer reaction to the quality has been mixed at best. Meanwhile, to promote its franchising agreements, RFS registered Despite prominently claiming to have been around “Since 1951,” they only started offering boneless bite-size chicken in 2008. The website says: “The BIG attraction since 1951. From the day we opened at an Oklahoma gas station, diners flocked to Rex's Chicken. Word spread until travellers across the USA were mapping a route that brought them to Rex for crispy bite-size chicken, fabulous frybread and honey sides.”

The key here was, obviously, abandonment. Abandonment results from discontinuation with intent not to resume use, which may be inferred from circumstances. Nonuse for 3 years is prima facie evidence of abandonment. The party asserting abandoment has the burden of proof on discontinuation and intent not to resume use, and courts have held that this burden is “strict,” though they’re not all clear on what that means. Moreover, once the presumption of abandonment from 3 years of nonuse attaches, the legal owner has the burden of producing evidence of either actual use or intent to resume use during the relevant period. The presumption can be rebutted by showing valid reasons for nonuse. A vague, subjective intent to resume use at some unspecified future date is insufficient: there must be evidence of intent to resume use within the reasonably foreseeable future.

Moreover, a trademark owner may grant a license and count that as use as long as it maintains quality control. But uncontrolled or naked licensing may cause the mark to lose its source-signifying function.

The court found that Magnum’s shutdown of the Rex franchise business in 2002 meant that the last Rex Chicken restaurant closed, at the latest, in 2003 or 2004. The ribbon mark would have been enough to preserve priority if it had created the same commercial impression, but the cancellation was evidence of abandonment of the ribbon mark starting at least in 2006. Thus, there was a presumption of abandonment even starting the count at the latest possible time, in 2006.

The burden was thus on plaintiff to rebut the presumption. Plaintiff offered (1) the assignments and “clarification statement,” (2) Ballard’s affidavit and assignment, and (3) the contention that the parties’ dispute was a valid reason for nonuse.

The court was unconvinced. The purported assignments didn’t establish either chain of title or the requisite intent to revive the mark. Rex Chicken, LLC, no longer existed as a company when the assignments were executed. It had stopped operating the franchise system nearly 10 years past, transferring it to Magnum. Magnum, in turn, stopped using the mark in 2002 (though it switched to the later-cancelled ribbon mark). The clarification statement was a self-serving affidavit entitled to little weight.

What about the Ballard affidavit? Uses whose nature and quality are controlled by the rights claimant can inure to the benefit of the claimant. But the licensor has to take some reasonable steps towards quality control. Because a finding of naked licensing leads to forfeiture of the mark, there’s again a high burden of proof for such a finding. Courts examine both the written agreements and the conduct of the parties for evidence of control. In some cases, the licensor may justifiably rely on the licensee for quality control, but that requires some sort of special relationship. For example, a close family relationship combined with a long-term working relationship may qualify; so may a situation in which the licensor manufactures at least 90% of the goods sold by the licensee; so may a successful forty-year relationship.

Here, the franchise agreement purported to provide quality control, but the question was whether there was sufficient policing and inspection by the franchisor in fact. The court found the nature of the relationship between Ballard and the franchisors after Vernon McFarland died was “ambiguous at best.” There was no evidence Ballard ever executed the one-year extension of license mailed to him in 1992. None of the registered mark owners ever abided by the terms of the agreement concerning assignment, and they never gave Ballard written notice. Ballard wasn’t required to pay any royalties after the sale to Rex Chicken, LLC, in 1993, and he testified he had never heard of Magnum or Price. Nevertheless, he continued, without any objection from anyone in the series, to sell Rex chicken, even though Price visited Ballard’s and spoke to Ballard some time in 1999 or 2000.

Regardless, the relationship between Ballard and Magnum clearly ended in 2002, when Magnum shut down its franchise system and stopped keeping track of Ballard. Ballard stopped buying food from the franchisor in 2002 at the latest, and nobody conducted any inspections of the place.

Plaintiff argued that the level of control was sufficient because Vernon McFarland exercised control while he was alive and after that Ballard’s had a good enough track record that the owner could rely on him. The court determined that there was no control as of 2002. If Vernon were still alive and his company still owned the mark, the close relationship might suffice to avoid a finding of naked licensing, but we’re many years and several companies past that. “The passage of time, the successive transfer of ownership, the waning exercise of oversight by owners, and ultimately the cessation of the business and use of the Mark altogether weigh in favor of a conclusion that Ballard, by 2002 at the latest, had a naked license.”

Plaintiff also argued that Ballard’s was subject to various state laws requiring licensing and inspection, thus providing adequate supervision by the Oklahoma Department of Health. Though the Restatement (Third) of Unfair Competition provides that the licensor’s obligation of reasonable control can be satisfied by supervision or testing by third parties, the Department of Health wasn’t plaintiff’s agent, and anyway it aims at health and food safety, not the maintenance of particular composition/quality standards.

Finally, plaintiff argued that the current ownership dispute was a valid reason for nonuse. While that’s true for recent nonuse, it doesn’t explain the 2002- (or 2006-)2010 gap. Thus, the mark had been abandoned.

Plaintiff also lacked standing under §1125 for both false advertising and common-law trademark infringement, because it’s never owned or franchised any restaurants, and thus had no commercial or competitive interests at stake. Likewise, its state-law deceptive trade practices failed because it had no actively competing franchises or stores.

One state law claim for common law unfair competition remained (though I’m not clear on its basis; it seems likely to go as well after motion practice), as well as a counterclaim for cancellation of the registered mark (which will presumably be granted, ditto).

Tuesday, November 29, 2011

Organization for Transformative Works looking for volunteers

Find out more at this page about volunteering for the OTW. Coders, testers, and other tech types are eagerly sought; the legal committee may also be able to take on law students for various forms of credit depending on the circumstances, though please note that all positions are volunteer and unpaid!

Eric Goldman on the Facebook settlement

As usual, a good piece of advice:
The FTC's privacy rules are quite easy to follow. Tell users the truth, and don't change the rules mid-stream without users' consent. We've all known that Facebook repeatedly cuts corners when it comes to its privacy promises. Like most Internet companies, they thought they could get away with it. They didn't.

False advertising class unaffected by Wal-Mart v. Dukes

Jermyn v. Best Buy Stores, L.P., 276 F.R.D. 167 (S.D.N.Y. 2011)

Jermyn got a class certified. Best Buy moved to decertify it. The court denied the motion. Best Buy again moved to decertify it. The court again denied the motion. “For background information, the reader is referred to the first six published decisions in this case.” The class consists of NY customers who were refused a valid “price match” at Best Buy, which advertises that it will meet any competitor’s price on products it sells, subject to several conditions. The court determined that there was a common question whether Best Buy maintains and communicates to local branches a corporate policy of denying valid price matches, and the existence of this policy was a jury question.

Best Buy argued that the class had to be decertified because of Wal-Mart Stores, Inc. v. Dukes, –– U.S. – (2011). That decision decertified a Rule 23(b)(2) class because there was insufficient commonality and because an injunction class under Rule 23(b)(2) was not appropriate when accompanied by class claims for individualized money damages that are more than merely “incidental” to the injunctive relief. The court here found it important that the plaintiffs in Wal-Mart didn’t allege an express corporate policy or uniform employment practice across the country. “If the reader wonders exactly what Dukes' commonality analysis has to do with this case, s/he is likely not alone.” It was a Title VII case holding that plaintiffs were required to identify “significant proof” of a general corporate policy of discrimination; delegation of discretion to individual managers can only be such a policy if the delegation creates a disparate impact and some “specific employment practice” is the source of discrimination. The Supreme Court held that there was no significant proof of any specific employment practice leading to a disparate impact.

Best Buy tried “to import these Title VII pleading requirements to Plaintiffs' claims, which allege deceptive business practices under New York's General Business Law.” This failed for two reasons: “First, these additional requirements are designed for and unique to the context of employment discrimination. They are necessary because the employer's motivation is crucial to establishing liability, and therefore to the common liability necessary to glue the plaintiff class together. In the deceptive business practice context, by contrast, the ‘why’ is less relevant, if it is relevant at all.” It’s enough if Best Buy advertises its price match guarantee, secretly disavows it, and thereby deceives the public. Motive is not required.

Second, “to the extent Plaintiffs here are required to identify a specific, illegal corporate policy rendering Defendant liable to all the class members, they have manifestly done so.” They alleged that Best Buy communicated to local branches a corporate policy of denying valid price match requests. “If that allegation were proved, it would render Defendant liable to every class member who suffered under the practice.... Had the Dukes plaintiffs actually alleged a general, non-discretionary corporate policy disfavoring women and offered some proof that such a policy existed, then obviously the case could have and would have proceeded as a class action. What the Supreme Court held was that the plaintiffs failed to present ‘significant proof’ of such a policy.” By contrast, plaintiffs here presented “significant (indeed, ample) proof that the illegal policy alleged in fact exists. I have already so held, not once, but at least three times.”

