Friday, June 28, 2013

Transformative work of the day

New Yorker cover featuring Bert & Ernie:
Additional fact of interest to copyright/licensing/etc. geeks: the image originally appeared on Tumblr, which mainstream media seem to have difficulty describing.  Tumblr is the host, so saying that there was an "unsolicited" submission to Tumblr is like saying that you made an unsolicited submission to Wordpress.  You can submit to various individually controlled Tumblr blogs, though I can't find the original post, nor can I find a submit function on the New Yorker's Tumblr, which makes some sense given idea submission law.

Thursday, June 27, 2013

Disputed scientific conclusions not actionable under Lanham Act

Whether this is a blockbuster, as my title should suggest, or is limited in future cases to claims made to specialized audiences (as some language in the opinion suggests), remains to be seen. 

Ony, Inc. v. Cornerstone Therapeutics, Inc., --- F.3d ----, 2013 WL 3198153 (2d Cir.)

District court opinion discussed here.  Intro, nicely summing things up:

This case asks us to decide when a statement in a scientific article reporting research results can give rise to claims of false advertising under the Lanham Act, deceptive practices under New York General Business Law § 349, and the common-law torts of injurious falsehood and interference with prospective economic advantage. We conclude that, as a matter of law, statements of scientific conclusions about unsettled matters of scientific debate cannot give rise to liability for damages sounding in defamation. We further conclude that the secondary distribution of excerpts of such an article cannot give rise to liability, so long as the excerpts do not mislead a reader about the conclusions of the article.

This represents a potentially powerful incursion into the ordinary Lanham Act standard for establishment claims; many defendants will likely be citing this case at least as often as they contest standing.

Plaintiff ONY and defendant Chiesi are two of the biggest producers of surfactants, biological substances that are critical to lung function.  Premature infants often have inadequate surfactant levels, putting them at higher risk of death.  Nonhuman surfactants produced by the parties, among others, are the primary treatment for this respiratory distress syndrome (RDS). The FDA has approved three surfactants for treating RDS in newborns.  ONY produces a bovine surfactant, Infasurf.  Chiesi produces a porcine surfactant, Curosurf.  Cornerstone distributes Curosurf in the US.

The parties “vigorously contest the relative effectiveness of their products—in the marketplace, in the scientific literature, and in the instant lawsuit.”  They agreed that mortality rate and length of stay in the hospital for treatment were particularly relevant variables, though not independent of each other (length of stay may be shortened by death, or may be shortened because an infant’s case is less serious).

Chiesi hired defendant Premier to build a database and conduct a study of the relative effectiveness of the different surfactants.  The doctor defendants were hired to present findings based on Premier’s database at various medical conferences.  They presented findings (1) that Curosurf was associated with a 20% lower mortality rate than either Infasurf or another competitor, Survanta and (2) that Curosurf was associated with a 15% shorter length of stay than either Infasurf or Survanta, based on Premier’s database.  They (along with a Premier employee) eventually decided to publish their findings in a peer-reviewed journal.  The Journal of Perinatology, the leading journal in the field of neonatology, published their article after peer review.

ONY argued that the article contained incorrect statements of fact that Infasurf was “associated with a significantly greater likelihood of death” than Curosurf, “even after adjusting for patient characteristics such as gestational age and [birth weight], and after accounting for hospital characteristics and center effects.”  ONY also argued that the publication was suspect: one of the authors was an associate editor of the journal, and another was a member of the editorial board.  ONY alleged that one of the two peer reviewers objected to the publication, but that the editor-in-chief broke the tie between the reviewers.  ONY didn’t allege, though, that this tiebreaking was a departure from customary or accepted practice.  The article was published as “open access,” free to the public, and the publication fees were paid by Chiesi and Cornerstone.

The authors did note that their findings may “most likely ... be due to different surfactant doses administered to the infants included in the database,” because Curosurf was, on average, prescribed in higher doses than its competitors. And they disclosed that the study was sponsored by Chiesi, that one author was an employee of Premier, that Chiesi hired Premier to conduct the study, and that all three physician defendants had served as consultants to Chiesi.

ONY’s primary objection to the methodology was that the authors omitted any mention of length of stay data.  This was allegedly done to mask the fact that Curosurf-treated infants had a greater ex ante chance of survival than those treated with Infasurf.  In addition, the authors failed to cite articles that concluded differently, though they knew of such articles, and they used retrospective data, which allegedly rendered the data subject to selective distortion.

After the article was published, Chiesi and Cornerstone issued a press release touting its conclusions and distributed promotional materials that cited the article's findings. ONY’s corporate officers, also pediatricians, wrote letters to the journal rebutting the article's conclusions, objecting to its methods, and asking that it be retracted. The court took judicial notice that several (two?) of the letters were eventually published, as were responses.

The court first evaluated claims arising out of the article’s publication.  The Lanham Act “proscribes conduct that, but for its false or misleading character, would be protected by the First Amendment,” so “free speech principles inform our interpretation of the Act.” This is especially so for academic works, because academic freedom is “a special concern of the First Amendment.”

ONY argued that the article’s scientific claims purported to be statements of fact, thus falsifiable, thus defamatory/false advertising if known to be false when made.  Scientific discourse does pose problems for the fact/opinion divide.  “Most conclusions contained in a scientific journal article are, in principle, ‘capable of verification or refutation by means of objective proof.’”  That is, in fact, what science claims to be for.  “At the same time, however, it is the essence of the scientific method that the conclusions of empirical research are tentative and subject to revision, because they represent inferences about the nature of reality based on the results of experimentation and observation.”  The court emphasized that scientific publications are directed to the “relevant scientific community, ideally in peer-reviewed academic journals that warrant that research approved for publication demonstrates at least some degree of basic scientific competence.”  Their conclusions are then available to other scientists, “who may respond by attempting to replicate the described experiments, conducting their own experiments, or analyzing or refuting the soundness of the experimental design or the validity of the inferences drawn from the results.”  When the area is novel, “facts” in the research “may be highly controversial and subject to rigorous debate by qualified experts. Needless to say, courts are ill-equipped to undertake to referee such controversies.”

(As a side note, compare the line of cases about blogs and hyperbole, where what looks like “factual” claims are dismissed as nonfactual because of their lowly presentation.  Apparently there is emerging the idea that there is a sweet spot for things that can be falsifiable; aim above or below and you aren’t making a “factual” claim for First Amendment purposes.  Whether this is a good idea or not I leave to readers.)

Courts have been reluctant to allow causes of action “grounded on statements of fact that are best evaluated by an informed reader.”  The fact/opinion divide was unhelpful in evaluating a statement “made as part of an ongoing scientific discourse about which there is considerable disagreement.”  While in theory scientific assertions are in principle verifiable, “for purposes of the First Amendment and the laws relating to fair competition and defamation, they are more closely akin to matters of opinion, and are so understood by the relevant scientific communities.”  (I bet the FDA is going to be super, super surprised by this.  Or are FDA requirements not about “fair competition”?  As a side note, is it now an unconstitutional condition to approve a new drug as long as the manufacturer only makes certain claims about it on labeling?)

Here, it was relevant that ONY didn’t allege that the data in the article were fabricated or fraudulently created.  “If the data were falsified, the fraud would not be easily detectable by even the most informed members of the relevant scientific community.” Instead, ONY alleged that the inferences drawn from that data were wrong, and that competent scientists would have used available variables that defendant authors didn’t.  “But when the conclusions reached by experiments are presented alongside an accurate description of the data taken into account and the methods used, the validity of the authors' conclusions may be assessed on their face by other members of the relevant discipline or specialty.”

Thus, the rule: “to the extent a speaker or author draws conclusions from non-fraudulent data, based on accurate descriptions of the data and methodology underlying those conclusions, on subjects about which there is legitimate ongoing scientific disagreement, those statements are not grounds for a claim of false advertising under the Lanham Act.”  ONY’s allegations weren’t that the data were incorrect, but that they were presented in a misleading way.  Even if that were actionable, that’s a weak claim where the authors disclosed the potential shortcomings of their methodology and their potential conflicts of interest.