Best Buy simply conflated liability and damages:
It fails to appreciate that by deceiving the public alone it would have committed a legal wrong against anyone who can prove that he was injured thereby. If, in Dukes, the plaintiffs had sufficiently proved a general corporate policy of sexual discrimination, class treatment would have been appropriate; as explained, that policy would be the ‘thread’ or ‘glue’ tying all of the plaintiff's injuries together. The mere fact that some women (only putatively) in the class were, in fact, turned down for non-discriminatory reasons would not preclude certification in that case, any more than the fact that one woman's adverse treatment damaged her in the amount of $100, while another woman's damaged her in the amount of $500. One thing that Dukes clearly does not change is that ‘for purposes of Rule 23(a)(2) even a single common question will do.’ 131 S.Ct. at 2556 (internal quotation marks and alterations omitted). Here, the significant proof an illegal, centralized corporate policy presents the requisite common question.
The court continued that Dukes’ second holding on Rule 23(b)(2) was potentially relevant here. The Supreme Court held that back pay claims shouldn’t have been certified as part of a Rule 23(b)(2) injunctive class: “Rule 23(b)(2) applies only when a single injunction or declaratory judgment would provide relief to each member of the class. It does not authorize class certification when each individual class member would be entitled to a different injunction or declaratory judgment against the defendant. Similarly, it does not authorize class certification when each class member would be entitled to an individualized award of monetary damages.”

But this applied to Rule 23(b)(2) classes seeking both injunctive and monetary relief. In this case, by contrast, the court also certified the class under Rule 23(b)(3), after finding that the additional predominance and superiority requirements of (b)(3) were satisfied. Unlike the Dukes class, this (b)(2) class was not seeking monetary relief, but only an injunction against further statutory violations. The separately certified (b)(3) class sought money damages. Because violation of the GBL entitles both classes to relief, only one liability trial would need to be held to determine the existence of the alleged anti-price matching policy. Best Buy reiterated its argument that it would be “impossible, or unconstitutional, or uneconomical” to resolve the individual claims for damages in the Rule 23(b)(3) class. Dukes provided no basis for revisiting the court’s earlier rejection of that argument.

Rogers v. Grimaldi, obsolete?

Whatever happened to pungent, enigmatic titles like Three Days of the Condor or Cheers? . . . If one were searching for the sneezing panda clip, one would, quite reasonably, type “sneezing baby panda.” As a result, many online articles now eschew the barrier of a stylized title to aid search results.

These are practical developments, and yet they lean on—and help cement—some rotten assumptions about narrative. To call a clip about a sneezing baby panda “The Sneezing Baby Panda” is to decisively restrict its meaning. For this reason, YouTube clips are reliable conversation-stoppers: The video is packaged as a discrete bit of information (we will click on the link, a baby panda will sneeze, we will laugh) rather than, say, an experience (the meaning of which cannot be predetermined). There is nothing to say about the clip, and the name confirms it.

Wednesday, November 23, 2011

Innovation story of the day

Product's use in meth labs shuts down small business. The product itself is legit, but it made me wonder about innovation in illegal businesses: the incentives to innovate come purely from the market (and perhaps from self-help), not law. There's been a lot of research in recent years on innovation in communities unprotected by the law, but I'm not sure I've seen anything on innovation in markets for illegal goods. It would be a great study if you could get the data. I wonder if Sudhir Venkatesh could be convinced?

Tuesday, November 22, 2011

Nationwide class certified under California law

Bruno v. Quten Research Institute, LLC, --- F.R.D. ----, 2011 WL 5592880 (C.D. Cal.)

The court partially granted plaintiff’s motion for class certification of her California UCL, FAL, CLRA, and breach of express warranty claims. Bruno alleged that she purchased a liquid product labeled with the material misrepresentation that its active ingredient had "6X BETTER ABSORPTION" and was "6 Times More Effective" than the equivalent active ingredient in competing brands. The active ingredient at issue is the CoQ 10 enzyme, used as a dietary supplement. The product was also available as a gelcap.

From January 2009 to April 2010, defendants made the 6x claims. They stopped doing so at Costco’s request and after the NAD concluded that they lacked substantiation for the claims. Since 2007, they’ve also marketed a gelcap with 3x better claims such as "3X Better Absorption" and "300% Better Absorption."

Defendants, of course, contested constitutional standing on the grounds that plaintiff and the unnamed class members lacked a concrete injury. The court disagreed: Rule 23, not standing, was the appropriate basis for decision. Plaintiff had standing for the 6x liquid product, because she bought it. Defendants argued that she lacked standing to bring claims based on the 6x gelcap product because that was a different product, and that the 6x liquid product was more costly than competing gelcaps because of the liquid form and not because of the alleged misrepresentation. The court found that the dispute over how to measure the premium for defendants’ products was a dispute on the merits, not over standing. The “vast majority of persuasive authority” rejected defendants’ argument that she couldn’t bring claims based on the gelcap product: whether class representatives can bring claims on behalf of others with similar, though not identical, interests depends not on standing but on typicality and adequacy of representation.

Nor was the class uncertifiable because unnamed class members lacked standing. Defendants argued that establishing injury for each one would require a fact-intensive, individualized inquiry. Again, the “vast majority of persuasive authority” was to the contrary. The California UCL (and the CLRA and FAL) doesn’t require individualized proof of reliance and causation. Article III is satisfied if the plaintiff and class members suffer economic loss caused by the defendant, here caused by purchase of a misrepresented product. The Ninth Circuit has repeatedly held that there’s standing if at least one named plaintiff meets the requirements.

So, how about that Rule 23 analysis? Numerosity: during part of the class period, defendants shipped approximately 220,000 units of the liquid product, so no problem there. Typicality: plaintiff was typical of consumers exposed to the 6x claims, but not to consumers exposed to the claim that the product is "3X better absorbent." It might be true that the same evidence could show the falsity of both claims, but it could also be true that 6x is false and 3x is true, so the misrepresentation is not necessarily the same as to all potential class members. Defendants argued that plaintiff was atypical because she had reasons other than the 6x representation for purchasing. But a plaintiff’s individual experience with a product is irrelevant “where, as here, the injury under the UCL, FAL, and CLRA is established by an objective test,” here whether the product was marketed with material representations that were likely to mislead. Defendants also argued that plaintiff misread the claim, which was actually “up to 6X BETTER ABSORPTION." The “up to” was in fine print and didn’t work as a disclaimer.

Commonality: questions of law or fact were common to the 6x class. Defendants argued that some class members might lack any injury, but that’s not responsive to the issue. Again, California presumes deception from material misrepresentations that are likely to deceive. Adequacy: despite attacks on the plaintiff’s credibility, the court found her adequate as a class representation.

Rule 23(a) was satisfied, so the court turned to Rule 23(b)(3). Defendants again argued standing; the court didn’t consider this a useful argument. They also argued that the alleged misrepresentations weren’t material because sales increased after the statements were removed. This didn’t help because it went to the merits, not to predominance and superiority. The court found that the central question of whether the 6x claims were materially misleading predominated over any individual questions, since California law analyzes this question using a single, objective reasonable consumer standard, not a subjective test inquiring into each class member’s experience. A class action was also superior because it was the only practical way of litigating these otherwise small claims.

In its last rebuff to defendants, the court concluded that California law applied to the nationwide class. Application of the laws of a single state to a nationwide class requires consideration of due process. Due process is satisfied where a state has a "significant contact or significant aggregation of contacts to the claims asserted by each member of the plaintiff class, contacts creating state interests, in order to ensure that choice of [substantive state] law is not arbitrary or unfair." Phillips Petroleum Co. v.. Shutts, 472 U.S. 797, 818 (1985). This is a modest requirement designed to screen out state law only casually or slightly related to the litigation.

Defendants, the court found, had significant contact or at least a significant aggregation of contacts with California related to the claims in this case. They maintained corporate headquarters in California during the class period and sold approximately 30% of the allegedly misrepresented products in-state. Defendants argued that the products and marketing materials were produced outside of California, but they couldn’t “immunize themselves from California law simply by locating production of the allegedly offending materials outside the state, but continuing to sell those offending materials to large numbers of Californians.” Indeed, “courts in California routinely hold that applying California law to nationwide classes comports with the Due Process Clause.”

Given that due process was satisfied, defendants didn’t meet their burden to show that the law of another forum should apply. California choice of law analysis requires identification of true conflicts, which means that courts must ask whether there are material differences between different states’ laws on the facts of the case. Defendants, however, didn’t provide their own analysis of state laws, instead citing another court’s conclusion that there were material conflicts between California’s consumer protection laws and the laws of the other states. The court found that unpersuasive: in that case, the plaintiffs bore the burden of showing no conflict of law, but the burden was on the other side here. Defendants didn’t identify any specific state’s law as conflicting with California law, just cited other cases.

Monday, November 21, 2011

A compelling dispute

Stanley v. Bayer Healthcare LLC, 2011 WL 5569761 (S.D. Cal.)

Stanley purchased Phillips’ Colon Health Probiotic Caps (PCH) and sued for false advertising, alleging that Bayer’s advertising that PCH's unique combination of probiotic bacteria strains provides digestive benefits and improved immune health unavailable from other similar products is false. She sued for violations of the California CLRA and UCL, breach of express warranty and unjust enrichment.

Bayer sought discovery on various matters. Discovery can cover anything nonprivileged and relevant. The court granted Bayer’s motion to compel Stanley to respond to requests for production concerning her medical records and history, arguing that Stanley put her medical condition directly at issue by alleging that PCH didn’t deliver the promised health benefits. Stanley responded that the requests were overbroad and that she wasn’t claiming physical injury.

The court found physical injury wasn’t necessary to make the records relevant. Some of the records were relevant to Bayer’s argument that “an alternative explanation exists” for PCH’s alleged failure to provide health benefits. Thus, Stanley was ordered to produce medical records relating to gastrointestinal health, as well as medical records reflecting any questions or advice about probiotics; Bayer could also re-depose her on her medical history. This would all be covered by a protective order.

Bayer also prevailed in its request for production of the attorney retention/fee agreement in this case. Bayer argued that it was relevant to Stanley’s fitness to serve as class representative and the law firm’s fitness to serve as class counsel. The court reviewed it in camera and found nothing privileged, and thus ordered production (though it didn’t seem to find relevance/potential relevance explicitly).

Finally, the court also granted Bayer’s request to compel production of an unredacted Ralph’s grocery store receipt showing the purchase; Stanley initially produced a receipt redacted of every other purchase, arguing that the other purchases weren’t likely to lead to the discovery of admissible evidence. (When people say “do you really want to make a federal case out of this?” I wonder if this is what they’re thinking.) After reviewing the receipt in camera, the court found that the receipt didn’t contain any sensitive information, and “given Plaintiff's deposition testimony,” the court found the receipt to contain relevant information. (Now I’m curious as to what that was.)

Friday, November 18, 2011

Sugar is sugar, but false advertising is false advertising

Western Sugar Cooperative v. Archer-Daniels-Midland Co., 11-cv-03473-CBM (C.D. Cal. Oct. 21, 2011)

Late to this because it didn’t show up in Westclip. Table sugar producers sued producers of high fructose corn syrup (HCFS) and their trade association, the Corn Refiners Association, for false advertising under California and federal law based on a campaign to rebrand HCFS or corn syrup as “corn sugar.” CRA began a TV, print, and other media campaign, including, to make claims such as “HFCS is corn sugar,” “HFCS is natural,” and “sugar is sugar.” Plaintiffs alleged that, to the contrary, HFCS is a “man-made product” that does not “naturally occur,” distinct from table sugar extracted from cane and beets. Further, they alleged that HCFS is linked to the obesity epidemic and that its effect on the human body differs from that of table sugar. Moreover, they alleged that consumers and entities that make/provide food and beverages “are conscious of the difference between sugar and HFCS and are making business decisions based on that difference.” CRA filed a petition with the FDA seeking to change the name of HFCS to “corn sugar.”

CRA argued that it was engaged in an education campaign, not advertising, and that as a trade association it’s not in competition with the plaintiffs and doesn’t promote or sell any products or services. Nope. Statements can be related to a public health issue and still be advertising. Also, though CRA’s ads don’t explicitly say “buy” or “purchase” HFCS, “it is clear that the purpose of CRA’s statements is to promote HFCS to purchasers. As a trade organization made up of corn refiners, an economic motive exists, and the statements refer specifically to high fructose corn syrup.” Moreover, the allegations that CRA represents the interests of corn refiners were sufficient to establish competition with plaintiffs. CRA was engaging in commercial speech because it was advertising a specific product for an economic purpose–the economic gain of its members. CRA disputed that its goal was to sell goods (wow: that does not pass the laugh test), but the court found that this was a factual dispute that couldn’t be resolved on a motion to dismiss (but, one hopes, would be readily resolved on a motion for summary judgment!).

CRA argued that plaintiffs failed to plead that the statements (1) that HFCS is “natural”; (2) that “sugar is sugar” (referring to HCFS as sugar); and (3) that HFCS is “corn sugar” were false. The court disagreed. For (1), plaintiffs alleged that HCFS is is not “found in nature” and cannot simply be extracted from an ear or stalk of corn CRA argued that the FDA doesn’t define “natural” as plaintiffs did, but cited no authority holding that the FDA can conclusively determine naturalness. (Actually, the FDA has been reluctant to define natural at all.)

As for (2), statements equating HFCS with sugar (“sugar is sugar,” “HFCS is nutritionally the same as table sugar,” “your body can’t tell the difference,” and “HFCS is corn sugar”), CRA argued that the statements weren’t literally false. Though the chemical makeup of HFCS is different than table sugar, CRA said, the difference was not qualitatively significant. That determination’s not appropriate for a motion to dismiss.

As for HCFS being “corn sugar,” plaintiffs’ allegations that CRA’s use of this term to claim that HCFS is natural and that it’s equivalent to table sugar was false sufficiently stated a claim.

CRA also argued that plaintiffs failed to allege that consumers would be deceived. First, ads can be presumed deceptive if the falsity is deliberate, when a plaintiff can allege that the defendant has expended substantial funds in an effort to deceive consumers and influence their purchasing decisions. Plaintiffs alleged that the CRA has spent about $50 million on its advertising
campaign. That was sufficient.

CRA’s arguments on materiality were also unavailing. CRA contended that food and beverage buyers are too sophisticated to be confused by any potential deception in advertising. However, given alleged consumer concerns regarding the presence of HFCS in food products and food and beverage producers switching from HFCS to sugar with consumer preferences in mind, the court found the complaint sufficient.

CRA then challenged the allegations of likely injury. However, plaintiffs alleged that the $50 million campaign was aimed to “turn consumer sentiment around” on HFCS, injuring plaintiffs in the form of price erosion and lost profits. That was enough.

Given this result under the Lanham Act, plaintiffs’ California claims also survived.

The court, however, dismissed claims against the other defendants, corn refiners who were board members of the CRA. Plaintiffs argued that they’d pled that CRA was an agent of the other defendants: it represents their interests, the other defendants are CRA members, members financed the ad campaign, and that they use CRA as their agent to affect consumer sentiment. The court found these allegations conclusory, and insufficient to establish that the other defendants had the authority to control CRA as required to show an agency relationship. There were no false advertising allegations directly against the member defendants. Thus, the claims against them were dismissed.

In a footnote, the court dealt with defendants’ argument that plaintiffs failed to comply with Rule 9(b). Noting the split on whether 9(b) applies to false advertising claims, the court made the usual move of courts rejecting motions to dismiss and declared the 9(b) standard satisfied regardless.

Finally, CRA argued that the complaint should be stayed or dismissed pursuant to the primary jurisdiction doctrine, which covers issues within the special competence of a government agency. Courts consider: (1) the need to resolve an issue that (2) has been placed by Congress within the jurisdiction of an administrative body having regulatory authority (3) pursuant to a statute that subjects an industry or activity to a comprehensive regulatory authority that (4) requires expertise or uniformity in administration. CRA argued that its pending petition with the FDA seeking approval of the “corn sugar” name for corn syrup justified dismissal of the case. (The petition also necessarily requested an amendment to the standard of identity for a product already labeled as “corn sugar,” dextrose monohydrate.)

Plaintiffs responded that misappropriation of “corn sugar” wasn’t the centerpiece of their claims. Instead, they were challenging the totality of CRA’s advertising, which the FDA doesn’t have the authority to regulate. Some of the alleged falsehoods, including the statements that HFCS is “natural” or “equivalent to real sugar,” aren’t even covered by the petition.

The court found the primary jurisdiction doctrine was inapplicable to a challenge to an ad campaign. Resolution of the petition wouldn’t resolve the issues raised by the lawsuit, and the question of whether HCFS is just like table sugar isn’t something Congress allocated to the FDA. Moreover, evaluating whether defendants engaged in false advertising doesn’t require FDA expertise.

Catholic University of America, Third Annual Intellectual Property Roundtable

Sampling Patent to Remix Copyright: Tonya Evans, Assistant Professor, Widener University School of Law, Harrisburg Campus

Thesis: copyright should sample (borrow) doctrines from patents that encourage second comers, in order to remix (inform) copyright and better protect fair uses and the public domain. A second generation creator may need to use an original. Offset imbalance of overprotection that prevents access and fair uses.

1976 Act is largely intact, and ideology of independent creation is still king. Even our definitions of collective and joint works encompass notion of independent creation. Collective work: constituting separate works that are combined. Joint work is about collaborativeness, but each must give a separate copyrightable contribution. The erosion of the quid pro quo in which the public gets something back from the rights granted.

How do we restore balanced protection of uses without causing significant market harm?

Underlying assumptions: patent and other laws have more successfully protectred the second generation of innovators who build on, improve on, and in some cases reverse engineer tech. Patent anticipates second-generation creation.

Creativity has outgrown copyright: subject matter and creative process have changed; tech has outpaced copyright, which is standard in our history. Creative process: recognize user as creator, collaborative process. Particularly underrecognized: contributions of performers in performance arts. (I could not agree more!) Overprotection is a problem, as is misuse: abusing the monopoly, restricting access to uncopyrightable elements.

Law has responded with specialized legislation: limited digital reverse-engineering rights; trade secrets; SPCA; DMCA.

But that doesn’t deal with performance, sampling, visual collage, user-generated content.

The policies for incentives/access are the same in patent and copyright. But patent focuses more on disclosure and encouraging commercialization.

What’s in a name? Economist: Creativity is thinking up new things. Innovation is doing new things. But it’s all starting to blur together in subject matter and terminology. Wants more use of misuse, maybe “unfair use” as a separate concept limiting assertion of rights. Who will do this? Legislatures; judges; markets. Scholarly bias against commingling IP laws.

My commentary:

The paper as currently written suggests patent has worked better than copyright in the new digital world, because improvers’ rights are built into the system. (1) Not clear that patent folks think this is true, especially with devices incorporating potentially 100s of patents. Blocking patents are no good if all you want to do is practice (which is related to the fact that patent infringement doesn’t require copying and that independent invention is no defense). The usual scenario where there are complaints about patents is not reverse engineering. Might work better if claims were confined to copyright v. patent w/r/t software?