Given this result, the article’s contents weren’t actionable under NY law either.

The court considered Chiesi and Cornerstone’s use of the article’s findings separately.  ONY alleged that this dissemination tortiously interfered with ONY’s prospective economic advantage in contracting with hospitals and other health-care providers. But ONY didn’t allege that the promotional materials misstated the article’s conclusions. This made the case much easier.  On the alleged facts, there was no error in dismissing the tortious interference claim because (a) the article itself was not actionable and (b) the tortious interference claim did not separately allege any additional misleading statements.


Wednesday, June 26, 2013

Sauce for goose isn't (chocolate) sauce for gander: pleading affirmative defenses

Miller v. Ghirardelli Chocolate Co., 2013 WL 3153388 (N.D. Cal.)

This ruling covers an issue discussed at the FDLI conference: what is the proper pleading standard for affirmative defenses?  The court says it’s Iqbal/Twombly, but can’t really be said to apply those cases.

Previous ruling.  Miller sued over “Ghirardelli® Chocolate Premium Baking Chips-Classic White,” which don’t contain white chocolate.  Ghirardelli’s answer asserted 25 affirmative defenses, 24 of which Miller moved to strike.  The court denied the motion.

Courts may strike as redundant, immaterial, or impertinent defenses that are not actually affirmative defenses. A defense that demonstrates that a plaintiff hasn’t met its burden of proof on a required element is not an affirmative defense.  Courts differ on whether prejudice is required, but moving to strike is usually a waste of time and money without prejudice.  Expensive and potentially unnecessary and irrelevant discovery is prejudice; a motion to strike can be proper if it makes the issues less complicated and streamlines the ultimate resolution of the case. 

Also, an affirmative defense is insufficiently pleaded if it fails to give the plaintiff fair notice of the nature of the defense.  Courts in N.D. Cal. have applied Iqbal/Twombly to affirmative defenses, requiring defendants to allege enough facts to state a plausible claim. This is to “weed out the boilerplate listing of affirmative defenses which is commonplace in most defendant's pleadings.”

Miller moved to strike 13 affirmative defenses as well as Ghirardelli’s “reservation of rights” as not actually affirmative defenses (e.g., that Miller didn’t reasonably rely on the product name).  He didn’t argue that striking the affirmative defenses would prevent unnecessary discovery, but instead argued that he bore the burden of proof on these issues.  There was no reason to grant the motion to strike when it would serve no real purpose to streamline the case.

Miller also argued that certain defenses were insufficiently pleaded. The court disagreed.  For example, the statute of limitations defense put Miller on fair notice by identifying some of the applicable statutes of limitations and explaining that the class period is longer than the limitations periods that may apply to absent class members, and also that the precise limitations period depends on a choice of law analysis.  Merits analysis was for summary judgment.

So too with preemption; Ghirardelli’s answer alleged that “[t]he claims are barred to the extent that they are preempted by federal law, including specifically by FDA labeling requirements and the prohibition on private rights of action to enforce FDA rules.”  This was enough because preemption could apply regardless of how it was pleaded.  And so on, including, “[i]njunctive relief is not necessary or appropriate because voluntary changes in the label and website have rendered the requested relief moot.”  Though Miller argued that Ghirardelli should’ve described the changes, this was sufficient detail for pleading purposes.  As the court notes below but doesn’t find important, this doesn’t seem like it’s applying Iqbal/Twombly equally—can you imagine a plaintiff surviving a motion to dismiss with a claim that a “label and website” is misleading?

Even the pure boilerplate survived, such as “23. Contributory Fault: The recovery of Plaintiff and/or other class members is barred and/or should be reduced because of contributory negligence or fault and/or comparative negligence or fault. 24. The FAC, and each cause of action alleged therein, is barred by the doctrines of unclean hands, estoppel, waiver, and laches. 25. Plaintiff, and any class members, failed or refused to exercise reasonable care and diligence to avoid loss and minimize damages, and therefore, may not recover for losses that could have reasonably prevented.”  Though these defenses were unsupported by factual allegations, and were the bare statement of a legal doctrine, Ghirardelli rejoined that it was common to allege these defenses in boilerplate fashion.

The court was

not unsympathetic to Miller's point that he is entitled to notice sufficient to oppose this defense. The court also recognizes the implicit equities argument that is at play here: the court took a hard look at the fact allegations in the complaint in the context of a standing argument that Miller thought would be better illuminated at the class certification stage after discovery. Given that posture, and [Iqbal's] and Twombly 's application to the affirmative defenses, then Miller doubtless thinks the same hard look should apply here, too.

Though these were fair points, a motion to strike is a different context.  Viewed in the context of the complaint, there was fair notice of the defenses.  (Unclean hands, estoppel, waiver, and laches?  Really?  What facts provide proper notice of these?  Where is the allegation of facts demonstrating prejudice to Ghirardelli based on its reasonable belief that Miller wouldn’t sue?)  Anyway, the reality was that there was no prejudice to Miller and no discovery burden. 


Voluntary change entitles California plaintiff to fees under catalyst theory

Henderson v. J.M. Smucker Co., 2013 WL 3146774 (C.D. Cal.)

Henderson moved for fees and costs in this UCL/FAL/CLRA case based on allegedly misleading health and wellness claims in Uncrustables and Crisco shortening products, which used trans fat (and, for Uncrustables, high fructose corn syrup).  Henderson’s individual claims were dismissed because she went into bankruptcy and her interest was a pre-petition interest; the trustee settled her individual claims for $22,500.  She sought fees as a successful/prevailing party under the catalyst theory, because Smucker removed “wholesome” and “homemade goodness” marketing claims from Uncrustables; removed trans fat from Uncrustables; and removed the bar chart comparing Crisco's saturated fat content to butter.  The court found that she was entitled to fees under California law.

First, the court determined that her claim for attorneys’ fees was not property transferred into the bankruptcy estate when she filed for bankruptcy; she herself was never entitled to collect the award and it could not be used to satisfy creditors’ claims.

Smucker argued that, because Henderson had no right to bring the action in the first place (since she filed suit after filing for bankruptcy), she couldn’t get fees.  But other cases so holding involved plaintiffs who lacked statutory or Article III standing in the first place, unlike Henderson, who simply had the bankruptcy trustee step into her shoes as the real party in interest.  There were several scenarios in which she could have continued prosecuting the suit, for example if the trustee abandoned the claims or agreed to let her proceed.

Under California law, the court may award fees to a successful party “in any action that ‘has resulted in the enforcement of an important right affecting the public interest if: (a) a significant benefit, whether pecuniary or nonpecuniary, has been conferred on the general public or a large class of persons, (b) the necessity and financial burden of private enforcement are such as to make the award appropriate, and (c) such fees should not in the interest of justice be paid out of the recovery, if any.’” A plaintiff need not obtain a judgment in her favor to be a successful party, as long as she obtains the relief sought, whether through voluntary change in the defendant’s conduct, settlement, or otherwise.  A plaintiff is a successful party if “(1) the lawsuit was a catalyst motivating the defendants to provide the primary relief sought; (2) that the lawsuit had merit and achieved its catalytic effect by threat of victory, not by dint of nuisance and threat of expense ... and, (3) that the plaintiffs reasonably attempted to settle the litigation prior to filing the lawsuit.”

The parties disputed the catalyst theory and whether the lawsuit had merit.  To be a catalyst, the lawsuit must have been “a substantial causal factor” contributing to the defendant's conduct, though it need not be the only cause.  This can include getting the defendant to act sooner than it otherwise would have done.  The defendant is in the best position to document why the plaintiff wasn’t a catalyst, if the chronology is such that the lawsuit gives rise to the inference of a causal relation.