(2) See Barton Beebe on the concept of progress and how scientific progress is different from aesthetic progress in a possibly relevant way. We value second-comers’ improvements more in patent than we do in copyright; Evans suggests this is due to outdated concepts of the Romantic author. (Another possible explanation, which may be related: It is less obvious that claimants would actually use second-comers’ particular innovations for themselves in copyright, so it’s less clear that they’ve created something worthy from everyone’s/the copyright owner’s perspective—which may also be connected to ideas of progress. SAT case: copyright owners claimed they didn’t want to make a Seinfeld quiz game; Salinger didn’t. Courts even talk about moral/free speech rights to stay silent. By contrast, patent doesn’t recognize a moral interest in withholding the use, and isn’t all that keen on NPEs at the present moment.)

Side note on the death of the author: it’s complicated, as crediting Foucault for identifying this death evidences. The author-function retains its pull, and can be contrasted to the inventor-function. (In fact the term function suggests some opportunity for playful exploration of this in the context of computer programs, where as Evans points out copyright and patent have begun to converge. Mark McKenna on boundaries of IP would be a useful resource.)

If we’re talking about reverse engineering we have to talk about contract, maybe in the context of misuse but maybe also in the context of public policy in general.

Say more about reverse engineering in music—fascinating source of comparative insight. Especially to the extent that looking at what others did can spur creativity, suggest new paths. Compare to Van Gogh and others painting existing paintings—a kind of reverse engineering.

Tun-Jen Chiang: In tech field, we have more appreciation of the fact that everything’s cumulative, but patent law on the ground (as opposed to doctrine) is not necessarily responsive to that. Patent doesn’t have fair use; Federal Circuit just interpreted misuse to nothingness. Cumulative innovation happens in spite of patent law. Patent law still has the myth of the lone inventor, per Mark Lemley’s recent article.

Evans: may be able to look at patent law’s aspirations for guidance.

The Reciprocity of Search, Tun-Jen Chiang, Assistant Professor, George Mason University School of Law

Patent law confronts the problem of 5000 patents reading on the iPhone. Usually we think about search as: if you’re looking to make a product, we expect you to find every patent and negotiate ahead of time. Not just in patents, but in all property—usually regarded as the essence of property that, before someone gets to use your property, they negotiate access to it. (This is making me think again that we should fight for the unfair competition/tort characterization of patent and copyright.)

Assumed that the user has the obligation to find the property owner. He doesn’t see the reason for that assumption; it’s not intrinsic to the property right that an ex ante transaction needs to be initiated by the user. We could have the owner find the user. In real property, that would be inefficient because of the practically infinite number of potential users of a piece of land. As property owner, you have no particular advantage in figuring out whether there’s a higher-utility user of your property out there. But in patent, that’s not true. As between two parties, the question is who has the lower cost of finding the other. In many cases, not all, the patent holder has an easier time finding potential users, and thus the burden of search should be allocated to the patent owner.

He means ex ante, before infringement begins. Not intended to deal with user who hides use and thus conceals infringement. But can you really find potential users before they start to use? His answer: yes, there are big companies in many fields who are potential users and who you should approach if you have a relevant patent. It’s very hard to find the absolute last user, but those are fairly unlikely to become major users, and for the very reason that you can’t know of them ahead of time, they can’t figure into ex ante incentives to create all that much. (What should the rule be for them? If not same rule, heightened barriers to entry.) Gist: when patent owner is the lower-cost searcher, it should have duty of search. Duty should be implemented by saying that, if you didn’t conduct an ex ante search, you forfeit infringement damages. (Injunction?) Has an alternative proposal requiring either marking (and thus practicing/producing) or notifying the user—much easier to give notice that people will actually see if you have a commercial product.

commentary by Lawrence Sung, Professor and Director, Intellectual Property Law Program, University of Maryland School of Law

Many in industry would say that they don’t know of a patent until someone’s been sued. That serves as notice to be concerned. This arguably takes care of less sophisticated parties. Is transparency the problem for unsophisticated parties? You have an issued patent (claim interpretation issues aside) and then you have markets/actual practice. People who aren’t manufacturers may not know whether or not the products they’re selling embody patented technologies.

Chiang: tort law dominates his paper: cheapest cost avoider. Don’t know ahead of time who’s the cheaper cost avoider. Basic rule of contributory negligence: ex post, we deem whoever was the lower-cost avoider either negligent or contributorily negligent. Ex ante, you take what you deem to be reasonable precautions. Here, that would be to do a cost-justified search.

Beth Winston: many informal arrangements for big companies already exist—you do go to the big companies.

Chiang: true: many people take appropriate precautions even in the absence of tort rules, but tort rules can help increase conformity.

Sung: tougher sell with unsophisticated users on one side or another.

Chiang: The smaller producers are no less well off absolutely in my system (though they are positionally less well off), and if the system doesn’t break down they’re ok, but the system will predictably break down once in a while (when little succeeds and gets bigger). Small patentee: faces different constraints.

Poisoned Flowers (Finding Superman in Cyberspace), Thomas C. Folsom, Professor, Regent University School of Law

The end of a project. A coded world can build products to behave exactly as we want—can diminish transaction costs to nothing if we can code away the features of a product that are causing unintended side effects/harms. (What does he mean by transaction costs?)

Nature and place of use: coded world is an embodied switched network for moving information traffic or changing the state of a machine. Overlapping places: cyberspace, metaverse, virtual worlds, psiberspace, cipherspace, newsspace. Actively involved in information traffic. “I” am an augmented presence when listening to another on a phone. Increases vulnerability (may not know who you’re dealing with). Need trust. If we want the law to incentivize that, we might specify rules that enhance trust.

Some rules can be the same as those from ordinary space, like when I buy a shirt. Other rules can’t be, and if they require transposition we need to check for appropriateness. When we get new law entirely, we need to figure out what it is: what is trespass in a case when we run two digital instances of the same thing? What happens when your speech is performative: you say “friend” and you open up a new source of information. You say “Kansas” to Siri and something happens.

(I’m reminded of George Lakoff’s work on categories: a lot of times the new spaces require us to specify relationships we actually can’t—our categories are fuzzy and have cores and peripheries, but we haven’t been able to code that. Transposition is working, if at all, by changing the nature of what it is to have a “friend.”)

His project aims to code in ways to avoid TM infringement liability for attention: give users an option to say “actually I was looking for the official site.”

Thursday, November 17, 2011

What's wrong with this picture?

This is the cover of the Georgetown Law Journal, circa 1921. There's a little problem.Georgetown Law 1921 cover

(Hint: when was copyright acquired?) As a bonus, here's a blurry photo of my newest acquisition, a Gay Olympics T-shirt:
Gay Olympics T-shirt

CFP: UCLA Entertainment Law Review/Journal of Law & Tech. Symposium

From the editor:

The UCLA School of Law’s Entertainment Law Review (ELR) and Journal of Law and Technology (JOLT) are co-hosting their first annual Symposium on March 18, 2012 at the UCLA School of Law. The Journals are seeking submissions for the Symposium, which will focus on legal issues related to cloud computing. Papers may address any important aspect of the law and cloud computing, including privacy concerns, antitrust violations, and intellectual property and copyright claims.

ELR and JOLT are particularly interested in the current issues and concerns regarding cloud computing. Cloud computing is the use of software as a service, rather than as a product, whereby shared resources and information are provided to computers by third parties over a network. The concerns raised in regard to privacy issues center on the increased ability of companies hosting the cloud service to keep track of the information and data stored between the user and the host. Service providers will be capable of accessing and monitoring consumers’ habits with greater ease than ever before. Another concern is antitrust as cloud computing services will provide large companies with more power to resist competition. As of right now, it is unknown whether or not a consumer will be forced to exclusively consume particular products and services once that consumer selects a cloud service provider. Many companies may use cloud computing as a way of linking the cloud service to their individual products, thus reducing the ability of consumers to use competing products. Finally, there is the possibility that intellectual property laws may interfere with the success of cloud computing, and it remains to be seen how cloud computing will comply with copyright laws.


Papers (drafts): February 27, 2012
Please submit an Abstract by December 21, 2011 to with “Symposium Submission” in the subject line. Selected presenters will be notified by January 3, 2012, and will be asked to provide a polished draft of their Paper by February 27. Papers will be jointly published in the Summer 2012 issues of the Entertainment Law Review and the Journal of Law & Technology.

Intellectual Property Law in the Next Century

Taking Its Proper Rank: The Next 100 Years of Academic Scholarship at Georgetown Law

Mark McKenna: what does it mean to compete in IP? Does Pepsi compete with Coke? Seems obvious that they do (except for with me, since as Mark points out I accept no substitutes) given how they’re sold and their relative pricing. What competition means: They’re sufficiently close in the mkt under some sufficiently meaningful measure. So we need some way to measure closeness (utilitarian—price; Louis Vuitton and Gap handbags are not close on price) and when the closeness is sufficient.

Examples of problems: functionality in TM. Aesthetic functionality and even some mechanical functionality cases require courts to determine whether exclusive use of a feature would put competitors at a significant non-reputation related competitive disadvantage. The more broadly you define the market, the less necessary a feature will be. Example: Dippin’ Dots flash-frozen spherical ice cream, claims against another maker of flash-frozen spherical ice cream. Response: can’t compete in the flash-frozen ice cream business if denied access to shape and general colors. Dippin’ Dots says Frosty Bites is free to make its ice cream like anyone else does. Court rejects that: Frosty Bites want to compete in the flash-frozen ice cream market. This seems intuitively right, but how do you reach the determination that it’s a discrete market?