Smucker argued that it was already in the process of making the three key changes before the lawsuit, so that there was no causal connection between the litigation and the changes.  The chronology, the court determined, indicated otherwise; for example, before the lawsuit, there had never been discussions about removing a key trans fat ingredient from Uncrustables.  Soon after Smucker was served, however, “its R & D staff began inquiring into the background on a potential reformulation project, and about three to four months later, the project was more officially initiated upon ‘upper management recommendation.’”  Though Smucker had a preexisting general goal of removing trans fat from all its products, that didn’t rebut Henderson’s argument that the lawsuit prompted it to prioritize the reformulation of Uncrustables in particular, and Smucker didn’t show that it had specific plans for Uncrustables before the lawsuit.  There wasn’t enough evidence to show that potential FDA action and negative publicity prompted the change, either: Smucker may have weakened its case when its best evidence of negative publicity was an article from a paper with a “relatively small” circulation of around 20,000 deeming Uncrustables “Not Healthful.”

Thus, the lawsuit was at least a substantial causal factor contributing to the reformulation.

With respect to the other changes, there was evidence that the package redesign that removed the “wholesome” health claims was already underway when the lawsuit was filed, and Smucker followed a reasonable timeline to finalize and implement a new design, so the fact that the change wasn’t actually made until after the lawsuit wasn’t dispositive.  Likewise, Smucker showed that it had a prelitigation plan to remove the bar chart from Crisco that was on track to be implemented when the lawsuit was filed.  Redesign takes planning and time.  Thus, the lawsuit was only a catalyst in prompting Smucker to remove the trans fat from Uncrustables.

The next question was whether the lawsuit had merit or was “frivolous, unreasonable or groundless.”  This is not a final determination on the merits, but rather an inquiry into whether the questions of law or fact were grave and difficult.  The court found that Henderson met that standard. The lawsuit specified the misleading claims, why they were misleading (including alleging increased risks of heart disease and other illnesses from trans fat consumption), and why they were material to health-conscious consumers.  Henderson also made an extensive argument about why her claims weren’t preempted.  Her lawsuit was not “frivolous, unreasonable, or groundless.” Also, being dismissed as an individual didn’t matter; again, she had Article III/statutory standing.  “Thus, the issue of Plaintiff's bankruptcy does not go to the merit of this action; instead, it goes to the wisdom of Plaintiff's counsel's decision to select Plaintiff as the putative class representative.”

Then the court looked at whether she reasonably attempted to settle the matter before filing suit.  Lengthy negotiations aren’t required, but a plaintiff must at least notify the defendant of her grievances and proposed remedies.  But an insufficient prelitigation attempt at settlement may not preclude attorneys' fees if “undisputed evidence shows a prelitigation demand would have been futile.”  Smucker didn’t contest the argument that Henderson’s prelitigation CLRA notice was adequate or that other demands would’ve been futile.

Next, the court considered whether the lawsuit resulted in the enforcement of an important right affecting the public interest.  Enforcing California consumer protection laws qualifies, though the court must look at the litigation practically.  Here, the suit was at least a causal factor in removing the trans fat.  Smucker argued that the fact that Henderson’s counsel filed another virtually identical lawsuit was evidence that her suit didn’t enforce important rights, but the fact that she didn’t obtain every form of relief sought affects the amount of, not the entitlement to, fees.

The court considered “the significance of the benefit, and the size of the class receiving the benefit, in light of all pertinent circumstances.” A consumer class action may confer a significant benefit on a large class of persons if it “caus[es] [the defendant] to change its labeling and advertising practices and by enjoining it from making future misleading representations.”  Here, though the suit wasn’t responsible for the change in ad claims, it did prompt Smucker remove a component of Uncrustables that made the claims allegedly false or misleading.  Henderson’s expert epidemiologist estimated that the reformulation reduced the amount of trans fat in the stream of commerce by about 12.6 million grams (actually more than that, based on the changes Smucker made).  Someone who ate one Uncrustable a day (ughhhh) would allegedly see an increase of coronary heart disease by 2.51% over a 168-month period, of colorectal cancer by 3.55% over a 13-month period, of Alzheimer's Disease by 16.8% over a 27-month period, and of stroke by 1.2% over a 96-month period, with no known offsetting benefit from trans fats.  Smucker’s conclusory attacks on the expert’s qualifications were insufficient.  “In sum, Plaintiff has offered evidence that Uncrustables are a widely distributed consumer product, that trans fat has been strongly linked to certain diseases in various studies, and that Defendant removed [trans fat] from Uncrustables in response to this suit.”  That was enough to show that the change conferred a significant benefit to a large class of persons.

The court turned to whether the necessity and financial burden of private enforcement made the award appropriate.  Here, it was uncontested that the financial burden placed on the plaintiff was out of proportion to her personal stake in the lawsuit.  “California courts have specifically recognized the ‘significant role ... private consumer enforcement plays for many categories of unfair business practices,’ including misrepresentations in labels and advertising.” Henderson argued that private enforcement was necessary because no government agency sought to enforce California’s false advertising laws against Smucker.  Smucker argued that agency enforcement was unnecessary because its labeling complied with all FDA regulations. But the lawsuit wasn’t an attempt to enforce FDA regulations. To the extent that Smucker was arguing preemption, “such argument not only assumes Defendant's nonliability but also ignores the relevant standard,” which focused on the impact of the action, not the manner of its resolution.  Henderson didn’t need to show that Smucker was liable to get fees.  Smucker hadn’t shown that private enforcement was unnecessary because the public rights at issue were adequately vindicated by government action.

Thus, Henderson was entitled to fees.

HP's power and performance claims were mere puffery

Elias v. Hewlett-Packard Co., --- F.Supp.2d ----, 2013 WL 3187319 (N.D. Cal.)

Elias bought an HP computer through HP’s website with a “recommended” graphics card, which HP marketed and advertised as a “faster, higher performance, more powerful and/or upgraded” computer component. However, although the graphics card manufacturer expressly recommended a 300-watt or greater power supply, Elias’s computer only had 220 watts.  HP didn’t tell Elias about the recommendation or offer a power supply upgrade.  HP didn’t disclose that using the graphics card with the 220-watt power supply would decrease the computer's performance, efficiency, and life-span, and increase its safety hazards, including the risk of catching fire.  Within the first year, Elias’s computer began to “randomly freeze, restart, or shut down,” and 17 months after purchase, the computer “shorted out,” “melted,” and was damaged beyond repair. HP refused to repair or replace it.  He filed a putative class action making the usual California claims.

The court didn’t dismiss the breach of warranty claims because Elias specifically alleged that the power supply was insufficient for the components, that the insufficiency was likely to result in malfunctions beyond normal troubleshooting, and that the defects manifested during the one-year warranty period.  Elias also stated a claim under the Song-Beverly Act.

The court then dismissed Elias’s consumer protection claims based on alleged affirmative misrepresentations.  The claims to which he pointed were nonactionable puffery: “ultra-reliable performance,” “full power and performance,” “versatile, reliable system,” “delivers the power you need,” “packing power and style into your tightest spaces,” and “Compact but powerful,” were all puffery, despite Elias’s allegation that the small physical size of the computer was part of the problem in terms of overheating/power supply.  Nor was offering the upgraded graphics card for sale with this model an affirmative representation that the power supply would be sufficient for it.  Even viewing the claims in their totality, the combination of puffing statements doesn’t automatically create an actionable misrepresentation.

The fraudulent omission claims also failed.  For failure to inform consumers of a risk outside the warranty period, there can only be materiality and thus liability if the failure poses safety concerns or if it’s linked with an affirmative misrepresentation.  But what about a risk inside the warranty period? The court agreed that “[i]t makes logical sense that the average consumer would expect the manufacturer to disclose significant defects of any nature that arise within the warranty period. But outside of that warranty period, the average consumer would only expect the manufacturer to guarantee against unreasonable safety risks.” Thus, Elias could allege fraudulent omissions beyond safety-related concerns if those omissions led to malfunctions during the warranty period, whereas omissions outside the warranty period would only be actionable if there was some kind of safety issue. 

Elias alleged that, due to the insufficient power supply, HP's computers were more likely to catch fire, creating a significant safety risk.  But he didn’t allege that anyone’s computer ever actually caught fire, or explain why a melting computer would create an unreasonable safety risk.  Nor did he cite facts beyond hypotheticals to show a nexus between the deficient power supply and the ultimate risk of fire.

As for events within the warranty period, Elias didn’t sufficiently allege HP’s awareness of the defect to trigger its duty to disclose.  Conclusory allegations of knowledge or intent aren’t enough without a plausible basis for such knowledge.  Elias cited to recommendations by manufacturers of minimum power supplies for certain graphics cards, but didn’t allege that HP knew of these manufacturer recommendations at the time of sale. Though HP offered a webpage on “Troubleshooting Power Supply Issues,” which discusses the need for adequate power supplies, that didn’t show that HP was aware that the specific customizable computers at issue in this case lacked sufficient power supplies at the time of purchase.  Thus, Elias failed to allege intentional concealment, though he had leave to amend.

As for unfairness under the UCL, the court allowed Elias leave to amend to add the allegation that HP stopped offering customers the option to “select upgraded, power-hungry components in the models at issue in the complaint.”  This might support a UCL claim based on unfair business practices as HP’s acknowledgement of the problem.  The UCL unlawfulness claim also failed without a predicate violation of the UCL’s ban on fraudulent conduct, since breach of warranty isn’t itself an unlawful act for purposes of the UCL.

Tuesday, June 25, 2013

Giant sucking sound: vacuum claims false

Dyson, Inc. v. Bissell Homecare, Inc., 2013 WL 2936453 (N.D. Ill.)

Dyson sued Bissell for false advertising; here the court grants Dyson’s partial motion for summary judgment and denies Bissell’s motion to exclude/disqualify certain experts.

Bissell advertises that consumers can improve their respiratory health by using Bissell vacuum cleaners, touting the specific air filtration performance of eleven different models on its website, packaging, and products.  Open-system (OS) vacuum cleaners are not sealed and leak some air from gaps and seams; most of the claims at issue related to OS models, though Dyson also challenged claims regarding Bissell’s Healthy Home vacuum, a closed-system model in which the unit is sealed.

In 2010, Bissell advertised that its OS vacuums had a “HEPA Media Filter,” and that the filters or vacuum cleaners “capture[d] over 99.9%” of certain allergens.  Dyson argued that HEPA is the term used in the US to indicate that a filter or filtration system traps 99.97% of dust and other particles that are 0.3 microns in size. But, Dyson continued, the statements were false because the OS vacuums didn’t meet HEPA standards or capture over 99.9% of allergens. And Bissell allegedly falsely claimed that the Healthy Home vacuum was “airtight” and that it captured 100% of certain allergens.

Dyson commissioned independent testing of the Bissell vacuums using allegedly industry standard tests, which showed that the filtration performance of the OS vacuums didn’t come close to HEPA level.  The testing also supposedly showed that the filters used in the vacuums didn’t even themselves meet the HEPA standards (or capture 99.9% of allergens, of course).  Further, the testing allegedly showed that the Healthy Home vacuum wasn’t airtight and didn’t perform at HEPA levels.

After Dyson sued, Bissell added new disclaimers indicating that only the filter, and not the vacuum cleaner as a whole, met HEPA standards, and revised the disclaimers in 2012.

Dyson also alleged that its unique designs and superior filters made its vacuums far superior to those of Bissell in terms of allergens.  Bissell, knowing the importance consumers place on healthy products, allegedly deceived consumers, who can’t independently verify its claims, thus harming Dyson, Bissell’s direct competitor.  Dyson sued under the Lanham Act as well as under Illinois’s
Uniform Deceptive Trade Practices Act, its Consumer Fraud and Deceptive Trade Practices Act, and common law unfair competition.

The court first evaluated Bissell’s challenge to an expert report on Dyson’s survey.  While Dyson bore the burden of establishing admissibility, and while a consumer survey must comply with principles of professional survey research, consumer surveys are rarely so flawed as to be completely unhelpful to the trier of fact and therefore inadmissible; shortcomings generally go to weight instead.

Dyson’s expert, Kivetz, examined certain advertising claims that the court agreed were representative of the claims at issue.  On four panels of the the package for one of its vacuums, Bissell stated: “HEPA Media Filter*—The filter captures 99.9% of pollens and ragweed from the air passing through it.” The packaging also included Bissell’s initial disclaimer on the lower left corner of the back panel, which states: “ *The filter media, not the vacuum as a whole, complies with the High Efficiency Particulate Air (HEPA) filter specification.”

The test cell saw that packaging, while the control group viewed modified packaging with a disclaimer directly below the claims stating  “*The vacuum during operation does not meet the HEPA filter specifications.”  (Wow, that’s a really defendant-favorable control ad.)  Respondents were asked what, if anything, was being communicated to them about the HEPA Media Filter and about the vacuum cleaner as a whole, with more specific followups.  Responses were coded by an independent coder.  Kivetz concluded that the challenged claims caused net 27% deception, and that Bissell’s initial disclaimer didn’t work.

Bissell argued that the survey questions didn’t address the relevant issue and were based on undefined terminology.  Respondents were first asked “what message or messages, if any, does this package mainly communicate to you about this product?” and “Anything else?” Then the filter question: “Does or doesn't this package communicate to you anything about a HEPA Media Filter?” A no response ended the survey.  A yes response led to: “What does this package communicate to you about a HEPA Media Filter?” and then “What else, if anything, does this package communicate to you about a HEPA Media Filter?” Next: “Do you think that:

This package does communicate to you whether the vacuum provides HEPA level performance during operation

This package does not communicate to you whether the vacuum provides HEPA level performance during operation, or

Do you not know?”

If the respondent chose the first option (not clear if it was rotated in practice), there was a follow-up:

 “What does this package communicate to you about whether the vacuum provides HEPA level performance during operation?” and “What else, if anything, does this package communicate to you about whether the vacuum provides HEPA level performance during operation?”

Bissell argued that the later questions didn’t address the relevant question of whether participants believed the claims related to the vacuum as a whole or merely to the filter.  Instead, the survey induced respondents to erroneously draw a distinction between the vacuum during operation and not in operation.  Bissell identified a “handful” of verbatim responses indicating that those respondents believed that HEPA level performance could only be achieved if the vacuum was running.  But this handful indicating “possible confusion” on the part of a few respondents didn’t sufficiently show that the survey didn’t address the relevant issue.  “ Confusion on the part of a few Participants is the unavoidable, albeit undesirable, by-product of asking Participants open-ended, non-leading questions during a Survey.”

Bissell argued that the questions didn’t raise the possibility that filtration performance claims might be based on filter-only testing, but that was “an objection to Kivetz's failure to use leading questions to suggest the response desired by Bissell.”  Plus, the progression of questions began broadly, then focused on the filter alone, then asked whether the claims communicated anything about the filtration benefits of the vacuum as a whole—which was the point of interest.

Bissell next objected to the use of “HEPA level performance” in the questions as an undefined term.  It argued that HEPA standards differ depending on what is being tested or described.  But the survey wasn’t designed to test consumers’ understanding of the phrase “HEPA level performance” or to determine whether the vacuum or filter actually achieved HEPA level performance.  Instead, the survey tested whether consumers believed that Bissell was making claims about the vacuum as a whole.  The precise definition of “HEPA level performance” was therefore not relevant to this survey, and it was close enough in meaning to Bissell’s claims (including the 99.9% claims) to serve as an appropriate proxy for them.  Mead Johnson & Co. v. Abbott Laboratories, 201 F.3d 883 (7th Cir. 2000), didn’t apply because the survey wasn’t being used to define the meaning of that phrase.