With patents lost profits cases: may need to know how patented good interacts with the other unpatented components. Has developed some degree of sophistication in identifying alternatives. Reasonable royalties: market definition is important because you have to identify alternatives that are close enough to serve as functional substitutes—the law here is much less developed/coherent than lost profits methodologies. Overall courts have no consistent methodology, which makes cases unpredictable and hard to argue. There probably is a best way to define markets, which we should do. Also, lack of definition allows significant and strategic inconsistency.

Courts/scholars are dismissive of ideas that IP rights create market power. Markets are broad and robust when it comes to the cost of IP rights, but narrow when it comes to awarding damages (courts assume there was no equally attractive substitute to the right you infringed).

Mark Lemley: When you start to apply antitrust tools in IP cases, really strange things start happening. Paradigm of last couple of decades: to define a market, ask what would happen if I had a small but significant nontransitory increase in price. Would people switch or stay? If they wouldn’t switch, then the two things aren’t really competing. However: even if you’re a monopolist, something constrains your price. A monopolist prices up to the point at which people would stop buying goods. Okay, so we need a reference price: could I raise my price 5% over marginal cost. If you start asking that in the context of IP, an astonishing array of IP rights have market power. Maybe Coke and Pepsi have some price constraints; brand loyalty may prevent switching—Rebecca Tushnet is not unique in being willing to pay $0.05 more for Coke.

Clorox sells at a significant margin over generic bleach, chemically identical. We know the answer to the question of whether Clorox could sell at a higher price over marginal cost, we know the answer is yes because it does. Likewise, people will not generally switch from J.K. Rowling to Stephen King in most cases, certainly not within anything close to marginal cost or fixed cost.

Even smaller brands suffer from this phenomenon. 2 bottles of organic green iced tea, Tazo and Honest Tea: 30% price differential, side by side on the shelf. Drugs: Advil has 70% price premium over gov’t-guaranteed identical ibuprofen sitting next to it on the shelf with a “compare to” sign. Under traditional analysis, then, these products do not compete with one another because there’s not sufficient price competition to constrain the price of the branded good.

For decades, we’ve talked about IP rights as not monopolies but really ordinary property rights creating boundaries. True that IP rights create boundaries and prevent substitution of the kind you’d ordinarily expect in a real antitrust case. If you raise your price, usually, other people may come in and compete with you. But people can’t come in and make Tazo iced tea: IP creates a barrier to entry insulating parties from price competition.

A lot of monopolists in the world? Monopolists are subject to significant legal constraints. Exclusive dealing/licensing arrangements turn out to be problematic if the company is a monopolist. Rule of reason analysis for exclusive licensing of publishing to one publisher: antitrust would presumptively condemn that.

Antitrust has dismantled limits on vertical restraints (exclusive territories). You can’t agree with competitors on prices, but if these things aren’t in the same market, then there’s no problem with companies agreeing on what they’ll do.

We have a digital rule (in or out) for an analog rule. Even if we abandoned marginal cost for fixed cost, we’d still find many cases of IP conferring price power significantly in excess of fixed cost.

We used to know there was a significant conflict between antitrust and IP, but then we’ve been saying that they both serve long-term dynamic competition. We should question that for antitrust and look at implications for IP: conferring rights often means conferring market power.

McKenna: The point of an IP right is to force people to use imperfect substitutes or pay your extra price. Some IP rights are better than others at this. One takeaway: this is just a reminder that something we’ve been trained to dismiss is true: IP rights have costs. They aren’t just speech costs or access costs, though those are real; they’re competitive costs. How to deal with that: a bigger question, bound up with how persuaded one is for IP justifications in the first place. If we want better substitutions, for example, we could cut back on the scope of substantial similarity in copyright and even on the derivative works rights—might be better substitutes than the next available substitute even though they are often also complements. Patents: might want to limit scope of claims. TM: pay more attention to mark similarity—get closer to draw on some of that power. Basis to criticize sponsorship/affiliation and dilution, where what’s driving decisions is brand meaning or value. Across all IP, strongest implication: robust first sale doctrine. Second-hand products may be better substitutes than the originals of another product.

Lemley: Broader sweep of history: both antitrust and IP, alone and in combination, have been cyclical throughout history—fear of dangerous monopolies gives us strong antitrust and weak IP, then we get desire for innovation and idea that we don’t need to worry much about monopolies. We’re in a strong IP/weak antitrust point, maybe starting to move in the opposite direction. In the 1930s and 40s it was common to speak of patents and TMs conferring market power. Question: can we smooth out the cycles?

Deven Desai: This is a call to limit IP before it blows up. Build better boundaries between what IP covers and what’s beyond its reach. Market definition reminds us that abstractions and line-drawing play major roles in figuring out what law will do. Open our minds to the unstated forces driving IP to see if that’s really working.

Focusing on markets may leave too much on the table. Proposed solutions: enhance substitutes—do they really do that? Enhancing comparative advertising might do so. But divergence between analysis and solutions suggests the real issue is reducing the scope of IP. How much market power is sufficient? Even if we limit rights, we’ll still have problems defining substitutes.

[apologies that I had to leave for class at this point]

Since I'm about to teach SFAA v. USOC

How does this episode of America's Next Top Model fare under the law protecting the USOC? Note that the law specifically covers using the protected terms for a "competition."

Wednesday, November 16, 2011

NYT on greenwashing

Blog post on the Greenwashing Index, with included video.

Organization for Transformative Works elections

If you're a member (and I hope you are!), the OTW is having an election. If you're eligible to vote, you should have received an email; there is more information at the elections post.

I strongly hope to see Naomi Novik--a wonderful public face for transformative fanworks, as well as a great coder and fundraiser and all-around pleasure to work with--return to the board, and I also hope to welcome Betsy Rosenblatt, who's been working with me on the OTW's legal committee and who would be a great asset to the Board both as a committed lawyer and an experienced manager of volunteers.

And if you're not a member now, please consider donating to help support and sustain our projects keeping spaces for noncommercial transformative uses available, and/or volunteering (volunteer intake is suspended during the election/transition, but we do need people!).

mmmm, litigious: Nutella class action survives motion to dismiss

In re Ferrero Litigation, 2011 WL 5438979 (S.D. Cal.)

Plaintiffs alleged that Ferrero misleadingly promoted its Nutella spread as healthy and beneficial to children when in fact it contains dangerous levels of fat and sugar, in violation of the UCL, FAL, and CLRA, as well as in breach of express warranty and implied warranty of merchantability. Ferrero argued that plaintiffs lacked standing for claims based on statements on Nutella’s website, to which plaintiffs responded that they were exposed to a long-term ad campaign. Actual reliance is required for the representative plaintiffs, but they don’t need to demonstrate individualized reliance on specific misrepresentations when a long-term ad campaign is at issue. Ferrero argued that its campaign wasn’t long-term, because it only began nationwide TV commercials in 2009, and that plaintiffs hadn’t visited the Nutella website. The parties disagreed as to the duration of the campaign and whether the named plaintiff visited the website. These might raise valid issues for a motion for summary judgment or class certification, but not for a motion to dismiss. Plaintiffs identified a 10-year class period, along with specific statements on Nutella’s labeling, website, TV ads, word-of-mouth marketing, and product categorization. They specifically alleged exposure to a long-term ad campaign and reliance thereon. By identifying specific statements from the ad campaign and how those statements are deceptive, along with the duration of the campaign, plaintiffs satisfied Rule 9(b).

Ferrero attempted to distinguish Tobacco II because, “unlike in that case, here it is not unrealistic for the Plaintiffs to plead and prove actual reliance on the specific statements that influenced their purchasing decision.” Except that Ferrero cited no law that such a distinction made a difference. Tobacco II says that, for long-term ad campaigns, a plaintiff isn’t required to plead reliance on particular ads or statements with an unrealistic degree of specificity.

broken promises and broken bones

BSN Medical, Inc. v. Parker Medical Associates LLC, 2011 WL 5509030 (W.D.N.C.)

NB: There is a lot going on in this case other than the false advertising claims, and I’m mostly ignoring the other claims. The core of this case is that BSN alleged that Bruce Parker, inventor of Ortho-Glass (fiberglass used for casts and splints), and his company PMA had taken BSN’s trade secrets, which BSN acquired through transactions with Parker’s companies involving various noncompete and confidentiality agreements. BSN also sued for copyright infringement and state and federal false advertising, as well as other state-law claims. Defendants counterclaimed for state and federal false advertising.

BSN’s false advertising claim centered around defendants’ alleged false marketing of their product as the “original” Ortho-Glass, causing confusion. (Sounds like a possible job for Dastar!) BSN argued that PMA claimed repeatedly to third parties that its products are "the new Ortho-Glass," "identical to Ortho-Glass," "the original Ortho-Glass," "reintroducing the original product," that PMA's products are "what amounts to the same thing as the original Ortho-Glass product," except for the "color of the ink and the name on the box," and that PMA’s EZY Splint was "identical to Ortho-Glass" except for its place of manufacture, its dispenser system, and the cost savings. BSN argued that consumers were confused and that this constituted trading on BSN’s goodwill and reputation and that it lost numerous clients to PMA.

Parker testified that PMA’s new product is not identical to Ortho-Glass, and BSN argued that this proved literal falsity. In any event, BSN argued that the claims were misleading.