Bissell also challenged the coding of the survey.  It contended that many responses indicated neutrality or uncertainty about whether respondents believed the vacuum provided HEPA level performance during operation.  The coding was done independently by a coder who didn’t know the purpose of the survey.  This masked procedure made Bissell’s claims of bias unconvincing.  “Moreover, Bissell has not presented any legal authority supporting the proposition that survey responses must be coded in a completely objective manner, and certain case law in fact suggests otherwise.”  It also didn’t matter that the coder wasn’t given “relevant information about filtration standards, HEPA, and HEPA protocols,” since the coder wasn’t evaluating how consumers defined HEPA level performance.  Likewise, it didn’t matter that Kivetz didn’t know that the HEPA standard referenced in Bissell’s first disclaimer was a test protocol for filter media alone; survey respondents would likely also lack such knowledge.

Bissell then argued that presenting only the packaging to respondents didn’t properly replicate market conditions, which should have included multiple products and point of sale materials.  But this wasn’t a trademark case, and there was no precedent that comparative products and literature are required to replicate market conditions in a false advertising case.  And “case law suggests that ‘standards for replicating market conditions for a consumer confusion survey in a trademark infringement case cannot be applied wholesale’ to cases alleging false advertising.”  A mall intercept survey using an actual package and a price card similar to the marketplace reality, along with instructions to examine the package as if the respondent was at the store thinking of buying it, were fine.  (Though I don’t think there was any problem with this survey, I don’t understand the rationale for distinguishing false advertising and trademark here.  There could be one, I suppose, having to do with what questions consumers are asking themselves when they make decisions—but then we’d be forced to confront the fact that trademark doesn’t require materiality, though it should.)

Bissell then pointed out that Kivetz criticized a survey in another case as unreliable for allowing participants to continue to view the packaging while the answered the survey questions, then did the same thing here.  But Kivetz identified material distinctions in the respective surveys, specifically the category of products at issue.  Here, the products were vacuums, “the purchase of which would likely involve deliberate and thoughtful decision-making by a consumer before its purchase because of its significant cost,” whereas the previous survey involved low-cost beverages.  In the context of a big-ticket purchase, market conditions are better approximated by allowing respondents to view the stimulus throughout the survey.

None of the criticisms warranted exclusion of the survey.

Likewise, Bissell failed to disqualify Dyson’s technical expert on filtration, Susan Goldsmith, even though she’d done work for Bissell as well, once more than ten years before the case began and once during the case, before Dyson disclosed her as an expert.  Goldsmith’s relationship with Bissell was far from exclusive. Instead, Goldsmith performs services for the entire vacuum industry, including for direct competitors.  She’s one of the world’s leading experts on vacuum cleaner testing, and few experts are capable of performing her services.  Her company was possibly the only independently accredited lab in the world with both the expertise and the expensive, specialized equipment required to run the tests at issue in the case.  The fact of her previous work for Bissell, including her exposure to confidential information, wasn’t sufficient to disqualify her. 

The court also noted that Dyson first hired her for work relating to this case.  Only after Goldsmith got results adverse to Bissell’s position did Bissell hire her as a consultant.  And by the time Bissell hired her, it should have been well aware of her work for Dyson related to the litigation based on Dyson’s initial disclosures, not to mention Bissell’s awareness that she worked for competitors.  It would be inequitable to disqualify her under these circumstances.

The court then turned to the parties’ cross motions for partial summary judgment on the falsity of the original statements about Bissell’s OS vacuums; the Lanham Act and state law claims were identical, except that for an Illinois CFDTA claim a plaintiff must also prove that the defendant intended consumers to rely on the deception.  Where an ad explicitly or implicitly represents that tests prove a claim, a plaintiff can show falsity by showing that the tests don’t prove the proposition for which they’re cited.  Bissell’s use of the term HEPA and reference to a specific numerical percentage implicitly (NB: and necessarily) indicates that Bissell was relying on tests to support its claim.

The parties disagreed over whether there was one definition for “HEPA.”  But Bissell failed to provide sufficient evidence to create a material dispute of fact: in the US, HEPA means that a filter or filtration system has a minimum efficiency of 99.97% for 0.3 micron particles when tested at the application's rated air flow.  Plus, even if the court applied Bissell’s suggested alternative standards, Bissell didn’t show that the ads would’ve been accurate under them anyway.

Bissell admitted that it didn’t base its statements on any tests performed on the OS vacuums themselves.  Instead, it based its statements on tests conducted on the filters alone.  However, Bissell requested that these standalone tests be done at air flow rates less than the actual rates created by the OS vacuums.  Even Bissell’s own expert thought this wasn’t ideal.  The court found it undisputed that, even if the claims were about the filters alone, Bissell still didn’t have adequate testing to support its claims.  Dyson’s own testing showed that when the filters were tested separately, they didn’t meet HEPA standards.  Bissell didn’t refute these results and didn’t create a genuine issue of fact about them.

Bissell argued that it used the term “Media” in its initial claims, which is understood in the industry to refer to the paper filter and thus notified consumers that its claims related only to the filters. But the court considered the statements in context: “The undisputed facts in this case and the evidence presented by Dyson clearly show that Bissell used the 2010 Statements to advertise and sell vacuum cleaners, not filters.”  Thus, Bissell’s claims were false and unambiguous representations that the vacuums operated at a HEPA filtration level and captured 99.9% of allergens.  Even if “Media” had been a clear reference to the paper in the filters, Dyson still clearly established literal falsity.

The court also found that the statements were material.  Bissell’s consumer research on the importance of respiratory health to improve its marketing showed materiality; Bissell’s studies showed that filtration efficiency was important to consumers.  Plus, the statements appeared on the front packaging of some vacuums, which was where Bissell highlighted prominent selling features.  An employee testified at his deposition that the filtration efficiency was one of the “key features that a customer [is] interested in....”  Plus, the statements related to health; particles less than 2.5 microns in size can result in adverse health effects in humans if inhaled.  No reasonable trier of fact could avoid finding materiality.

In addition, there was no disputed issue on probable injury to Dyson. Dyson wasn’t seeking its own lost profits; it need only show probable injury to prevail.  Bissell was Dyson’s number one competitor in the industry, both on volume and dollar market share terms.  Dyson and Bissell vacuums are sold in many of the same places and often appear side-by-side.  The false statements here would’ve made cheaper Bissell vacuums more appealing than more expensive Dyson vacuums advertising the same high filtration efficiency rates.  Thus, Dyson suffered a probable and discernible competitive injury as a result of the false statements, as a matter of law.

Dyson didn’t move for summary judgment on the later ads with disclaimers, though Bissell did; the court denied Bissell’s motion for failure to explain why it was entitled to summary judgment.  Dyson had shown adequate evidence that the later ads were false to go to a trier of fact. Likewise, there was enough evidence that the closed-system Healthy Home vacuum didn’t capture 100% of allergens to go forward.

Finally, the court rejected Bissell’s affirmative defenses, including release—that was based on a 2006 release ending earlier litigation.  The release couldn’t have contemplated later-made ad claims for new products like these, and in any event Illinois doesn’t enforce contracts exculpating persons from the consequences of their wilful and wanton acts, and with respect to the initial statements, the facts showed that Bissell’s false advertising was wanton and willful.

Acquiescence, estoppel, laches, and a statute of limitations argument also failed for essentially the same reasons: Dyson never condoned Bissell’s conduct and took action promptly.  For laches, Bissell argued that it was prejudiced by incurring marketing expenses, but didn’t show that any specific expenses were connected to any Dyson delay.  “[U]nder Bissell's own version of [the] facts, Bissell was able to sell OS Vacuum Cleaners for years before Dyson challenged the current models, which indicates, if anything, that Bissell may have profited from any delay on the part of Dyson.”  And the court borrowed Illinois’s three-year statute of limitations under the UDTPA/CFDTPA and found that Dyson acted promptly when it knew or should have known of its claims (including by engaging in testing to disprove the filtration claims).