PMA argued that the vast majority of statements identified by BSN were inadmissible hearsay, made by independent contractors or distributors, or not made to customers. Only two statements went to any customers that BSN identified as having received false statements. One, an email sent from PMA’s national sales manager, said “Bruce Parker was the inventor and original patent holder of the 7 layer splinting products your members have used years ago. Over the past few years though, Parker Medical has made some changes that customers have mentioned as positive. For example, some have noticed an improved clip and are impressed with our patent pending dispenser system--further improving Parker Splint's cost effectiveness potential. There are also some in-house changes with our original 7-layer design that only a chemist can explain.” This email was also sent after the customer had decided to go with PMA instead of BSN.

The second was a letter sent to the Methodist Healthcare System in Dallas, Texas: “Parker Medical was formed over 17 years ago. Its founder, Bruce Parker, was the original patent holder on Ortho-Glass and after several years of rapid growth and making that brand the market leader in roll form splints, sold to Smith & Nephew. Eighteen months ago that patent expired and Parker Medical re-entered the market place. It is our proven manufacturing and technology expertise, in the same manufacturing facility that easily met the demands of a number of major hospital systems and purchasing organizations, which allows us to economically re-introduce the original product to the healthcare market now.”

PMA argued that “reintroducing the original product” was true in that PMA sold a seven-layer splint like the original Ortho-Glass, whereas BSN has switched to a single-layer product. Indeed, BSN’s director of US marketing said in an email to high-level BSN employees that PMA’s product was "the exact same product" as Ortho-Glass.

The court denied PMA’s motion for summary judgment. The statements could have confused consumers into believing that the PMA products were the same as BSN’s Ortho-Glass. Hearsay objections could be dealt with at trial, and there were at least some admissible statements at issue. (The court also noted a conflict between PMA’s stance on the trade secret claim and its position on the false advertising claim: for purposes of the trade secret claim, PMA argued that its products were not made using the Ortho-Glass process and were not even derived from Ortho-Glass. “This is yet another reason for allowing plaintiff's Lanham Act claim to survive summary judgment, as defendants will need to take one position or another before a jury responsible for fleshing out the Lanham Act and trade secret appropriation claims.”)

Its copyright claim was based on the Ortho-Glass Splinting Manual (2d ed.), a training booklet provided to customers, which had been condensed into a pocket chart (a derivative work). This claim foundered, somewhat unusually, on joint authorship: a product manager led the creation of the manual, and collaborated with two other people, including a freelance graphic designer, on the work. The graphic designer contributed all the graphics and illustrations and did the layout; she testified that she had final say on layout. Though she wasn’t given credit, the court found that this was not dispositive. She contributed copyrightable material and the parties intended their contributions to be merged into an inseparable whole. Thus, she was a joint author and capable of granting a nonexclusive license to defendants, which she did implicitly when they hired her to create their own pocket chart. Thus, as the court explains it, defendants apparently created a work that was substantially similar to a derivative work created by BSN’s predecessor, but the copyright in that derivative work wasn’t registered (too bad for plaintiffs, because if it had been, the license to use the original wouldn’t have helped unless the substantial similarities derived only from similarity to the original, which doesn’t seem to be the case on the facts recited).

PMA’s counterclaims focused on an alleged anti-PMA campaign by BSN, where BSN claimed that PMA’s seven-layer splints were subject to delamination and wrinkling. (E.g., in an email to a company that had switched from BSN to PMA, “Ortho-Glass is a wrinkle-free splint material vs. the 7-layer Parker splint, which wrinkles very easily (causing pressure points) and has delamination issues (causing the splint to breakdown)”; and an illustration in its catalog comparing the two and labeling the 7-layer image with "more delamination," "more layers," "more wrinkles," and "more worries.") BSN replied that it only told the truth, though its director of quality management admitted that it had never had a customer complaint about delamination or wrinkling for decades. Likewise, its senior marketing manager conducted tests on PMA’s products and testified that he was not aware of any such issues. Indeed, he testified that the claims were neither fair nor true, and even the person who said them admitted in deposition that they weren’t true.

PMA also argued that BSN attempted to thwart competition by telling PMA’s potential customers that the parties were involved in a lawsuit, which would result in PMA’s inability to supply product, and that PMA would be out of business within a year.

BSN argued that its statements weren’t made in commercial advertising or promotion. As to the email, BSN argued that it wasn’t made to influence the company to buy BSN’s products because the company had already decided to buy PMA’s products based on price, and because it was made to an educator, not to someone making a purchasing decision. Plus, it was just to one individual.

BSN also argued that internal documents used to convey information to its sales force and Powerpoints used in presentations to healthcare collaboratives weren’t actionable, the former because they weren’t disseminated to purchasers and the latter because they were used to negotiate prices, not to make a sale. (You almost have to admire the lawyer’s ability to make that last argument with a straight face.)

Then BSN argued that the individual’s statements in the email were based on her personal observation and that the catalog illustrations were mere puffery. (Again, wow.) Anyway, BSN argued that its tests have indicated that there is more wrinkling and delimination in seven-layer splints than in single-layer ones.

The court denied BSN’s motion for partial summary judgment. At least some of these statements constituted commercial speech, including statements in the catalog and statements made to potential customers, including oral statements made by sales reps. Plus there was a genuine issue of material fact on literal falsity.

The one caveat, made on the state-law claim, was that PMA didn’t show that the filing of the lawsuit was itself an unfair and deceptive trade practice, even though BSN’s SWOT analyis (strengths, weaknesses, opportunities and threats—I remember those!) listed PMA as a threat and “Slow/disable new OG competitors through lawsuit” as an opportunity. PMA argued that BSN sued solely to interfere with PMA’s business, burying PMA in discovery and motion practice. The court found, however, that BSN had a reasonable basis for suing.

The last rejected argument: Both parties argued that the other failed to present sufficient evidence of damages to survive summary judgment. Here, though, the court followed precedents that, once the elements of a cause of action are established, a plaintiff is entitled to recover at least nominal damages. The court was satisfied that, if either party were to prevail, it could prove at least nominal damages.

Tuesday, November 15, 2011

Odd facts, bad law?

Another case about the folly of an incompletely specified agreement between an advertiser and its website maintainer.

Sam's Riverside, Inc. v. Intercon Solutions, Inc., 790 F.Supp. 2d 965 (S.D. Iowa)

Sam’s Riverside sells heavy duty truck parts and air cleaners. Bryan Hainline is a Sam’s employee.

Intercon, a web marketing business that doesn’t sell or repair trucks or air cleaners, is owned by Howard Gossage and Brian Brundage. ARSCO, owned by Gossage, sells truck parts mainly to rebuilders, but it doesn’t sell trucks, repair trucks, or keep trucks on-site.

In 2001, Brundage and Hainline agreed that Intercon would develop and maintain several websites to help Sam’s. Brundage registered,, and, and created websites for them. The sites, for reasons passing understanding, contained Sam’s contact information, but didn’t link directly to Sam’s existing website, Instead, they had an email link using an address managed by Intercon. Emails were supposed to be sent to Sam’s, but on two occasions between 2001-2004 they were sent to ARSCO instead.

In 2004, Hainline terminated the relationship, though there was a dispute about what the parties said about future use of the domain names and websites. Brundage claimed that Hainline told him that Intercon could keep the sites, and Hainline testified that he told Brundage to shut them down. At that point, Brundage told Intercon’s staff to remove references to Sam’s (whether this actually occurred was disputed), but continued to use the sites to obtain leads, some of which were forwarded to ARSCO, and this may have resulted in some sales. In fall 2008, Sam’s discovered that the sites were still in use. Sam’s sent a C&D, after which Brundage shut down the sites. Unwilling to take this as a victory, Sam’s sued.

Sam’s claimed that, prior to 2001, it established protectable rights in “Sam’s Riverside.” The court noted a dispute over the admissibility of Internet Archive evidence, but determined that Sam’s failed to show that it had protectable rights in the phrase “Sam’s Riverside,” standing alone, prior to the commencement of the alleged infringement. (This seems a bit hinky, given that the “standing alone” part apparently refers to descriptive terms usually used along with the Sam’s name, which I wouldn’t think made a difference to the acquisition of secondary meaning.) There went the §43(a)(1)(A) claim.

Sam’s also brought a false advertising claim. The websites at issue emphasized that Sam’s was a truck dealer with a huge selection of trucks, and Sam’s argued that, after it terminated its relationship with Intercon, Intercon left the claims on the websites just the same. Thus, Sam’s argued, defendants made literally false claims that they dealt in/sold trucks and had trucks onsite.

For some reason, this is the rare recent Lanham Act false advertising case that doesn’t talk about standing.

Sam’s argued that it was entitled to a presumption of consumer deception from literal falsity. The court disagreed. (Another weirdness, albeit based on EFCO Corp. v. Symons Corp., 219 F.3d 734 (8th Cir. 2000), a case holding that it was not error to refuse to instruct a jury to presume deception from literal falsity. The whole point of the literal/implicit falsity divide is whether the plaintiff also has to show that consumers are fooled. Why, if there’s no presumption of deception for literally false claims, does the doctrine divide false from misleading claims? EFCO actually said that "when an advertisement is literally false (as opposed to implicitly deceptive), the plaintiff need not prove that any of its consumers were actually persuaded by the advertising," but the court here said that EFCO was talking about presuming that plaintiff’s damages were causally related to defendant’s misconduct, not the separate element of whether consumers were deceived. Hunh? Also EFCO was different, the court said, because it involved comparative advertising.) The court also expressed doubt that the claims remained on the website after 2004 and that they were literally false, in that the court doubted that a reasonable consumer would perceive the statements to be claims about defendants’ goods or services.