Grab bag of food claims survives preemption, not Rule 9(b)

Samet v. Procter & Gamble Co., 2013 WL 3124647 (N.D. Cal.)

Plaintiffs bought a bunch of allegedly misbranded foods, including Pringles, Kellogg's MorningStar Farms Hickory BBQ Riblets, and Kellogg's Fruity Snacks Mixed Berry, alleging that they reasonably relied on the nutritional content claims on the related website and labels.  They brought the usual California claims on behalf of a putative class of consumers who bought (1) potato chip snacks labeled “0 Grams Trans Fat,” but containing more than 13 grams of fat per 50 grams; (2) products labeled with the ingredient “evaporated cane juice;” (3) Products labeled or advertised as “healthy” despite being disqualified under 21 C.F.R. 101.65; (4) fruit and fruit-flavored snacks; and (5) products sold in a slack-filled container.

Although plaintiffs quickly learned to plead standing, we must nonetheless deal with P&G’s standing challenge, which was that plaintiffs lacked standing because none of the products were alleged to have been “tainted, spoiled, adulterated, or contaminated.”  This is not required; plaintiffs pled that, as health-conscious consumers, they relied on the misleading labels, and that had they known the truth they wouldn’t have bought the products at the premium price they paid.  Whether this was all true was for a later stage of litigation.

To avoid preemption in situations like these, a plaintiff must be suing for conduct that violates the FDCA, but must not be suing because the conduct violates the FDCA, but rather to vindicate an independent right under state law.

One claim was that Fruity Snacks’ packaging was misleading because it displayed pictures of berries next to “made with real fruit,” implying that the product contains the fruits pictured when in fact the only fruit in the product was apple puree concentrate (yum!).  But this complied with the FDA’s fruit vignette rules, which allow manufacturers to use the name/image of fruit to describe flavor even if the product doesn’t contain that particular fruit, as long as the label says “artificially flavored.” Even if the proximity of the statement “Made with Real Fruit” was misleading, the claim was expressly preempted.

However, the slack fill claims against Pringles and Fruity Snacks weren’t preempted.  Federal regulations ban “nonfunctional” slack fill which does not exist for permissible purposes such as “[p]rotection of the contents of the package,”“[u]navoidable product settling during shipping and handling,” and the like.  Though plaintiffs didn’t expressly plead nonfunctionality, the complaint did reference the relevant regulation, including the functional exceptions, and stated that defendants had “no lawful justification” for the slack fill.  Thus, the court declined to find express preemption.

The court also rejected defendants’ field preemption argument.  Here, plaintiffs weren’t trying to enforce the FDCA, which lacks a private right of action, but rather to vindicate their separate and independent right to be free of false advertising.  Pom Wonderful was not to the contrary; it didn’t bar state-law claims.  “Plaintiffs' claims for damages arise from state-made common law duties that also happen to coincide with the federal statutory scheme, which ensures that these claims will not conflict with or impair the FDA's regulatory power.”

Likewise, the court rejected the application of the primary jurisdiction doctrine.  “Allegations of deceptive labeling do not require consultation of the expertise of the FDA as ‘every day courts decide whether conduct is misleading.’”  Specifically, with respect to “evaporated cane juice,” defendants argued that the FDA was in the process of developing a position on use of the term, but its draft guidance from 2009 was nonbinding and was circulated for the purpose of soliciting comments only. Plus, there was already a specific regulation requiring that “[t]he common or usual name of a food” shall be used to “identify or describe, in as simple and direct terms as possible, the basic nature of the food or its characterizing properties or ingredients.”  Plaintiffs’ allegations that the products at issue contained “sugar,” which should be cited by its “common or usual name” under the regulations, was sufficient to proceed no matter what the FDA did next.

Turning to failure to state a claim, defendants argued that “0g Trans Fat” wasn’t misleading as a matter of law.  Plaintiffs argued that Pringles failed to contain a required disclosure: When a “nutrient content claim” is made, and the product contains more than the maximum levels of total fat, saturated fat, sodium, or cholesterol prescribed by FDA regulations, then the nutrient content claim must be accompanied by the statement “See nutrition information for [the exceeding ingredient] content,” but Pringles didn’t add that disclosure.  Defendants nonetheless argued that the statement wouldn’t mislead a reasonable consumer.  Though the statement wasn’t false, it could be misleading.  However, plaintiffs failed to allege in sufficient detail how they were actually misled; they needed more than an allegation that they were “unaware” that the products were “misbranded” and contained fat content in excess of the amounts set forth in FDA regulations.

As for the slack fill claim, plaintiffs alleged that they were deceived into thinking they were receiving more of the products than they actually did.  “Defendants argue that as a matter of law a reasonable consumer would know that there is extra air in a bag of snacks. While this may be true, the amount of slack-fill expected by the reasonable consumer is a debatable factual question that is inappropriate to resolve at the motion to dismiss stage.”

However, plaintiffs failed to plead some of their claims with the specificity required by Rule 9(b).  They didn’t provide the entire statements they alleged were misleading, which products were at issue, or how they were misled; they needed to provide at least sample labels, since a single out of context phrase wasn’t enough to provide fair notice.  Nor did they properly allege that defendants’ website was “labeling” under the FDCA.  (If it’s not, I don’t think that matters—it’s not the case that false and misleading non-labeling material is immune from regulation under state law.)

Similarly, the claim that sugar was misleadingly identified as evaporated cane juice wasn’t specific enough.  Plaintiffs didn’t specify the deceptive products and labels, how they relied on those labels, or why a reasonable consumer would be likely to be deceived; alleging “misbranding” wasn’t enough.

The warranty claims also failed because the statements targeted weren’t “warranties” as defined by Magnuson-Moss, and the products at issue were “consumables” and outside the scope of the California Song-Beverly Act.

Monday, June 24, 2013

"Fan use" or fair use?

Torrentfreak has a story with a new coinage about which I am skeptical, to the extent that it seeks to deprecate fair use, though I am glad to see Warner Brothers (sort of) acknowledge that fair use exists in practice:
[David Kaplan, Chief of Anti-Piracy Operations at Warner Bros.] says that Warner Bros. and its parent company Time Warner are turning a blind eye to some forms of copyright infringement. This means, for example, that the company won’t clamp down on fan-art that offers no commercial threat.

“We give a wide berth to ‘fan use’ and permit fans to use and interact with our content in ways that might technically still constitute copyright infringement, but do not directly substitute for the full length feature, episode or game,” Kaplan notes.
[Also, that Wikipedia link might better have gone to Fanlore!]

Descriptive or nominative?

Spelunker's ad: "Frozen burgers? That's not a happy meal."  Note also the directions: "Just past McDonald's on right."  Cf. "Better burgers: 1 block further," from the district court in Playboy v. Netscape.

Photo by Zach Schrag, who is sorry we didn't take the picture in the morning when the light was much less troublesome.

Friday, June 21, 2013

Revenge is tweet

A blogger with the project "Around the World in 80 Jobs" found an employment company using the same concept.  Although he references lawyers, it's not clear what if any legal action he's taken.  But by encouraging supporters to use the company's name in tweets, he's gotten some revenge, since the company automatically streams Twitter references on its site.
How should we think about such brand hijacking?  The company is itself publicizing the attacks on it.  I'd like to think we'll never see a case in which a company claims a right to be free from uses of its Twitter handle it doesn't like, but I'm not too hopeful.

H/T Jeremy Sheff.

New book chapter on Barbie and IP exceptions

Rebecca Tushnet, Make Me Walk, Make Me Talk, Do Whatever You Please: this version doesn't have the Barbie pornography I showed at IPSC, though that's still in the IP database for those interested.

Rolling Stone writes about fraud and puffery

Matt Taibbi on puffery, fraud, and whether ratings agencies can defend their "integrity" while also claiming that it was dumb for any investor to have relied on them.  (Then what are the ratings for?)

Sharing v. stealing

Today's xkcd has a relevant point to make.  And the alt-text line is, in fact, a good one under highly specific circumstances.

Thursday, June 20, 2013


Slate critically examines Honest Diapers' claims to be safer than other diapers, and finds them wanting.  Though the diapers are indeed better for the environment than standard diapers, this isn't as good a selling point as "protect your baby from dangerous Other Diapers."  I wonder whether Pampers or any other mainstream producer is going to take action.

NY consumer protection standing exists when deceptive transaction occurred in NY

Cruz v. FXDirectDealer, LLC, --- F.3d ----, 2013 WL 3021904 (2d Cir.)

Cruz appealed from the dismissal of his complaint against FXDD for dishonest and deceptive practices in managing its online foreign exchange trading platform. The court of appeals affirmed the dismissal of the RICO claim, but reinstated NY GBL §§ 349-350 claims and a claim for breach of contract.

FXDD provides forex trading and related services.  Since forex doesn’t have a regulated exchange or central marketplace, FXDD and other retail brokers provide individual investors access to the market.  “As market makers, they create their own market and set the prices they offer to their customers. In addition to facilitating trading by customers, FXDD buys and sells currency for its own account, and may act as a counterparty in customer transactions.”  (In other words, FXDD is not on its customers’ sides.)

The FXDD contract warns that, “due to market conditions or other circumstances, FXDD may be unable to execute [a customer's] Order at the Market or specified level and the Customer agrees that FXDD will bear no liability for failure to execute such orders.” The Agreement also provides, however, that “all Market Orders and non-Market Orders ... are accepted by FXDD and undertaken on a ‘best-efforts basis.’” In addition, “FXDD makes no warranty expressed or implied; that Bid and Ask Prices shown represent prevailing bid and ask prices in the interbank market.”

Cruz alleged that FXDD misrepresented the actual risks of participating in its forex market.  A 2005 website ad stated that FXDD “Does Not Trade Against Their Clients, but Facilitates Trade Via Transparent Real–Time Bid/Offer Pricing,” while a 2007 advertisement represented that “[m]arket orders are filled instantaneously at the rate you request, with no manual dealer intervention or slippage.”  Contrary to these representations, Cruz alleged, FXDD engaged in several undisclosed practices to turn customer trades to its own benefit, such as: (1) rerouting profitable customer trading activity to a “slow server,” which delays trades and allows FXDD to “hijack” customer profits by buying and selling in the time between a customer's order and trade execution; (2) refusing to execute profitable customer trade orders by generating false error messages; (3) manipulating prices so that the change in price between the time the price is quoted and a market order is placed generally favors FXDD over its customers.  Cruz lost over $280,000 during two years of trading on the FXDD platform.

On the GBL claims, the district court found that Cruz lacked statutory standing because he lived in Virginia and had not alleged that FXDD's dishonest practices occurred, or that his trades were executed, in New York.  GBL § 349 prohibits “[d]eceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in this state” and provides a cause of action to “any person who has been injured” by a violation of the section.  GBL § 350 prohibits “[ f]alse advertising in the conduct of any business, trade or commerce or in the furnishing of any service in this state....” The court of appeals found that the complaint alleged a “sufficient nexus between Cruz's transactions with FXDD and New York to fall within the territorial reach of these two provisions.” 

NY’s highest court apparently interpreted “in this state” to require that “the transaction in which the consumer is deceived ... occur in New York.” Subsequently, a split of authority developed: a “transaction-based” test or a test premised on where the victim is deceived, regardless of where the transaction occurs.  The two tests weren’t mutually exclusive, but the court of appeals found that the appropriate test here was the location of the transaction, “and in particular the strength of New York's connection to the allegedly deceptive transaction, rather than ‘on the residency of the parties.’”  The language was not intended to function as a per se bar on out of state plaintiffs, though the fact that NY is a defendant’s principal place of business is insufficient.

Here, Cruz alleged a series of allegedly deceptive transactions that occurred in NY and implicated the state’s interest.  “FXDD is paid in New York and refuses to disburse funds from customer accounts until it receives a ‘Funds Redemption Form’ at its New York office. FXDD requires that all customer communications, including the Agreement and objections to trades, be sent to its New York office. The Agreement specifies that New York law governs all disputes between Cruz and FXDD; indeed, it provides that all suits relating to the Agreement are to be adjudicated in state or federal courts located in New York.” The complaint properly alleged that some part of the underlying transaction occurred in NY.

The court also reinstated the breach of contract claim: intentionally delaying trades or causing them to fail were incompatible with a promise to execute orders on a “best-efforts basis.”  There’s no separate claim for breach of the implied covenant of good faith and fair dealing in NY when there’s a basic breach of contract claim, though, so that wasn’t reinstated.

Tuesday, June 18, 2013

No preliminary injunction in consumer class action

Silber v. Barbara's Bakery, Inc., --- F.Supp.2d ----, 2013 WL 2948154 (E.D.N.Y.)

Plaintiffs in this putative consumer class action unsuccessfully sought a preliminary injunction against the allegedly false advertising of certain Puffins cereal and snack products as “all natural” when they actually included synthetic ingredients and GMO corn.  The parties strongly disputed what “natural” meant, since the FDA hasn’t seen fit to provide a definition.  Plaintiffs cited a study indicating that most consumers believes “natural” implies the absence of GMOs, and another finding that nutrition-related health claims on cereal boxes “lead to greater willingness in parents to buy those cereals for their children,” along with other evidence of consumer concern.  For example, a Rhode Island health food store pulled all defendant’s products from its shelves after learning about the GMOs.  Plaintiffs sought an injunction against the labeling, or immediate reformulation of the products in the alternative.

The court found no irreparable harm, defined as the harm from the deceptive advertising done to individual consumers—the plaintiffs didn’t rely on concerns about food safety, effects on the ecosystem, etc.  Plaintiffs argued that irreparable injury should be presumed under NY GBL §349, citing also Lanham Act cases brought by competitors.  The court found no authority for presuming irreparable injury to consumers.  False advertising suits by competitors were “qualitatively different from those brought by consumers, who need not prove lost sales or harm to brand equity.” Courts presume irreparable harm in the former case because it’s “notoriously difficult” to prove lost sales or harm to brand reputation.  But it’s “neither difficult nor impossible to prove the losses related to excessive or inflated costs in false advertising suits brought by consumers.”  Thus, competitors’ excuse from showing irreparable harm didn’t apply.

Separately, plaintiffs unreasonably delayed in seeking a preliminary injunction.  They waited nearly five months after suing to move for injunctive relief.  They were aware of their rights and not actively pursuing them elsewhere; thus the general rule that delay destroys a presumption of irreparable harm applied. “Furthermore, Plaintiffs are average consumers—they are not competitors or commercial sellers for whom lost goodwill or brand confusion stands to cause permanent fiscal injury, which would be exacerbated by delay in seeking permanent relief.”

And money damages would adequately compensate the plaintiffs, making any injury reparable.  Plaintiffs argued that deceptive injury, distorting consumers’ decisions, was irreparable in itself.  But plaintiffs couldn’t explain how, other than through excessive pricing, the deceptive ads injured the plaintiffs.  (I can, and I think it’s at least of equal dignity to other injuries regularly considered irreparable, though I understand why recognizing it would make things difficult—if the claims are truly false and misleading, then the harm they inflict isn’t just monetary; it’s harm to the dignity and autonomy interests of the consumer.  In Kantian terms, deception is wrong because it treats the consumer as a means rather than as an end.  At least in cases of willful fraud, most victims don’t feel whole even if they get their money back; it’s the trickery, the disrespect, that inflicts the extra injury.)