Sam’s argued that it had showed actual deception, but it relied on a single email to defendants looking for a particular Sam’s truck. The court found no evidence that the email was causally related to the allegedly false statements. Anyway, one consumer wasn’t enough.

Also, even if Sam’s had shown a genuine issue on consumer deception, it would have failed on materiality. Brundage explained in deposition that he added the challenged statements to the website on Sam’s behalf (to help it sell), but Brundage wasn’t an expert on marketing or otherwise qualified to opine on the issue of consumer perception. There was no other relevant evidence of materiality.

Sam’s also claimed “per se palming off” based on Intercon’s use of a photo of certain air cleaners on one of the websites at issue and on a separate website. Sam’s alleged that the photo depicts an air cleaner made exclusively for Sam’s, and thus Intercon falsely claimed to be able to sell that air cleaner. However, Sam’s didn’t argue that Intercon actually sells air cleaners, or any goods at all. Instead, Sam’s argued that Intercon forwarded sales leads from that site to Sam’s direct competitor Fleet. But diverting sales leads isn’t the same as selling goods under false pretenses. (It isn’t? What happened to bait and switch? This case just seems to have gone off on weird tangents.) More importantly, Sam’s didn’t show that Fleet ever actually sold air cleaners to any customers who came to Fleet via the websites, let alone that Fleet claimed to sell the exclusive air cleaners. And Sam’s didn’t show that Fleet was in an agency relationship with Intercon.

Monday, November 14, 2011

Literally false images get another airing

Aviva Sports, Inc. v. Fingerhut Direct Marketing, Inc., 2011 WL 5395975 (D. Minn.)

Another day, another opinion in this case. Aviva makes fixed-air inflatable water slides and pools (this means they’re inflated and then plugged). Manley also makes fixed-air products, as well as constant-air products which require continuous inflation through the use of an air compressor; these are generally larger and more expensive. Aviva created a prototype of a constant-air slide, but Target allegedly told it not to pursue the product because Manley already “owned” the market. Target also stopped selling Aviva’s inflatable pools and slides. Shoremaster acquired Aviva, resulting in significant internal changes, including a number of lost employees. Aviva’s sales declined over the next few years.

Aviva sued Manley and four retailers for alleged patent infringement (stayed pending reexamination, which resulted in a rejection of some claims, which is on appeal) as well as violations of the Lanham Act and Minnesota UDTPA. Aviva alleged that ads and/or packages for 95 Manley products contain false representations, superimposing scaled-down images of children onto images of Manley products to make them look bigger. See, e.g., reviews at Sears or this review with helpful contrast between the Manley picture and the reviewer’s picture. Manley product imagereviewer's product image showing smaller productIn addition, Manley allegedly used larger, custom-made products for its photo shoots, rather than the actual products being advertised.

On Manley’s motion for summary judgment, the court treated the UDTPA and Lanham Act claims the same. Manley argued that Aviva lacked evidence on at least one element for each of the 95 products, and proof as to one ad isn’t proof as to any other. The court agreed that each ad needed to be proved false, but thought that evidence about one ad could also work as evidence about other ads when the ads and the products are similar. “To find otherwise would completely ignore the role of circumstantial evidence.”

However, Aviva had no standing to contest Manley’s advertising for its 32 constant-air products because it didn’t show that its products competed with constant-air products. Aviva argued that its failure to enter the constant-air market was Manley’s fault, but Aviva didn’t provide evidence of what its reputation was or could have been without the false advertising, nor that Manley’s alleged category ownership was the result of false advertising.

Turning to the fixed-air products: visual images may be literally false. The court here found the question of literal falsity best left to the jury. Aviva presented the testimony of two individuals involved in the design and creation of Manley’s packaging and ads. One testified that the products used for photo shoots were custom-made items that were roughly twenty percent larger than the actual product being sold. Moreover, she was instructed to miniaturize the children in the images to make the products look larger for "[a]lmost every package." Another senior packaging designer declared that "all of the design team, myself included were specifically directed to misrepresent the size of every Banzai product in its product packaging and advertising, as well as most other Manley Toys product lines." He also stated that "the actual products photographed for the Banzai advertisements and product packaging are custom made, and are 25% larger than those actually sold in the packaging…. [T]he children depicted in the Banzai advertising are then photoshopped into the photographs, and reduced in size to make the Banzai product appear even larger." Manley disputed whether these people worked directly for Manley, but since intent isn’t required, that didn’t matter.

Manley argued that reasonable jurors couldn’t find false advertising before 2007, when these people weren’t yet involved in Manley’s ads. Moreover, Manley argued, neither one testified as to the specific 95 products at issue. The court was unpersuaded: a jury could infer that the images of the 95 products at issue were altered enough to be literally false, and that such practices existed prior to 2007, especially if the jury finds the ads similar across time.

Aviva also offered an expert witness who physically examined 26 Manley products and analyzed the images of 36 additional products. He concluded that "many of the Manley Toys product packages misrepresent the size of the products contained in the box by shrinking the children, relative to the products, who are shown in the promotional images." Further, "the magnitude of the differential scaling between the children and the products is such that young children (ages 5-10 years old) are often portrayed to be the size of toddlers or babies."

Expert testimony was not necessarily required for the remaining products, when common sense would suffice. The jury could reasonably conclude that “at the very least, those product advertisements are literally false.” Moreover, it could compare the images of other products to products Aviva did analyze to assess their similarity and thus the falsity of the ads for the other products.

Manley argued that evidence that the images alone were false was insufficient for a jury to conclude that the ads taken as a whole were false. The court disagreed. Context matters, but a jury could reasonably conclude “that if the images misrepresent the size of the product, then the advertisement as a whole is literally false.” (Indeed, I’m hard pressed to see how a jury could conclude otherwise. Perhaps having lost earlier motions, Aviva was leery of moving for summary judgment on liability. But so far I’m not seeing Manley’s case for non-falsity.)

If a jury found literal falsity, Aviva would be entitled to a presumption of consumer deception. As to materiality, Aviva presented two consumer depositions testifying that the product images affected their purchasing decisions. Manley argued that the testimony of one consumer per product was insufficient. The court found this argument meritless, under the circumstances. (This may be a litigation deathmatch, but if I were Manley’s attorneys I’d be thinking hard about settlement. What is a jury going to think about these pictures?)

Aviva [I think the court misidentified the source] submitted an expert report from Hal Poret, who conducted a consumer survey. One cell was shown the actual image and description of a Manley product as it appears in the ads and packaging. The other was shown an allegedly “accurate” image, and the same description. Both cells were shown images and descriptions of three other products, including an Aviva product. Participants then ranked the products and explained their reasons. In the group shown the ad, 69% would have selected the Manley product as their first choice and 10% would have selected the Aviva product as their first choice. In the group shown the allegedly "accurate" image, 25% would have selected the Manley product as their first choice and 28% would have selected the Aviva product as their first choice. The court found this testimony relevant and reliable circumstantial evidence of materiality with respect to the other Manley products.

As to injury and causation, Aviva’s burden depended on the type of relief it was seeking—injunctive relief, defendant’s profits, and plaintiff’s damages (also costs). Injunctive relief requires proof of likely injury and a causal link between the injury and defendant’s conduct, but not proof of specific damage. Because the Lanham Act protects consumers as well as competitors, courts shouldn’t be reluctant to grant injunctions to allow competitors to act as vicarious avengers of consumer rights. Poret’s study was evidence of likely injury causally related to the allegedly false advertising; that was enough for an injunction.

For money damages, plaintiffs have to prove actual damages causally linked to the false advertising, and damages must be awarded as compensation, not penalty. The difficulty of proving exact damages, combined with the necessity of showing record support for damages, means that the plaintiff must prove the fact of damage with certainty but not the amount. Aviva argued that the erosion of its revenues when Manley entered the inflatable market, plus Manley’s revenue growth, provided evidence of damages, as did the loss of Target as a client while Target continued to sell Manley products. However, in a noncomparative advertising case, evidence of plaintiff's decreased sales, defendant's increased sales, and plaintiff's loss of sales to the defendant may not sufficiently prove causation without a link to the specific false claims challenged.

Aviva also compared its increased sales of other products in similar markets to declining sales of inflatable pool and water products. The court found that this comparison did not prove that the difference was caused by Manley’s false advertising. Other factors such as competition from other sellers and Manley's greater physical presence on retailers' shelves or attractive licensing agreements may have made the difference. A jury would have to make too great an analytical leap to find that Aviva’s losses were caused by false advertising.

Why couldn’t the jury be aided by Poret’s study? It examined only one Manley product and one Aviva product, and was admittedly "not designed to quantify the number of sales gained or lost due to use of the Enlarged Image on Banzai products or to quantify damages due to use of the Enlarged Image." (Okay, but that’s quantification, not the basic fact of harm causation, which I thought was the point.) Still, the court found that it didn’t meet the heightened evidentiary requirements for recovering monetary damages. Comment: Manley succeeded here where it didn’t elsewhere, breaking down each item of proof and arguing that, on its own, that item was insufficient.

What about disgorgement of profits? This has to be compensatory, but doesn’t require a finding of actual damages. Courts in the Eighth Circuit are divided about whether willfulness is required for disgorgement, and the court here found that the 1999 amendment to the Lanham Act made clear that willfulness is not required, though it is a factor to be considered. For false advertising, a plaintiff must establish defendant’s sales of the products at issues, and the defendant bears the burden of showing deductions, including sales not due to false advertising, just as with infringement. Nothing in the Lanham Act suggests that the rules should be different for trademark infringement and false advertising.