Given that plaintiffs sought compensatory damages and restitution for the excess price they alleged they paid, the court didn’t believe them when they said money damages were inadequate. (The court also expressed some skepticism about the money damages from the “supposed” higher price for “natural”-labeled products, since plaintiffs didn’t provide many details about pricing.)  Though Section 349 aims to “strongly deter deceptive business practices” through issuance of injunctive relief, these statutory provisions “do not relieve a litigant moving for a preliminary injunction in federal court from the general requirement that she demonstrate irreparable injury.”

Though it wasn’t necessary, the court went on to conclude that the balance of hardships favored Barbara’s Bakery.  Plaintiffs were essentially seeking a product recall, which was excessive in a false advertising case without physical injury.  Plaintiffs argued that Barbara’s could just use stickers to cover up the misleading language, but despite the “charm” of this alternative, the court wasn’t persuaded.  “[W]hether or not Defendant eliminated its allegedly deceptive advertising through the use of stickers, Defendants would be forced to execute product alteration on a national scale in order to remove all references to its products' ‘All Natural’ ingredients from its product packaging.”  Given plaintiffs’ delay and the compensabiltity of the harms through money, the burden of making such changes “clearly outweighs that of Plaintiffs in continuing to pay a possibly premium price for Defendant's products.” 

The court also noted that a settlement agreement was pending in a case bringing similar claims in the Northern District of California. The proposed settlement contemplates the same relief requested here—an injunction against “All Natural,” “No Artificial Additives,” “No Artificial Preservatives,” and “No Artificial Flavors.”

Monday, June 17, 2013

back pocket logo as "title" for advertising injury insurance purposes

H/T Marty Schwimmer:
CGS Indus., Inc. v. Charter Oak Fire Ins. Co., No. 11-2647-cv  (2d Cir. June 11, 2013)

Charter appealed from a judgment that it breached its duties to defend and indemnify to its insured, CGS, under its advertising injury policy. The court of appeals affirmed on the duty to defend and reversed on the duty to indemnify, since there was sufficient legal uncertainty about coverage to trigger the duty to defend.  The parties stipulated that damages were almost $400,000—the settlement plus CGS’s defense costs; the court remanded for an award just of defense costs.

In the underlying lawsuit, Five Four Clothing sued Walmart and CGS for trademark infringement based on CGS’s use of Five Four’s rear pocket stitching design, known as FF stitching, on jeans it supplied to Walmart.  Eventually, CGS settled by paying $250,000 on behalf of both parties (because of course Walmart required CGS to indemnify it).  Charter’s policy covered advertising injury, defined as injury arising out of one or more specifically listed offenses, including “[i]nfringement of copyright, title or slogan.”  It had the standard exclusion for knowing violation of rights.

Under Hugo Boss Fashions, Inc. v. Federal Insurance Co., 252 F.3d 608 (2d Cir. 2001), New York law distinguishes between the duty to indemnify and the duty to defend, applying “very different presumptions” to each.  If there’s a reasonable basis for a difference of opinion as to the meaning of the policy, the language is ambiguous and interpreted in favor of the insured. The duty to defend is broader than the duty to indemnify and an “even stronger presumption in favor of coverage” applies. To avoid that duty, an insurer “must demonstrate that the allegations of an underlying complaint place that pleading solely and entirely within the exclusions of the policy and that the allegations are subject to no other interpretation.”

Charter argued that the FF stitching was neither a “title” nor a “slogan” used in advertising.  The court of appeals agreed as to “slogan.”  The policy didn’t define slogan, but reference to “a body of law or an established custom” can fill in the gaps.  Neither New York law nor industry custom provided insight into the meaning of “slogan,” but the term could still be unambiguous if it had a clear meaning in federal law, which it did.  Complete federal judicial unanimity isn’t required, as long as there is an “overwhelming current of judicial opinion,” that is, a meaning used by “the vast majority of federal courts.” Using that standard, the vast majority of federal courts have defined “slogans” as “phrases used to promote or advertise a house mark or product mark, in contradistinction to the house or product mark itself.”

“To hold that the stitching design on a jeans pocket is a ‘slogan’ would stretch that definition beyond recognition, as the design is clearly not a ‘phrase.’” A slogan must be something other than the house mark or product mark itself; the FF stitching was in effect a house or product mark.  Here, too, there was no residual ambiguity over meaning to trigger the duty to defend.  Hugo Boss settled the meaning of “slogan” in advertising injury policies, and there had been no contrary developments in case law or commercial understanding.

However, the interpretation of “title” was a bit different.  Again, the term wasn’t defined in th epolicy, and neither New York law nor industry usage provided significant insight.  The “vast majority” of federal cases held that, in this context—“that is, in a list that includes ‘copyright’ and ‘slogan,’ but conspicuously does not include coverage of infringement of ‘trademarks’– ‘title’ means the name or appellation of a product, and does not cover design elements such as pocket stitching that may serve as a trademark designating the origin of the product.”  A title need not contain words—the court referred to the symbol of the artist currently known as Prince, also used as an album title—“we have no difficulty in concluding that the stitching on the back pocket of a pair of jeans cannot fairly be called the name or appellation of that pair of jeans.”  (The court found no need to decide whether “title” was necessarily limited to literary or artistic works.)

While this definition was clear enough to bar the duty to indemnify, if there was any residual uncertainty about whether a court would find the term unambiguous, then Charter still had a duty to defend.  Insurers may refuse to defend only “cases in which the policy is so clear that there is no uncertainty in fact or law.”  So here: “while the vast majority of federal cases unambiguously define ‘title’ to mean a word or phrase, a handful define title in a way that could arguably include a design or symbol similar to the pocket stitching at issue here.” One court defined “title” as “names and related trademarks,” then noted that “trademark” is defined as a “‘word, name, symbol, or device, or any combination thereof used by a person . . . to identify and distinguish his or her goods.’” Another court held that infringement of a stylized “D” logo fell under “infringement of title”; still another found that “the language clearly suggests coverage of claims where there are allegations of infringing a company’s mark or slogan.”  These cases were mistaken to reason that, because a trademark can be a title, and a symbol is a trademark, infringement of the symbol is infringement of title.  But they created enough legal uncertainty to give rise to a duty to defend, at least until the uncertainty around the term was resolved.  Thus, Charter’s failure to defend breached the policy.  Charter should’ve begun defense and immediately sought a declaratory judgment as to the meaning of “title.”

Charter next argued that the injury alleged by Five Four didn’t stem from “advertising.”  But the insurer must defend no matter how groundless the suit may be if the allegations in the underlying complaint, liberally construed, are within the scope of the policy.  The underlying complaints consistently alleged “wrongful acts, including advertising.”  “If Charter believed that Five Four did not intend to allege advertising by CGS or that CGS did not advertise the jeans, Charter should have begun to defend and immediately sought a bill of particulars to resolve any ambiguity in the pleadings.”  To the extent that Charter argued that its duty to defend terminated once discovery responses demonstrated that CGS and Walmart never advertised the jeans, Charter had not so argued below and had instead stipulated to damages, waiving this argument.

Nor did the knowing violation exclusion help Charter. Though the underlying complaint alleged willful infringement, the Lanham Act claims could succeed without such a showing. “Our inquiry ends there: as at least one of the claims in the Underlying Action did not require intent, Charter was required to defend the entire action.” The cases cited by Charter were distinguishable—in one, the defendant “approached a local manufacturer to produce a cheaper, low-quality knock-off product; marketed the counterfeit product in packaging indicating it was a genuine creation manufactured in Denmark, both blatantly false; and then fraudulently misled the plaintiff about sales.  In another, the plaintiff was a serial infringer.  “Here, the complaint alleges merely that CGS sold jeans with similar pocket stitching to Five Four’s jeans, not that CGS marketed the jeans as genuine Five Four jeans, or that it was a serial infringer. From the facts alleged in the complaint … it is possible that CGS unintentionally infringed on Five Four’s pocket design.”