The court found that Aviva could make out a case for disgorgement. It had sufficient evidence of likely damage, and of Manley’s sales and profits from the products at issue.

Manley also moved to exclude the testimony of Aviva’s experts, and Aviva did the same with Manley’s rebuttal experts. This led to more detail about Poret’s study: 60% of the respondents who saw the actual ad who chose Manley as their first choice cited size as a reason for their choice. In the altered image group, only 45% gave size as a reason for choosing the Manley product first. Among those who chose the Aviva product as their first choice, size was a reason for 47% in the actual ad group, whereas 81% cited size in the altered image group.

Manley argued that the study was not relevant because Poret didn’t test consumer perception of any Manley ad taken as a whole. The court disagreed. “The information accompanying the images included descriptions of the products, dimensions, and price--the same information a consumer would see when viewing the product on a website (minus the consumer comments, ratings, and consumer-posted images).” Manley argued that Poret should have showed participants entire packages or full internet ads, but Poret explained that this would have been infeasible (there was no way to create a good control group with a non-manipulated image) and unreliable (because actual internet ads include customer comments, which distort responses to the ads). Manley didn’t identify any critical omissions, and anyway expert testimony on the image alone would be relevant to a jury’s determination of literal falsity.

Manley also argued that Poret’s testimony was irrelevant because he used information from the internet, when Manley’s products are primarily sold in stores. “Poret's study was designed only to demonstrate the effect that the product image had on consumer decisions. Whether the consumers saw the image in the store or on a website does not affect the relevance Poret's study or conclusions.” At most, this went to weight and credibility, not admissibility.

Manley then challenged the survey’s reliability, first arguing that Poret was wrong to take the altered image as an accurate depiction of Manley’s product, because he didn’t create the image himself or know how it was created. All he did was “eyeball” it in comparison to unspecified photos on the internet. The court found that Poret’s assumption that the “accurate image” was at least more accurate than the Manley image was not fundamentally unsupported. Aviva’s experts explained how they created that image, using known anthropometric data and basic mathematical formulas. Poret’s eyeball test was also some evidence that his assumption was warranted. “Perhaps most tellingly, Manley has not presented any evidence that the ‘Accurate Image’ was anything other than accurate, at least with respect to the size of the product.” (Again I think that the smart money is that Manley should consider writing a check. And consulting its advertising injury coverage.)

Manley then identified six additional variables between the two images: the actual size of the image, the number of children using the product, the number of children actively engaged with the product, the background and landscaping, the coloring of the product, and the image of a girl whose feet were apparently chopped off. Poret didn’t think these differences were important, and Manley argued that he couldn’t know that for sure. The court found these criticisms relevant to weight, not reliability.

Next, the court rejected Manley’s argument that Poret failed to consider other factors, such as product features, colors, and prices, affected consumers. To the contrary, Poret acknowledged that these features mattered. “He did not opine that size was the only factor responsible for consumers' purchasing decisions; he merely concluded that size was the only factor responsible for the difference in purchasing decisions between the Control Group and the Test Group.” By keeping the descriptions constant, he focused on the effect of apparent product size. The Lanham Act doesn’t require the falsehood to be the only factor consumers care about. “The fact that there was a difference between the product choices among the two groups, when the only variable changed was the image of Manley's product, is reliable evidence that consumer decisions were materially affected by the image, regardless of the other factors.”

Manley then argued that Poret’s testimony was unreliable because he didn’t compute an error rate. Poret explained that, for a non-probability study, an error rate is inappropriate. Manley’s rebuttal expert testified that it could have been computed, but not that it should have been, given the type of study. Moreover, the methodology was reliable: “Manley identified no problems with Poret's sampling plan, shopping mall selections, respondent selection, interviewing process, check-in procedures, or interviewing period.” This was a randomized double-blind study of 303 participants, asking appropriate questions.

Aviva also offered the testimony of Dr. Michael Houston, an expert in consumer behavior and marketing whose research has focused on the impact of visual components on consumers. He opined on the deceptiveness of Manley’s ads and the resulting improvement in Manley’s market position compared to Aviva, as well as on the effect of dissatisfaction with Manley’s products on trust in the entire product category. The court agreed that there were “serious concerns” about the factual basis for Houston’s opinions, because he kept no record of the products he viewed, the websites he visited, or the number of consumer comments he read and was unable to reconstruct them in deposition. “This lack of factual detail and documentation is concerning, to say the least.”

Houston drew broad conclusions based only on the two consumer depositions and various online complaints, but he didn’t know what the people who didn’t complain thought or what fraction of sales the complainers represented. By Manley’s calculations, the gripers constituted less than 0.008% of the volume of sales of the ninety-five products. (I should note that the black-letter law is that complaining is difficult and most people don’t bother, so even a few complaints can be evidence of a deeper problem. Perhaps the internet is changing this some, but most people still can’t be bothered.)

“Houston had no factual basis for forming conclusions related to non-complaining consumers.” He couldn’t know that, as he testified, many other consumers would have reacted the same way, or how many would have done so. (Why isn’t his general expertise on the effects of visuals relevant here? I should note that the deposition portions quoted sound like he was pretty vague in his responses, but this seems like a preparation problem rather than something inherent in this kind of testimony.) He also failed to account for other factors relevant to consumers’ purchasing decisions, such as price and availability (that is, Manley’s better distribution system). He also didn’t know enough about the parties, and other competitors, to testify that Manley’s market position let it harm Aviva. Moreover, in terms of consumers being driven away from the product class, he testified that dissatisfaction with quality was more likely to drive consumers away and that consumers were also dissatisfied with the quality of Manley’s product, not just with the size.

In the end, “[w]hile sometimes ‘observations and highly specialized expertise may suffice to form the basis of an expert opinion,’” Houston failed to "explain how that experience leads to the conclusion reached, why that experience is a sufficient basis for the opinion, and how that experience is reliably applied to the facts." After his specific conclusions were excluded, all that was left was “essentially an academic lecture about the importance of visual information in marketing--that ‘[a] picture is an effective way to convey product information.’” This was a matter well within the knowledge or experience of lay people and thus superfluous. (As I argue in a forthcoming piece, ordinary people are actually quite unaware of just how much pictures influence them. Again, this testimony might have been badly configured, but I can see how expert testimony in this vein would have offered the jury something it didn’t know.) His testimony was excluded.

Aviva also offered the testimony of Dr. David Krauss, an expert in human perception and the science of measuring sizes and ratios in the human body, "to provide a scientific analysis of various Manley Toys products and packaging to determine whether the images that appear on product packaging misrepresent the actual product sizes." Krauss physically examined 26 Manley products and analyzed product packages for 36 more. For the 26, he measured the dimensions of the products as they appeared on the packaging and then their actual dimensions. He then used that scale factor to figure out whether the children were appropriately scaled. He did that by measuring the visible body dimensions of the children on the packages and comparing the extrapolated size of the child to the average size of a child of the estimated age. To deal with variability, he used the lowest 5th percentile (so that 95% of the relevant population would be larger), and then added further wiggle room to reduce the effect of measurement errors. He did similar things with the 36 products for which he only had pictures, using other similar products to get dimensions.

He concluded that 74% of the packages misrepresented product size by shrinking the children relative to the products. Young children (5-10 years) were often shown toddler- or baby-sized. Manley argued that Krauss wasn’t qualified because he’d never used this approach to determine whether ad images were distorted. The court was unimpressed. Krauss used similar methods in all his work, and had specialized knowledge in applying these principles and methods to image analysis. Specialized knowledge in advertising or marketing was not required.

Manley also challenged the reliability of Krauss’s investigation because his methods had never been used before in a false advertising case and because his cutoff for a misrepresented image was arbitrary and not generally accepted in the scientific community. Moreover, Manley argued that he made too many judgment calls, had too small a sample size, and didn’t use a double-blind procedure, among other things. Nope, said the court: “Krauss's study basically involved measuring images of children and products on a box, measuring the actual products, and then, using basic arithmetic, determining what the actual size of the children would be if placed next to the actual products. Krauss then determined whether that size was below the 5th percentile for a child of that approximate age.” This specific application might have been novel, but the underlying principles were generally accepted and widely used. “The novel application of accepted, published, reviewed, and tested techniques to a new set of facts does not make the analysis unreliable.”

Manley argued that Krauss’s cutoff for identifying misrepresentation wasn’t linked to consumer deception, but that missed the point. The cutoff wasn’t designed to determine any effect on consumer behavior. It was merely used “to conclude with some degree of statistical certainty that the images of children were reduced in size compared to the products.”

The court excluded the testimony of Aviva’s expert Frances McCloskey on Aviva’s damages, for the failure to make the causal connections discussed above. However, her testimony on Manley’s profits on fixed-air products survived. Disputes over whether certain products were actually different from the allegedly falsely advertised products were factual issues for the jury to resolve.

Aviva also challenged Manley’s rebuttal experts challenging Poret’s survey, Krauss’s report, and McCloskey’s conclusions. Aviva argued that, because the rebuttal experts only criticized Aviva’s experts and performed no analysis of their own, they identified no reliable principles or methods; they merely identified flaws without establishing whether any of those flaws would have provided different results. However, district courts have held that rebuttal expert witnesses may criticize other experts' theories and calculations without offering alternatives. The court found that these rebuttal experts’ testimony was not unduly speculative and would help the jury weigh the evidence presented; it was too early to decide whether their testimony would be cumulative to cross-examination at trial.